CASE 25/93

Members:
KL Beddoe SM

Tribunal:
Administrative Appeals Tribunal

Decision date: 30 June 1993

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KL Beddoe (Senior Member)

The Tribunal has before it four applications previously reviewed by the Tribunal, as then constituted, and which have been remitted to the Tribunal by an order of the Federal Court. The matters are associated and it is convenient to deal with the four applications remitted in these reasons for decision.

2. In application QT87/2049 (year ended 30 June 1982) by the Trustees for the M Superannuation Fund the Court allowed the respondent Commissioner's appeal against a decision of this Tribunal reported as AAT Case 6621,
(1991) 22 ATR 3460. The Court ordered that the Tribunal's decision be set aside and the matter remitted for reconsideration in accordance with the reasons of the Court as to whether or not the Tribunal should exercise the discretion conferred by sub-section 23F(7) of the Income Tax Assessment Act 1936 (``the Act'') in respect of the superannuation fund and for making of any consequential orders and directions.

3. An order in the same terms was made in respect of application QT87/2050 (year ended 30 June 1983).

4. In application QT87/4867 by one L the Court allowed the respondent Commissioner's appeal against a decision of this Tribunal also reported as AAT Case 6621, (1991) 22 ATR 3460. The Court ordered that the part of the Tribunal's decision whereby the Tribunal ordered that the respondent Commissioner's assessment for the year ended 30 June 1982 be reduced by $4,996 be set aside and the matter remitted for reconsideration in consideration with the reasons of the Court as to the amount, if any, that should be allowed as a deduction under section 82AAC of the Act in respect of contributions made to the M Superannuation Fund.

5. In application QT90/21 by one R, a similar order was made by the Court the difference being the amount in dispute is $4,995.

6. In relation to the applications made by the trustees of the superannuation fund the following paragraph of the Court's reasons sets out the reasons for remitting these applications to the Tribunal (at page 17 [91 ATC 5024 at page 5030]):

``It appears to me that the point raised under para. 23F(2)(h) has not been dealt with in respect of each of the 1982 and 1983 years. The question would seem to me to be whether the discretion given by s. 23F(7) should be exercised in favour of the respondents.''

The respondents there referred to by the Court are the applicant trustees in the proceedings before the Tribunal.

7. In relation to the applications made by L and R the Court gave the following reasons for remitting these matters back to the Tribunal for reconsideration at pages 19/20 [ATC page 5031]:

``It appears to be implicit in the Commissioner's argument that the test of purpose posed in s. 82AAC is more rigid or stringent than that purpose mentioned in s. 23F(2). Section 23F(2)(a) does not require that one focus on the separate purpose of each payment in and payment out; it requires a wider scrutiny, of the maintenance of the fund over a whole year. It may well be that a particular payment into a fund complying with s. 23F is not deductible under s. 82AAC. Each separate payment does not have to be, in itself, one for the purpose of provision of superannuation benefits; a payment might be made to repay a loan to the fund, without taking the fund outside s. 23F. Further, as Mr. McGill pointed out, if the s. 82AAC purpose test, as to a payment, is not complied with, no part of the payment is deductible; there is no provision for apportioning a payment which has not the requisite purpose.

It is my opinion that the Tribunal has either misunderstood or overlooked this point. Although counsel for the respondents contended otherwise, the Tribunal was, I think, obliged to disallow in full deduction of any payment made in the 1982 year which did not comply with the purpose test imposed by s. 82AAC and s. 82AAE. Although no doubt the Commissioner would assert that, on the primary findings, a conclusion adverse to the respondents on this point is inevitable, in my opinion the matter should be remitted to the Tribunal for reconsideration on this point also, with leave to both parties to adduce further evidence.''

8. The relevant statutory provisions of the Act are:

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``23F(2) Subject to the succeeding provisions of this section, this section applies, in relation to a year of income, to a superannuation fund, not being a fund of a kind referred to in paragraph 23(jaa), if-

• (a) the fund is an indefinitely continuing fund established and maintained solely for either or both of the following purposes:-
  • (i) the provision of superannuation benefits for employees in the event of their retirement or in other circumstances of a kind approved by the Commissioner; and
  • (ii) the provision of superannuation benefits for dependants of employees in the event of the death of the employees;
• ...
• (h) the benefits that any employee has, or the dependants of any employee have, the right to receive from the fund are not excessive in amount having regard to-
  • (i) the remuneration paid to the employee for services rendered by him to his employer;
  • (ii) the period of the service rendered by the employee to his employer;
  • (iii) the benefits, pensions and allowances that have been, are being or may be provided for the employee or his dependants from any other fund to which this section... applies in relation to the year of income or has applied in relation to a previous year of income; and
  • (iv) any other matters that the Commissioner considers relevant;''

``23F(7) Where a requirement specified in subsection (2) has not been complied with in relation to a superannuation fund in relation to a year of income but the trustee of the fund satisfies the Commissioner that, by reason of special circumstances that existed in relation to the fund during that year of income, it would be reasonable for this section to have effect as if that requirement had been complied with, this section has effect as if that requirement had been complied with.''

