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Case M29

Members:
HP Stevens Ch
CF Fairleigh QC
JR Harrowell M

Tribunal:
No. 1 Board of Review

Decision date: 27 May 1980.

H.P. Stevens (Chairman)

The question at issue in this reference is whether the taxpayer is entitled, pursuant to the provisions of sec. 26AA, to a deduction in respect of the amount of a pension (received under the Commonwealth Superannuation Act 1976 following a retirement from the Australian Government Service due to invalidity) which represents its undeducted purchase price. To be entitled to such a deduction two conditions need to be satisfied:

  • (a) the pension must be ``an annuity which has been purchased''; and
  • (b) there must be an amount ``which represents the undeducted purchase price''.

    ATC 192

General

2. Although the amount in dispute in this case is less than $100 (in an allied case, Case M30, 80 ATC 220 the amount is $964 for a full year) the issues involved are of widespread importance. The scheme set up by the Act in question covers all ``Crown employees and other employees of Commonwealth authorities or of companies or bodies in which the Commonwealth has a controlling interest or for which it is financially responsible'' (per Mason J. in
Superannuation Fund Investment Trust v. Commr. of Stamps (S.A.) 79 ATC 4429 at p. 4441 ) so that a very large number of taxpayers are directly interested in the resolution of the issues. In addition, in my view, the principles involved cover not only that scheme but all other public and private sector superannuation schemes where the effect of the Acts or Deeds respectively are the same as for the present scheme.

3. Despite the actual facts relating to the taxpayer's claim being basically clear cut, the reference is complicated by reason of the fact that the Commonwealth Superannuation Act 1976 (commencing date 1 July 1976) introduced a new superannuation scheme for officers of the Australian Government Service in replacement of one (old scheme under the Superannuation Act 1922) that had been in operation for many years. As will be seen the taxpayer was a contributor to both the old and new schemes and was actually retired before the taking of all the steps necessary to implement the changeover from the old to the new scheme. Therefore it will be necessary to refer to the salient features of both schemes. In so doing I set to one side those provisions in each scheme whereby, upon the death of a contributor, benefits are given to his spouse and/or dependants. Similarly the fact that under both schemes the Australian Government did not and does not make contributions at the same time as its employees contribute - it makes no payments until such time as benefits are due to former contributors.

Old Scheme

4. Under the 1922 Act (sections quoted are those in the 1922-1973 Consolidation) it was provided (except in presently irrelevant circumstances) that ``every employee... shall contribute to the fund...'' (sec. 19(1)) and the scheme was on a unitary basis (Div. 2 of Pt. III). There were various classes of units including non-contributory (Div. 2A of Pt. III) and reserve (Div. 5 of Pt. III). The general situation was that contributors took up units as they became entitled to receive them (after a certain age units could be rejected - sec. 20A - whilst in certain circumstances some could be taken up on a non-contributory basis) and made fortnightly contributions therefore at rates based on their age at which the particular units became available to be taken up. These rates varied also depending upon whether age 60 or age 65 retirement was contemplated (Div. 3 of Pt. III). Reserve units represented those taken up in advance of entitlement and which could later become ``full'' units - sec. 32 allowed for an election to discontinue such reserve unit contributions and receive the amount of such contributions already made ``together with compound interest on those contributions'' at the specified rate, Each ``full'' unit gave the contributor an entitlement to $91 annual pension upon retirement (sec. 42(1)); i.e. his annual rate of pension was $91 multiplied by the number of units held - sec. 43. For non-contributory units the entitlement was $65 per unit annual pension - sec. 42(2) and 43A. In respect of each ``full'' unit of pension received upon retirement an amount of $26 was financed by the fund with the balance financed by the Government from Consolidated Revenue - for any non-contributory units held the amount received was solely that provided by the Government. Section 9 appropriated Consolidated Revenue Fund as required. Records were kept to show the contributions of individual contributors and upon resignation a contributor was entitled to a refund of his contributions (sec. 51). There was no provision for interest on contributions made but the fund was subject to regular actuarial investigation (sec. 17) to see whether it was in surplus or deficit and, if in surplus, a possible result (but not the only one) was a distribution to contributors. Pursuant to Pt. XB the $65 portion (i.e. non-contributory portion) was subject to adjustment for C.P.I. increases. This old scheme became inoperative (for present purposes) as from 1 July 1976 with the Superannuation Amendment Act 1976 (Act No. 32 of 1976) providing, inter alia, that contributions under the old scheme shall not

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be made on or after 1 July 1976 (sec. 6) whilst benefits under the old scheme were not applicable to a person who is retired on or after 1 July 1976 (e.g. sec. 24 re invalidity).

New Scheme

5. This was introduced by the Superannuation Act 1976 (Act No. 31 of 1976) - sec. 3(1) defining ``commencing day'' as 1 July 1976. The Act provided, inter alia, for both a Commissioner for Superannuation (Pt. II, sec. 17-27) and a body by the name of the Superannuation Fund Investment Trust (Pt. III Div. 1, sec. 28-39) and for the establishment of a fund to be known as the Superannuation Fund (Pt. III Div. 2, sec. 40-44). The Commissioner was to have the general administration of the Act other than Pt. III (sec. 17(2)), the Trust was to manage the Fund (sec. 41(1)), and the Commissioner was to pay all contributions received by him into the Fund (sec. 53(3)). Both the Commissioner and the Trust were required to keep records with respect to contributions, etc., and in respect of the Fund (sec. 27 and 44(1)). Since the new scheme was replacing the old scheme the Superannuation Act 1976 also contained transitional provisions (Pt. XII, sec. 169-192). These will be dealt with before returning to the ordinary provisions of the new scheme.

