Federal Commissioner of Taxation v. Markey
Judges:Neaves J
Burchett J
Lee J
Court:
Full Federal Court
Neaves, Burchett and Lee JJ.
This is an application by the Commissioner of Taxation (``the Commissioner'') by way of appeal pursuant to subsec. 44(1) of the Administrative Appeals Tribunal Act 1975 (Cth) from a decision of the Administrative Appeals Tribunal allowing, in part, the objections lodged by Barry John Markey (``the taxpayer'') against assessments to income tax in respect of the years of income ended 30 June 1981 to 30 June 1984 inclusive.
In each of the years of income in question the taxpayer was employed within the Department of Education of the State of Western Australia. He had, indeed, been so employed since about 1960. As such employee he had, shortly after his employment commenced, elected to become a contributor to the superannuation fund (``the fund'') established by sec. 24 of the Superannuation and Family Benefits Act 1938-1960 (W.A.) and he thereafter remained a contributor to the fund. In each of the relevant years of income the taxpayer returned, as part of his assessable income, the salary paid to his as such employee. He claimed to be entitled, in respect of each of those years of income, to a deduction under subsec. 51(1) of the Income Tax Assessment Act 1936 (Cth) of an amount equal to the amount of the contributions which in that year had been deducted from his salary as contributions to the fund. Although the evidence on the point is not entirely clear, it would appear that in each year of income he claimed that, in the event of the claim under subsec. 51(1) being disallowed, he was entitled to have the amount of the contributions paid in that year taken into account for the purposes of the concessional rebate for which sec. 159N and 159R of the Income Tax Assessment Act provided.
The Commissioner disallowed the claim that the contributions were deductible under subsec. 51(1) and assessed the taxpayer to tax accordingly. The taxpayer lodged an objection in respect of each assessment and, when the objection was disallowed, he requested that the matter be referred to a Board of Review. Pursuant to the legislative changes effected by the Taxation Boards of Review (Transfer of Jurisdiction) Act 1986 (Cth), the objections came before the Administrative Appeals Tribunal (``the Tribunal''). The Tribunal determined that, in respect of each of the years of income, the taxpayer was entitled to a deduction under subsec. 51(1) of the Income Tax Assessment Act of an amount representing 15.36% of the amount paid in that year by way of contributions to the fund and directed that the relevant assessments be amended accordingly.
From that decision the Commissioner has appealed to this Court. By virtue of the provisions of subsec. 44(1) of the Administrative Appeals Tribunal Act, an appeal to this Court lies only on a question of law. It will be necessary to return to the question whether the Commissioner's appeal is competent.
As appears from what has already been said, the Tribunal rejected the taxpayer's claim that he was entitled in each year of income to a deduction under subsec. 51(1) of the Income Tax Assessment Act of an amount equal to the whole of the contributions made by him in that year to the fund but allowed a deduction in each year of an amount equal to 15.36% of those contributions. In doing so, the Tribunal characterised the contributions made to the superannuation scheme embodied in the relevant legislation as ``premium payments'' and characterised the scheme as a scheme providing, inter alia, benefits ``in the event of invalidity in service'' of a contributor. The Tribunal relied on actuarial evidence before it which it regarded as providing ``the cost component of each of the various contingency factors which, collectively, were used in calculating the cost of the contributions to this particular scheme''. From this evidence, the Tribunal ascertained what it referred to as the ``invalidity in service'' component of the annual contributions paid by the taxpayer in each of the years of income under review and determined that the ``cost'' of that component in each of the years of income was 15.36% of those contributions. The Tribunal concluded that that cost component, which it described as the cost of obtaining cover against the loss or impairment of income earning capacity and as ``invalidity insurance cover'', was deductible under the first limb of subsec. 51(1) of the Income Tax Assessment Act. The Tribunal expressed itself as not being persuaded ``that the cost of this component is any less deductible because it is `mixed' in a lump sum with other expenditures of a non-deductible kind and/or has become `amalgamated'''.
ATC 4603
It is necessary to refer to the broad outline of the superannuation scheme for which the Superannuation and Family Benefits Act provides. That Act was amended on a number of occasions after its enactment in 1938 and prior to the commencement of the earliest of the years of income the subject of the appeal to this Court, viz. 1 July 1980, and has been amended on a number of occasions since that date. It is, however, sufficient for present purposes to refer to the scheme as embodied in the Superannuation and Family Benefits Act, 1938-1979 (W.A.), that is to say, in the form in which the Act stood as at 1 July 1980. We shall refer to the Act in that form as ``the Superannuation Act''. What follows refers to the provisions of the statute as they apply to a male employee or contributor.
The Superannuation Act is described in its long title as ``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''. Section 24 establishes the fund which is administered by a superannuation board (``the board'') constituted by sec. 9 of that Act. Into the fund are paid the contributions of employees who become contributors and certain other moneys, including moneys paid to the fund by the State of Western Australia, and from the fund are paid the benefits provided for in the Act. Income derived from the investment of the fund also forms part of it.
