Case X16

PM Roach SM

Administrative Appeals Tribunal

Decision date: 25 January 1990.

P.M. Roach (Senior Member)

In the late 1960s the applicant company was incorporated and commenced carrying on business as a cleaning contractor. I shall hereafter refer to it as ``Cleanco''. It came to be but one company in a group of companies. The cleaning operations it undertook were substantial and in the early 1980s its turnover more than doubled to exceed $6,000,000. It was said that at times there were as many as 1,000 persons engaged in its service. It may be that in a given period, because of rapid turnover of staff, that that was so. But at any one time the numbers engaged were far less. Many were employees. One employee of the early years was Richard. He commenced in service with Cleanco in the late 1960s; he rose to become manager; he then left the service of the company in 1976; returned to its service in 1977; and at the date of hearing he was managing director of Cleanco.

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2. The principal issue to be determined is whether and, if so, to what extent, Cleanco was entitled to income tax deductions for moneys paid by it to the trustee of a superannuation fund which had been established with the approval of the Commissioner.

3. In each of the years of income ended 30 June 1981 to 1985, Cleanco had claimed substantial income tax deductions in relation to contributions so said to have been made by it. Commencing with an assessment for the year of income ended 30 June 1981 which issued in August 1982, the Commissioner wholly disallowed the claims so made in each of the years of income ended 30 June 1981 to 1985. He also disallowed claims to losses carried forward. In relation to the year of income ended 30 June 1983 he disallowed portion of a further claim: an adjustment which is not in dispute. Any issue as to the deductibility of losses carried forward will be determined by decisions to be made in relation to the claim to deduct superannuation contributions. In addition to issuing assessments to primary tax, in relation to the years of income ended 30 June 1981 and 1984 the Commissioner also assessed the company as liable to pay Div. 7 tax.

4. The result of the assessments so made so far as they are in dispute is summarised in the following table:

Year ended 30 June         1981       1982       1983       1984       1985
                            $          $          $          $          $
Taxable income
acknowledged             (15,344)   (86,980)    10,329     (7,250)    107,280
prior losses                         15,344     86,980                  7,250
contributions            195,631    197,699     44,200     20,500      33,632
Taxable income
assessed                 180,287    126,063    148,440     13,250     148,162
                         -------    -------    -------     ------     -------
* Tax assessed            82,932     57,989     68,282      6,095      68,155

Additional tax for
late return                1,555        -          648        277       1,307
Div. 7 tax                14,603        -           -         716         -
                          99,090     57,989     68,930      7,088      69,462
                         -------     ------    -------     ------      ------

*Figures are to the nearest $1

5. The superannuation fund in question had been established by a deed entered into in terms approved by the Commissioner on 25 May 1973. Relevant provisions were as mentioned below.

6. Clause 1 identified a ``Member'' as:

``an employee, director or other officer of the Company who has been approved by the directors as eligible for inclusion in the Fund and in respect to whom notice of approval has been given by the Directors to the Trustee'', and

``Retiring age'' was defined to

``mean the attainment by a male Member of his sixty-fifth (65th) birthday or by a female of her sixtieth (60th) birthday or in either case such later age as the Directors may determine in respect of a particular Member.''

Clause 3. Control of the fund was to be vested in trustees.

Clause 4. Employees of Cleanco were to become members of the fund on Cleanco giving the trustee notice that such employees had been approved as eligible for inclusion in the fund. Upon admission as a member of the fund, Cleanco was to ``give the Member notice in writing of the existence of the right of that Member and his dependants to receive benefits from the Fund not later than the time that

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(Cleanco) pays its first contribution to the Fund''.

Clause 5. The fund was to comprise contributions by the company; any other amounts received by the trustee for the fund; and interest and profits arising from the investment of the moneys in the fund.

Clause 9. The trustees were empowered (inter alia) to effect life assurance on the lives of members.

