Confidential and Commissioner of Taxation
[2006] AATA 733
•25 August 2006
Administrative
Appeals
Tribunal
DECISION AND REASONS FOR DECISION [2006] AATA 733
ADMINISTRATIVE APPEALS TRIBUNAL № VT2003/184-185
TAXATION APPEALS DIVISION
Re: CONFIDENTIAL
Applicant
And: COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal: Mr B.H. Pascoe, Senior Member
Date:25 August 2006
Place:Melbourne
Decision:The Tribunal affirms the decisions under review
(sgd) B.H. Pascoe
Senior Member
INCOME TAX – superannuation contributions – controlling interest in company – contributor and fund member same person – eligible employee – Tribunal bound by Federal Court decisions on interpretation of eligible employee
Income Tax Assessment Act 1936 s 82 AAA, s 82 AAC
Harris v Federal Commissioner of Taxation (2002) 125 FCR 46
Prebble v Federal Commissioner of Taxation (2003) 131 FCR 130
Hoare v Federal Commissioner of Taxation (2004) ATC 2169
REASONS FOR DECISION
25 August 2006 Mr B.H. Pascoe, Senior Member
1. This is an application to review a decision of the respondent to disallow objections against amended assessments of income tax for the years ended 30 June 1999 and 30 June 2000. The amended assessments had been issued to disallow deductions claimed for superannuation contributions of $24,000 in the year ended 30 June 1999 and $20,000 in the year ended 30 June 2000.
2. At the hearing the applicant represented herself with the assistance of her husband. The respondent was represented by Mr S. Steward of counsel. Pursuant to s 14ZZE of the Taxation Administration Act 1953, the applicant requested that the hearing be in private.
3. There was no dispute as to the facts of this case which can be summarised as:
·the applicant is an employed solicitor and a member of her employer’s superannuation fund.
·since 1 June 1993 she had also been a member of the H Pty Ltd superannuation fund which was a complying fund for the purposes of s 82AAC of the Income Tax Assessment Act 1936 (the Act).
·In April 1999, H Pty Ltd was formed to act as trustee of the family trust. The applicant was the sole shareholder, secretary and director of that company.
·In 1999 the applicant made enquiries concerning the possibility of making contributions to her employer’s superannuation fund by way of salary sacrifice but was informed that this was not possible.
·On advice of her solicitor, the applicant made a contribution of $24,000 in May 1999 to the H Pty Ltd superannuation fund for her own benefit in her capacity as controller/owner of H Pty Ltd.
·Prior to 30 June 2000, the applicant made a further contribution of $20,000 on the same basis.
·Both contributions were claimed as allowable deductions in returns lodged for the relevant years and allowed in the original assessment.
·In April 2002, the respondent issued amended assessments disallowing the deduction for the contributions in each year.
·In April 2003, the applicant objected against each of the amended assessments.
·On 6 August 2003, the respondent allowed the objection in part in respect of the year ended 30 June 1999 to the extent of reducing additional tax by way of penalty to nil and remitting the general interest charge to 4.72%. No additional tax by way of penalty had been imposed in respect of the year ended 30 June 2000 and the objection was disallowed in full.
·In February 2004, the respondent amended the assessments issued to the H Pty Ltd superannuation fund in respect of the 1999 and 2000 years to exclude the contribution of $24,000 and $20,000 respectively from the assessable income of the fund.
4. The deductions were claimed under s 82AAC of the Act which provides:
82AAC (1) 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 dependent of the eligible employee if the eligible employee dies before or after becoming entitled to receive the benefits); and
(b)the fund is a 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.
This provision requires the contribution to be for the benefit of an eligible employee who is defined in s 82 AAA of the Act as follows:
82AAA (1)
…
“eligible employee”, in relation to a taxpayer, means:
(a)in the case of a taxpayer whether 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; or
(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.
82AAA (2) For the purposes of this Subdivision, a director of a company shall be taken to be employed by the company.
On the face of this definition, the applicant is an eligible employee being a director of H Pty Ltd in which she has a controlling interest.
5. However, the obstacle to this interpretation for which the applicant contends is the interpretation adopted by the Full Court of the Federal Court in Harris v Federal Commissioner of Taxation (2002) 125 FCR 46. There the court unanimously decided that an eligible employee will be a different person to the contributor. At page 66 the Court said:
To the extent that par (a)(ii) of the definition of “eligible employee” in s 82AAA(1) may be read as covering the same individual in two different capacities, the statutory context requires that it be read down. Hence, 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. Bearing in mind the legislative history of these provisions, this reading is readily accommodated in s 82AAE (and s 82AAC), both of which refer to a contribution made by “a taxpayer…for the purpose of making provision for superannuation benefits payable for an eligible employee” in s 82AAA, these provisions would naturally be read as referring to a taxpayer on the one hand and a different person, an employee, on the other.
Further, in light of the legislative history, it is tolerably clear that the object of Subdiv AB would be frustrated in part if s 82AAE were construed in the manner for which the appellant contends. The object of Subdiv AB is to specify and limit the circumstances in which a person (whether employed or not) may obtain a deduction for a contribution made for his or her own benefit. There is nothing in the Act or in the legislative history that would provide a rational basis for permitting a contributing taxpayer (who happened to be a controlling shareholder and director of a corporate employer) to secure an unlimited deduction under s 82AAE, in respect of a contribution to a fund to make provision for himself. 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 provision for themselves on their retirement. If the appellant is correct, a controlling shareholder who happened to be a director of a corporate employer has, at least since 1964, been able to circumvent the limitations imposed on the deductibility of contributions made by a person for his or her own benefit. The legislative history of these provisions makes it difficult to accept that this result conforms to the legislative scheme, which has evolved since 1915 and substantially reached the form with which this appeal is concerned in 1989 (albeit subject to subsequent amendments).
