the Trustee for the Payne Superannuation Fund v Commissioner of Taxation
[2015] AATA 58(Decision by: Senior Member R W Dunne)
the Trustee for the Payne Superannuation Fund
v.Commissioner of Taxation
Member:
Senior Member R W Dunne
Subject References:
Taxation
tax loss
self-managed superannuation fund
allowable deductions relating to the fund's exempt income exceed that exempt income
whether the fund can claim the excess as a carried forward loss to be offset against the fund's exempt income in a later income year
definition of 'net exempt income'
objection decision under review affirmed
Legislative References:
Income Tax Assessment Act 1997 (Cth) - s 36-10; s 36-15; s 36-20; s 295-385; s 295-390
Other References:
Explanatory Memorandum to the Income Tax Assessment Bill 1996
Decision date: 3 February 2015
Adelaide
Decision by:
Senior Member R W Dunne
REASONS FOR DECISION
INTRODUCTION
1. The parties have consented to my reviewing a decision of the respondent disallowing the applicant's objection (dated 1 October 2013) against the amended assessment for the 2010 income year by considering the matter on the papers and without holding a hearing, pursuant to s 34J of the Administrative Appeals Tribunal Act 1975 (Cth) ("AAT Act"). For the reasons referred to below, I have decided to proceed on that basis.
2. The applicant stated that the objection related to the respondent's calculation of net exempt income under s 36-20(1) of the Income Tax Assessment Act 1997 (Cth) ("ITAA 1997") for the 2010 income year. When the respondent decided to disallow the objection (which occurred on 15 January 2014), the applicant applied to this Tribunal for review of the objection decision.
3. The following summary of background facts is derived from the documents lodged with the Tribunal pursuant to s 37 of the AAT Act, including the T documents and supplementary T documents, and also the parties' Statements of Facts, Issues and Contentions and submissions.
BACKGROUND FACTS
4. The applicant is the trustee of the Payne Superannuation Fund ("Fund"), a self-managed superannuation fund which is a complying superannuation fund. The applicant lodged returns for the Fund for the years ended 30 June 2009, 30 June 2010 and 30 June 2011. These returns claimed a deduction for exempt current pension income. The expression "exempt current pension income" applies where a complying superannuation fund is entitled to an exemption for so much of its income as is attributable to its liability to pay current superannuation income stream benefits: see s 295-385(3) and (4) and s 295-390 of the ITAA 1997.
5. The Fund was selected by the respondent for audit in respect of tax losses claimed in its annual returns for the relevant years and as a result some items in the Fund's returns were identified as incorrect and amended assessments were issued. The amended assessments apportioned the expenses claimed by the Fund between the assessable and exempt income in each of the relevant years. Net exempt income of the Fund and the tax losses originally calculated and carried forward to the 2010 and 2011 income years were adjusted.
LEGISLATION
6. As described in the ITAA 1997 itself, Subdivision 36-A deals with deductions for tax losses of earlier income years. Given the issue in this case that is described in paragraph 7 below, the only provision of the legislation that requires specific analysis is s 36-20(1). That provision reads:
" Net exempt income
(1) If you are an Australian resident, your net exempt income is the amount by which your total exempt income from all sources exceeds the total of:
- (a)
- the losses and outgoings (except capital losses and outgoings) you incurred in deriving that exempt income; and
- (b)
- any taxes payable outside Australia on that exempt income.
..."
ISSUE
7. The applicant has argued that the issue in this case is the interpretation of s 36-20(1). The applicant's focus and the majority of his submissions relate to the correct interpretation of that section. In preparing my review of the respondent's decision disallowing the applicant's objection, I examined the provisions contained in s 36-10, s 36-15 and s 36-20 of Subdivision 36-A. However, in his discussions paper dated 30 October 2014, addressing the respondent's outline of submissions dated 24 October 2014, the applicant has expressed the view that the respondent's submissions in paragraphs 6 - 11 and 13 are irrelevant to the issue. I disagree with that view. In order to have a proper understanding of the meaning of s 36-20 and how it fits into the scheme of Subdivision 36-A, it is necessary for there to be an analysis of the other provisions that I have referred to above. For completeness, I have perused these other provisions and, in my view, they read and should be interpreted in the way that follows.
8. Under s 36-10, a tax loss arises in any income year in which the taxpayer's allowable deductions exceed the taxpayer's assessable income (ignoring tax losses of earlier income years), provided that excess also exceeds any net exempt income for the income year. This can be expressed as the following formula:
Tax loss = [Allowable deductions - Assessable income] - Net exempt income
The formula will not include any capital losses. Capital losses are only taken into account in determining the amount of a net capital gain or net capital loss.
