FALSON v FC of TMembers:
J Block DP
SE Frost M
Administrative Appeals Tribunal, Sydney
MEDIA NEUTRAL CITATION:
 AATA 1668
ATC 2439J Block and SE Frost (Deputy President; Member)
1. There have been conflicting decisions by this Tribunal in respect of the tax deductibility of personal superannuation contributions made by "substantially self-employed" taxpayers. At least three cases have been decided in favour of the Commissioner while one has been decided in favour of the taxpayer.
2. The current case, it is hoped, will provide some certainty in this area. The case raises questions of statutory construction which are regarded as of sufficient significance to warrant the grant to the Applicant taxpayer, Gary Falson, of funding under the Commissioner's Test Case Litigation Program to assist the Applicant to meet his costs of the proceedings.
3. The case centres on the question whether Mr Falson was an "eligible person", in respect of the year ended 30 June 2004 ("the relevant year") for the purposes of section 82AAS of the Income Tax Assessment Act 1936 ("the Act"), and in respect of which he claimed a deduction for a personal superannuation contribution. Only an "eligible person" is entitled to a deduction. In simple terms a person who is substantially self-employed will be an "eligible person", although the expression "substantially self-employed" is no more than a convenient label summarising the effect of a series of statutory provisions which are over 500 words long and take up almost 60 lines of text in the Act.
4. It is the proper meaning of those provisions that will decide this case.
5. The Tribunal had before it the T documents lodged pursuant to section 37 of the Administrative Appeals Tribunal Act 1975; at the conclusion of the hearing which took place on 27 April 2007 a time-table in respect of written submissions was arranged; submissions were duly received by the Tribunal, the last of them having been received on 30 July 2007.
6. The Applicant was represented by Mr D.B. McGovern S.C. and Mr A. O'Brien of counsel instructed by Mr P. Holmes of Access Business Lawyers while the Respondent was represented by Ms J. Batrouney S.C. and Ms M. Brennan of counsel instructed by Mr E. Chiaw of the Australian Taxation Office.
7. Simply stated, the issues in this case are:
- 1) how the income that Mr Falson received from his employer during the relevant year should be taken into account in the mathematical calculation set out in section 82AAS of the Act; and
- 2) whether we should follow an earlier decision of the Tribunal in
Norris v Federal Commissioner of Taxation 2002 ATC 2091.
8. Mr Falson commenced full-time employment with the NSW Police Service ("NSW Police") in about 1992 on a temporary basis as a Stores Officer. In 1998 he became a permanent employee, working Monday to Friday.
9. In 2002 he started working 3 days per week but maintained his income level by taking some of his accrued recreational and long service leave. However, in March 2003 he decided to retire for health reasons. He notified his employer of that intention in May or June 2003. His last day of work with the NSW Police was 4 July 2003 - that is, four days into the 2004 financial year.
10. Although there is some slight confusion about the actual amounts involved, the taxpayer's case proceeded (with the Commissioner's concurrence) on the basis that the elements of the final payment made to Mr Falson by the NSW Police were as follows:
|"True" salary and wages||$802|
|Long service leave, post 1993||$1,898|
|Long service leave, post 1990 - Lump Sum A||$1,262|
(Taxpayer's Initial submissions, paragraph B.3)
11. Mr Falson's income tax return for the relevant year discloses total assessable income of $81,734, made up as follows:
|Total amount paid by NSW Police (as above)||$12,641|
|Gross interest income||$6,291|
ATC 2440Franked dividend
|Net capital gain||$58,242|
12. During the 2004 financial year Mr Falson and his wife disposed of an investment property - this explains the "net capital gain" of $58,242 just mentioned. From the proceeds of that sale Mr Falson made a payment into the ANZ One Answer Personal Superannuation Fund. In his return for the relevant year he claimed a deduction of $41,000 in respect of that personal superannuation contribution. The Commissioner did not allow the deduction. Mr Falson objected against the Commissioner's assessment and the objection was disallowed. It is that objection decision which is under review in this matter.
13. Sections 82AAS and 82AAT appear in Subdivision AB in Division 3 of Part III of the Act. Subdivision AB is titled "Contributions to superannuation funds by eligible persons".
14. Section 82AAS is an interpretative provision. In the relevant year of income, subsection (1) provided that in Subdivision AB, unless the contrary intention appears:
" eligible employment , in relation to a person, means:
- (a) the holding of any office or appointment; or
- (b) the performance of any functions or duties; or
- (c) the engaging in of any work; or
- (d) the doing of any acts or things;
that results in the person being treated as an employee for the purposes of the Superannuation Guarantee (Administration) Act 1992 (assuming that subsection 12(11) of that Act had not been enacted).
eligible person has the meaning given by subsection (2)."
