Prescott and Commissioner of Taxation (Taxation)
[2022] AATA 2478
•4 August 2022
Prescott and Commissioner of Taxation (Taxation) [2022] AATA 2478 (4 August 2022)
Division:Taxation and Commercial Division
File Number(s): 2020/4877-4878
Re:Timothy Edward Prescott
APPLICANT
AndCommissioner of Taxation
RESPONDENT
DECISION
Tribunal:Senior Member K James
Date:4 August 2022
Place:Melbourne
The Decision under review is affirmed.
..............................[sgd]..........................................
Senior Member K James
CATCHWORDS
TAXATION – Superannuation Lump Sum – Election – Where a taxpayer is required to elect to receive a partial commutation as a superannuation lump sum, election must be made in accordance with regulatory requirements – The common law doctrine of election has no application – Objection decision affirmed.
LEGISLATION
Administrative Appeals Act 1975 (Cth)
Tax Administration Act 1953 (Cth)
Income Tax Assessment Act 1936 (Cth)
Income Tax Assessment Act 1997 (Cth)
Income Tax Assessment Regulations 1997 (Cth)
Superannuation Industry (Supervision) Act 1993 (Cth)
Superannuation Industry (Supervision) Regulation 1994 (Cth)
Treasury Laws Amendment (Income Tax Assessment and Consequential Amendments) Regulations 2021 (Cth)Treasury Laws Amendment (Fair and Sustainable Superannuation) Regulations 2017 (Cth)
CASES
Commonwealth v Verwayen (1990) 170 CLR 394
GDGR and Commissioner of Taxation [2020] AATA 766
SECONDARY MATERIALS
Australian Tax Office, Income tax: when a superannuation income stream commences and ceases (TR 2013/5, 31 July 2013)
Explanatory Statement Income Tax Assessment Regulation 2007 (No. 2) (SLI 2007/90)
REASONS FOR DECISION
Senior Member K James
4 August 2022
Pursuant to section 34J(1) of the Administrative Appeals Act 1975, the Tribunal determined that this matter could be determined in the absence of the parties, the parties’ consent was obtained, and the matter determined without the need to conduct a hearing.
This matter concerns the different tax treatment of ‘pensions’ and ‘lump sums’ received by members of superannuation funds. Specifically, the operation of the now repealed regulation 995-1.03(b) of the Income Tax Assessment Regulations 1997 (ITAR).
FACTUAL BACKGROUND
The parties were in agreement as to the key facts in the case, which can be summarised as follows.
Since 2007, taxpayers who were under age 60, had reached their preservation age[1] and had retired, could elect to take an ‘allocated pension’ from their superannuation fund. The minimum amount of an allocated pension was a prescribed percentage of the total fund, with no upper limit. Where the taxpayer had elected to draw the allocated pension of the fund, the earnings from the fund became exempt from tax, and the pension taxed at the marginal rate less a 15% rebate to a maximum 31.5%. Where the taxpayer elected to be paid a lump sum outside of the allocated pension those payments were subject to a maximum 16.5% tax.[2]
[1] Superannuation Industry (Supervision) Regulations 1994 reg 6.0.
[2] Income Tax Assessment Act 1997 s 301-20(4), Income Tax Assessment Act 1936 (Cth) s 251S(1A).
The Applicant was born in 1957 and reached preservation age in 2012. In November 2012 he elected to take an allocated pension from his self-managed superannuation fund, the Forever Now Super Fund (Forever Now). The applicant and his wife were the only members of Forever Now.
Forever Now was established in March 2012. In accordance with the superannuation legislation, Forever Now’s trustee was a company, Paradise Forever Pty Ltd (Paradise Forever). The Applicant and his wife were the only shareholders and directors of Paradise Forever and its sole members.
The applicant elected to draw $10,000.00 per month from Forever Now as an allocated pension, this later increased to $15,000.00 per month.
In dispute was which of two alternative tax treatments applied to certain payments, additional to the regular monthly payments, made to the Applicant by Forever Now. The central issue in this matter is whether the applicant had elected for those payments to be ‘superannuation lump sum’ payments as defined in relevant legislation, and if so, has the appropriate taxation treatment been applied.