9. Deduction of a tax loss is used in two distinct senses. It can either be deducted against an excess of assessable income over allowable deductions or it can be deducted against net exempt income. It can also be deducted against some combination of each. When a tax loss is deducted against excess assessable income, it is treated for this purpose the same as any other allowable deduction incurred in an income year, except that the maximum deduction for use of a tax loss in this manner is always limited to the amount of that excess. In other words, deduction of a tax loss cannot itself give rise to a new tax loss. What would otherwise be the taxable income for the year is reduced by the deduction for the carried forward tax loss. Any unused portions of a tax loss that are deducted in this manner or any other unused carried forward tax losses remain attached to the year in which they were incurred and continue to be carried forward.
10. When a tax loss is deducted against net exempt income, both the tax loss and the net exempt income are used up to the extent of the deduction. Thus, the tax loss (to the extent that it is used against net exempt income) is no longer available for deduction against excess assessable income, either in the current income year or by carry forward into future income years.
11. Ignoring carried forward tax losses, in any income year a taxpayer's assessable income may exceed allowable deductions (i.e., it becomes excess assessable income). Or allowable deductions may exceed assessable income (i.e., they becomes excess allowable deductions). In either case, this may or may not be accompanied by the derivation of net exempt income. If there are excess allowable deductions for an income year, whether a new tax loss will be created for that year and its amount will depend upon whether there is also net exempt income in that year.
12. Under s 36-15, taxpayers other than corporate tax entities may be able to treat tax losses that arise in earlier income years as an allowable deduction against assessable income derived in the current income year. The extent to which this can occur will depend:
- (a)
- on the amount of assessable income and other deductions of the current income year;
- (b)
- when the tax loss was incurred;
- (c)
- the type of tax loss;
- (d)
- whether the tax loss has already been utilised to any extent in a previous income year;
- (e)
- whether the taxpayer has also derived any exempt income; and
- (f)
- special rules that may be applicable to particular taxpayers.
13. The derivation in any income year of exempt income not only affects the manner in which a tax loss for the income year is calculated, it also affects the manner in which tax losses from earlier years are deducted or utilised. This applies not just in the year in which there is excess assessable income for a tax loss to be offset against, but also where exempt income is derived in intervening years between the year in which the tax loss was incurred and the first year in which an excess of assessable income is available.
14. A carried forward tax loss is deducted in later income years in accordance with the following rules:
- (a)
- if there is excess assessable income and no net exempt income, the tax loss is deducted from the excess assessable income: s 36-15(2);
- (b)
- if there is excess assessable income and also net exempt income, the tax loss is deducted first from the net exempt income, with any remainder being deducted from the excess assessable income: s36-15(3); and
- (c)
- if there are excess allowable deductions and also net exempt income, the tax loss is deducted from the net exempt income, but only to the extent that the net exempt income exceeds the excess allowable deductions: s 36-15(4).
Section 36-15 does not provide for a situation where assessable income is equal to allowable deductions and net exempt income is derived.
15. In deducting carried forward tax losses in the above manner, they are deducted in the order in which they were incurred (i.e. earlier years first): s 36-15(5). Any unused portion of a carried forward tax loss that has not been deducted from either net exempt income or excess assessable income in an income year because it was of insufficient amount, or any other unused carried forward tax losses, remain attached to the year in which they were incurred and are carried forward to be used in the manner described above in future years: s 36-15(7).
16. Although the applicant has focussed on the correct interpretation of s 36-20(1), I wish to make some general observations, briefly, on the tax loss provisions. In general, the procedures for carrying forward a tax loss are automatic and do not allow a taxpayer (other than a company) to elect the year or years in which to deduct a prior year loss. Losses (or the balance of losses) must be carried forward one year at a time until they are exhausted.
17. Where a loss is brought forward, it must first be offset against any net exempt income and then against any assessable income remaining, after all current year deductions are allowed. If, in the year of recoupment, the deductions exceed the total assessable income, that excess is subtracted from the net exempt income and the tax losses deducted from any net exempt income that remains.
18. The following are two examples which, in my opinion, demonstrate how a tax loss is dealt with under Subdivision 36-A.
Example One
In Year 1, X incurs a loss of $7,000. In Year 2, X has assessable income ($20,000), allowable business deductions ($23,000) and net exempt income ($15,000). The excess of allowable deductions over assessable income ($3,000) is subtracted from net exempt income, resulting in a net exempt income balance of $12,000. The tax loss from Year 1 is deducted from that balance, reducing it to $5,000. The tax loss is now exhausted.
Example Two
X has a loss of $25,000 in Year 1. In Year 2, X's total assessable income is $20,000 and allowable deductions (other than for the tax loss) are $3,000, thus resulting in an excess assessable income of $17,000. There is no net exempt income in Year 2. In these circumstances, the $25,000 loss is carried forward so as to reduce the excess assessable income amount of $17,000 to nil. The balance of the loss ($8,000) is available to be carried forward to Year 3 or subsequent income years.