Clause 12 provided that:

``Unless the Directors otherwise determine in the case of any particular Member upon admission to the Fund, each Member shall either agree with the Directors to contribute to the Fund in each year ended the thirtieth day of June in one sum or by instalments an amount not less than one percentum (1%) of such Member's remuneration for that year ended the thirtieth day of June or shall authorise the Company to deduct each week or at such other periodical times as the Trustees shall determine from his remuneration a sum not less than one percentum (1%) thereof as at that date and all amounts so deducted shall be forthwith paid into the Fund to the credit of such Member and from such credits subject to there being a sufficient balance in hand so contributed by the Member, the Trustees shall, in the event of a policy having been effected pursuant to Clause 9(c) hereof pay to the appropriate life assurance corporation the premiums falling due under such Member's Policy. An authority given pursuant to this clause shall be irrevocable except with the written concept [sic] of the Directors while the employee remains a Member of the Fund.''

Clause 16. Provision was made that:

``In the event of any Member either voluntarily resigning or being dismissed from the service of the Company or resigning from the Fund with the express permission in writing of the Directors before attainment of retiring age:

  • (a) The Trustees may deal with the amount remaining to the member's credit in the Fund arising from the Company's contributions and the Trustee's policy on that Member's life for all or any of the purposes and in the time and manner prescribed in paragraph (f) of Sub-section (2) of Section 23F of the Income Tax Assessment Act 1936 as amended.
  • (b) All amounts remaining to the Member's credit in the Fund arising from his own contribution shall be paid to him and the Member's policy shall be handed to him forthwith...''

Clause 17 dealt with the rights of members on attaining retiring age. Despite some deficiencies in the drafting I am satisfied that cl. 17 conferred on members who attained retiring age in the service of the company an immediate right to all moneys held to their credit with the fund at least in the absence of a resolution adopting a later age for retirement (cf. ante).

Clause 18 provided that if a member died while in the service of the company, the trustee was to pay all moneys held in the fund to the credit of the deceased member to the personal representatives of the deceased or his dependants by way of a capital sum or an annuity or pension and in such proportions and otherwise, as the trustees should in their absolute discretion determine.

Provision was made for trustees' meetings and the execution of documents (cl. 23); for the maintenance of trustees' records (cl. 24); for accounts (cl. 25); for the removal of trustees and appointment of new or additional trustees (cl. 26); and for winding up (cl. 32).

The trustees were empowered [sic]:

``To ensure that (the benefits being provided under the Deed together with benefits under any other superannuation or similar fund) are not in the opinion of the Trustees greater than the benefits which are approved from time to time or in any particular case for the purposes of Paragraph (h) of Sub-section (2) of Section 23F of the Income Tax Assessment Act as amended''

(cl. 34).

7. I am well satisfied that following its establishment the fund commenced to operate in a quite unremarkable way as a superannuation fund. Initially, individual persons were named as the trustees. Although how it came to pass was not explained, I am satisfied that before the commencement of the relevant period, the trustee came to be a company which I shall refer to as ``Trustco''.

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For some years following its establishment, the administration of the fund was such as to hardly attract notice. In the case of the two directors then controlling the company, only Cleanco made contributions to the fund. But with most others, including Richard, employer and employee contributions were made in equal amounts. They were not large. Further, the records show that in that early period, when membership with the fund came to an end, presumably on resignation from the service of Cleanco, retiring members were ordinarily paid the amounts standing to their credit as a result of ``employee contributions'' but the amounts standing to their credit as a result of ``company contributions'' were not: they were credited to others. When Richard's service came to an end during the year of income ended 30 June 1977 - at which time there was no expectation that he would return to the service of the company - it seems from the record that he was paid an amount well in excess of the credit for ``employee contributions''. I am satisfied that the amount paid to him was $3,524.45 but the evidence is not clear as to how that amount was made up. I am also satisfied that there was at least one instance in which an insurance policy on the life of a fund member matured upon the death of the member and that the proceeds of the $5,000 policy were paid to his personal representatives. Whether any other amounts were paid in respect of that deceased member was not made clear.

8. But changes did come and they were substantial. Commencing with the year of income ended 30 June 1981, Cleanco made contributions to the superannuation fund at the rate of $400 for each of 428 employees on its payroll at the date of contribution who were not otherwise provided for. (I shall refer to the persons in this group as the ``unnamed employees'', not because their names were unknown but because their names were not specified in any returns of income.) In each instance the amount so contributed was credited to an account maintained with the fund in the name of the employee. I find that neither the figure of $400, nor any of the other lesser amounts used later, in relation to unnamed employees was related in any way to the remuneration of any of those employees for that year, or any other year, or to their rate of remuneration, or to any consideration personal to the employees.

