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2008 ATC 10-018

RG Kenny M

Administrative Appeals Tribunal, Brisbane


Judgment date: 9 April 2008

RG Kenny (Member)


1. Ashley Gorton worked as a medical practitioner until May 1992 when the effects of injuries received in a motor vehicle accident some years earlier prevented him from continuing in his practice. Thereafter, Mr Gorton received monthly payments of $2,500 under a professional income replacement insurance policy (the policy) he had with the Australian Mutual Provident Society (AMP). These continued until October 2004 when AMP denied further liability under the policy. Negotiations between AMP and Mr Gorton's legal representative resulted in Mr Gorton signing a deed of release for the benefit of AMP which extinguished the policy and any right for Mr Gorton to make further claims there under. In return, AMP was to make a lump sum payment of $225,000 to him. From this, certain deductions were made. These were $8,116.60 to reimburse Centrelink for income support payments paid to Mr Gorton while waiting for the settlement to be realised; legal costs of $8,653.93; and other costs of $43. He received the amount of $208,186.17. On 15 November 2005, Mr Gorton paid $200,000 into a superannuation fund (the BT SuperWrap pension plan). In accordance with that arrangement, he receives a monthly payment of approximately $758.

2. The lump sum from AMP was paid to Mr Gorton in the 2005/2006 financial year and it was included by the Commissioner of Taxation as part of Mr Gorton's assessable income for that year. No deductions were allowed in relation to his payment into the SuperWrap fund. Mr Gorton sought a private ruling on the assessability of the lump sum. The private ruling, made on 23 November 2006, confirmed that the lump sum was part of Mr Gorton's assessable income. Objections lodged by Mr Gorton on 17 January 2007 and 9 March 2007 resulted in determinations on 5 July 2007 and 13 July 2007, respectively, affirming the decision that the lump sum was part of Mr Gorton's taxable income and the decision that no deduction arose in relation to the payments into the SuperWrap fund. Mr Gorton now seeks review of those matters by the Administrative Appeals Tribunal (the Tribunal).


3. Mr Gorton gave the following evidence. AMP refused to make monthly payments to him after October 2004 because it alleged that he was in breach of the terms of the insurance policy. It offered him a lump sum payment of $145,000. He denied that he was in breach and refused to accept that lump sum payment. He referred the matter to an independent body which he described as the Insurance Complaints Commission. After 7 months, that body requested that AMP seek to resolve the matter with him and this resulted in the further offer by AMP of the lump sum of $225,000 which was paid to him in October 2005. As he was without income for the 7 month period, he claimed and received, under social security legislation, income support payments from Centrelink during that time.

4. Mr Gorton believed that he would continue to receive the monthly payments from AMP until he was 65 years of age and referred to calculations to demonstrate that he would have received considerably more than the lump sum which AMP ultimately paid to him. His decisions to accept the lump sum from AMP and to enter into the SuperWrap arrangement in the manner that he did were made in reliance on advice from his lawyer, from his tax agent and from staff of BT Portfolio Services which, he said, administered the SuperWrap fund. Mr Gorton was advised that he would incur no taxation liability by arranging his affairs in that manner. He would not have agreed to this if he had been aware of taxation implications. He accepted that the lump sum payment was the amount negotiated between AMP and his lawyer and that he signed the deed of settlement on the basis that the lump sum was in final settlement of his dealings with AMP. He also agreed that he did not advise the administrator of the SuperWrap fund that he wished to claim, as a tax deduction, the amount or any part of it, that he paid into the SuperWrap fund. He was not aware that he needed to provide any such advice because he believed that he would not be assessed for income tax on the lump sum he received from AMP.

Other evidence

5. In evidence was a letter from Mr Gorton's solicitor advising him that the net proceeds from the AMP settlement were paid, on 19 October 2005, into his bank account. A copy of the policy was also in evidence. The only benefit which it provided was a monthly payment which was to be calculated in accordance with the definition, set out in the policy, of the "average monthly earned income". In Mr Gorton's situation, this was the average monthly income earned through his personal exertion "during the period of one year immediately preceding the commencement of total disablement, after deduction of any expenses incurred in the production of any income but before taxation thereon." The policy gives no guidance on the manner in which the lump sum paid to Mr Gorton was calculated.


