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08 Dec 14 Pension not exempt from tax - Macoun

The Full Court of the Federal Court (Edmonds, Perram and Nicholas JJ) has upheld the Commissioner's appeal from the decision of the AAT in Macoun and FCT [2014] AATA 155 (20 March 2014).

The AAT held that the pension received by the taxpayer, a former officeholder of the International Bank for Reconstruction and Development (IBRD), was exempt from Australian tax by reason of the operation of s 6 of the International Organisations (Privileges and Immunities) Act 1963 (Cth) (“IOPI Act”) and cl 8 of the Specialized Agencies (Privileges and Immunities) Regulations 1986 (Cth) (“Regulations”).

Subsection 6(1)(d) of the IOPI Act and cl 8 of the Regulations distinguish between a person who holds an office in an international organisation and a person who has ceased to hold such an office. While the former is given the privileges and immunities specified in Pt I of the Fourth Schedule to the IOPI Act (which include "Exemption from taxation on salaries and emoluments received from the organisation"), the latter is given only the immunities specified in Pt II of the Fourth Schedule (which do not include the aforesaid exemption).

Edmonds and Nicholas JJ described the AAT's approach as follows at para 39:

"The focus of the Tribunal’s process of reasoning was directed at the issue of whether the pension payments received by the respondent in the years of income were 'emoluments' as that word is used in item 2 of Pt I of the Fourth Schedule to the IOPI Act and, having come to the conclusion that they were, focused on the issue as to whether they ceased to have that character by reason of the termination of the respondent’s employment. The Tribunal concluded that the termination of the respondent’s employment did not alter the character of the pension payments as “emoluments” and that therefore they were exempt from income tax. In coming to this conclusion, the Tribunal was heavily influenced by the consideration that 'entitlement' to the pension arose during the respondent’s term of employment...and that this entitlement did not cease on termination of his employment..."

In upholding the Commissioner's appeal, Edmonds and Nicholas JJ held that there was "a clear dichotomy established by s 6(1)(d) of the IOPI Act between the privileges and immunities which apply to a person who holds office, and the immunities which apply to a person who has ceased to hold office" (para 43). The fact that the “entitlement” to the pension arose during the course of employment was totally irrelevant. The only relevant consideration was whether the “receipt” occurred during the course of employment.

In a separate judgment, Perram J agreed that the appeal should be allowed for the reasons given by Edmonds and Nicholas JJ, but noted that the international Convention on the Privileges and Immunities of the Specialized Agencies, to which Australia was a signatory, properly construed, rendered the pension exempt from Australian tax as a matter of public international law. His Honour said, at para 59:

"If it were possible to read the Act and Regulation so as to avoid the outcome that Mr Macoun’s pension is liable to income tax, I would do so. However, it seems to me that the legislation has been drafted with the specific intention of ensuring that pensions of employees of international organizations are subject to income tax."

The Commissioner's appeal was allowed.

FCT v Macoun [2014] FCAFC 162 (Full Court, Federal Court; Edmonds, Perram and Nicholas JJ; 4 December 2014).


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