9. In the years following the amount of each contribution in relation to unnamed employees sometimes changed and the number of employees always changed - with the following result:

      Year ended       Contribution       Number of          Total
      30 June          per employee       employees       contributions
                            $                                   $
       1981                400               428             171,200
       1982                400               456             182,400
       1983                100               432              43,200
       1984                126               157              19,782
       1985                400                70              28,000

10. Although records were kept by Trustco of the amounts credited to each employee, I am not persuaded that the fund obtained, or maintained, or sought to keep itself properly or reasonably informed with particulars as to dates of birth of the unnamed employees, or as to the identity of their personal representatives or their dependants. I am satisfied that Cleanco was aware of all the relevant practices, or lack of them, on the part of the trustee. I find that in a number of instances the amount of $400 so contributed was substantially greater than five per cent of the remuneration of the employee for that year. I also find as a fact that what caused Cleanco to fix upon $400 as the amount to be so contributed was the circumstance that sec. 82AAE of the Income Tax Assessment Act (``the Act'') was so expressed as to not place a limit of five per cent of employee's salary as prima facie the maximum amount of deductible contributions available to an employer so long as the contribution made for an employee did not exceed $400.

11. I am satisfied that Cleanco and the fund were conscious of the fact that it was in the

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nature of the industry that many of the unnamed employees would only serve the company for a short term and would never qualify to receive benefits. The same finding is appropriate as to the other named employees outside the principal employees. I find that the principal employees, such as the directors (JC and PC) and Richard, were well aware of the existence of the fund and of their prospects of deriving substantial benefits from it. I am not so persuaded as to the unnamed employees. One witness in the person of a former employee, called on behalf of Cleanco to attest his awareness of the fund, was so inaccurate in his statements of members' entitlements as expressed in the deed and so vague in his understanding that I am not persuaded that he was ever aware of membership or of any prospective entitlement of members such as himself to benefits. I am also satisfied that, measured by his own understanding, it was clear that he had never expected to personally benefit from any membership such as he might have had and, having voluntarily left the service of Cleanco, did not think of himself as possibly entitled to anything.

12. His evidence, as an indication of the understanding of most employees, was confirmed by a witness called on behalf of the Commissioner. She had been an unnamed employee. I find that she had never known of the fund and had never considered herself to have any entitlement to benefits. Yet the fact was that upon her retirement from the service of the company, by reason of her age she had been entitled to benefits amounting to at least $16,363. Despite that, upon her retirement her benefits were treated as forfeited to others without anything having been done by the trustee or by Cleanco, acting to advance the interests of its employees, to ensure to her the benefit of the entitlement she had.

13. The foregoing sets out in outline the essence of the problem. The principles expressed in that outline find concrete expression in the following tables. Table A sets out the contributions to the fund made by Cleanco, identifying the amounts contributed for the three principals (JC, PC and Richard); for the ``named employees'', that is the employees whose names were identified to the Commissioner in returns of the fund from year to year; and the contributions made in relation to ``unnamed employees'': persons identified in records of the fund and in the employment records of Cleanco, but not identified to the Commissioner in the income tax returns of the fund.

                                         TABLE A
                                   CONTRIBUTIONS MADE

Year ended 30 June       1981       1982       1983       1984       1985
PRINCIPALS                 $          $          $          $          $
JC                       1,281      2,080        100        214      1,200
PC                                    400
Richard                  3,420      1,521        100        126      4,032

                        19,730     11,298        800        378        400

400 x 428              171,200
400 x 456                         182,400
100 x 432                                     43,200
126 x 157                                                19,782
400 x 70                                                            28,000
                      -------     -------    -------     ------     ------
                      195,631     197,699     44,200     20,500     33,632

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Table B identifies what was available to be known to the Commissioner upon a comparison of the several income tax returns of the fund. It is distinguished by the circumstance that, as to ``unnamed employees'', the sums of money said to be collectively available to their credit were recorded but not the extent of benefits held for, or forgone by, any individual; that only PC had been paid out without forfeiture; and by the position of LB - a named employee - as to whom there had been some payment but also some forfeiture.