6. By virtue of sec. 171 the investment assets and liabilities of the old Fund became, inter alia, ``deemed to be moneys of the new Fund invested by the Trust'' and ``liabilities of the Trust'' respectively whilst sec. 175 required the allocation of the old fund between existing pensioners and contributors. Section 177 further required the allocation of that portion applicable to existing contributors among the individual contributors - sec. 177(2) providing for the Minister ``as soon as practicable'' to determine the amounts to be treated as basic and supplementary contributions respectively as at 1 July 1976 and sec. 177(3) providing for the Commissioner to allocate those amounts amongst the existing contributors (individual contributors to be notified as soon as practicable after such allocation - sec. 177(4)). A right of election to receive a refund of amounts allocated as supplementary contributions was given and, where not exercised, an amount equal thereto ``shall be deemed to be an amount of supplementary contributions paid by him under this Act on'' 1 July 1976 (sec. 177(10)). No right of election was given for basic contributions and sec. 177(9) provided an amount equal thereto ``shall be deemed to be an amount of basic contributions paid by him under this Act on'' 1 July 1976. Service whilst covered by the old scheme was to be included for the purposes of the new scheme - covered by S.R. 1977 No. 105 (next paragraph).

7. As initially enacted the Superannuation Act 1976 did not contain all provisions necessary for the required calculations and this was filled in by later Regulations under the Act such as S.R. 1977 No. 105 (dated 28 June 1977) headed Superannuation (Period of Contributory Service) Regulations, No. 156 of 1978 (dated 23 August 1978) headed Superannuation (Allocation of Previous Fund) Regulations and No. 253 of 1978 (dated 13 December 1978) headed Superannuation (Interest) Regulations - each being ``deemed to have taken effect from and including 1 July 1976''. Thus it was not until around December 1978 that notices under sec. 177(4) were actually issued to individual contributors - as will be seen the taxpayer had then been retired for over a year. However sec. 158 gave authority for the Commissioner to make interim payments where payment of benefits cannot be made ``by reason that the... amount of that benefit has not been ascertained'' and it provided that ``any interim payment so made shall be deemed to be a payment made in respect of that benefit''.

8. Turning now to the ordinary provisions of the new scheme it, unlike the old, was not based on a unitary concept. Rather it was provided - sec. 45 - that each ``eligible employee shall pay fortnightly basic contributions'' - sec. 3(1) defining an eligible employee as including, inter alia, ``a person who is a permanent employee'' with sec. 46 stating that the amount of the fortnightly basic contribution ``is an amount equal to 5 per centum of the fortnightly rate of salary'' payable on the anniversary of his birth. (As an officer's salary increases there is thus a yearly upwards variation of the amount of the basic contribution whilst sec. 47 deals with the position of decreases in

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salary.) In addition to the compulsory basic contribution an eligible employee may elect to pay a further supplementary contribution - sec. 48-50. Under this new scheme the pension entitlement of an officer is based on his period of contributory service (defined in sec. 3(1)) and, for present purposes, can be placed in two categories, viz. a normal age retirement (sec. 55-57) and a retirement due to invalidity (sec. 66-79). It might be appropriate to deal with the rights given to both categories but before doing so it is mentioned that the situation of a person who simply resigns from the service is covered by sec. 80(1). In this event that person ``is entitled to a lump sum benefit, payable out of the Fund, of an amount equal to the person's accumulated contributions''. Section 3(1) defines ``accumulated contributions'' as ``the sum of his accumulated basic contributions and his accumulated supplementary contributions (if any)'' - the same section defines each of the other terms as including ``the amount of any interest that, in accordance with the regulations, is payable in respect of those contributions''.

9. In the case of a normal age retirement an officer is entitled to -

  • (i) a standard age pension based on his period of contributory service - sec. 55(1)(a) and 56 - and constituting the appropriate percentage of his final annual rate of salary as set out in the schedules to the Act. If there had been units rejected whilst a contributor under the old scheme, then this standard age retirement pension was to be calculated in accordance with the formula set out in sec. 214 which was introduced by S.R. 1978 No. 281 (dated 22 December 1978) headed Superannuation (Former Contributors for Units of Pension) Regulations - a lower amount resulting; and
  • (ii) unless an election in terms of sec. 64 is made -
    • (a) an additional age retirement pension in accordance with sec. 57(1) - a maximum of 20% of final annual rate of salary arrived at, inter alia, by applying to the officer's ``accumulated contributions'' a factor (related to age on last day of service) as set out in S.R. 1976 No. 158 (dated 22 July 1976) headed Superannuation (Additional Pension) Regulations, and
    • (b) a lump sum benefit - sec. 55(1)(c) - in accordance with sec. 57(2), i.e. an amount (if any) equal to the accumulated contributions in excess of the sum required to yield the preceding maximum of 20% of final annual rate of salary.

Where an election in terms of sec. 64 is made, inter alia, ``not later than 3 months after'' an entitlement to the additional age retirement pension arises, then he may ``commute that pension into a lump sum benefit payable to him''. Section 65 provides, inter alia, that, where he so elects, he shall be paid ``a lump sum benefit equal to his accumulated contributions'' less any amount that he may have received under (ii)(b) above. Provision is made for percentage increases due to changes in the consumer price index number (sec. 147-153) but such percentage increases apply only to the standard age pension and not to any additional age retirement pension.

10. Where there is a retirement on account of invalidity the officer, in a straightforward case (e.g. where benefit not reduced on medical grounds and period of service is not less than 15 years), is entitled to -

  • (a) providing no election in terms of sec. 68 has been made, the benefits provided by sec. 67 (sec. 66(1)(a)), i.e. -
    • (i) an invalidity pension; and
    • (ii) a lump sum benefit ``equal to the person's accumulated supplementary contributions'' (if any) - sec. 67(5);
  • (b) if an election has been made under sec. 68, the benefits provided by that section (sec. 66(1)(b)), i.e. -
    • (i) an invalidity pension (of reduced amount); and
    • (ii) a lump sum benefit ``equal to the person's accumulated contributions'' - sec. 68(5).

