Case Q18
Judges:KP Brady Ch
JE Stewart M
Court:
No. 2 Board of Review
K.P. Brady (Chairman) and J.E. Stewart (Member)
The return of income of the taxpayer for the year ended 30th June, 1977 contained a deduction of $2,023 claimed under sec. 51(1) of the Income Tax Assessment Act for amounts paid during that year to the Western Australian State Superannuation Fund.
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2. Such contributions were made by the taxpayer in order to obtain financial security upon his retirement from the teaching staff of one of the State's main educational institutes. Also he claimed $1,111 of the total so paid as a concessional rebate under sec. 159R (that amount was something less than the maximum allowable of $1,200 because of a claim made for a life insurance premium of $89), and in a schedule accompanying his return he stated that the claim for rebate was an alternative one, and should appertain only in the event of the sec. 51 deduction being disallowed. That in fact was the action taken by the Commissioner, on the grounds that the contributions did not constitute outgoings incurred in gaining the taxpayer's assessable income. Also he considered that they were of a capital nature, alternatively of a private nature. In the result, he allowed them as rebateable under sec. 159R(1)(b)(i) being payments made, as he saw them, to a superannuation fund for the personal benefit of the taxpayer, or his spouse or child. The taxpayer objected, and upon the Commissioner disallowing that objection the matter has come before this Board for review.
3. Prior to joining the educational body, which we shall call T, in 1968, the taxpayer taught at the Y Technical College where he was already a contributor to the Fund. It seems that T was established from the nucleus of the professional staff working at the latter college. In giving his evidence, he told us that it was a condition of his employment at T that he should remain a contributor to the Fund. He advised us that other new members of staff who came from outside the government service had a choice of joining the State Superannuation Fund or another fund sponsored by T, along the lines adopted by most universities and colleges of education. But as an existing contributor, he contended that no choice to join the alternative scheme was open to him.
4. We turn now to setting out the relevant provisions of the legislation by which the superannuation scheme was established in order to determine the nature of the payments into (and out of) the superannuation fund. This may perhaps best be done by using the following subheadings:
Object of the legislation
This may be ascertained by examining the long title of the Act, which reads:
``An Act to provide Superannuation Benefits for persons permanently employed by or under the Government of the State and to make provision for the families of those persons and for incidental and other purposes.''
Management of superannuation scheme
By sec. 9 the entire management and administration of the scheme is entrusted to a Superannuation Board. Section 19(1) stipulates that the Board shall be a body corporate having perpetual succession and a common seal.
The superannuation fund
By sec. 24, a fund is established called ``The Superannuation Fund'' into which is to be paid:
- (i) the contributions of employees who become contributors or qualified contributors,
- (ii) payments by the State as required by the Act, and
- (iii) ``employer'' payments applicable in the situation where the Treasurer approves that a public hospital may be properly categorised as a ``department'' for the purpose of having its employees made eligible for the benefits provided by the Act.
Section 6 defines a ``qualified contributor'' as one who makes a special contribution in respect of a pension to his wife and children, and a ``contributor'' is basically one who is other than a qualified contributor. ``Employee'' also is defined, and basically means a person employed in a permanent capacity under the State in any department who is, by the terms of his employment, required to give his whole time to the duties of his employment.
Eligibility
The scheme is generally available to all employees of the State who are employed in what is deemed to be a permanent capacity, and who will have completed service aggregating seven years or more at the date of elected retirement (sec. 6 and 32(2)). By operation of sec. 31(1) membership of the
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scheme is voluntary. However, once membership has been accepted by the Board, it is not possible to withdraw, except on termination of service (sec. 31(2)).Contributions
Contributions (and benefits) are directly related to the number of units for which a member contributes. The minimum number of units a member may have is two, while the maximum number is determined by salary (sec. 37(1)). The scale of unit entitlement is set out in scale A appended to sec. 37(1)(a), which appertains if the employee commenced contributing before 1st January, 1958. Scale B, appended to sec. 37(1)(b), appertains generally if the employee commenced contributing on or after 1st January, 1958.
