Case K52

Judges:
AM Donovan Ch
LC Voumard M

Court:
No. 2 Board of Review

Judgment date: 13 September 1978.

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A.M. Donovan (Chairman) and L.C. Voumard (Member): The issue in this reference is the deductibility under sec. 51 of the Act, more particularly under the first limb of that section, of an amount of $486 contributed by the taxpayer during the year ended 30th June, 1976, pursuant to the Superannuation Act 1922.

2. The facts were presented to the Board by way of an agreed statement, and are as under: -

``1. During the period 1st July, 1975 to 21st May, 1976, the taxpayer was employed in a permanent capacity by the Australian Government.

2. The taxpayer was appointed on 27th May, 1974, as an... in the Department of...

3. Upon his appointment as an... the taxpayer, as a condition of his employment, commenced making contributions to the Provident Account, which forms part of the Superannuation Fund established under the Superannuation Act 1922-1973.

4. These contributions were deducted from the taxpayer's fortnightly salary and were at the rate of 10c for each $2 or part of $2 of each fortnightly payment of his salary.

5. The contributions made by the taxpayer during the year of income amounted to $486.60.

6. As a contributor to the Provident Account the taxpayer, on retirement, would have been entitled to a sum equal to three times the aggregate of -

• a. the contributions paid by him to the Provident Account; and
• b. compound interest on those contributions at the prescribed rate.

7. The taxpayer resigned from employment with the Australian Government on 21st May, 1976.

8. On resigning from the Australian Government on 21st May, 1976, the taxpayer was entitled to a lump sum consisting of the contributions paid by him to the Provident Account together with compound interest thereon at the prescribed rate.

9. A lump sum of $1,364 (the entitlement referred to in 8) was received subsequent to 30th June, 1976.''

3. The Superannuation Act 1922 established a contributory scheme of benefits for eligible employees upon cessation of their service with the Commonwealth. The benefits under the Superannuation Fund itself took the form of pensions. For reasons which are here of no significance, some eligible employees contributed to what was described as the Provident Account. The benefits to which these contributors were entitled were not pensions but were lump sum payments, and it is necessary to refer briefly to some of them. Upon retirement because of age or ill health, the contributor was entitled to receive a lump sum equal to three times the amount of the contributions

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ATC 512

he had made, together with interest. An amount calculated in the same manner was payable to the spouse or, failing a spouse, eligible child or children of a contributor who died in service. If there were no spouse or child of a deceased contributor, an amount equivalent to the contributions made, plus interest, was payable to his estate. An amount similarly calculated was payable to a contributor on his resignation from the Commonwealth Service or was payable to him on his transfer from the Provident Account to the Superannuation Fund if his service continued.

4. The taxpayer, who presented his own case to the Board, displayed a considerable familiarity with the relevant authorities. He argued that the decision in
Hannan v. F.C. of T. (1923) S.A.S.R. 434, was distinguishable and, in effect, submitted that the contributions made by him to the Provident Account were obligatory upon him by reason of occupying the position from which his salary arose and were thus incurred in deriving that income within the meaning of sec. 51 of the Act. Impliedly, he recognised that the payments did not arise in the course of performing the duties of his office, but contended that this fact was not detrimental to his case and pointed to the decisions in
F.C. of T. v. Hatchett 71 ATC 4184; (1971) 125 C.L.R. 494,
F.C. of T. v. Finn (1961) 106 C.L.R. 60,
F.C. of T. v. White 75 ATC 4018 and
F.C. of T. v. Smith 78 ATC 4157, as instances where, he said, expenses not strictly incurred in the performance of the duties for which the taxpayer was paid were nevertheless held to be deductible.

5. We trust that it will not be taken amiss if we do not review the authorities to which we were referred, but in our view the answer to the question raised is quite clear. It is unnecessary to go beyond the review of the authorities on sec. 51 and the explanation of its meaning which were given in the joint judgment of Williams, Kitto and Taylor JJ. in
Hayley and Lunney v. F.C. of T. 11 A.T.D. 404. Referring to the view earlier expressed by the Court that the first limb of sec. 51 was satisfied if the outgoing under consideration was ``incidental and relevant'' to the production of assessable income, the joint judgment continued at p. 412 in the following terms:

``Examination of these cases, however, readily shows that the expression `incidental and relevant' was not used in an attempt to formulate an exclusive and exhaustive test for ascertaining the extent of the operation of the section; the words were merely used in stating an attribute without which an item of expenditure cannot be regarded as deductible under the section. That this is so appears from some of the brief passages already quoted and is made quite clear by consideration of the reasons in the cases referred to. In
Ronpibon Tin N.L. and Tongkah Compound N.L. v. F.C. of T. (1949) 78 C.L.R. 47, at pp. 56, 59; 8 A.T.D. 431 at pp. 435-436, the passage quoted above was immediately followed by the observation `The words `incurred in gaining or producing the assessable income' mean in the course of gaining or producing such income'. Thereafter, it was said: `In brief substance, to come within the initial part of the subsection it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income or, if none be produced, would be expected to produce assessable income'. In the context in which they have been used the expressions relied upon by the appellants have been intended as a reference, not necessarily to the purpose for which an item of expenditure has been incurred, but, rather, to the essential character of the expenditure itself.''

And at p. 412-3 it continued:

``The question whether the fares which were paid by the appellants are deductible under sec. 51 should not and, indeed, cannot be solved simply by a process of reasoning which asserts that because expenditure on fares from a taxpayer's residence to his place of employment or place of business is necessary if assessable income is to be derived, such expenditure must be regarded as `incidental and relevant' to the derivation of such income. No doubt both of the propositions involved in this contention may, in a limited sense, be conceded but it by no means follows that, in the words of the section, such expenditure is `incurred in gaining or producing the assessable income' or `necessarily incurred in

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ATC 513

carrying on a business for the purpose of gaining or producing such income'. It is, of course, beyond question that unless an employee attends at his place of employment he will not derive assessable income and, in one sense, he makes the journey to his place of employment in order that he may earn his income. But to say that expenditure on fares is a prerequisite to the earning of a taxpayer's income is not to say that such expenditure is incurred in or in the course of gaining or producing his income. Whether or not it should be so characterised depends upon considerations which are concerned more with the essential character of the expenditure itself than with the fact that unless it is incurred an employee or a person pursuing a professional practice will not even begin to engage in those activities from which their respective incomes are derived.''

6. A consideration of the nature of the taxpayer's contributions to the Provident Account leads inevitably to the conclusion that they bore the character of outgoings directed to the provision of the benefits mentioned in the Superannuation Act. They were not outgoings related to the performance of the taxpayer's duties of office or related in any relevant sense to the derivation of his income from salary. It may be accepted that payment of the contributions was a condition of his appointment to that office and to his continued occupation of it, so that if he declined to contribute to the Provident Account he would have derived no income from salary. But, as was explained in the latter of the two passages above, that circumstance does not determine the matter. The character of the contributions and their failure in any relevant sense to be connected with the derivation of the taxpayer's income from salary preclude them from deductibility under sec. 51.

7. The taxpayer made an alternative submission. It was based on the receipt by him during the year ended 30th June, 1977, of the lump sum payment of $1,364. Although the agreed statement of facts did not go so far, it may be taken that an amount equivalent to 5% of this sum, that is to say, $69, was included in his assessable income of the year ended 30th June, 1977, in accordance with the requirements of sec. 26(d) of the Act. The taxpayer submitted that the contributions of $486 to the Provident Account during the year ended 30th June, 1976, were incurred in gaining or producing this assessable income of $69 and were therefore deductible. He correctly pointed out that it was not fatal to his claim that the income arose in a year subsequent to that in which the outgoing occurred. The submission itself, however, is quite untenable and may be shortly dealt with. The contributions secured the entirety of the rights conferred by the Superannuation Act upon such contributors. The more important of them have already been described, and in each instance consisted of a lump sum payment to the taxpayer himself, his dependants or to his estate, and which would be the recipient of the benefit would depend upon the happening of subsequent events. At the time the contributions in question were made, they therefore could not be regarded as having been incurred in the production of the lump sum payment which in the events that happened the taxpayer himself actually received and part of which was assessable. It is quite unnecessary to go on and consider the further question which would otherwise arise, that is whether, if the contributions were in fact related to the derivation by the taxpayer of the lump sum of a capital nature, they would nevertheless be deductible because a small proportion of that lump sum fell to be treated as assessable income in consequence of the provisions of sec. 26(d) of the Act.

8. For these reasons, the amount of $486 representing the contributions in question is not deductible under sec. 51 of the Act. The Commissioner's decision on the objection is upheld and the assessment confirmed.

Claim disallowed