Relevant Legislation
The operative section of the Income Tax Assessment Act 1997 (ITAA97) provides:
Section 301-20. Superannuation lump sum--taxable component taxed at 0% up to low rate cap amount, 15% on remainder
(1) If you are under 60 years but have reached your *preservation age when you receive a *superannuation lump sum, the *taxable component of the lump sum is assessable income.
(2) You are entitled to a *tax offset that ensures that the rate of income tax on the amount mentioned in subsection (3) does not exceed 0%.
(3) The amount is so much of the total of the *taxable components included in your assessable income for the income year under subsection (1) as does not exceed your *low rate cap amount (see section 307-345) for the income year.
(4) You are entitled to a *tax offset that ensures that the rate of income tax on the amount mentioned in subsection (5) does not exceed 15%.
(5) The amount is so much of the total of the *taxable components included in your assessable income for an income year under subsection (1) as exceeds your *low rate cap amount for the income year.
Sections 307-65 and 307-70 of the ITAA97 provide:
307-65 Meaning of superannuation lump sum
(1) A superannuation lump sum is a *superannuation benefit that is not a *superannuation income stream benefit (see section 307-70).
(2) Treat a lump sum payment arising from a partial commutation of a *superannuation income stream as a superannuation lump sum for the purposes of this Act (other than Subdivision 295-F).
307-70 Meaning of superannuation income stream and superannuation income stream benefit
(1) A superannuation income stream benefit is a *superannuation benefit specified in the regulations that is paid from a *superannuation income stream.
(2) A superannuation income stream has the meaning given by the regulations.
During the relevant years, regulation 995-1.03 of the ITAR provided:
Reg 995-1.03. Payments that are not superannuation income stream benefits
A payment from an interest that supports a superannuation income stream is not a superannuation income stream benefit if:
(a) the conditions to which the superannuation income stream is subject allow for the variation of the amount of the payments of benefit in a year in circumstances other than:
(i) the indexation of the benefit under the rules of the product; or
(ii) the application of the family law splitting provisions; or
(iii) the commutation of the benefit (including commutation to pay a surcharge liability); or
(iv) the payment of an assessment of excess contributions tax; and
(b) the person to whom the payment is made elects, before a particular payment is made, that that payment is not to be treated as a superannuation income stream benefit.
This regulation was repealed on 29 March 2017 with the enactment of the Treasury Laws Amendment (Fair and Sustainable Superannuation) Regulations 2017 (Cth). The different tax treatment of lump sums and pensions is no longer relevant.
In Ruling TR2013/5 the Commissioner advised that effective from 31 July 2013:
Further, draft Taxation Ruling TR 2011/D3 stated that upon a partial commutation of a superannuation income stream the resulting payment was a superannuation lump sum for income tax purposes as the member, by making the choice to partially commute the income stream was also taken to have made an election under paragraph 995-1.03(b) of the ITAR 1997 for that payment not to be treated as a superannuation income stream benefit (effectively, for the payment to be treated as a superannuation lump sum). However, this Ruling requires the person to actually make the election before a partial commutation payment is made for that payment to be treated as a superannuation lump sum. The requirement to actually make the election under regulation 995-1.03 of the ITAR 1997 applies from the date of issue of this Ruling. For a partial commutation payment made before the date of issue of this Ruling that payment is a superannuation lump sum payment unless the person has treated the payment as a superannuation income stream benefit.[3]
[3] Australian Tax Office, Income tax: when a superannuation income stream commences and ceases (TR 2013/5, 31 July 2013) 10 [48].
The relevant payments were made by Forever Now after 31 July 2013, with the first occurring sometime following 31 August 2013.
