Hoare and Commissioner of Taxation
[2004] AATA 623
•21 June 2004
CATCHWORDS – INCOME TAX –
assessable income – superannuation fund – taxpayer controlling director of company – whether taxpayer entitled to claim a deduction for contributions he has made to superannuation fund – whether taxpayer is an eligible employee – whether Tribunal bound to apply Federal Court’s interpretation of “eligible employee” in context of different section – decisions affirmed
PRECEDENT – whether Federal Court’s interpretation of “eligible employee” under different section binds Tribunal – term common to both section and definition – Tribunal bound.
Income Tax Assessment Act 1936 ss. 7A, 7B, 82AAA, 82AAC, 82AAD, 82AAE, 82AAS, 82AAT, 14ZYA, 222C, 226K, 267 and 274
Superannuation Contributions Tax (Assessment and Collections) Act 1997 ss. 7 and 43
Administrative Appeals Tribunal Act 1975 ss. 37 and 44
Superannuation Industry (Supervision) Act 1993 s. 45
Taxation Administration Act 1953 s. 14ZYA
Administrative Decisions (Judicial Review) Act 1977
Judiciary Act 1901 s. 39B
Harris v Commissioner of Taxation (2002) 125 FCR 46, [2002] ATC 4659
Prebble v Commissioner of Taxation [2002] FCA 1434
Prebble v Commissioner of Taxation [2003] ATC 4770
DECISION AND REASONS FOR DECISION [2004] AATA 623
ADMINISTRATIVE APPEALS TRIBUNAL )
) VT2003/124 & VT2004/49
TAXATION APPEALS DIVISION )
Re DR JULIAN HOARE
Applicant
And COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal: Deputy President S A Forgie
Mr W G McLean (Member)
Date: 21 June, 2004
Place: Melbourne
Decision:The Tribunal:
1.affirm the objection decision dated 29 May, 2003 relating to the applicant’s income tax liability; and
2.with regard to the objection decision relating to the superannuation contributions surcharge and deemed to have been made pursuant to s. 14ZYA of the Taxation Administration Act 1953:
(1)set aside the objection decision;
(2)substitute a decision that the superannuation contributions surcharge payable by the applicant be calculated on the basis that the contribution by JS Hoare Pty Limited was $5,000.00 (and not $29,443.00); and
(3)remit the matter to the respondent to re-calculate the amount of the superannuation contributions surcharge payable by the applicant.
S A FORGIE
Deputy President
REASONS FOR DECISION
Two applications were heard together. The first concerned an objection decision by the Commissioner of Taxation (“the Commissioner”) to disallow a claim by the applicant, Dr Julian Sherwood Hoare, that his contributions to a superannuation fund for the purpose of making provision for superannuation benefits for himself were deductible under s. 82AAC of the Income Tax Assessment Act 1936 (“ITAA 1936”). The second concerned an objection decision deemed to have been made by the Commissioner disallowing Dr Hoare’s objection to an assessment made in relation to the superannuation contributions surcharge payable by Dr Hoare under the Superannuation Contributions Tax (Assessment and Collection) Act 1997 (“SCTAC Act”). As the amount of the superannuation contributions surcharge was determined in part by the amount of Dr Hoare’s adjusted taxable income, the outcome of his second application depended upon the outcome of his first. We have decided that the Commissioner’s objection decision was correct in both cases and affirm both objection decisions. Our reasons are set out below.
At the hearing, Dr Hoare represented himself and the Commissioner was represented by Mr Steward of counsel. The documents lodged pursuant to s. 37 of the Administrative Appeals Tribunal Act 1975 (“T documents”) were admitted in evidence. Dr Hoare gave oral evidence in support of his case and no oral evidence was called upon behalf of the Commissioner.
THE ISSUE
The primary issue in this case was whether the sum of $24,443.00 claimed by Dr Hoare as superannuation contributions was an allowable deduction under s. 82AAC of the ITAA 1936. This requires consideration of whether Dr Hoare was an “eligible employee”. If, as Dr Hoare argues, he was an eligible employee, that would lead to the conclusion that the sum was an allowable deduction. As a consequence, his taxable income, and so his adjusted taxable income, would be reduced. A reduction in his adjusted taxable income might lead to a reduction in the superannuation contributions surcharge that is payable under the SCTAC Act.
