Flint and Commissioner of Taxation

[2002] AATA 785

DECISION AND REASONS FOR DECISION [2002] AATA 785

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No NT2002/7

TAXATION APPEALS  DIVISION         )          
           Re      David   Flint         
  Applicant
           And    Commissioner of Taxation        
  Respondent

DECISION

Tribunal       Mr J Block, Deputy President       

Date10 September 2002

PlaceSydney

Decision      The objection decision under review is affirmed.        

[SGD] Mr J Block   Deputy President
CATCHWORDS
TAXATION - payments made by way of reimbursement of employer's contributions to superannuation fund - essential character of the payments - relevant nexus

LEGISLATION
Income Tax Assessment Act 1936 sections 82AAT, 82AAS
Income Tax Assessment Act 1997 section 8(1)

CASE LAW
Lunney v FC of T; Hayley v FC of T (1958) 100 CLR 478
Ronpibon Tin  NL v FC of T 8 ATD 431
F C of T v Cooper 91 ATC 4396
F C of T v Markey 89 ATC 4600

REASONS FOR DECISION

10 September 2002   Mr J Block, Deputy President            

1. The objection decision under review is the decision by the Respondent to disallow an objection dated 3 April 2000 against the notice of assessment numbered 246307/001 issued on 14 March 2000 in respect of the year ended 30 June 1999 ("relevant year").

2. (a) The Applicant (who was a Professor of Law and for some years Dean of the Faculty of Law at the University of Technology) was self-represented while the Respondent was represented by Ms J Gatland of the Australian Taxation Office Legal Practice.

   (b) The Tribunal had before it the T-documents lodged pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 together with exhibits as follows:
   Exhibit R1 is a letter by the University of Technology, Sydney ("the University") to the Applicant dated 24 July 1997.
   Exhibit R2 is a document referred to in the hearings as "Leave Without Pay Guidelines"; the parties were of the view (although not altogether certain) that exhibit R2 was applicable during the relevant year, and at the times when the agreements referred to in clause 3 below were entered into.
   Exhibit R3 is also a document referable to "Leave Without Pay Guidelines"; its relevance was unclear given that it appears to have been approved in June 2002.

3. (a) The Applicant did not give oral evidence at the hearing before the Tribunal. The facts were, so it appeared, not in dispute. The Applicant acknowledged that, subject only to the fact that he considered that clause 5 of the Respondent's Statement Of Facts and Contentions ("Respondent's Statement") required amplification on the basis set out below, the Facts set out in clauses 1 to 12 (inclusive) of the Respondent's Statement were correct. In fact and in a letter to this Tribunal dated 14 August 2002, the Applicant noted that he had on 11 July 2002 provided a Statement of Facts and Contentions and then went on to state; "I understand that the ATO is to respond to this, and propose an agreed Statement of Facts, which I expect should result in the hearing being reduced to brief oral submissions by both parties".

   (b) Clauses 1 to 12 inclusive of the Respondent's Statement read as follows:

   "Facts

   Chronology

4. The Applicant commenced his employment at the University of Technology, Sydney ("the University") on 30 January 1973. By virtue of his date of commencement, the Applicant is a member of the State Superannuation Fund (SSF), a defined benefit superannuation fund.

1. The Applicant was at all relevant times a professor of law at the University – F1. 

1. During the mid 1990's, the Applicant took study leave during the course of his employment at the University. Whilst taking study leave, the Applicant accepted an appointment to a Commonwealth Statutory Agency ("Commonwealth Agency") for a term of three years – F2.

1. The Applicant sought leave without pay (LWOP) from the University in order to take up the appointment at the Commonwealth Agency.

1. As the Applicant sought leave without pay for a period in excess of six months, LWOP would affect the Applicant's superannuation entitlements. In order to preserve and maintain the same level of superannuation entitlements that the Applicant would have had but for the LWOP, it was agreed between the University and the Applicant that the Applicant would pay an amount equivalent to the University's superannuation contributions to SSF.