15. Subsection (2) provided that a person was an "eligible person" in relation to a year of income unless:
- "(a) during the whole or a part of the year of income circumstances existed by reason of which it was reasonable to expect that superannuation benefits would be provided for the relevant person in the event of the retirement of the relevant person or for dependants of the relevant person in the event of the death of the relevant person (whether or not any condition other than the retirement or death of the relevant person would be required to be satisfied in order that those benefits be provided); and
- (b) to the extent to which those benefits would be attributable to the year of income:
- (i) the benefits would be wholly or partly attributable to contributions made, or required to be made, in relation to the year of income:
- (A) to a superannuation fund of the relevant person; and
- (B) by someone other than the relevant person; and
- (C) in connection with the eligible employment of the relevant person in the year of income; or
- (ii) the benefits would, in whole or in part, be paid in relation to the year of income:
- (A) out of money (other than contributions made to a superannuation fund) of someone other than the relevant person; and
- (B) in connection with the eligible employment of the person in the year of income."
16. If that were the end of the matter, then any person who was an employee, and who received employer superannuation support, during an income year would not be an "eligible person" and could not, therefore, claim a deduction for a personal superannuation contribution. However, subsection 82AAS(3) modified that position by providing as follows:
- (a) during a period, or a combination of periods, in a year of income, a person was engaged in particular eligible employment; and
- (b) either:
- (i) both:
- (A) the person's assessable income, or the person's exempt income, of the year of income, or the person's reportable fringe benefits total for the year of income, includes one or more amounts attributable to that eligible employment; and
ATC 2441(B) the total of the amounts mentioned in subsubparagraph (A) is less than 10% of the total of the person's assessable income of the year of income and reportable fringe benefits total (if any) for the year of income; or
- (ii) the person's assessable income, or the person's exempt income, of the year of income, or the person's reportable fringe benefits total for the year of income, does not include any amount attributable to that eligible employment;
a reference in subsection (2) to superannuation benefits does not include a reference to superannuation benefits to the extent to which:
- (c) they would be attributable to, or paid out of money representing:
- (i) contributions made, or required to be made, in relation to the person in connection with that eligible employment; or
- (ii) income or accretions arising from such contributions; or
- (d) they would otherwise be attributable to that eligible employment."
17. In summary, a person whose assessable income from an employer who provided, or was required to provide, superannuation support was less than 10% of the person's total assessable income would still be an "eligible person". For convenience we refer to this saving provision in subsection 82AAS(3) as the "10% rule".
The history of the legislation
18. Both the taxpayer and the Commissioner provided a detailed history of the relevant legislative provisions. The legislative history is relevant because it is part of the context in which the legislation exists and is to be interpreted.
Prior to 1986
19. Prior to 1986, section 82AAT provided deductions for contributions to qualifying superannuation funds by persons in gainful occupation for whom no provision for superannuation benefits on retirement or death was funded by an employer or any person other than the taxpayer. The deduction at that time was subject to a limit of $1,500 in any year of income.
Amendments in 1986
20. In 1986 the Australian Conciliation and Arbitration Commission agreed to the ratification by it, or a State industrial tribunal, of agreements between unions and employers for limited employer contributions to superannuation funds under certain superannuation agreements. However, the effect of such employer contributions would have been to deny to the affected employees eligibility for them to obtain deductions under section 82AAT of the Act.
21. Broadly, amendments were made to section 82AAS of the Act (to apply on or after 1 July 1986) to ensure that eligible persons would not lose their deductions under section 82AAT of the Act by reason only that they received superannuation support by way of contributions by other persons provided they were provided pursuant to a superannuation award ratified by an industrial tribunal or an award that is similar although not ratified: section 12 of the Taxation Laws Amendment Act (No. 3) 1987.
Amendments in 1990
22. Prior to the 1990-91 financial year, the maximum annual deduction available was $3,000. From 1 July 1990 deductibility of superannuation contributions for "unsupported eligible persons" (broadly, self-employed people and employees without employer superannuation support) was increased to $3,000 plus 75% of the contributions in excess of $3,000, subject to an upper limit based on the individual concerned (that is, age and reasonable benefit limits - "RBLs"). However, eligible persons who were not "unsupported eligible persons" (broadly, employees whose only superannuation support was under an award based superannuation agreement) were entitled to a maximum deduction of $3,000.
Introduction of the 10% rule in 1992
23. That amendment was recognised as leading to some unfairness where the level of superannuation support provided to eligible persons under an award based superannuation agreement was nominal. The Explanatory Memorandum to the Bill that became the
ATC 2442Taxation Laws Amendment Act (No. 2) 1992 stated:
- "4.12 Under the existing law, people who are substantially self-employed, but who undertake part-time employment through which they receive only superannuation support under an award based superannuation agreement, are not "unsupported eligible persons". Consequently they are restricted to a maximum deduction of $3,000 for their personal superannuation contributions, even though the amount of employer support received may be very small.
- 4.13 In such cases, the tax concessions forgone, because of the reduction in the maximum level of deductible contributions to $3,000, may exceed the benefit received from the employer superannuation support.
- 4.14 Examples of people who may fall within this situation are medical practitioners working in public hospitals, professionals working part-time as teachers at TAFE colleges or universities, and part-time statutory officers."
24. The legislation was amended so that a substantially self-employed person was included in the class of "unsupported eligible persons" provided the person derived less than 10% of their assessable income during the year from employment providing award based superannuation support: section 17 of the Taxation Laws Amendment Act (No. 2) 1992.
