Case V127
Members:KL Beddoe SM
Tribunal:
Administrative Appeals Tribunal
K.L. Beddoe (Senior Member)
The question at issue in each application is whether an amount said to have been paid to the applicant by a superannuation fund is a receipt of a capital nature, income according to ordinary concepts, an allowance falling within the terms of para. 26(e) of the Income Tax Assessment Act 1936 (``the Act'') or an eligible termination payment within the terms of sec. 27A of the Act. The objection decisions subject to review are in respect of assessments made by the respondent for the year of income ended 30 June 1984.
2. The four applicants are two married couples who will be described as Mr and Mrs Senior and Mr and Mrs Junior. Mr and Mrs Senior are the parents of Mr Junior. At all
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relevant times each was a director of J.S. & Co. Pty. Ltd., the company which carried on business as scrap metal merchants. Each was a resident of Australia.3. On the first day of hearing, Mr R. Barnett, an actuary, represented the applicants but on the second day of hearing Mr N. Davis, a solicitor, appeared on their behalf. Mr E.J. Read of counsel appeared for the respondent.
4. Subsection 25(1) of the Act provides that the assessable income of a resident taxpayer shall include the gross income derived directly or indirectly from all sources which is not exempt income, an amount to which sec. 26AC or 26AD applies or an eligible termination payment within the meaning of Subdiv. AA of Div. 2 of Pt 3 of the Act.
5. Paragraph 26(e) of the Act provides that the assessable income of a taxpayer shall include the value to the taxpayer of all allowances, gratuities, compensations, benefits, bonuses and premiums allowed, given or granted to the taxpayer in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by the taxpayer. Exclusions from para. 26(e) include eligible termination payments and amounts to which sec. 26AC or 26AD apply.
6. Sections 27B and 27C of the Act provide for the inclusion of eligible termination payments in the assessable income of a taxpayer.
7. ``Eligible termination payment'' is defined in subsec. 27A(1) of the Act to mean inter alia:
``(a) any payment made in respect of the taxpayer in consequence of the termination of any employment of the taxpayer, other than a payment -
- (i) to which paragraph (b) applies;
- (ii)...
- (iii) from a fund in relation to which section 121DA applies, or has applied, in relation to the year of income commencing on 1 July 1984 or any subsequent year of income;
- (iv) of an amount to which section 26AC or 26AD applies; or
- (v) of an amount that, under any provision of this Act, is deemed to be a dividend paid to the taxpayer;
(b) any payment made from a superannuation fund in respect of the taxpayer by reason that the taxpayer is or was a member of the fund, not being a payment that is -
- (i) income of the taxpayer; or
- (ii) a benefit to which sub-section 26AF(1) applies....''
Section 26AC of the Act provides for assessment of amounts received on retirement or termination of employment in lieu of annual leave while sec. 26AD applies to amounts received in like manner in respect of long service leave.
8. ``Employment'' is defined in subsec. 27A(1) to include the holding of an office while ``superannuation fund'' is defined in the same subsection to mean:
``(a) a provident, benefit, superannuation or retirement fund, being -
- (i) a fund to which paragraph 23(ja), (jaa) or (jb) or section 23F, 23FB or 121DAB applies, or has applied, in relation to any year of income; or
- (ii) a fund to which section 79 of this Act, as in force at any time before the commencement of the Income Tax Assessment Amendment Act (No. 3) 1984, applied in relation to the year of income that commenced on 1 July 1983 or a preceding year of income; and
(b) a scheme for the payment of benefits upon retirement or death, being a scheme constituted by or under a law of the Commonwealth or of a State or Territory;''
9. There is no basis for saying that the present fund comes within para. (b) of the definition of superannuation fund.
10. Section 23F provides for exemption of income of certain superannuation funds established for the benefit of employees. Subsection 23F(2) sets out the requirements with which a fund must comply to come within the terms of the section. That subsection requires inter alia:
- (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
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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.
- (i) the provision of superannuation benefits for employees in the event of
11. Subsection 27A(3) of the Act provides that a reference in the definition of eligible termination payment to a payment made in respect of a taxpayer is a reference to a payment made (whether voluntarily, by agreement or by compulsion of law).
12. Subject to the Act sec. 17 provides for the levy of income tax upon the taxable income derived during the year of income. Taxable income is defined in subsec. 6(1) to mean (unless the contrary intention appears) the amount remaining after deducting from assessable income all allowable deductions.
13. ``Assessable income'' is defined in subsec. 6(1) of the Act to mean (unless the contrary intention appears) all the amounts which under the provisions of the Act are included in assessable income. By virtue of sec. 19 of the Act income shall be deemed to have been derived by a person although it is not actually paid over to him but is dealt with on his behalf or as he directs.
The evidence
14. It will become apparent that there are considerable difficulties with the evidence in these applications. It is not possible for the Tribunal to give any reason for these difficulties but there is an overall impression that little attention was paid to detail and backdating of documents took place on more than one occasion. Furthermore the applicants were reluctant to give oral evidence before the Tribunal.
15. Exhibit 6 is a copy of minutes of a meeting of the directors of the company said to have been held at 8 p.m. on 2 June 1980. The minutes indicate that Mr Senior was chairman and that Mrs Senior and Mr Junior were present. Also present was another director, a woman described in other documents as a justice of the peace. The minutes read as follows:
``The Chairman advised the Meeting that it was proposed that the Company constitute a superannuation Fund for the benefit of employees in the Company, such Fund complying with the requirements set out in Section 23F of the Income Tax Assessment Act, 1936, as amended.
The Chairman tabled a Deed constituting the Fund.
IT WAS RESOLVED that the Company constitute the Superannuation Fund aforesaid and that the tabled Deed be executed on behalf of the Company and that the Common Seal of the Company be affixed thereto.
SIGNED as a correct record of the proceedings at the Meeting.''
The minutes were signed by Mr Junior.
16. Exhibit 5 is a copy of minutes of a meeting of the directors of the company also said to have been held on 2 June 1980. Present at this meeting were Mr and Mrs Senior and the minutes are signed by Mr Senior. The minutes read as follows:
``It was RESOLVED that superannuation benefits would be provided for the employees of the company.