1. By letter dated 24 July 1997, the University notified the Applicant that the leave without pay was granted from 5 October 1997 and noted that the Applicant would be required to pay an amount of employer superannuation contributions, in order to secure the same level of superannuation entitlements.

1. The Applicant took up the appointment with the Commonwealth Agency.

1. On 4 July 1998, the Applicant retired from his employment at the University and was made an emeritus professor.

1. On his retirement, the Applicant was paid an amount of $27,597.92 as part of the termination payment upon retirement from the University. An amount of employee contributions to the SSF and an amount of employer contributions to the SSF for the period the Applicant was on LWOP was deducted from the Applicant's retirement payout.

The amount of the payout was calculated as follows:

Gross Annual Leave      $18,868.94
Gross Long Service Leave                    $17,967.33
Gross Post 15/8/78 Amount                   $ 48,654.30
Gross Post 17/8/93 Amount                   $13,403.92

Total Gross Amount  $97,958.49

Less  Tax   $31,261.41 -

Total Payout  $67,633.08

Less

Employee contribution  $14,558.24 -
Employer contribution  $25,476.92 -

Total received   $27597.92

10. The Applicant lodged his 1999 tax return together with a letter seeking a deduction of $27,605 for the following expenses:

$ 25,476.92 employer contributions
$   1,789.00 financial advice
$     340.00 establishment fee for a superannuation fund.

11. The deductions were disallowed by the Respondent. On 3 April 2000, the Applicant lodged an objection to the disallowed amounts.

12. On 12 September 2000, the Notice of Decision on Objection issued disallowing the objection in full.  This appeal is in respect of the employer contributions only."

Terms defined in the Respondent's Statement and quoted in this decision have the same meaning when used in this decision.

(c) The Applicant made a number of statements from the bar table, most particularly as to clause 5 of the Respondent's Statement. He said that there was not in fact only one agreement but rather two agreements as follows:

(i) The first agreement was made in May 1997 (some two months prior to July 1997); under that agreement, the Applicant received LWOP for three years in order to take up an appointment to the Commonwealth Agency and undertook to make payments of superannuation contributions. (Clause 5 of the Respondent's Statement refers in its terms to "an amount equivalent to the University's' superannuation contributions to SSF"); however the agreement in question was referable to both employer and employee superannuation contributions; there was no question before the Tribunal as to the deductibility of the employee contributions because they were not in any event deductible having regard to sections 82AAT and 82AAS of the Income Tax Assessment Act 1936 ("the 1936 Act") and the fact that the Applicant was not an eligible person under section 82AAS of the 1936 Act.
(ii) In July 1997 the Applicant and the University entered into a second agreement pursuant to which the Applicant received an increase in salary to the level of Dean, in respect of the brief period from the last payment period in September 1997 until 5 October 1997, and agreed to retire from the University in July 1998 (and being apparently the earliest possible retirement date). The Applicant had paid superannuation contributions as Dean of the Faculty of Law for a period of years before standing down from that position at the end of 1996 and considered that for him to receive superannuation payments at a lower level was unfair to him.

The second paragraph of exhibit R1 reads as follows:

"I would support your salary being increased to your previous level as Dean from the last pay period in September this year subject to your confirmation that you will retire as of 4 July 1998 and that you proceed on leave without pay from 5 October 1997. You would be aware that, if you are on leave without pay for more than six months you are required to pay both personal and employer superannuation contributions."

It will be noted that the University in effect treated its overall agreement with the Applicant as recorded and encapsulated in that letter, and so that it is conceivable and indeed likely that the two agreements were in effect merged into one. However, Ms Gatland did not seek to dispute the fact that there might have been two agreements rather than one, and I am prepared to do the same. I note that I do not think that anything material turns on whether or not there were two agreements merged into one.

(d) Clause 5.6.19(b) of exhibit R2 reads as follows:

"a member of the State Superannuation Fund granted LWOP is required to continue to pay the employee contributions for the full period of LWOP. In addition, the employee is liable for the employer's contribution for the full period of LWOP if it is to exceed six months. An election to reduce unit entitlements has implications for payment of both employee and employer contributions, and employee benefits."

