Nguyen and Repatriation Commission

[2004] AATA 717

Administrative

Appeals

Tribunal

 

DECISION AND REASONS FOR DECISION [2004] AATA 717

ADMINISTRATIVE APPEALS TRIBUNAL               Nº V2004/107

VETERANS'      APPEALS      DIVISION

Re:                KIEM CHI NGUYEN

Applicant

And:                REPATRIATION COMMISSION

Respondent

DECISION

Tribunal:       Mr B.H. Pascoe, Senior Member

Date:             6 July 2004

Place:            Melbourne

Decision:The Tribunal affirms the decision under review.

(sgd) B.H. Pascoe

Senior Member

VETERANS’ AFFAIRS – service pension income test – salary sacrifice arrangement – additional superannuation contribution by employer – whether income of applicant – exemption from income tax – relevance of income tax ruling

Veterans’ Entitlements Act 1986

REASONS FOR DECISION

6 July 2004  Mr B.H. Pascoe, Senior Member

1. This is an application to review a decision of the Repatriation Commission (“the respondent”) which affirmed a determination of 2 January 2004 that no rate of service pension was payable to the applicant or his partner from 23 December 2003 as their combined income was $2235.74 per fortnight which exceeded the allowable limit of $2116.50 per fortnight, where any pension could be paid.  The issue was the inclusion within the assessed income of the applicant of the amounts representing the amount of salary sacrifice to be contributed by his employer to superannuation.

2. At the hearing, the applicant Mr Kiem Chi Nguyen, was unrepresented and the respondent was represented by Mr K. Herman, an advocate with the Department of Veterans’ Affairs.  There was no dispute as to the facts in this application.

3. Mr Nguyen is employed by Yarra Trams as a tram driver.  Advice from his employer stated that Mr Nguyen had arranged a salary sacrifice of $100 per week at 30 July 2001, increased to $200 per week from 16 August 2001 and further increased to $250 from 18 July 2003.  These amounts were contributed by his employer to superannuation.  The respondent recalculated the entitlement to pension retrospectively and required Mr Nguyen to refund an overpayment of pension from 10 January 2002 to 22 December 2003.

4. Mr Nguyen submitted that the amount of salary sacrificed against an increased contribution to superannuation by his employer was not income.  He maintained that the salary sacrifice was in accordance with the Tax Ruling N°TR 2001/10 (“the tax ruling”) issued by the Commissioner of Taxation so that it was excluded from his assessable income and should not be regarded as income under the Veterans’ Entitlements Act 1986 (“the Act”). He argued further that an amount contributed by his employer to superannuation would result in income to him after his retirement from employment and its inclusion as income in the year when salary sacrificed, would result in the same amount being included as income twice. Mr Nguyen submitted that some other forms of salary sacrifice for provision of a motor vehicle, payment of school fees or medical insurance result in a direct and immediate benefit to the employee, but superannuation contributions are locked away until retirement. Mr Nguyen believed that the taxation rules regarding salary sacrifice were introduced in the year 2000 and the Act which came into force in 1986 could not have contemplated this issue. As a consequence, he maintained that the later law should take precedence. He was critical of the fact that the respondent first sought details of any amounts sacrificed from salary on 5 December 2003 and that the recalculation of his entitlement was retrospective including amounts as income which had not been sought previously.

5. On behalf of the respondent it was submitted that the respondent is bound by the provisions of the Act and that any salary entitlement which is sacrificed is ordinary income under s 5H of the Act. It was said that the definition in this section does not refer to assessable income under the Income Tax Assessment Act 1997 (“the ITA Act”) and is much broader to include salary income available but not received and dealt with by direction of an employee.

6. Section 46 of the Act provides:

   A reference in this Act to a person’s ordinary income for a period is a reference to the person’s gross ordinary income from all sources for the period calculated without any reduction, other than a reduction under Division 2.

The reductions under Division 2 of the Act relate to income from the carrying on of a business and are not relevant to this matter. Section 5H of the Act provides the following relevant definitions:

5H (1)…

adjusted income, in relation to a person for the purpose of assessment of the rate of income support supplement, means the sum of:

(a)      the person’s ordinary income…

earned, derived or received has the meaning given by subsection (2)…

income, in relation to a person, means:

(a)      an income amount earned, derived or received by the person for the person’s own use or benefit…

but does not include an amount that is excluded under subsection (4), (5) or (8);

income amount means:

(a)valuable consideration; or

(b)personal earnings; or

(c)moneys; or

(d)profits;

(whether of a capital nature or not);

…

ordinary income means income that is not maintenance income or an exempt lump sum.

…

(2)      A reference in this Act to an income amount earned, derived or received is a reference to:

(a)an income amount earned, derived or received by any means; and

(b)an income amount earned, derived or received from any source (whether within or outside Australia).

