ADMINISTRATIVE APPEALS TRIBUNAL - TAXATION APPEALS DIVISION

AAT CASE 12,596

Re POOLEY and FEDERAL COMMISSIONER OF TAXATION

S A Forgie, Deputy President

3 February 1998 - Brisbane

S A Forgie, Deputy President On 30 May 1997, the applicant, Mr Henry Thomas Pooley, applied for review of an objection decision made by a delegate of the respondent, the Federal Commissioner of Taxation (the Commissioner). That objection decision, which was dated 4 April 1997, was to disallow Mr Pooley's objection dated 21 January 1997 against the Commissioner's notice of assessment issued on 17 December 1996 in respect of the financial year ending 30 June 1996.

2 At the hearing, Mr Pooley represented himself with the assistance of his daughter, Andrea Dawson. The Commissioner was represented by Ms McPhee. The documents lodged pursuant to s 37 of the Administrative Appeals Tribunal Act 1975 (Cth) (T documents) in respect of each application were before the tribunal. Admitted in evidence were letters from National Mutual Life Association of Australasia Ltd (National Mutual) to Mr Pooley dated 13 November 1995 (Ex A), 3 May 1996 (Ex B) and 12 April 1997 (Ex C), each in relation to his superannuation withdrawal. Also admitted was a letter from the Deputy Commissioner to Mr Pooley dated 24 July 1997 (Ex D).

The issue

3 The issue in this case is whether an eligible termination payment (ETP) received by Mr Pooley has been correctly taken into account in the Commissioner's notice of assessment issued for the financial year ending 30 June 1996.

Background

4 Mr Pooley, who is over the age of 55 years, receives a pension under the Social Security Act 1991 (Cth). It was agreed between the parties, and I find, that during the financial year ending 30 June 1996, Mr Pooley withdrew an amount of $22,985 from National Mutual. That amount was an ETP within the meaning of s 27A(1) of the Income Tax Assessment Act 1936 (Cth) (the Act). National Mutual completed a statement to the effect that the sum of $10,282.29 was the post-June 1983 component, the sum of $5611.07 was the pre-July 1983 component and the amount of $7091.64 comprised undeducted contributions: T doc, p 14-15.

5 Mr Pooley disclosed the payment of $10,562 as his ETP in his taxation return for the year ending 30 June 1996. This was made up of the sum of $10,282.29 as the taxed component of his post-June 1983 taxed element and a sum of $280.55 which represents 5% of his pre-July 1983 component. Under the heading of "notional taxable income of spouse" in relation to Australian Government pensions, Mr Pooley showed his wife's taxable income to be $7128: T doc, p 7.

6 The Commissioner assessed Mr Pooley's taxable income to include the ETP. Taking into account Mr Pooley's service pension paid under the Veterans' Entitlements Act 1986 (Cth), his superannuation payments from ComSuper, his interest payments and his ETP, the Commissioner found his taxable income to amount to $23,215. The Commissioner assessed tax on Mr Pooley's taxable income at $3915.10 but allowed $2457.90 in rebates. The total tax remaining payable by Mr Pooley was assessed to be $1457.20: T doc, p 16.

7 Mr Pooley lodged an objection to the assessment on the basis that the ETP should not have been included in the taxable income as such payments are tax free. In support of his objection, Mr Pooley said that he had been told by an officer of the Australian Taxation Office (ATO) that he would have to include the taxed elements of the post-June 1983 component of his ETP in his income but that he would not pay tax on that component. The pre-July 1983 component would be taxed at the rate of 5%. The officer went on to say, Mr Pooley continued, that he would have little tax to pay because of such matters as spouse rebate.

8 At the hearing, Mr Pooley said that he could not understand how an ETP could be said to be tax free if it is be included in his assessable income. It cannot be considered to be tax free if its effect was ultimately to reduce or effectively to extinguish the pensioner or spouse rebate available to a taxpayer. In saying this, Mr Pooley recognised that he had been given rebate of the tax otherwise payable on the ETP itself.

9 Mr Pooley also drew attention to the fact that he had made all of the contributions to the National Mutual fund and that no employer contributions had been made on his behalf.

Consideration

10 The amount of tax payable by a person must be assessed in accordance with the Act. In general terms, the amount of tax which a person must pay is calculated by multiplying his or her taxable income by the rate of tax payable on that taxable income and then deducting any rebates. If the figure reached by this calculation is above zero, the person must pay that amount as tax. The sum of all available rebates cannot exceed the amount otherwise payable as tax: s 160AD.

11 In so far as it is relevant in this case, a person's taxable income is the amount remaining after deducting from his or her assessable income all allowable deductions: s 6(1). His or her assessable income "… means all the amounts which under the provisions of this Act are included in the assessable income": s 6(1). An allowable deduction is a deduction allowable under the Act: s 6(1).

