QWYN v FC of T

Judges:
D O'Donovan DP

Court:

MEDIA NEUTRAL CITATION: [2025] ARTA 83

Judgment date: 5 February 2025

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Deputy President O'Donovan

1. This decision concerns the tax treatment of fortnightly payments which the applicant has received since his retirement from the Australian Public Service on disability grounds in 2007. He has objected to the tax assessments which he received in the financial years ending June 2008 ( FY08 ) until June 2020 ( FY20 ). The Commissioner has considered those objections and dismissed them. The issue on review is whether the applicant has established that the assessments in question are excessive.^[1] Section 14ZZK Taxation Administration Act 1953 (Cth) ( TA Act ).

2. The central question which has emerged for determination is whether the payments the applicant receives should be classified as a lump sum or as a superannuation income stream benefit (as those terms are defined for the purposes of the Income Tax Assessment Act 1997 ( ITAA 97 )). In the applicant's circumstances, the category into which he falls depends upon whether the definition of 'pension' in the Superannuation Industry Supervision Act 1993 ( SIS Act ) includes payments which satisfy the ordinary meaning of that word, or only covers the specific kinds of payments that are taken to be pensions under the Superannuation Industry Supervision Regulations ( SIS Regulations ).

3. If, as a matter of statutory construction, the definition of 'pension' includes payments which satisfy the ordinary meaning of that word, then a factual question arises as to whether the fortnightly payments that the applicant receives do fall within the ordinary meaning of the term 'pension'.

4. For the reasons which follow, I am satisfied that the applicant's fortnightly payments are a superannuation income stream benefit and that the payments to him answer the description of the term 'pension' as that term is ordinarily understood. The definition of that term in the SIS Act does include a pension in the ordinary sense of the word as well as the payments specified in the SIS Regulations.

Evidence and Submissions

5. The material before me consists of the following:

• (a) T - Documents as filed on 4 December 2023 (T1 to T33, pages 1 to 180); and
• (b) Supplementary T - Documents as filed on 3 November 2022, with the exception of ST14, ST15, ST24 and ST25

6. In making my decision I have had regard to the oral submissions made on behalf of the parties and the following written submissions:

• (a) respondent's statement of facts, issues and contentions dated 3 November 2022
• (b) respondent's outline of submissions dated 6 June 2024
• (c) respondent's supplementary submissions dated 6 December 2024
• (d) applicant's statement of facts, issues and contentions dated 4 March 2024;
• (e) applicant's submissions in reply dated 28 October 2024;
• (f) applicant's amended supplementary submissions in reply dated 31 January 2025;
• (g) applicant's submissions by email to the Tribunal dated 6 September 2024 and attachments;
• (h) applicant's submissions by email to the Tribunal dated 12 September 2024 and attachments;
• (i) applicant's submissions by email to the Tribunal dated 3 October 2024 and attachments;

Facts

7. There is no discernible factual dispute between the parties. Each sought to emphasise certain matters concerning the applicant's pension with a view to establishing that it did or did not meet the ordinary meaning of the term 'pension' - but the transactions which led to the tax liability were not in dispute. The following summary is largely drawn from the respondent's statement of facts, issues and contentions and is uncontroversial.

8. Between 15 January 1980 and 18 May 2007,^[2] T-Documents, T6, pp 61-62. the applicant was employed in the Australian Public Service. At some point during that employment, he became a member of the Public Sector Superannuation Scheme ( PSS Scheme ). The PSS Scheme was established under the Trust Deed referred to in s 4 of the Superannuation Act 1990 ( Superannuation Act ).

9. On 7 May 2007, the applicant at age 44, received an invalidity retirement certificate from the PSS Scheme pursuant to s 13(1) of the Superannuation Act.^[3] Ibid, p 56. The certificate stated that the applicant was retired on the ground that he was unable to perform his duties because of 'any physical and mental condition' and that he was entitled to invalidity benefits under the PSS Scheme.^[4] Ibid.

10. The applicant ceased to be a contributing member and exited from the PSS Scheme on 30 May 2007.^[5] Ibid, pp 47 and 50.

11. On 13 July 2007, he was advised of the benefits that would be paid to him.^[6] Ibid, p 50. In the same letter he was advised that he had a small Superannuation Surcharge Tax Debt and that his superannuation benefit would be paid as follows:

Gross Lump Sum:	$109,264.60
Tax Deducted:	$856.83 (being the surcharge tax debt)
Net Lump Sum Paid:	$108,407.60

12. The letter went on to say:

Your superannuation pension entitlement is $52128.52 per annum. Regular fortnightly payments of $2004.94 will commence on Thursday 19 July 2007. Your first pension payment will include an adjustment amount of $5155.56.