6. Mr Mark Curran for the respondent submitted that the lump sum received by Mr Gorton was ordinary income for taxation purposes because its character was determined by reference to the payments it replaced which, in Mr Gorton's case, was clearly income. He submitted that the lump sum continued to bear that character of income and, therefore, had to be taken into account when assessing Mr Gorton's taxation liability. He also submitted that no deduction was available to Mr Gorton in respect of the payment he made into the SuperWrap fund because the required notifications had not been made by him. Mr Gorton submitted that the lump sum should not be treated as income but, rather, as equivalent to a worker's compensation payment made to an injured employee.


7. Section 6-5 of the Income Tax Assessment Act 1997 (the ITAA 97) defines assessable income as including income according to ordinary concepts which is called ordinary income. In
Sommer v Commissioner of Taxation [1], the taxpayer received a lump sum payment under an insurance policy in circumstances not materially different from those outlined above for Mr Gorton. In that case, the Federal Court determined that the lump sum payment constituted ordinary income in accordance with the above definition. Merkel J referred to the well-established principle that monthly payments received under an insurance policy were received on revenue account [2] and said that the payment in a lump sum did not change the revenue character of the receipt by the taxpayer where it was designed to provide compensation to the taxpayer in respect of income replacement claims or where it was a payment in substitution for those claims [3]. His Honour found that there was no capital component in the payment made and described the substance and commercial reality of the settlement as one comprising "full and final settlement of the dispute between the [taxpayer] and the insurer in relation to the [taxpayer's] past and future claims to be entitled to income replacement benefits as a result of his total or partial disability ....." [4]. I am satisfied that those observations are equally applicable to the lump sum payment made to Mr Gorton and that it comprised ordinary income and, therefore, assessable income to be taken into account in assessing his taxation liabilities for the 2005/2006 financial year.

8. As it applied in the 2005/2006 financial year, the Income Tax Assessment Act 1936 (the ITAA 36) made provision for tax deductibility of contributions made to a superannuation fund in certain situations. Section 82AAT of the ITAA 36, as at that time, applied to eligible persons in respect of complying superannuation funds. It was conceded by Mr Curran that Mr Gorton was an eligible person and that the SuperWrap fund was a complying superannuation fund. However, the provision also included the further requirement that the person seeking the deduction was to have given a written notice under s 82AAT(1A) of the ITAA 36 to the trustee of the fund. The notice was to state that the person intended to claim a deduction of the whole or a specified part of the contribution. Also, under that provision, the trustee was required to provide the person with an acknowledgment of the person's notice.

9. Mr Gorton conceded and I am satisfied that he did no comply with that notice requirement. In his evidence, he said that he did not believe that it was necessary for him to claim any deductions as he was not aware that the monies he received constituted taxable income. Clearly, on the basis of my decision concerning the character of the lump sum which he received, Mr Gorton was incorrect in that belief and I am satisfied that the terms of s 82AAT of the ITAA 36 have not been met. In that situation, the monies paid by him into the SuperWrap fund are not deductible against his taxable income in the 2005/2006 financial year.


13. In this matter, the onus of proving that the assessment of the Commissioner should not have been made or should have been made differently rests with Mr Gorton [5]. I am satisfied that Mr Gorton has not discharged that onus and that the decisions under review should be affirmed.

2002 ATC 4815; [2002] FCA 1205.

2002 ATC 4815; [2002] FCA 1205 at [15] citing
Carapark Holdings Limited v Commissioner of Taxation (1967) 115 CLR 653 at 663 and
Commissioner of Taxation v Smith 81 ATC 4114; (1981) 147 CLR 578 at 583-584.

2002 ATC 4815; [2002] FCA 1205 at [16].

2002 ATC 4815; [2002] FCA 1205 at [19] Note also 15-30 of the ITAA 97 which provides that assessable income includes an amount received by way of insurance or indemnity for the loss of an amount if that amount would have been included in assessable income and is not assessable as ordinary income under s 6-5.

[5]See s 14ZZK(b)(iii) of the Taxation Administration Act 1953.


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