Brauer and Commissioner of Taxation

[2004] AATA 455

Administrative

Appeals

Tribunal

 

DECISION AND REASONS FOR DECISION [2004] AATA 455

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No QT2000/35

TAXATION APPEALS DIVISION		)
Re		KENNETH BRAUER

Applicant

And COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal Mr K L Beddoe, Senior Member

Date11 May 2004

PlaceBrisbane

Decision

The Tribunal decides:

(a)     to set aside the decision under review;

(b) that the applicant is not entitled to a deduction for $17,250 in terms of section 82AAC of the Income Tax Assessment Act 1936 for the year of income ended 30 June 1998;

(c)     the applicant is not liable for the penalty tax ($1,649.06) notified on the notice of assessment for the said year of income; and

(d)     these proceedings have terminated in a matter favourable to the applicant.

..........(Sgd) K L Beddoe.......

Senior Member

CATCHWORDS

INCOME TAX – deductions – contributions to applicant’s complying superannuation fund – applicant is director and shareholder of company – meaning of “eligible employee” - applicant is not an “eligible employee” – deduction not allowed

Income Tax Assessment Act 1936 ss 82AAA and 82AAC

Harris v Commissioner of Taxation (2002) 125 FCR 46
Prebble v Commissioner of Taxation [2003] FCAFC 165
Federal Commissioner of Taxation v Salenger (1988) 81 ALR 25

REASONS FOR DECISION

11 May 2004 Mr K L Beddoe, Senior Member   

1.      The applicant seeks review of an objection decision refusing his claim for a deduction, in the year ended 30 June 1998, for contributions of $17,250 he made to a complying superannuation fund, and to impose penalties of $1,649.06 against him.

2. The application for review was heard by the Tribunal on 1 March 2004. The applicant was represented at the hearing by Mr Cadman of McLaren Knight, Accountants and Business Advisors, and the respondent was represented by Mr S Steward of counsel. The Tribunal had before it the documents lodged with the Tribunal pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 (“the T documents”), together with the following documentary exhibits:

§Exhibit 1:  Copy of Mercantile Mutual Taxation Questionnaire; and

§Exhibit 2:  Copy of applicant’s tax return for the year ended 30 June 1998.

Background

3. The applicant and his wife are the sole shareholders and directors of Keltic Pty Ltd, each holding one share in the company. During the year ending 30 June 1998, the applicant paid $22,000 into a Mercantile Mutual Masterfund superannuation fund in his own name. In September 1998, the applicant completed a Mercantile Mutual Taxation Questionnaire (Exhibit 1) in which he indicated that he wished to claim $17,250 of those contributions as a taxation deduction pursuant to section 82AAT of the Income Tax Assessment Act 1936 (“the Act”). Section 82AAT relates to contributions made into a superannuation fund by an individual for their own benefit.

4. Prior to the hearing, the applicant continued to contend that the contributions were allowable deductions pursuant to section 82AAT(1) of the Act. At the hearing, the applicant amended his contentions and no longer relied on section 82AAT. He instead argued that the contributions were allowable deductions pursuant to section 82AAC of the Act, which applies to contributions made by a taxpayer in relation to an eligible employee.

5.      At the conclusion of the hearing, the applicant was directed to file any further documentation to support his request for the remission of the penalties imposed by the respondent in this case.  That material was received on 17 March 2004.

6.      On 25 March 2004, the respondent wrote to the Tribunal and made the following concessions in relation to this matter:

§The applicant’s claim for a deduction for the superannuation contributions of $17,250 was made pursuant to section 82AAC of the Act; and

§The applicant is no longer liable to the penalty of $1,649.06 notified on the notice of income tax assessment for the year ended 30 June 1998.

7. These concessions narrowed the issues for determination in this matter quite considerably. The only issue for remaining for determination in this case is whether the contributions are allowable deductions under section 82AAC of the Act.

Legislative Framework

8. Section 82AAC(1), as at 30 June 1998, provided:

“Where:

(a)a taxpayer makes a contribution to a fund for the purpose of making provision for superannuation benefits payable for an eligible employee (whether or not the benefits are payable to a dependant of the eligible employee if the eligible employee dies before or after becoming entitled to receive the benefits); and

(b)the fund is an complying superannuation fund, within the meaning of Part IX, in relation to the year of income of the fund in which the contribution is made;

the amount of the contribution is an allowable deduction in respect of the year of income of the taxpayer in which the contribution is made.”

9. Section 82AAA defines the terms “eligible employee” and “employee” as follows:

“(1)  In this Subdivision, unless the contrary intention appears: …

‘eligible employee’, in relation to a taxpayer, means:

(a)     in the case of a taxpayer where a company or a person other than a company:

(i)an employee of the taxpayer;

(ii)an employee of a company in which the taxpayer has a controlling interest; or

(iii)an employee of a company in which the taxpayer is the beneficial owner of shares but in which the taxpayer does not have a controlling interest (not being an employee who is associated with the taxpayer or who, or a relative of whom, has set apart or paid, or entered into a contract, agreement or arrangement under which he is, or will or may be, required to set apart or pay, amounts as or to a fund for the purpose of providing superannuation benefits for, or for a relative of, the taxpayer); and

(b)     in the case of a taxpayer being a company:

(i)an employee of a person that has a controlling interest in the taxpayer; and

(ii)an employee of a company in which a controlling interest is held by a person who also has a controlling interest in the taxpayer;

‘employee’ means a person who is employed by a taxpayer and:

(a)     is engaged in producing assessable income of the taxpayer; or

(b)     is a resident of Australia and is engaged in the business of the taxpayer.

