MCLENNAN v FC of TMembers:
KS Levy RFD SM
Administrative Appeals Tribunal, Brisbane
MEDIA NEUTRAL CITATION:
 AATA 311
K S Levy, RFD (Senior Member)
1. The applicant, Kevin McLennan, made a number of superannuation transactions in 2009 and 2010. He withdrew a lump sum amount in 2009 and reinvested this in fixed term deposits. Later that year and in 2010, as these fixed term deposits matured, he redeposited those amounts back into his superannuation account. These were classified by the Australian Taxation Office (ATO) as non-concessional contributions. Because of the number of deposits and the amounts involved, he exceeded the "cap" for non-concessional contributions for the 2009/2010 financial year and was assessed as being liable to excess non-concessional contribution tax.
2. Mr McLennan appealed the Commissioner's decision and sought to have the Commissioner exercise his discretion under s 292-465 of the Income Tax Assessment Act 1997 (Cth) (the Act) so that the excess might be disregarded or allocated to another financial year. His objection was unsuccessful. He now appeals that decision to this Tribunal.
3. The issue for determination is:
Should the discretion under s 292-465 of the Act be exercised in favour of Mr McLennan to disregard or allocate to another financial year the excess non- concessional contributions made in respect of the 2009/2010 financial year?
4. The applicant was employed for many decades by the Magnetic Island Fire Service (later the Queensland Fire Service) on a part-time basis as well as having a part-time position as a body corporate manager. His wife was a primary school teacher. They contributed to their superannuation progressively over 25 years from "after tax" income.
5. Mr McLennan reached the age of 65 years on 27 October 2007 and retired from his position with the fire service. In late 2008, during the worldwide economic calamity which has become known as the "global financial crisis", the applicant's superannuation experienced a decline in value of $78,000 in a matter of months. Following an announcement by the then Prime Minister, Mr Kevin Rudd, that the government would guarantee bank deposits, Mr McLennan withdrew $366,572.85 from his superannuation in January 2009 and placed it in varying amounts in term deposits with major banks.
6. In his written statements, the applicant has pointed out that by following that course with a view to minimising any further capital loss, he accepted a capital loss of $61,905.74 from his account and, as I understand it, a combined loss of $78,000 from the superannuation accounts of the applicant and his wife. About six months later, as his term deposits matured, he thought it was safe to redeposit these amounts with his former superannuation fund, QSuper. These deposits occurred in July 2009, October 2009 (two separate deposits), November 2009 and April 2010. The total of these deposits to his former QSuper account amounted to $218,000.
7. By letter dated 30 May 2012, the Commissioner advised Mr McLennan that he had exceeded his non-concessional contributions cap for the 2009/10 financial year by $68,000. In response to the Commissioner's letter, the applicant sought review of the Commissioner's conclusion about these various transactions so as to try and avoid any excess non-concessional contributions tax. The applicant explained that the motivation for the transfers was to be able to preserve his superannuation for retirement and to be a self-funded retiree. He also contended that:
- (1) the excess contribution should not be taxed as it was income earned;
- (2) no tax deduction was claimed; and
- (3) the money deposited was the same as that withdrawn in 2009 with a view to preservation of funds. He summarised it this way: "... it represents a transfer of funds rather than an injection of funds".
8. The Commissioner considered the applicant's submissions and concluded the applicant did not have "special circumstances" as required by s 292-465 of the Act. Consequently, the Commissioner said the excess contributions could not be disregarded or reallocated and, therefore, the amount of excess contributions tax previously advised in the letter of 30 May 2012 was payable.
Oral Evidence of Mr McLennan
9. Mr McLennan gave sworn evidence. He told the Tribunal that he had approximately $443,000 in superannuation when he retired in December 2007. He described the period from August 2008 to January 2009 and watching his superannuation savings quickly evaporating. He and his wife had lost $150,000 from their joint superannuation, or one third in 10 weeks (October 2008 to January 2009). He said this represented about 20 years of savings.