The invalidity pension in both circumstances is based on a percentage (depending upon the period of prospective service - sec. 3(1) defines this as the aggregate of period of contributory service and period to age 65 or his maximum retiring age whichever is earlier) of his final annual rate of salary (sec.

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67(2)-(4) and 68(2)-(4) respectively). Where the period is not less than 30 years the respective rates are 70% and 50%. The election in terms of sec. 68(1) is to be made ``not later than 1 month after becoming so entitled'' but sec. 157 allows the Commissioner to extend the period for lodgment of any election under the Act. The indexation provisions also apply to an invalidity pension but only to the amount that would be payable if an election under sec. 68(1) had been lodged, i.e. if the rate were 70% the indexed amount would be only that equivalent to the 50% rate.

11. As indicated in para. 5 a separate Fund was set up and, where a retirement takes place, sec. 112(1) provides that subject to, inter alia, subsec. (3) ``the accumulated contributions of an eligible employee shall, upon his ceasing to be an eligible employee, be paid out of the Superannuation Fund into the Consolidated Revenue Fund'' whilst sec. 112(2) provides that, except as otherwise provided, ``any payment of benefit shall be made out of the Consolidated Revenue Fund, which is appropriated accordingly''. Section 112(3) refers to where a ``lump sum benefit of an amount equal to his accumulated contributions is payable'' and, in this event, sec. 112(1) does not apply. Thus the lump sum benefit is payable out of the Superannuation Fund and sec. 42(1) requires the Trust to so manage the Fund ``that moneys that are from time to time required to pay benefits that are payable out of the Fund are available for that purpose''.

12. The provisions of the Superannuation Act 1976 have recently been considered by the Full High Court in Superannuation Fund Investment Trust v. Commr. of Stamps (S.A.) (supra). That case, as the CCH headnote shows, produced some judicial differences of opinion but there are some comments therein which are not irrelevant to the present case. Thus at p. 4433 Mr. Justice Stephen said:

``The Superannuation Act 1976, the legislature to which the Trust owes its origin and from which it takes its particular character, replaced the Superannuation Act 1922 as amended and in doing so made quite radical changes to the general legislative scheme established under that earlier Act for the superannuation of Commonwealth public servants. It is only with aspects of those changes that relate to the present Trust that I am concerned. Under the 1922 Act there was no equivalent to the present Trust. The general administration of the statutory scheme was in the hands of a Superannuation Board which exercised such discretionary powers as the scheme provided for and only one of whose functions it was to invest moneys of the Fund. The 1976 Act introduces a new concept: the general administration of the Act, other than Part III, is given to a Commissioner for Superannuation, but by Part III, entitled `The Investment Trust and the Fund', the Trust is established as a body corporate, its membership and proceedings are provided for, a Superannuation Fund is constituted and to the Trust is assigned its management.''

Whilst at pp. 4434-4435 he remarked:

``No true analogy can, I think, be drawn between the Trust's closely confined statutory power of management of the Fund and of investment of such of its assets as are available for investment and the position of a trustee in a privately constituted trust: I have thus found the attempted identification of some cestui que trustent of the Fund to be of little profit. The most that can usefully be concluded concerning the Fund, viewed as a going concern, is that both contributors and the Commonwealth are in a practical sense interested in its prudent but profitable management. The current flow of moneys into the Fund derives exclusively from contributions by contributors. These the Commissioner receives and pays into the Fund. At its outset the Fund also received the moneys and assets of the old fund established under the 1922 Act. That fund, unlike the present Fund, was fed from two sources, the Commonwealth as well as contributors making contributions to it - see 1922 Act sec. 8(1). Thus, apart from a component of Commonwealth funds in the initially transferred assets of the old fund the moneys which the Trust invests come exclusively from contributors and not out of Consolidated Revenue...''

ATC 196

13. Mason J. held at p. 4442 ``that the Trust is the Crown in right of the Commonwealth'' (others dissented) and at p. 4441 commented:

``The argument for the respondent rested chiefly on the submission that the moneys standing to the credit of the Fund belong in equity to the contributors. I do not agree with this submission. The Act prescribes the amounts of the benefits to which contributors become entitled but it does not, as I read its provisions, give them any property or equitable interest in the Fund. To a very substantial extent benefits payable under the Act are payable out of the Consolidated Revenue Fund, that Fund being reimbursed in appropriate cases by the Superannuation Fund. The moneys standing to the credit of the Superannuation Fund are Commonwealth public moneys in an account within the Treasury (sec. 60 of the Audit Act 1901 (as amended)). to the extent to which the Trust is a trustee of the moneys it is a trustee for the Commonwealth, not for the contributors.''

14. Aickin J. at p. 4446 said that the Fund ``is thus to be held by the Trust upon trusts to be ascertained from the terms of the Act itself'' and, after commenting upon what happens when an individual ceases to be an eligible employee, at p. 4447 said:

``In this sense, the Fund is held primarily, but not exclusively, for the purpose of making payments to the Commonwealth on the happening of the relevant events, i.e. the cessation of an eligible employee to be such.''

Later he said (also p. 4447):

``Although the Commonwealth is in a sense the principal beneficiary for whom the Fund is held, it cannot be said to be absolutely entitled, either now or at any particular future time, although it will from time to time become so entitled to parts of the Fund, upon occasions which are certain and to some extent predictable as to time.''