25. The legislation was further amended in 1992 as a consequence of the introduction of the superannuation guarantee levy. The amendments extended the concept of a substantially self-employed person by omitting the requirement that the employer support from the paid employment be restricted to industrial award superannuation: section 7 of the Taxation Laws Amendment (Superannuation) Act 1992. In addition the tax deduction for $3,000 was abolished for those taxpayers who were not substantially self-employed. For substantially self-employed persons the age-based limits and standard contribution limit (the RBL) were to be indexed annually.
The 1999 amendments
26. The final relevant amendment introduced the reference to "reportable fringe benefits", and substituted the expression "amount(s) attributable to that eligible employment" for "amount(s) that were derived from that eligible employment". Those amendments were introduced by the A New Tax System (Fringe Benefits Reporting) Act 1999. The Explanatory Memorandum to the 1998 Bill that became the 1999 Act stated:
- "1.100 Section 82AAT of [the Act] allows a tax deduction for personal contributions made to a complying superannuation fund or to a retirement savings account. A person is entitled to the deduction if he or she is self employed or does not have any superannuation support from his or her employer. Subsection 82AAS(3) extends this concession to a person who is substantially self employed. A person is substantially self employed if the total remuneration he or she receives from an employer who provides superannuation support is less than 10% of his or her total assessable income.
- 1.101 The amendments include the reportable fringe benefits total for the income year with the employee's assessable income for the purpose of applying the 10% test."
The previous cases in the Tribunal
27. The previous cases that were referred to by the parties in their submissions are:
Edmonds-Wilson v Commissioner of Taxation 98 ATC 2276;
Northey v Federal Commissioner of Taxation 2002 ATC 2001; and
Norris v Federal Commissioner of Taxation 2002 ATC 2091.
28. In addition to those, there is at least one other decision of the Tribunal -
Thornton v Federal Commissioner of Taxation 97 ATC 2117 - dealing with the issue before us. Of these four cases, only Norris has been decided against the Commissioner.
29. The four cases have dealt with two different versions of subsection 82AAS(3) of the Act. The version of subsection 82AAS(3) of the Act considered in Northey and Norris is identical to the version under consideration here, as set out in paragraph 16 above. However, the legislation relevant to the earlier years of income in Thornton and Edmonds-Wilson contained no reference in subsection
ATC 244382AAS(3) of the Act to "reportable fringe benefits". Also, rather than referring (as it later did) in subsections 82AAS(3)(b)(i)(A) and 82AAS(3)(b)(ii) of the Act to "amount(s) attributable to that eligible employment", it referred to "amount(s) that were derived from that eligible employment". The Applicant contends that that difference in language is significant, as will be discussed later in these reasons.
The decision in Thornton
30. Thornton was dealt with on the papers. It seems to have been decided as a simple question of arithmetic: total assessable income was $46,862 and the assessable income derived from employment was $42,319. The 10% rule was not attracted. The taxpayer asserted some "inequity" in the disallowance of a deduction in circumstances where he had accepted "an incentive to leave the employ of the Government": he had apparently taken redundancy, four months into the financial year. The Tribunal, however, saw no inequity, noting that the taxpayer's redundancy payment had been "substantially tax exempt".
The decision in Edmonds-Wilson
31. While Thornton might be regarded as a straightforward case, Edmonds-Wilson was somewhat less so. The arithmetic, on the face of it, was easy - employment income of $5,144 out of total assessable income of $32,741 - but not all of the employment income had attracted employer superannuation support. This was because, although the taxpayer had been employed (on a casual basis) for the whole of the income year, her salary had exceeded the statutory minimum for employer superannuation support ($450) for only four of the 12 months. So, although her total employment income was not within the 10% rule, that part of it that had attracted employer superannuation support was.
32. The Tribunal noted at paragraph 7 of its reasons:
"The purpose of subs 82AAS(3), as expressed in the explanatory memorandum, was 'to expand the concept of a substantially self-employed person so that people who are substantially self-employed do not lose access to tax deductions for their personal superannuation contributions because they perform small amounts of paid employment through which they receive employer superannuation support'."
33. The taxpayer contended (paragraph 10 of the Tribunal's reasons) that subsection 82AAS(3) "should be construed in a manner whereby only the salary income for which superannuation support had been provided be used in matching the result obtained to the 10 per cent of total assessable figure". The Commissioner, on the other hand, argued that the whole of the salary derived from an employer who provided superannuation support had to be taken into account - even if not all of that salary had attracted superannuation support.
34. The Tribunal agreed with the Commissioner, stating at paragraph 12:
"The sub-section refers to particular eligible employment and to one or more amounts of assessable income derived from that eligible employment. Clearly, the legislation requires the gross amount of $5,144 to be used as a measure against the product of 10 per cent of assessable income. In the result, the taxpayer is not an eligible person ..."