(e) The Applicant said from the bar table that he taught public international law at the University, although at an earlier stage he also lectured in tax law.
(f) In the result, the Applicant did not give oral evidence and the matter was argued on the papers augmented or amplified by the Applicant's view as to clause 5 of the Respondent's Statement. At no stage was the concept of an apportionment mentioned by either party. Put in other words, the Applicant did not at any time suggest that he might be entitled to an apportioned deduction referable to his small salary increase or his leave entitlements. Nothing was said about the amount of his salary increase or the (short) period to which it related. Similarly, nothing was said about what his leave entitlements might have been. The onus was on the Applicant to establish, if he could, a basis for an apportionment, and to furnish evidence as to how any such apportionment might or should be calculated.
(g) It is important to emphasise that the debate focussed almost entirely on the Applicant's superannuation entitlement on termination. He said (more than once) that he had contributed at the level of Dean and felt very much aggrieved by the fact that he would receive a superannuation entitlement at a lower level. Whether or not there were two agreements merged into one, it was abundantly clear that the focus of exhibit R1 was to ensure that the Applicant received a superannuation entitlement at the level of a Dean and not at a lower level.              

1. (a) The Applicant was a member of the SSF which is a defined benefit superannuation fund. As such his retirement benefits would be calculated in accordance with a formula referable to his final salary and would not be directly related to contributions.

   (b) The Applicant said from the bar table that he contributed at the highest level available to him; he said also that he could have contributed at a lower level and could had he so desired to do so, have brought about a reduction in his unit entitlements in SSF.
   (c) The effect of the arrangement with the University was that:

   (i) For a very brief period the Applicant received an increase in salary to the level of that of a Dean. The period was expressed to be from the last pay period in September 1997 until 5 October 1997; the exact commencing date of that period was not specified and the aggregate increase was described as small; it was not quantified and it is fair to say that it was treated effectively as de minimis;

   (ii)The Applicant would of course receive no salary during the LWOP period, but his notional salary would be that of the Dean, which would be beneficial to him in respect of his termination superannuation payment.

   (iii) The Applicant agreed to resign from the University on the expiry of one year (in July 1998) after the date of the letter which is exhibit R1.

2. (a) As will be noted from clause 9 of the Respondent's Statement, the Applicant on his retirement received $18,868.94 in respect of gross annual leave and $17,967.33 in respect of gross long service leave.

   (b) Clause 9 of the Respondent's Statement records that on his retirement the Applicant received a total payout which took into account the amounts referred to in subclause (a), and also the amount of his superannuation contributions and being $14,558.24 in respect of employee contribution and $25,476.92 in respect of employer contribution. The net amount was, so he said not received in cash but was rather rolled over within SSF. It is clear however, that the fact that it was rolled over at his direction does not detract from the fact that it was derived by him in the relevant year.
    (c) The Applicant said that he could have made payments on a periodic and recurrent basis as from 5 October 1997 by way of reimbursement of the employer contribution as and when payments fell due instead of by way of lump sum deduction on his retirement. As to why he did not to do so was not in evidence before me; the fact is that in the relevant year (and he was a cash taxpayer) he derived a lump sum from which (inter alia) the aggregate employer contribution was deducted.

3. The Applicant claimed that in the relevant year he made payment (having agreed to do so in May and July 1997) of an amount equivalent to the aggregate of the employer contribution and that he did so in order:

   (a) to derive income from the Commonwealth Agency;
   (b) to derive increased income from the University, as I have said, for the brief period involved;
   (c) to preserve his position at the University.
   (d) The Applicant contended (as I have said) that the payments in question could have been made periodically and recurrently and so that they should be regarded as analogous to rent.
   (e) The Applicant argued also that he received not only the small increase in salary previously referred to but also the leave entitlements set out in clause 9 of the Respondent's Statement.