12 The first step, then, is to work out Mr Pooley's assessable income. I note that the Act contains many provisions stipulating that particular payments or gains are to be included in a taxpayer's assessable income. The range of payments or gains is wide and varied. Among those particular provisions is s 27B(1) which provides that:

If an ETP (other than a death benefit ETP) is made in relation to a taxpayer in a year of income, the taxpayer's assessable income of the year of income includes:
(a) the taxed element of the retained amount of the post-June 1983 component; and

(b) the untaxed element of the retained amount of the post-June 1983 component.

Also of relevance is s 27C which provides, in so far as it is relevant in this case, that:

Subject to subsection (1A), if an ETP is made in relation to a taxpayer in a year of income, the taxpayer's assessable income of the year of income includes 5% of the retained amount of the pre-July 83 component.

13 An ETP is an eligible termination payment: s 27A(1). An "eligible termination payment" is defined in s 27A(1). I have already found, and the parties have agreed, that the payment at the heart of this case is an ETP. For the purposes of the definition of an ETP, no distinction is made between funds to which contributions are made wholly by the member and those to which contributions may be made by the member's employer.

14 As the payment of $10,282 is the taxed element of the post-June 1993 component, the effect of s 27B(1) is that the amount must be included in Mr Pooley's assessable income. As the payment of $5611.07 is a pre-July 1983 component, 5% of it must be included in Mr Pooley's assessable income ie $280.55. Taking into account the other amounts shown in his return and in relation to which there was no dispute between the parties, it follows that the assessable income for Mr Pooley was $23,215.

15 Having determined the assessable income, the next step is to determine Mr Pooley's taxable income. As he did not claim any deductions, his taxable income is the same as his assessable income ie $23,215.

16 Having determined the amount of taxable income, the next step is to determine the tax payable on that income. Having regard to what I have said above, that is done by looking first to the rate of tax payable on his taxable income. The rate is found in the Income Tax Rates Act 1986 (Cth) (the Rates Act) and more particularly in Sch 7 of that Act. As his ETP did not include an excessive component, the effect of Sch 7 is that the rate of tax on his taxable income exceeding $5400 and up to $20,700 is 20% and that exceeding $20,700 at the rate of 34%. Applying those rates to his taxable income, the tax on Mr Pooley's taxable income is 20% of $15,300 (ie $3060 on $20,700 less $5400) and 34% of $2515 (ie $855 on the amount of taxable income exceeding $20,700). The total amount of tax on Mr Pooley's taxable income becomes $3915.10.

17 The next step to consider is whether there are any rebates of the amount of tax payable. The first rebate that is applicable in this case is that relating to the ETP. Section 159SA(1) provides that:

If the assessable income of the taxpayer of the current year of income includes any eligible assessable income, the taxpayer is entitled to a rebate of tax in the taxpayer's assessment of such amount (if any) as will ensure that the rate of tax on a rebatable amount specified in Table 1 will not be more that the corresponding rate of tax specified in that table.

18 "Eligible assessable income" is defined in s 159S and it includes an amount included in the taxpayer's assessable income under s 27B(1). That subsection provides, in part, that the "… taxed element of the retained amount of the post-June 1983 component" are included in the taxpayer's assessable income: s 27B(1)(a). There was no disagreement between the parties that Mr Pooley has eligible assessable income in the form of his taxed element post-June 1983 components.

19 The entitlement to a rebate is set out in s 159SA. It provides, in so far as it is relevant, that:

If the assessable income of the taxpayer of the current year of income includes any eligible assessable income, the taxpayer is entitled to a rebate of tax in the taxpayer's assessment of such amount (if any) as will ensure that the rate of tax on a rebatable amount specified in Table 1 will not be more than the corresponding rate of tax specified in that table.

…

20 There then followed a table in which Item 2 describes a class of eligible assessable income as the "current year's total of taxpayer's s 27B(1)(a) amounts for age 55 ETPs". The corresponding rebatable amount was the low rate part and the rate of tax was shown to be 0%. An "age 55 ETP" "… in relation to a taxpayer, means an ETP made in relation to a taxpayer on or after the taxpayer's 55 birthday": s 159S.

21 As Mr Pooley is an "age 55 ETP" and the sums in question are s 27B(1)(a) amounts, the rate of tax payable on his ETP is nil. On one view of the Act, it might be said that the ETP falls within, or at least partly within, the threshold amount of $5400 on which no tax is payable. If that were so, no tax has been payable on that amount. That interpretation would not, however, "ensure" that the rate of tax on the payment itself will be nil.

22 One way to ensure that the rate on the ETP will be nil is to calculate the amount of tax payable on it using the rate used to calculate the tax payable on the taxable income. That rate was 34% of the amount of his income exceeding $20,700 and 20% of the amount below that but exceeding $5400. As the amount of $855.10 was assessed in relation to the sum of $2515 by which Mr Pooley's taxable income of $23,215 exceeded $20,700, that must be allowed as part of the rebate. Deducting the sum of $2515 from the post-June 1983 ETP of $10,282 leaves the amount of $7767 to be assessed at the rate of 20%. That amounts to $1553.40. The total of the rebate is the sum of $1553.40 and $855.10 ie $2408.50. That sum was correctly included in the total amount of rebate allowed Mr Pooley in the notice of assessment. That total amount also included a low income rebate of $49.40.

