KERR v FC of T

Members:
G Ettinger SM

Tribunal:
Administrative Appeals Tribunal, Sydney

MEDIA NEUTRAL CITATION: [2007] AATA 1732

Decision date: 5 September 2007

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G Ettinger (Senior Member)

1. Superannuation has been a difficult and involved topic to understand in the years leading to the significant changes which took effect on 1 July 2007. Mr Kerr is a taxpayer who received an Eligible Termination Payment (ETP) in 2000 on his retirement, which took place before he reached the age of 55 years. He says that he invested funds in various superannuation products as advised by his licensed financial planner. I am satisfied from his evidence that Mr Kerr relied on the financial planner, but note that he also made certain inquiries with the ATO by checking its website, and checking the list of benefits provided to him. He agrees however that he did not contact the ATO directly for information.

2. The result of the advice given by Mr Kerr's financial planner was, and this was corroborated in an unsigned statement by the financial planner dated 21 May 2007 which is before the Tribunal, that Mr Kerr received incorrect advice from him. This incorrect advice has disadvantaged Mr Kerr financially because, as the financial planner admitted:

"Through no fault of his own and due to the complexity of the rules, David Kerr has slightly underpurchased in percentage terms the amount of 'complying annuity' in the form of a Term Allocated Pension, that he needed to qualify for the 15% tax rebate."

3. Mr Kerr says in his written submission:

"My superannuation arrangements have (just) failed to meet the requirement that 50% of the RBL Amounts be in a complying pension. As a result I am not eligible for the higher Pension RBL and part of my pension payments have been determined to be excessive and are therefore not entitled to the 15% tax rebate.

I agree that the ATO have complied with the strict requirements of the law and have therefore processed my RBL amounts in accordance with the law.

…"

4. The Commissioner of Taxation who is the Respondent in these proceedings held that based on the information provided to him on behalf of the Applicant, the Reasonable Benefit Limits (RBL) determination that issued was correct.

5. Mr Kerr is appealing against the decision of the Commissioner. He has put forward two suggested scenarios to resolve the situation in his favour, including the exercise of the discretion to find "special circumstances" pursuant to section 140ZB of the Income Tax Assessment Act 1936 (the Act).

6. In order for "special circumstances" to apply, I would have to be satisfied that the circumstances in which Mr Kerr finds himself are unusual, exceptional or uncommon, and that in the event the discretion to find "special

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circumstances" was not exercised in his favour, the result would be unjust, unreasonable or inappropriate.

7. Mr Kerr's suggestion for an alternative resolution to the problem was to split the $185,480 amount into two components, namely $155,179 as not excessive, and $30,301 as excessive. Mr Kerr referred to the total amounts he received, which are detailed later in these Reasons for Decision. He indicated that after the $479,000 amount was paid on 1 December 2004, and before the $185,480 amount was processed by the ATO, he had a running total of $479,000 in complying pensions, and $323,821 in lump sum non complying pensions. He submitted that when the ATO processed the $185,480 benefit amount, the margin of $155,179 was ignored, whereas the ATO could have classified the $30,301 as excessive, and $155,179 as not excessive.

8. I noted the Commissioner in making a final determination with regard to Mr Kerr's situation was within the correct time frame and followed procedures appropriately (section 140R and 140M of the Act). I have noted that pursuant to section 140S of the Act if certain conditions exist as detailed there, a final determination may be revised. Having considered the argument on both sides, I preferred the submissions of the Commissioner who said that having complied with his duties in making the determination, it was final unless the discretion in section 140ZB was exercised. I did not accept Mr Kerr's suggestion for an alternative solution as it does not comply with the legislation. Accordingly the decision can be varied only by consideration of section 140ZB of the Act, and the discretion to apply "special circumstances". I have dealt with that later on in these Reasons for Decision.

9. I am satisfied that the financial penalty Mr Kerr has had to pay is at least in part as a result of his reliance on his licensed financial planner. Whilst I accept that this creates a form of financial hardship on the Applicant, I was not satisfied from the evidence before me that his situation is so unusual or uncommon that it constitutes "special circumstances" in terms of the legislation. I am not satisfied that the result of not applying the discretion to find "special circumstances" in this case results in a situation which is unjust, unreasonable or inappropriate in relation to Mr Kerr.

10. My reasons follow.

The issue before the Tribunal

11. The parties agreed, and I accepted that the calculations made by the Commissioner in his final determination in respect of Mr Kerr's pension were correct.

12. Accordingly I only had to decide whether the correct or preferable decision was to exercise the discretion to find "special circumstances" (pursuant to section 140ZB of the Act), in all the circumstances of the case.

13. As relevant section 140ZB of the Act states;

"If:

• (a) the whole or a part of an ETP, a superannuation pension or an annuity would, apart from this section, exceed the recipient's RBLs; and
• (b) the Commissioner is satisfied that, because of the special circumstances of the case, the whole or a part of the ETP, pension or annuity should be treated as if it were not in excess of the recipient's RBLs;

• the Commissioner may make a final determination or an interim determination accordingly".