``82AAC(1) Where a taxpayer, for the purpose of making provision for superannuation benefits for, or for dependants of, an eligible employee, sets apart or pays in the year of income an amount or amounts as or to a fund or funds 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 or the sum of the amounts, as the case may be, so set apart or paid in, subject to the succeeding provisions of this Subdivision, an allowable deduction.''

``82AAE The deduction, or the sum of the deductions, allowable under this Subdivision in an assessment or assessments of a taxpayer or taxpayers in respect of income of the year of income in respect of amounts set apart or paid by the taxpayer or taxpayers as or to a fund or funds for the purpose of making provision for superannuation benefits for, or for dependants of, any one employee-

• (a) shall not exceed whichever is the greater of the following amounts:
  • (i) $400; and
  • (ii) 5% of the total remuneration paid to the employee by taxpayers during the year of income of the employee that, in the opinion of the Commissioner, corresponded to the first-mentioned year of income in respect of his employment by those taxpayers; or
• (b) if the Commissioner is of the opinion that there are special circumstances that justify the allowance of a greater deduction, or of deductions of a greater sum, than the amount ascertained in accordance with paragraph (a) - shall be such amount, being greater than the amount so ascertained, as he considers reasonable.''

8a. ``Superannuation benefits'' is defined in sub-section 6(1) of the Act, unless the contrary intention appears, to mean individual personal benefits, pensions or retiring allowances.

9. Further evidence was called for the applicants. Both L and R gave evidence. They are also trustees of the M Superannuation Fund.

10. L said in evidence that he went into partnership with one M in 1977 in a provincial city. L said that R joined the partnership shortly thereafter. M was well known and well liked in the area and considered to be an attribute to the

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partnership. On this account and also because M had an established business L decided to go into partnership with M rather than establish his own practice. L found, however, that M's accountancy practice was limited in its scope consisting mainly of income tax compliance work.

11. In 1979 M retired from the partnership but continued on as an employed consultant of the business now being conducted by L and R. Apparently the practice experienced considerable growth after M left the practice and L said in evidence that M was amazed by the growth and appeared to become slightly bitter that he was not participating in the growth. L said in evidence that it was desirable to keep M ``in the good books'' and that he came to the view that the partnership could make a greater contribution to the superannuation fund for M's benefit.

12. It is clear on the evidence that the fund was established in 1979 for M's benefit. There were, however, two other members of the fund who joined in June 1982 and whose benefits were subsequently transferred to an associated fund.

13. It is also clear on the evidence that a tentative decision was taken in 1982 to increase the benefits payable to M from the previously agreed amount of $42,000 to a figure in excess of $150,000 but this was never given full effect.

14. R also gave evidence about the superannuation fund. His evidence in relation to M corroborated the evidence of L. It is fair to conclude from the evidence of L and R that M was perceived to be somewhat out of date and pedestrian as an accountant but that his people skills were important for the expansion of the practice.

15. In the year ended 30 June 1982 the trustees, acting on advice from an actuary, changed their previous view that M was an associated person of the employer. Part of Exhibit N is the 1982 tax return for the superannuation fund which includes a copy of the actuary's advice. In that advice, dated 23 June 1982, the actuary advised that the contribution payable for the year ended 30 June 1982 would be $50,611. The advice included a schedule that disclosed the make up of that amount as being $48,023 in respect to M and $2,588 in total for the other two members. Those contributions were made to the fund by the partnership and the funds loaned back to the partnership at 17.5% pa interest.

16. The superannuation fund return for the 1984 year also included in Exhibit N shows a payout of benefits on 1 July 1983 of $85,957 to M. However in the 1983 income tax return for the Fund (Exhibit N) no mention is made of M as a member of the Fund at 30 June 1983. Nor is any actuarial certificate attached to the return, contrary to R's evidence that such a certificate was supplied.

17. Exhibit G is the passbook of the Fund which makes it clear that the Fund was effectively wound up in July 1983 with the payment to M.

18. Cross-examination of R revealed that he did not differentiate M's position as a consultant to the partnership from his earlier position as a member of the partnership. R seemed to assimilate the employment as a consultant with membership of the partnership and seems to have acted in 1982 on the basis of a confused understanding of M's relationship with the practice. At pages 31-32 of the transcript the following questions and answers appear:

``Q. He was not a partner?

