J Block SM
Administrative Appeals Tribunal
J Block (Senior Member)
In accordance with an application for review dated 7 May 1996, the Applicant sought the review of a decision by the Respondent dated 18 March 1996; that decision, which related to an objection by the Applicant dated 24 April 1995 in respect of the year ending 30 June 1994, was allowed in part (not relevant for these Reasons) and disallowed in part, as to the Applicant's claim that she was entitled to a deduction under section 27H of the Income Tax Assessment Act 1936 (the ``Act'').
2. The Applicant was represented by Mr N. Davis of Clayton Utz and the Respondent was represented by Mr N. James of the office of the Respondent. The Tribunal received into evidence the T Documents lodged pursuant to section 37 of the Administrative Appeals Tribunal Act 1975, and in addition the following exhibits:
- • Exhibit A1 being a trust deed dated 30 June 1981 in respect of a certain superannuation fund (the ``Fund'');
- • Exhibit A2 being a deed of amendment dated 27 June 1990 in respect of the trust deed;
- • Exhibit A3 being a deed of amendment dated 29 June 1993 in respect of the trust deed;
- (The term ``trust deed'' refers to the trust deed as amended);
- • Exhibit A4 being an Affidavit dated 6 March 1997 by an accountant who is referred to as ``S'' and to which is annexed, as Annexures A and B respectively letters by S to the Respondent dated 7 February 1994 and 23 March 1994 respectively and Annexure marked ``C'', a letter by the Respondent to S dated 22 March 1994.
3. The Tribunal was furnished with a document entitled ``Agreed Statement of Facts''; as a matter of convenience, the agreed facts are set out, edited only for purposes of anonymity, as follows:
``1. The Applicant is aged 81 and is a member of the [Company] Pty Limited Staff Superannuation Fund (the `Fund').
2. The Applicant is retired and, in 1993, was entitled to receive a retirement benefit from the Fund.
3. All of the contributions made to the Fund for the Applicant were employer contributions for which tax deductions were allowed.
4. She elected to be paid a pension from the Fund in accordance with the provisions of the trust deed governing the Fund.
5. The first pension payment was made to her on 6 October 1993.
6. The Applicant's accountant was advised that there may be a need to roll-over the Applicant's lump sum entitlement to another superannuation fund in order to obtain a tax deduction for the undeducted purchase price of the pension under section 27H of the Income Tax Assessment Act.
7. On 7 February 1994 the Applicant's accountant wrote to the Taxation Office and the Taxation Office replied on 22 March 1994.
8. For the whole of the 1993/94 income year, a pension was paid to the Applicant from the Fund.''
4. In this matter the Tribunal is concerned with Subdivision AA of Part III, Division 2 of the Act, in respect of the year ending 30 June 1994. As a matter of convenience, those sections or definitions which are relevant for the purposes of these Reasons are gathered and set out in this clause 4; (emphasis has been added):
(a) The following definitions contained in section 27A(1) of the Act are relevant:
```purchase price' means-
- (a) in relation to a superannuation pension - the sum of-
- (i) contributions made by any person to a superannuation fund to obtain superannuation benefits consisting only of the superannuation pension; and
- (ii) so much as the Commissioner considers reasonable of contributions made by any person to a superannuation fund to obtain superannuation benefits including the superannuation pension; and
`undeducted purchase price' , in relation to an annuity or superannuation pension, means the sum of-
- (a)... (not relevant);
- (b) so much of the purchase price of the annuity or superannuation pension as was paid on or after 1 July 1983 and has not been, and will not be, an allowable deduction, reduced by so much of the purchase price of the annuity or superannuation pension as is taken, by virtue of section 27D, to consist of an amount to which sub-paragraph 27D(1)(b)(iii)(A) or (B) applies;''
It is relevant to note that in accordance with section 28 of Act 208 of 1992, the definition of ``undeducted purchase price'' was altered in certain respects, that that alteration became effective on 1 July 1994, and that the form of the altered provision was known prior to the effective date.