LEGISLATIVE FRAMEWORK
Contributions to superannuation fund
Income tax is payable for each income year by each individual and company as well as by some other entities (s. 4-1) Income Tax Assessment Act 1997 (“ITAA 1997”). Income tax is worked out by reference to taxable income for that income year (s. 4-10(2) (ITAA 1997)). Taxable income is assessable income less deductions (s. 4-15(1)). A deduction may be made for contributions to an eligible superannuation fund for employees. That is provided for in Subdivisions AA and AB of Part III of the ITAA 1936. Subdivision AB relates to “eligible persons” who are, in broad terms, self-employed persons (ss. 82AAS (1) and (2)). Dr Hoare is not such a person as he was employed by JS Hoare Pty Limited (“the Company”).
Subdivision AA is concerned with contributions to superannuation funds for the benefit of employees. Only s. 82AAC(1) is relevant in this case as the issue is whether Dr Hoare has an allowable deduction at all and is not concerned with the limits of any allowable deduction. It provides:
“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.
Note 1A deduction may be denied by section 85-25 of the Income Tax Assessment Act 1997 if the eligible employee is an associate of the taxpayer.
Note 2:Section 86-60 of the Income Tax Assessment Act 1997 (read together with section 86-75 of that Act) limits the extent to which superannuation contributions by personal service entities are allowable deductions.
Note 3:However, a deduction might be denied or reduced by section 26-80 of the Income Tax Assessment Act 1997 if the contribution is made more than 28 days after the month in which the eligible employee turns 70.”
The expression “eligible employee” is defined in s. 82AAA(1) of the ITAA 1936 in the following terms:
“eligible employee, in relation to a taxpayer, means a person other than the taxpayer who is:
(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.”
The term “employee” is defined in the following terms:
“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.”
Superannuation contributions surcharge
The SCTAC Act provides for the assessment and collection of the superannuation contributions surcharge (“surcharge”) that may be payable by a person who is a member of, in the circumstances of this case, a superannuation fund (SCTAC, s. 43). That surcharge is payable on a member’s surchargeable contributions for the financial year commencing on 1 July, 1996 or a later financial year (SCTAC, s. 7(1)) but only if that member’s adjusted taxable income for that year is greater than the surcharge threshold for that financial year (SCTAC, s. 7(2)). The “adjusted taxable income” has the meaning ascribed to it by either ss. 7A or 7B (SCTAC Act, s. 43). In either case, the adjusted taxable income is the member’s taxable income for the financial year together with other amounts specified in those sections. The member’s “taxable income” is his or her taxable income as assessed under the ITAA 1936 (SCTAC, s. 43).
Part IX – taxation of superannuation business and related business
In broad terms, Part IX of the ITAA 1936 makes specific provision for the taxation of contributions received by a fund that is an eligible superannuation fund, approved deposit fund or a unit trust that is a pooled superannuation trust (“PST”) in the year of income. Each is known as an “eligible entity” (s. 267(1)). Section 274 provides that, subject to Division 2 of Part IX, certain amounts paid to an eligible entity (other than a PST) or a retirement savings account in a year of income are taxable contributions in relation to a year of income, known as a contribution year. The superannuation fund in this case is an eligible entity and also a complying superannuation fund within the meaning of Part IX (ITAA 1936, s. 267(1) and Superannuation Industry (Supervision) Act 1993, s. 45). Section 274(1)(b) of the ITAA 1936 provides that an amount paid to an eligible entity that is a complying superannuation fund is a taxable contribution if a contribution is of the kind mentioned in s. 82AAT(1)(b) in certain circumstances. Section 82AAT comes within Subdivision AB of Part III and relates to contributions made to a complying superannuation fund by a person who is, in broad terms, a self-employed person making the contribution in order to obtain superannuation benefits for him or her self or for his or her dependants in the event of death. It provides that those contributions are deductible if made by an eligible person.
BACKGROUND
At the hearing, there was little, if any, disagreement between the parties as to the facts in this case. Rather, their disagreement centred upon the consequences that follow from those facts in view of the relevant legislative provisions. In view of that and on the basis of the evidence, both oral and written in the case, we make the findings of fact that we set out in the following paragraphs.
The Company was incorporated on 13 May, 1993. It carries on the business of a medical practice. Dr Hoare has, at all material times, been a director and shareholder of the Company and has held a controlling interest in it within the meaning of the definition of “eligible employee” in s. 82AAA(1). In addition, he has been employed by the Company as a medical practitioner.
