Case M29

Members: HP Stevens Ch

CF Fairleigh QC
JR Harrowell M

Tribunal:
No. 1 Board of Review

Decision date: 27 May 1980.

C.F. Fairleigh Q.C. (Member)

The taxpayer, a retired Australian Government employee, stated in his return of income for the year ended 30 June 1978 the receipt of $10,756 obtained as a pension pursuant to the Superannuation Act 1976, and claimed a deduction of $88 in reliance upon the provisions of sec. 26AA of the Income Tax Assessment Act 1936, as amended, more particularly the following exclusion:

``The assessable income of a taxpayer shall include the amount of any annuity, excluding, in the case of an annuity which has been purchased, that part of the amount of the annuity which represents the undeducted purchase price.''

The salient words, for present purposes, are ``annuity'', ``purchased'', and ``undeducted purchase price''.

2. The Commissioner adjusted the income as returned by disallowing that deduction and a notice of assessment issued accordingly. The taxpayer objected thereto and the Commissioner decided to disallow the objection. That decision was referred to this Board for review. The amount in issue is $95, or as an alternative $8 ( vide para. 10 hereof).

4. The notice of objection contains the following paragraph:

``During the years prior to the year ended 30 June 1976 part of the amount deducted from my salary as contribution to the Commonwealth of Australia Superannuation Fund was not an allowable deduction due to the application of section 82H(2) and was not allowed as a deduction. Although under the provisions of the Superannuation Act 1976 I received a refund of contributions, the amount of pension to which I am entitled under that Act is dependent on my having maintained full unit entitlement under the previous Act. To maintain that entitlement the total amount of contributions I made in each of the years prior to 30 June 1976 were necessary and hence the sums not allowable as deductions became undeducted purchase price in terms of section 26AA in respect of my pension.''

                                                                       $

      Lump sum benefit .......................................     31,384.53

      Less                                             $

      Interim lump sum(s) previously paid ........ 18,038.63}

      Accrual(s) on interim lump sum .............  2,060.71}      20,099.34

      Sum(s) paid from payment date to

        distribution date (15 December 1978) .................     11,285.19

6. The taxpayer completed a form known as S2B on 10 March 1977 and he indicated thereon his acceptance of the first of the alternatives:

7. Consequent thereon, and upon retirement, the taxpayer was entitled to a ``standard'' pension at the rate of $9,928.28 per annum and an additional pension at the rate of $3,782.20 per annum (total $13,710.48 per annum) payable fortnightly from 14 May 1977; the basic payment per fortnight was $527.33. The amount of $13,710.48 is given as 72.5% of $18,911, i.e. of the taxpayer's final annual salary; and $9,928.28 is given as 52 ½ % of his final annual salary as in accordance with the third schedule to the Superannuation Act 1976. He received his first pension cheque on 19 May 1977.

8. After retirement and receipt of that pension for some 2 ½ months the taxpayer sought and obtained an extension of time to make an election and by notice in writing bearing date 1 August 1977 he elected under sec. 66 and 68 of the Superannuation Act 1976 that, in lieu of the aforesaid maximum pension payable to him, he receive a lump sum payment equal to the accumulated contributions made by him under (or pursuant to) the Superannuation Act 1976 and that his pension thereupon be the ``standard'' pension. (The word ``standard'' is used in a special sense as it is only by chance that any other person has the same rate of pension.)

9. Thereupon the taxpayer was entitled on the evidence to receive a lump sum of $18,038.63 as being the equivalent of the accumulated contributions made by him under (or pursuant to) the Superannuation Act 1976 and a ``standard'' pension at the rate of $10,312.78 per annum payable fortnightly from 25 August 1977 at $396.65 per fortnight. Due, it was said, to an adjustment of pension over paid ($949.86) he received in August 1977 a lump sum of $17,088.77. (It is only in a special sense that one can speak of the equivalent of the accumulated contributions made by the taxpayer; see further para. 20 to 23 hereof.)

10. One result of the last-mentioned adjustment is that for a full year upon the mode of calculation which was adopted by the taxpayer the amount in issue would be $95 and not $88; and as an alternative for the appropriate portion of the year to date of election (if the same is allowable in principle) the claim should be for $8 pursuant to sec. 26AA(3). (For what significance it may have (para. 18 and 19 hereof) the Commissioner's representative and the taxpayer agreed ``if there is any undeducted purchase price'' that $1,458 was the ``total figure that has not been allowed in terms of sec. 82H to which we would have to apply a divisor in terms of sec. 26AA''; the divisor, years of life expectancy, being 15.27 and not 14.61 as first contended for by the taxpayer.)