(b) Section 27A(5C) provides:
``[`purchase price'] In the definition of `purchase price' in sub-section (1)
- (a) a reference to contributions made by any person to a superannuation fund to obtain superannuation benefits does not include a reference to contributions made to a superannuation fund by an employer, or by another person under an agreement to which the employer is a party, for the purpose of providing superannuation benefits for, or for dependants of, an employee of the employer; and
(c) Section 27A(17) provides:
``[ETP deemed paid from eligible superannuation fund] For the purposes of this Subdivision, where the Commissioner is of the opinion that the whole or a part of a particular ETP:
- (a) is not, apart from this subsection, paid from an eligible superannuation fund;
- (b) is, in effect, funded from an eligible superannuation fund;
the ETP, or the part of the ETP, as the case may be, shall be treated as if it were paid from that eligible superannuation fund.''
(d) Sections 27H(2) and 27H(3) are in the following terms:
``(2) [`deductible amount'] Subject to subsections (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 formulaA (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;
- (a) if there is a residual capital value in relation to the annuity and that residual capital value is specified in the agreement by virtue of which the annuity is payable or is capable of being ascertained from the terms of that agreement at the time when the annuity is first derived - that residual capital value; or
- (b) in any other case - nil; and
D is the relevant number in relation to the annuity.
(3) [Commissioner may determine deductible amount] 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.''
5. It is also convenient in respect of the Fund to gather and set out in this clause 5 those of its provisions which are relevant for the purposes of these reasons:
(a) Clause 6.1 provides:
``A member who leaves Service at or after the Normal Retirement Date is entitled to a benefit equal to the Accumulated Credit.''
(Clause 1.1 defines ``Accumulated Credit'' as ``the total balances of the Contribution Account of a Member''; similarly ``Contribution Account'' is defined so as to mean ``Compulsory Contribution Account, Employer Contribution Account or Member Contribution Account''; and ``Normal Retirement Date'' is defined to mean the day on which a Member reaches the age of 65.)
(b) Clause 8.10 reads as follows:
``If a Member entitled to a benefit asks the Trustee to apply all or part of it to provide a pension from the Fund, then the Trustee may, with the approval of the Principal Employer, comply with the request. A pension under this rule must be provided according to the rules set out in Schedule 1.''
(c) Clauses A11, A12 and A13 of Schedule 1 are as follows:
``A11 A member may commute the whole or a part of the Member's pension at any time by notifying the Trustee in a manner approved by the Trustee.
A12 On a member fully commuting the Member's pension, the Trustee must pay a lump sum benefit to the Member equal to the Accumulated Credit of the Member.
A13 On a Member partially commuting the Member's pension, the Trustee must pay a lump sum benefit to the Member equal to the amount requested by the Member up to the amount of the Member's Accumulated Credit.''
6. Having regard to the Agreed Statement of Facts and the terms of the Trust Deed:
(a) the Applicant was a Member (as defined) of the Fund and left Service (as defined) after the Normal Retirement Date (as defined); (clause 6.1 of the Trust Deed);
(b) the Applicant elected under clause 8.10 of the Trust Deed to receive a pension from the Fund;
(c) clauses A11 to A13 (inclusive) of Schedule 1 to the Trust Deed indicate that the Applicant could prior to 30 June 1994, and having regard to the then impending alteration to the definition of ``undeducted purchase price'' (referred to henceforth for purposes of
ATC 231brevity as ``UPP'') have commuted her pension into a lump sum.
7. (a) The starting point for the purposes of these Reasons is Section 27H(2); there will (subject relevantly to Section 27H(3)) be a deductible amount, if and only if, B in the formula contained in Section 27H(2) has a value. Section 27H(3) will be considered separately later in these Reasons.
(b) In respect of the definition of ``purchase price'' (referred to henceforth for purposes of brevity as ``PP'') paragraph (a)(ii) is relevant. Paragraph (a)(i) would apply where the contributions were made to obtain superannuation benefits consisting only of the superannuation pension; that is not the case in this instance since under the Trust Deed, the Applicant became entitled to a capital sum (the Accumulated Credit) which could (under clause 8.10) be taken in the form of a pension. Paragraph (a)(ii) relates to the case where the superannuation benefits in question include the superannuation pension. The significant aspect for these purposes is that the definition encompasses contributions made by any person to a superannuation fund.