In commenting upon the statutory obligation resting ``upon the Commonwealth to pay to each former eligible employee a pension as prescribed'' out of the Consolidated Revenue Fund he said at pp. 4446-4447:

``That statutory obligation continues throughout the life of each former eligible employee with provision in appropriate cases for payments to widows and dependants. The making of such payments out of the Consolidated Revenue Fund is not a use of the Fund either wholly or partly for that purpose, nor is it a use wholly or partly for that purpose of moneys paid into the Consolidated Revenue Fund by the Fund itself. Nor is the amount of the pension calculated by reference, direct or indirect, to the amount of an individual eligible employee's accumulated contributions to the Fund, but it is fixed by the Act itself. Lump sums are, however, related to the accumulated contributions, whether payable out of the Fund or out of Consolidated Revenue. The Consolidated Revenue Fund is from its very nature a common fund in which are blended indistinguishably all payments made to or moneys received by the Commonwealth and payments are made out of the general mass by appropriation. No statute provides for the tracing of individual amounts that are paid into the Consolidated Revenue Fund, for they are by their very nature consolidated upon payment in. If it matters, there could never be an occasion for the application of
Clayton's case (1816) 1 Mer. 572, 35 E.R. 781 or the conceptions of tracing which have been developed in Equity. That which reaches the Consolidated Revenue Fund from the hands of the Trust thereby ceases to be trust moneys under the Superannuation Act or at all and becomes simply part of the general funds of the Commonwealth, consolidated together in a single fund pursuant to sec. 81 of the Constitution and the Audit Act 1901-1969 (Cth). In no sense, therefore, can it be said that the pensions are payable out of the Fund, though some lump sums are payable directly out of it.''

Facts re taxpayer

15. The facts of the present case may now be shortly stated. Born on 20 November 1916 the taxpayer began service as an officer of a

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State Public Service in 1935 and contributed to the superannuation fund of that service. Later the Commonwealth took over the functions performed by the particular department of the State in which the taxpayer was employed. He became a member of the Commonwealth Public Service and, as from 1 July 1946, a contributor to the old scheme. He did not reject any units and as at 30 June 1976 he was still entitled to all units for which he had become eligible (albeit some as non-contributory units). The taxpayer was an age 60 contributor and the evidence was that ``you generally ceased to pay contributions for your units about 6 months before you actually attained your retiring age''. It was said that this was the situation in the taxpayer's case but, as the actual date of cessation of contributions was not given, it is not known if such had ceased prior to 30 June 1976. It was an agreed fact that an amount of $1,458 contributions had not been allowed as a deduction and I find this represents in toto portion of the fortnightly deductions under the old scheme.

16. As from 1 July 1976 the taxpayer contributed to the new scheme and, during the period to 13 May 1977 (the date of his retirement by way of invalidity) such contributions totalled $813.80. No portion of this sum is at issue before the Board.

17. As indicated in para. 7 provision was made for interim payments and at the relevant time the Commissioner for Superannuation worked, in the case of invalidity retirees, on the basis of records showing the actual contributions made by the retiree under both the old and new schemes. This was said to be in order to obviate any subsequent recovery issues. Thus in a letter issued to the taxpayer on 9 May 1977 he was advised that he was entitled to a pension at the rate of $13,710.48 per annum based on 41 years' contributory service and that, if he elected in accordance with sec. 68, the benefit would ``be paid as a part pension of $9,928.28 per annum and a lump sum of $18,038.63 representing a refund of your accumulated contributions'' ($18,038.63 being his actual contributions).

18. The taxpayer received his first fortnightly pension payment on 19 May 1977 and, after a period of indecision, he lodged an election in terms of sec. 68 dated 1 August 1977. Apparently there had been prior correspondence between him and the Commissioner's office and it was recommended and approved on 1 August 1977 to extend the period for making the election to that date. The election had the effect of entitling him to the above amount of $18,038.63 and of requiring an adjustment on account of the overpayment of pension (reduced to $9,928,28 per annum as from date of retirement) - thus a net amount of $17,088.77 was received about 25 August 1977. In respect of the source of payment of this amount an officer from the Commissioner for Superannuation's office said that initially the taxpayer's contributions would have been transferred to Consolidated Revenue (sec. 112(1)) by journal entry. Upon the election being made ``it was as if it had not taken place from our point of view, we would just reverse the journal entry and put the money back in to the super fund from the revenue''. However he was uncertain as to the exact mechanics and I disregard this evidence.

19. As indicated in para. 6 it was not until December 1978 that notices under sec. 177(4) were issued to individual contributors under the old scheme. The notice issued to the taxpayer indicated that the amounts allocated to him were Basic Contributions $20,519.29 and Supplementary Contributions $4,472.18 and that he was entitled to an adjustment in respect of the interim gross amount of $18,038.63 paid him in August 1977. The taxpayer's receipt of such adjustment is not in issue.

The Issues

20. The two conditions to be satisfied, as set out in the opening paragraph, involve four questions, viz. -

  • (i) was the pension received under the new scheme an ``annuity'';
  • (ii) if so, was it an annuity ``which has been purchased'';
  • (iii) if so, what was the purchase price thereof; and
  • (iv) what was the part of the pension ``which represents the undeducted purchase price''?

However, as the case was argued before the Board attention was directed specifically

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only to the first two questions - in line with the Commissioner's statement in terms of reg. 35(1) that the ``pension is not an annuity which has been purchased by the taxpayer''. Nevertheless I will refer to each question (albeit the last two briefly only).

Whether an ``annuity''

21. This term is not defined in the Income Tax Assessment Act and one must look for its meaning elsewhere. In this regard I put to one side the fact that whilst the term ``income from personal exertion'' is defined as encompassing ``pensions'' or ``superannuation allowances'' it does not refer to an " annuity' - so that on one view an ``annuity'' is therefore ``income from property''. I do so because I do not think that it follows a pension or superannuation allowance cannot be an ``annuity'' - all it indicates to me is that those annuities which constitute ``pensions'' or ``superannuation allowances'' are income from personal exertion whilst those annuities which are not ``pensions'' are income from property ( Rydge's 1923 Edition of the Annotated Commonwealth Income Tax Acts at p. 23 states that if an annuity ``were given as a reward for personal services, it would not be property income'').