12. It is remarkable that neither party paid any attention to the construction given to the Superannuation Act 1976 by the High Court, and the Commissioner relied on the evidence of a public servant as to the practice adopted in the administration of the Act and on that public servant's understanding of the meaning of the provisions of the statute, given without knowledge of the High Court's decision. In these circumstances it is desirable to set out at considerable length passages from the reasons of the members of the High Court. It is to be mentioned also that that witness produced, or identified, forms signed by the taxpayer and correspondence with him, but did not produce any other financial records; and some of his evidence with respect to the consolidated revenue fund was unacceptable as not being in accord with the statutory provisions; furthermore double entry bookkeeping methods as inherent in his approach to some of the problems are inappropriate for the consolidated revenue fund.

13. Before proceeding to the construction which the High Court has given to the provisions of the Superannuation Act 1976 it is necessary to mention that that statute as enacted (and as construed by the High Court) contains 192 sections. Regulations as gazetted (some with retrospective operation) purport to increase (for some purposes) the number of sections as enacted pursuant to a power to ``modify'' and also purport to alter the text of other sections. Doubts inevitably arise whether the alteration of the text of some sections and the insertion of additional sections (for some purposes as e.g. by S.R. 1978, No. 281) are within the regulation making power as conferred by sec. 126, 155, 168 and 183 of the Act; and whether, constitutionally, Parliament may grant to the Governor-General-in-Council the power to make regulations except as (substantially) in sec. 168; and whether regulations which ``modify'' the Act (e.g. pursuant to sec. 183) are replaceable in the ordinary way from time to time, as ordinarily occurs with regulations (assuming the validity) are immutable. In brief whether there has been a fusion of legislative and executive powers. If what has occurred is valid (cf. sec. 1 and 61 of the Commonwealth Constitution) then it follows as well that (i) a statute can empower the Executive to add new sections to (and to change the text of existing sections of) the same or of any other statute; (ii) the Executive (under the usual power to make regulations) may make regulations under those sections which the Executive has added to the statute (or altered in the statute); and (iii) the Executive may give retrospective operation (to the date of commencement of the statute) to whatever the Executive has thus done, and so as (if desired by the Executive) to remove the basis for any intervening High Court decision (cf.
W.H. Blakeley & Co. Pty. Ltd. v. The Commonwealth of Australia (1953) 87 C.L.R. 501 at p. 520 et seq. ;
Poulton v. The Commonwealth (1952-1953) 89 C.L.R. 540 at p. 601 et seq. ;
Nelungaloo Pty. Ltd. v. The Commonwealth (1947-1948) 75 C.L.R. 495 at pp. 504, 530, 543, 545, 560-561, 564 et seq. ;
Andrews v. Howell (1941) 65 C.L.R. 255 ;
Minister of State for the Army v. Dalziel (1944) 68 C.L.R. 261 ;
Minister of State for the Army v. Pacific Hotel Pty. Ltd. (1944) St.R. Qd. 112 ;
British Medical Association v. The Commonwealth (1949) 79 C.L.R. 201 ;
Attorney-General (Commonwealth) v. The Queen ; Kirby v. The Queen (The Boilermakers' case) (1957) 95 C.L.R. 529 ;

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Huddart Parker Ltd. v. The Commonwealth (1931) 44 C.L.R. 492 ;
Arthur Yates & Co. Pty. Ltd. v. Vegetable Seeds Committee (1945) 72 C.L.R. 37 ;
Williams v. Government of the Island of St. Lucia (1970) A.C. 935 at p. 941 ; generally Aus. Dig. 2nd ed. vol. 3 Pt. IV, Div. 2 and 3; Acts Interpretation Act, sec. 14, 15A, 33(3) and 49A). For present purposes these questions will be left aside.

14. In
Superannuation Fund Investment Trust v. Commr. of Stamp Duties (S.A.) 79 ATC 4429 Barwick C.J. said with respect to the Superannuation Act 1976:

``... the fund of which the Trust has the management is wholly the property of the Crown in right of the Commonwealth.''

Stephen J. said (at p. 4434):

``The current flow of moneys into the Fund derives exclusively from contributions by contributors. These the Commissioner receives and pays into the Fund. At its outset the Fund also received the moneys and assets of the old fund established under the 1922 Act. That fund, unlike the present Fund, was fed from two sources, the Commonwealth as well as contributors making contributions to it - see 1922 Act sec. 8(1). Thus, apart from a component of Commonwealth funds in the initially transferred assets of the old fund the moneys which the Trust invests come exclusively from contributors and not out of Consolidated Revenue... That the Fund is thus made to form part of the Trust Fund of which the Audit Act speaks may have consequences from an accounting viewpoint and no doubt emphasizes the extent to which the Auditor-General, already given wide powers by the Superannuation Act, may oversee dealings with the Fund.''