DEED
It was RESOLVED that the Trust Deed tabled at the meeting be adopted for the formation of a superannuation fund.
CONTRIBUTIONS
It was RESOLVED that the company would make contributions to the fund as required.
It was RESOLVED to invite the staff listed to apply to join the fund. The membership was agreed to be as shown on the schedule prepared by the consultants.
The investment of the fund was considered. (Consultant) has indicated that it would be acceptable for the fund to make a loan to the company. It was decided that such loans would be granted subject to the employer agreeing to the terms of the loan.
Confirmed as a true and correct record.''
These minutes were signed by Mr Senior.
17. Exhibit T is a copy of what purports to be minutes of a meeting of the trustees of the superannuation fund. The minutes state that the meeting was held on 2 June 1980. The minutes read as follows:
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``It was RESOLVED that Mr Senior and Mr Junior would act as the trustees of The Superannuation Fund.
DEED
It was RESOLVED that the deed be executed by the trustees.
It was RESOLVED that the deed would be submitted to the Stamp Duties Office for stamping and that a copy of the deed would be sent to the Taxation Office for approval.
It was understood that the deed had been approved generally by the Taxation Office according to the advice of the superannuation consultants.
INVESTMENT OF FUNDS
It was RESOLVED that the contribution of $45,131.79 be accepted and part of this would be used to purchase insurance policies as arranged with the superannuation consultants.
Confirmed as a true and correct record.''
18. Exhibit K is a bundle of letters dated 4 June 1980 on the letterhead of the company and addressed to Mr and Mrs Senior and Mr and Mrs Junior. The letters advise that the company has established a superannuation fund for present and future employees who elect to participate in the fund but without contributions; the company would be the sole contributor to the fund. The letters went on to summarise the benefits and invite the addressee to participate in the fund. By an undated advice Mrs Senior and Mr and Mrs Junior elected to participate. Mr Senior did not sign an election in his name (even though a justice of the peace has purported to witness his signature). Nothing turns on this as all parties have proceeded on the basis that Mr Senior did so elect (Exhibit L).
19. Also, Exhibit I is a bundle of six letters in the same form and dated 4 June 1980 inviting six employees of the company to elect to participate in the superannuation fund. Exhibit 2 is six acceptances, five of which were dated 4 June 1980 and signed by the six employees. Mr Junior gave evidence to the effect that only one copy of each of these documents was prepared, the documents were given to the employees and directors and ``obviously everyone handed them back to me''.
20. All elections mentioned above were consented to by the company on 4 June 1980. Exhibits 3 and 4 indicate that five other employees elected to participate in the superannuation fund but those elections were not consented to by the company. The evidence before the Tribunal (Exhibit H) indicates that two of these employees had become members of the superannuation fund by 30 June 1982.
21. By letter dated 26 June 2980 [sic] (Exhibit 7) the consultant wrote to the company in the following terms:
``Thank you for your instructions to implement a Superannuation Fund for the above Company.
We now enclose the following documentation for completion: -
1. Trust Deed . The Deed is to be signed, sealed and witnessed as indicated.
2. Company Minute . The attached Company minute is to be signed and placed in the Company Minute Book.
3. Letter of Invitation . The attached draft Invitation is to be typed on Company letterhead and handed to each employee, including Directors.
4. Letter of Acceptance . The attached draft Letter of Acceptance is to be typed on plain paper and attached to each letter of Invitation. It is to be completed by each employee, including Directors, and returned to the Company to be filed in a safe place. The Company must accept the Application by signing as indicated. Should an employee refuse to sign the Letter of Acceptance, he/she cannot be included in the Fund, and this Office should be advised accordingly, in order that we can prepare a new calculations sheet for the Taxation Department.
It is a good idea to have any new staff invited to join the Fund and sign an application when they join your Company. You will then have the Acceptance Form on hand ready for the next year.
Instructions for the implementation of the Fund are forwarded herewith.
PLEASE RETURN THE SIGNED, SEALED AND WITNESSED TRUST DEED by return mail to this Office.
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Should you have any queries regarding the above, please do not hesitate to contact this Office.''
22. Exhibit E is a copy of the executed deed establishing the superannuation fund. It is dated 2 June 1980 and stamped in the stamp duties office on 1 July 1980. The deed is unexceptional in its form and follows what appears to be a standard precedent for such funds. It will be necessary to refer to specific clauses in the deed at a later stage in these reasons.
23. The deed was then submitted to the respondent's office for approval in terms of sec. 23F of the Act (Exhibit B). That resulted in a Deputy Commissioner of Taxation writing to the trustees by letter dated 31 October 1980 (Exhibits B and F). The Deputy Commissioner advised that the deed was acceptable for the purposes of sec. 23F subject to comments contained in the letter. Those comments included a number of drafting amendments to the deed which the Deputy Commissioner stated may be made at the next time the deed was to be varied provided the fund operated in the light of the comments contained in the letter. Just how the Deputy Commissioner thought he could vicariously amend the deed in this way has not been made clear. The trustees would be obliged to comply with the terms of the deed as it stood. The Deputy Commissioner went on to say the following in the letter:
``You will appreciate, of course, that acceptance of the constituent document will not constitute formal approval of the fund which, in order to obtain exemption, will need to be administered in accordance with the specific requirements of section 23F and any other relevant provisions of the law.''
24. On or about 24 April 1981 the trustees lodged an income tax return with the respondent for the year of income ended 30 June 1980. That return disclosed that the fund had a balance at the bank of $40,171 and that $40,131 had been allocated to 10 members of the fund. The applicants in these proceedings were among the 10 members of the fund.
25. By letter dated 18 May 1981 (Exhibit M) a Deputy Commissioner of Taxation requisitioned the company in respect of its claim for a deduction of $45,131 in respect of superannuation contributions. That requisition was fully answered on behalf of the company on 26 June 1981 (Exhibit N). From that point on the respondent has been content to accept the fund as a fund coming within the terms of sec. 23F although not exempt from tax because it failed to comply with sec. 121C of the Act and was therefore assessable in accordance with sec. 121D.