On the Applicants evidence the professional advisers to the Applicant and Paradise Forever did not draw to his attention, in either his role as director of Paradise Forever or member of Forever Now, the existence of regulation 995-1.03, and-or the Commissioner’s Ruling TR2013/5, before relevant payments were made by Forever Now.[4] The Applicant acknowledged that it was only after his financial advisor questioned the tax treatment in 2017 that he became aware of the application of the then Regulation 995-1.03 to the 2014 and 2015 taxation years.[5]
[4] Section 37 Tribunal Documents (T-Documents) T-2 8; T-9 98; T-10 112; Affidavit of Timothy Edward Prescott dated 27 January 2021 [12]; Applicant’s Amended Statement of Facts, Contentions and Issues dated 16 July 2021 [12];
[5] Applicant’s Amended Statement of Facts, Contentions and Issues dated 16 July 2021 [12]; T- Documents T-8 89.
It was also accepted that the Applicant did not execute a formal ‘election’ document before each relevant payment was made by Paradise Forever. Similarly, Paradise Forever did not make or enter any formal document in respect to each relevant payment before each payment was made.
The applicant submitted that prior to lodging the objection the tax position in the relevant years was as follows:
The Fund reported to the Commissioner of Taxation that it had issued PAYG payment summaries to the Applicant as follows:
a. 2014 superannuation income stream $464,0963; and
b. 2015 superannuation income stream $365,0354.
The Applicant made the following declarations in his income tax returns:
a. 2014 income year
i. $464,096 – Australian annuities and superannuation income streams – taxable component taxed elements
b. 2015 income year
ii. $365,035 – Australian annuities and superannuation income streams – taxable component taxed elements.
The Applicant did not declare in the tax returns lodged for the 2014 and 2015 income years that he received any superannuation lump sum benefits. The information supplied in the said income tax returns vis-à-vis Australian annuities and superannuation income streams – taxable component taxed elements was from the PAYG payment summaries prepared by the trustee of the Fund.[6]
[6] Applicant’s Amended Statement of Facts, Contentions and Issues dated 16 July 2021 [7]-[9].
The Governance Arrangements of the Fund
Paradise Forever appointed a licenced financial planner, Phillip White of the Westpac Banking Corporation (then trading as BT Financial Group), to manage the fund’s investments.[7] This investment manager placed and administered the investments in consultation with the Applicant, in his capacity as director of Paradise Forever. Forever Now’s investments were in accounts managed and controlled by the investment manager. Accounts termed ‘Super Working Account’ and ‘Super Savings Account’ were established in which the Applicant operated and from which he could pay/withdraw funds. All other accounts were conducted by the investment manager.[8]
[7] Affidavit of Timothy Edward Prescott dated 27 January 2021 [1]-[9]
[8] T-documents T-10 112
The practice was that the Applicant would request the investment manager to deposit funds in those accounts that he, as a director of Paradise Forever, managed. There was usually a discussion between the Applicant and the investment manager as to which investment would be sold down or funds withdrawn from, in anticipation of a payment to the Applicant in his capacity as a member of Forever Now.
The Applicant used the description ‘Tim pension’ on the online transaction, which then appeared on Forever Now’s bank statement.[9] These bank statements were not tendered as evidence. The Tribunal notes that the case proceeded on the basis that the banking records did not assist the Applicant’s case. The Applicant’s case was based primarily on the contents of the discussions between the Applicant and the investment manager when requests were made for funds to be placed into the above accounts that enabled him to make online transactions.
[9] T-documents T-10 112.
Paradise Forever appointed Heffron Consulting Pty Ltd (Heffron) to administer Forever Now in distinction from its investments. This included the preparation of accounts and various compliance returns.
Section 37 documents filed by the Commissioner show that Heffron had access to Forever Now’s banking records and were in regular contact with the investment manager.[10] In one document sent by Heffron to the investment manager they described their service in the following terms:
In addition to the year-end accounting function, we also provide your client’s fund with a comprehensive on-going administration and compliance service. A Key element of the compliance service is to ensure the ongoing compliance requirements for their fund are met and where a compliance issue is identified we bring it to your attention for rectification.
As part of this service, we review the transactions and key documents for the fund in order to identify any potential compliance or administration issues. This review is extremely comprehensive and is carried out in order to provide you and your client with additional comfort and peace of mind as to the compliance status of their fund.[11]
[10] T-Documents T-3 10-16, T-8 86-95.