13. The payments commenced on 19 July 2007, and the applicant has been in continuous receipt of fortnightly payments from the PSS throughout the relevant tax period, being the FY08 to FY20.^[7] See payment summaries at Supplementary T-Documents, ST1 to ST13.

14. In each of the relevant years, the trustee and administrator of the PSS Scheme ( CSC ), issued PAYG payment summaries to the applicant. Each PAYG payment summary up to 30 June 2018 has characterised the fortnightly payments to the applicant as a 'superannuation income stream'. From 30 June 2019, the summary described the payments as 'capped defined benefit superannuation income stream'. It is unclear why the description changed because the tax treatment did not. The applicant is concerned about the misdescription of his benefit,^[8] See applicant’s statement of facts, issues and contentions dated 4 March 2024 at [60]. but as far as I am able to discern, the applicant's tax liability was actually calculated on the basis that he was receiving a superannuation income stream benefit at all times.

15. The applicant completed income tax returns for all relevant years. In some cases, these included income and losses from other sources. The applicant was assessed on the basis that his fortnightly payments from the PSS were superannuation income stream benefits.^[9] T-Documents, T2 at [28].

16. The applicant lodged his objection on 27 April 2020.^[10] Ibid, T3, p 29. Initially the objection was to tax assessments for FY07 to FY19. The objection to the assessment in FY07 was subsequently dropped as the applicant did not receive any PSS related payment in that financial year. FY20 was subsequently added when an assessment for that year was issued.^[11] Ibid, T4, p 30.

17. The objection was lodged one month after the Administrative Appeals Tribunal handed down its decision in the matter of Burns and Commissioner of Taxation
[2020] AATA 671. The applicant framed the objection in the following terms:^[12] Ibid, T3, p 29.

The [Tribunal]^[13] In his objection the applicant refers to ‘the Court’, which based on context is actually a reference to the Tribunal. rightly found that CSC Invalidity pensions should have been treated as 'disability superannuation benefits', not ordinary retirement income, which by virtue of that fact, should have attracted less tax being levied.

As such, I [the applicant] here-by retrospectively and from this day forth, object to my CSC pension (i.e. PSS Superannuation Invalidity Benefit) being taxed and treated as ordinary income for taxation purposes, by virtue of the fact that the benefit's sole purpose was/is to provide a superannuation invalidity benefit for permanent incapacity, as duly certified by two Doctors/Specialists, in accordance with s 307-145 of the Income Tax Assessment Act of 1997; a matter rightly clarified and affirmed under the ruling of Burns v Commissioner of Taxation

18. Section 307-145 of ITAA 97, at the time of the applicant's objection was lodged, provided (and still does provide), for the favourable modification of the tax liability arising on superannuation benefits by providing for a tax-free component.

19. Section 307-145(1) provides the threshold for access to the concessional treatment:

Work out the tax free component of the superannuation benefit under subsection (2) if the benefit is a superannuation lump sum and a disability superannuation benefit. [emphasis added]

20. One aspect of this provision to note is that to pass the threshold, a benefit must be both a superannuation lump sum and a disability superannuation benefit.

21. The applicant elaborated on the basis of his objection in a letter to the respondent dated 22 June 2021.^[14] T-Documents, T6, pp 39-45. By that stage, the Full Federal Court had heard and determined a number of appeals from Tribunal decisions relating to the tax treatment of fortnightly disability payments under military compensation schemes. In one decision,
Commissioner of Taxation v Douglas [2020] FCAFC 220 ( Douglas ), the Full Court addressed the question of when a fortnightly payment would constitute a superannuation lump sum.

22. In his June letter, the applicant engaged with certain provisions of the SIS Regulations and explained why his fortnightly payments did not meet the technical requirements for a pension as set out in those regulations. However, what the applicant did not engage fully with, and which remains the critical issue in the determination of the tax treatment of his payments, is whether:

• (a) his fortnightly payments constitute a 'pension' within the ordinary meaning of that term; and
• (b) if they do, whether that is sufficient for them to meet the definition of a 'superannuation income stream benefit'^[15] As defined in s 307-70 of the ITAA97 and reg 995-1.01 of the former Income Tax Assessment Regulations 1997. (and therefore not a 'superannuation lump sum'^[16] As defined in s 307-65 of the ITAA 97. ).

