The taxation implications of insurance payouts can become quite “messy” and are not always clear. A recent decision by the Administrative Appeals Tribunal (AAT) is worth noting.
The AAT confirmed that lump sum payments made to three former Qantas pilots under a “loss of licence insurance” scheme if they lost their pilot’s licences for medical reasons were assessable to the pilots as eligible termination payments (ETPs).
The former pilots lost their pilot’s licences for medical reasons and were paid lump sum payments in the 2007-08 income year under a “loss of licence insurance” scheme that formed part of the terms of their employment under certain “Collective Agreements” with their employer. Each of the taxpayers suffered a medical condition that resulted in the cancellation of their licence by the Civil Aviation Safety Authority and they received the relevant payments.
The taxpayers argued that the payments were not assessable ETPs essentially because they were received for the loss of their pilot’s licences and not in consequence of the termination of employment. They also claimed there was no relevant connection between each termination of employment and the applicable payments because the termination of employment was not a condition for payment under either the Collective Agreements or the insurance policy.
They also argued that if the payments were received in consequence of the termination of their employment, then the payments were capital payments in respect of personal injury and therefore fell within the exception for ETPs under the tax law. Alternatively, they argued that the payments were exempt FBT payments in respect of personal injury or non-assessable payments (that is, allowances, etc, provided in respect of employment).
In dismissing the former pilots’ arguments and finding that the payments were assessable ETPs, the AAT held that on the basis of established case law, the proper test was to assess whether or not the payments were related to, or were an effect or followed from, the termination of their employment with Qantas. Moreover, it found that under this test, the payments did satisfy this requirement.
In particular, the AAT found that the relevant agreements under which the payments were made “contemplated that a pilot’s employment will terminate as a result of the pilot’s licence being cancelled or not renewed”. In this regard, the AAT said the capital payment made under “the loss of licence” insurance plan was meant, in part, to recover the cost of a pilot retraining for a career other than flying, following a permanent loss of licence and “to get themselves re-established in a new career”.
Accordingly, the AAT concluded that the payments were ETPs as in each case the terms of employment anticipated the termination of employment of a pilot who received the payment or, in other words, the consequence of the capital payment was that there would be a termination of employment. Therefore, the AAT found that the relevant connection between the payment and termination of employment existed as evidenced in the relevant agreements that gave rise to the payments.
The AAT then found that the payments as ETPs were not exempt capital payments for, or in respect of, personal injury. This was essentially because there was nothing to suggest that the taxpayers’ capacity to obtain other employment was taken into account in determining the payments and that, as a result, there was no basis for concluding that the amount was reasonable having regard to the likely effect of the personal injury on the taxpayers’ capacity to derive income from personal exertion.
A post-script regarding excess super tax
Another recent AAT decision dealt (again) with the vexed issue of excess superannuation contributions tax. The taxpayer had a partial win, with the AAT setting aside the Tax Commissioner’s decision and ordering that a non-concessional superannuation contribution for the 2009 year, and the related penalty that was assessed, be disregarded and not be taken into account in consideration of the liability for excess non-concessional contributions tax for the subsequent transaction in 2010.
However, AAT senior member Dr K S Levy, RFD had great sympathy with the husband and wife taxpayers’ situation. He said:
“…an objective person could be confused with this area of the law and in the circumstances of this case and would not be reasonably able to foresee that an excess contribution could occur then or in a subsequent superannuation transaction. There is clearly some confusion in this area of the law. The number of appeals to this Tribunal in 2012 year alone is ample evidence of that. But looking at a reasonable person in the [wife’s] position, it would be difficult to foresee the outcome of the transaction, particularly after the [wife] and her husband made reasonable attempts to ensure they were in compliance with the law, yet those attempts yielded an incorrect understanding of the law. Indeed, without the subsequent transaction (Transaction 2) by the [wife], the excess contribution would not have occurred at all.” [Emphasis added]
We haven’t heard the last of this excess super contributions tax issue by a long shot!
Terry Hayes is the Editor-in-Chief of tax news reporting at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.