[11] T-Documents T-8 91-92.
The Applicant retained his personal accountant to lodge his income tax returns.
The Applicant’s evidence was that:
In 2014, I almost died when I suffered a cardio-pulmonary arrest following a serious anaphylaxis. I took over three years to recover, both physically and emotionally, from this. As a result, I was unable to earn any other form of income and relied on the returns from my superannuation account. Also, I was not in a proper frame of mind to deal with my financial affairs and relied heavily on my advisers (Westpac and Heffron) to make decisions in my best interests.[12]
[12] Affidavit of Timothy Edward Prescott dated 27 January 2021 [11].
The Commissioner’s Decision
On 21 November 2018 the Applicant lodged an objection out of time for the 2014 and 2015 income years. The objection was accompanied with copies of amended, but not lodged, returns for Forever Now for the same years.
On 30 June 2020 the Commissioner exercised his discretion and accepted the out of time objection but otherwise rejected the objection and affirmed the original assessments.
On 14 August 2020 the Applicant lodged the present applications for review with the Tribunal.
ISSUES
The Commissioner’s position
In his reasons for decision the Commissioner stated,
‘Elects’ in not defined in the ITAR, or any other relevant taxation legislation. Accordingly, it takes its ordinary meaning unless there is something in the context to suggest that another meaning is intended. The Macquarie Dictionary defines ‘elect’ as ‘to select by vote’, ‘to determine in favour of’, ‘to pick out or choose’ inter alia. It is inherent in this definition that when a person ’elects’ something, knowledge of what is being elected is required. That is, it is impossible to ‘select’, ‘determine’ or ‘choose’ something without knowing what is being chosen or selected. [footnote: Notably, there are similar requirements for election at common law. At common law, ‘election consists of a choice between rights which the person making the elections knows he possesses’ citing Commonwealth v Verwayen (1990) 170 CLR 394, 421; See also Tropic Traders Limited v Gonnan (1990) 111 CLR 41.] (other citations omitted)[13]
[13] T-Documents T-2 7.
The first three sentences are accepted by the Tribunal. l agree that to elect something is to make a choice as set out above.
The fourth and fifth sentences of the above paragraph from the Commissioner’s reasons for decision, concerning impossibility and the doctrine of election, resulted in submissions from the Applicant arguing it is a misrepresentation of the doctrine of election.
In submissions the Respondent conceded that in the contractual context of the ‘doctrine of election’:
[T]he innocent party may be unaware of the existence of its legal right to terminate or affirm the contract, the actions taken by that party in response to the breach, by way of words or conduct, is an exercise of the party’s legal right of election. In addition the words or conduct of the innocent party constitutes the communication of the election made to the other party.[14]
[14] Respondent’s outline of submissions dated 29 June 2021 [48].
In a departure from the reasons for the objection decision the Respondent then submitted.
The [relevance of the doctrine of election] has no analogy to the regulatory regime under consideration in this matter. Under the regulatory scheme any payment made by the Fund to a member is taken to be a superannuation income stream benefit. There are no material facts or events occurring that require the Applicant to elect between alternative and inconsistent rights. It is entirely voluntary as to whether the Applicant makes the election under the Regulation.[15]
[15] Respondent’s outline of submissions dated 29 June 2021 [49].
Regulation 995-1.03
The parties agreed that the primary issue before the Tribunal was whether the Applicant had in fact made an election or elections ‘that would satisfy’[16] or ‘were in accordance with’[17] regulation 995-1.03 of the ITAR.
[16] Applicant’s amended statement of Facts, Contentions and Issues dated 16 July 2021 [1][a]
[17] Statement of Issues, Facts and Contentions of the Respondent dated 12 March 2021 [6.1]
Whilst regulation 995-1.03 makes it clear that an election must be made by the member in receipt of the payment, before payment is made, it is silent on a number of issues relevant to this matter and appropriate practice generally.
Firstly, the regulation is silent as to in what form the election should be made.
