Kander and Commissioner of Taxation (Taxation)

[2020] AATA 2635

Kander and Commissioner of Taxation (Taxation) [2020] AATA 2635 (31 July 2020)

Division:TAXATION AND COMMERCIAL DIVISION

File Number(s):      2019/4442 and 2019/4443

Re:Shanthiny Kander

APPLICANT

AndCommissioner of Taxation

RESPONDENT

DECISION

Tribunal:Senior Member R Olding

Date:31 July 2020

Place:Sydney

The decisions under review are affirmed.

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Senior Member R Olding

CATCHWORDS

TAXATION – INCOME TAX - where applicant intended to enter into salary sacrifice arrangement – where applicant mistakenly directed employer to make after-tax superannuation contributions – whether ordinary income – decision affirmed

LEGISLATION

Fringe Benefits Tax Assessment Act 1986 (Cth), s 136

Income Tax Assessment Act 1936 (Cth), s 23L(1)
Income Tax Assessment Act 1997 (Cth), ss 6-5(1), (4)
Taxation Administration Act 1953 (Cth) s 14ZZK

Cases

Secondary Materials

REASONS FOR DECISION

Senior Member R Olding

31 July 2020

1. Is Ms Kander liable to pay income tax on amounts her employer, Westpac Banking Corporation, caused to be paid to a superannuation fund at her request?

2. Ms Kander intended to enter into a salary sacrifice arrangement such that the amounts would be “pre-tax” contributions but she mistakenly instructed Westpac to make “after-tax” deductions from her salary. The Commissioner says that as there was no effective salary sacrifice arrangement, the amounts are subject to income tax as part of Ms Kander’s salary paid at her direction to the superannuation fund.

3. I have concluded that the amounts were properly taxed as part of Ms Kander’s ordinary income.  My reasons follow.

   THE DECISIONS UNDER REVIEW

4. Ms Kander has applied to the Tribunal for review of decisions of the Commissioner disallowing objections against her income tax assessments for the years ended 30 June 2013 and 30 June 2014. 

5. Essentially, objections asserted that the amounts in question should not have been included in Ms Kander’s assessable income.

   LEGISLATIVE FRAMEWORK

6. Under s 6-5(1) of the Income Tax Assessment Act 1997 (Cth), a person’s assessable income includes income according to ordinary concepts, which is called “ordinary income”.

7. A person is taken to have received an amount of ordinary income “as soon as it is applied or dealt with in any way on your behalf or as you direct”: s 6-5(4). However, income derived by way of the provision of a “fringe benefit” is not assessable income: Income Tax Assessment Act 1936 (Cth), s 23L(1).

8. “Fringe benefit” for this purpose takes its meaning from the Fringe Benefits Tax Assessment Act 1986 (Cth), s 136. A “fringe benefit” is a “benefit” provided to an employee in respect of the employee’s employment but does not include a payment of salary or wages. A “benefit” includes a benefit that is, or to be, provided under an arrangement for or in relation to the performance of work.

9. Thus, whether an amount paid to a superannuation fund by an employer for the benefit of an employee is income derived by the employee, or a fringe benefit provided by the employer depends on the nature of the arrangements between the employer and the employee. 

10. If the employee is entitled to an amount as salary or wages but does not actually receive the amount because the employee directs the employer to deal with it some other way of their behalf, the amount is nevertheless ordinary income derived by the employee. However, if the arrangement with the employer is that the employee is entitled to a salary and also to have additional amounts contributed by the employer to a superannuation fund, the Commissioner accepts the employee’s ordinary income is limited to the salary component and the superannuation contributions are fringe benefits; provided the arrangement is entered into before the payments are made.

11. Ms Kander has the burden of proving the assessments are excessive: Taxation Administration Act 1953 (Cth) s 14ZZK. Thus, the issue for determination is whether Ms Kander has proved that under the contract or arrangement between herself and Westpac for the relevant years, her salary did not include the amounts in question which she directed Westpac to pay to the Fund.

    THE FACTS

12. The following findings are based on the evidence of Ms Kander and Ms Karen Longhurst - an employee of Westpac who at all relevant times was part of the Westpac payroll team whose responsibilities included payment of PAYG and superannuation – and were generally not contested by Ms Kander or the Commissioner:

    (a)Ms Kander has been an employee of Westpac or associated entities since 1990.

    (b)Between October 1996 and August 2006, Westpac made “pre-tax” contributions to the fund for Ms Kander’s benefit.

    (c)From August 2006 to September 2010, Ms Kander did not make any contributions to the fund.

    (d)In October 2010, Ms Kander recommenced making contributions, providing instructions to Westpac by making entries through Westpac’s online human resources portal, known as “Peoplexpress”.

    (e)Peoplexpress now and at the relevant time had a section for initiating salary sacrifice arrangements. There is and was a separate section for managing payroll deductions offering a choice to initiate regular deductions for “Extra withholding payments”, “Superannuation”, “Union membership”, Social club” and “Charities – Matching Gift Programs”.

    (f)Copies of screenshots produced by Ms Longhurst show that Ms Kander made entries through the area in Peoplexpress for managing payroll deductions. They also show that Ms Kander selected the Superannuation option and the deduction selected was “Employee Nominated Contributions (Post-tax) – DB”.

    (g)The process of organising a deduction included a review screen which allowed the employee to review their instructions before finalising the instruction by clicking on a “Submit” button. This completed the process of directing that amounts be deducted from their salary and directed to nominated destination.

    (h)Employees could review their instructions at any time, but the system did not generate a confirmation email or letter.

    (i)Payslips for Ms Kander for the relevant periods also describe the deductions as “Employee Nominated Contributions (Post-tax) – DB”.

