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03 Oct 12 Deductions not to be offset first against ETP cap amount - Boyn

The AAT has 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"). The balance of $100,880 ("the employment termination remained" or ETR) was subject to a 45% tax rate. The taxpayer had 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.

In finding for the taxpayer, the AAT described the relevant provisions as "confusingly drafted" and "almost largely incomprehensible". The AAT said, at para 34:

"The provisions in question here are almost largely incomprehensible, but the approach taken by the Respondent [Commissioner] in effectively setting all the deductions against the ETP cap amount and thereby leaving most of the ETR subject to tax, in my view, leads to a perverse outcome which does not seem to be supported by the legislation. In particular, in the circumstances confronted by the Applicant [taxpayer], the effect of the Respondent’s mode of calculation would largely erode the benefit of the 15% maximum tax rate applicable to the ETP cap amount since all deductions would be taken against that amount leaving a larger amount of ETR subject to the maximum tax rate of 45%. I do not believe that this was the legislative intention. Had the legislature intended such an outcome they could have used more direct and unambiguous language to the effect that in circumstances where there is both an ETP cap amount and an ETR within assessable income, all deductions must first be taken against the ETP cap amount. The legislature chose not to use language of that nature."

Boyn and FCT [2012] AATA 660 (AAT, Professor R Deutsch DP, 28 September 2012).


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