Secondly, in GDGR and Commissioner of Taxation (GDGR)[18] in discussing this Regulation, Deputy President Logan commented:
It is explicit in reg 995-1.03(b) of the ITAR that an election must be made before a particular payment is made. The event that the applicant finally submitted constituted an election for the purposes of this regulation was a communication in October 2016. That was after he had received each of the payments of invalidity pension in the relevant income years. For his reason alone, it could not be an “election” for the purposes of reg 995-1.03.
The communication to which the applicant pointed was one made to the CSC [Commonwealth Superannuation Corporation], not to the Commissioner. It is not stated in reg 995-1.03 of the ITAR to whom, if anyone, the election must be communicated. Communication of a choice between alternatives with the person affected has been regarded as an element of an effective election in other contexts: Scarf v Jardin (1882) 7 App. Case 345 at 360-1 and Sargent v ASL Developments Ltd (1974) 131 CLR 634 at 655-656, per Mason; see however Stephen J at 646-647. The Commissioner, not the CSC, administers the ITAA97 and the ITAR and has the task of assessing, including whether in so doing to treat a payment as a “superannuation income stream benefit”. That inclines me to the view that an election ought to be communicated to the Commissioner. However, I accept that there is an alternative construction which proceeds from reg 995-1.03(a) of the ITAR. That provision directs attention to the “conditions to which the superannuation stream is subject”. These are first and foremost the concern of the CSC in its administration. On that basis, the necessary communication of the election would be to the CSC. To whom, if anyone, an election needed to be communicated was not canvassed in submissions. In these circumstances and because the only communication said to constitute an election was made after the relevant income years, it is unnecessary to reach any concluded view on the subject.
The Tribunal agrees that here was nothing in the wording of the regulation that the choice made by the recipient member was required to be communicated to ‘whom, if anyone’ when made.
[18] [2020] AATA 766 [43]-[44].
Thirdly, both parties agreed, at some stage the trustee, as payer, needs to be informed of the member’s choice in order to meet their statutory obligations including the remittance of PAYG. A record of such communication is absent in this case.
Trustees are also under an obligation in the Superannuation Industry (Supervision) Act 1993 and a standard deed, to at all times keep appropriate accounting records which includes source or prime records explaining all transactions. In this context, trustees have an obligation to understand the nature of payments they are making.
In a non-self-managed superannuation fund, it would be expected that a prudent trustee would have systems and procedures in place that all payments to members would have a tax classification agreed to by the member.
In a SMSF the member is often communicating with themselves as a director of the corporate trustee or in other cases as a trustee. The trustee is still however under the same obligation to keep accounting records that explain transactions. Good practice would be to have had something recorded, but as posed in GDGR[19] the issue remains whether such a record is essential to evidence whether an election has been made.
[19] GDGR and Commissioner of Taxation [2020] AATA 766.
Forever Now’s bank statements are a source accounting record of the Trustee and, as discussed above, while the description ‘Tim pension’ does not assist the Applicant’s case it is not fatal to it. At its most beneficial view to the applicant, they are the actions of the applicant in his capacity as of an officer of Paradise Forever, not in his capacity as a member of Forever Now.
Correspondence between the applicant and the investment manager
Importantly, the only records where the Applicant might be said to be acting in his capacity as a member of Forever Now are those emails between the Applicant and the investment manager, with requests for funds to be placed in accounts so Paradise Forever could subsequently make payments to the Applicant as a Forever Now member. In this context a member is making a request to Paradise Forever’s investment manager.
The Applicant’s submissions were that the correspondence between the Applicant and the investment manager support the proposition that a complying election (choice) was made. In the Applicant’s submissions in reply, it was submitted:
There is no specific mode or method of election for the purposes of Regulation 995-1.03 of ITAR. It is accepted that the election must be made prior to a payment being made. Rhetorically, does the election require the specific words “that payment is not to be treated as a superannuation income stream benefit”.
During the 2014 income tax year, the Applicant made the following requests for withdrawals:
Date Amount
Requested
Mode of
Request
Exhibit
Page
30 August 2013
$85,000
21
Request
Regarding the top up of the Super Savings Account, I think put in $85k as a transfer. It will allow for the $40k (for the jetty), the tax bill of $14k (?) and the rest for pension payments.