                                     TABLE B
                             MEMBERS' ACCOUNT BALANCES
                      (Forfeitures are indicated by parentheses)

                   1980       1981       1982       1983       1984       1985
THE PRINCIPALS      $          $          $          $          $          $
JC               24,688     28,330     78,169    130,359    215,904    497,531
PC               25,739     28,201     76,143    117,000     PAID
Richard            -         3,420     10,706     17,940     29,809     72,559

TS x              9,125      9,998     27,594      ( )
SV x              5,171      6,576     18,390      ( )
DL               20,632     22,605     61,649      ( )
DT               12,351     16,656     45,541     75,988    125,855      ( )
GR                9,096      9,966      ( )
AV               13,427     14,711      ( )
LB                2,614      4,016     11,333     18,985     31,538   (PART) xx
BW                3,463      3,794      ( )
PW                3,218      3,526      ( )
CB                             942      ( )
MU                           1,855      ( )
PM                             400      1,474      2,556      4,355     10,410
GW                             400      1,844       ( )
KH                             633      ( )
JC                             963      ( )
JH                           1,136      4,091      6,918      ( )
GL                           3,420      ( )
MP                           1,136      ( )
GW                           1,631      ( )
FS                           1,768      ( )

                      650      1,183     ( )

              1980       1981       1982       1983       1984         1985
                $          $          $          $          $            $
DS                                   650       (   )
AB                                 1,281       2,234      (   )
HB                                   832       1,487      (   )
TD                                   737       (   )
TN                                 1,181       2,067      (   )

Others     112,142     294,067   371,469     488,461     479,790      456,743

It is to be noted:

  • (a) that of the nine named employees who were members of the fund at 30 June 1980, none remained at 30 June 1985;
  • (b) that only one of the nine received any amount in respect of ``employer contributions''; and
  • (c) of the named employees introduced in the two years to 30 June 1982, only one remained in the fund at 30 June 1984.
  • x These persons also had credits for employee contributions.
  • xx LB was paid $20,000, forfeiting only $11,538.

14. Table C presents a different aspect: being concerned only with the identification of the individuals and groups who suffered their benefits to be forgone and of the individuals and groups to whom the benefits so forgone were credited.

                                        TABLE C

                         (Benefits forgone appear in parentheses)

Year ended 30 June 1981        1982         1983         1984         1985
                                $            $            $            $
TC                            39,149       35,970       56,511      212,991
PC                            38,971       35,038                     PAID
Richard                        4,726        4,926        7,777       29,407
TS*                           13,816      (27,594)
SU*                           11,595      (18,390)      (2,758)
DL                            31,238      (61,649)
DT                            23,017       20,956       32,941     (125,855)
GR                            (9,966)
AV                           (14,711)
LB**                           5,550         5,215       8,230      (11,538)
BW                            (3,794)
PW                            (3,526)


Year ended 30 June 1981        1982          1983         1984          1985
                                 $             $            $             $
MU                            (1,855)
PM                               553           678        1,108         4,296
GW                               553        (1,844)
KH                              (633)
JC                              (963)
JH                             1,570         1,883       (6,918)
GL                            (3,420)
MP                            (1,136)
GW                            (1,631)
FS                            (1,768)
MH                                             299       (1,183)
DS                                            (650)
AB                                             589       (2,234)
HB                                             383       (1,487)
TD                                            (737)
TN                                             543       (2,067)

Unnamed                     (223,672)     (115,600)    (301,642)     (293,287)
                              97,279       119,984      211,749       183,986
                            ---------      -------      -------       -------
                            (268,017)     (226,464)    (318,316)     (430,680)
                             268,017       266,464      318,316       430,680

* TS and SU made employee contributions and on or before retirement received employee contributions (plus interest thereon) but the remaining share of benefits were forfeited.