22. In the Shorter Oxford English Dictionary the first of the meanings given to the word ``annuity'' is ``a yearly allowance, or income'' and, in
Milne v. D.F.C. of T. (1930-32) 1 A.T.D. 173 at p. 178 , Murray C.J. said:

``Prima facie, it is clear in my opinion, that an annuity, or what is the same thing, a sum of money of definite amount payable annually or by equal instalments quarterly, half-yearly, or at other regular periods, either in perpetuity, or for the life of the recipient, or for a term of years, or for the life of another person, under a contract, will, or settlement, is income in the ordinary acceptation of the term.''

His Honour, in that case, did not have to decide whether the quarterly payments of an annual sum payable under a deed of separation was an annuity but only whether such amounts constituted income. However his comments set out above are useful as also is his finding (p. 180) that ``the object of the parties was not to make compensation to the appellant for anything given up by her, but to free her from the obligation of cohabiting with her husband and to provide her with an income for life or until she should marry again.''

23. The third meaning given in the dictionary is ``an investment of money, entitling the investor to receive a series of equal annual payments, made up of both principal and interest'' and is in line with
Foley v. Fletcher (1858) 28 L.J. Ex. 100 wherein Lord Watson said:

``An annuity means where an income is purchased with a sum of money and the capital has gone and ceased to exist, the principal having been converted into an annuity.''

and
Scoble v. Secretary of State for India 4 T.C. 618 at p. 622 per Mathew L.J.:

``An annuity in the ordinary sense of the expression means the purchase of an income and generally involves the conversion of capital into income.''

24. The above two cases have been referred to in the Australian authorities, e.g.
Egerton-Warburton v. D.F.C. of T. (1934) 51 C.L.R. 568 and
Atkinson v. F.C. of T. (1951) 84 C.L.R. 298 but, as Dixon, Webb and Fullagar JJ. said in the latter case, at p. 304:

``The question what constitutes an `annuity' for the purposes of income tax laws has been the subject of much judicial decision without any clear or satisfactory test emerging.''

Unfortunately the same comment still seems apposite in relation to the present case. The parties were not able to refer the Board to a decided case wherein the issue was whether amounts received under a superannuation scheme constituted an annuity.

25. Atkinson's case is important in that the Court held the amounts in question were an annuity despite their finding at p. 307 ``There is therefore no question of the investment of a capital sum which may be considered returned by annual instalments''. At p. 308 the Court said:

``As the question whether the £ 39 a quarter is an annuity is to be governed, not by the intention of the parties that it should or should not be so classified, but on substantial considerations disclosing

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`its true nature', it would seem that little importance should be attached to the formal manner in which the policy states `the benefit' it assures.... It seems obvious that the purpose was to provide `an income'... The premiums were the consideration for which the `income' of £ 39 a quarter was obtained. The quarterly payment in no sense represents the premiums and its intrinsic character is an income for the maintenance of those on whom the insured by his will should bestow it, in case of his premature death, until the end of a time regarded by him as either adequate having regard to their circumstances or else being as much as he was prepared to provide for.''

26. Giving the matter the best consideration I can it is my view that the pension received in the present case is aptly to be described as an annuity. As Mason J. indicated at p. 4441 in Superannuation Fund Investment Trust (supra) ``Superannuation benefits are part of the total remuneration which the Crown provides for its employees'' and, in my opinion, as such their ``intrinsic character is an income for the maintenance of those'' employees and their spouses and/or dependants. It might be said they fail to qualify as an annuity despite this ``intrinsic character'' because the annual rate of pension might change. I do not agree. The formula is fixed and the rate is in that sense also fixed (or certain). In this regard Brett L.J., In
Re Knight ex p. Voisey (1882) 21 Ch.D. 442 (referred to in both Words and Phrases Judicially Defined 2nd ed. and Stroud's Judicial Dictionary 3rd ed. under Certain and Certain Rent respectively) said at p. 448 that, for an amount to constitute rent ``It must be certain''. However he continued on to say:

``But the rent is certain if, by calculation and upon the happening of certain events, it becomes certain, and... the mere fact of rent being fluctuating does not make it uncertain.''

The amount of the pension is, in my view, certain in the same sense for the ``formula'' under the Act is fixed and it is a mere matter of calculation when particular (certain) events occur as Aickin J. said (see para. 14) the amount of the pension ``is fixed by the Act itself''. The fact that the legislation might be later changed - thus contributing to a lack of fixity - can I think be put to one side (although this could be classed as one of the possible ``certain events''). Superannuation rules for funds in the private sector normally contain provisions enabling amendment and I similarly do not think that this would render the amounts payable thereunder to lack the necessary quality of being fixed or certain.

27. On this aspect I might refer to the case of
Mowling v. F.C. of T. (1954) 90 C.L.R. 545 . Although the issue there was different Taylor J. at p. 550 said:

``But in 1930 when the amendment to the definition of `income' in the 1922 Act, insofar as it referred to annuity income, was effected, there was no provision, so far as I can see, which authorized the deduction by a taxpayer of moneys, or any part thereof, expended on the purchase of an annuity for himself. In saying this I exclude from consideration payments made to a superannuation fund, which, in appropriate circumstances, were, at least in part, deductible under sec. 23(g) of the Act, for pensions and superannuation and retiring allowances not paid in a lump sum were dealt with specifically and treated as income from personal exertion.''

It would seem that his Honour was not excluding payments from a superannuation fund as being, in some instances at least, annuities. Accordingly, although I do not rely on his observations, I do not regard them as detracting in any way from the view I have reached.

