HWE JONES v DFC of T

Members:
RD Fayle SM

Tribunal:
Administrative Appeals Tribunal (sitting as the Small Taxation Claims Tribunal)

Decision date: 4 September 1998

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Associate Professor RD Fayle (Senior Member)

The applicant, Mr Harry Jones, was employed for some thirty years by the New Zealand public service and when he retired in 1971 became entitled to an annual pension pursuant to the Government Superannuation Fund Act 1956 [``the Superannuation Act'']. That scheme was unfunded except for contributions which were made by eligible employees such as the applicant.

2. In 1994 the applicant became resident in Australia where he currently lives in proximity to his extended family.

3. In 1990 the New Zealand government amended the Superannuation Act, which resulted in the amount of pension entitlement being reduced and it becoming free-of-tax in New Zealand. The Tribunal understands that the reason for the change was to accommodate a changed taxation regime whereby previously tax-exempted New Zealand superannuation funds became liable for income tax on their income.

4. The applicant filed his income tax return for the year ended 30 June 1997, disclosing the amount of pension received as assessable income, and that amount was included in the applicant's taxable income pursuant to s 27H of the Income Tax Assessment Act 1936 [``the ITAA'']. He subsequently objected to the

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assessment on the ground that the amount by which his pension had been reduced pursuant to the 1990 amendment to the Superannuation Act was foreign tax paid by him. Therefore, it should have been both included as assessable income and allowed as a foreign tax credit in arriving at the correct amount of tax payable.

5. The respondent Deputy Commissioner of Taxation disallowed the objection on the bases that, firstly, the reduction in pension entitlement was not a ``tax'' paid by the applicant and secondly, that in any event, Article 19 of the Australia and New Zealand double tax agreement<sup>[1]</sup> Schedule 4 to the International Tax Agreements Act 1953, signed on 27 January 1995 and which entered into force on 29 March 1995. These provisions will be referred to, in these reasons, as ``the double tax treaty'' provisions. provides that only Australia can tax the pension. That Article states inter alia:

``ARTICLE 19

Pensions and annuities

Pensions (including government pensions) and annuities paid to a resident of a Contracting State shall be taxable only in that State.''

6. Ms Aylmyr Sequeira, for the respondent, submitted that even if the New Zealand government had assessed the taxpayer's pension to tax then, in terms of Article 19, that would be in error and cannot affect the right of the respondent to assess the pension. She further submitted that the amount by which the applicant's pension entitlement was reduced in consequence of the 1990 amendment to the Superannuation Act is not a ``tax'' under the relevant New Zealand taxation law, nor, in any event, is it an amount for which the applicant was personally liable, a prerequisite condition to the granting of a foreign tax credit pursuant to s 160AF of the ITAA.

7. The relevant New Zealand government's amendment to the Superannuation Act is contained in Act 1990, No. 30 cited as the Government Superannuation Fund Amendment Act 1990, to be read together with the said Government Superannuation Fund Act 1956. Part 1 of that Act provides:

``PART 1

REDUCTION OF EXISTING ALLOWANCES AND ANNUITIES

2. Application of this Part - This Part of this Act applies to every retiring allowance, annual allowance, and annuity that is, as at the 31st day of March 1990, payable under the principal Act, except-

• (a) Any children's allowance payable under the principal Act; or
• (b) Any allowance or annuity payable in respect of any contributor to the Fund under section 22B or section 22BA or section 50 or section 50A of the principal Act; or
• (c) Any allowance or annuity to which section 9 of this Act applies.

4. Existing retiring allowances, annual allowances, and annuities to be reduced - Every instalment payable under section 89 of the principal Act after the 31st day of March 1990 of every retiring allowance, annual allowance, and annuity to which this Part applies shall be reduced in accordance with the provisions of this Part of this Act.

5. Amount of reduction - The amount of the reduction to be made in accordance with this Part of this Act to each instalment of a retiring allowance, annual allowance or annuity that would, but for this Part of this Act, have been payable, shall be a percentage of that instalment where the percentage to apply in respect of that allowance or annuity is calculated at the commencement of this Act in accordance with the following formula:

T/P × 100/1

• where-
  • P is the amount of the first full instalment of the retiring allowance, annual allowance, or annuity that would, but for this Part of this Act, have been payable on and after the 1st day of April 1990:
  • T is the amount of the total tax deduction that would have been required to be made in respect of that instalment if-
    • Notwithstanding the enactment of the Income Tax Amendment Act 1989, deduction in respect of income tax were required to be made from those allowances and annuities; and
    • The rates of tax were the rates of tax prescribed in Part B of the First Schedule to the Income Tax Act 1976 that apply for the income year

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      commencing on the 1st day of April 1989; and
    • The recipient of the allowance or annuity was resident in New Zealand; and
    • In the case of a person who is entitled as at the 31st day of March 1990 to the use of the tax code `T', that tax code applied to that person; and
    • In the case of any other person, the tax code `G' applied to that person.