19. I now turn to examine s 36-20(1). For an Australian resident, the term "net exempt income" is defined in the section. It is used in determining whether a tax loss exists and the manner in which that tax loss is required to be deducted. In my opinion, in the interpretation of s 36-20(1), for a resident taxpayer (such as a self-managed superannuation fund) net exempt income for a year of income is the amount by which the total exempt income from all sources for that year of income exceeds the total of the losses and outgoings (except capital losses and outgoings) incurred in deriving that exempt income, and any taxes payable outside Australia on that exempt income. I confirm that, when s 36-20(1) refers to an Australian resident, it applies in calculating net exempt income in all areas of taxation, not only or simply self-managed superannuation funds. Specifically, s 36-20(1) is applied to self-managed superannuation funds in the same way as it is applied to other taxpaying entities, but having regard to provisions of the ITAA 1997 that apply to superannuation funds.
20. Moreover, when s 36-20(1) speaks of losses and outgoings incurred in deriving that exempt income, as the respondent has submitted, it uses language analogous to the language in s 8-1 of the ITAA 1997 in respect of general deductions. In other words, s 36-20(1) allows a deduction for a loss or outgoing to the extent that it is incurred in deriving that exempt income in that year of income. The respondent's submission is supported by the Explanatory Memorandum to the Income Tax Assessment Bill 1996 which states that net exempt income in s 36-20 means:
"Exempt income (other than certain income that has been exempted so as to prevent double taxation), reduced by expenses incurred in deriving that income."
21. The applicant has asked why s 36-20(1) does not contain "the logical equivalent". In my view, although s 36-20(1) does not use the words "except losses and outgoings from previous years", the section is interpreted to include those words in it.
22. In the respondent's outline of submissions dated 24 October 2014, the respondent has said (in paragraphs 15 and 16):
"The Respondent submits that the Applicant cannot carry forward the excess of losses and outgoings relating to the Applicant's exempt income as a carried forward loss to be offset against the Applicant's exempt income in a future year.
There are no provisions of the tax law that provide that where losses and outgoings in relation to exempt income exceed exempt income the excess can be applied to reduce net exempt income in a future year. Whilst there are specific provisions relating to earlier year tax losses related to assessable income (see for example sections 36-10 and 36-15 of the ITAA 1997) there is no corresponding provision in relation to exempt income."
I agree with these submissions.
23. In commenting upon paragraph 15 of the respondent's submissions, the applicant says that the words "carry forward the excess of losses and outgoings relating to the Applicant's exempt income as a carried forward loss to be offset against the Applicant's exempt income in a future year" are not the words of s 36-20. However, as I say in paragraph 21 above, that is how s 36-20(1) is interpreted.
24. In commenting upon paragraph 16 of the respondent's submissions, the applicant says it is incorrect to assert "that there is no provision to consider losses and outgoings of previous years". In my view, when s 36-20(1) refers to "the losses and outgoings incurred in deriving that exempt income", this does not include all such losses and outgoings, including those from previous years.
25. The applicant has provided a summary near the end of his discussions paper. He asserts that, when s 36-20(1) refers to "losses and outgoings" provided that they were incurred in deriving that exempt income, there is no logical reason to suppose that there is an implied exclusion depending on the particular year in which the losses and outgoings were incurred. It is clear that s 36-20(1) does not include losses and outgoings incurred in previous years of income. For the sake of clarity, it might be best if the section were amended to be expressed in the manner the applicant has suggested, i.e. that "losses and outgoings" excludes losses and outgoings of previous years.
26. Further, the applicant asserts that the respondent's interpretation is obviously not what was intended and he has referred to s 15AA of the Acts Interpretation Act 1901 (Cth), which relevantly reads:
" Interpretation best achieving Act's purpose or object
In interpreting a provision of an Act, the interpretation that would best achieve the purpose or object of the Act (whether or not that purpose or object is expressly stated in the Act) is to be preferred to each other interpretation. "
27. As I have explained, the purpose or object of Subdivision 36-A (including s 36-20(1)) is to show how to calculate a tax loss for an income year (s 36-10) and how to deduct tax losses of entities other than corporate tax entities (s 36-15). In my view, the requirements of s 15AA of the Acts Interpretation Act 1901 have been satisfied.
28. The applicant has made other comments concerning certain of the respondent's particular submissions. Given the circumstances of the applicant's case and the approach he has legitimately taken, I see no advantage in addressing the other comments he has made in his discussions paper.
SUMMARY
29. To summarise, in my opinion the respondent has correctly interpreted the provisions of s 36-20(1) of the ITAA 1997. That interpretation is consistent with the correct interpretation of s 36-10 and s 36-15 that I have outlined in paragraphs 8 - 15 above.