A. No, but, you know, that's right, that was one of the reasons we did that in the first place to, sort of, remove that exercise. But he was still there in a three office working area.

Q. Yes. All of that was done in 1979. That had the effect of removing him as a partner in return for which he was employed, you agreed to employ him for a particular period of time although he had a right to resign earlier, right?

A. Yes, I think.

Q. Okay. Now do you recall what that period of time was?

A. I don't remember whether it was five years.

Q. Well, anyway, it still had a couple of years to run in the middle of 1982.

A. Yes, I would have thought so.

Q. All right. Are you saying that it was contemplated from your point of view, from the point of view of the partnership, it was

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desirable to terminate that relationship before it ran out by the effluxion of time?

A. No, I am not saying that.

Q. No. All right. So that in 1982 you were contemplating the original - the arrangement that had been made in 1979 would proceed to its natural conclusion?

A. Yes.

Q. And that arrangement provided for a superannuation benefit of $42,000. Right?

A. Yes, it did originally.

Q. All right. M never asked you for a greater superannuation benefit, did he?

A. No, he didn't.

Q. And he was working within the limits of his abilities and so on. He was working hard in the partnership as a consultant in 1982, wasn't he?

A. Yes, he was there.

Q. Yes. The decision to pay the increased contribution in June 1982 was made in the knowledge that it was based on a calculated retirement benefit of $156,520, was not it?

A. Whatever was in that actuarial certificate.

Q. All right. Well, we will have to have a look at this at some stage. Could the witness see exhibit M again, please? Do you have the actuarial certificate there? It might take you a minute or two to find it.

A. Yes.

Q. All right. So in 1982 there was a deliberate decision to pay a contribution in respect of M which was based on a final benefit to him, projected final benefit to him of $156,520. Right?

A. Yes, that would be correct.''

19. On the termination of the Fund, benefits totalling $16,312 were transferred to an associated superannuation fund for the benefit of the two employee members of the fund who continued their employment by the partnership. R said in evidence that this amount was made up of two years contributions amounting to $6,307 together with earnings of the fund amounting to $10,005. Bearing in mind that the earnings of the fund were from a loan back to the employer at 17.5% interest per annum R was unable to explain how this situation came about.

20. R sought to avoid answering what were obvious questions to be resolved in 1982 by saying that the actuary engaged by the partnership could answer the questions raised by Mr McGiIl in cross-examination. However, the actuary was not called to give evidence before me and I am left with the clear impression of R that he was less than frank and in fact dissembling in his evidence. I am unable to accept that R, as a professional accountant, did not fully understand the affairs of the superannuation fund which L said was under R's control. I am left with the impression that R preferred not to give truthful answers to Mr McGiIl's questions by attributing responsibility to the actuary. Having come to that conclusion I cannot determine these matters on the basis of R's uncorroborated evidence.

21. I do not need to consider whether the fund was a bona fide superannuation fund. That issue has been resolved by the Federal Court proceedings. As Mr Logan said I am concerned with the embers rather than the fire itself.

22. In submissions Mr Logan sought to rely on guidelines published by the respondent (Exhibit AQ) known as IT294. He submitted that the present fund comes within paragraph 31 of IT294 as a permitted loan back fund and that the trustees sought to follow the respondent's guidelines in the administration of the fund.

23. Mr Logan placed considerable emphasis on the decision of the Federal Court in
Raymor Contractors Pty Ltd v FC of T 91 ATC 4259. He urged the Tribunal to follow that decision as the authorative basis for deciding the present case. In that case the Federal Court decided, inter alia, that to be deductible under section 82AAC contributions by an employer must be for the purpose of benefiting the employee members of the fund.

24. Hill J explained the meaning of purpose in the context of section 82AAC at page 4270 as follows:

``In the context of s. 82AA, purpose is the object which the taxpayer has in view or in mind. There may be a fine distinction between purpose and intention but it is not necessary to explore that distinction, cf
Plimmer v Commissioner of Inland Revenue (N.Z.) (1957) 11 ATD 480 at 483-484. Generally speaking a person will be said to

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intend the natural and probable consequences of his acts and likewise his purpose may be inferred from them. In the present case the taxpayer's purpose in making the payments in each year of income may be inferred from the objective evidence that in the years of income in question benefits were continually being forfeited and only one person was in fact paid out, that person being a director of the appellant. Coupled with the fact that virtually the whole of the contributions were lent back to the contributing companies these facts suggest that the appellant's purpose was not to benefit those persons who were members of the fund; or certainly that that was not the sole or dominant purpose in making the contributions in the years in question.''

