77 ATC 417
AM Donovan Ch
RK Todd M
LC Voumard M
No. 2 Board of Review
Judgment date: 2 August 1977.
A.M. Donovan (Chairman); R.K. Todd and L.C. Voumard (Members): The taxpayers involved in these references are two pilots employed by a domestic airline. Because each had the same complaint against the Commissioner, and as each was represented by the same tax agent, it was convenient and it was agreed that both references be heard together.
2. The Airline Pilots' Agreement, which set out the terms on which they are employed, included the following provision:
``25. LOSS OF LICENCE INSURANCE.
A. As part of the terms of employment and in addition to all other remuneration currently being paid to its pilots, the employer shall either: -
- 1. pay its pilots the sum of $220 per annum as a fixed amount allowance to enable the pilots to secure an insurance cover against loss of licence; or
- 2. provide an equivalent loss of licence cover based on the employer's internal scheme or any other scheme.
B. The choice as between A.1. or A.2. shall be at the option of each pilot.
Pursuant to this provision each pilot received $220 from his employer, and quite properly included that amount as assessable income of the year ended 30th June, 1975, the year in which it was received. Each taxpayer elected to effect his own loss of licence insurance through a fund known as the Australian Air Pilots Mutual Benefit Fund. At least one of the taxpayers did so by paying to the fund a sum greater than the $220 allowance received, yet in each case a claim was made to deduct only an amount equal to the amount of the allowance; the reason for claiming a lesser sum than was expended did not appear. The amount of contributions to the fund was determined by reference to the amount of a ``capital benefit'' in respect of which the contributor desired to contribute.
77 ATC 419
3. The objects of the fund were expressed to be ``to provide financial and other assistance and benefits to members of such Fund whose earning capacity as a Pilot has ceased due to the temporary suspension of his licence by the Director of Aviation Medicine... or the cancellation of his licence... on medical grounds only'' (Rule 1(b)). The benefits provided allow for payment of a capital sum of fixed amount, payable in one lump sum should the licence be permanently withdrawn, and a recurrent payment, designed, no doubt, to provide compensation for loss of income caused by the temporary loss of licence, equal to a fixed percentage of the capital sum selected by the pilot where incapacity results from illness or injury. In this latter event the benefit payment commences 90 days ``after the commencement of the disability which (results) in the suspension and/or cancellation of the... licence'' and, broadly, ends 27 months later (Rule 7). Although not specifically stated in the rules, it was stated in evidence that the pilots felt that, since the trustees of the fund had a wide discretion, disability benefits might be paid also in cases where the licence was suspended because of such things as misconduct.
4. It appeared that, in issuing the relevant assessments and in disallowing the objections, the Commissioner had taken the view that the contributions to the fund fell within sec. 82H in that the contributions were within the description of ``amounts paid by the taxpayer... as premiums or sums for insurance... against sickness of or against personal injury or accident to the taxpayer''. The result was that the $220 paid had been treated as forming part of the $1,200 allowed as a concessional deduction under sec. 82H, but as the total of life insurance premiums paid and superannuation fund contributions made by each taxpayer far exceeded $1,200, a rather more favourable result could be achieved by the taxpayers if the $220 were deductible under sec. 51 of the Income Tax Assessment Act (ignoring for the moment any problems that might arise under sec. 82(1)). The taxpayers' view was that the ``premiums'' were not paid for insurance against sickness, personal accident or injury; they were paid for insurance against the loss of income that would be suffered should a pilot's licence be suspended or otherwise lost as a result of sickness, personal accident or injury, so that in no event did sec. 82H apply.
5. The primary question argued before the Board, therefore, was whether the payments to the fund were deductible, in whole or in part, under sec. 51. The taxpayers' representative conceded that the allowance made under the Airline Pilots Agreement was assessable income and that deductibility of a like amount depended, not upon whether the allowance had been expended, but rather upon whether, as the taxpayers were admitted to be employees, the amount expended was an outgoing incurred in the course of gaining or producing the assessable income. The very proper concession that was made that the taxpayers were employees disposed of any question of deductibility under the second limb of sec. 51. One argument advanced to support the claim that the contribution to the fund had been so incurred was that the amount contributed to the fund was necessarily incurred in producing the allowance of $220; that is, that the income of $220 was generated by the fact that the pilots made the payment to the fund, notwithstanding that there was no obligation on them to do so. The answer to this claim is that, on the facts, the allowance came to the pilots by the terms of their contract of employment, and that it was in no way generated by any contributions they might make to the fund.
