CASE Z19

Members:
RD Fayle M

Tribunal:
Administrative Appeals Tribunal

Decision date: 13 April 1992

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RD Fayle (Member)

This is an application to review an objection decision of the Commissioner of Taxation made in response to an objection lodged by the applicant pursuant to s. 185 of the Income Tax Assessment Act 1936 (the Act). The applicant claims that a greater amount should be allowed as a deduction for what is known as the undeducted purchase price of an annuity received by the applicant during the year ended 30 June 1990. In fact the applicant had not claimed a deduction for the undeducted purchase price in his return for the year of income, nor previously for that matter. When alerted to this as a result of another adjustment made in the course of arriving at the tax assessment he was invited to provide

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sufficient information to permit the Commissioner of Taxation (the respondent) to calculate his entitlement under s. 27H of the Act. It is in relation to this calculation that the applicant has objected. His grounds of objection are twofold - (i) that the amount of the undeducted contributions made toward the pension entitlement during his years of employment should be indexed to adjust for the effect of inflation in the intervening years; and (ii) that as the pension is payable during the period ending on the death of the last survivor of either himself or his spouse, that the average of the lower life expectancy statistic in relation to himself (being the elder) and the higher one which relates to his spouse (who is younger) should be used to ascertain the annual deduction in accordance with s. 27H(2). In calculating the deduction the respondent used the higher statistic relating to the applicant's spouse and this results in a lower annual deduction entitlement.

The Act provides a form of relief from full assessment of amounts which are income received by way of annuity or pension where the capital sums paid to purchase the future annuity were not deducted against income in the years of payment. As mentioned, that relief is by way of a calculated deduction. This provision is s. 27H and so far as is relevant states:

"27H(1) The assessable income of a taxpayer of a year of income shall include-

(a) the amount of any annuity derived by the taxpayer during the year of income excluding, in the case of an annuity that has been purchased, any amount that, in accordance with the succeeding provisions of this section, is the deductible amount in relation to the annuity in relation to the year of income; and

(b)...

27H(2) Subject to sub-sections (3) and (3A), the deductible amount in relation to an annuity derived by a taxpayer during a year of income is the amount (if any) ascertained in accordance with the formula where:

            A (B - C)
            ---------
                D
          

A is the relevant share in relation to the annuity in relation to the taxpayer in relation to the year of income;

B is the amount of the undeducted purchase price of the annuity;

C is-

(a) if there is a residual capital value...; or

(b) in any other case - nil; and

D is the relevant number in relation to the annuity.

27H(3) Subject to subsection (3A), where the Commissioner is of the opinion that the deductible amount ascertained in accordance with subsection (2) is inappropriate having regard to-

(a) the terms and conditions applying to the annuity; and

(b) such other matters as the Commissioner considers relevant,

the deductible amount in relation to the annuity derived by the taxpayer during the year of income is so much of the annuity as, in the opinion of the Commissioner, represents the undeducted purchase price having regard to-

(c) the terms and conditions applying to the annuity;

(d) any certificate or certificates of an actuary or actuaries stating the extent to which, in the opinion of the actuary or actuaries, the amount of the annuity derived by the taxpayer during the year of income represents the undeducted purchase price; and

(e) such other matters as the Commissioner considers relevant.

27H(3A)...

27H(4) In this section-

`actuary' means a Fellow or Accredited Member of the Institute of Actuaries of Australia;

`annuity' includes a superannuation pension, but does not include an annuity that is a qualifying security for the purpose of Division 16E;

...

`life expectation factor', in relation to a person in relation to an annuity, means the number of years in the complete expectation of life of the person as ascertained by reference to the prescribed Life Tables at the time when the annuity first commenced to be payable;

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`relevant number', in relation to an annuity in relation to a year of income, means-

(a) where the annuity is payable for a term of years certain - the number of years in the term;

(b) where the annuity is payable during the lifetime of a person and not thereafter - the life expectation factor of the person; and

(c) in any other case - the number that the Commissioner considers appropriate having regard to the number of years in the total period during which the annuity will be, or may reasonably be expected to be, payable;

`relevant share', in relation to an annuity derived by a taxpayer during a year of income, means-

(a)...