11 October 2013
$50,000
22
Request
Further to our conversation this is to confirm I would like you to take the 50k from the fixed interest part of the portfolio. (Specifically the UBS Bond fund) and move it into the Super Savings account.
31 December 2013
$15,000
25
Request
Before I proceed to that, I am in need of funds urgently for a variety of reasons (for extra pension payments) needed now. Can you please arrange for $15,000 to be moved into my Super savings account as quickly as possible.
14 February 2014
$50,000
28 – 29
Request
Can you replenish the Super Savings account by $50k. This can be taken from one of the Cash Funds in the new BT Wrap. (FYI I may be doing this again before things change.)
7 May 2014
$25,000
30
Request
Re our funds. Yes, I am unfortunately well aware of our withdrawals (and the need to rebalance). Unfortunately it has been unavoidable – but we are reaching the decision points we had set ourselves, and I will discuss this with you. In the meantime I do need you to top our cash funds, and would like 25k put into the Super Savings Account.
25 June 2014
$80,000
33 – 34
Request
In the meantime as discussed I would like to draw down some funds from our BTWrap in a transfer to replenish the Super Savings account. These funds will be used over coming months to finance my living pension and other personal business expenses.
After thinking about it I would like you to sell down some of the "growth" equities and deposit $80,000 into Super Savings Account.
During the 2015 income tax year, the Applicant made the following requests for withdrawals:
Date
Amount
Requested
Mode of
Request
Exhibit
Page
7 October 2014
$30,000
47
Request
I am writing to request some funds be placed into the Super Savings Account please.
We have had some Heffron fees and Insurances, as well as pension payments in the past month that have depleted it.
I think 30k should be enough for the immediate future, but happy if you think we should do 50k for ease of management.
26 November 2014
$35,000
50
Request
I need some funds placed into the Super Savings Account please. I would like you to transfer $35k asap.
19 December 2014
$25,000
53
Request
I am writing to request a deposit of more funds into our Super Savings account please.
Can you arrange a cash withdraw from the fund and deposit $25k please.
4 February 2015
$25,000
53
Request
Can you please arrange a withdrawal of 25 k into our Super Savings Account please.
4 March 2015
$25,000
57
Request
In the meantime my Super has to fund our family, our lifestyle, my new business venture, (and our insurances)!
To that end we have hit a financial bump in the road and would like you to top up our accessible funds. I would '1 appreciate it if you could move $25k into the Super Savings account asap. I understand from our meeting you will be arranging an increase in the auto deposit of $15k month into the Super Working acct.2 April 2015
$25,000
60
Request
Can you please drawdown and transfer $25k into our Super Savings account asap.
My business projects are developing well but continue to require capital.
5 August 2015
$30,000
62
Request
In the meantime we currently require some
additional funds. Can you please transfer $30k into the Super Savings Account.It is accepted that each of the requests made by the Applicant do not contain the words “that payment is not to be treated as a superannuation income stream benefit”.
These proposition flow from the foregoing:
Each of the requests speak for themselves;
Whilst not express in the terms of Reg 995-1.03(b), it is submitted that each of the requests indicates that the payment was not to be treated as a superannuation income stream benefit.
…
The Applicant submits that the Tribunal would be satisfied that the trustee of the Fund was on notice of the elections prior to each payment was made (if the Tribunal accepts the matters in paragraphs 5 to 8 above):
a.The trustee of the Fund at the relevant times was Paradise Forever Pty Limited.
b.The Applicant was a director of the Trustee.
c.Given he was the director and the electing party, the Trustee must have been on notice of the election.
d.Alternatively, the recipients of the requests for payment were agents of the Trustee in circumstances where those recipients must have had the authority of the Trustee to effect transactions. It follows that the Trustee had actual knowledge of the election (or alternatively, constructive knowledge).[20]
[20] The Applicant’s reply to the Respondent’s submissions dated 29 June 2021 [5]-[9], [12].