Section 40 prescribes that the amount of contribution payable by an employee shall be based upon (i) the number of units or half units of pension in respect of which the employee contributes, (ii) the sex of the employee, (iii) the age at which the employee commences to contribute for each unit or half unit, and shall be in accordance with the tables of contributions detailed in schedules accompanying the Act.
Contributors may choose to retire at age 60 or 65, with contribution rates for provision of a full pension at 60 years being higher than the rates which provide the same pension at 65 years.
Contributions are payable from the date of application to join the scheme. They are payable for all leave of absence whether with or without pay (sec. 47).
Sections 43, 43A and 44 stipulate the amounts of payments required to be made by the State to the Fund where units of pension are paid from the Fund.
Benefits
Section 52 provides that every contributor shall be entitled to a pension upon his retirement, on or after attaining the maximum age for retirement, subject to having completed an aggregate period of seven years service prior to retirement.
Section 60 provides that the amount of pension will be according to the number of units for which he was contributing at the time of his retirement.
Section 60D(1) permits commutation of the whole or part of the Fund's share of a contributor's pension to a lump sum payment, and sec. 60D(2), (3) and (4) permits commutation by the widow of a contributor.
Section 61 provides for payment of a pension prior to normal retirement age where the contributor is retired on grounds of invalidity or physical or mental incapacity to perform his duties. Reversionary benefits are also provided for by the Act. A pension equal to twenty-two thirty-fifths of the contributor's entitlement at the time of his death becomes payable to his widow in the situation where marriage occurred prior to the contributor's retirement (sec. 76). Where a marriage has occurred after retirement, a pension equal to twenty-two thirty-fifths of the husband's entitlement at the time of his death is payable to the widow providing she has attained the age of 55 years. If she has not attained the age of 55 years at the time of her husband's death, she will be entitled to the pension on attaining that age if she has not remarried.
Each dependent child of a contributor under 16 years or student child under 25 years receives an allowance of $16 per week on the death of a contributor who was in receipt of a pension under the Act (sec. 62(1)). Upon the death of a contributor without dependants, a refund of contributions together with interest is payable to the contributor's estate (sec. 65).
The benefit payable on resignation, as distinct from retirement, is a refund of the full amount contributed to the Fund by the contributor together with interest (sec. 67(1)); similarly with dismissal.
5. On the basis of the above provisions, the Commissioner's representative sought to show that there was a strong possibility that the taxpayer might never receive anything from the Fund, for example, he could die before reaching retirement age. Stemming from that, he argued that receipts from the Fund could not be income according to general concepts, and as an extension of that argument he contended that the contributions could not be seen to be incurred in deriving the taxpayer's assessable income as represented by his salary. Thus, sec. 51(1) could not apply. In rebutting those submissions, the taxpayer's representative
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referred us to actuarial tables which pointed to the probability of the taxpayer reaching the age of 71 (he was 58 years old at the time of the hearing); thus there was every chance that his client would be enabled to exercise his rights to benefits as provided by the Superannuation and Family Benefits Act. A nexus was clearly established, so he contended, between the contributions outlays and the pension income, making those outlays properly deductible under sec. 51.6. The taxpayer's representative, in putting forward his submission, relied heavily on the Full Federal Court and High Court judgments in
F.C. of T. v. D.P. Smith, cited at 79 ATC 4553 and 81 ATC 4114 respectively, doubtless because the decisions in
Hannan v. F.C. of T. (1923) S.A.S.R. 434; Case J23,
77 ATC 220; Case K52,
78 ATC 510; Case P130,
82 ATC 651 and Case P131,
82 ATC 658 might be considered to stand in his way.
7. In Smith's case, the taxpayer was a medical practitioner employed in a hospital in Perth. While so employed, he was injured in a motor car accident (on 19th October, 1977). He was disabled until 16th February, 1978. Some years prior to the accident, he had taken out an insurance policy against disability occasioned by injury or sickness. With the policy still current at the time of the accident, the taxpayer received from the insurance company in the year of income ended 30th June, 1978, sums totalling $2,113 in respect of the period of his disability. In that same year of income, he paid an insurance premium of $91.36 which was for the renewal of his insurance for the year commencing 1st June, 1978.