While in Harris, the Court was concerned with a claim for deduction under s 82AAE, applying to a contribution to a non-complying superannuation fund, both s 82AAC and s 82AAE refer to a contribution for the benefit of an eligible employee and the definition in s 82AAA is applicable to both sections. The Court clearly stated that s 82AAC requires there to be two different persons.
6. In Prebble v Federal Commissioner of Taxation (2003) 131 FCR 130, a differently constituted Full Court of the Federal Court followed the earlier decision in Harris. In Prebble, the High Court refused leave to appeal on the basis that it was not persuaded that there are sufficient prospects of success in demonstrating error either in Harris v The Commissioner (2002) 125 FCR 46 or in the treatment of Harris by the Full Court in the present case.
7. In a decision of this Tribunal in Hoare v Federal Commissioner of Taxation (2004) ATC 2169 involving facts similar to this case, it was said (at paragraphs 29‑31):
29. Although not a court, the Tribunal’s decisions are subject to appeal to the Federal Court pursuant to s. 44 of the Administrative Appeals Tribunal Act 1975 and to judicial review pursuant to the Administrative Decisions (Judicial Review) Act 1977 or s. 39B of the Judiciary Act 1901. That brings it within the ambit of the doctrine of precedent and it is bound by it just as the courts are bound. Therefore, it is bound to apply the principle upon which a case in the Federal Court has been decided (sometimes referred to as the ratio decidendi of the case) if that principle is applicable to the law and circumstances being considered by the Tribunal.
…
30. How does the doctrine of precedent affect our consideration of this case? The principle upon which the Full Court decided Harris v FC of T and Prebble v FC of T was that the definition of an “eligible employee” in s. 82AAA(1) must be read as referring to two different people; a taxpayer on the one hand and a different person, an employee, on the other. In the context of this case, that means that, whenever the definition of “eligible employee” in s. 82AAA(1) must be applied in interpreting a provision of ITAA 1936, we are bound to read it as referring to those two different people. Unlike a Full Court differently constituted from an earlier Full Court, we cannot depart from a principle established by that earlier Full Court in another case. We cannot do that even if we were minded to have reservations about the correctness of a judgment of the Full Court of the Federal Court.
31. As the definition of an “eligible employee” is relevant in interpreting s. 82AAC, we must read that section as requiring that the taxpayer and the employee must be two different people. As Dr Hoare paid the contribution to the Fund in his own name and from an account held jointly with his wife, we find that he paid it on his own behalf. He did not pay it on behalf of the Company even though we recognise that he was the controlling shareholder of that company. If follows that we do not find that he can be regarded as a “taxpayer [who] makes a contribution for the purpose of making provision for superannuation benefits payable for an eligible employee…” within the meaning of s. 82AAC(1)(a) of the ITAA 1936 and so is not entitled to a deduction under s. 82AAC.
While the same doctrine of precedent does not bind the Tribunal to follow its own earlier decision, I am in no doubt that I am equally bound to follow the decisions in Harris and Prebble that s 82AAC does not permit a deduction where the contributor and the fund member is the same person.
8. The applicant’s husband had clearly spent considerable time in researching the history of the relevant statutory provisions. He sought to distinguish the circumstances of this case from those considered by the Court. Primarily he argued that both Harris and Prebble involved non-complying funds which were not subject to the same taxing rules as apply to the complying fund involved here. Much of his submission went to the intention of Parliament and criticism of the decision in Harris. While having great respect for the arguments advanced, it is not a question of whether the Tribunal agrees or disagrees with the decision in Harris or Prebble but whether the Tribunal is bound to accept the interpretation of the law adopted in those decisions. As already indicated, it is clear that I am so bound.
9. It was further argued by the applicant that the contribution was effectively an employer contribution and had been treated as such by the superannuation fund. However, it was clearly a contribution by the applicant from her own funds and for her benefit. It is difficult to see that the decision to disallow a deduction for the contribution produces an anomalous result. The applicant acknowledged that she did not want to make the contribution to her employer fund as this was not the most efficient method of saving for her retirement. It seems clear that this view arose from the fact that such contributions would not be deductible for tax whereas the hope was that using a controlled private company fund would allow the deduction under s 82AAC. It is difficult to see the practical difference between the two. One difference can be the tax treatment of the contribution within a fund. Here the respondent has ultimately and correctly treated the contribution as not subject to tax in the fund.
10. The applicant sought a decision of the Tribunal in relation to the taxation of the contribution in the fund and liability for superannuation contribution surcharge. Neither of these questions is properly before the Tribunal. The decisions under review are solely the decisions on the objection against the disallowance of the deductions for the contributions. The applicant could have arranged objections against the income tax and surcharge assessed to the trustee of the fund. She chose not to do so and there is no relevant decision for review before the Tribunal. However, the respondent has amended the fund assessments to exclude the contribution from assessable income of the fund. No amendments of the surcharge assessments have been made but, at the hearing, the respondent accepted that such amendments would be made on request of the applicant subject to being within the statutory time limits for such amendments.
11. It follows from the foregoing that the decisions under review should be affirmed.
I certify that the eleven [11] preceding paragraphs are a true copy of the reasons for the decision herein of
Mr B.H. Pascoe, Senior Member
(sgd) Lydia Zozula
Associate
Date of Hearing: 4 August 2006
Date of Decision: 25 August 2006
Advocate for the applicant: Self-represented
Counsel for the respondent: Mr S. StewardSolicitors for the respondent: Australian Government Solicitor
0
2
0