4. As I understood the Applicant, he contended that the fact that he could have adopted a different option was entirely beside the point and that he was entitled to arrange his affairs in a manner best suited to him. It may be noted that the Respondent enumerated the options available to the Applicant in clause 14 of the Respondent's Statement as follows:

   "Other than the course of action adopted by the Applicant in paragraph 13 above, it was open to the Applicant to choose any one of the following options:

• elect to take LWOP but reduce his superannuation unit entitlements; or

• remained working at the University; or

• retire early from the University; or

• resign from his employment at the University."

1. (a) In order to obtain a deduction of an amount equivalent to the employer contribution, the Applicant must demonstrate that it falls within section 8(1) of the Income Tax Assessment Act 1997 ("the 1997 Act") which reads as follows:

   "SECTION 8-1 General deductions

   (1) You can deduct from your assessable income any loss or outgoing to the extent that:

   (a) it is incurred in gaining or producing your assessable income; or

   (b) it is necessarily incurred in carrying on a *business for the purpose of gaining or producing your assessable income.

   Note: Division 35 prevents losses from non-commercial business activities that may contribute to a tax loss being offset against other assessable income."

   (b) Lunney v FC of T; Hayley v FC of T (1958) 100 CLR 478 establishes that for a loss or outgoing to be deductible, it must have the essential character of an outgoing incurred in gaining assessable income. At page 499 the High Court said:

   "Whether or not it should be so characterised depends upon considerations which are concerned more with the essential character of the expenditure itself than with the fact that unless it is incurred by an employee or a person pursuing a professional practice will not even begin to engage in those activities from which their respective incomes are derived."

   (c)  Ronpibon Tin NL v FC of T 8 ATD 431 establishes that there must be a nexus between the outgoing and the assessable income such that the outgoing is incidental and relevant to the gaining of the assessable income.
   (d) The fact that something is done by direction of an employer does not necessarily have the effect that the expenditure is deductible. In FC of T v Cooper 91 ATC 4396 Hill J said at page 4414:
    " Assuming that that letter was a direction lawfully given under Mr Cooper's contract, it does not follow that the expenditure must be deductible. An employer may require an employee to travel to and from work by a particular mode of transport…
   …
   An employer may require an employee to travel to and from work by a particular mode of transport, but the fact that the employee is required, as a term of his employment, to incur a particular expenditure does not convert expenditure that is not incurred in the course of the income-producing operations into a deductible outgoing. If it did, then, no doubt, employers would be besieged by employees with requests that the employer should require the particular expenditure to be incurred. There may be cases where the fact that expenditure is required to be made assists an employee to show the relevant connection between the outgoing and the activities which produce assessable income, but the decision of the High Court in FC of T v Finn (1961) 12 ATD 348; (1961) 106 CLR 60, shows that there was no difference in the availability of a deduction for overseas travel expenditure, between those expenses which the taxpayer there incurred in travelling to South America at the request of his employer, and those which he incurred in travelling to Great Britain and Europe in his own vacation time. There was, in each case, the necessary connection between the expenditure and the taxpayer's income-earning activities as an architect."
   The statement by Hill J in Cooper's case is, even if obiter, strongly persuasive.
   (e) In FC of T v Markey 89 ATC 4600 the Full Federal Court said at page 4605:
   "Upon the analysis we have made of the scheme embodied in the Superannuation Act, we are of opinion that it was not open to the Tribunal to reach the conclusion that a portion of the contribution made to the fund by the taxpayer in each of the years of income was an allowable deduction under subsec.51(1) of the Income Tax Assessment Act as an outgoing incurred in gaining or producing the assessable income of the taxpayer. The true nature of the contribution to the superannuation fund was that of an investment to secure rights under the Superannuation Act. As such it was in the nature of capital expenditure. The taxpayer's argument that payments from the fund may be received upon retirement from employment on the ground of invalidity or incapacity does not assist the taxpayer in ascertaining the true nature of the payment to the fund. Entitlement to a superannuation pension after a retirement brought on by invalidity or incapacity is an entitlement to the receipt of an accelerated pension and not to income in lieu of anticipated income. The true legal character of the taxpayer's payment to the fund is a periodical payment to purchase an annuity. The fact that, in actuarial terms, the calculation of the amount to be paid as a contribution includes provision for an accelerated payment of the annuity in the case of invalidity or incapacity does not convert the nature of the contribution into two components of, firstly, an outgoing incurred in gaining or producing the assessable income of the taxpayer and, secondly, an instalment of the purchase price required to be paid to acquire the annuity. Nor can it be said that in truth any part of the payment was in the nature of a premium to secure an indemnity in the event of invalidity or incapacity. Apportionment is as inappropriate as Kitto J. held it to be in F.C. of T v Western Suburbs Cinemas Ltd, (1952) 86 CLR 102 at pp.107-108 and for essentially the same reason. The taxpayer is not entitled to a deduction for a notional expenditure upon disability insurance, which he might have obtained, when his actual expenditure related to something quite different, the superannuation rights he did obtain." (Emphasis added)

