Case U89

Members:
PM Roach SM

Tribunal:
Administrative Appeals Tribunal

Decision date: 15 April 1987.

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P.M. Roach (Senior Member)

The applicant is a superannuant who, following a professional career in the public service for the State of Tasmania, derived annuity income from a superannuation fund pursuant to the Retirement Benefits Fund Act (Tas.).

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2. When the applicant retired and commenced to receive the annuity he was obliged, pursuant to sec. 27H of the Income Tax Assessment Act ("the Act"), to treat as assessable income the annuity so derived but "excluding... the deductible amount in relation to the annuity in relation to year of income" calculated in accordance with that section.

3. In his return of income for the year ended 30 June 1985 the taxpayer claimed that the portion of his annuity (that is, the "annuity derived by the taxpayer during the year of income") to be excluded from the assessable income should be $2,563 or 11.2%, being that proportion of the annuity "earned" by the "undeducted purchase price" of the annuity. The Commissioner allowed for the exclusion of only $858, having acted on the basis, that, in applying the appropriate statutory formula, the "relevant number" was 13.75, a number derived from the prescribed Life Expectation Tables as reflecting the life expectancy of a male person of the age of the applicant at the relevant date. Before me the applicant contended that in selecting that figure the Commissioner was in error and that a lower figure should have been selected as the "relevant number".

4. At the hearing the Commissioner conceded that the number chosen was in error, but only in that it had been the Commissioner's intention to select 17.89 as the "relevant number". That figure was derived from the Life Expectation Tables as giving the life expectancy of the applicant's wife. She had the prospect of becoming an annuitant upon the death of her husband. The Commissioner contends that as she had greater life expectancy it was reasonable to expect that an annuity would also be paid to her, although at a lower rate, throughout the period of her survivorship, if the applicant and his wife conform to the pattern projected by the statistics so that the applicant will predecease his wife.

5. The applicant and his wife were both born in 1919. It was agreed at the hearing that, according to the prescribed Life Tables, at the date of the applicant's retirement his life expectancy was 13.75 years and that of his wife 17.89 years. The applicant contends that his life expectation is less than that so stated and supports that contention by producing a medical certificate (admitted by consent) which provides:

"This is to certify that this man has significant loss of normal lung volume - total lung capacity 42% predicted values for his sex, age and height. On formal lung testing there was no evidence of any intrinsic lung disease in the remaining functional lung. He also has a hiatus hernia and diverticular disease. His lung pathology limits his ability to exert himself and any future chest infections may compromise his lung function further."

6. It was also agreed in evidence that the applicant's wife has over a long period experienced high blood pressure and high cholesterol levels and that she has suffered a heart attack. For that reason he contends that his wife's life expectancy is also less than that suggested by the prescribed Life Tables. He also points to the circumstance that the Life Tables themselves are no longer as accurate as indicators as they might once have been for statistical purposes because the data from which they are calculated is no longer the best available. For all those reasons he says the action of the Commissioner in selecting 13.75 as the "relevant number" for the purposes of the formula is wrong.

7. The problem as the applicant sees it arises because both he and his wife believe that they have a lower life expectation than Life Tables proposed for persons of their age and sex. He foresees that in their lifetimes, and more particularly in his, they are not likely to be able to bring to account the totality of "undeducted purchase price" and reduce taxable income accordingly.

8. To place that complaint in perspective, I have considered the least complicated circumstances of a subscriber for superannuation entitlements by way of pension. That appears to be the person who at no time during his period of qualifying service or later had dependants. During his service such a person would be a contributor and thereby be contingently entitled to benefits by way of pension. During his service he may have been entitled to tax deductions or rebates for all or part of his contributions but, to the extent to which he was not so entitled, he is said to have an "undeducted purchase price". If he does not survive to qualify for benefits, part of his

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subscriptions will be applied to the benefit of others. He will receive no annuity in the form of a pension; and no factor in relation to "undeducted purchase price" will be taken into account in the fixing of his liability to income tax. If he survives to qualify for a pension, his income will include the pension annuity less an allowance for "undeducted purchase price." If his entitlement is to an annuity for a fixed term of years, in each year the pension is paid he will be entitled to offset an amount equal to the "undeducted purchase price" divided by the number of years in the fixed term. That will be a constant. If he dies within the term he will not have brought to account in full the "undeducted purchase price". It is only if he survives the full term of the annuity period that he will benefit from the offset of the entire "undeducted purchase price". In such a case the subscriber is unaffected by statutory probabilities or by the expectations of the Commissioner or actuaries.