6. It was also argued that the payment of the ``premium'' was in the nature of a ``specialised business expense'' incurred by a professional pilot in obtaining and maintaining his income; that the outgoing was not therefore of a capital, private or domestic nature, and so was an allowable deduction under sec. 51. But nothing in the evidence suggested that the payment made to the fund had any bearing on the income that either taxpayer would derive from his normal activities; certainly there was no suggestion that the normal income would increase because of the making of the payment. Hence, there was not the necessary nexus between the outgoing and the normal salary. If, therefore, the claims were to succeed, it had to be shown that, in whole or in part, the sums payable by the fund to the pilots represented assessable income, so that it could be said that the payment to the fund was an outgoing incurred in gaining or producing (prospective) assessable income. An immediate difficulty arose here because in certain circumstances the benefit was plainly of a capital nature, and to the extent that the ``premium'' related to that it was non-deductible under sec. 51, being
77 ATC 420
itself an outgoing of a capital nature. The taxpayers' representative pointed to two earlier decisions of this Board (as then constituted), namely, Case E38,
73 ATC 330 and Case G52,
75 ATC 371, to support the claim under sec. 51. These cases treated certain premiums a payments outlaid to no other end and for no other purpose than the production of periodical payments upon the happening of the events specified in a policy of insurance, with the result that the premiums were thus incurred in gaining or producing periodical payments constituting assessable income. They were therefore held to be deductible under the first limb of sec. 51(1). In Case J20 (S.R. Chapkhana v. F.C. of T.)
77 ATC 186 (presently the subject of an appeal), the Board adopted the reasoning and conclusions there reached.
7. But there is a difference between those cases and the facts now before the Board. In those earlier cases, both the amount of the ``premium'' referable to what might be called the income benefits to be provided, and the amount of those benefits, were known; here the former, at least, is not. The Board invited the taxpayers' representative to submit evidence on the question whether, assuming some part of the periodical payments contemplated by the fund would represent assessable income when received (despite the fact that the Commissioner's representative was disposed to dispute this), any, and if so what part, of the contribution made by each taxpayer was to be ascribed to such payments. An adjournment was afforded for the purpose of enabling the acceptance of this invitation, but it was not in fact accepted. The result was that, once it was conceded that even part of the benefits, and therefore part of the contributions, were of a capital nature, there was no basis on which the Board could make the apportionment or dissection permitted by the expression ``to the extent to which'' in sec. 51(1).
8. It should be noted that the reasoning discussed in the latter part of para. 6 above, based upon Cases E38, G52 and J20 (Chapkhana's case) (each referred to above), and which was the basis of the Board's adjournment of the case for the purpose of affording an opportunity for the submission of additional evidence, is reflected in para. 8, 9 and 10 of the reasons of Mr. F.E. Dubout (Chairman) in Case D40,
72 ATC 228. It appears that Mr. Dubout would have been disposed to allow a deduction upon the stated basis had he not found a stumbling block in the provisions of sec. 82(1). Mr. Gordon Thompson and Mr. Dempsey (Members) in their reasons denied deductibility under the first limb, but upon the ground that there was not sufficient nexus between the outgoings and the gaining by the taxpayer of his assessable income as a pilot (see para. 12 of Mr. Thompson's reasons and para. 7 and 8 of those of Mr. Dempsey). They did not, on our reading of their reasons, discuss the point here under discussion.
9. It follows that we would uphold the Commissioner's decisions on the respective objections and confirm the respective assessments. It also follows, from the fact that the sum contributed to the fund is not in our opinion an allowable deduction under sec. 51(1), that it is not necessary to consider the effect of sec. 82(1), and whether, if it otherwise appeared that the sum was deductible under sec. 51(1), that section or sec. 82H is the more appropriate one under which to allow the deduction.
*CCH Note: The decision of the W.A. Sup. Ct. in
Chapkhana v. F.C. of T. is reported at 77 ATC 4412.