10. Under cross-examination by Counsel for the Commissioner, he told the Tribunal that:
- (1) he did not retain an accountant at any time over this period;
- (2) in response to his enquiry, he was told by either his superannuation fund, or the ATO, or perhaps it was his general knowledge, that he understood he could withdraw his superannuation "without penalty". He assumed that he would then return it to QSuper without penalty;
- (3) he did not check about the taxation implications of returning the money to QSuper;
- (4) he did enquire as to whether he was working sufficient hours to be able to make voluntary contributions to superannuation; and
- (5) he made the decision to withdraw and re-deposit his superannuation monies without advice rather than on the advice of a qualified person.
11. Mr Brennan, for the Commissioner, then suggested to Mr McLennan that he "assumed" that he could withdraw and return his superannuation before the global financial crisis and therefore his assumption had nothing to do with the economic conditions then existing. Mr McLennan disagreed emphatically, stating his decision was made because the investment scenario had changed.
12. The Tribunal asked Mr McLennan whether his term deposits were in a retirement savings account (i.e. in a superannuation account) or merely in a savings account in his own name. He indicated it was deposited in a savings account only.
13. The applicant's counsel submitted that Mr McLennan's circumstances revealed "special circumstances" and at least as unusual as the cases which she identified which had succeeded in having the discretion exercised in their favour. She specifically referred me to
Bornstein and Commissioner of Taxation  AATA 424 where there was seen to be a "perfect storm of events" which led to a justifiable breach of the legislation. She argued that was the case for Mr McLennan also. She also submitted that the applicant did everything he was required to do as envisaged by the legislation in order to be self-reliant in retirement and therefore the imposition of excess tax was "unfair".
14. The Commissioner's submissions are that:
- (1) the Commissioner's discretion under s 292-465 of the Act cannot be exercised as the preconditions in sub (3) of that section are not satisfied;
- (2) a mistake or unintended consequence will not amount to "special circumstances" unless they are extenuating circumstances which would make the error "reasonable or understandable in the circumstances" (see para 28 of the respondent's Statement of Facts, Issues and Contentions);
- (3) the transactions cannot be regarded as a "roll-over" as there was no transfer from one complying fund to another (see para 27 of the respondent's Statement of Facts, Issues and Contentions);
- (4) the applicant did not seek advice from his superannuation fund, the ATO or professional advisors (see para 29 of the respondent's Statement of Facts, Issues and Contentions); and
- (5) any matter which would lead to the imposition of excess contributions tax must have been reasonably foreseeable, that is, an objective test applies (see s 292-465(6); see para 31 of the respondent's Statement of Facts, Issues and Contentions).
15. The relevant statutory provisions are contained in Division 292 of the Act. The object of that division, as stated in s 292-5, is said to be:
... to ensure that the amount of concessionally taxed superannuation benefits that a person receives results from superannuation contributions that have been made gradually over the course of the person's life.
That theme is particularised in various other provisions in Division 292 so as to reflect the policy of the law.
16. Provisions dealing with superannuation in Division 292 of the Act give separate treatment for concessional contributions and non-concessional contributions and the statute provides a ceiling for each category. For the 2009/10 financial year, concessional contributions had a limit, or "cap", of $25,000 per annum for an individual, while non-concessional contributions had a "cap" of six times the annual limit for concessional contributions, or $150,000 per annum, for an individual (see s 292-85(2)(c)). Concessional contributions are those which are included in the assessable income of the complying superannuation fund. Non-concessional contributions are those which are, broadly speaking, not included in the assessable income of the superannuation provider, for example an individual's personal contributions to superannuation from after-tax income. The detailed provisions which define the inclusions of amounts in concessional or non-concessional contributions are determined by reference to Division 295 of the Act. In relation to non-concessional contributions, the inclusions contained in the Act relate to amounts which have already been taxed.