9. More commonly, persons entitled to superannuation pensions have an entitlement to an annuity for life. Entitlement for a fixed term of years is usually limited to dependent children. Depending on the personal circumstances of such an annuitant for life, there may be no prospect of any other person becoming entitled to an annuity following his death. That may be because the contributor who qualifies for an annuity is not survived by a spouse. It may also arise because the annuitant is the spouse of a deceased contributor. When there is no prospect of any person becoming entitled to an annuity following the death of the contributor-annuitant the "undeducted purchase price" is appropriately related by the Commissioner to the period of his life expectancy. If he outlives the period then not only will his annuity entitlement continue longer than for others of his class and age, but he will also be entitled to offset more than 100% of his "undeducted purchase price". However, if he fails to live to the age statistically calculated as the likely measure of his life expectancy, he loses not only his life and his annuity, but also the right to offset some part of the "undeducted purchase price".

10. But the case for this applicant, and for many others, is that he is married and that, if his spouse survives him, she will become entitled to an annuity upon his death. Because she is of the female sex, her actuarial life expectancy is greater than his. Further, because there is no significant age differential between them, the statistical projection is that she will outlive him by some five years.

11. The question for determination is to be resolved by reference to sec. 27H of the Act, one of nine sections comprised in "Subdivision AA - Superannuation, termination of employment and kindred payments" within Div. 2 of Pt III of the Act. Those sections typify the complexity of drafting which encourages persons to consider Income Tax Rulings of the Commissioner as a source from which to determine the law, rather than by a consideration of the words of Parliament. In fact as it was argued for the Commissioner, the case was presented rather more by reference to the Rulings than to the provisions of the Act. It is both understandable and reasonable that the assessment process should be conducted by reference to the Commissioner's Rulings and Guidelines, but the review process requires that regard should be had to the provisions of the Act. Unfortunately, it seems to be assumed by many that the meaning of the Act is necessarily so obscure that regard needs to be and, therefore, should be had to the Explanatory Memoranda presented to the Parliament upon the Second Reading of the Bill as an aid to understanding. What tends to be overlooked is that ordinarily Income Tax Rulings, Ministerial Explanatory Memoranda and instructions to Parliamentary Counsel all have the same origin: normally they are the work of officers of the Commissioner. However, the basic reference point remains the Act. If the standards of the Act and of the Rulings are the same, it would be a sufficient answer to the objection of the applicant to declare that the Rulings have been correctly applied, or that in applying them there has been no error to the detriment of the applicant. However, such an answer cannot be properly given unless, upon examination of the Act and of the Rulings, it is established that the Rulings do precisely reflect the criteria established by the Act. That being so, and although not having the assistance of the competing contentions being expounded and criticised by able counsel, I have endeavoured to comprehend the Act.

12. My endeavours to understand the provisions have prompted some basic questions, viz.:

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• 1. Whether the term "annuity" is used consistently throughout the section and throughout the Subdivision?
• 2. Whether at any one time a reference to "annuity" is limited to the annuity to which the taxpayer has a vested entitlement; or does it extend to any "annuity" payable contemporaneously, pursuant to a vested entitlement in the taxpayer and others (as the definition of "relevant share" suggests); or does it extend to include any "annuity" to which others may acquire a vested entitlement at some future date?

13. The marginal note to the Act relevant to sec. 27H reads: "Assessable income to include annuities and superannuation pensions." The Act contains no definition of "annuity" of general application and Subdiv. AA does not define "annuity" for the purpose of the subdivision, although sec. 27A does define "deferred annuity"; "eligible annuity"; "immediate annuity"; and "roll over annuity".

Section 6 of the Act defines "superannuation benefits", ("In this Act, unless the contrary intention appears... `superannuation benefits' means individual personal benefits, pensions or retiring allowances"), but that phrase is not used in Subdiv. AA. Instead the Subdivision refers to "superannuation pension" - "a pension payable from a superannuation fund" - which term is in turn defined to include a scheme constituted by State law such as that which provides the annuity income of the applicant.