25. At paragraph 7 of these reasons I have cited relevant dicta of Pincus J in these proceedings.

26. Mr Logan submitted that Pincus J was there referring to the Commissioner's submissions. However, I take the view of that paragraph that his Honour was there expressing his own view as to the meaning of purpose in the context of section 82AAC.

27. Mr Logan submitted that nothing should be made of the loans back by the fund to the partnership because these had been done in accordance with the Commissioner's published guidelines. Although he well recognised the inherent problem in his submission Mr Logan submitted that this Tribunal should apply the Commissioner's published guidelines. The result would be that the fact of the loans back to the partnership should be accepted as not disqualifying the fund under section 23F and not preventing L and R obtaining allowable deductions under section 82AAC. Mr Logan also submitted that the 17.5% interest rate on the loans back, being the Commissioner's figure in his guidelines, should be accepted (Exhibit AQ). There is no doubt in my mind that the trustees sought to follow those guidelines and applied the criteria set out in those guidelines and I so find. I am satisfied that there has been substantial compliance with the mechanics of the Commissioner's guidelines.

28. When this matter was last before the Tribunal there was a finding that the fund had failed to comply with paragraph 23F(2)(h) of the Act in that the benefits were excessive in relation to the contributions made in respect of M during the year ended 30 June 1982. The contribution of $48,023 in respect of M has been explained as an adjustment to effect the change of view to the effect that M was not an associated person. That explanation totally overlooks the partners' obligations in the deed of assignment to pay M a benefit of $42,000.

29. It seems to me, and I so find, that the only reasonable explanation of the evidence is that L and R were keen to terminate M's employment and they sought to induce him to go by substantially increasing the superannuation benefits.

30. It follows, in my view, that the payment of $48,023, although prima facie within the Commissioner's guidelines, fails the fundamental test of making provision for superannuation benefits because it was made for the purpose of inducing M to resign from his employment earlier than the date specified in the agreement.

31. That is not to say, however, that the resulting benefits under the fund must thereby be held to be excessive. However, as Mr McGill correctly submits, that issue has not been remitted to the Tribunal for decision. I have to consider whether the discretion in sub-section 23F(7) should be exercised because the fund failed the excessive benefits test in paragraph 23F(2)(h).

32. Given that I am satisfied that the contribution in respect to M was made in the 1982 year primarily to induce M to resign his employment there is nothing else about the contribution that might be thought to be special. I do not think it is relevant that there was some misunderstanding as to whether M was an associated person. Nor do I think it relevant that the payment was made as part of the process of inducing M's resignation. There is nothing else before me. I therefore take the view that there are no circumstances justifying a finding of special circumstances for the purposes of sub- section 23F(7) and I so find.

33. In relation to the 1983 year there is a problem in relation to the other employees but not M. Because of the way the fund was allocated the two junior employees with relatively minor interests in the fund were allocated most of the fund income. Given that the fund was to be terminated and the employees' interest rolled over to another fund the trustees had no option but to allocate the

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balance of the fund to the remaining members. That allocation in itself will not result in excessive benefits, given the respective ages of the employees. There is therefore no basis, in my view, for finding that the fund did not comply with section 23F for the year ended 30 June 1983 on the basis of the income allocation.

34. That is not the case, however, in respect to the benefit of $85,957 paid to M. On any reasonable basis that benefit is excessive in the circumstances of the case. Once again there is nothing in the circumstances of the case which justifies a finding of special circumstances for the purposes of section 23F so as to justify the exercise of the discretion in sub-section 23F(7) and I so find.

35. As to the deductions claimed under sections 82AAC and 82AAE I am of the view, and so find, that the partnership contribution to the fund for the year ended 30 June 1982 was made primarily for the purpose of inducing M to resign his employment. The payment was not made for the purpose of making provision for superannuation payments in respect of M but was so made in respect to the other members of the fund. I would therefore allow a deduction under sub-paragraph 82AAE(a)(ii) in respect of the two employees but not in respect to M. For completeness I add that I have been unable to find any special circumstances relevant to the operation of paragraph 82AAE(b).

36. For these reasons the objection decisions in relation to the fund, insofar as they are before me, will be affirmed.

37. In relation to the objection decisions for L and R for the year ended 30 June 1982 those decisions will be varied so as to allow deductions under section 82AAC of the Act, as calculated in accordance with paragraph 82AAE(a)(ii), in relation to the two employees other than M.

THE TRIBUNAL DECIDES THAT:

In applications QT87/2049 and QT87/2050 and insofar as is relevant the objection decision under review be affirmed.

In applications QT87/4867 and QT90/21 and insofar as is relevant the objection decision be varied so as to provide for a deduction in accordance with paragraph 82AAE(a)(ii) of the Income Tax Assessment Act 1936 in respect of the two employees other than M.