23 As Mr Pooley receives a pension of a type which must be included in his assessable income, regard must also be had to any rebate of tax which may apply. Section 160AAA(2) provides that:

Subject to subsection (4), where the assessable income of a taxpayer of a year of income includes an amount of rebatable pension, the taxpayer is entitled in the taxpayer's assessment in respect of income of the year of income to a rebate of tax of an amount (if any) ascertained in accordance with the regulations.

There is no doubt that Mr Pooley has a rebatable pension as that expression is defined in s 160AAA(1) .

24 Regulation 151 of Div 2 of Pt 8 of the Income Tax Regulations (the Regulations) sets out the rebate in respect of certain pensions. If a taxpayer's taxable income does not exceed his or her rebate threshold, he or she is entitled to a rebate of the taxpayer's rebate amount. If his or her taxable income exceeds his or her rebate threshold, his or her rebate amount is reduced by 12.5 cents for each dollar of the amount of the excess: reg 151(1).

25 The taxpayer's rebate threshold is calculated by using the formula "Tax-free threshold + (Taxpayer's rebate amount ÷ Lowest marginal tax rate)": reg 151(2). The "tax-free threshold" means ( reg 148), in relation to a year of income, the:

… amount of income mentioned in the table in Part 1of Schedule 7 to the Income Tax Rates Act 1986 as that table would apply to the year of income of a person if the effect of Decision 5 of that Act were disregarded in relation to the person.

26 When regard is had to Part 1 of Schedule 7 of the Regulations, it is seen that the rates of tax on a person's taxable income are assessed by reference to the EC part of the taxable income and the taxpayer's ordinary taxable income. The EC part of his or her taxable income is "… so much of the taxable income as does not exceed the excessive component included in assessable income under subs 27B(3)": s 3(1). The "ordinary taxable income" means the "… taxable income, reduced by the EC part of the taxable income": s 3(1). Mr Pooley had no excessive component included in his assessable income under s 27B(3). In calculating the tax-free threshold, there is no scope for taking into account any form of ETP of the type received by him.

27 The "lowest marginal rate" referred to in the formula is the lowest rate specified in the Table in Pt 1of 7 to the Income Tax Rates Act 1986 in the application of the Table to that year of income: reg 148. Again, there is no scope for taking Mr Pooley's ETP into account in assessing that rate.

28 The "taxpayer's rebate amount" is calculated by using the formula (reg 151(3) ):

Lowest		(Annual		Non-pension		Tax free)
marginal	×	(pension	+	income	-	threshold)
tax rate		(amount		limit		)

29 The terms "lowest marginal tax rate" and "tax-free threshold" I have already set out. The "annual pension amount" in the case of Mr Pooley is (s 151(4)(a)(ii) ):

…the amount that would have been included in his or her assessable income of the year of income if he or she had received a partnered-rate social security pension throughout that year.

30 The "non-pension income limit" is a reference in the case of Mr Pooley to (s 151(4)(e)(ii) ):

… the amount, indexed in accordance with Division 2of Part 3.16 of SSA91, applicable under item 4 of column 2 in Table E-1 at point 1064 of SSA91.

31 The reference to "SSA91" is a reference to the Social Security Act 1991: reg 148. Item 4 of column 2 in Table E-1 at point 1064-E4 of the Social Security Act 1991 specifies a figure which is indexed annually in line with CPI increases. The amount of the taxpayer's assessable income, taxable income or receipt of an ETP is irrelevant in fixing this amount.

32 It follows that there is no room in the calculation of a pensioner rebate to have regard to an ETP of the type received by Mr Pooley. On that basis, I find that the Commissioner correctly found that his taxable income was such that it excluded him from eligibility for a pensioner rebate.

33 Mr Pooley feels that his ETP has, in effect, been taxed. Although he has been required to pay tax, the reality is that his ETP has been free of tax for a full rebate has been given for the tax assessed in relation to it. The reason why he has paid tax is that his ETP is income which has meant that he is not entitled to a pensioner rebate. The pensioner rebate is determined, in part, by reference to non-pension income and an ETP is non-pension income. In providing that a rebate of tax will be given on an ETP so as to ensure that the rate of tax on a rebatable amount specified in Table 1 of s 159SA(1) of the Act will be not more than the corresponding rate of tax specified in that table, the Act is not providing that the receipt of an ETP will have no consequences upon the assessment of a taxpayer's tax liability. It is simply limiting the rate of tax on the ETP itself and nothing more.

34 For the reasons I have given, I affirm the objection decision of the respondent dated 4 April 1997.