** Forfeiture was only partial.


15. Questions to be addressed in the resolution of problems raised on the references include: whether the fund was a ``superannuation fund''; if it was, whether the provisions of Subdiv. AA of the Act (``Contributions to Superannuation Funds for Benefit of Employees'') apply; and whether the deductions claimed are allowable pursuant to either the provisions of that Subdivision or pursuant to sec. 51(1) of the Act. For reasons to be stated later, some of those questions will need to be the subject of separate consideration in relation to each of the three groups of employees: principals; named employees; and unnamed employees.

16. Superannuation schemes do not ensure the provision of benefits to all members (or their dependants) regardless of circumstances. Some members qualify to benefit from employers' contributions; some members do not. One result is that benefits arising from employer contributions made in relation to members who never qualify for benefit come to be available to others. Another consequence is that the greater the incidence of non-qualifying members, the greater the benefits to qualifying members. It also follows that, the more predictable it is that some members will not qualify for benefits by way of employer contributions, the more confident some other members can be that the amounts to become available to them on qualifying will be enhanced. Then again, the greater the influence some members have upon the affairs of the employer and the fund, the greater their

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confidence can be that they will be able to ensure that the trustee of a superannuation fund will exercise any discretion in their favour.

17. It was contended for the Commissioner that the arrangement was in the nature of a ``tontine'': a financial scheme by which contributors to a common fund draw on it for annuities which increase as the number of annuitants diminishes. In some respects the analogy is apt - but so it is with many superannuation schemes. Those who live longest benefit most.

18. It can next be observed that, as to the making of provision for superannuation benefits for employees, the Act only requires that the benefits should be available to an employee if he qualifies for them. Benefits are not the less made available for an employee because in the end, by reason of his own acts, he does not qualify to receive ``employer's benefits'', with the consequence that the benefit to pass to others will be increased. So it is that the mere expectation on the part of an employer that particular members (if identifiable), or a group, or a percentage of members are unlikely to benefit will not of itself render the contributions of an employer to a fund non-deductible. Nor does the circumstance that the employer, or those directing the affairs of the employer, can foresee that, as members, they are more likely to benefit, and are likely to benefit in greater amount or degree than others in consequence of contributions made, of itself render the contributions non-deductible.

19. Furthermore, that that is so is not diminished by the circumstance that the Parliament has allowed for $400 to be available as a deduction, if made in relation to any employee, no matter how high a percentage of his remuneration; no matter how unreasonable the contribution may be; and no matter that members guiding the affairs of the employer will benefit if such employees fail to qualify for benefit.

20. In summary: initially there was a superannuation fund duly administered in the way of superannuation funds. In the course of its administration some members forfeited prospective benefits by retiring from the fund before qualifying for benefits. The benefits so forfeited passed to others. In that period the persons most likely to benefit and to benefit in the largest degree were those controlling the affairs of Cleanco. Then, from about 1980, there were substantial changes. Large numbers of persons who were even less likely to qualify for benefits than many earlier members who were themselves not likely to qualify for benefits were admitted to the fund. Neither their admission, nor the improbability of them ever qualifying for benefits, can of itself deny the character of a superannuation fund to the fund. Further, as the Act allowed, contributions were made in relation to the new class of members at rates of up to $400 per annum not limited to the five per cent of salary which in most circumstances was the maximum rate of deductible contribution permitted when salary exceeded $8,000 per annum. That circumstance did not alter the character of the fund as a superannuation fund either.

The authorities

21. Some aspects of the question as to what would constitute a superannuation fund established for the benefit of employees were considered by Owen J. sitting as a single Judge of the High Court of Australia in
J.D. Mahoney & Anor v. F.C. of T. (1965) 13 A.T.D. 519. That was a case in which his Honour was satisfied that such a fund had been established but was of the view that that alone was not enough to qualify the claimant for exemption. As his Honour said (at p. 526):

``There remains a further matter which the appellants must establish affirmatively. Was the Fund, during the years in question, being applied for the purpose for which it was established, that is to say for the purpose of benefiting employees?''