35. However, the Tribunal felt compelled to comment on this outcome in the following way, at paragraph 13:
"Here we have a taxpayer aged 51 years being denied a deduction of $5,721 because of employer superannuation support of a sum ($154) which is not likely to provide much financial joy or comfort to her upon retirement. Hardly an outcome that encourages people to provide for their own retirement or one that sufficiently expands the concept of substantially self-employed persons. More concerning is the result obtained in comparing this outcome with that of an assumed taxpayer whose circumstances, with one exception, are identical with those of this taxpayer. The only factual difference is that the other taxpayer was employed by a second employer during those months when earnings were less than $450. Notwithstanding an equality in assessable income and employer superannuation support, it seems that the other taxpayer qualifies as an eligible person whereas this taxpayer does not. Surely this represents an unintended consequence. It appears that the
ATC 2444legislation needs to be revisited and that perhaps a system which allows a deduction based on a differential between the deduction limit permitted under sub-s. 82AAT(2) and the amount of superannuation support provided by an employer would assist in overcoming the kinds of inconsistencies encountered in this reference."
The decision in Northey
36. In Northey the income year under consideration was the year ended 30 June 2000. By this time the Act had been amended, but not, it seems, in the way the Tribunal had suggested in Edmonds-Wilson.
37. The amendments that had been made are those mentioned in paragraph 26 above - the introduction of the reference to "reportable fringe benefits" and the change from "amount(s) that were derived from that eligible employment" to "amount(s) attributable to that eligible employment".
38. Mr Northey's income from eligible employment was $70,986 and his total assessable income was $174,654. Expressed as a percentage, his eligible employment income was 40.6% of the total.
39. The Commissioner referred to the decision in Thornton to support his argument that Mr Northey was not an eligible person, and the Tribunal accepted the Commissioner's argument. At paragraph 15 the Tribunal stated:
"The Tribunal finds that due to the provisions of section 82AAS(2) Mr Northey was not an eligible person in relation to the year ended 30 June 2000. It was reasonable to expect that superannuation benefits would be and, in fact, were provided by an employer to him during a part of a year of income. ... The Tribunal concurs with the Thornton finding that section 82AAS(2) clearly contemplates that such benefit may be provided for only part of the year. Section 82AAS(2) is not concerned with the position of a person at the time when superannuation contributions were made but with the year of income as a whole. There is no discretion available to not apply the clear requirements of the legislation."
The decision in Norris
40. This case, also decided on the papers, had some factual similarities to the current one. It was also decided on legislation identical to that with which we are concerned.
41. The taxpayer was employed by the Australian Taxation Office (ATO) but had been on extended leave without pay while working in Fiji for the local Revenue and Customs Authority. Eventually he decided to resign from the ATO and he notified the ATO of that intention. He had some unused long service leave and other entitlements and, since he wished to direct some of his resignation payout towards superannuation, he applied for a private ruling on the question whether he would be an "eligible person" under section 82AAS. The private ruling was issued in his favour, with an explanation that:
"... should the taxpayer remain on leave without pay, there would be no obligation on behalf of the employer to make superannuation contributions in respect of the taxpayer and that the taxpayer would be therefore an "eligible person" ..."
42. However, the ATO (in its capacity as the issuer of the private ruling, rather than as the employer) cautioned that:
"Should the taxpayer take the long service or annual leave payments in service rather than as a lump sum on termination, then the situation may be different. The leave periods would then count as periods of employment service and attract a notional contribution and a productivity contribution. It would then be necessary to examine the taxpayer's income from eligible employment and the application of s 82AAS(3) ... to determine whether the taxpayer would be an 'eligible person'."
43. At paragraphs 9 to 11 of its reasons, the Tribunal explained what happened next, and what the competing arguments of the parties were:
- " When negotiating over the terms of his severance from the ATO, the applicant says he was informed he would be required to return to work if he wished to claim his long service leave. He did so: he returned from Fiji and reported for work for two days before resigning. He also claimed several days of annual leave as part of the required notice period. His resignation took effect on 5 January 2000.
ATC 2445 The respondent disallowed the applicant's claim for a deduction in respect of the superannuation contributions made in the financial year ending 30 June 2000. The respondent said the applicant was not an "eligible person" within the meaning of s 82AAS because he had worked during the relevant year and took leave and received superannuation support (albeit for a period of two days). The respondent says he should be covered by the terms of the private ruling that he was an "eligible person". In the alternative, he says he should come within the exemption provided for in s 82AAS(3) which permits the taxpayer to retain "eligible person" status when they derive less than 10% of their taxable income from "eligible employment". The applicant says he was paid a total of $1,686.67 for his two days work and holiday. That is less than 10% of his total assessable income of $35,198. But the respondent has counted the amounts paid to the applicant in respect of long service leave and annual leave, even though superannuation contributions were not made in respect of those amounts. If those amounts are counted, the total amount derived is well in excess of 10% of the applicant's assessable income during the relevant period. The result - according to the respondent - is that the applicant does not qualify as an "eligible person", and is therefore unable to claim a deduction. The respondent says the private ruling does not assist the applicant because the conduct contemplated in the ruling is materially different to the conduct of the applicant.
-  The applicant argues in the alternative that if the amounts paid in respect of leave are to be considered for the purposes of the calculation under s 82AAS(3), they should be apportioned over the life of his employment. The respondent says there is no basis for doing so."
44. The Tribunal found that the Commissioner was not bound by the private ruling because there was a material difference between the actual facts and the assumptions contained in the ruling.