Facts of the case

14. It is not in dispute, and I accept that the following payments were made to the Applicant, and reported to the Respondent.

• • The Applicant was paid an Eligible Termination Payment (ETP) on 5 July 2000 for the amount of $86,000 by MLC Ltd. Mr Kerr stated that this was a non superannuation payout from an employee share plan and was listed by the ATO as having an RBL amount of $36,148.80, and not the full $86,000.
• • The Applicant was paid an ETP by Lend Lease Superannuation Fund on 26 July 2000 in the amount of $6,000.
• • The Applicant was paid an ETP on 8 November 2004 in the amount of $225,000.
• • Retirement Portfolio Service, commenced paying the Applicant a pension on 1 December 2004. It was reported as having a purchase price of $479,000.

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  • Retirement Portfolio Service commenced paying the Applicant a pension on 1 December 2004. It was reported as having a purchase price of $185,480.46 and as not meeting the pension/annuity standards.

15. The Commissioner determined that the non-complying income stream was in excess of the Applicant's Reasonable Benefit Limits (RBL's), and on 20 November 2006, the Respondent issued a "final excessive determination" regarding the pension with a purchase price of $185,480.46 to which the Applicant objected.

16. The Applicant sought a review of the decision made by the Respondent to disallow his objection, and on the 15 January 2007 appealed to the AAT.

The Applicant's case

17. In support of the Applicant's claim that the Pension RBL should apply, as opposed to the Lump Sum RBL, the Applicant referred to the five components of his benefits (see also Exhibit A2 and the Applicant's written submissions), and submitted as follows:

• • He tried to comply with the 50% complying benefit pension benefit requirement by seeking professional advice and checking that against advice received from the ATO.
• • The 5 July 2000, $86,000 benefit amount was what caused the problem. This was a non superannuation payout from an employee share plan, and was listed by the ATO as having an RBL amount of $36,148.80, and not the full $86,000. Mr Kerr commented that by contrast, the ATO had, for the other four payments, used the listed RBL amount to determine the 50% complying pension requirement.
• • Mr Kerr said that the advice he received from his financial advisor was that he would meet the 50% pension RBL requirement by establishing a complying pension of $479,000. He submitted that after checking ATO figures he worked out that after allowing for indexation, the complying pension proportion would be 51.3% of the indexed total RBL amounts, whereas it has worked out at only 48.5%, with the resultant financial disadvantage.
• • The Applicant also noted that there was a long delay between the first non superannuation ETP in July 2000 and the establishment of the superannuation pensions in December 2004, and that he had forgotten about these payments.

The Respondent's case

18. The Commissioner relied on what he termed as the final determination made pursuant to the legislation. He submitted that unless the situation envisaged in section 140S of the Act prevailed, the final determination could not be revised.

19. The Commissioner did not agree with Mr Kerr that the discretion to find "special circumstances" in his case should be exercised.

The Tribunal

20. I am mindful that there is a limit to the value of benefits which a person can receive over a lifetime at reduced tax rates, which is the RBL.

21. I have also noted that notwithstanding Mr Kerr's argument that just missing the 50% requirement, and losing the 15% rebate on the whole of the $185,480 amount was unjust, he agreed that the Commissioner's calculations in the Commissioner's final determination, were correct at law.

22. Accordingly, I turned to consider section 140ZB of the Act which provides the Commissioner, and therefore the Tribunal, with a discretion to treat benefits as being within the recipient's RBLs notwithstanding that the whole or part of the ETP, superannuation pension or annuity would exceed the RBLs.

23. A summary of Mr Kerr's submissions that his circumstances amounted to "special circumstances" which are quite unusual and exceptional, follows.

• • Mr Kerr says he received incorrect advice from his financial planner, and errors were made notwithstanding the Applicant's own research. The fact he gave incorrect advice was corroborated by the financial planner (Exhibit A1).
• • Mr Kerr says he retired before the age of 55 years, and there was a gap of four years between the year 2000 lump sum payments and the pension arrangements made in December 2004, creating the possibility for error.

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  • Mr Kerr's submits his lengthy service and senior position resulted in a high payout, and an anomalous RBL amount compared to the benefit amount; accordingly bona-fide mistakes could be made.
• • The legislation is very complex, and the information provided by the ATO was misleading; further since 1 July 2007 the whole field of superannuation has been simplified and the situation vis-à-vis the Applicant was unjust because the present situation does not require funds to be "locked away".
• • The Lend Lease employee share plan, was a very unusual situation, and only a very small number of people, comprising less than a hundred people Mr Kerr estimated, which meant one in a hundred thousand taxpayers were in the same or in a similar type situation.
• • The strict application of the legislation, although correct, has given rise to an unjust, unreasonable or inappropriate result for Mr Kerr.

24. Mr Kerr said in summary of his situation that "just missing the 50% requirement and losing the 15% rebate on the whole $185,480 amount is unjust, unreasonable and inappropriate, because the net effect for me is to lose a rebate over the years till I reach 60, totalling $8,845 …."