An investigation as to the state and sufficiency of the fund is to be made by an actuary at three yearly intervals (sec. 30). The actuary is to report whether any reduction or increase is necessary in the rates of contributions payable to the fund or in the proportion payable by the State of Western Australia in respect of any pension and, where a surplus is disclosed, what additional benefits (if any) could be provided out of the surplus.
It is not compulsory for an employee to become a contributor to the fund: he may elect to do so (sec. 31). The board may require an employee who has made such an election to undergo such medical examination or examinations as it directs (sec. 32). The board is obliged to accept the election if it is of opinion that the employee is not suffering from any physical or mental defect or condition which is likely to render him incapable, before attaining his maximum age for retirement, of performing his duties as an employee. If the board is of the contrary opinion, it may refuse to accept the election of the employee to become a contributor or may accept the election conditionally upon the employee being a contributor for limited benefits. The maximum age for retirement means the age of 65 years or, in the case of a contributor whose age for retirement is fixed by law at an earlier age than 65 years, the age so fixed (sec. 6(1)).
A contributor is obliged to make contributions to the fund in respect of units of pension. Contributions are directly related to the number of units for which the employee contributes. The minimum number of units for which a contributor must contribute is two, while the maximum number in respect of which he may contribute at any time is determined by his then salary. A contributor who is not contributing for a number of units equal to his total unit entitlement may at any time elect to contribute for an additional number of units so that his total number of units is equal to, or less than, his total unit entitlement (sec. 36, 37, 38).
Tables are prescribed by or under the statute (see sec. 40) showing the amount of the fortnightly contribution payable by a contributor in respect of any unit of pension for which he is contributing. The amount of the contributions payable in respect of a unit of pension is prescribed by reference to the age which the contributor will attain on his birthday next after the date of his election to take up that unit and the age, whether 60 or 65 years, which he has selected, for the purposes of the scheme, as his age of retirement. The contribution in respect of a unit is fixed at the date of election and does not thereafter vary.
It is clear that the fortnightly contributions are not fixed at amounts which, when invested by the fund, will provide the pension benefits for which the statute provides. What those contributions are designed to produce is what is referred to as ``the Fund share'' of the pension payable to the contributor, the legislation providing that the difference between the fund share and the pension payable is a charge upon the consolidated revenue fund of the State of Western Australia (sec. 43, 60). Thus, although pensions are payable out of the fund, the fund is able to meet its obligations in that regard
ATC 4604
only by virtue of the payments made to it from the consolidated revenue fund. The contribution from the consolidated revenue fund is made only at the time of payment of the benefit. The extent of the fund's dependence on the consolidated revenue fund is illustrated by the fact that, in respect of the payment of pensions during each of the financial years ended 30 June 1981 to 1984 inclusive, the share borne by the consolidated revenue fund exceeded 90%.Subject to certain provisions to which it is unnecessary to refer, a pension is payable to a contributor on his retirement on or after attaining the maximum age for retirement (sec. 52). The amount of the pension payable is related to the number of units for which the employee is contributing at the time of his retirement (sec. 60). A contributor may elect to commute the whole or any part of the fund share of his pension to an equivalent entitlement by way of a lump sum payment (sec. 60D).
A contributor who is retired on the ground of invalidity or of physical or mental incapacity to perform his duties may also receive a benefit under the statute (sec. 53). If the invalidity or incapacity is due to wilful action on the part of the contributor for the purpose of obtaining a pension, or if the retirement occurs within three years of his becoming a contributor, or if he failed to disclose at the medical examination for the purpose of becoming a contributor a physical or mental defect or condition of which he knew and which causes the retirement, the contributor is to receive a refund of his contributions together with interest. In other cases the contributor is entitled to the full pension for which he was contributing at the time of his retirement (sec. 61).
Benefits are also payable in the case of resignation, retrenchment or dismissal of the contributor but in these cases the benefit payable is directly related to, though not limited by, the amount of the contributions paid by the contributor (sec. 66, 67).
In the case of the death of a contributor or pensioner, benefits are, in the circumstances prescribed, payable to the widow of the contributor in respect of herself and any dependent children of the contributor or pensioner (sec. 61 and Sixth Schedule).
The essential features of the scheme may be summarised as follows:
- it provides a means whereby a contributor may put aside, by payment into the fund, certain moneys out of his earnings as an employee of the State;
- it provides for those moneys to accrue interest arising from their investment by the managers of the fund; and
- it ensures that the funds so accumulated will be available for payment to the contributor or members of his family either by way of a return of the amount contributed with interest or as part of a pension payable upon the contributor's retirement, whether such retirement occurs upon his attaining a prescribed retirement age or at an earlier date if the retirement is due to invalidity or mental or physical incapacity to perform his duties.