45. As for the substantive issue, the Tribunal referred to the earlier decision in Edmonds-Wilson and the extract from the explanatory memorandum that is quoted in paragraph 26 of these reasons. The Tribunal held, at paragraph 30:
"I take a different view [from the one taken by the Tribunal in Edmonds-Wilson]. The reference to payments of income in s 82AAS(3) ought to be construed in light of the objectives identified in the explanatory memorandum: s 15AB of the Acts Interpretation Act 1901. If counting all of the payments made by the employer undermines the objectives of the section, but adopting a narrower interpretation will advance those objectives, the Tribunal should prefer the narrow definition. This case illustrates why a narrow definition is appropriate. Most of the amounts paid by the ATO did not include superannuation support, so Mr Norris made his own superannuation arrangements. Without the incentive of a deduction he might have preferred to rely on the social security system to provide for his retirement - which is precisely the burden the legislation is designed to avoid. It follows the decision-maker should only have regard to the amounts of income that attract "employment superannuation support" if the exception in s 82AAS(3) is to have its intended effect."
Commentary on the Tribunal decisions
46. Edmonds-Wilson and Norris are the decisions which bring the issues in this case into sharp focus. The decisions are difficult to reconcile unless great significance is placed on the change in language from "derived from" to "attributable to". But that change does not seem to have been a critical factor in Norris; the Tribunal did not even mention it in its reasons.
47. In fact, the decision in Norris rested on the Tribunal's perception that a narrow interpretation of the expression "one or more amounts attributable to that eligible employment" would provide an outcome more closely reflecting "the objectives identified in the explanatory memorandum".
The taxpayer's submissions
48. The first submission of the taxpayer is that, in a case such as this where there is no reportable fringe benefits total, the 10% rule requires the calculation of a quotient by reference to a denominator equal to the total assessable income ($81,734), and a numerator equal to the "total income received from paid employment by the Applicant during the 2004 tax year which attracted [a Superannuation Guarantee Levy] payment": in other words, $802.
49. At the hearing the taxpayer's counsel took what might be regarded as a "purer" argument in relation to the word "attributable" in subsection 82AAS(3)(b)(i)(A) of the Act, to the effect that the numerator should comprise:
- (a) that part of the amount of $802 that related to the four days of employment in July 2003; and
- (b) that part of the remaining figure that accrued to the taxpayer during those four days in July 2003.
50. Apart from the fact that there was no real attempt on the taxpayer's part to identify how the apportionment required in paragraph 49(b) might be undertaken between the four days in July 2003 and the remainder of Mr Falson's employment with the NSW Police, the Commissioner's representatives pointed out that this "apportionment contention" had not been raised in the taxpayer's objection. Given the status of this matter as a test case, the Commissioner did not object to the amendment of the taxpayer's grounds of objection under s 14ZZK of the Taxation Administration Act 1953, and accordingly, leave to that effect was granted. The hearing proceeded on the basis that the apportionment contention was incorporated in the taxpayer's grounds of objection.
51. The taxpayer's further submission is that we should follow the earlier decision of the Tribunal in Norris (although, since the taxpayer's success in Norris was not based upon the apportionment contention, our following of Norris would be on the basis that the numerator should be represented only by the amount of $802 referred to in paragraph 48 above).
52. The taxpayer's submissions invite us to read down the expression "one or more amounts attributable to that eligible employment" in subsection 82AAS(3)(b)(i)(A) of the Act in either of the following ways:
- (a) the "amounts" that are attributable are only those which attract superannuation support from the employer; or
- (b) the words "attributable to that eligible employment" mean "attributable to that period of eligible employment", even though the statutory provision does not include the words "that period" which have been inserted in bold type.
On either basis the taxpayer says that the quotient is well below the 10% threshold set out in subsection 82AAS(3) of the Act.
53. As to the basis in paragraph 52(a), the taxpayer says that the amount should only be included in the numerator if it attracted superannuation support. This, he says, is an outcome that is consistent with the purpose of the legislation, and is the basis on which Norris was decided.
54. As to the basis in paragraph 52(b), the taxpayer relies on the 1999 amendment that substituted the words "attributable to" for the words "derived from". He concedes that the whole of the amount of $12,641 received from the NSW Police was "derived" in the relevant year, but says that only a very small part of that sum (namely, that part that relates to the first four days of the relevant year) is "attributable to" his eligible employment for the relevant year. (We note that the concession that the whole amount was derived in the relevant year was, bearing in mind that the Applicant was a cash taxpayer, correctly made.) In effect, his contention is that subsection 82AAS(3) of the Act requires the identification of the amount or amounts "attributable to that eligible employment for the particular year of income" (Taxpayer's Initial submissions, paragraph C.6) or, put a different way, "attributable to the particular year of income" (Taxpayer's Initial submissions, paragraph C.8).
55. The taxpayer contends that one of the reasons for the change in language from "derived" to "attributable" may have been to remove uncertainty. That uncertainty is said to have arisen in circumstances where (as here) an employer paid an employee, on termination of employment, a lump sum in respect of unused annual leave. The Act provided in subsection
ATC 244726AC(2) that the amount paid "shall be included in the assessable income of the [employee] of the year of income" in which it was paid. If, however, it was paid on 30 June in one income year but not received (and therefore, perhaps, not "derived") until the following day (that is, 1 July in the following income year), then a possible outcome is that the payment would form part of the numerator for the later income year without the same amount being included in the denominator.