17. Section 292-85(4) of the Act, when read in conjunction with s 292-85(3), allows for a person who was under 65 years to be able to "bring forward" or "fast-track" the following three years limit of non-concessional contributions commencing with the current year, so that the equivalent of three years non-concessional contributions (or $450,000) could be contributed by a taxpayer in the first year. However, the taxpayer is constrained and is not able to exceed that contribution limit over that three year period that would have been available to the person if he or she contributed the maximum "cap" on each of the three succeeding years of that period. However, Mr McLennan was 68 when he made the withdrawal of $366,000 and therefore this cannot apply to his situation.
18. Further, reg 7.04(1) of the Superannuation Industry (Supervision) Regulations 1994 (Cth) ("the Regulations") provide, inter alia, that where the member is over 65 but under 70 years of age, contributions for the member may be made where they are mandated employer contributions or where the member is gainfully employed at least on a part-time basis. "Gainfully employed" is defined in reg 7.01(3) to mean "... if the person was gainfully employed for at least 40 hours in a period of not more than 30 consecutive days in that financial year".
19. It is to be observed that non-concessional contributions are defined in s 292-90(2) of the Act as being those made for an individual which are not included in the assessable income of the superannuation provider; or which is a "roll-over" superannuation benefit. "Excess non-concessional contributions" are specifically included in the definition of non-concessional contributions (see s 290-90(1)).
20. Clearly, Mr McLennan's concessional contributions were set at $25,000. Subject to satisfying reg 7.04(2) of the Regulations, he could have been eligible to contribute non-concessional contributions to his superannuation in 2009/10 but the limit was $150,000 for that financial year. His evidence showed that he was aware of the work test and he told the tribunal that he was monitoring that he was eligible to make non-concessional contributions. There seems to be no dispute as to his satisfying that requirement.
21. Considering the facts of Mr McLennan's case, he withdrew $366,572.85 in January 2009. He then redeposited a part of this amount in five deposits with his excess non-concessional contributions amount determined as follows:
28 July 2009 $48,000 16 October 2009 $49,000 28 October 2009 $31,000 21 November 2009 $40,000 21 April 2010 $50,000 Total deposits 2009/10 $218,000
Less Annual Contribution Limit for 2009/10 (s 292-85(2)) $150,000 Excess non-concessional contributions $ 68,000
22. The Commissioner is obliged by law to ascertain any excess contributions in a financial year and is also obliged to assess the liability which would accrue in the form of excess contributions tax (see s 292-230). A person is entitled to object to the amount assessed, as Mr McLennan has done (see s 292-245).
23. An examination of the facts shows that the applicant had made an excess contribution in the 2009/10 year. There seems to be no dispute about that fact. The Commissioner has, as required by s 292-230, assessed the amount of tax liability which is relevant to Mr McLennan's excess contributions as being $31,620. I find that the amount of the assessment is correct and, therefore, is not excessive. I now deal with the substantive issue for determination.
Issue - Should the discretion under s 292-465 of the Act be exercised in favour of Mr McLennan, to disregard or allocate to another financial year, the excess non-concessional contributions made in respect of the 2009/2010 financial year?
24. For the applicant to be able to gain the benefit of the Commissioner's discretion, he must comply with s 292-465 of the Act. The relevant statutory provisions state that the Commissioner may disregard any excess, or allocate any excess contributions to a different financial year in accordance with the discretion provided for in s 292-465(1)(b).
25. In considering whether to exercise that discretion, the Tribunal must consider the following factors in accordance with s 292-464(3):
- (a) There must be special circumstances; and
- (b) Exercise of the discretion must be consistent with the objects of Division 292.
These requirements are cumulative, that is both those factors must be satisfied if an applicant is to succeed.