JS Hoare Pty Limited Superannuation Fund (“the Fund”) was established on 1 June, 1993. At all material times, it was a complying superannuation fund for the purposes of s. 82AAC(1)(b) of the ITAA 1936. On 27 March, 1995, the Company was appointed trustee of the Fund. At all material times, Dr Hoare was a member of the Fund. On 8 February, 1999, Dr Hoare chaired a meeting of the Company as trustee of the Fund. The meeting noted that a solicitor had provided written advice, which was recorded in the minutes of the meeting as:
“… regarding the income tax and superannuation surcharge implications of the Fund receiving a contribution directly from a member in the member’s capacity of a controlling shareholder of an employer company.
This advice was that the contribution should be deductible in the hands of the payer and not be assessable income or subject to surcharge in the hands of the Fund.” (T documents, page T6.1)
Dr Hoare then:
“… noted that the contributions would have been made by the member or the member’s employer and that the purpose of the contribution was to enhance the member’s retirement benefits.
… the contributions are permitted under the Fund’s trust deed.” (T documents, page T6.1)
Dr Hoare then borrowed the sum of $26,000.00 from the Company. He paid it into an account he held jointly with his wife and then withdrew the same amount and paid it to the Fund for the purpose of providing superannuation benefits for himself. The Fund included Dr Hoare’s contribution in its assessable income when it submitted its return for the year ended 30 June, 1999. The Commissioner issued a notice of assessment to the Fund in relation to those contributions.
In the year of income ended 30 June, 1999, Dr Hoare received salary totalling $86,004.00 from the Company as well as gross interest, dividends and supplementary income of $2,537.00 and a net capital gain of $2,150.00. He included all of these amounts as assessable income in his return for that year. Relying on s. 82AAC of the ITAA 1936, Dr Hoare claimed a deduction of $24,443.00 being part of the $26,000.00 that he had contributed to the Fund. Age based limitations in the ITAA 1936 prevented him from claiming the full amount of his contribution. In addition, Dr Hoare claimed other deductions totalling $18,712.00 and returned taxable income of $47,536.00.
As trustee of the Fund, the Company issued a statement to Dr Hoare on 2 April, 2000. In that statement, it advised him that the employer contributions had been $29,443.00 and member contributions as $1,557.00 for the year ending 30 June, 1999 (T documents, page T13.1).
The Commissioner issued an assessment to Dr Hoare on 13 June, 2000 in respect of the year ending 30 June, 1999. He allowed the deductions claimed by Dr Hoare and assessed his taxable income as $47,536.00.
In 2002, the Commissioner reassessed Dr Hoare’s taxation liability. An amended assessment was issued on 17 April, 2002. In that amended assessment, the Commissioner disallowed the deduction of $24,443.00 and increased his taxable income by that amount to $71,979.00. He also imposed a penalty of $2,322.30 and interest of $2,935.60. Dr Hoare objected to the amended assessment on 22 March, 2003.
On 15 August, 2002, the Commissioner issued an amended superannuation surcharge assessment advice to Dr Hoare in respect of his liability to pay superannuation contributions surcharge. At the same time, he issued an amended provider superannuation contributions surcharge assessment (“amended pscs assessment”) to the Fund. That amended pscs assessment showed the Employer amount (Accumulation) to the Fund to be $29,443.00 for the year ended 30 June, 1999. It comprised the sum of $24,443.00 that Dr Hoare had paid to the Fund and a further $5,000.00 paid by the Company. As a director of the Company that was trustee of the Fund, Dr Hoare objected to the amended pscs assessment. He did so in the same letter dated 22 March, 2003 that he had used to object to the amended assessment issued on 17 April, 2002 in relation to his personal income tax liability.
The Commissioner overlooked Dr Hoare’s objection to the Fund’s amended pscs assessment and addressed only his objection to the amended assessment relating to his income tax liability. He addressed the objection to the amended assessment on 29 May, 2003 and allowed Dr Hoare’s objection to the extent that it reduced to nil penalty tax that had been imposed. The Commissioner did so in accordance with the Federal Court’s judgement in Prebble v Commissioner of Taxation [2002] FCA 1434 (Cooper J). The Federal Court had decided that a taxpayer claiming superannuation contributions to a superannuation fund as part of a controlling superannuation arrangement had a reasonably arguable position under s. 222C of the ITAA 1936. In view of that, no penalty could be imposed under s. 226K. In accordance with the Media Release 2003/30, the Commissioner also reduced the General Interest Charge that had been imposed for a period of 60 days after the issue of the amended assessment. He reduced it from 11.75% to 4.72% and did so on the basis that Dr Hoare’s contributions had been made to a superannuation fund on or before 19 May, 1999.