    (j)The Fund’s annual statements provided to Ms Kander from 2011 described her contributions as “after-tax contributions you made”.

    (k)Ms Kander’s tax returns for the 2014 and 2015 income years reflected the amounts included in the relevant payment summaries issued by Westpac which, consistent with the instructions entered through Peoplexpress, treated the amounts in dispute as part of her salary.

    (l)In January 2015, Ms Kander lodged an objection to her 2014 income tax assessment on unrelated grounds.

    (m)It was not until mid-2017 that Ms Kander first sought to have her payment summaries amended to reflect that the relevant amounts were pre-tax contributions and not part of her salary. The Tax Office advised Ms Kander to contact her employer to have the payment summaries amended.

    (n)Ms Kander asked Westpac to amend her payment summaries for the 2011 income year and subsequent income years.

    (o)Westpac eventually agreed to amend the treatment of contributions for the 2017 income year and for four pay periods in the 2018 year “as a goodwill gesture”. Westpac considered that it was able to do this as the fund at the time had not yet completed its reporting for 2017. 

    (p)Westpac declined to amend Ms Kander’s payment summaries for earlier years for which reporting had closed. Ms Longhurst confirmed this in an email to Ms Kander on 4 January 2018, stating:

    As previously advised we will not be making any adjustments for prior years. It is not as simple as re-reporting (it is actually a very time-consuming and complicated process involving payroll and the super fund). Please refer to previous emails regarding this.

    (q)Ms Kander asked the Tax Office to amend her 2013 and 2014 returns. The request was refused.

    (r)Ms Kander then lodged the subject objections which were disallowed.  It is the decisions to disallow the objections which are under review by the Tribunal.

13. Ms Kander was cross-examined about her evidence that she did not become aware of the “error” until 2017 when, due to financial circumstances arising out of her child’s illness, she was forced to examine her financial circumstances more closely.  In particular, that she had not seen the references to the amounts being after-tax contributions in her payslips and annual superannuation fund statements over this extended period.

14. Ms Kander explained that payslips were not sent to employees by Westpac.  If employees wanted to see their payslip, this could be done online. In relation to the superannuation fund statements, Ms Kander explained she had no cause to study the statements because the fund was a defined benefit fund under which her final benefit would be calculated by reference to her final average salary and other factors; rather than an accumulated amount in the fund. 

15. I found Ms Kander to be an honest witness who gave her answers in a straight-forward way.  The Commissioner did not submit otherwise. Ms Kander’s explanation is not improbable in the context of a busy working parent in a senior position; I accept her explanation.

16. I also accept that Ms Kander intended that the contributions would be made under a salary sacrifice arrangement when she entered instructions through Peoplexpress in 2010.  That is consistent with the basis of her earlier contributions before the pause, as Ms Kander termed it, in contributions between 2006 and 2010. It would have been in her interests to do so. She simply entered instructions for payroll deductions rather than salary sacrifice in error and did not discover her error until 2017.

    HAS MS KANDER DISCHARGED THE ONUS OF PROVING THAT THE AMOUNTS WERE NOT ORDINARY INCOME?

17. In her Statement of Facts, Issues and Contentions and in oral submissions Ms Kander pointed to a number of factors.

18. She noted the fortnightly amount she received from Westpac did in fact reduce after the instructions were entered which is consistent with a salary sacrifice arrangement being entered into. However, that is also consistent with Westpac acting on Ms Kander’s instruction to commence making after-tax payroll deductions.

19. Ms Kander noted that treating the amounts as pre-tax contributions was consistent with her instructions when making earlier contributions before the pause in contributions from 2006 to 2010. She noted Westpac did not advise her of the after-tax treatment.  She suggested Westpac may have failed in a duty of care in that regard. She noted that an instruction for after-tax treatment would not have made sense, but no-one checked whether she really wished to proceed in that way. 

20. Ms Kander also suggested Westpac’s agreement to make the amendments for 2017 and for the four pay periods in 2018 was consistent with her having entered into a salary sacrifice arrangement. The email from Ms Longhurst on 4 January 2018 indicated that Westpac only declined to do so for the earlier years because it would be time-consuming and complicated.  I questioned Ms Longhurst about this as I did not understand how the 2017 payments could be retrospectively treated as not derived by Ms Kander. Ms Longhurst’s evidence was that she was acting on advice that the change could be made because reporting had not been completed.

21. In my view, none of these factors is sufficient to found an inference that Westpac accepted a request to enter into a salary sacrifice arrangement in the face of Ms Kander’s explicit contrary instruction through Peoplexpress.  The difficulty for Ms Kander is that, though mistakenly, she did in fact instruct Westpac to direct part of her salary to the Fund, Westpac acted on that instruction.  Once that occurred, under s 6-5(4) of the Income Tax Assessment Act 1997 Ms Kander was taken to have derived the income.

22. Ultimately, Ms Kander seemed to accept that a salary sacrifice arrangement had not been entered into but submitted this was in error and asked for the error to be corrected.  The Tribunal has no power to do so. The Tribunal’s role is to determine whether Ms Kander has discharged the onus of proving the assessments are excessive. For the reasons I have set out, she has not. Accordingly, I must affirm the objection decisions.

I certify that the preceding 22 (twenty -two) paragraphs are a true copy of the reasons for the decision herein of Senior Member R Olding

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Associate

Dated: 31 July 2020

Date of hearing (Video Conference):	1 July 2020
Applicant:	Self represented
Solicitors for the Respondent:	Ram Pandey and Jon Franklin and Ram Pandey ATO Review and Dispute Resolution