26. In considering the requirements of s 292-465(3) of the Act, ss 292-465(5) and (6) provides that the Commissioner may have regard to:
- (5) ... whether a contribution made in the relevant financial year would more appropriately be allocated towards another financial year instead; and
- (6) ... whether it was reasonably foreseeable, when a relevant contribution was made, that you would have excess concessional contributions or excess non-concessional contributions for the relevant * financial year, and in particular:
- (a) if the relevant contribution is made in respect of you by another person-the terms of any agreement or arrangement between you and that person as to the amount and timing of the contribution; and
- (b) the extent to which you had control over the making of the contribution.
27. In respect of s 292-465(3)(b) of the Act, the objects of Division 292 are explained in Practice Statement Law Administration PS LA 2008/1 (PSLA 2008/1). It is explained there, at para 20, that in accordance with s 292-5:
Capping the concessional tax treatment for superannuation contributions for a financial year also, in effect, limits the total amount of concessionally taxed superannuation benefits a person can accumulate over their lifetime.
28. In PSLA 2008/1, it is clear that "special circumstances" refers to incidents where imposition of excess contributions tax would be unjust. It relates to the intention of Parliament as evidenced in the explanatory memorandum to the Bill which introduced the amendments. It states at para 24:
It is clear from the case law that special circumstances are unusual circumstances, or circumstances out of the ordinary. Whether circumstances are special will vary from case to case as the context requires, but in this context they must make it unjust, unreasonable or inappropriate to impose the liability for excess contributions tax.
29. The respondent also referred me to a number of decisions of the Administrative Appeals Tribunal in relation to this provision of the Act. In particular, the respondent referred me to
Tran and Commissioner of Taxation  AATA 123 in the context that the applicant had claimed that his redeposits or contributions should be regarded as "in effect" a roll-over superannuation benefit (see s 306(10) of the Act for a definition of "roll-over superannuation benefit). The respondent says that argument should not be accepted. The respondent also referred me to that case as authority to the proposition that ignorance of the law will never amount to special circumstances and a mere error or mistake will not "... constitute special circumstances unless extenuating circumstances exist which would make any misapprehension or error reasonable or understandable in the circumstances" (see para 28 of the respondent's Statement of Facts, Issues and Contentions).
30. The applicant has submitted a letter in response to the Commissioner's determination dated 12 July 2012. The applicant has, in this response dated 20 June 2012 (which seems to be incorrectly dated as it predates the apparent letter of the Commissioner to which he responds), emphasised the following:
- (a) the Commissioner's educative material points to examples of "new" money coming into superannuation whereas he says his contribution was "old" money returning to superannuation;
- (b) in view of the six month period between withdrawal and first return, it is "perfectly logical to accept the transaction to be a transfer back so that knowledge or ignorance of the $150,000 limit was never a consideration";
- (c) to not regard his circumstances as "special" would be "unjust, unfair and inappropriate"; and
- (d) there is a combination of factors of (a) to (c) above.
31. In Mr McLennan's application to this Tribunal he also points to the following:
- (a) there is no tax advantage to him to redeposit his money into superannuation;
- (b) he was unaware that his financial strategy would initiate the excess contributions tax;
- (c) if he had been born one year earlier or if one of the payments had been slightly earlier or later (putting it into another financial year) his liability would have been greatly reduced;
- (d) if he had deposited the money a year earlier, a limit of $450,000 would have applied to him;
- (e) the ATO is double dipping (as his contributions have already been fully taxed); and
- (f) it is a most unfortunate and unintended outcome of the legislation if it is to apply to a situation such as this.
32. The Commissioner says there must be "something unusual or different to take the matter out of the ordinary course" (see
Minister for Community Services and Health v Chee Kiong Thoo (1988) 78 ALR 307 at 324 per Burchett J;
Groth v Secretary, Department of Social Security (1995) 40 ALD 541 at 545 per Kiefel J).