(b) in any other case - the number 1."

The materials prepared in accordance with s. 37 of the Administrative Appeals Tribunal Act 1975 were taken into evidence (Ex. 1) along with a statement prepared by the applicant dated 19 March 1992 (Ex. 2). The applicant gave evidence.

There was agreement between the applicant and the respondent in relation to facts as follows:

• (i) That the undeducted contributions made by the applicant toward the purchase of the pension totalled £3,045.55 [T7] which produced an annual deductible amount of £ 134.28 when the formula in s. 27H(2) was applied.
• (ii) That the sum of £134.28 should be converted to Australian dollars in relation to the relevant prevailing exchange rate at the end of each relevant year of income.
• (iii) That the life expectation factors at the time the annuity became payable were 16.4 years and 22.68 years for the taxpayer and his spouse respectively.
• (iv) That the pension received by the applicant is an annuity as defined in s. 27H(4) and that there is no residual value attaching to the annuity.
• (vi) That the pension which he received was income.
• (vii) That the pension is payable in full during the life of the applicant and should his wife survive him then her entitlement for life was 50% of what he would have received had he continued to live.

The applicant gave evidence that he was employed in the British public service from 1942 to 1973 and later from 1978 to 1980. During these two terms of employment he contributed toward the Local Government Superannuation Scheme (UK) at the rate of 6% of his salary and his employer also made contributions on his behalf. These combined contributions entitled the applicant to a pension for life and should his wife survive him then a pension at half the rate for the period of her survivorship. There were no other entitlements arising from the contributions. When he retired at age 60 years he became entitled to two separate pension payments which were indexed annually in April. These related to the two separate periods of employment.

No evidence was led in relation to the terms of the pension scheme except to say that it was a scheme which covered British public servants and that there was nothing unusual in the pension conditions applying to the applicant.

No actuarial evidence or actuarial submissions were made by the applicant.

The respondent's representative, Mr Angelkov, did not cross-examine the witness nor was there any evidence led by him.

The assessment in question used the figure of £ S3,045.55 as the amount of the undeducted purchase price (item B) and 22.68 years as the relevant number (item D). It was agreed that item A is the number 1 and item C is nil. Applying these numbers to the formula in s. 27H(2) the respondent arrived at a deductible amount of £S134.28 which, for the year in question, converted to $A283. The applicant did not disagree with the arithmetic.

The applicant's submissions were firstly, that as the pension was indexed to inflate it in line with the movement in the UK price index so too should have been the undeducted purchase price of £S3,045.55 at the time he commenced to receive pension entitlements and second, that the life expectation factors for his spouse and himself should be averaged to arrive at the relevant number for the purpose of s. 27H(2). The respondent provided a calculation which suggested that the value (his word) of the

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contributions of £S3,045.55 at the date of retirement was £S12,033 and that it is this number which should be taken as item B in the s. 27H(2) formula, not £S3,045.55.

The applicant made no reference to the statutory provisions in making these submissions and when questioned by the tribunal admitted that there were no peculiar, distinguishing, extenuating or unusual circumstances applying to his pension conditions or entitlements so as to distinguish it from any other pension payable under the particular scheme or indeed similar schemes. The applicant relied on dicta found at the conclusion of the reasons in Case U89,
87 ATC 513 to support his contention that a lower relevant number, arrived at by averaging, should be used. In that case Senior Member Roach, after deciding that the assessment decision should be affirmed, made the following observation in relation to a pension which was similarly payable to a surviving spouse for her term of survivorship:

``I add, although it is not necessary to do so, that for the reasons mentioned above, it seems probable that, if the figure for `purchase price' in the calculation was the whole of the contributions made, it was probably excessive; and that an adjustment should have been made to take account of the contingent entitlement in the applicant's spouse to receive an annuity in the event that she survives him. Such a view would overcome many, but not all, of the difficulties arising in the course of construing the relevant provisions.''