8. When preparing his return of income for the 1977/78 year, he included the insurance receipts as income and claimed the premium as a deduction under sec. 51(1). In assessing the taxpayer, the Commissioner accepted the receipt as income but disallowed the premium claim. The taxpayer objected, and when that was disallowed he requested the Commissioner to treat his objection as an appeal and forward it to his home State's Supreme Court. There, in a decision cited as
Smith v. F.C. of T. 78 ATC 4741, Wickham J. held that the receipts were not assessable income because on the construction of the insurance policy the cover effected was against loss of occupational ability; hence, the payments received by Dr. Smith were not connected to a loss of income. He also held that the premium was not deductible under sec. 51(1) on the basis that it was not incurred in gaining assessable income but rather was paid for insurance against a future risk. In giving his reasons he referred to a decision he had given a year or so earlier on broadly similar facts in the case of
F.C. of T. v. Chapkhana 77 ATC 4412.
9. The Commissioner appealed to the Federal Court, and Dr. Smith countered with a cross appeal claiming that, if it were proper to regard the insurance receipts as assessable income, the price of obtaining those receipts, as represented by the premium, should be held to be deductible.
10. The Full Federal Court unanimously reversed the decision of Wickham J., holding that the moneys paid to Dr. Smith were substantially to replace earnings lost by him during the period of disablement. The Court thus saw the moneys as being on revenue account, and so assessable under sec. 25(1). In giving its judgment, the Court referred to the decision of the High Court in
F.C. of T. v. Dixon (1952) 86 C.L.R. 540. There, the matter in issue was whether a sum of money provided by an employer to make up the difference between the military pay of an employee who had enlisted, and the pay that he would have received in his civilian occupation, formed part of the soldier's assessable income. Speaking as one of the majority, Fullagar J. at p. 568 considered the payment to be a substitute for the salary which would have been earned and paid if the enlistment in the armed forces had not taken place.
11. In any event, in Smith the Federal Court considered that the receipts were also assessable income under sec. 26(j) being an indemnity for a loss of income (i.e. the taxpayer's salary as a resident medical officer), which would have been assessable if the loss of it had not occurred. Additionally, the Court allowed the taxpayer's cross appeal considering the premium to be properly deductible under sec. 51(1). The Court voiced its disagreement with the lower Court's finding that the lack of a direct connection between the premium claimed and the insurance receipts was fatal to the taxpayer's claim. Quoting from the judgment of Dixon C.J. in
F.C. of T. v. Finn (1961) 106 C.L.R. 60 at p. 68,
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the Court, per the principal judgment of Toohey J., stated at p. 4559:``The better view, however, is that sec. 51 as now drawn does not in either limb require a rigid restriction to the gaining or production of assessable income of the current year''
and referred to the High Court's more recent decision in
A.G.C. (Advances) Ltd. v. F.C. of T. 75 ATC 4057 where the above dictum was expressly approved (ref. pp. 4070-4072).
12. The Federal Court then went on to disapprove the reasons given for the decision in Chapkhana and (by implication) the lower Court's reasoning in Smith. Mr. Justice Toohey stated at p. 4559:
``His Honour's approach was that in taking out such insurance policy, the taxpayer recognised the possibility of loss if he did not insure but did not expect to produce income from that source.
With respect, that approach seems to me in error. The deductibility of the premium falls to be assessed in the context that any payments made under the policy constitute assessable income. It is true, as his Honour suggested, that money payable under the policy is only forthcoming in the event that certain contingencies are satisfied. But that is not inconsistent with the expectation of assessable income. There is nothing in the language used by the Court in Ronpibon Tin N.L. [
Ronpibon Tin N.L. and Tongkah Compound N.L. v. F.C. of T. (1949) 78 C.L.R. 47]... or in other cases to like effect that requires the production of income to be free from contingencies.''