33. I have considered the applicant's submissions and I find as follows:
- (1) For the purposes of s 292-465, it is the uniqueness of the circumstances which is critical; it is not the degree of misfortune or the fact that a mistake or error or misunderstanding occurred which might render a transaction unjust (see
Tran and Commissioner of Taxation  AATA 123). There was an error, which was an unfortunate one for the applicant. This is the basis of many errors of superannuants who breach these provisions of the legislation, but there is nothing unique or "special" which sets it apart from other taxpayers who have similar breaches;
- (2) The ATO is not double dipping. The actions of the ATO is as agent of the government and it is merely enforcing the law which has been made by Parliament;
- (3) The fact that Mr McLennan might have withdrawn the money more than a year before is purely hypothetical. Even if there had been some reason to speculate a year earlier why he might try to have a defensive mechanism for his superannuation (and there is no evidence of that), the fact remains he did not withdraw it a year earlier. Division 292 is designed to control the amount of tax concessions a person can accumulate. The relevant question is when he redeposited the amounts. This was in the period July 2009 to April 2010. He was then aged 67 and 68.
- (4) The applicant also argues it is a "most unfortunate and unintended outcome" that is undoubtedly the case from his perspective. However, the law deals with the outcome and factors attributable to the decision making process of taxpayers are not over-riding factors; and
- (5) Mr McLennan did not seek professional advice or ascertain the legal consequences of his superannuation transactions prior to his withdrawal and re-depositing those monies. The evidence shows Mr McLennan did not ascertain the structure of the legislature or its consequences. There is material on the ATO website available to taxpayers. The applicant did not avail himself of that information, nor did he seek any professional advice to guide him. There is no shortage of such professional advice. While some of that advice might be less reputable (e.g. Storm Financial), there is no shortage of accountants or solicitors who provide advice to members of the public, particularly in times of concern such as the period to which Mr McLennan refers.
34. I note the circumstances of this case also involved multiple transactions and while there was an air of panic in the transactions of Mr McLennan, this Tribunal has given consideration to such circumstances previously. Where there has been a pattern of contributions made by the taxpayer, it is to be expected that it would be reasonably foreseeable to the contributor that it is likely to result in excess contributions (See
Leckie and Commissioner of Taxation  AATA 129). In addition, where a taxpayer has conducted his affairs in a way in which he or she has taken a number of risks, then that cannot amount to "special circumstances" (see
Chantrell and Commissioner of Taxation  AATA 179). It seems to me these authorities are also relevant here.
35. I find that the circumstances do not amount to a roll-over benefit under s 306-10 of the Act. This is further supported by the decision of
Player v Commissioner of Taxation (2011) FCA 869. There, the Federal Court held that where an amount had been received from a superannuation fund "legally and beneficially" before then redepositing the money into a second fund, this would not amount to a roll-over benefit. This is what occurred in Mr McLennan's case.
36. Attribution of the error or mistake referred to by Mr McLennan is, regrettably, his alone. He was not reliant on any person or circumstance outside of his control. These are not "special circumstances" for the purpose of Division 292.
37. Given the authorities and my findings above, I find that the applicant does not satisfy the requirement of "special circumstances".
Would exercise of discretion be consistent with the objects of the Division?
38. The other criteria for exercising a discretion under s 292-465(1)(b) of the Act to disregard or allocate an excess contribution to another year, is if such a discretion would be consistent with the objects of the Division. While there was strictly no "tracing" of the withdrawals and redeposits, I accept Mr McLennan as a witness of truth. As a result, I accept that the contributions made by Mr McLennan were "made gradually over the course of his life". From that perspective, he might have satisfied the objects of the division.
39. However, as there are no "special circumstances" in this case, the applicant cannot succeed as both subsections of s 292-465(3) must be satisfied. As sub (a) is not satisfied, the application must therefore fail. The applicant and his wife will undoubtedly feel it is "unfair" to save so long for retirement only to lose a significant amount due to the exigencies of the financial markets. However, the matter is required to be determined according to how the facts satisfy the law.
40. Therefore, a discretion cannot be exercised in favour of the applicant.
41. I find that the decision made by the Commissioner is correct. The decision under review is therefore affirmed.