Explanatory Statement to Regulation 995-1.03
The Explanatory Statement when Regulation 995-1.03 was introduced relevantly stated:
Superannuation income stream benefit
The definition of a ‘superannuation income stream benefit’ is inserted by item 3 as new regulation 995-1.03. A ‘superannuation income stream benefit’ is any payment from an interest supporting a superannuation income stream unless the taxpayer elects, before a particular payment is made, that the amount is not a superannuation income stream benefit. Such an election can only be made if the superannuation income stream product allows for variation in the size of the payments of a benefit in a year. This provides more flexibility for taxpayers to determine what amounts they need in a particular year. An amount which a person elects to take as a lump-sum does not count against the minimum draw down requirements.[21]
[21] Explanatory Statement Income Tax Assessment Regulation 2007 (No. 2) (SLI 2007/90).
This Explanatory Statement was provided to the Tribunal by both parties in response to a request from the Tribunal.
The Applicant submitted:
The purpose of the introduction of the regulation was to provide flexibility to taxpayers to determine their monetary needs for the year.
The Explanatory Statement makes the following clear:
a.The regulation creates a default position in the absence of an election;
b.The election must be made before a particular payment is made;
c.The election can only be made if the superannuation income stream product allows for a variation in the size of the benefit in a year.[22]
[22] Applicant’s Submissions in Response to the Tribunal’s Correspondence Dated 25 January 2022 [3]-[4].
The Respondent submitted:
[I]t is clear the flexibility provided by the introduction of the Regulation was to allow a taxpayer to determine, by way of an election being made prior to the payment, whether the payment would be taxed as a superannuation income stream benefit or, alternatively, as a superannuation lump sum. Importantly, the flexibility provided to taxpayers by the Regulation is a choice and is conditional upon the taxpayer making an election for the purposes of the Regulation prior to payment.
The Explanatory Statement to the Income Tax Assessment Amendment Regulations 2007 (No. 2) does not provide any further assistance in respect of the Regulation nor does it suggest any reason to depart from the ordinary meaning of the words ‘before a particular payment is made’ under the Regulation as the express language is precise and unambiguous. As outlined above the definitions in the ITAA have the effect that a payment from a superannuation fund to a member must be either a ‘superannuation lump sum’ or a ‘superannuation income stream benefit. Absent the making of a choice between the two options the default position is that the payment will be a superannuation income stream benefit.[23]
[23] Respondent’s Further Submissions dated 23 February 2022 [4]-[5].
I accept that communication ‘of a choice between alternatives with the person effected’ has been an element of an effective election in other contexts.[24] In these other contexts, sometimes referred to as the doctrine of election, the effect of the making of the election is that the electing party has lost a right they had against that other party.[25]
[24] GDGR and Commissioner of Taxation [2020] AATA 766 [44] citing Scarf v Jardine (1882) 7 App. Cas 345; Sargeant v ASL Developments Ltd (1974) 131 CLR 634, 655-6 (Mason J).
[25] Commonwealth v Verwayen (1990) 170 CLR 394, 421 (Brennan J)
Elections in an Income Tax context are the choice of a benefit prescribed by statute. The electing taxpayer has not lost a right, they have simply exercised a choice between two taxation treatments. Nor has the Trustee, or for that matter the Commissioner gained or lost a right.
As noted in paragraph 32 above, in submissions to the Tribunal the Respondent submitted that the ‘doctrine of election’ had no analogy to the regulatory regime under consideration here.
In the contractual context a right [choice] can be sterilized by ‘words and deeds’[26] or as sometimes expressed as ‘word or acts’. I am of the view, in the context of a regulation having an objective providing ‘more flexibility to taxpayers to determine [choose] their monetary needs for a year’, words, deeds, or acts should again be considered in determining whether a choice has on the facts been exercised as required by the regulation.
[26] Commonwealth v Verwayen (1990) 170 CLR 394 421 (Brennan J)
As noted above both parties accepted that the regulation is clear that that ‘choice’ must have been made before the trustee makes payment.[27]
[27] The Applicant’s Submissions in Response to the Tribunal’s Correspondence Dated 25 January 2022.
[4]; Respondent’s Further Submissions dated 23 February 2022 [4].