26. Exhibits P, G, H and Q reveal that membership of the fund has fluctuated over the years. This may be shown in tabular form as follows including individual interests in the fund:
Member Year Ended 30 June
1980 1981 1982 1983
$ $ $ $
Mr Senior 5,348 8,705 10,460 16,238
Mrs Senior 7,645 11,687 13,906 16,085
Mr Junior 3,980 5,741 7,434 6,422
Mrs Junior 300 876 1,413 2,953
Employee B 13,613 21,991 25,064
Employee J 2,921 4,845 6,171
Employee Z 828 1,038 1,604
Employee M1 1,512
Employee M2 3,260 3,657
Employee L 722
Employee T 587
Employee F 550
Employee V 400
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27. The evidence before the Tribunal, while not conclusive, indicates that it is most unlikely that any member of the fund other than the applicants ever received any payment from the fund. I will return to this aspect later.
28. By an agreement in writing dated 1 July 1983 the company contracted to sell its business to another company of very similar name as trustee for the Mr Junior family trust. Consideration for sale of the business was $214,251 with $300 payable on execution of the contract and $300 payable per week thereafter. The outstanding balance to be interest-free. The purchaser also assumed liability for moneys owing on the real property acquired in the terms of the contract. The transaction can only be explained as a normal family dealing whereby a family business is passed on to the next generation.
29. Part of Exhibit 21 is a copy of minutes of a meeting of the trustees of the fund said to have been held on 20 June 1984 at which Mr Senior and Mr Junior were shown as present. Mr Senior signed the minutes as chairman.
30. The minutes are set out in full (subject to editing to maintain confidentiality):
``The Chairman advised that the company had ceased business on account of the business being assumed by a new company,... Pty. Ltd.
It was decided that the following retirement benefits would be payable following advice obtained from a meeting with an actuary. It was understood that these payments were within the provisions of the trust deed governing the fund and would be acceptable as reasonable benefits by the Taxation Office.
Name Amount $ Mr Senior 28,787 Mrs Senior 28,787 Mr Junior 14,790 Mrs Junior 7,206 ------- $79,570 -------It was noted that there was a residual amount remaining in the fund after the payment of these benefits, represented by cash and the Sentry Life Policies. The amount of cash was required to meet the taxation liability in respect of the year ended 30th June 1983.
It was RESOLVED that this amount would be retained by the trustees to meet this liability.
It was noted that there was a further amount, remaining in the fund after this, represented by the Sentry Life Policies.
The actuary suggested that these life policies would not have a surrender value equal to the premiums paid and that it could be worthwhile maintaining these policies in order to maintain a real investment in return.
Since the superannuation fund did not require any further moneys to meet its obligations it was decided to waive the collection of interest on the loan to the employer. If this money was received the fund would then return the balance to the employer so that the transactions would, in effect, be cancelled. The taxation position would similarly be that the payments would be offsetting.
Since... Pty. Ltd. (the new company) had set up a superannuation fund it was advised that the new employer would not be contributing to this fund. It was resolved to treat all members as ceasing employment with the Company in terms of the Deed.
The two other members of the Fund Messrs Z and M1 would be assuming employment under the new firm. It was therefore considered appropriate to transfer these policies to the trustees of the new fund. The actuary would be instructed to arrange this with Sentry Life.
The provisions of the deed did not specifically require these amounts to be transferred but in accordance with Clause 16 of the deed which enabled the provisions to be varied by resolution of the trustees it was decided that the residual of the fund would be so transferred.
It was RESOLVED that a clause be added to the deed as follows:
Transfer to other Funds 47 .
The trustee may transfer to the trustee of any other superannuation fund or plan the residual amount of this fund after payment of all benefits that fall due in the event of
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any of the members transferring to the said other superannuation fund and for whom no benefits had been paid under this fund.'''
31. Exhibit 20 is a copy of p. 71 of the cash journal of the fund. The journal shows that on 26 June 1984 the fund received $60,000 from the company apparently as repayment of the loan made by the fund to the company. On 29 June 1984 the fund drew three cheques as follows:
No. 492 Mr and Mrs Senior $14,500
No. 493 Mr and Mrs Junior $29,060
No. 494 Mr and Mrs Junior $10,000
32. Evidence was given at the hearing that Australian Savings Bonds held by the fund with a face value of $24,000 (the fund purchased the bonds on 29 June 1983) were transferred to Mr and Mrs Senior in June 1984. Details of interest due on those bonds are not in evidence but it is apparent, and I so find, that the net assets of the fund (excluding the life policies) were divided equally between Mr and Mrs Senior and Mr and Mrs Junior. No other member of the fund participated in the distribution.
33. What then of the resolution of the trustees in the minutes dated 20 June 1984 which authorise an entirely different distribution. Two further documents need to be considered. The first is Exhibit C which is a letter dated 7 March 1985 sent to the fund's tax agent by Mr Barnett in his capacity as a superannuation consultant and actuary. After dealing briefly with an incident of employee dishonesty, to which I will return, Mr Barnett went on to say that the benefits payable to Mr and Mrs Senior should be $28,787 each on the basis that their employment terminated on 30 June 1984. In respect of Mr and Mrs Junior, Mr Barnett calculated the respective benefits as $14,790 and $7,206 respectively. Mr Barnett stated that each of these calculations had been made in accordance with the respondent's guidelines. I do not need to determine whether the assertion is correct. I am satisfied that Mr Barnett believed the calculations to be in accordance with the guidelines. Mr Barnett then went on to note that the fund required the cash balance to meet a taxation liability and that the life assurance policies should be maintained and transferred to the superannuation fund established by the company which had acquired the business and former employees. He also noted that the fund had not charged interest on the loan from the fund to the company for the year ended 30 June 1984. Mr Barnett made further comments with which the Tribunal need not be concerned.
34. The second document is probably the most bizarre document in evidence before the Tribunal. It is Exhibit 22 and is dated 20 June 1984. It is apparent from the document and also from the evidence that it was not executed on that day. The document is addressed to the trustees of the fund by Mr and Mrs Senior. It states (edited to maintain confidentiality):
``We hereby authorise you to pay part of our superannuation benefits to the credit of our son and daughter-in-law Mr and Mrs Junior, as repayment of moneys which we owe them.