28. In reaching the above view I have had regard only to decisions of the Courts. However I am comforted by comments made elsewhere and it might be appropriate to refer thereto. Firstly, Dr. Harman in his Principles of Income Taxation at p. 70, refers to a ``superannuation allowance (as this kind of annuity is frequently called)'' whilst Ryan in his Manual of the Law of Income Tax in Australia 2nd ed. at pp. 56-57, uses as an example of a purchased annuity a pension received as a result of contributions to a superannuation fund. Secondly, Case D17,
72 ATC 90 in which the taxpayer argued that payments received by her from a State Superannation Fund to which her deceased husband had contributed

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did not constitute amounts within sec. 26AA - this argument was rejected and in the course thereof the proposition that ``since the pension was not a fixed or certain sum in each year, it did not constitute an annuity'' was also not accepted (see per Chairman para. 9 p. 93, Mr. Thompson para. 2 p. 94 and Mr. Dempsey para. 21 p. 98).

29. Finally on this aspect I would refer to the Treasurer's Explanatory Notes given when sec. 26(c) was inserted in the Act by Amending Act No. 50 of 1930. Prior to that amending Act sec. 4 defined ``Income'' as including some items but as not including ``(d) in the case of an annuity which has been purchased - that part of the annuity which represents the purchase price'' whilst sec. 23(1)(g) allowed a deduction for ``payments not exceeding One hundred pounds in the aggregate made for the personal benefit of the taxpayer or his wife or children during the year of income... to superannuation, sustentation, widows' or orphans' fund established in Australia...'' The ``defect'' in the then existing sections that was considered necessary to be rectified is clearly set out in the following extract from the Treasurer's Explanatory Notes (taken from J.A.L. Gunn's Commonwealth Income Tax Law and Practice 1st ed. at pp. 243-244):

``Under the present definition of `income' in sec. 4 of the Principal Act, exemption is provided for that part of a purchased annuity which represents the proportion of the purchase price which is being returned in the annuity.

This provision, in conjuction with the provisions of sec. 23(1)(g) of the Principal Act, results in a double deduction being allowed for the purchase price of an annuity. That section allows a deduction in an assessment of payments not exceeding £ 100 in the aggregate made for the personal benefit of the taxpayer or his wife or children... to a superannuation, sustentation, widows' or orphans' fund established in Australia.

All persons who make contributions to pension funds are,... entitled to that deduction.

Hence, a person who is to be ultimately entitled to a pension secures exemption from income tax of up to £ 100 of the purchase price of his pension during the years in which he contributed to the pension fund out of which his pension is paid.

Pensions are liable to income tax, and, as the Courts have established that pensions are annuities, it follows that contributions to a pension fund are amounts which represent the purchase price of the annuity within the meaning of the definition which is the subject of this amendment. It then follows that when a contributor to a pension fund subsequently receives his pension, he is, under the present wording of the law, entitled to have excluded from his assessments the part of each pension payment received by him which represents a part of the total amount contributed by him for the pension. But as he has already received deductions in respect of the whole or part of those contributions that were made by him since the income tax was imposed, it is not right that he should again secure a deduction of the same amounts.

The amendment, accordingly, will prevent double deductions in such cases.''

The Notes clearly show that the ``defect'' arose because pensions were regarded as not only constituting annuities but also annuities which had been purchased. It follows that this is a situation which has existed for a very considerable period and the solution then adopted was not to remove pensions from the category of such annuities but to limit the situations in which an amount would be excluded. Again when it was realized that the new provision - the exclusory portion of the definition of income became ``(d) in the case of an annuity which has been purchased - that part of the annuity which represents the purchase price to the extent to which that price has not been allowed or is not allowable as a deduction under the provisions of this Act or of any Act repealed by this Act'' - which became sec. 26(c) in the 1936 Act (``income'' no longer being defined in the Act) was also defective (see Mowling's case ) the amendment (Act No. 43 of 1954) was designed to further limit the situations in which an amount would be excluded.

Whether annuity ``which has been purchased''

30. Having come to the conclusion that the pension received by the taxpayer is

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properly to be regarded as an ``annuity'' it is now necessary to consider whether it is one ``which has been purchased''. Prior to the amendments in 1954 referred to in the preceding paragraph it was not necessary in order to obtain a deduction that an annuity be actually purchased by the taxpayer himself. By those 1954 amendments the then existing sec. 26(c) was replaced by sec. 26AA. The new section, sec. 26AA(1), still only refers to ``an annuity which has been purchased'' but sec. 26AA(4) defines ``the undeducted purchase price'' in relation to ``so much of the purchase price of the annuity paid by the taxpayer '' (emphasis inserted). Thus, for practical purposes, it is now required that the taxpayer purchase the annuity in question.

31. The respective arguments on this issue may be set out briefly. For the Commissioner it was conceded that the taxpayer had made contributions but, since under the new scheme (the only one to consider), he was entitled to have his accumulated contributions paid out of the Fund and the taxpayer had taken advantage of this entitlement, then it followed that what he received by way of pension was not an annuity purchased by him. Reference was made to
Robshaw Brothers Ltd. v. Mayer (1956) 3 All E.R. 833 wherein it was held that, because the sale price was expressed to be nil, proceedings did not lie since the contract was not for ``sale or purchase'' - the primary meaning thereof being a sale or purchase in consideration of a payment in money.

32. On the other hand the taxpayer said that until the new scheme came into existence he was contributing, in order to receive a pension (the only benefit available), those contributions were paid into the new scheme, he was contributing in order to receive a (lesser pension and lump sum or a higher pension) and the fact he chose to take part of that total benefit as a lump sum does not affect the proposition that his contributions relate to the lesser pension he received. If he had made no contribution then he would not be receiving that pension. He referred to Case G80
75 ATC 564 (where a teacher became liable to refund a sum representing the total of all allowances paid to him which had been included by him as assessable income) and said that you should look at the position in the years in which the contributions were paid.