(c) The provisions of paragraph (a)(ii) as to the definition of PP must be read subject to section 27A(5C) which excludes employer contributions. Mr Davis criticised the language in which section 27A(5C)(1)(a) is cast; the definition of PP does indeed contain a reference to ``contributions made by any person to a superannuation fund''; however that definition (of ``PP'') does not contain a specific reference to ``contributions made to a superannuation fund by an employer''. While the language of the section may in some respects be less than precise, the meaning is clear; all contributions which are not employer contributions are taken into account.
(d) At the closing argument stage, Mr Davis argued that the term ``contributions'' was apt to catch any amount of whatever nature (and including income) forming part of an Accumulated Credit. Put in other words, Mr Davis contended that income accumulations (and for example interest paid by a bank) would constitute a contribution for this purpose. To interpret the term ``contribution'' in this fashion would, in the view of the Tribunal, strain its meaning; when a bank pays interest which becomes a part of an Accumulated Credit, that bank makes a payment, but it cannot be said that it makes a contribution; that contention is therefore not tenable.
8. (a) Mr Davis contended in the first instance that although the Applicant decided under clause 8.10 of the Trust Deed to ask the trustee of the Fund to apply her Accumulated Credit, to the provision of a pension, she had nonetheless paid a PP equivalent to the Accumulated Credit, that that amount was not and would not be an allowable deduction as referred to in paragraph (b) of the definition of PP, and that the reference to section 27D contained therein (a reference to eligible termination payments) was irrelevant. He argued in effect that there was a set-off of one obligation against another as referred to in
In re Harmony and Montague Tin & Copper Mining Company (``Spargo's Case'') (1873) 8 L.R. Ch. App. 407.
(b) In respect of Spargo's Case, Mr Davis referred in particular to page 412 where Lord Justice James said:
``But if a transaction resulted in this, that there was on the one side a bona fide debt payable in money at once for the purchase of property, and on the other side a bona fide liability to pay money at once on shares, so that if bank notes had been handed from one side of the table to the other in payment of calls, they might legitimately have been handed back in payment for the property, it did appear to me in Fothergill's Case, and does appear to me now that this Act of Parliament did not make it necessary that the formality should be gone though of the money being handed over and taken back again; but that if the two demands are set off against each other the shares have been paid for in cash.''
Mr Davis referred also to page 414 where Lord Justice Mellish said:
``Indeed, it is a general rule of law, that in every case where a transaction resolves itself into paying money by A. to B., and then handing it back again by B. to A., if the parties meet together and agree to set one demand against the other, they need not go through the form and ceremony of handing the money backwards and forwards.''
(c) See also page 410 of the Judgment in Spargo's Case where Lord Justice Mellish said:
``They were fully paid up. The company was under a present obligation to pay for the
ATC 232mine, Spargo under a present obligation to pay for his shares. The two were set off, and if Spargo had been sued at law the facts would have supported a plea of payment, and the Companies Act 1967 section 25, is satisfied.''
(d) The Tribunal does not consider that Spargo's Case applies in this case, in this instance there were never two concurrent present obligations; the trustee of the Fund was obliged to provide the Applicant with her Accumulated Credit; there was at that point in time only one relevant obligation. The Applicant by her election converted that obligation into an obligation to provide a pension; that was a different obligation, and in consequence of which the trustee was no longer obliged to provide a lump sum, but rather a pension. Spargo's Case related to a set-off of two concurrent obligations, by different debtors against each other. The Applicant also contended in clause 23 of her Statement of Facts and Contentions as follows:
``It is submitted, therefore, that the purchase price of this superannuation pension was paid when the trustee set off its obligation to pay the lump sum by applying the lump sum to acquire the pension with the consequence that the amount of the lump sum constitutes the undeducted purchase price for the purposes of paragraph (b) of the definition of `undeducted purchase price'.''