This is not an assignment of our benefits, but we would ask that the moneys be dispensed in this manner. The amount which we wish to have paid to Mr and Mrs Junior is $17,604.
In order to save bank charges we trust that you will be able to obtain advice that this can be arranged.''
35. Exhibits 21 and 22 must have been brought into existence after Mr Barnett gave his advice in March 1985. There is no evidence other than the documents themselves which supports the view that they were signed on 20 June 1984. I am satisfied that the entries in the cash book dated 29 June 1984 evidence the true position. That is that the trustees decided to divide the net assets of the fund between themselves and their respective wives without regard to the rights of other members of the fund, the trust deed, the respondent's guidelines or anything else. To put it bluntly they decided to relieve the fund of its net assets for their own benefit. Exhibits 21 and 22 represent an attempt to undo the past when the need to prepare the fund's income tax return brought the matter to the attention of the trustees' professional advisers. That the trustees thought they could take the course of action evidenced by the cash book is confirmed by the attitude taken in relation to the setting up of the fund and the attitude of the trustees to the members of the fund other than the applicants.
36. There is only scant evidence before the Tribunal to support any contention that the
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applicants retired from their employment with the company and that evidence relates to Mr and Mrs Junior only.37. The income tax return lodged by the company in respect of the year ended 30 June 1983 (Exhibit 8) disclosed that Mr and Mrs Senior were the only shareholders in the company and that the applicants were employed as follows:
Name Position Hours per week Directors fees Salary
$ $
Mr Senior Director Full-time 7,000
Mrs Senior Director Full-time 7,000
Mr Junior Director/Secretary Full-time 19,010
Mrs Junior Wife of Mr
Junior/Clerk Full-time 7,260
Details disclosed in Exhibit 12 which is the income tax return lodged by the company in respect of the year of income ended 30 June 1984 show the following:
Name Position Hours per week Directors fees
$
Mr Senior Director Part-time 7,000
Mrs Senior Director Part-time 7,000
That return also disclosed that the business had been sold to Mr Junior family trust on 11 July 1983 although Exhibit J indicates that the sale took place on 1 July 1983. I infer that Mr and Mrs Junior terminated their employment before the family trust took over the business on or about 11 July 1983.
38. Certainly the accounts of the company show that no salaries or wages were incurred during the year ended 30 June 1984 and the directors' fees of $14,000 were, as set out above, paid to Mr and Mrs Senior. I therefore find as a fact that Mr and Mrs Junior terminated their employment with the company on or about 1 July 1983.
39. The same cannot be said for Mr and Mrs Senior. They continued to be directors of the company during the year ended 30 June 1984 albeit on a part-time rather than a full-time basis according to Exhibits 8 and 12. I suspect, but need not decide, that Mr and Mrs Senior devoted considerably less than 40 hours per week to the affairs of the company at all relevant times.
40. I am unable to find, on the evidence, that there has been any termination of employment in respect of Mr and Mrs Senior because there is no evidence before the Tribunal to support such a finding.
41. Evidence was given by two former employees of the company who were members of the fund. Neither had any clear recollection of being invited to join the fund although they both recognised their signatures on the respective applications. This is consistent with the evidence of Mr Junior to the effect that no meeting of employees was held to explain the fund to them, that only one copy of the document regarding the fund was prepared for each employee and these were retained by the company.
42. Mr M2 gave evidence that he was employed in 1980 to paint the company's houses. Apparently the company owned a number of houses and the witness was engaged for at least 12 months to paint these houses. It seems he was in fact employed for approximately two years. He had some difficulty in recognising his application to join the fund but he explained to the Tribunal that in the early 1980s he had a literacy problem which he was reluctant to acknowledge causing him to pretend to others that he could read documents put in front of him. He could not remember having had the fund explained to him and a search of his home had failed to reveal any document relating to the fund. Because of the literacy problem I regard this evidence as
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equivocal and therefore of little value unless corroborated.43. Of much greater concern is the evidence of Mr B. It will be noted from the table in para. 26 above that Mr B had a substantial interest in the fund. This reflected the fact that Mr B attained the age of 65 in 1982.
44. Before turning to the evidence of Mr B it is first necessary to consider certain documentary evidence. Exhibit 17 is the minutes of a meeting of the trustees said to have been held on 1 July 1982. Both trustees were said to be present at the meeting. The minutes read as follows (edited to maintain confidentiality):
``The meeting was called to examine the payment of a benefit to Mr B on the termination of his employment with the firm.
It was noted that because of the proximity of Mr B to the date of normal retirement that a benefit should be considered. Against this however, the circumstances surrounding his departure required consideration. Given these circumstances it was decided that no benefit would be payable.
Confirmed as a true and correct record.''
45. The minutes were signed by Mr Senior. The immediate difficulty with this document is that Mr Senior was in Malaysia on 1 July 1982 (Exhibit U). Both Mr Senior and Mr Junior stated, somewhat tentatively in their oral evidence, that they had discussed B's position prior to his termination and that those discussions may have been by telephone. Mr Senior admitted that Exhibit U was signed by him on a date subsequent to 1 July 1982. He said that he signed the minutes after he returned from overseas on 21 July and before he travelled to his Gold Coast residence. He denied he attended company's premises at this time. I will return to this exhibit later.
46. On 5 February 1988 the Australian Government Solicitor acting for the respondent requested the applicants to provide particulars as follows (edited to maintain confidentiality):
``Full details of the circumstances surrounding the departure of B from his employment with the Company which were taken into consideration in making the determination of 1 July 1982 that no benefit would be paid to him.''
(Exhibit 18)
47. By letter dated 10 February 1988 (Exhibit 19) the applicants' representative replied as follows:
``I am pleased to provide an account of the circumstances in which the trustees of the superannuation Fund determined that no benefit would be payable on the cessation of employment of B. This account has been given to me by one of the trustees Mr Junior.
In presenting this account we would stress that the matter is to be regarded as confidential. At the time any ill feeling between the employer and B was avoided by not having to disclose the circumstances of the decision.
We ask specifically that this confidence be observed. The decision of the trustees of the superannuation Fund not to pay a benefit to B was made after considering the following clauses of the trust deed.
