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The Administrative Appeals Tribunal has (reluctantly) affirmed the Commissioner’s position, expressed in a private ruling, that an amount paid to a taxpayer as compensation under a deed of release was paid “in consequence of termination” of the taxpayer’s employment, and was properly characterised as an employment termination payment. The Tribunal held that it had no choice but to find that the Commissioner’s ruling was correct. However, this was due to the self-fulfilling manner in which the Commissioner described the “scheme” in the private ruling issued to the taxpayer, leaving no room for any other answer on the question of law. The result, in the Tribunal’s view, was unsatisfactory as a matter of tax administration because of the way in which the so-called facts were identified as the “specified scheme” by the Commissioner in the private ruling.

The taxpayer, a public servant, applied for a private ruling from the Commissioner in relation to the income tax treatment of a payment of $15,000 made to her in accordance with the terms of a deed of release between her and her former employer. The Commissioner issued a private ruling stating that the payment was a taxable ETP.

The taxpayer had argued that it was not an ETP under s 82-130(1) of the Income Tax Assessment Act 1997 because, among other reasons, she considered that it was a capital payment in respect of personal injury within the terms of the exclusion in s 82-135(i) of the ITAA 1997. She objected to the private ruling and provided further documents in support of her position. Subsequently, the Commissioner disallowed her objection.

The sole issue before the Tribunal was whether the Commissioner’s view of the law as it applied to the “specified scheme” in the private ruling should have been made differently.

The Tribunal noted that its role with respect to the review of an objection decision regarding a private ruling is confined to reviewing the correctness of the ruling premised on the “specified scheme” described in the private ruling and it has no role whatsoever in fact finding. Given the fact that the Commissioner, in his private ruling, described the “scheme” exclusively on the basis of certain clauses in the deed of release, the Tribunal was left with no alternative but to decide that the payment of $15,000 was in consequence of the termination of the taxpayer’s employment. Further, the Commissioner determined that the clauses of the deed indicated that the payment was consideration for the termination of employment and not in relation to any specific personal injury. Again, the Tribunal had no alternative but to arrive at the same conclusion because of the “specified scheme”.

The Commissioner’s private ruling was correct as it was self-fulfilling in its approach. That is to say, his view of the law in its application to the “facts” was correct because the “facts” that he identified in the scheme were such that the only possible answer on the legal question was that which he determined. Therefore, the ruling to the effect that the payment of $15,000 was a taxable employment termination payment was correct.

The Tribunal made the following comments on the Commissioner’s conduct in this matter.

“As noted above, the Commissioner was correct in not considering the additional material produced by the Public Servant at the time of the objection because the scheme would, in my view, have been materially different to that identified by him in the private ruling. However, having been presented with the additional material at the objection stage, the Commissioner should have asked the Public Servant to apply for another private ruling, as he was required to do under the TAA. He should have also recognised that some of this information had in fact been provided by the Public Servant at the time of her making the application for the private ruling.

Not only did he did not do this, he later participated in directions hearings in these proceedings without bringing to the attention of the Public Servant or those officers at the Tribunal who were dealing with the application, the limited nature of the review, namely, involving the correctness of the private ruling based on the ‘scheme’. He allowed directions to be made requiring the Public Servant to put on evidence and only after she had gone to the considerable effort and expense of doing so, did the Commissioner’s counsel point out at the hearing concerns as to the relevance of the evidence because of the nature of the private rulings system. It is an unsatisfactory approach on the part of the Commissioner, particularly as the Public Servant had no legal representation. In my view, it would have been appropriate for the Commissioner to spell out the difficulties with the Public Servant’s challenge to the private ruling objection decision and to have alerted the Tribunal’s officers at the earliest opportunity.”

Re The Public Servant and FCT [2014] AATA 247 (AAT, G Lazanas, Senior Member, 28 April 2014).

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