Mason J. said (at p. 4440):

``All the amounts payable for age retirement benefits, both periodic and lump sum payments, are payable out of the Consolidated Revenue Fund (sec. 55 to 57 inclusive). This result is achieved by sec. 112(2) which provides that, except where other provision is made, any payment of benefit is to be made out of the Consolidated Revenue Fund, which is appropriated accordingly. Every benefit to the extent that it consists of periodic or pension payment is payable out of the Consolidated Revenue Fund and out of it only. Lump sum benefits payable under sec. 62(2) in case of involuntary retirement are also payable out of the Consolidated Revenue Fund.

But a number of lump sum payments are made directly out of the Superannuation Fund. They include accumulated contributions payable out of that Fund under sec. 68(5), 71(5) and 80(1) and certain lump sum benefits equal in amount to the employee's accumulated supplementary contributions. In each case where a pension is payable additionally, it is payable out of the Consolidated Revenue Fund. In such case there is paid from the Superannuation Fund to the Consolidated Revenue Fund an amount equal to the employee's accumulated basic contributions and the total benefit, with the exception of the lump sum equal to accumulated supplementary contributions, is payable out of the Consolidated Revenue Fund (sec. 112(2))...

The argument for the respondent rested chiefly on the submission that the moneys standing to the credit of the Fund belong in equity to the contributors. I do not agree with this submission. The Act prescribes the amounts of the benefits to which contributors become entitled but it does not, as I read its provisions, give them any property or equitable interest in the Fund. To a very substantial extent benefits payable under the Act are payable out of the Consolidated Revenue Fund, that Fund being reimbursed in appropriate cases by the Superannuation Fund. The moneys standing to the credit of the Superannuation Fund are Commonwealth public moneys in an account within the Treasury (sec. 60 of the Audit Act 1901 (as amended)). To the extent to which the Trust is a trustee of the moneys it is a trustee for the Commonwealth, not for the contributors.''