Such being its essential features, it is, in our view, erroneous to equate the scheme, or any part of it, to a contract of insurance. No part of the scheme provides an indemnity against loss of income arising from a contributor's inability to earn. The benefits payable are not conditioned by reference to any period of disability of the contributor or any incapacity on his part to perform his duties. The only relevant criterion for payment is the contributor's retirement, on whatever ground, from his employment in the service of the State. So viewed, the scheme is essentially different in character from the disability insurance policy considered in
F.C. of T. v. Smith 81 ATC 4114; (1979) 29 A.L.R. 586; (1980-1981) 147 C.L.R. 578. That case is, therefore, clearly distinguishable.
The amount of the contributions paid by a contributor in a particular year of income is, of course, merely the sum of the fortnightly amounts prescribed by or under the statute in respect of each of the units of pension for which the employee is contributing. As has already been mentioned, the fortnightly amount payable for each unit is fixed at the date the election is made to contribute for that unit and is an amount ascertained by reference to the age of the contributor on his birthday next after the date of such election and the selected age of retirement. In that sense, the total amount of the contributions may be apportioned as being referable to particular units of pension. But the
ATC 4605
amount is not otherwise apportionable. In particular, it is not apportionable by treating part of the sum as having been paid to provide the benefit which may become payable to the contributor in the event of a certain contingency. What the contributor is paying is a single sum for the totality of the benefits to which the scheme may entitle him or members of his family in the events which, in fact, occur. It is no doubt possible to determine at any given time and in relation to any particular contributor, by appropriate actuarial calculations, the present value of each of the benefits that might become payable to him or members of his family under the scheme and the proportion of that present value represented by the present value of the benefit payable in the event that his retirement occurs on the ground of invalidity or incapacity. It is upon such a calculation that the Tribunal relied to support its apportionment of the contributions paid by the taxpayer in each of the years of income under review. But the circumstance that such a calculation can be made does not alter the character of the payment made by the contributor. Such a calculation bears no relationship to the basis upon which the prescribed amounts of fortnightly contribution for each unit taken up were determined and, as was conceded before the Tribunal, is a notional calculation only. It should not be overlooked that the payments represent only a nominal contribution to the benefits payable upon retirement in circumstances qualifying the taxpayer for a pension. That fact alone makes the analogy to invalidity insurance quite exiguous.Upon the analysis we have made of the scheme embodied in the Superannuation Act, we are of opinion that it was not open to the Tribunal to reach the conclusion that a portion of the contribution made to the fund by the taxpayer in each of the years of income was an allowable deduction under subsec. 51(1) of the Income Tax Assessment Act as an outgoing incurred in gaining or producing the assessable income of the taxpayer. The true nature of the contribution to the superannuation fund was that of an investment to secure rights under the Superannuation Act. As such it was in the nature of capital expenditure. The taxpayer's argument that payments from the fund may be received upon retirement from employment on the ground of invalidity or incapacity does not assist the taxpayer in ascertaining the true nature of the payment to the fund. Entitlement to a superannuation pension after a retirement brought on by invalidity or incapacity is an entitlement to the receipt of an accelerated pension and not to income in lieu of anticipated income. The true legal character of the taxpayer's payment to the fund is a periodical payment to purchase an annuity. The fact that, in actuarial terms, the calculation of the amount to be paid as a contribution includes provision for an accelerated payment of the annuity in the case of invalidity or incapacity does not convert the nature of the contribution into two components of, firstly, an outgoing incurred in gaining or producing the assessable income of the taxpayer and, secondly, an instalment of the purchase price required to be paid to acquire the annuity. Nor can it be said that in truth any part of the payment was in the nature of a premium to secure an indemnity in the event of invalidity or incapacity. Apportionment is as inappropriate as Kitto J. held it to be in
F.C. of T. v. Western Suburbs Cinemas Ltd. (1952) 86 C.L.R. 102 at pp. 107-108 and for essentially the same reason. The taxpayer is not entitled to a deduction for a notional expenditure upon disability insurance, which he might have obtained, when his actual expenditure related to something quite different, the superannuation rights he did obtain.
It remains to deal with the argument presented on behalf of the taxpayer that the appeal is not competent as it is not on a question of law. The primary facts concerning the taxpayer's employment, his election to contribute to the fund and the amount of the contributions paid in each year were not in dispute. The question whether upon those facts it was open to the Tribunal to regard the case as falling within the purview of subsec. 51(1) properly construed is, in our opinion, a question of law (see
Farmer v. Trustees of the late William Cotton (1915) A.C. 922 per Lord Parker of Waddington at p. 932;
Hayes v. F.C. of T. (1956) 96 C.L.R. 47 at p. 51;
Hope v. The Council of the City of Bathurst 80 ATC 4386 per Mason J. at p. 4389; (1980) 144 C.L.R. 1 at p. 7). We, therefore, reject the argument.
For the reasons set out above, we allow the appeal, set aside the decision of the Tribunal and in lieu thereof order that the assessments in respect of the years of income ended 30 June 1981 to 30 June 1984 inclusive be confirmed.
ATC 4606
We note the Commissioner's agreement to pay the taxpayer's costs of the application in any event and the order to that effect previously made by consent.This information is provided by CCH Australia Limited Link opens in new window. View the disclaimer and notice of copyright.