33. As I understood the arguments on behalf of the Commissioner it was his view that, if the pension received constituted an annuity, then, provided there was no exercise of the right to obtain the lump sum benefit, the taxpayer would be considered to have purchased an annuity. In fact it was put as an alternative argument that the taxpayer was entitled to a deduction for the period prior to the lodgment of the election, i.e. 1 August 1977 (an amount of $8) but, as from that date, no further entitlement existed - this alternative was on the basis that, although effect was given to the election as from the date of retirement, the taxpayer had been receiving the higher rate of pension from that earlier date.

34. In Egerton-Warburton's case the High Court referred to the vagueness of the term ``that part of the annuity which represents the purchase price'' (as then used), to the lack of a ``definite or ascertainable capital sum... agreed upon between the parties'' and said at p. 575:

``If the price were ascertained, the transaction, so regarded, might come within the provision which would authorize the exclusion of so much of the annual payment as represented principal expressed in the price. The difficulty is that no definite or ascertainable capital sum is agreed upon between the parties. The purchase price of an annuity depends upon the annuitant's expectation of life, which is not solely a question of age, and upon the adoption of a rate of interest which is not rigidly determined by law or custom. With no fixed price expressed by the parties, with no expectation of life fixed when the annuity was stipulated for, and no rate of interest adopted by the parties for its calculation, it is, we think, impossible to find in the transaction a purchase price for the annuity. The statutory provision gives an advantage in cases which conform to conditions established positivi juris. One of the conditions is that there must be an ascertained or ascertainable price. In our opinion the conditions cannot be satisfied in the present case.''

ATC 202

I do not think the same defect exists in the present case.

35. Certainly, as at any given point of time, it cannot be said that contributions totalling a particular amount will be paid but, by the time an entitlement to a pension arises, the amount is not only ascertainable but ascertained. (Similarly in relation to the benefits contributed for although both are ascertainable in the sense that the relevant provisions of the statutes give certainty - neither the contributions nor the benefits are left to the winds of chance.) Accordingly it is my view that, providing it can be said the contributions are being paid for the required purpose, there is here an ``ascertained or ascertainable price''. The fact that price represents regular fortnightly contributions is I think irrelevant - if a party (albeit as part of a contract of employment) expressly or impliedly says I will give you an annuity (pension) if you pay me regular contributions until the date of your becoming entitled to the annuity then those contributions are, in my opinion, clearly the price being paid for that pension.

36. To the extent that a person's medical condition at the time of joining is relevant the fact is that a medical examination is required - sec. 16 (that required for permanent appointment under the Public Service Act may often serve the dual purpose). If not satisfactory a benefit classification certificate shall be issued by the Commissioner (sec. 16(4)) and where, for example, the Commissioner considers the invalidity was caused by a condition set out in that certificate (sec. 66(2)(b) and (c)) then certain results follow.

37. Turning to whether the regular contributions are being paid for the required purpose (para. 35) it is my view that they cannot be said to be paid other than for the package of benefits provided by the ``fund established by the Crown for the purpose of providing superannuation benefits for its employees'' (per Mason J. at 4441 ibid. ). One of those benefits - perhaps ultimately the sole benefit - for which the contributions are being indiscriminately made is a pension (annuity) and they relate directly thereto. To suggest to a contributor aged 40 with, say, 20 years of contributory service behind him and another 20 years ahead of him that he was not contributing for an annuity (pension) would be to invoke my young grandson's current favourite expression ``That's ridiculous''. To further suggest to him that any pension he might ultimately receive, if he elects for the lower rate, was a non-contributory one which has cost him nothing would be to invite a more forceful response. Of course he might receive nothing, e.g. killed in a car accident, and to hypothesize that it would then have cost him nothing for the benefits to be provided for his dependants after his death would be a very risky affair indeed.

38. I disagree that what he receives, if he elects to receive part of the ``package'' of benefits provided by the Act as a lump sum, represents (statutorily or otherwise) a refund (so that, in effect, there has been no payment for the pension he receives). The Act does not say he is entitled to a refund - it provides he is entitled to a lump sum benefit which is to be calculated in a specific manner. It is trite law that calculating the quantum of something by reference to another does not make that something the same as that which has been used for calculation purposes - to use the words of Lord Buckmaster in
Glenboig Union Fireclay Co. Ltd. v. I.R. Commrs. (1922) 12 T.C. 427 at p. 464 :

``There is no relation between the measure that is used for the purpose of calculating a particular result and the quality of the figure that is arrived at by means of the application of that test.''

Mr. Justice Aickin (para. 14) referred to the lump sums being ``related to the accumulated contributions'' (as distinct from comprising such contributions) whether ``payable out of the Fund or out of Consolidated Revenue'' whilst he also pointed out there can be no tracing of individual amounts (this principle applies irrespective of whether one is speaking in relation to the Consolidated Revenue Fund or the Superannuation Fund). I am uncertain as to the precise relevance of the last point (apart from its significance for trust purposes) for it is also a fact, in relation to what would be accepted by all as an annuity (which has been purchased), i.e. one from an assurance company, that it would be impossible to conduct a tracing operation. Amounts paid go into the company's coffers and are used for all sorts of purposes -

ATC 203

administration costs, purchases of investments (sometimes being totally lost), etc. - and it could not be said that each dollar of the annuity can be traced to the dollar of the purchase price. Further, as Mason J. said (para. 13) the contributors have no property or equitable interest in the Fund and they receive merely the amount of benefits as prescribed by the Act. In addition, if the Statute had wished to simply give a contributor a pure refund, it would have been easy for it to have specified and the absence of such precision could allow any ambiguity (if any existed) to be resolved in favour of the subject.