The provisions of clause 18 of the trust deed were considered. Under this clause it appears that no requirement to pay a benefit in respect of B arose since he was retiring prior to the normal retirement age. The trustees also considered the provisions of clause 23 and in particular clause 23(a)(i).
Under this clause the company considered that there had been misconduct and that this was based on reasonable grounds. It was considered that the benefit could be forfeited under sub-clause (c) of this paragraph and that the moneys could be returned to the employer. It was decided, however, that the amounts forfeited would be held within the fund for the benefit of the remaining members.
It is stressed at this point that it is considered that there has been no breach of the trust deed in reaching the decision. The circumstances surrounding the misconduct were that certain complaints had been made to the employer concerning the conduct of B. The complaints had resulted in a loss of business and this was considered to be sufficient grounds. It is noted that following the cessation of employment of B the customers lost were retrieved.''
48. In his oral evidence Mr Junior stated that B was not dismissed from his employment but there was a question of dishonesty. He stated
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that B left the company's employment of his own free will but his retirement was brought about by ill health manifesting itself in pneumonia at the time he retired. The company had agreed to B retiring early because of the state of his health. Nothing was said to B regarding the alleged dishonest practices.49. The evidence before the Tribunal is that B was paid by the company for unused leave and that he ceased employment on 1 July 1982. That was apparently about six weeks before B's 65th birthday. The early retirement arose from a discussion between Mr Senior and B as to his health. B apparently resisted early retirement claiming his health was not too bad and being concerned to ensure he got his full leave entitlements. Senior assured him that early retirement because of his health would not prejudice payment for his leave entitlements. B gave evidence of a function organised by the company for his retirement and a presentation to him on behalf of the company inscribed ``in appreciation of 24 years loyal service''.
50. At no time around the time of his retirement was B's attention drawn to his rights in the fund and he said he did not become aware of those rights until he was interviewed by the respondent's officers in early 1988 in preparation for the hearing of this matter. B's evidence is consistent with Exhibit 19 quoted above and I have no doubt that B was unaware of his rights to superannuation until the matter was drawn to his attention in 1988.
51. B denied that he had been involved in dishonest practices while employed by the company and also denied that anyone had discussed with him or warned him about dishonest practices.
52. Mr Senior gave evidence in rebuttal to the effect that he had not had a discussion with B before B's retirement. This was explained by the fact that Senior was overseas from 21 June 1982 to 21 July 1982. Whether Senior did or did not have a discussion with B prior to 1 July 1982 seems to be immaterial for the purposes of deciding this application. It seems that Senior and B have been on friendly terms until early 1988 when B became aware of his interest in the fund. Apparently that friendship has now been terminated.
53. I turn now to the company's contributions to the fund. It is relevant to note the company's net profit (loss) and the interest payments and contribution to the fund for each year of income. Exhibits 8-12 are copies of the returns of income for the years ended 30 June 1980 to 1984 inclusive. Details are:
Interest to fund Contribution to fund Net profit
1980 - $45,132 ($4,782) loss
1981 $4,600 $24,418 $3,966
1982 $8,478 $10,971 $5,700
1983 $12,827 $1 $60,754
1984 NIL NIL ($6,281) loss
54. It is apparent that except in the year ended 30 June 1983, which was the last year the company carried on business, the fund has been the repository for almost all of the company's profits derived before payment of contributions and interest to the fund.
The applicants' income tax returns for the year ended 30 June 1984
55. Mr Senior lodged his income tax return on or about 30 October 1984. He disclosed income from a statutory board, directors' fees of $7,000 from the company, dividends from the company of $6,723 and interest from banks etc. (Exhibit 14). By Notice of Assessment Made issued on 27 February 1985 the respondent assessed the applicant to tax on a taxable income of $16,651 (Document T2).
56. By Notice of Amended Assessment Made issued on 19 November 1985 the respondent amended the taxable income to $45,438 by adding payment from the fund amounting to $28,787.
57. The only material differences in respect of Mrs Senior is that she returned a slightly different taxable income in her return (Exhibit 15) and the respondent issued the initial notice of assessment on 8 January 1985.
58. Mr Junior lodged his income tax return with the respondent during October 1984
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disclosing salary from the trustee for the Junior family trust amounting to $22,900, interest from banks, etc., a share in the net income of the Junior family trust. No directors' fees were disclosed and the applicant did not disclose any payment received from the fund. By Notice of Assessment Made issued on 17 January 1985 the respondent assessed the applicant to tax on a taxable income of $74,579. By Notice of Amended Assessment Made on 19 November 1985 the respondent increased the taxable income by $14,770 to include payment received from the fund.59. Mrs Junior lodged her return of income during October 1984 disclosing salary derived from the trustee for the Junior family trust, a share in the net income of the Junior family trust and interest from banks etc. No directors' fees were disclosed and the applicant did not disclose any payment received from the fund. By Notice of Assessment Made issued on 17 January 1985 the respondent assessed the applicant to tax on a taxable income of $66,032. By Notice of Amended Assessment Made issued on 19 November 1985 the respondent increased the taxable income by $7,206 to include payment received from the fund.
60. It will be apparent that the amounts which the respondent assessed in the amended assessments were not the amounts paid to the applicants by the fund on 29 June 1984. No attention was given to this point by the parties in their submissions to the Tribunal but it is an issue which the Tribunal will need to consider.
The position of other members of the fund
61. As already stated the Tribunal heard oral evidence from Mr M2 and Mr B, two employees of the company and members of the fund that they had not received benefits from the fund. While there is no reason why M2 should have received benefits the respondent was rightly concerned to make the point that B, having been retired on grounds of ill health a few weeks before his 65th birthday, and with accrued leave rights, had been denied payment of his benefits by the fund.
62. I turn now to the documentary evidence regarding the other employees. Putting the applicants to one side for the moment the other members of the fund at 30 June 1982 were B, J, Z, and V. F and V joined the fund during the year ended 30 June 1982 and therefore only had a small interest in the fund whereas B, J and Z had been members for several years. It is clear on the evidence so far that B got nothing from the fund.