[Sections 5 to 8 inclusively not directly relevant]

9. Part not to apply to pensioners and annuitants who are resident overseas as at 31st March 1990 - This Part of this Act does not apply to any retiring allowance, annual allowance, or annuity that is, as at the 31st day of March 1990, being paid by the Board to an address outside New Zealand in respect of a person whom the Board is satisfied is not a resident in New Zealand with the meaning of the Income Tax Act 1976.

[Section 10 provides for a reduction in pension for those pensioners to whom section 9 applies when and if they return to New Zealand and become a resident for taxation purposes.]''

8. Ms Sequeira pointed out that pursuant to Subpart HH 3(1) and (5) of the Income Tax Act 1994 (NZ) a pension paid pursuant to the Superannuation Act is not assessable income, being income derived from a ``non-qualifying trust''. Further by reference to Part O of the Income Tax Act 1994 (NZ), Ms Sequeira demonstrated that ``tax'' and ``income tax'' as defined, for the present purposes, means income tax imposed under that Act.^[2] See Subpart OB 6(1), (2) and Subpart OZ 1(3).

9. It was conceded by the applicant that the pension would not be excluded from the reduction imposed under the amending Act 1990, No. 30 by any of the exceptions contained in section 2 nor section 9, the latter because as at 31 March 1990, whilst he was then in receipt of the pension he was resident in New Zealand.

10. The applicant's case is fairly well summarised in his reasons for having made this application to the Tribunal for review of the objection decision in question. He said:

``I think it is unjust that, having had my pension reduced in consideration of not having to pay tax, I nevertheless have to pay tax. In effect my pension is both pre-taxed and post-taxed.''

11. The applicant submitted that his pension entitlement was in accordance with his conditions of service with the New Zealand public service. However, as a consequence of a subsequent change of government policy, to tax the income of all superannuation funds rather than levying a tax on superannuants, such as himself, the pension became tax free. He believes the measure was intended to simplify the tax treatment of superannuation funds by assessing them instead of the numerous member superannuants. However, he submitted, that as the government superannuation fund in question is largely unfunded, its pension liabilities being met from consolidated revenue,^[3] See exhibit A1 which supports this conclusion. it derives no income which would be subject to tax under the new measures introduced in March 1990. Notwithstanding, the pension entitlement of superannuants was reduced in line with those of other income- earning private funds which would have had a tax liability arising from the 1990 amendments mentioned above.

12. He submitted that for New Zealand resident retirees in receipt of superannuation pensions, on average, the result was probably fairly tax neutral - before the 1990 amendments their pension was assessable to income tax but afterwards the reduced amount was tax-free. However, in his case, as a resident of Australia the reduced pension is assessable to tax in Australia by operation of Article 19.1^[4] And Article 13(1) of the predecessor Schedule 4 to the International Agreements Act 1953 which prevailed from November 1972 until the present Schedule 4 took effect in March 1995. of the New Zealand-Australia double tax treaty. So, he submitted, there is a clear inequity for persons in his position - superannuants who became non-residents of New Zealand after 31 March 1990, when the changes were made. And because of this apparent anomaly he is making both an indirect contribution to New Zealand government revenue equal to the reduction in his pension entitlement^[5] The pension entitlement was reduced by $NZ3,444.92 being 19.8% of the otherwise gross pension entitlement; ref. T6, p. 37 (a reference to the documents filed with the Tribunal pursuant to s 37 of the Administrative Appeals Tribunal Act 1975). and also to Australian tax revenue as a result of the pension received being assessable here - a situation which he submitted must have been unintended having regard to the clear demarcation of taxing rights negotiated under the Australia-New Zealand double tax treaty. He further submitted that the fact that the New Zealand government specifically excluded, from the reduction in

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their pension entitlements,^[6] A reference to s 9 of the amending Act 1990, No. 30 cited above. those New Zealand pensioners who, on 31 March 1990 were not resident in New Zealand, is further indication of the inequity or lack of fairness in his case.

13. The applicant's further submission related to the nature of the government's reduction in the pension as being a ``tax'' as that term is ordinarily understood - quoting from the Shorter Oxford and Websters dictionaries-

``tax ... A contribution to State revenue, compulsorily levied on people, businesses, property, income, commodities, trans- actions, etc''

[Shorter Oxford]

``tax ... a charge on a person's income or property, direct tax or on the price of goods sold, indirect tax made by a government to collect revenue.''

[Websters]

14. He submitted that it is the clear intent of Part 1 of the amending Act 1990, No. 30 to reduce compulsorily the superannuant's pension entitlement by a ``tax'' as that term is defined in its ordinary parlance. Indeed, he submitted, section 5 of that Act, in working out the amount of the reduction to apply to pensions, makes specific reference to prevailing tax rate schedules. This is evident from the definition of the term ``T'' in that provision.