56. The taxpayer then says (Taxpayer's Final submissions, paragraphs B.25 to B.28):
- "25. ... the potential consequences from such an interpretation raised considerable difficulties to the disadvantage of the taxpayer (and, accordingly, suggests an alternative interpretation be given to the expression) where:
- • payments received consisted of salary or wages containing significant components of income earned (but not paid) in the preceding year of income;
- • lump sum payments of annual leave and long service leave paid in a preceding year of income but received in the year of income; or
- • lump sum payments of annual leave and long service leave being paid and received in the year of income, but being amounts that accrued over previous years of income.
- 26. By replacing the expression "deriving from" with "attributable to" the draftsman has allowed some latitude, if that be needed, to move away from the traditional meaning of "derived" (at least in the context of "deriving" ordinary income) and adopted an approach that is consistent with the intent and policy of the legislation. There is nothing in the bills or accompanying Explanatory Memoranda that suggests the apportionment approach was not what was intended by the draftsman either when the provision was first introduced or subsequently. In other words it is open to the Tribunal to adopt the proportional approach in interpreting the meaning to be given to the expression "attributable to".
- 27. The proportional approach will generally be more equitable to the taxpayer by overcoming the distortions referred to above by ensuring that lump sum payments are appropriately spread across the years of income to which they are properly attributable.
- 28. Any interpretation of the provision which resolves the issue in favour of the taxpayer should be taken by the Tribunal in respect of the operation of section 82AAS(3). As indicated in earlier submissions the purpose of the provisions is to ensure that substantially self-employed persons do not lose their access to personal superannuation contributions because they earn minor amounts through paid employment. In the current context the taxpayer should not miss out on a $41,000 deduction in circumstances where he was only employed for 4 days in the relevant year and earned a salary of [$802] (with superannuation support of $72.15)."
The Commissioner's submissions
57. According to the Commissioner, the proper approach is to identify whether, in the year of income, the taxpayer was engaged in particular eligible employment. If he was so engaged, then the next step is to identify what was the assessable income that was "attributable to that eligible employment" - not "attributable to that eligible employment, but only if the income was subject to superannuation support from the employer", and not "attributable to that period of eligible employment", but simply "attributable to that eligible employment". He says that the total of the amounts set out in paragraph 10 above is attributable to that eligible employment. That total is greater than 10% of the total assessable income of the taxpayer, and therefore, the Commissioner submits, the taxpayer is not an "eligible person" and cannot claim the deduction.
58. The Commissioner submits, in summary, that the expression "that eligible employment" in subsection 82AAS(3)(b)(i)(A) of the Act is not modified by a reference to the "particular year of income" and there is no warrant for reading the provision as if it were.
How the provisions should be construed
59. Both the taxpayer and the Commissioner have urged us to adopt a construction of the Act that is consistent with its purpose. Indeed, that
ATC 2448is mandated by section 15AA of the Acts Interpretation Act 1901, which states:
- "(1) In the interpretation of a provision of an Act, a construction that would promote the purpose or object underlying the Act (whether that purpose or object is expressly stated in the Act or not) shall be preferred to a construction that would not promote that purpose or object."
60. The difficulty is that the parties do not agree on what that purpose is.
61. The taxpayer says (Taxpayer's Initial submissions, paragraph C.11):
"The purpose of the provisions is to ensure that substantially self-employed persons do not lose their access to personal superannuation contributions because they earn minor amounts through paid employment."
62. The Commissioner, on the other hand, says (Commissioner's Further submissions, paragraph 31):
"The legislative history and context of subsection 82AAS(3) shows that the true purpose of the 10% exemption rule is to provide a deduction for superannuation contributions to the self-employed or the substantially self-employed person where the test for a substantially self-employed person, as indicated by the words of the subsection, is to be based on the percentage of assessable income received from an employer, or employers, who do, or are required to, provide superannuation benefits in any one year. The test is not based on superannuation support actually received. As a deduction provision the test requires a percentage calculation where the numerator will include all amounts of assessable income derived in the year of income and attributable to the relevant employment relationship in that year. There is no basis in the legislative history of the deduction provision to exclude from assessable income derived in a year, amounts which accrued in earlier years, or amounts which do not attract superannuation support but are otherwise assessable income attributable to the particular employment relationship which gave rise to the derivation of assessable income in that year. That is, there is no support to be found in the legislative history or the context in which the subsection appears for reading down the words 'attributable to that eligible employment' to mean attributable solely to work performed under that employment relationship in that year of income."
63. We accept, in a general sense, the taxpayer's proposition that the purpose of these particular provisions is to benefit certain categories of taxpayers - referred to in Explanatory Memoranda as "substantially self-employed persons" - by allowing them deductions which might otherwise not be available to them. However, we consider that there are considerable (and indeed insuperable) difficulties in taking the taxpayer's proposition beyond that very general statement.
64. One difficulty relates to the reach of the expression "substantially self-employed person", which is used frequently in the Explanatory Memoranda but not at all in the Act itself. A person who is self-employed for, say, all but four days in a year might readily be described as "substantially self-employed". But that does not advance the taxpayer's position, because that is not the test laid down in the Act. Our task in this Tribunal is not to interpret the words used in an Explanatory Memorandum. Our task is to interpret the words used in the Act.