63. It is apparent from the resolution quoted at para. 30 above that Z also got nothing from the fund except that the Sentry Life Policies were transferred to the fund established by the new employer. While the evidence is less than complete the only finding open on the available evidence is that the applicants were the only members of the fund to be paid benefits. In so far as other members of the fund had interests in the Sentry Life Policies those rights were transferred to the new employer's fund. Those rights were valued at about half of the premiums paid on the policies with a value of $7,475 all up (Exhibit C). Bearing in mind that Mr and Mrs Junior also have interests in these policies the amounts transferred to the new fund in the form of the Sentry Life Policies in respect of Z and M 1 total about $3,250 for the two of them. That is almost de minimus in the overall context of the fund.
The distribution to the applicants
64. There is no evidence in writing other than the entries in the cash journal of the fund (Exhibit 20) and the backdated documents (Exhibits 21 and 22) to support the view that the trustees decided to distribute the assets of the fund equally to the shareholders, their son and daughter-in-law, i.e. the applicants in these proceedings. However, the evidence does not allow the Tribunal to come to any other conclusion. The applicants have not denied that is what happened. The onus is on them to show otherwise.
65. I have come to the conclusion that the document headed ``Minutes of a meeting of the Trustees of the... Superannuation Fund'' and dated 20 June 1984 (part of Exhibit 21) and the letter to the trustees signed by Mr and Mrs Senior and also dated 20 June 1984 (Exhibit 22) are merely documents created for the purpose of convincing the respondent that the facts surrounding the payments from the fund were other than they really were. These documents had their genesis in Mr Barnett's report dated 7 March 1985. There is no other plausible explanation. The cash journal evidences the real transaction. The documents dated 20 June 1984 represent an attempt to create different ``facts'' long after the event.
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The Tribunal finds that the trustees agreed to distribute the net assets of the fund (except the Sentry Life Policies) to the applicants and that this was given effect on or about 29 June 1984 as evidenced by the cash journal (Exhibit 20).Was the fund a superannuation fund?
66. Exhibit E is a copy of the deed dated 2 June 1980. Whether the deed was executed on that date or some later date seems to be of little relevance. Certainly it was executed on or before 1 July 1980 - the date of stamping for stamp duty purposes.
67. By the deed Mr Senior and Mr Junior were appointed trustees of a fund established by the company for the purposes of providing retiring allowances and other benefits for such of the present and future employees as shall be eligible and elect to participate in the fund. ``Employees'' is defined to include directors of the company.
68. Clause 4 of the deed provides that the members of the fund shall consist of those employees of the company who are at the company's discretion invited by the company to join and participate in the fund and who within a period of 60 days apply in writing. Such applications require the consent of the company before the applicant employee becomes a member of the fund and membership commences on the date of that consent.
69. By cl. 5(c) the fund is to consist of such contributions made by the company for the credit of the members individually together with interest and profits thereon provided always that the company had the right to increase, reduce, suspend or terminate all or any of its contributions should it think fit. The other paragraphs of cl. 5 do not appear to apply in the present case.
70. Clause 9 provides for the allocation of the income of the fund to the credit of individual members. Clause 10 provides that the fund's assets or income shall not revert to the company while cl. 13 provides for the trustee to pay benefits to the members of the fund at the absolute unfettered discretion of the trustee. Clauses 17 and 18 deal with the payment of benefits on retirement as follows:
``RETIREMENT AND PAYMENT OF BENEFITS:
17. As and when any Member shall, after reaching the retiring age of sixty-five (65) years in the case of a male member of sixty (60) years in the case of a female member or other retiring age as the company and the Member may agree upon, retire from the service of the Company, the Trustee may in its absolute unfettered discretion:
- (a) pay to such Member the whole or any part of the amount standing to the credit of the Member in the Fund's books; and/or
- (b) determine to pay to the Member so much of the said amount not paid to the Member under (a) above by way of periodical payments of such amounts and at such times as the Trustee shall in its absolute unfettered discretion think fit, in which case the Trustee shall pay the same to the Member in the manner provided in such determination PROVIDED ALWAYS that in the event of the Trustee making any such determination it may at any time and from time to time thereafter in its abolute unfettered discretion vary the amount of such periodical payments or pay to the member the whole or any part or parts of the balance for the time being standing to the credit of such Member in the Fund's books of account AND PROVIDED FURTHER that if the Member shall die before receiving the whole of the amount standing to his credit in the Fund's books, then the Trustee shall (whether it shall have made any such determination or not) either pay or apply the amount standing to the credit of such Member in the Fund's books or so much thereof as shall not have been paid to such Member, to or for the benefit of such Member's dependants or of such one or more of them to the exclusion of the other or others of them and in such proportions and manner as the Trustee in its absolute unfettered discretion may think fit or at the option of the Trustee to such Member's legal personal representatives or may at the Trustee's absolute and unfettered discretion continue to pay a periodical payment to or for the benefit of such Member's dependants or of such one or more of them to the exclusion of the other or others of them and in such proportions
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and manner as the Trustee in its absolute unfettered discretion may think fit.EARLIER RETIREMENT OR DISMISSAL
18. Upon a Member ceasing to be employed by the Company for any reason other than those set out in Clause 17 hereof, the Trustee may at its absolute unfettered discretion pay to the Member all or any part of the amount standing to the credit of such Member in the Fund's books at the time of the Member's early retirement or dismissal and such amount may be paid by way of lump sum or by way of periodical payments including payment of a pension or annuity at the absolute unfettered discretion of the Trustee PROVIDED ALWAYS that if the Trustee does not exercise its discretion to pay the whole or any part of the amount standing to the credit of such Member to the Member, the Member shall not in such case be entitled to any portion of the amount standing to his credit in the Fund's books other than the amount of his or her contributions made to the Fund in accordance with Clause 7 hereof.''
71. Clause 22 empowered the trustee to deduct, in effect, any long service leave payable by the employer from the benefit otherwise payable at the time of termination of employment subject to the amount deducted not exceeding the employer's contributions to the fund.
72. Clause 23 provides, so far as is relevant that any member who:
``(a)(i) in the opinion of the Company based on reasonable grounds commits any fraud, dishonesty, defalcation or gross, wilful or serious misconduct in relation to the Company or its affairs; or
...