23. The objection was disallowed on 18 October 2021.^[17] T-Documents, T2, pp 25-28.

24. On 16 December 2021, the applicant applied to the Administrative Appeals Tribunal for review.^[18] Ibid, T1, pp 4-24

Summary of the legal issue

25. As noted above, the applicant contends that he is entitled to concessional tax treatment under section 307-145.^[19] Applicant’s statement of facts issues and contentions dated 4 March 2024 p 36, paragraph g.

26. The respondent's contention is that the applicant's fortnightly payments did not constitute a 'superannuation lump sum' and therefore they do not pass the threshold for access to concessional treatment. The applicant spent considerable effort establishing that his payments were a disability superannuation benefit. That seems likely to be the case. However, establishing that proposition will not alter the tax treatment of the payment unless it is also established that the benefit paid is a superannuation lump sum. That is the question on which these reasons focus.

27. Section 307-65(1) provides that:

A superannuation lump sum is a superannuation benefit that is not a superannuation income stream benefit.

28. In other words, any 'superannuation benefit' that falls outside the definition of a 'superannuation income stream benefit' is a 'superannuation lump sum'. Because the definition is structured this way, it is necessary to explore the outer limits of what is covered by the term 'superannuation income stream benefit', in order to determine if a payment is a lump sum.^[20] It is not in dispute that the payments are ‘superannuation benefits’, see respondent’s statement of facts, issues and contentions at footnote 14.

29. Subsection 307-70(1) defines a 'superannuation income stream benefit' as follows:

…a superannuation benefit specified in the regulations that is paid from a superannuation income stream.

30. The applicant does not suggest that his superannuation benefit has not been specified,^[21] In Douglas , the Full Federal Court found that the inclusion of this definition in the regulations meant that MSB Benefits (which were payments from an interest that supports a superannuation income stream) were ‘specified in the regulations’ for the purposes of subsection 307-70(1). To the extent that there was any doubt about this, sub-regulation 307-70.01(1) of the former ITAR 97 specified it with retrospective effect, from 1 July 2007. which leaves only the question whether his benefit is paid from a 'superannuation income stream'.

31. Sub-regulation 995-1.01(1) of the former Income Tax Assessment Regulations 1997 ( former ITAR 97 ) gave a number of definitions of the term 'superannuation income stream'. The relevant regulation provided:

Superannuation income stream means:

• (a) An income stream that is taken to be:
  • i. an annuity for the purposes of the SIS Act in accordance with subregulation 1.05(1) of the SIS Regulations; or
  • ii. a pension for the purposes of the SIS Act in accordance with subregulation 1.06(1) of the SIS Regulations; or
• (b) an income stream that:
  • i. is an annuity or pension within the meaning of the SIS Act; and
  • ii. commenced before 20 September 2007.

32. The applicant argues persuasively that the benefit which he receives does not fall within the terms of paragraph (a).^[22] The respondent concedes this. See respondent’s statement of facts, issues and contentions at [32]. What remains controversial is whether the benefit he receives falls within paragraph (b). As there is no dispute that payment of his benefit commenced before 20 September 2007, the only dispute is whether the income stream is a 'pension' within the meaning of the SIS Act.

33. Subsection 10(1) of the SIS Act provided, at the relevant times, as follows:

pension , except in the expression old-age pension, includes a benefit provided by a fund, if the benefit is taken, under the regulations, to be a pension for the purposes of this Act.

34. The respondent contends that it was accepted in Douglas,^[23] Respondent’s statement of facts, issues and contentions at [27]-[39]; Douglas at [154]-[156] and by the Administrative Appeals Tribunal in decisions to which the Douglas appeal relates,^[24] Re Burns and Federal Commissioner of Taxation [2020] AATA 671 at [54] to [57] ; Douglas and Federal Commissioner of Taxation [2020] AATA 494 at [63] . that the definition of pension is an inclusive one in the sense that it includes:

• (a) everything that would ordinarily be regarded as a pension; and
• (b) also includes certain payment types which might not otherwise be regarded as pensions were it not for the specific identification of those payments as pensions in the SIS Regulations.

35. The applicant argues that these propositions should not be accepted. He contends that, properly understood, the definition of 'pension' includes only benefits which are taken under the SIS Regulations to be pensions. Payments which meet the ordinary meaning of the term pension are not 'pensions' within the meaning of that word in the SIS Act.^[25] Applicant’s statement of facts, issues and contentions at [50], [78].