(2)  For the purposes of this Subdivision, a director of a company shall be taken to be employed by the company.”

10.     In order for the superannuation contributions to be allowable deductions, the applicant must be an “eligible employee”.  At all material times, he was a director and shareholder of the company.  He held one share in the company and his wife held the other share.  His wife was also a director of the company.

11.     The issue of whether a director and shareholder of a company is an eligible employee for superannuation contribution purposes was considered at length by the Full Federal Court in Harris v Commissioner of Taxation (2002) 125 FCR 46. The Court held:

“…in order to satisfy s 82AAE (and s 82AAC), there must be a contribution by one person (an employer or a person who, for these purposes, can be regarded as acting in the stead of the employer) and a different person (the employee) for whose benefit the contribution is made.  That is, these provisions refer to an act by one person (making payment to a relevant fund) for the benefit of another person.”

12.     A differently constituted Full Federal Court reconsidered Harris in Prebble v Commissioner of Taxation [2003] FCAFC 165. There the Court found that it had not been demonstrated that Harris was plainly erroneous and therefore the Court chose to follow Harris and dismissed the appeals before them.  The Court said (at pars 26-28):

“It must be said that the definition of ‘eligible employee’ is ambiguous.  It is open to the interpretation that the taxpayer could be both the controlling interest shareholder and the employee referred to in that definition.  Perhaps the fact that the definition has, immediately after the words defined (‘eligible employee’) the words ‘in relation to a taxpayer’ can be used to support the view that taxpayer and employee are intended to be different persons, but it is possible to argue, with respect to the Full Court in Harris that this is really neutral and that the words ‘in relation to a taxpayer’ do no more than identify the subject of which the defined expression is an object. …

…To say that the words require ‘a relationship between two subject matters’ will usually be true.  This, however, does not necessarily lead to the conclusion here that taxpayer and employee must be two separate persons.

What is perhaps more significant in the present circumstances is not the use of the words ‘in relation to’ but rather that neither subparagraphs (i) or (iii) of the definition or paragraph (b) of the definition could ever have the result that the taxpayer and the employee were the same person.”

13. After reviewing the legislative history behind Subdivisions AA and AB of Division 3 of the Act, the Court went on to say (at par 45):

“It can be said that the course of legislation showed a general intention to encourage deductions (sic) by employers to funds for the benefit of employees and initially at least for deductions, then rebates for persons contributing on their own behalf to superannuation funds subject generally to limits on both categories of deductions.”

14.     The Full Court in Harris had expressed similar views (at pp 65-66):

“There is nothing in [the statutory] context, including the legislative history, that would support the propositions that [the words ‘in relation to’] signify a relationship between two different capacities of the same taxpayer.  On the contrary, throughout the legislative history of the Commonwealth income tax law, there have been two streams of deductions for superannuation contributions, and each stream has been treated as exclusive of the other…  One stream has concerned contributions by an employer (or someone who stands in the place of the employer for this purpose) to a fund for the benefit of another who is an ‘eligible employee’.  The history of Subdiv AA, in particular, confirms that the employer contribution provisions have, since their inception, been premised on a relationship between two different persons.  There is nothing in the legislative history between 1915 and the end of the 1998 year of income that supports the proposition that a taxpayer may utilise an employer contribution provision to secure a deduction in respect of a contribution to a superannuation fund for his or her own benefit.  The history of this branch of the law shows that any provision for the taxpayer’s own benefit fell within the second stream of personal benefit contributions which, in the 1998 year of income, found expression in Subdiv AB…

…The Act makes it plain that there is a difference between the legislative policy underlying Subdiv AA, which is designed to encourage employers (and those who stand in their place) to make provision for their employees, and the policy underlying Subdiv AB, which is designed to encourage individuals to make provisions for themselves on their retirement.”

15.     The Tribunal is bound by the Federal Court’s decisions and must apply the law as stated therein unless there are a special reasons for not doing so (Federal Commissioner of Taxation v Salenger (1988) 81 ALR 25). The Tribunal in this case cannot see any reason not to apply the Federal Court’s decisions to the factual scenario in this matter.

16.     The applicant is a director and shareholder of Keltic Pty Ltd.  He is the controlling mind of the company.  He says that he is a proprietor of the company.  In reality, he is both an employer and employee of the company.  As has been clearly stated in Harris, in order for section 82AAC to apply, there must be a contribution by one person for the benefit of another person. That is not the case here. The applicant is acting in the stead of the employer, therefore he cannot make a contribution for himself pursuant to section 82AAC.

17. For these reasons, and in light of the concessions of the respondent as set out above, the Tribunal sets aside the objection decision under review and decides that the applicant is not entitled to a deduction, under section 82AAC of the Act, for superannuation contributions of $17,250 made during the year ended 30 June 1998. The Tribunal further decides that the applicant is not liable to pay the penalty of $1,649.06 as notified in the notice of assessment for the year of income ended 30 June 1998.

I certify that the 17 preceding paragraphs are a true copy of the reasons for the decision herein of Mr K L Beddoe, Senior Member

Signed:  S Oliver

Associate

Date of Hearing  1 March 2004
Date of Decision  11 May 2004
For the Applicant  Mr Cadman, McLaren Knight, Accountants
Counsel for the Respondent     Mr S Steward
Solicitor for the Respondent     Australian Government Solicitor