65. The expression "substantially self-employed person" must be seen as a convenient but inexact way of describing, by way of a label, the entire statutory test set out in subsection 82AAS(3) of the Act. The correct approach does not and cannot require the Tribunal to mould the statutory language (which has been drafted with a high degree of precision) to conform to the inexact label in the Explanatory Memorandum. Nor, for that matter, would that be an easy task, for it would require first some identification of the territory marked out by the label - and the label itself has no signposts to assist in that identification. It cannot be denied that the label must give way to the language of the Act. In Re Bolton;
ex parte Beane (1987) 162 CLR 514 at 518, Mason CJ, Wilson and Dawson JJ said in relation to a Minister's Second Reading Speech, "the words of a Minister must not be substituted for the text of the law". There is no reason why the
ATC 2449position should be different with an Explanatory Memorandum.
66. The starting point must be the language of the Act.
Newcastle City Council v GIO General Limited (1997) 191 CLR 85 at 112, McHugh J observed:
"[A] court is permitted to have regard to the words used by the legislature in their legal and historical context and, in appropriate cases, to give them a meaning that will give effect to any purpose of the legislation that can be deduced from that context."
68. His Honour then referred to the following comments of Brennan CJ, Dawson, Toohey and Gummow JJ in
CIC Insurance Limited v Bankstown Football Club Limited (1997) 187 CLR 384 at 408:
"It is well settled that at common law, apart from any reliance upon s 15AB of the Acts Interpretation Act 1901 (Cth), the court may have regard to reports of law reform bodies to ascertain the mischief which a statute is intended to cure. Moreover, the modern approach to statutory interpretation (a) insists that the context be considered in the first instance, not merely at some later stage when ambiguity might be thought to arise, and (b) uses "context" in its widest sense to include such things as the existing state of the law and the mischief which, by legitimate means such as those just mentioned, one may discern the statute was intended to remedy. Instances of general words in a statute being so constrained by their context are numerous. In particular, as McHugh JA pointed out in Isherwood v Butler Pollnow Pty Ltd [(1986) 6 NSWLR 363 at 388], if the apparently plain words of a provision are read in the light of the mischief which the statute was designed to overcome and of the objects of the legislation, they may wear a very different appearance. Further, inconvenience or improbability of result may assist the court in preferring to the literal meaning an alternative construction which, by the steps identified above, is reasonably open and more closely conforms to the legislative intent [Cooper Brookes (Wollongong) Pty Ltd v Federal Commissioner of Taxation (1981) 147 CLR 297 at 320-321].
(some footnotes omitted)"
69. The "context" referred to in that passage can include not only the existing law and the mischief to be addressed, but also, more broadly, the history of the legislation (
Palgo Holdings Pty Limited v Gowans (2005) 221 CLR 249 at 261 ), the reasons given for the introduction of the particular provision, the light thrown on its meaning by surrounding provisions, and the general purpose and object of the statute (
Central Bayside General Practice Association Limited v Commissioner of State Revenue 2006 ATC 4610; (2006) 80 ALJR 1509 at 1529 ).
70. However, no matter what role "context" plays, our task remains one of interpreting the language actually used in the Act. As McHugh J cautioned in
Newcastle City Council v GIO General Limited (1997) 191 CLR 85 at 109:
"... the function of the court remains one of construction and not legislation. When the express words of a legislative provision are reasonably capable of only one construction and neither the purpose of the provision nor any other provision in the legislation throws doubt on that construction, a court cannot ignore it and substitute a different construction because it furthers the objects of the legislation."
71. Later, at 113, in a reference to CIC Insurance Ltd, his Honour added:
"Extrinsic material cannot be used to construe a legislative provision unless the construction of the provision suggested by that material is one that is 'reasonably open'. Even if extrinsic material convincingly indicates the evil at which a section was aimed, it does not follow that the language of the section will always permit a construction that will remedy that evil. If the legislature uses language which covers only one state of affairs, a court cannot legitimately construe the words of the section in a tortured and unrealistic manner to cover another set of circumstances. As Brennan CJ and I said in IW v City of Perth [(1997) 71 ALJR 943 at 947], even when a court adopts a purposive construction to remedial legislation it 'is not at liberty to give it a construction that is unreasonable or unnatural'."
ATC 2450There are several reasons why we do not agree with the taxpayer's submissions.
73. First, the submission that the only employment income that should be taken into account is that which attracts a superannuation guarantee levy payment is not logical, when considered by reference to the other language of subsection 82AAS(3)(b)(i)(A) of the Act. That provision includes a reference to "reportable fringe benefits", which do not attract a superannuation guarantee levy payment; to read such a restriction into the remainder of the provision does not appear to us to be tenable.