The alleged set-off referred to by the Applicant is not, in the view of the Tribunal, aptly characterised as a set-off at all; in fact the election caused the trustee to substitute one obligation (to pay a pension) for another pre- existing obligation (to pay a lump sum).
9. The Tribunal does not agree with the contention advanced by Mr Davis that it should regard the transaction as one where the Applicant received her lump sum, and simultaneously repaid it in consideration of the grant of the pension. This did not in fact occur. (See also Case 26/96, referred to in clause 10 below.)
10. (a) It is clear in the opinion of the Tribunal that the reference in the definition of UPP to section 27D does not mean that that definition is relevant only in the context of an eligible termination payment. Had the Applicant herself made contributions which formed part of the Accumulated Credit, those contributions would have been taken into account in the calculation, notwithstanding that section 27D might not be relevant.
(b) Mr Davis argued in the alternative that the Accumulated Credit could be classified as an eligible termination payment, which was rolled back into the Fund, from which it was received, or, in other words, rolled over in the same Fund. Such an argument is rejected, having regard in particular to the decision of Deputy President B.M. Forrest in Case 26/96,
96 ATC 313 where the facts were in some respects similar to the facts in this case. See in particular pages 317 and 318 of that decision (with which this Tribunal respectfully agrees) where Deputy President Forrest said:
``The argument that the applicant is receiving a lump sum benefit irrespective of whether it is paid as a lump sum or applied in the purchase of a pension cannot be sustained. The election which the applicant made on 6 September 1993 had the effect of converting his lump sump benefit from the Fund into a pension. It was not withdrawn from the Fund or `rolled over' to another fund. It was paid instead in the form of a pension (Rule C9.15). It was not a payment which fell within the definition of an ETP.''
(c) Nor does the Tribunal accept that section 27A(17) assists the Applicant, since that section applies in its terms only to an eligible termination payment, and the decision in Case 26/96, followed by this Tribunal, established that on the facts there was no relevant eligible termination payment.
11. The Applicant's second alternative argument is that the circumstances are such that, even if there is no deductible amount under section 27H(2), the Respondent should exercise his discretion to allow a deductible amount, having regard to the circumstances revealed by Exhibit A4 and the provisions of section 27H(3)(e). In this context:
(a) The Affidavit by S which is Exhibit A4 establishes that in 1994 S sought information from the Respondent as to whether it was necessary that the Accumulated Credit be rolled over into another superannuation fund. The Tribunal refers in this context to Annexures A and B to Exhibit A4. The second paragraph of Annexure B to Exhibit A4 reads:
``My clients require this information to decide whether they are able to take an allocated pension from their existing
ATC 233Superannuation Fund i.e. following a deemed rollover into the allocated pension, or whether they need to physically transfer the funds as a normal rollover into another Fund. As they must attend to this prior to 30th June 1994 they would like to receive your advice as soon as possible so that they have plenty of time to make their decision.''
(b) The reply from the Respondent which is Annexure C to Exhibit A4 was ambiguous; the Tribunal refers in particular to the penultimate paragraph which reads:
``Thus in both situations mentioned in your letter i.e. an allocated pension purchased with roll-over ETP money and one purchased directly from a complying superannuation fund, the calculations of the UPP exclusion and the pension rebate will take the pre 1 July 1983 period and the post 30 June 1983 periods into account as per the formulae under section 27H(2) and sections 159SJ-159SY of the ITAA respectively.''
One wonders what is meant by the words ``one purchased directly from a complying superannuation fund'', especially in the context in which they appeared. Does the word ``purchased'' have its ordinary meaning or a technical meaning?
(c) Although the pension commenced in October of 1993 and the correspondence annexed to Exhibit A4 was sent and received in the first half of 1994, the Tribunal accepts that had S been told that a physical roll-over of funds into a different superannuation fund was required, this was capable of being achieved prior to 30 June 1994 when the definition of UPP altered.