In paragraph 43 above the Applicant sets out the statements on which it was submitted ‘the Tribunal would – in my reading in this context ‘should’ -be satisfied that the Trustee was on notice of the elections prior to each payment was made if the Tribunal accepts the matters in paragraphs 5 to 9 and 12 of the above Applicant’s submission I summarise as:
(a)The Regulation does not specify the mode or method by which the election needs to be communicated to the Trustee.
(b)Correspondence between the Applicant and the investment manager do not expressly state the amounts transferred were to be treated as lump sums, but this can be implied from their context.
(c)In making the requests the Applicant shows an awareness that they were not part of his usual income stream from the Fund, and therefore superannuation lump sums as defined by the legislation.
CONSIDERATION
If there are clear words, acts or deeds of a choice being made by the member, then given the member also wears the hat of a director of the Trustee, there would be evidence that an election has been made and understood by the Trustee.
The Tribunal accepts that the Applicant was conscious of the fact that all the requests were to enable him to draw out amounts that were in excess of his minimum pension requirement. The Tribunal also accepts that if you look at the whole of the correspondence the Applicant was aware that the requests were in total amount, more than the current annual earnings of Forever Now.
The issue is that the regulation requires there be ‘words, acts and or deeds’ that demonstrate that the Applicant had made a choice. It is not evident, nor can it be implied in this correspondence with the investment manager, that a contemplated future withdrawal of amounts were to be treated as superannuation lump sums, and consequentially not a superannuation income stream benefit.
The Applicant’s submission that the requests support a finding that a ‘blanket’ choice[28] that all the designated requests were payments of a lump sum is rejected. Being aware that they were additional payments, is not of itself evidence of a choice as to payment form. There needs to be something in the ‘words, action or deeds’ indicating a choice has been made.
[28] Applicant’s amended statement of Facts, Contentions and Issues dated 16 July 2021 [36][b]
As to the identified requests the ‘words, act and or deeds’ fail to establish that a choice had been made that particular payments made by the fund were ‘superannuation lump sums’ or not ‘a superannuation income stream benefit’. The only action or deed other than the requests is the online transfers, the records of which were not in evidence.
Taking as an example the first ‘request’ of $85,000, $26,000 was for future pension payments, $14,000 was for a tax bill, which, on the evidence, would be the tax on previous pension payments on which no PAYG withholding was made. The $40,000 was an allowance ‘for the jetty’. How much was drawn out ‘for the jetty’ was not in evidence.
The second ‘request’ for $50,000 is silent as to what its purpose was.
The third ‘request’ for $15,000 was ‘needed urgently for a variety of reasons (for extra pension payments) needed now.’
In these ‘requests’ the words fall short of establishing that Applicant had made a choice that the payments that followed were not superannuation income stream benefits and therefore superannuation lump sums.
The words used in all of the requests set out above in paragraph 43 above are to the same effect and fall short of evidence of the making of a choice as to the taxation treatments.
CONCLUSION
This is not a matter in which the legislation has conferred a discretion on the Commissioner nor the Tribunal. The form of the regulation placed a duty on the trustee to keep appropriate accounting records and to inform the member of the taxation consequences before making any payment. That a failure to comply with the regulation has occurred over an extended period in a governance framework which is otherwise to be commended, is unfortunate for the Applicant but not the responsibility of the Commissioner. That the failure continued after the identification of a concern by Heffron in August 2014[29] is especially regrettable. The legislative framework did not provide the Commissioner with a discretion to correct failings of a trustee and/or the trustees or members professional advisors.
[29] T-Documents T-3 14.
I find then that the Applicant did not make an election complying with Regulation 995-1.03 and as a result the payments were correctly treated as superannuation income stream payments.
Accordingly, I affirm the decision under review.
I certify that the preceding 64 (sixty -four) paragraphs are a true copy of the reasons for the decision herein of
...............................[sgd].........................................
Associate
Dated: 4 August 2022
Date(s) of hearing: 29 July 2022 Date final submissions received: 23 February 2022 Solicitors for the Applicant: Conomos & Spinak Lawyers Respondent: In person
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