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21 Mar 13 Commissioner's appeal on ETP offset upheld - Boyn

The Federal Court (Edmonds J) has upheld the Commissioner's appeal from the decision of the AAT in Boyn and FCT [2012] AATA 660 (28 September 2012).

In its decision, the AAT rejected the Commissioner's calculation of tax that would have rendered ineffective the 15% maximum tax rate applicable to that part of an employment termination payment (ETP) received by the taxpayer that did not exceed his ETP cap amount ($150,000).

The taxpayer received an ETP with a taxable component of $250,880, of which $150,000 was subject to a 15% maximum tax rate under s 82-10(3) ITAA 1997 ("the ETP cap amount"). So much of the balance of $100,880 that did not exceed the taxpayer's taxable income ($75,261) ("the employment termination remained" or ETR) was subject to a 45% tax rate under Div 82 ITAA 1997 (a "maximum tax rate provision"). The taxpayer had other income of $5,114 and deductions of $180,733.

In calculating the taxpayer's tax liability, the Commissioner first applied the deductions to the $150,000, reducing it to nil, and only the balance to the ETR and the taxpayer's other income.

In contrast, the taxpayer argued that the deductions should first be applied against the ETR, reducing it nil, and that only the balance should be applied against the $150,000, preserving $79,853 that was subject to the 15% maximum rate.

On the taxpayer's approach, tax payable was $8,512.05. On the Commissioner's approach, tax payable was $33,891.30 (including medicare levy).

The Federal Court held that the tax liability calculated by the Commissioner was correct. The amount of the ETR was determined by the definition of that term in s 3(1) of the Income Tax Rates Act 1986. That definition referred to "so much of the taxable income" as was included in assessable income under a "maximum tax rate provision". The amount included under the "maximum tax rate provision" was $100,880, but this was to be reduced to the taxpayer's taxable income of $75,261. It was this amount that attracted the 45% tax rate.

Edmonds J said at paras 22 and 23:

"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.

Contrary to the taxpayer’s calculations...only if his taxable income was zero, would his ETR be zero."

FCT v Boyn [2013] FCA 232 (Federal Court, Edmonds J, 20 March 2013)

 


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