22. In the particular circumstances of that case his Honour concluded that the fund was not to be so characterised. But the question being addressed by his Honour was substantially different from that arising in the present case. Here clearly the fund was being conducted for the benefit of some employees. The first criticism of it as a superannuation fund for employees is that, by reason of a high ``drop-out'' rate among its members, the fund was being conducted with a view to the ultimate substantial benefit of but a few members. That question was more nearly raised, but without being resolved, in certain observations made by Kitto J. in
Compton & Ors v. F.C. of T. (1966) 116 C.L.R. 233 at p. 246, where the circumstances touching the

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establishment and management of the fund were such that his Honour said:

``I am not at all sure that the correct conclusion would not have been that [the fund] was constituted and applied as a fund for the benefit of shareholders, that is to say shareholders who happened to be employees but were selected not as being employees but as being persons entitled to participate in distributions of profits of the companies... Perhaps the true view of the facts is that a fund was established which was not the fund contemplated by the deed, was not really a superannuation fund, and was not for the benefit of employees as such, but was a means of producing for the Comptons themselves advantages fundamentally different in character from employees' superannuation benefits. Again, the manner in which the fund was administered may be thought to raise a corresponding question, namely whether the purpose which governed the application of the fund throughout the relevant years was not rather the purpose of benefiting the Comptons as individuals than the purpose of providing them with superannuation as employees.''

His Honour ended by saying:

``Upon these questions, however, it is unnecessary to form a concluded opinion.''

23. However the views then expressed by his Honour did not deter him from later finding (in joint reasons for decision with Barwick C.J. in
Driclad Pty. Ltd. v. F.C. of T. (1968) 121 C.L.R. 45 at p. 68) that the fund there under consideration was an exempt fund notwithstanding the fact that:

``evidence has shown that the bulk of the moneys in the hands of the trustees were lent to the taxpayers making the payments, but, although the deed permits this, it does not require it...''

In the present case I am satisfied that there was nothing in the administration of the investments of the fund which disqualified it from being a superannuation fund.

24. Further, in this instance if regard be had to only those contributions made in relation to employees expected to benefit, it was clearly to that extent a superannuation fund. It follows that the company was at least entitled to be allowed deductions for contributions made in relation to those persons. In my view, having reached that conclusion, it follows that all of the contributions which were made and credited to employees were contributions made to a ``superannuation fund''.

25. Losses and outgoings incurred in the course of deriving assessment of income are deductible if the provisions of sec. 51(1) of the Act are satisfied, unless other provisions of the Act prevail. Since sec. 82AAR of the Act provides:

``A deduction is not allowable under any provision of this Act other than this Subdivision in respect of an amount set apart or paid by a taxpayer as or to a fund for the purpose of making provision for superannuation benefits for, or for dependants of, an employee or employees,''

it follows that, if the amounts now sought to be deducted are to be described as contributions ``to a fund for the purpose of making provision for superannuation benefits for, or for dependants of, an employee or employees'', the claim must be resolved by reference to the provisions of Subdiv. AA of the Act - ``Contributions to Superannuation Funds for Benefit of Employees''. If the payments are not to be so characterised, it will be necessary to consider deductibility under sec. 51(1) of the Act.

26. The provisions of the Subdivision particularly calling for consideration are sec. 82AAC(1) and 82AAE. They provide (immaterial words omitted):

``82AAC(1) Where a taxpayer, for the purpose of making provision for superannuation benefits for, or for dependants of, an eligible employee,... pays in the year of income an amount... to a fund... from which the benefits are to be provided, and the right of the employee or dependants to receive the benefits is fully secured, the amount... so set apart or paid is, subject to the succeeding provisions of this Subdivision, an allowable deduction.


82AAE The deduction... allowable under this Subdivision in an assessment... of a taxpayer... in respect of income of the year of income in respect of amounts set apart or paid by the taxpayer... as or to a fund... for the purpose of making provision for

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superannuation benefits for, or for dependants of, any one employee -
  • (a) shall not exceed whichever is the greater of the following amounts:
    • (i) $400;...''

27. I construe the provisions on the basis that the tests as to deductibility for employers must be satisfied in relation to each payment and in relation to each employee. Those tests include satisfying:

``a very precise requirement that the payments allowed as deductions must be for the purpose of making provision for individual personal benefits of employees and for that purpose only''

(Driclad (ante) at p. 67).

