NORRIS v FC of T

Members:
DW Muller SM

Tribunal:
Administrative Appeals Tribunal (sitting as the Small Taxation Claims Tribunal)

Decision date: 19 June 1998

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DW Muller (Senior Member)

This is an application to review a decision to (a) impose tax of $490.52 plus provisional tax of $541.00 on a taxable income in Australia of $548.00 and (b) to impose provisional tax on a taxable income of less than $1,000.

2. In the tax year ended 30 June 1996, the taxpayer:

• (i) Was contracted to the Fiji Government (on leave without pay from the Australian Taxation Office).

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  ATC 2258

• (ii) Received exempt foreign earnings of $43,734.00.
• (iii) Received interest income in Australia of $128.00.
• (iv) Received rental income in Australia of $3,995.00.
• (v) Incurred expenses in respect of interest ($17.00) and rental income ($2,291.00) of $2,308.00.
• (vi) Paid superannuation contributions to Comsuper of $1,267.00.
• (vii) Was entitled to a deduction for superannuation contributions.

3. The tax payable is to be calculated according to the formula set out in subsection 23AG(3) of the Income Tax Assessment Act 1936 (the Act). The subsection provides as follows:

``23AG(3) [Income consisting of exempt and non-exempt income] If the income of a taxpayer of a year of income consists of an amount that is exempt from tax under this section (in this section called the `exempt amount' ) and other income, the amount of tax (if any) payable in respect of the other income is calculated using the formula:

Notional gross tax
------------------ x Other taxable income
Notional gross
taxable income
              

where:

`Notional gross tax' means the number of whole dollars in the amount of income tax that would be assessed under this Act in respect of the taxpayer's taxable income of the year of income if:

• (a) the exempt amount were not exempt income; and
• (aa) if the exempt amount is an exempt resident foreign termination payment (within the meaning of Subdivision AA of Division 2) - the exempt amount (excluding any part of that amount that represented contributions made by the taxpayer) were assessable income of the taxpayer; and
• (b) the taxpayer were not entitled to any rebate of tax; and
• (c) Division 5 of Part II of the Income Tax Rates Act 1986 did not apply in relation to the taxpayer.

`Notional gross taxable income' means the number of whole dollars in the amount that would have been the taxpayer's taxable income of the year of income if the exempt amount were not exempt income;

`Other taxable income' means the amount (if any) remaining after deducting from so much of the other income as is assessable income:

• (d) any deductions allowable to the taxpayer in relation to the year of income that relate exclusively to that assessable income; and
• (e) so much of any other deductions (other than apportionable deductions) allowable to the taxpayer in relation to the year of income as, in the opinion of the Commissioner, may appropriately be related to that assessable income;''

4. The taxpayer had a taxable income of $1,815.00 in Australia before the deduction of $1,267.00 for superannuation was taken into account. If the superannuation payment had been deducted in full from the Australian income, the taxpayer would have had a taxable income of $548.00. Calculation of tax payable using the formula above would give $152.29. The taxpayer complains that a tax bill of $490.52 plus provisional tax of $541.00 is not commensurate with a taxable income of $548.00.

5. The respondent has treated the superannuation deduction as being split proportionally between the $43,734.00 income from Fiji and the $1,815.00 income from Australia. Thus the respondent has apportioned $1,217.00 of the $1,267.00 superannuation payment to the Fiji income and $50.00 to the Australian income. This leaves a net foreign income of $42,517.00 ($43,734.00 − $1,217.00)

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ATC 2259

and an Australian taxable income of $1,765.00 ($1,815.00 − $50.00). The respondent's calculations are based on these figures.

6. This dispute concerns the way in which the superannuation component is to be treated. Should it be fully deducted from the Australian income or should there be an apportionment? The answer depends on the interpretation of the words ``may appropriately be related to that assessable income'' which form part of subsection 23AG(3)(e) of the Act.

7. I have had the advantage of considering the following very helpful material:

• (i) Taxation Ruling IT 2556 - clause 11

  ``Deductions that clearly relate exclusively to income other than the relevant foreign income should be excluded from consideration. Only those allowable deductions which can clearly be viewed as related to the derivation by the taxpayer of both the relevant foreign income and other income are to be subject to apportionment. An example would be general administration or head office expenses incurred by a taxpayer who conducts business activities both in Australia and overseas and which are incidental or relevant to the conduct of each of those activities. Another example may be an expense such as interest on borrowed funds which have been used to purchase income- producing assets, including assets used to derive foreign income.''

• (ii) Taxation Determination Number TD 95/36

  ``1. Deductions for superannuation contributions and tax agents' fees should be apportioned between exempt foreign earnings and assessable income on the same basis as `apportionable deductions' when determining the taxpayer's `Other taxable income'.

  ...

  5. Superannuation contributions and tax agents' fees are not considered to relate exclusively to either the production of assessable income or exempt foreign earnings. It is arguable that being concessional in nature they do not `relate to' assessable income at all. They are not `apportionable deductions' as defined in subsection 6(1). It follows that those deductions are to be taken into account for the purposes of the definition of `Other Taxable Income' in paragraphs 23AF(17A)(e) and 23AG(3)(e). In that regard, conceptual and practical considerations require that the extent to which they may be appropriately related to the taxpayer's assessable income be determined in the same manner as is prescribed in subsections 23AF(17B) and 23AG(4) for apportionable deductions.''

• (iii) Case 67/96 - 96 ATC 598 per Senior Member Block

  ``15. I was also referred to Taxation Determination TD 95/36 which while it does not deal with section 160AF of the Act does refer to section 23AG of the Act which might, in loose terms, be referred to as the obverse of section 160AF(8) of the Act. Clause 5 of TD 95/36 is in the following terms:

  `Superannuation contributions and tax... for apportionable deductions'

  16. TD 95/36 is a public ruling and the regime applicable to public rulings applies. It is of course true to say that TD 95/36 takes a view which is different from that taken in IT 2446. However TD 95/36 is not binding on the Applicant or the Tribunal and in any event deals with different sections. At least insofar as it is contended that it favours the method of assessment contended for by the Respondent in this case, I consider that it is not correct.

  ...

  21... Similarly the superannuation deduction was not appropriately or for that matter in any way connected with the derivation of the foreign income. Accordingly the definition of `net foreign income' will not in respect of either deduction permit an apportionment and the deduction of any part of these deductions against foreign income.''

8. I respectfully agree with the conclusions reached by Senior Member Block and there is really nothing further that I can add.

9. The decision under review is set aside.