On or about 2 June, 2003, Dr Hoare served a notice on the Commissioner. In that notice, he required the Commissioner to make an objection decision in relation to his objection regarding the superannuation contributions surcharge. When 60 days had elapsed and he had not received notice that the Commissioner had made an objection decision, Dr Hoare gave the Commissioner a notice requiring him to make it. That notice was issued pursuant to s. 14ZYA(2) of the Taxation Administration Act 1953. When the Commissioner did not make an objection decision within the 60 day period following Dr Hoare’s giving him the notice, the effect of s. 14ZYA(3) was to deem him to have made an objection decision under s. 14ZYA(1) disallowing Dr Hoare’s objection.
In his application lodged in the Tribunal on 1 July, 2003, Dr Hoare sought review only of the Commissioner’s objection decision dated 29 May, 2003 in relation to his income tax liability. He did not seek review of the Commissioner’s deemed taxation objection and, indeed, could not have done so for it would not have been deemed to have been made until some 60 days after 2 June, 2003. On 2 March, 2004, Dr Hoare sought an extension of the time within which he could seek review of the deemed objection decision and, with the Commissioner’s consent, his application was granted.
The Commissioner has since accepted that the Employer amount (Accumulation) shown in his amended provider superannuation contributions should not have been $29,443.00 (comprising $24,443.00 contributed by Dr Hoare and $5,000 by the company). At the time of the hearing, the Commissioner had not issued the amended assessment.
THE SUBMISSIONS
Dr Hoare submitted that, on their ordinary meanings, ss. 82AAA and s. 82AAC mean that the contribution that he made to the Fund in respect of himself are deductible. That is to say, Dr Hoare submitted that he could be both the eligible employee in respect of whom the contribution was made and the controlling shareholder in the taxpayer, which was the Company. He distinguished the cases of Harris v Commissioner of Taxation (2002) 125 FCR 46, [2002] ATC 4659 (Sackville, Kenny and Allsop JJ) and Prebble v Commissioner of Taxation [2003] ATC 4770 on the basis that there had been an unlimited untaxed controlling shareholder contribution to a non-complying fund. It was not applicable in a situation in which there had, as in his case he submitted, been a taxed controlling shareholder contribution made to a complying fund in accordance with the relevant age based deductions. The decision reached in each case had been correct but the reasoning was not, Dr Hoare submitted.
Dr Hoare distinguished between the wording of s. 82AAE, which was considered by the Federal Court in those cases, and s. 82AAC, with which we are concerned and which was touched upon, but not central to, the Federal Court’s judgements. He pointed to the use of the word “makes” in s. 82AAC(1) when it refers to a deduction’s being allowable when a “… taxpayer makes a contribution to a fund …” in certain circumstances and to the use of the word “paid” in s. 82AAE when it refers to a deduction’s being allowable “… in respect of an amount paid by a taxpayer as a contribution …” in others. The word “paid”, he submitted, had connotations of the contribution’s having cost the taxpayer something.
Dr Hoare also submitted that he was entitled to regard the contribution of $24,443.00 as having been made by the Company as his employer. Where tax had been paid on the contributions by the Company, there can be no anomaly. Unlike the situations in Harris v Commissioner of Taxation and Prebble v Commissioner of Taxation, Dr Hoare submitted, he was not attempting to minimise the taxation offered to the Commissioner. When it was suggested to him that he was seeking to reduce his tax at the highest marginal rate while offering the Commissioner tax on an employer contribution to the Fund at a much reduced taxation rate of 15% and payment of any superannuation contributions surcharge, Dr Hoare replied that the Company normally makes the contributions. It was his intention to have the maximum deductible contribution. He submitted that he did not make the contribution as an eligible employee but as a controlling shareholder in the Company as trustee of the Fund.