It is difficult to see how this assists the applicant. If accepted as a proper way to apply the legislation where, as in this case, paragraph (c) of the definition of ``relevant number'' in s. 27H(4) applies, a lower deductible amount would obtain. By applying the proposition, all that it would do is reduce the numerator, item B in the formula, by an amount not here determinable and hence the resulting deductible amount. That is contrary to what the applicant seeks. In any event the tribunal in applying the clear words of the provision cannot take such liberties.

In this respect Mr Angelkov submitted that paragraph (c) of the definition of ``relevant number'' in s. 27H(4) was appropriate in this case since paragraph (a) did not apply and in paragraph (b) ``a person'' should be read as referring to the applicant, so that paragraph does not apply either. This is so because if the applicant's wife survived him she would receive payments thereafter. Mr Angelkov submitted that the only reasonable conclusion which the Commissioner could make was to apply paragraph (c) and adopt the life expectancy factor for the spouse as it was greater than that of the applicant. He further submitted that there was no basis upon which the Commissioner could average the life expectancy factors since that would not reflect a reasonable expectation of the total period during which the annuity might be payable - it would have to be an actual expected lifetime, not some average. This submission is accepted. The tribunal finds that the correct statistic for the relevant number, item D in the s. 27H(2) calculation is that used by the respondent, 22.68 years.

On the question of inflating the actual contributions to the pension fund, if this was possible it would need to be done having regard to the provisions of s. 27H(3). That provides for a substituted amount arrived at by the s. 27H(2) formula if, having regard to the terms and conditions applying to the annuity and such other matters as the Commissioner considers relevant, the deductible amount is inappropriate. If the Commissioner decides on that criteria that the deductible amount ascertained by applying s. 27H(2) is inappropriate then he is required to decide on an appropriate amount having regard to the terms and conditions applying to the annuity, any actuarially determined amount of the undeducted purchase price and such other matters as the Commissioner considers relevant (s. 27H(3)(c), (d) and (e)).

No evidence was led in relation to the terms and conditions applying to the annuity, nor was a copy of the annuity contract or pension terms admitted. The complaint by the applicant is not about the terms and conditions applying to the annuity but about the formula in sub-section (2). The applicant agreed that his case is not unusual nor are there any conditions prevailing in relation to the annuity payment which make it oppressive or onerous or extraordinary. The tribunal therefore finds that the applicant has failed to show that the provisions of s. 27H(2) produce an inappropriate result and affirm the assessment in this respect.

The deduction in question is calculated by reference to ascertainable criteria with a general

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application. It is not calculated by some administrative decision based on individual preferences unrelated to the tests laid down in the legislation. To replace the statutory tests in sub-section (2) with some other test or opinion where the statutory test clearly applies would be to make the taxing measure arbitrary. There can be no scope to overlook the statutory test where its application cannot give rise to a harsh or an unreasonable incidence with regard to the object of the provision. The tribunal drew the attention of the applicant to the fact that whilst his annuity entitlement was indexed with inflation the tax scales had moved in his favour during the same time to adjust, at least in some way for what is known as bracket creep.

It may be appropriate for the respondent to have formed a different opinion in terms of sub- section (3), where, in his opinion, to apply the formula in sub-section (2) would be inappropriate. Whether it would be inappropriate would oniy be adjudged having regard to the interests of the public generally, of citizens to be affected, of the Revenue and of the requirements of those policies, political, economic and fiscal which the Parliament is prepared to sanction; cf. Barwick CJ in
Giris Pty Ltd v FC of T 69 ATC 4015 at 4017. No argument or evidence was put by the applicant that, in these terms, the respondent should have adjudged the formula in s. 27H(2) as inappropriate to his circumstances.

The objection decision under review is affirmed.