28. Although I am of the opinion that, by the terms of sec. 82AAC, a decision must be made in relation to the deductibility of payments paid in relation to each employee as an individual, that does not prevent one speaking usefully in generalisations or prevent identification of the employees by reference to some common characteristic. But it does mean that, just because some claims to deductibility fail, it does not automatically follow that all claims to deductibility for contributions made must fail. Conversely, because some claims to deductibility succeed, it does not automatically follow that all claims to deductibility will succeed.

29. The next thing to observe is that sec. 82AAC, 82AAE and 82AAR all speak of payments ``to a fund for the purpose of making provision for superannuation benefits''. It follows in my view that if, as was contended for the Commissioner, the Subdivision is to be the basis for disallowing a claim, it must be accepted that the payments in question did satisfy the test of being payments made ``for the purpose of making provision for superannuation benefits''.

30. On the other hand, upon the evidence presented I am satisfied that the expectation of the employer and the trustee that the unnamed employees would never qualify for benefit was such that no care was taken by the applicant or the trustee to ensure that at retirement any who did qualify for benefits would receive the benefits to which they were entitled. I am not satisfied that it was ever intended that any member of the class of unnamed employees should be so entitled and benefit. None the less one person at least was entitled.

31. If the view so expressed is correct the Subdivision does not apply and in relation to the contributions for unnamed employees it is necessary to consider deductibility in terms of sec. 51(1) of the Act. I am satisfied that in so far as the payments in question were not made ``for the purpose of making provision for superannuation benefits for, or for dependants of'' eligible employees nothing is available pursuant to sec. 51(1) of the Act. In relation to such moneys nothing persuades me that the outlays in question were ``for the purpose of gaining assessable income'' or that the expenses were incurred ``in'' gaining assessable income in the course of carrying on the business of Cleanco (
Ure v. F.C. of T. 81 ATC 4100).

32. I return to a consideration of Subdiv. AA. Section 82AAC(1) introduces a further concept namely that:

``the right of the employee or dependants to receive the benefits is fully secured.''

That phrase is of critical importance. Yet is a phrase amenable to many interpretations. In the circumstances of the present case the question could rhetorically be asked: ``How could it be said that the rights of members were fully secured, when information was withheld from `members' as to their status as members?'' and, a fortiori, as to their entitlements to benefit. On the other hand, the question can also be rhetorically asked for the taxpayer: ``How can it be said that the rights of members were not fully secured when, subject to qualifying for benefit, the trustee could have no basis for resisting any claim to benefit?'' - as in my view will be the case with at least one witness.

33. It must be possible to say that the rights of the employee are ``fully secured''; but it is not necessary to find that there must be an expectation on the part of either the employer or the employee, that each employee will actually come to qualify for benefit. It is sufficient that the employee will be entitled to benefit if as a member of the fund he satisfies the qualifying conditions.

34. In determining that issue, one must be guided by the available decisions of the courts. The most commonly cited decision expressing any view of the matter is the decision of a Full

ATC 192

Court of the High Court of Australia in
F.C. of T. v. The Northern Timber and Hardware Co. Pty. Ltd. (1960) 103 C.L.R. 650 where the Court said (at p. 657):

``Finally, a deduction under s. 66 is conditional upon the rights of the employees to receive the benefits being fully secured. This in the context must mean that the employees have secured rights to receive out of the fund the benefits that it is established to provide. Here, even if what the taxpayer did could be regarded as creating a fund, it would be a fund under its unfettered control to deal with as it chose and to be unmade as it was made, viz. by a stroke of a pen. It would be a fund which provided the employees with no security of any sort.''

The concern of the Court in that instance arose upon a consideration of the powers formally reserved in the deed constituting the fund. But, although the Court did not refer to its earlier decision in
Metropolitan Gas Co. v. F.C. of T. (1932) 47 C.L.R. 621, I find nothing in the Northern Timber decision inconsistent with the observations of Gavan Duffy C.J. and Starke J. when, in considering the claim of a fund established by a public utility to be exempt, their Honours said (at p. 631):

``According to the argument presented to us on behalf of the Company, the function of the Commissioner under this section is merely to satisfy himself that the instrument creating a fund or regulating its administration also makes sufficient provision for securing to every beneficiary the benefits to which he is entitled under it, so that in law he may obtain that which the instrument purports to give him. It was conceded that the Commissioner was entitled to consider whether a fund was established bona fide, giving real and not merely visionary rights or benefits to employees, but it was said that he was not at liberty to consider the reasonableness or propriety of any condition, whether precedent or subsequent, affecting the right of the employee to receive the benefit, pension or retiring allowance.