15. The applicant called upon the Tribunal to rule in his favour, finding that the reduction in question is indeed a tax levied by the New Zealand government on his entitlement to the pension, and therefore the Australian Tax Office should treat the reduction as ``foreign tax''^[7] As defined in s 6A8(2)(a)(i) of the ITAA. paid by him, grossing-up his New Zealand pension^[8] By operation of s 6AC of the ITAA. by that amount and allowing him a foreign tax credit^[9] By operation of s 160AF of the ITAA. against his otherwise Australian income tax liability.

Discussion, reasons and conclusions

16. For the reasons expressed below the Tribunal is not able to accede to the very lucid submissions of the applicant. Indeed, the Tribunal merely observes in passing that the applicant's circumstances give rise to apparent unfairness. He made contributions to his employer's superannuation fund for some thirty years in the knowledge that he would receive a pension based on a specific calculation and which, he expected, would be subject to income tax. However, by dint of the fact that for family reasons he has since left New Zealand and taken up residence in Australia he now finds that his pension entitlement, to use his words, ``is both pre-taxed and post-taxed''. It is clear that his otherwise pension entitlement has been diminished by the New Zealand government's measure, in 1990, to simplify the tax treatment of superannuation pensions. The measure appears to apply to qualifying superannuation funds whether they are funded (and thus earning income from their investments) or defined benefit schemes which are unfunded (apart from employee contributions, like the scheme applying in this case). That the pension entitlements of members of an unfunded superannuation scheme are subject to a reduction in the same way as those for funded schemes must be purposeful, to ensure that all such pensions are tax-free, not just those being paid by funded schemes which would contribute tax because of their investment and other assessable income. So in the instant case, instead of the government paying the pensions and then taxing them, the transfer payment is avoided by reducing the pensions accordingly and not taxing the reduced pension. This effficiency measure has had an apparent unintended effect on persons in the applicant's situation.<sup>[10]</sup> Although, having regard to s 9 of the amending Act 1990, No. 30 it seems that the limited nature of the exclusion from the reduction of the pension is deliberate. The remedy, if one be desirable, would be for the New Zealand government to enact specific legislation along the lines of s 9 of the amending Act 1990, No. 30, that is, to extend exemption from the reduction to persons resident in countries like Australia where a double tax treaty operates for the purpose of concluding ``an Agreement for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income''.^[11] Quoted from the recital to Schedule 4 of the International Agreements Act 1953.

17. That aside, the applicant cannot succeed in this matter.

18. The calculation of the reduction in the pension is made by reference to ``each instalment of a retiring allowance'' (s 4 of Act 1990, No. 30) and specific reference therein to the factor ``T'' being ``the amount of the total tax deduction that would have been required to be made in respect of that instalment if... (references to assumed conditions applying including references to personal tax deduction scales)''. Despite the effect of these calculations being specific to each pensioner's entitlement and a reference to specific personal income tax deduction scales applying as if the gross amount was a regular payment like a salary or wage, the resultant amount is described in s 4 of that Act as ``the amount of the reduction to be made in accordance with

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this Part of this Act...'', a reference to s 3 of that Act which stipulates that ``... every retiring allowance... shall be reduced in accordance with the provisions of this Part of this Act''.

19. The reduction is not a deduction in the sense that the pensioner's entitlement is a fixed gross amount and from it is deducted an amount for which he or she is personally liable. The effect of sections 3 and 4 of the amending Act 1990, No. 30 is to reduce the pensioner's entitlement. The pensioner is not personally liable to anyone for the amount of the reduction, indeed, for reasons above, no transfer payment will be made because the fund is not liable to remit to the tax authorities an amount equivalent to the reduction. All that happens, in this instance, is that the liability of the fund to their pensioners is reduced. It just so happens that the reduction is of each pensioner's regular instalment of pension, that reduction in liability being worked out by reference to a formula which adopts personal tax deduction rate scales as a variable.

20. The applicant's pension entitlement in question is not subject to tax in New Zealand, as that term is understood in relation to the Australia-New Zealand double tax treaty.^[12] As set out in Article 2 of Schedule 4 of the International Agreements Act 1953. Article 19.1 of Schedule 4 of that double tax treaty empowers the Australian tax authorities to tax the pension in question. As no ``foreign tax'' for which the applicant could be said to be personally liable^[13] In this respect the Tribunal has also considered whether the provisions of s 6AB(3), which deem a personal liability for foreign tax in particular instances, assists the applicant. It concludes, on the facts, that it does not. had been paid by him then there is no scope for the tax treatment sought by the applicant. The provisions of sections 6AC and 160AF of the ITAA cannot operate in these circumstances. And in any event, if, to the contrary, it was found that the applicant was personally liable for income tax paid in New Zealand on the pension then that would appear to be contrary to the provisions of Article 19.1 of the Australia-New Zealand double tax treaty, the remedy, if any, being found in Article 25, the competent authority provision of that treaty.

21. For the above reasons, in accordance with s 43 of the Administrative Appeals Tribunal Act 1975, the decision under review is affirmed.