39. In reaching the above conclusion I have placed no reliance upon inflationary aspects whereby what was received back might not represent the ``real'' value of that which was over a period withheld from him. Nor have I had regard to ``opportunity'' or ``imputed'' cost concepts. I have endeavoured, in the words of Bowen C.J. in the
Federal Coke Co. Pty. Ltd. v. F.C. of T. 77 ATC 4255 at p. 4263 , ``to have regard to the actual facts and not their equivalents''.

What was the purchase price?

Amount representing ``the undeducted purchase price''

40. These issues were not the subject of dispute before the Board. Both parties agreed that the undeducted purchase price was $1,458 (see para. 15) and that, having regard to the taxpayer's life expectancy (as per the prescribed Life Tables - sec. 26AA(2)(a)) of 15.27 years, for a full year a sum of $95 would be deductible if sec. 26AA were, as I have found, otherwise satisfied.

41. Although a Board is not bound to adopt a ``concession'' (either by the Commissioner or a taxpayer against themselves) but is bound to follow the law, nevertheless I consider it is necessary for one to be satisfied (after independent review) that such a concession is wrong in law before setting it aside. In the present case, whilst I have some reservations, I am not satisfied the concession is wrong in law.

42. The ``concession'' is in line with the Commissioner's long standing practice of regarding periodic contributions as the purchase price of a pension and the undeducted purchase price as that part of the periodic contributions that have not been allowed as deductions in the years in which they were paid. This practice was evidently in force prior to the 1930 amendments referred to in para. 29, was accepted in the Treasurer's Explanatory Notes referred to in that paragraph and is also illustrated by the old Case 14
8 T.B.R.D. p. 41 wherein it was held (Reference No. 34/1937) that the periodic contributions total ``is the amount which must be regarded as the purchase price'' with the unallowed portion thereof being the undeducted purchase price and by more recent cases such as G10 and G52,
(1956) 7 T.B.R.D. 53 and 296 - in the latter Mr. McCaffrey at p. 299 also found that a person's periodic contributions represented the ``purchase price''. Admittedly Case G52 concerned the old scheme where there were no lump sum benefits. However I cannot see, as presently advised, that the addition of another class of benefit to those for the contributor personally and for his spouse and dependants renders the position so completely different that the ``concession'' is wrong in law. In any event, having regard to the fact the practice has been in force for well over 50 years it might not be entirely inappropriate to adopt the following remarks (even though made in a different context) of Dixon C.J. in
Lunney v. F.C. of T. (1957-1958) 100 C.L.R. 478 at p. 486 :

``If the whole subject is to be ripped up now it is for the legislature and not the (Court) to do it.''

43. My main reservation stems from the fact that, as at the date of the taxpayer's retirement (although the necessary calculations could not then be made), he was entitled to elect to receive back that part of his ``equity'' in the old scheme as represented supplementary contributions whilst basic contributions (and also supplementary if no election) were deemed to be amounts paid under the new scheme. Both parties assumed that, irrespective of the old scheme having been terminated (for the purposes of contributors as at 30 June 1976), the past yearly contributions under the old scheme should be regarded in the same manner as contributions under the new scheme and, for the purposes of calculation, it was necessary to look at each of those past years to determine what had, or had not, been allowed as a deduction. In other words it was accepted that the taxpayer's ``equity'' in the

ATC 204

old scheme was not an initial contribution on 1 July 1976 to the new scheme - if it were the situation in past years would be irrelevant for it would be the deductibility of the total amount contributed in the year ended 30 June 1977 that would arise for consideration.

44. Undoubtedly any other attitude would give rise to difficulties (particularly where as here retirement took place before calculation was possible and the taxpayer was never in a position to decide whether or not to receive back his supplementary contributions) but it may not necessarily follow that it is a correct attitude. In his objection the taxpayer referred, inter alia, to his contributions during the years prior to the year ended 30 June 1976, to part of those contributions not being allowable ``due to the application of sec. 82H(2)'', to the amount of pension to which he was entitled under the new scheme being ``dependent on my having maintained full unit entitlement under the previous Act'' and claimed that ``hence the sums not allowable as deductions became undeducted price in terms of section 26AA in respect of my pension''. As a result it seems clear that the particular matter referred to above has not been raised by the taxpayer in his objection. In these circumstances it is perhaps profitless to pursue the matter further.

45. However, since both schemes fit Mr. Justice Mason's description of being established by the Crown as employer for the purpose of providing benefits for its employees, I would, as presently advised, treat the transition as not giving rise to a payment by the taxpayer to the new scheme.

46. It is also unnecessary in the circumstances to pursue a possible implication of the Commissioner's view (para. 32) that a taxpayer would be considered to have purchased an annuity if he does not appropriately elect. Although the ``concession'' is based on the periodic contributions representing the purchase price it might be asked whether, in the above situation, it is the act of non-election that is the determinative feature. If it were then it might be argued that, since the additional age retirement pension is based not on the contributions but on the ``accumulated contributions'' (including an interest component), the ``purchase price'' is that higher figure (or the amount in excess of the periodic contributions). On the other hand it could be said that this is not so - the act of non-election being one of the ``certain events'' to be taken into account under the statutory formula purely for calculation purposes. As presently advised I would accept the latter view.

47. Accepting as I do the agreed figure of $95 it follows that in my view this is the amount to be deducted in terms of sec. 26AA.

Conclusion

48. For the above reasons (see also para. 8 of reasons in Reference No. 248/1979 [ Case M30,
80 ATC 220 ]). I would allow the taxpayer's objection. Assessment for the year ended 30 June 1978 to be adjusted by the allowance of a deduction of $95.


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