36. Further, even if the term 'pension' is broad enough to include pensions in the ordinary sense of that word, the payment which the applicant receives does not fall within the ordinary meaning of the term pension.^[26] Applicant’s statement of facts, issues and contentions at [79]-[80].

37. In order to resolve the argument, three questions must be addressed. First, did Douglas determine conclusively that the definition of pension is inclusive such that I am bound to proceed on the basis that the definition of pension includes everything that would be ordinarily regarded as a pension.

38. Second, if I am not bound to proceed on that basis, applying ordinary principles of statutory construction, is it correct to approach the statutory definition of 'pension' as including payments which meet the ordinary meaning of that word.

39. Finally, do the payments that the applicant receives fall within the ordinary meaning of the word pension.

40. I will address each question in turn.

Is Douglas binding?

41. It is clear on the face of the Douglas decision that it does not resolve, in a manner binding on me, the question of whether the word 'pension' as used in the SIS Act, includes pensions in the ordinary sense of that word, as well as the payments taken under the regulations to be a pension for the purposes of the Act. As the Court noted at [154]:

The parties agreed, as the Tribunal concluded at DJ[63], that the definition of "pension" in s 10 of the SIS Act was "of an inclusive type, leaving scope for the ordinary meaning of that word". The parties agreed, correctly, that the arrears payment was a pension within the ordinary meaning of the word…

42. From this passage, it is clear that the Court expressed no view on the question of whether the defined term 'pension' in the SIS Act included a pension in the ordinary sense of the word. It was unnecessary for them to do so in light of the parties' agreement. The Court did however express the view that, proceeding on that legal premise, the parties were correct to agree that the arrears payments the subject of consideration in the case, were a pension within the ordinary meaning of the word.

43. Consequently, it is necessary for me to determine whether the definition of 'pension' in the SIS Act is defined in an inclusive way which leaves scope for the ordinary meaning of the word as Justice Logan (sitting as a Deputy President of the AAT) found in
Douglas and Federal Commissioner of Taxation [2020] AATA 494).

Is the definition of pension inclusive?

44. I am satisfied based on the text of the definition of 'pension' and the context in which it appears in the SIS Act, that the definition is an inclusive one.

45. The textual aspect of the analysis is straightforward. The words of the provision convey that meaning:^[27] SIS Act, s 10(1).

pension , … includes a benefit provided by a fund, if the benefit is taken, under the regulations, to be a pension for the purposes of this Act.

46. The use of the word 'includes' means that the words which follow expand the definition of pension rather than codify or narrow it. It appears obvious from the words that what the Parliament did by inclusion of the definition was to take the word pension as the term is ordinarily understood and expand it to include certain benefits which the Act specified would be taken to be pensions for the purposes of the Act. There is no suggestion in the phrasing, that only the benefits taken to be a pension under the Act were to be regarded as pensions.

47. As far as the statutory purpose is concerned, each party gave me a theory as to what the Parliament was seeking to do by defining pension in the way that it did. On the one hand, the applicant contended that the purpose of the definition was to constrict the ordinary meaning of the pension so as to prevent concessional tax treatment from being available too broadly.^[28] Applicant’s statement of facts, issues and contentions at [25]-[28]

48. The respondent on the other hand, submitted orally that the Parliament was trying to define products as pensions which would not ordinarily be classed as such so as to make concessional treatment available to them.

49. It was difficult to discern either purpose from the structure of the relevant amending act and associated Parliamentary materials. Consequently, these claims could not be resolved in a way which would assist my analysis.

50. The text however is clear. For the purposes of the SIS Act a pension includes both a pension in the ordinary sense as well as the benefits specified in that Act to be pensions. If a payment meets either test, then it is a pension for the purposes of the SIS Act and satisfies one of the two critical elements of the paragraph (1)(b) definition of a superannuation income stream.

Is the benefit the applicant receives a pension as that term is ordinarily understood?

51. I am satisfied that the benefit that the applicant receives is a pension as that term is ordinarily understood.

52. The Macquarie Dictionary defines the word 'pension' as follows:

• 1 A fixed periodical payment made in consideration of past services, injury or loss sustained, merit, poverty, etc.
• 2 An allowance or annuity.
• 3 A regular income paid out of a superannuation fund.

53. The first of these definitions appears to be appropriate to the current circumstances, although I doubt the result would be different if any of them were used.