He went on to say at p. 4560:
``Now it is true that in the case of an insurance policy premiums may be paid year after year without ever producing assessable income. But to say that is not to say that there is lacking a connection between the two. Once the events postulated in the policy have occurred, money will be paid and that money will constitute assessable income. In my view that represents a sufficient connection between the payment of premiums and the production of income.
For reasons already given, I do not regard the premium in question as an outgoing of a private nature. Nor was it of a capital nature. The advantage which the expenditure was intended to gain was monthly payments in the event of total disability, payments which would serve to replace income the taxpayer stood to lose by reason of that disability. It was an advantage of a revenue character.''
13. Upon a further appeal and cross appeal being heard by the High Court by special leave, that Court stated its agreement with the reasons of the Federal Court and unanimously dismissed both appeals.
14. We have gone to some lengths in examining the basis of the decision in Smith, because the taxpayer's representative placed a very substantial reliance on it. He submitted that if it were proper, as with Dr. Smith, to allow a deduction under sec. 51(1) for a premium paid for accident insurance cover, a deduction should likewise be allowed to an employee for contributions paid to a superannuation fund. That argument, however, whilst superficially attractive, lacks substance for we find the differences between Dr. Smith's situation and the situation in the instant case to be many and basic.
15. First, let it be said that the fact that the taxpayer was required to contribute to the Fund as a condition of employment is of little relevance. Conditions of employment per se can cover a wide range of subject matter having nothing to do with deductibility under sec. 51, e.g. the employer providing finance for housing. The one essential point for examination is the nature of the contributions. In a very recent case which came before the No. 1 Board of Review, Case P130 (supra), involving the question of deductibility of contributions paid to the Commonwealth Public Service Superannuation Board, the Board was of the view that the taxpayer was contributing in respect of a package of statutory rights, and accordingly the Board's finding was that the contributions were of a capital nature. With respect, we agree with that finding. In the situation now before us, the taxpayer, upon his retirement, could agree to receive his full pension entitlement over future years, or he could exercise an option to exchange all or part of the Fund share of his benefit for a
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lump sum and receive a correspondingly reduced pension.16. Another course open to him in the event of attaining the age of 60 was to elect to have the amount of pension determined in advance, and to cease making normal fortnightly contributions to the Fund.
17. Again, albeit improbably, he could resign before reaching the age of 60 and accept reduced benefits. Alternatively, he could resign after 60 (but before the maximum retirement age of 65) and have a different range of options open to him than would exist upon reaching the stipulated maximum retirement age.
18. Furthermore, the possibility always existed since joining the superannuation scheme (and in fact continued to exist at the date of the hearing) that he could die and receive no income from the Fund, with the ultimate recipient being his wife and/or children, or possibly his estate.
19. In contrast, once Dr. Smith suffered the mishap postulated in the insurance policy, viz. the disability through injury, the amount of the insurance cover was required to be paid to him. True it is that the doctor could have paid the premium year after year without ever suffering an accident and thereby receive no amount in substitution for lost earnings, but the fact that money became payable once the specified contingency was satisfied is sufficient to constitute a nexus between the outgoing as represented by the premium payment and the assessable income as constituted by the insurance recovery.
20. A further distinguishing feature lies in the fact that the only possible recipient of the insurance recovery was the doctor, whereas in the instant case there is no certainly that the taxpayer will ever receive any income from the Fund at all.
21. For all of the above reasons, we do not consider that the contributions could be said to be outgoings incurred in gaining or producing the taxpayer's assessable income. They were not outgoings related to the performance of the taxpayer's duties or related in any relevant sense to the derivation of his salary income, nor was there sufficient nexus with the pension income which he might, or might not, receive in the future. We see the contributions as outlaid to essentially provide a new source of income for his family and himself upon his employment as a salaried officer coming to an end.
22. For the above reasons, we would uphold the Commissioner's decision on the objection and confirm the assessment.
Claim disallowed
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