Murphy J. drew attention to sec. 160(1) of the Act viz. (at p. 4443):

```The costs of the administration of this Act, including the costs of and incidental

ATC 210

to the management of the Fund by the Trust, shall be paid out of the moneys appropriated from time to time by the Parliament for the purpose.'''

Aickin J. said (at pp. 4446-4448):

``By sec. 113 it is provided that pensions shall be paid in fortnightly instalments, i.e. out of the Consolidated Revenue Fund. There are certain lump sums which are required to be paid out of the Fund to eligible employees or their personal representatives... Certain other provisions provide that in some cases accumulated supplementary contributions may be payable out of the Fund... but nonetheless the accumulated basic contributions are in such cases paid out of the Fund into the Consolidated Revenue Fund in accordance with sec. 112... Where lump sums are otherwise payable, either alone or along with pensions, the lump sums are paid out of the Fund to the person entitled and the balance of the accumulated contributions (if any) in respect of that employee is paid by the Fund into the Consolidated Revenue Fund.

The Fund is thus to be held by the Trust upon trusts to be ascertained from the terms of the Act itself. Those trusts may be described briefly by saying that they are to hold the contributions upon trust to accumulate the income thereof until each relevant employee who makes them ceases to be an eligible employee, to hold all the contributions and the income derived therefrom as a common fund for purposes of investment and to invest the amounts in the forms of investment authorized by the Act. Upon an individual employee ceasing to be an eligible employee, the primary trust is to pay to the Commonwealth by payment into the Consolidated Revenue Fund the proportion of the fund represented by the contributions of that eligible employee and the interest or other income earned thereon during the time that he was an eligible employee (`the accumulated contributions'). In certain exceptional cases the Trust is required to pay either part or the whole of those accumulated contributions to the employee or to his dependants or personal representatives. A statutory obligation rests upon the Commonwealth to pay to each former eligible employee a pension as prescribed by the terms of the Act. That pension is to be payable out of the Consolidated Revenue Fund which is appropriated for that purpose by the terms of the Superannuation Act itself (sec. 112(2)). That statutory obligation continues throughout the life of each former eligible employee... The making of such payments out of the Consolidated Revenue Fund is not a use of the Fund either wholly or partly for that purpose, nor is it a use wholly or partly for that purpose of moneys paid into the Consolidated Revenue Fund by the Fund itself. Nor is the amount of the pension calculated by reference, direct or indirect, to the amount of an individual eligible employee's accumulated contributions to the Fund, but is fixed by the Act itself. Lump sums are, however, related to the accumulated contributions, whether payable out of the fund or out of consolidated revenue. The Consolidated Revenue Fund is from its very nature a common fund in which are blended indistinguishably all payments made to or moneys received by the Commonwealth and payments are made out of the general mass by appropriation. No statute provides for the tracing of individual amounts that are paid into the Consolidated Revenue Fund, for they are by their very nature consolidated upon payment in.... That which reaches the Consolidated Revenue Fund from the hands of the Trust thereby ceases to be trust moneys under the Superannuation Act or at all and becomes simply part of the general funds of the Commonwealth, consolidated together in a single fund pursuant to sec. 81 of the Constitution and the Audit Act 1901-1969 (Cth). In no sense, therefore, can it be said that the pensions are payable out of the Fund, though some lump sums are payable directly out of it. In this sense the Fund is held primarily, but not exclusively, for the purpose of making payments to the Commonwealth on the happening of the relevant events, i.e. the cessation of an eligible employee to be such.

... Although the Commonwealth is in a sense the principal beneficiary for whom

ATC 211

the Fund is held, it cannot be said to be absolutely entitled, either now or at any particular future time, although it will from time to time become so entitled to parts of the Fund upon occasions which are certain and to some extent predictable as to time. As such events occur the Fund will continue to grow or at least be replenished as other eligible employees make contributions to it... In the absence of amendment of the Superannuation Act the Fund will continue in existence so long as the Commonwealth and its Public Service exist, and during that period there will never be a time when any person or body politic will be absolutely entitled to the Fund.

... It (the Trust) has only very limited responsibility for the making of payments to eligible employees or those who have been eligible employees... It is an investment manager... It has no discretion, however, as to the manner in which the Fund is to be dispersed... It does not, however, collect the contributions, but receives them in bulk from the Commissioner, who keeps the records relating thereto, and it makes no payments of pensions as such. Determinations of the entitlement of the individual eligible employees are made by the Commissioner, and the Trust plays no part in dealing with disputes as to entitlement...''

15. Actuarial tables are not in themselves the final word on factual matters (
Rose v. Trigg (1963) 41 T.C. 385 ;
Hemsworth v. Wilson (1961) S.R. (N.S.W.) 723 ; see also
O'Brien v. McKean (1968) 118 C.L.R. 540 at p. 548 ; cf. Carlyle: ``A judicious man looks at statistics not to get knowledge but to save himself from having ignorance foisted on him''; see further
Chesterman v. F.C. of T. (1923) 32 C.L.R. 362 on questions 4 and 5 thereof at pp. 380, 388, 397, 398 and 400 - reversed by the Privy Council on other grounds (1925) 37 C.L.R. 317).

16. The Superannuation Act 1976 does not anywhere use the word ``annuity''. Whether or not it was appropriate to regard the pension under the superseded Superannuation Act as an annuity within the meaning of that word (undefined) in sec. 26AA of the Income Tax Assessment Act is presently irrelevant; so also (if permissible) for calculation of undeducted purchase price of such a pension under the superseded Act.

17. The primary definition of ``annuity'' as in standard reference works speaks of a ``fixed sum payable annually'', or of ``a certain sum payable yearly'', or of ``a yearly payment of a certain sum of money'', and so on. Of course an annuity may be and often is paid in periodic instalments, and so is a pension. What was said by Brett L.J. in In