25. The Respondent on the other hand, submitted that:

• • The calculations made in the Commissioner's final determination, are correct at law;
• • The information the Commissioner provided was not misleading, and was a list "for calculation" (purposes), but was not " the calculation";
• • Mr Kerr relied on his advisor and did not call the ATO to make a specific inquiry;
• • Mr Kerr could have sought a private ruling;
• • The Applicant's circumstances were not so unusual as to qualify to be "special circumstances"; (cases were referred to me which are discussed further on in this Statement of Reasons)
• • The Commissioner relied on the document NTLG Minutes for a meeting of 7 September 2005 in which the ATO discussed "Higher Reasonable Benefits Limit", and provided guidance for the application of the "special circumstances" discretion.

26. I am mindful that the term "special circumstances" whilst not defined in the Act, has been examined by Courts and Tribunals in many decisions, and in different contexts. In
Re Beadle and Director-General of Social Security (1984) 6 ALD 1 Toohey J stated:

"An expression such as "special circumstances" is by its very nature incapable of precise or exhaustive definition. The qualifying adjective looks to circumstances that are unusual, uncommon or exceptional. Whether circumstances answer any of these descriptions must depend on the context in which they occur. For it is the context which allows one to say that the circumstances in one case are markedly different from the usual run of cases. This is not to say that the circumstances must be unique but they have a particular quality of unusualness that permits them to be described as special."

27. In
Beadle v Director-General of Social Security (1985) 60 ALR 225, the Federal Court defined "special circumstances" as being those which are "unusual, uncommon or exceptional", and that this has been reinforced in many following cases that have been decided since, including
Secretary, Department of Social Security v Hulls (1991) 22 ALD 570, and
Tefonu Pty Ltd v Insurance and Superannuation Commissioner (1993) 44 FCR 361.

28. In Beadle (supra), the Federal Court, in examining "special circumstances" within the terms of section 102(1) of the 1947 Act said:

"It would depend upon the circumstances of the particular case whether these constituted special circumstances. We do not think it is possible to lay down precise limits or precise rules. The matter is one for the Director-General bearing in mind the purpose for which the power is given."

29. I was referred to AAT Case 64/96; No 11,379 (1996) 96 ATC 583; (1996) 34 ATR 1175, where in considering the application of special circumstances, Senior Member Muller (as he then was), stated that:

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"The point of legislation which allows for a discretion to be exercised in 'special circumstances' is recognition of the fact that strict application of the legislation may in some unusual or unforseen cases result in an unjust, unreasonable or inappropriate result: a result that the legislators did not intend."

30. However, notwithstanding the element of retrospectivity on which he commented, the Senior Member did not find special circumstances could be found in relation to the Applicant in Case 64/96.

31. In
Thommeny v Federal Commissioner of Taxation 2006 ATC 2440, Member Way noted that to warrant the exercise of the discretion to find "special circumstances", the situation of the taxpayer must be unusual, uncommon or exceptional, and a situation where the strict application of the law gives rise to an unjust, unreasonable or inappropriate result. In all the circumstances, he did not find for Thommeny in that case.

32. In
Tefonu Pty Ltd v Insurance & Superannuation Commissioner, her Honour Justice Beasley went through a number of situations which affected the Applicant in that case, including the application and effects of certain retrospective legislation, and found that the situation of the Applicant there could not be held to be so unusual or exceptional as to invoke the discretion for the application of "special circumstances".

33. I have noted also that the Respondent cited the NTLG Minutes for a meeting of 7 September 2005 in which the ATO discussed "Higher Reasonable Benefits Limit", and provided guidance for the application of the "special circumstances" discretion. And of course guidance is all this document provides. The Tribunal is not bound by it, but notes that what the ATO had in mind in the application of "special circumstances" was that higher than usual earnings, benefits taken in the wrong order, retrospectivity of legislation, ignorance of the law, or incorrect/poor financial advice did not qualify. I noted however, that incorrect advice or delayed advice by the ATO itself was considered by the Commissioner as a special circumstance. I was not satisfied that Mr Kerr, notwithstanding his submission that he had been misled by information from the Commissioner, was indeed so misled.

34. Having considered all the submissions, and decided case law on "special circumstances", I could not be satisfied that the Applicant's situation as pleaded at the Tribunal, including the reliance on incorrect advice from a financial advisor, the lapse of time between payments, higher than usual earnings and complex legislation, could be considered as so unusual, uncommon or exceptional as to constitute "special circumstances" in the terms of the legislation.

35. I am satisfied that the financial penalty Mr Kerr has had to pay is as a result generally of his reliance on his licensed financial planner. Whilst I accept that this creates a form of financial hardship on the Applicant, I was not able to find "special circumstances" in the terms of the legislation. Accordingly the decision of the Commissioner had to be affirmed.

Decision

36. The Tribunal affirms the objection decision.