…

None of the exclusions from income under ss (4) to (8) of the Act apply to the amount in question in this matter.

1. While the Act does not refer to assessable income under the ITA Act, it is relevant to note that s 6‑5 of that Act states:

   (1)       Your assessable income includes income according to ordinary concepts, which is called ordinary income.

   …

   (2)       If you are an Australian resident, your assessable income includes the *ordinary income you *derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

   …

   (4)       In working out whether you have derived an amount of *ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct.

   …

2. It is quite clear that Mr Nguyen was entitled to be paid by his employer the full entitlement to salary without reduction by the amount which he arranged to have contributed to superannuation.  The term “salary sacrifice” is generally accepted as meaning an arrangement by which an employee foregoes part of his salary or wages in return for the employer providing benefits of a similar cost.  For taxation purposes some such benefits are treated as fringe benefits on which the employer pays fringe benefits tax and some, such as superannuation contributions are not treated as a fringe benefit.  The decision to salary sacrifice is that of the employee who, with the consent of the employer, has a choice of entering into such an arrangement or receiving the full entitlement to further salary or wages.  Here Mr Nguyen had that choice.  He entered into the arrangement in July 2001, increased the amount on two occasions and may withdraw from the arrangement at any time.  The amount contributed to superannuation from his salary sacrifice was at his discretion and at his direction.  Consequently, it was income being an amount that was earned or derived by him.

3. The major issue for Mr Nguyen is that the Commissioner of Taxation has issued the tax ruling dealing with salary sacrifice arrangements.  In this ruling it is said that amounts sacrificed from salary under an agreement with an employer prior to the employee becoming entitled to payment of the salary and wages by performance of services for the employer, are not included in assessable income for income tax purposes.  In that ruling, it is stated in paragraph 28 that:

   Benefits provided to or on behalf of an employee under an effective SSA [salary sacrifice arrangement] may be derived as ordinary or statutory income by the employee. Any such benefits that are convertible to money are derived by the employee as ordinary or statutory income. However, these benefits are not assessable income of the employee under section 6‑5 or 6‑10 of the ITAA 1997 because they are exempt income under section 23L of the ITAA 1936.

It is particularly relevant to note that the tax ruling refers to the interaction between the Fringe Benefits Tax Assessment Act 1986 and the ITA Act. With the introduction of fringe benefits tax, being a tax on certain benefits provided to employees and payable by the employer, a specific exemption from income tax of such fringe benefits was provided by s 23L of the Income Tax Assessment Act 1936. If it was not for that interaction and that exemption it is most unlikely that the Commissioner of Taxation could have conceded the non assessability of amounts dealt with in the way Mr Nguyen has done. Consequently, the tax ruling for income tax purposes cannot be regarded as directly relevant to whether the amounts in question are income for the purposes of the Act.

1. Mr Nguyen was concerned also at the alleged potential double counting of the income both in the year the amount was sacrificed and in a subsequent year when he received the benefit from superannuation.  There was no evidence of the form of superannuation benefit which may be provided by the additional superannuation contributions and it is not clear that such benefit will constitute income after retirement.  In any event the fact that future income may be derived cannot result in an amount of income derived while working being excluded from being considered as income in the period in which it is derived.

2. In the same way a retrospective decision of the respondent to include an amount of past income which was in fact derived in that earlier period cannot be accepted as a reason for its non‑inclusion. Mr Herman said that the question of the treatment of amounts sacrificed from salary had been under consideration by the respondent since November 2001. However, it was not until February 2003, after advice from the Australian Government Solicitor that the decision was made to obtain the information from employers and include salary sacrifice amounts as income. While it is not unreasonable to be critical of the respondent for the tardiness in making this decision, that tardiness cannot provide a reason for not correctly applying the provisions of the Act.

3. The final submission of Mr Nguyen was that the salary sacrifice rules came into effect in the year 2000 and that the subsequent law excluding such amounts should be applied over the Act which came into force in 1986. Apart from the fact that interpretations of law under one Act, the ITA Act, cannot be applied to law under a different Act, it should be noted that the provision under which fringe benefits are excluded from assessable income, s 23L, was inserted in the Income Tax Assessment Act in 1986.

4. It follows from the foregoing that the decision under review should be affirmed.

I certify that the thirteen [13] preceding paragraphs are a true copy of the reasons for the decision herein of

Mr B.H. Pascoe, Senior Member

(sgd)       Olympia Sarrinikolaou

Clerk

Date of Hearing:  4 June 2004

Date of Decision:  6 July 2004
Advocate for the applicant:          Nil – self-represented

Advocate for the respondent:       Mr K. Herman, Department of Veterans’ Affairs