Bond vs Federal Commissioner of Taxation

On 17 March 2015 the Federal Court decided whether esteemed Qantas pilot Mr Bond had received a termination payment in compensation for an injury, or whether the golden handshake received was in the order of something much more generous than 'compensation'.

From what we can infer from the judgement, Mr Bond's injury was linked to increasing medical issues accumulating later in his career, probably linked to the aging process.  The case rested on whether or not a payment in the order of $500,000 was a fair reimbursement to Mr Bond with regard to his injuries.  A case that had the potential to delve into a long winded dispute about fundamental temporal principals of human biology was quickly answered in the negative by judge Mansfield in the space of 119 paragraphs - in which the world record for highest usage of the term "LOL" in a court judgement was considerably beaten.  In summary, Mr Bond did not receive his employee termination payment in compensation for any injury sustained while working, he had in fact received a payment in respect of his retirement, a payment he would have received injured or not.

Background

Mr Bond was a pilot of Qantas for over 15 years.  Pilots in his category of service were eligible to access an insurance scheme to cover themselves in the case of them losing their pilot license with the Civil Aviation Safety Authority (CASA).  Judge Mansfield informs us that Qantas pilots were eligible to access “loss of licence (LOL) insurance” under which Mr Bond was entitled to a LOL payment if he lost his licence for medical reasons.

The question arises as to whether or not the eventual insurance payment to Mr Bond was in fact an employee termination payment (ETP) under s 82-130 after he lost his license due failing to pass a medical for two years.

The Law

An ETP includes any payment made to you in result of the termination of your employment, received within 12 months of termination (s 82-130).

Section 82-135 provides that the payment is not an ETP if it is received in respect of personal injury to you, so far as the payment is reasonable and its likely effect on your capacity to derive income from personal exertion.

If a termination payment is exempted by s 82-135 it is generally not taxable. 

The Decision

Firstly, Judge Mansfield concluded that the LOL insurance payout was in fact an ETP and that it had been triggered by failing a medical whilst Mr Bond was employed by Qantas.

However, Judge Mansfield concluded the LOL payment was not covered by s 82-135 because the payment was not made in consideration of any personal injury.  He took guidance from Scully in the federal court where it was determined that any consideration made in compensation for injury must involve some kind of measurement or calculation in order to determine a fair value for the loss of a worker's income.  Judge Mansfield summarized the payment as follows:

"I do not think it can be said that the amount of the Capital Benefit is “for or in respect of” Mr Bond’s condition or can be assessed to be reasonable having regard to the nature of the injury and its likely effect on the capacity to derive income from personal exertion, in the way that “reasonable” is explained in Scully at [30]. For a pilot, the Capital Benefit is the same for any illness or injury causing loss of licence for any age up to age 54, although it then drops significantly for each year after that age. It is the same for all senior officers, whether Captains, First or Second Officers, or Flight Engineer Officers. It is the same irrespective of the nature of the injury, although the nature of the injury and consequential disability must be relevant to the ongoing capacity to derive income. It is the same whether the relevant employee is or is nor re-employed, and irrespective of the actual earnings in any new position."

Conclusion

Termination payments for injury are (1) required to be reasonable and (2) must be calculated with some connection to the injury.  In the case of Qantas pilots, their LOL insurance policy fails this test because the payment is made according to a pre-determined formula with too little regard to individual circumstances.  

This should not come as a surprise.  The law was clearly designed to make it hard for high income earning employees to claim a tax free golden handshake.  It does however raise an interesting question, how would you fairly compensate someone for lost income as a result of the natural biological aging process?  (to the point where it satisfies s 82-135)

LOL

Judge Mansfield used the term 127 times during the judgement, surely a new world record. 

[2015] FCA 245

http://www.austlii.edu.au/au/cases/cth/FCA/2015/245.html