Section 27H(4) provides "In this section, annuity includes a superannuation pension". The phrase "annuity or superannuation pension" occurs in such definitions as "undeducted purchase price" and "unused undeducted purchase price", but a distinction is drawn between an "annuity" and a "superannuation pension" in the definition of "purchase price" in sec. 27A. It provides that in the Subdivision,

"...unless the contrary intention appears...

`purchase price' means -

• (a) in relation to a superannuation pension - the sum of -
  • (i) contributions made by any person to a superannuation fund to obtain superannuation benefits consisting only of the superannuation pension; and
  • (ii) so much as the Commissioner considers reasonable of contributions made by any person to a superannuation fund to obtain superannuation benefits including the superannuation pension; and
• (b) in relation to an annuity - the sum of -
  • (i) payments made solely to purchase the annuity; and
  • (ii) so much as the Commissioner considers reasonable of payments made to purchase the annuity and to obtain other benefits;"

14. As there is no particular statutory definition to provide guidance, I must attribute to "annuity" its ordinary meaning. With that in mind I take into account the fact that, annuities which are paid in the form of a "superannuation pension" by superannuation funds which are employment-related may pay:

• (a) an annuity to a contributor for his life;
• (b) an annuity for life to the spouse of a deceased annuitant during his or her survivorship;
• (c) an annuity for life to the spouse of a deceased contributor who died before becoming an annuitant;
• (d) an annuity for a fixed term of years, for example, to a dependent child of a deceased contributor or annuitant;
• (e) an annuity for a term fixed neither by reference to a predetermined period of years nor to the life of the annuitant (e.g. a parliamentary pension which might be forfeited upon re-election to the same or another Parliament; or a spouse's pension which might be forfeitable upon remarriage).

15. I also bear it in mind that the contributions of the subscriber may have acquired pension rights:

• (a) concurrently for the contributor, and his or her spouse and their dependants - what is referred to in sec. 27H(4) in the definition of "relevant share" as a "total annuity"; or

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• (b) successively for himself and others - as is the case with this applicant - with the result that, having survived to qualify for the pension, the applicant has a vested entitlement to the annuity; and his wife has a contingent entitlement to another but lesser pension, which prospective entitlement will cease if she predeceases the applicant.

As to the former, the Act makes express provision by treating the circumstances as giving rise to a "total annuity", with the result that the definition of "relevant share" in subsec. (4) operates to reduce the set-off otherwise allowable. A similar result will be achieved in the latter case, if the definition of "purchase price" operates to limit that price to "so much as the Commissioner considers reasonable of contributions made...".

16. With those things in mind, I find on considering sec. 27H that, when any taxpayer in a year of income derives "any annuity", an amount is to be included in his assessable income for that year (sec. 27H(1)). If the annuity "has been purchased" the assessable income is to include the amount of "the annuity" less "the deductible amount" in relation to "the annuity" in relation to that year of income (sec. 27H(1)(a)). If that annuity has not been purchased, there is no deductible amount (cf. sec. 27H(1)(a)). Any supplement to "an annuity" is to be included in that assessable income (sec. 27H(1)(b)). Subject to subsec. (3) and (3A), the deductible amount is to be determined by formula. Subject to subsec. (3A), the Commissioner may depart from the formula calculation if he thinks the deductible amount so obtained "is inappropriate" by reason of either the terms and conditions applying to "the annuity" or "such other matters as the Commissioner considers relevant" (sec. 27H(3)).

Subsection (3) provides:

"(3) Subject to sub-section (3A), where the Commissioner is of the opinion that the deductible amount ascertained in accordance with sub-section (2) is inappropriate having regard to -

• (a) the terms and conditions applying to the annuity; and
• (b) such other matters as the Commissioner considers relevant,

the deductible amount in relation to the annuity derived by the taxpayer during the year of income is so much of the annuity as, in the opinion of the Commissioner, represents the undeducted purchase price having regard to -

• (c) the terms and conditions applying to the annuity;
• (d) any certificate or certificates of an approved actuary or approved actuaries stating the extent to which, in the opinion of the approved actuary or approved actuaries, the amount of the annuity derived by the taxpayer during the year of income represents the undeducted purchase price; and
• (e) such others matters as the Commissioner considers relevant."