54. In the present case, the payment the applicant receives is a largely fixed (subject to minor adjustments) periodical payment in consideration of the injury or loss which he sustained. The sum is paid, not in exchange for work, but to make proper provision for the applicant as a result of the disability from which he suffers.

55. This conclusion is consistent with the approach adopted by Justice Logan in his AAT decision in the Douglas matter.

Conclusion

56. In these circumstances, the payments which the applicant receives meets the statutory definition of a 'superannuation income stream'. The payments commenced before 20 September 2007 and meet the definition of a 'pension' within the meaning of the SIS Act.

57. Once it is established that the payment is a superannuation income stream it cannot be a superannuation lump sum.^[29] See former ITAR 97 reg. 307-65(1) Once it is established that the payment is not a superannuation lump sum, the concessional tax treatment provided for in section 307-145 is not available. It does not matter that the applicant's benefit is a disability superannuation benefit. In those circumstances, the objections must be rejected and the decisions under review affirmed.

Calculation of 15% Offset for disability benefits

58. Towards the end of the hearing, the applicant also raised an issue concerning the calculation of his tax liability. He advanced the proposition that if the payments he receives are 'superannuation income stream benefits', s 301-40 of the ITAA 1997 has been applied incorrectly. In the relevant years, his assessments have been made on the basis that a 15% tax offset to which he is entitled is only applied to the taxed element of his superannuation benefit.^[30] Supplementary T-Documents, ST1 to ST13 pp 181 to 193. The applicant contends the tax offset should have also been applied to the untaxed element of the benefit.^[31] Applicant’s amended submissions in reply dated 31 January 2024 at [18]. If it were applied to the untaxed element of his superannuation benefit, the value of the offset would be more than 100 times larger.

59. The law on this point is clear. The tax treatment of the tax-free component of a benefit and the 'taxed in the fund' element are dealt with under Subdivision 301-B, but the 'untaxed in the fund' element is dealt with by Subdivision 301-C.^[32] See s 301-90 of the ITAA 1997

60. Subdivision 301 - B, at section 301-40 provides that if a benefit is a superannuation income stream benefit and a disability superannuation benefit, a taxpayer is entitled to a tax offset equal to 15% of the taxable component of the benefit.

61. However, because that provision is located in subdivision 301-B, it only applies to the taxed element of the taxable component.

62. The tax treatment of the untaxed element is dealt with under subdivision 301-C and it provides that for recipients aged under 60 years, the untaxed element is treated as assessable income.^[33] Sections 301-110 and 301-120.

63. Against the clear words of the statute, the applicant proffered the following in his submissions:^[34] Applicant’s amended submissions in reply dated 31 January 2024 at [12].

The Applicant engaged the Copilot [Microsoft's Artificial Intelligence product] in a range of probing questions pertaining to superannuation and taxation matters, upon which in part, it returned the following responses:

The Explanatory Memorandum to the Taxation Laws Amendment (Superannuation) Bill 1992, which introduced the new regime taxing superannuation benefits, states in paragraph 2.20 that "the Bill will provide a tax rebate of 15 per cent for disability superannuation pensions. This will apply to all disability pensions, irrespective of whether they are paid from a taxed or an untaxed source. The rebate recognises that disability pensions are paid as compensation for the loss of earning capacity and are not merely a form of retirement income.

64. I have examined the Explanatory Memorandum to the Taxation Laws Amendment (Superannuation) Bill 1992. I was unable to locate any paragraph in that document in the same or similar terms to the paragraph generated by Copilot. It did not contain a paragraph 2.20.

65. It has been noted by others that AI bots are prone to hallucinations.^[35] Stanford University, AI on Trial: Legal Models Hallucinate in 1 out of 6 (or More) Benchmarking Queries (Webpage, 23 May 2024) <https://hai.stanford.edu/news/ai-trial-legal-models-hallucinate-1-out-6-or-more-benchmarking-queries> That appears to be what has happened here. It is my assessment that submitting unverified material generated by AI, is not consistent with a party's duty to use their best endeavours to assist the Tribunal to achieve its statutory objectives. To expect the Tribunal to read and consider material which a party does not know is authentic impedes the Tribunal's attempts to provide a mechanism of review that ensures that applications are resolved as quickly and with as little expense as a proper consideration of the issues permits.

66. Nothing in the remainder of the applicant's submissions altered my view that the untaxed element of the benefit should be taxed under Subdivision 301-B.

Decision

67. The decision under review is affirmed.