74. Second, the precision of the language of subsection 82AAS(3) of the Act cannot be overlooked. Paragraphs (a) and (b) of the subsection include the expression "in a year of income", or something similar to it, no less than seven times:
- (i) during a period, or a combination of periods, in a year of income: (3)(a);
- (ii) the person's assessable income, or the person's exempt income, of the year of income: (3)(b)(i)(A);
- (iii) the person's reportable fringe benefits total for the year of income: (3)(b)(i)(A);
- (iv) the person's assessable income of the year of income: (3)(b)(i)(B);
- (v) reportable fringe benefits total (if any) for the year of income: (3)(b)(i)(B);
- (vi) the person's assessable income, or the person's exempt income, of the year of income: (3)(b)(ii); and
- (vii) the person's reportable fringe benefits total for the year of income: (3)(b)(ii).
75. In those same paragraphs, the expression "attributable to that eligible employment" is used twice, and on neither occasion is it modified by reference to "the year of income". That omission cannot have been inadvertent. On the contrary, we conclude that the Parliament was alive to the effect that the "year of income" modifier would have, and that it deliberately chose when to employ, and when not to employ, that modifier.
76. Third, the various interpretations suggested by the taxpayer are not "reasonably open" - a necessary requirement, according to McHugh J in
Newcastle City Council v GIO and also according to CIC Insurance. The expression "that eligible employment" in subsection 82AAS(3)(b)(i)(A) of the Act is a reference to the "particular eligible employment" in subsection 82AAS(3)(a) of the Act, and that, in turn, is a reference to the particular activity or state of affairs set out in subsection 82AAS(1) of the Act. It cannot reasonably be read as a reference to the period in which that employment was undertaken.
77. Fourth, even if any of the taxpayer's interpretations were reasonably open, we do not accept that any one of the Explanatory Memoranda "convincingly indicates" - see paragraph 71 above - that the provisions were intended to be read that way. In fact, there are strong indications that the Explanatory Memoranda point in the opposite direction. For example, in the Explanatory Memorandum to the 1992 amendments there appears the following commentary at paragraph 4.17:
" What are amounts derived from 'that employment or those services'?
Amounts derived from 'that employment or those services' (subparagraph (b)(i)(A) and subparagraph (b)(ii) of the new definition of 'unsupported eligible person') are salary and wages and any other payments, including eligible termination payments, paid by the employer providing the award based superannuation support. They do not include payments from other sources, such as eligible termination payments from superannuation funds (including the fund to which the employer makes award based superannuation contributions) or approved deposit funds." (emphasis added)
78. Admittedly, in 1992 the relevant provision contained the expression "derived from" rather than "attributable to", but it does not appear to us that the change in language in 1999 was intended to affect the outcome just described.
79. Also, there is a very deliberate reference, in the Explanatory Memorandum to the 1999 amendments (see paragraph 26 above), to "the total remuneration [a taxpayer] receives from an employer who provides superannuation support", which could have been expressed much more simply as "the total remuneration that attracts superannuation support" if that had been the outcome expected or sought by the draftsman.
ATC 2451Fifth, there was no attempt by the Parliament to amend the law, following the decision in Edmonds-Wilson, in the way that the Tribunal suggested in that case. This might indicate that the result in that case was in accordance with the expectations of the legislature.
81. Sixth, the introduction in 1999 of the "reportable fringe benefits total" to both the numerator and the denominator in the statutory formula must be seen as a tightening of the test for eligibility. It follows, arithmetically, that if there is a "reportable fringe benefits" amount to be taken into account, then the quotient must be greater than if there were no such amount to be taken into account, and it would thus be correspondingly more difficult for a taxpayer to be an "eligible person". In other words, while subsection 82AAS(3) of the Act might properly be described as a "concession", it may not be easy to attract.
82. Finally, as to the question of whether we should follow Norris, some comment is perhaps desirable.
83. The normative role performed by this Tribunal encourages its members to decide similar cases consistently. As the Tribunal's first President, Brennan J, said in
Re Drake and Minister for Immigration and Ethnic Affairs (No. 2) (1979) 2 ALD 634 at 639:
"Inconsistency is not merely inelegant: it brings the process of deciding into disrepute, suggesting an arbitrariness which is incompatible with commonly accepted notions of justice."
84. However, the Tribunal cannot always maintain absolute consistency. One example of an exception to the general rule was given in
Re Scott and Commissioner for Superannuation (1986) 9 ALD 491 at 499:
"Doubtless, in some instances, where a matter has been decided by the Tribunal without full argument or full consideration and it is necessary for the Tribunal in later proceedings to examine the matter fully, it may then properly reach a conclusion different from the previous decision. In that event, because the later decision is the first made upon a full consideration of the matter, it is clear to administrators that that decision should be followed rather than the previous decision."
85. This is one of those instances. The Commissioner recognised that the previous decisions in the Tribunal were in conflict, and identified this case as a test case warranting test case funding from the Commonwealth. In recognition of the significance of the case, two very experienced and capable teams of counsel were briefed. The interpretation of the legislation was forcefully argued, orally and in writing, by both the taxpayer and the Commissioner. We had the benefit (unlike the Tribunal in the earlier cases) of a comprehensive exposition of the background and history of the legislative provisions, and we were able to give the issues proper attention and consideration. Having considered all the material before us, we consider that the decision we have reached is the correct one. In the circumstances it is appropriate that we decline to follow Norris.
86. For the reasons set out, the objection decision under review must be affirmed.