Re Knight ex p. Voisey (1882) 21 Ch.D 442 at p. 458 is applicable for an annuity and for a pension as for rent, mutatis mutandis:

``Now it is true that, if that which is agreed upon as the payment is uncertain, it is not a rent. It must be certain. But the rent is certain if, by calculation and upon the happening of certain events, it becomes certain, and... the mere fact of rent being fluctuating does not make it uncertain. If a lease be made for ten or twenty years, at a rent increasing every two or every three years, there the rent fluctuates, no doubt, but it is not uncertain. It becomes certain as each year advances. And so in other cases. If the rent of a farm for one year, if you please in advance, is to be so much if a certain number of acres are ploughed up; then in the next year a different rent if so many acres are left in pasture or in crops; there the rent is fluctuating, but it becomes certain the moment the condition is fulfilled, and therefore, although a fluctuating, it is a certain rent.''


Greater London Council v. Connolly (1970) 1 All E.R. 870 , as to sufficient certainty, is not in point. ``Annuity'' implies the quality of being recurrent or being capable of recurrence (cf.
Moss' Empires Ltd. v. I. R. Commrs. (1937) A.C. 785 at p. 795; 21 T.C. 264 at p. 269 ; In
re Hanbury deceased , Comiskey and Others v. Hanbury (1939) 38 T.C. 588 at p. 589 ). The ``standard'' pension under the Superannuation Act 1976 is dependent on many imponderables, whilst the contributor continues to be a public servant and after his retirement, voluntary or not.

18. A submission was made that it should be assumed on behalf of both parties that the taxpayer's contributions as deducted fortnightly from his salary with a view to a

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``standard'' age pension (and it is not clear whether that submission refers as well to contributions to the superseded fund) come within sec. 26AA(1) of the Income Tax Assessment Act whereby the substantial issue is simply the calculation of such part (if any) of the annuity/pension as represents the undeducted purchase price thereof.

19. When that submission was challenged because the Board must ascertain the law and not proceed upon concessions by or assumptions of the parties, several authorities were cited, but not the High Court case aforesaid. Such authorities as were cited give little, if any, support to the proposition which the parties advance.

20. If the word ``tracing'' is used with its established meaning ( Jacobs' Law of Trusts in Australia 4th ed. Ch. 27 p. 569 et seq.) there is no acceptable way of tracing a contribution (or all or some contributions) made under the superseded Act to the allocation of money for the benefit of a contributor under the current fund. A witness for the Commissioner gave an untenable proposition to the contrary.

``... the Treasurer shall... determine, in relation to the value of the net assets of the existing Fund -

  • (a) the amount that is to be treated as basic contributions made by existing contributors on the commencing day; and
  • (b) the amount that is to be treated as supplementary contributions made by existing contributors on the commencing day;

and, in making the determination, the Treasurer shall have regard to such matters as are prescribed.''

``The Commissioner shall, as soon as practicable after the commencing day -

  • (a) allocate among existing contributors, in such manner as the Treasurer directs, the amount nearest to the amount available for allocation as basic contributions that it is practicable to allocate in that manner among existing contributors;
  • (b) allocate among existing contributors, in such manner as the Treasurer directs, the amount nearest to the amount available for allocation as supplementary contributions that it is practicable to allocate in that manner among existing contributors; and
  • (c) allocate among existing contributors, in such manner as the Treasurer directs, the amount available for distribution as supplementary contributions that it is practicable to allocate in that manner among existing contributors;

and in giving those directions, the Treasurer shall take into account all matters relevant to ensure that the amounts will be allocated among the persons concerned on a fair and reasonable basis.''

``An existing contributor may, not later than the election date or..., elect by notice in writing to the Commissioner, that an amount specified in the election, being an amount not exceeding the amount allocated to him under paragraph (3)(c) be paid to him.''

22. Where an existing contributor makes that election then (with an exception relating to death) there is to be paid to him out of the new fund an amount equal to that which is specified in the election (sec. 177(6)). (See further para. 11 hereof.) There has to be (sec. 178) transferred from the new fund to consolidated revenue (though it may be during a period of 10 years) an amount equal to the amount by which the value of the net assets of the old fund exceeds the sum of -

ATC 213

23. The Superannuation Act 1976 did not leave the continuing contributing Commonwealth public servant with any of the benefits which existed until and including 30 June 1976 under the superseded Act. The new Act gave new benefits. Any expression such as ``equity in the fund'' is a misnomer (so far as the right to pursue equitable remedies is concerned) for any person continuing after 30 June 1976 as such public servant and contributing after 30 June 1976 to the superannuation scheme under the 1976 Act. A witness for the Commissioner gave an untenable proposition to the contrary. The Superannuation Act 1976 does not confer on such a contributing continuing public servant as and from 1 July 1976 the right to ``trace'' (in the established sense of that word in equity) moneys from the old fund by pursuing equitable remedies with respect thereto. It is only where there is a right that there can be said to be a remedy ( ubi jus ibi remedium Ashby v. White (1703) 2 Ld. Raym. 955). Doubtless the identification or juristic classification of precise legal or equitable rights is not determinative of the issue (cf.
Foxwood (Tolga) Pty. Ltd. v. F.C. of T. 80 ATC 4096 per Deane J.). So far as it is necessary to characterize the standard pension which the taxpayer receives, the appropriate word may be ``subvention'' in the sense given to that word in the Shorter Oxford Dictionary (see also the use of that word by Dixon C.J. in
The National Insurance Co. of New Zealand Ltd. v. Espagne (1960-1961) 105 C.L.R. 569 at p. 573 ). This is not to say that the pension which was obtainable under the Superanuation Act 1922, as amended, was a subvention.

24. The conclusions are:

25. In my opinion the decision on the objection is to be upheld and the assessment is to be confirmed.

 

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