There was no suggestion that the Commissioner considered "the deductible amount", when properly calculated in accordance with subsec. (2), to be "inappropriate".

17. Subsection (3A) provides for a reduction in "the deductible amount" where the annuity derived is part of an annuity entitlement which has been commuted. It was not suggested that that provision had any relevance either.

18. That being so "the deductible amount" is to be determined as subsec. (2) requires: in accordance with the formula

              A(B - C)
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                 D
      

In the circumstances of this applicant the values to be attributed in the formula are as follows:

• A has a value of 1. It would be a fraction of 1 if the annuity derived by this taxpayer was but a share of "an annuity...payable to the taxpayer and another person or other persons... derived during the year of income by the taxpayer and the other person or person". In the case of the applicant, he alone derived the entirety of the annuity (cf. definition of "relevant share" - sec. 27H(4));
• B is the amount of the undeducted purchase price of the "annuity". The amount is not in dispute before me. I note that the value of B is a constant throughout the years of derivation as a result of the application of the definition in sec. 27A. However, I also

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  observe that in the definition of "purchase price", in relation to both "superannuation pensions" and an "annuity", a distinction is drawn between contributions and payments (as the case may be) made solely to obtain the pension or annuity benefits and similar payments made to obtain those benefits and other benefits. In the former case the purchase price is the entirety of the contribution or payments; in the latter it is only "so much as the Commissioner considers reasonable...". (The use of "and" as a conjunction appears to be inappropriate - cf.
  Associated Newspapers Ltd. v. Wavish (1956) 96 C.L.R. 526);
• C in the circumstances of the applicant has a nil value, there being no relevant "residual capital value"; and
• D "is the relevant number in relation to the annuity". On that basis the formula is reduced to:

        Undeducted Purchase Price
        -------------------------
                     D
          

19. The sole issue between the applicant and the Commissioner as the matter was presented before me narrows down to the value of D. The value of D is to be determined by reference to the definitions appearing in sec. 27H(4) which provide (inter alia):

"In this section -

• `life expectation factor', in relation to a person in relation to an annuity, means the number of years in the complete expectation of life of the person as ascertained by reference to the prescribed Life Tables at the time when the annuity first commenced to be payable;
• `relevant number', in relation to an annuity in relation to a year of income, means -
  • (a) where the annuity is payable for a term of years certain - the number of years in the term;
  • (b) where the annuity is payable during the lifetime of a person and not thereafter - the life expectation factor of the person; and
  • (c) in any other case - the number that the Commissioner considers appropriate having regard to the number of years in the total period during which the annuity will be, or may reasonably be expected to be, payable;"

20. In this case the Commissioner used as the relevant number for the taxpayer his "life expectation factor" as determined by reference to the prescribed Life Tables at the time when the annuity first commenced to be payable. It is said that he had intended to take into account the greater life expectation of the applicant's wife but he did not do so.

21. I therefore address the questions arising out of the references. I accept that the applicant thinks that his life expectation falls short of that determined by reference to the Life Tables. I hope that he is in error, but there is nothing in the evidence which persuades me that the disabilities from which he suffers are such that he in fact has a shorter life expectation than is projected by the Life Tables. Secondly, in the circumstances of this case, I am satisfied that the calculation of assessable income arising from the annuity is to be determined according to the formula in subsec. 27H(2). Thirdly, I am satisfied that the formula calls for "D" to have a value of 13.75 and as that happens to have been the figure used by the Commissioner - notwithstanding that, according to the Commissioner's argument, 17.89 should have been used - there has been no excessive assessment on that account.

I add, although it is not necessary to do so, that for the reasons mentioned above, it seems probable that, if the figure for "purchase price" in the calculation was the whole of the contributions made, it was probably excessive; and that an adjustment should have been made to take account of the contingent entitlement in the applicant's spouse to receive an annuity in the event that she survives him. Such a view would overcome many, but not all, of the difficulties arising in the course of construing the relevant provisions.

22. I uphold the determination of the Commissioner.