In our opinion the argument is unsound. The question which the Commissioner has to consider and upon which he must be satisfied, is whether the rights of the employees to receive the benefits, pensions or retiring allowance have been fully secured. It is not whether the stipulated rights have been secured in due legal form, but whether the Commissioner is satisfied that the actual receipt of the individual personal benefits, pensions and retiring allowances from the fund to which an employer has made contributions from his assessable income is fully secured. The Commissioner has a wide discretion: it is part of his function to satisfy himself that employees shall in fact get the benefit of the fund, that they are protected against unreasonable deprivation of benefits from the fund, that the management and investment of the fund are properly safeguarded, and so forth.''

35. In the circumstances of this case, I am satisfied that the trustee was quite indifferent to the discharge of its responsibilities to the unnamed employees in that regard and I am satisfied that the applicant was aware of that. In a narrow legal sense, the rights of employees may have been ``fully secured'' in that those who became eligible to benefit acquired an indefeasible claim to benefit, not the less indefeasible because by reason of the inaction of others they did not know of that entitlement. In contrast to the situation in Northern Timber (ante), there was nothing which Cleanco or the trustee could do to diminish the entitlements of the employees. But that, in my opinion, is not the correct approach.

36. The questions under the Subdivision which must be determined in relation to each membership group are:

  • (a) whether the contributions so made were ``for the purpose of making provision for superannuation benefits for, or for dependants of, [eligible employees]''; and
  • (b) whether ``the right of the employee or dependants to receive the benefits is fully secured''.

37. In my view both questions must be answered in the negative so far as the group of ``unnamed employees'' is concerned. I am not persuaded that the applicant, in transferring funds to the trustee to be credited to accounts in the names of the unnamed employees, had a purpose or object of ensuring benefits to them (or their dependants) as individuals or collectively. I find that it was not expected that any of those unnamed employees would qualify

ATC 193

for benefit and that no care was taken to ensure that any member of the class would receive any benefits to which as members they might become entitled. Furthermore, I am satisfied that no effective steps were taken by Cleanco to ensure that any persons from that group would become aware of the possibility of future entitlement.

38. As to the question as to whether the provision of such benefits was ``fully secured'' to the unnamed employees, I adopt the test as posed in Metropolitan Gas (ante) and answer it in the negative: a conclusion which accords with the view taken by Taxation Board of Review No. 2 in Case A11,
69 ATC 53.

39. It remains to consider the claims in relation to contributions said to have been made in respect of the principals and in respect of the group I have referred to as the named employees. It is implicit in the findings I have made that it was very much the purpose of the applicant in effecting the payments made in relation to the principals to ensure that those principals (or their dependants) would be provided with superannuation benefits. As to the principals I am satisfied that the conditions for deductibility specified in the Subdivision have been satisfied. To that extent the claims will be allowed.

40. The matter is more difficult in relation to the group I have referred to as the ``named employees''. On the one hand as appears from the findings I have made, in the period of their membership only one of the persons in this group ever qualified for benefits reflecting employer contributions, although some did obtain the benefit of employee contributions. On the other hand, Richard at an earlier time had been a member of this group and had drawn benefits upon the termination of his service; some members of the group had made ``employee contributions'' and received at least those benefits on retirement; membership was provided for more senior employees; and contributions were set in sums which varied from employee to employee according to circumstance. On balance I am persuaded that the contributions so made were allowable deductions.

41. For those reasons the order of the Tribunal will be that the decisions of the Commissioner under review shall be varied and that the taxable income of the company shall be reduced by sums of $24,431, $15,299, $1,000, $718, and $5,632 in relation to the years of income ended 30 June 1981 to 1985 respectively and that the assessments of Div. 7 tax in the years of income ended 30 June 1981 and 1984 be varied accordingly.

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