(d) Mr James argued that section 27H(3)(e) should be construed ejusdem generis with paragraphs (c) and (d) of that section, both of which relate to the terms of the annuity. His argument in this context is supported by an extract from the relevant Explanatory Memorandum furnished to the Tribunal by the Respondent which relevantly provides:
``In the case of some annuities (eg an indexed annuity), the amount to be excluded as ascertained under the formula in sub- section (2) may bear no real relationship to the capital component of the annuity. Sub- section (3) will in such cases permit the exclusion from the annuity of an amount which more accurately represents that part of the undeducted purchase price which is more appropriate to the amount of the annuity received in the particular year of income.
Paragraph (3)(a) provides the first criterion for the application of sub-section (3), that being that the annuity is payable for a term of years certain or that the annuity is payable only during the lifetime of one person. The other condition for the application of sub- section (3) is that the Commissioner is of the opinion that the deductible amount calculated under the sub-section (2) formula is not appropriate having had regard to the terms and conditions applying to the annuity and other relevant matters.''
The Explanatory Memorandum in its terms refers (by way of example) to an indexed annuity. Where in such a case, the amount drawn is indexed, and that amount increases through inflation, the capital component of each payment will increase. In these circumstances the ``straight-line'' formula provided by section 27H(2) may not be apposite, and section 27H(3) is designed to allow the Commissioner to effect an appropriate amendment.
Mr James argued in effect that the reference in paragraph (e) to ``such other matters as the Commission considers relevant'' (and there are provisions of similar import in other parts of the Act) is not apt to encompass the factual situation arising from Exhibit A4.
(e) That the Respondent gave the Applicant unhelpful advice cannot be doubted. But as Kitto J said in
FC of T v Wade (1951) 9 ATD 337 at page 344; (1951) 84 CLR at pages 116 and 117:
``... If the £2,016 formed part of the taxpayer's assessable income by reason of s. 26(j), as I think it did, its inclusion in his assessable income in the course of making the assessment was right, whether or not the Commissioner referred to s. 26(j), and even though he described the amount inaccurately. No conduct on the part of the Commissioner could operate as an estoppel against the operation of the Act.''
Giris Pty Ltd v FC of T 69 ATC 4015, the court was there faced with a provision of a similar nature. See in particular page 4024 where Menzies J. said:
``... Moreover, the Act requires that he `shall have regard to such other matters, if any, as he thinks fit'. However I assume that he is to be guided and controlled by the policy and purpose of the enactment, so far as that is manifest in it. That would exclude from his consideration any matter which it would be unlawful for him to take as a criterion, such as the State of residence of a trustee or of the beneficiaries of a trust.''
(g) The Tribunal considers that it is relevant that, by the time of the correspondence annexed to Exhibit A4, an election under the Trust Deed had been made, and a payment under the pension had been received. The relevant correspondence was entered into after the event and was in effect designed to ensure that if a mistaken decision had been made, it could be corrected. Paragraph (e) is not, in the view of the Tribunal, apt to relate to matters extraneous to the pension itself, and occurring after an election for the pension had been made and a payment had been received. Rather, it is designed to allow the Respondent in a suitable case to effect amendments referable to the actual pension itself. Exhibit A4 relates effectively not to the pension but to the possibility that the election in respect of the pension might be reversed, in order to obtain a tax benefit in consequence of the grant (probably) of another pension by a different fund.
(h) The provisions of subclause (g) should not be construed so as to derogate from the fact that the Applicant's accountant was to some degree mislead, and the fact that a private ruling could have been sought is not in the opinion of the Tribunal to the point. Mr James advised the Tribunal that the Applicant might be able to seek ex gratia relief from the Respondent, or to relief under the Audit Act. Whether or not this is so, is not a matter for this Tribunal; however, the Tribunal (to the extent that it is apposite for it to do so) respectfully recommends to the Respondent that the circumstances are such that the grant of relief would be appropriate.
12. For the reasons set out previously, the objection decision under review is affirmed.