Mr Steward submitted that we should follow Harris v Commissioner of Taxation and the later case of Prebble v Commissioner of Taxation as they are not distinguishable in any relevant way from this case. In essence, he argued, the taxpayer who pays the contribution to a complying superannuation fund for the purpose of making provision for superannuation benefits must be a person different from the eligible employee for whose benefit that contribution is made. The words “in relation to” when used in the definition of an “eligible employee” necessarily connote that there are two different people; the eligible employee in relation to the different person being the taxpayer.
CONSIDERATION
While differently constituted Full Courts of the Federal Court in Harris v Commissioner of Taxation and Prebble v Commissioner of Taxation considered s. 82AAE of the ITAA 1936 rather than s. 82AAC, with which we are concerned, their judgements are very persuasive with regard to s. 82AAC. In saying that, we appreciate that the two sections have been differently drafted at least to the extent that one uses the word “paid” and the other refers to “makes” when referring to the taxpayer’s contribution. That difference is not, in our view, of significance in the context of this case. Whether a contribution has been made or paid, the issue is whether the taxpayer must be a person different from the eligible person for whom superannuation benefits are being provided. Certainly, the wording of both ss. 82AAC and of s. 82AAE is important but, in this case, of crucial importance is the definition of an “eligible employee” as set out in s. 82AAA. That definition is common to both ss. 82AAC and of s. 82AAE. It was the definition that was considered by each Full Court and that was crucial in each of their decisions. Neither Full Court limited its consideration of the definition to a context of s. 82AAE, which was the section under which they were considering whether a deduction was allowable. Both considered the provisions of both Subdivisions AA and AB of Part III of the ITAA 1936 and so of s. 82AAC as well as s. 82AAE and other sections in those Subdivisions.
After considering the definition of “eligible employee” in its statutory context as well as in light of the history of the statutory provisions, the Full Court in Harris v Commissioner of Taxation concluded that:
“… 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’ (emphasis added). In the absence of the definition of ‘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.” (page 66)
The Full Court in Prebble v Commissioner of Taxation, followed the judgement of the Full Court in Harris v Commissioner of Taxation. Spender J was of the view that the earlier Full Court had correctly decided the matter. Hill and Hely JJ were more circumspect. They were not convinced that Harris v Commissioner of Taxation was plainly erroneous or that they should refuse to follow it. In saying that, they considered that there were arguments both for and against submissions advanced on behalf of Dr Prebble upon which the Court might either allow or dismiss his appeal.
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. The doctrine of precedent is, as Sir Anthony Mason has said (The Use and Abuse of Precedent, (1988) 4(2) ABR 93 at 93), the “… hallmark of the common law … the doctrine of precedent makes the common law continuous, consistent and predictable.” The rationale of the doctrine is this:
“Our common-law system consists in applying to new combinations of circumstances those rules of law which we derive from legal principles and judicial precedents; and for the sake of attaining uniformity, consistency and certainty, we must apply those rules, where they are plainly unreasonable and inconvenient, to all cases which arise; and we are not at liberty to reject them, and to abandon all analogy to them, in those to which they have not yet been judicially applied, because we think that the rules are not as convenient and reasonable as we ourselves could have devised. It appears to me to be of great importance to keep this principle of decision steadily in view, not merely for the determination of the particular case, but for the interests of law as a science.”
How does the doctrine of precedent affect our consideration of this case? The principle upon which the Full Courts decided Harris v Commissioner of Taxation and Prebble v Commissioner of Taxation 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 judgement of the Full Court of the Federal Court.
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. It 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.
For the reasons we have given, we:
1.affirm the objection decision dated 29 May, 2003 relating to the applicant’s income tax liability; and
2.with regard to the objection decision relating to the superannuation contributions surcharge and deemed to have been made pursuant to s. 14ZYA of the Taxation Administration Act 1953:
(1)set aside the objection decision;
(2)substitute a decision that the superannuation contributions surcharge payable by the applicant be calculated on the basis that the contribution by JS Hoare Pty Limited was $5,000.00 (and not $29,443.00); and
(3)remit the matter to the respondent to re-calculate the amount of the superannuation contributions surcharge payable by the applicant.
I certify that the thirty two preceding paragraphs are a true copy of the reasons for the decision herein of
Deputy President S A Forgie,
Mr W G McLean (Member)
Signed: ...............................................................
R. Crook Associate
Date of Hearing 5 March, 2004
Date of Decision 21 June, 2004
For the Applicant self represented
Counsel for the Respondent Mr S. StewardSolicitor for the Respondent Ms. C. Leslie
C/- Australian Government Solicitor
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