(v) does or attempts to do or suffers any act or thing or if any event happens whereby if his benefit or any part thereof were payable to him absolutely he would be deprived of the right to receive it or any part of it or it would be disposed of or dealt with otherwise than in accordance with this Deed; or
(vi)... shall cease to be presently or presumptively entitled to his benefit or any part thereof.''
(The clause goes on to provide in para. (b) that the trustee may in its absolute unfettered discretion apply the amount of the member's benefit then remaining under the trustees' control for the maintenance and support or otherwise for the benefit of such member and/or such one or more of his dependants as the trustee may in its absolute discretion determine. The clause also provides for the company to be reimbursed, at the company's request, for losses arising out of the member's fraud, dishonesty, defalcation or gross, wilful or serious misconduct in relation to the company or its affairs.)
73. It will be apparent that cl. 23 does not provide for termination of benefits per se but rather that the member ceases to be presently or presumptively entitled to his benefit. It then vests in the trustee a discretion as to the application of the benefits and allows the company to claim payment of its losses.
74. The trustees' minute of a meeting held 1 July 1982 (Exhibit 17) dealing with B's pending retirement seems to have assumed that it was for the trustees rather than the company to form the opinion under subcl. 23(a)(i). It can be implied from the minute, although not expressly stated, that the trustees declined to exercise their discretion under subcl. 23(b). It can also be implied, although there is no evidence, that the company did not seek reimbursement of any losses (if any). Clearly the company did not get reimbursement. B's interest in the fund finished up in the applicants' pockets purportedly in accordance with cl. 24. There is no evidence before the Tribunal that the company formed any opinion within the terms of cl. 23(a)(i).
75. Clauses 34 and 35 of the trust deed deal with the situation, which arose in this case, of the company selling its business. Those clauses are designed to secure the rights of members. They do not provide for the course of action pursued by the trustees.
76. Clause 40 provides for the trustees to make loans to members in limited circumstances set out in the clause. Those circumstances do not apply in respect of the applicants. There is no basis for saying that the payments made on 29 June 1984 were loans to members within the terms of the trust deed.
77. The respondent accepted that the fund was a fund to which sec. 23F applied provided
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the fund was administered in accordance with the requirements of that section (Exhibit F). That seems to have been the case at least until the question of payment of benefits to B arose. Even if the trustees acted in breach of trust over the non-payment of benefits due to B there is no sound basis for saying that the fund was not a superannuation fund until some date proximate to 29 June 1984 when the payments were made to the applicants. Unlike the situation found inScott v. F.C. of T. (1966) 40 A.L.J.R. 265, this fund was administered as a superannuation fund. It was established as such a fund and the consequence is that it must be accepted as being a superannuation fund within the terms of sec. 27A, being a fund to which sec. 23F has applied. It is not open on the evidence to come to any other conclusion. However, the plundering of the fund by the trustees on 29 June 1984 meant that it was no longer being administered in accordance with sec. 23F and it therefore ceased to be a superannuation fund for all purposes on or before that date. The brazen fraud on other members which this action represented makes it clear that the fund had ceased to be a superannuation fund.
78. In the alternative, the applicant submitted that the fund was a fund to which sec. 121DAB applied. That section came into operation with effect on and from 1 July 1984 (Act No. 47/1984 subsec. 60(b)) and therefore has no effect in respect of these applications. The argument in the alternative is rejected although in view of my findings above it is not really necessary to deal with the argument.
79. Details of assessments and amended assessments made by the respondent and notified to the applicants in respect of the year of income ended 30 June 1984 which form the basis for the applications before the Tribunal have been referred to above but may be summarised as follows:
Applicant Orig. Assessment Amended Assessment Taxable
Date Taxable Date Taxable income in
income income dispute
$ $ $
Mr Senior 27.2.85 16,651 19.11.85 45,438 28,787
Mrs Senior 8.1.85 15,349 19.11.85 44,136 28,787
Mr Junior 17.1.85 74,579 19.11.85 89,369 14,790
Mrs Junior 17.1.85 66,032 19.11.85 73,238 7,206
80. Each applicant lodged two notices of objection against the amended assessments. Neither party made any issue as to which notice was the valid one. I infer that the two notices were lodged together.
81. There is no material difference between the notices of objection lodged by each applicant and it will suffice for the purposes of those reasons if I summarise the grounds of objection made by Mr Senior. The applicant claims that the amended assessment was not authorised, that the amount of $28,787 is not assessable income being a receipt of a capital nature or, in the alternative, the payment was an eligible termination payment within the terms of subsec. 27A(1) of the Act. Grounds of objection were also taken as to the respondent's power to make the amended assessments. Those grounds of objection can only be described as nonsensical in the light of the evidence before the Tribunal and were not pursued by the applicants' representative. Several grounds were taken as to the assessment of additional tax imposed by subsec. 226(2) of the Act. Those grounds were maintained at the hearing.
82. The second notice of objection concentrated its grounds upon whether the payment received was an eligible termination payment within the terms of sec. 27A of the Act.
83. Each objection was disallowed by the respondent and in due course, by letter dated 21 July 1986, the applicants' accountant requested that the objection decisions be referred to ``a Board of Review or its replacement''. On 28 November 1986 the respondent referred the applications to this Tribunal.
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84. Under sec. 190(b) of the Act in proceedings on a review before the Tribunal the burden of proving that the assessment is excessive lies upon the applicant taxpayer.
85. Given that the fund was no longer a superannuation fund are the payments made on 29 June 1984 assessable income?
86. The applicants' representative contended that each amount was a receipt of a capital nature and not therefore assessable income. The respondent contends, in particular, that the payments fall within the terms of para. 26(e). In the alternative the applicants contend that the amounts in dispute were eligible termination payments for the purposes of sec. 27A of the Act.
87. The applicants' argument that the amounts received (whatever those amounts were) were of a capital nature relies upon the decision of the High Court in
Constable v. F.C. of T. (1952) 86 C.L.R. 402. That case involved a member of a provident fund conducted for the combined petroleum companies. Because of a change in the rules of that fund the appellant was entitled, under the old rules, to withdraw from the fund in consequence of which he received payments in full discharge of his interest in the fund. The Commissioner of Taxation assessed to tax the amount received as assessable income. The amount assessed was made up of two payments received and those payments each represented contributions by the appellant, contributions by the employer and interest on the contributions.