   The essential point is that emphasised; that is that the true legal character of  the taxpayer's payment to the fund was a periodical payment to purchase an annuity and therefore of a capital nature.

   (f) Perhaps the point most strongly argued by the Applicant was that, as he saw it, Markey's case is distinguishable in that Markey made a payment directly to the fund; by contrast he made a payment equivalent to the employer contribution. He argued that the University could equally have stipulated for some other payment, such as a contribution towards the cost of the law library or his own office.   

1. (a) There was no nexus of any kind between the payment of the employer contribution paid to the Applicant's superannuation fund and the income that the Applicant derived from the Commonwealth Agency.

   (b) The Applicant's leave entitlements would have been derived in any event. It is conceivable that the entitlements were greater that they would have been without the arrangement in question but there was no evidence of any kind as to what, if any, the additional amount might have been, and as I have said, the Applicant did not endeavour to establish an apportionment.
   (c) The increased salary was as I have said small and referable to a brief period; no amount was specified and there was no evidence as to an apportionment. It was treated as I have said as de minimis.
   (d) The Applicant certainly did not incur the expenditure to preserve his position because one concomitant of the arrangement was that he was obliged to retire earlier than he might otherwise have done.
   (e) I do not accept the argument that the payments could have been made periodically and were thus analogous to rent. Even if they had been made periodically (and they were not) they were made within Markey's case in order to fund a superannuation benefit and thus were made on capital account.
   (f) Nor do I accept the argument that the employer benefit was simply a convenient measure which might have taken a different form. The Applicant made a brief and passing reference to "duress". At the request of the Applicant, the University agreed to advance the Applicant (notionally except for a very brief period) to the level of Dean in order to improve his superannuation benefit. The University stipulated that during the LWOP the Applicant should pay (inter alia) an amount equivalent to the employer contribution. There was no evidence of any element of duress; the Applicant could have elected to take up another option but chose the one perceived by him to be most advantageous to him. Nor would another type of payment have suited; the University required only the reimbursement of the relevant contribution. There is thus a clear nexus between the payment and the benefit and to nothing else, and the essential character test is satisfied by that characterisation.
   (g). The fact that the Applicant paid an amount equivalent to the employer contribution does not in my view have the effect that Markey's case is distinguishable. Albeit that the University made the employer contribution to SSF and received reimbursement in accordance with its arrangement with the Applicant, the effect is that the Applicant paid that amount (indirectly) to the Fund and so that that payment falls within Markey's case and is thus of a capital nature. (I agree with the Applicant's contention that it is neither private nor domestic).

2. The Respondent's Statement indicated that there were other deductions claimed but it was agreed between the parties that the only issue before me was in relation to the employer deduction of $25,476.92.

3. Accordingly the objection decision under review must be affirmed.

I certify that the 11 preceding paragraphs are a true copy of the reasons for the decision herein of Mr J Block, Deputy President.

Signed: H Sim         .....................................................................................
  Associate

Date of Hearing  28 August 2002
Date of Decision  10 September 2002       
Applicant  self represented             
Solicitor for the Respondent    Ms J Gatland of the ATO Legal Practice