88. The Commissioner assessed Constable on the amount withdrawn from the fund as to the amount representing the employer's contribution and interest thereon. These amounts were assessed as personal exertion income. Also an amount in respect of interest on contributions made by Constable was also assessed, this time as property income. The Commissioner did not assess Constable in respect of an amount representing his contributions to the fund. As the payments had not been made in consequence of a termination of employment para. 26(d) could not apply.
89. The decision of the court is clearly expressed by Dixon C.J., McTiernan, Williams and Fullagar JJ., at para. 418 where their Honours state:
``It appears to us that the taxpayer became entitled to a payment out of the fund by reason of a contingency (viz.: an alteration of the regulations curtailing the rights of members) which occurred in that year enabling him to call for the amount shown by his account. It was a contingent right that became absolute. The happening of the event which made it absolute did not, and could not, amount to an allowing giving or granting to him of any allowance, gratuity, compensation, benefit, bonus or premium. The fund existed as one to a share in which he had a contractual, if not a proprietary, title. His title was future, and indeed contingent or, at all events, conditional. All that occurred in the year of income with respect to the sum in question was that the future and contingent or conditional right became a right to present payment and payment was made accordingly. This, in our opinion, cannot bring the amount or any part of it within s. 26(e). The amount received by the taxpayer from the fund is a capital sum, and, unless it or some part of it falls under s. 26(e) (there being no other applicable imposition of liability), it is not part of the assessable income.''
Webb J. agreed for different reasons.
90. It is clear that the court found that the amount received was paid because of a contingency becoming an absolute right to call for payment. The payment was held not to fall within the terms of para. 26(e) and was not assessable income. The decision of the High Court has no application in these cases because the applicants did not have any right at all to call for the payments which they received. The amounts were paid to the applicants by the trustees in their absolute discretion (cl. 35 of Exhibit E).
91.
Freeman & Ors v. F.C. of T. 83 ATC 4456 parallels this application in some aspects. Ignoring aspects of the case which do not arise here the facts were that the employer company sold its business to an associated company on 1 July 1977. As in these applications the evidence was less than satisfactory and there was a marked reluctance to give evidence by those who might be expected to do so.
92. This caused Northrop and Fisher JJ. some difficulty with the case in relation to the payments made by the superannuation fund which they overcame at p. 4474 as follows:
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``Having carefully considered all the evidence, such as it is, in this regard and bearing in mind that the onus which lies on the taxpayers under sec. 190(b) of the Act is no higher than the ordinary civil onus of balance of probabilities we are prepared to infer that each taxpayer was entitled to the particular sum which he received from the trustees of the directors' fund.''
93. The evidence in these applications does not allow the Tribunal to draw the inference which their Honours drew. The amounts received by the applicants were substantially different to the amounts which the trustees' advisers said were due.
94. The respondent has assessed the applicants on the basis of the amounts determined retrospectively in the light of the advice given to the trustees. That has caused me some concern as to whether the decision in Freeman's case should be applied here; however, the relevant part of the decision in Freeman does not apply for another reason. That reason is that the fund had ceased to be a superannuation fund when the trustees made the payments on 29 June 1984.
95. Furthermore the payments were not occasioned by the termination of employment of the applicants. While it appears that Mr and Mrs Junior did terminate their employment with the company in July 1983, I am satisfied on the balance of probabilities that the payments were made to the applicants in their capacities as shareholders or son and daughter-in-law of shareholders and not in their capacity as employees who had retired from employment. The other former employees who were members of the fund received no such payment. It was not therefore the fact of retirement from employment which determined that the payments be made. Furthermore Mr and Mrs Senior did not retire but continued as directors of the company. I am therefore satisfied that sec. 27A has no operation in these matters.
96. Were the amounts received assessable in terms of para. 26(e)? The answer must be yes. The amounts were allowances given or granted to the applicants directly or indirectly in relation to the services rendered by them to the company. They received the payments because of their membership of the fund and that membership depended upon them being employees of the company. The necessary nexus between the payments and services rendered to the company is established. I have already found that the payments were not eligible termination payments and there is no evidence to suggest that the payments were in respect of annual leave or long service leave. There is no provision of the Act which could deem these payments to be dividends in the hands of Mr and Mrs Senior. The Australian Savings Bonds transferred to Mr and Mrs Senior represent a benefit within the terms of para. 26(e) (
Donaldson v. F.C. of T., 74 ATC 4192).
97. The nature of the payment to each applicant by the trustees i.e. 25% of the net worth of the fund (excluding the life policies) does not disclose any basis for holding that the payment was a payment of a capital nature (cf.
Brumby v. Milner (1976) 3 All E.R. 636).
98. Two of the applicants (Mr and Mrs Senior) have discharged the burden of establishing that their assessments are excessive while Mr and Mrs Junior have been under-assessed in respect of amounts paid to them by the fund.
Additional issues
99. The respondent assessed additional tax to each applicant on the basis that subsec. 226(2) of the Act applied and (he says) exercised his discretion to remit 49% of that additional tax (according to the sec. 37 statement). The amounts assessed in respect of further tax and additional tax reveal that in fact the respondent remitted approximately 75% of the additional tax imposed by the section (the percentages vary between the applicants). There is nothing before the Tribunal to suggest that the respondent acted other than reasonably given the evidence in these proceedings. I can see no basis for interfering with the exercise of discretion except to say that it should be exercised again in a comparable manner in accordance with the recommendations of the Tribunal which follow. No applicant has established that the assessment of additional tax is excessive on a percentage basis.
Proposed recommendations
100. Each of the objection decisions under review will be set aside and each matter remitted to the respondent Commissioner for reconsideration of the objections with the
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recommendation that the assessments of each applicant be amended to reflect the amounts actually paid to the respective applicant by the trustees on 29 June 1984 including the value of the Australian Savings Bonds transferred to two of the applicants and with the further recommendation that additional tax imposed by subsec. 226(2) of the Act be assessed on the same basis as was applied in respect of the objection decisions under review.101. Leave to apply upon giving two days' written notice of such application to the other will be reserved to both parties.
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