Raymor Contractors Pty Ltd v Commissioner of Taxation

Re: RAYMOR CONTRACTORS PTY. LTD.
And: COMMISSIONER OF TAXATION
Nos. G434, 523-526 of 1990
FED No. 109
Taxation
91 ATC 4259/21 ATR 1410

COURT

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Davies(1), Wilcox(2) and Hill(3) JJ.

CATCHWORDS

Taxation - superannuation fund - allowable deductions - whether payments to fund made for the purpose of benefiting eligible employees or their dependants - meaning of "purpose" - whether fund in fact being applied for the benefit of the employer company or others rather than the employees.

Income Tax Assessment Act 1936 (Cth) - s.82AAC(1).

HEARING

SYDNEY

#DATE 27:3:1991

Counsel and Solicitors D.H. Bloom QC and R.F. Edmonds for appellant: instructed by Baker and McKenzie

Counsel and Solicitors A.H. Slater instructed by the for respondent: Australian Government Solicitor

ORDER

The appeal be dismissed with costs.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

These are appeals from a judgment of a single judge of the Court whereby his Honour dismissed appeals against assessments of taxation which had disallowed as deductions sums claimed by an employer, Raymor Contractors Pty Limited, to the Raymor Contractors Pty Limited Superannuation Fund. These appeals are limited to the years of income ended 30 June 1974, 1975, 1976 and 1977. No appeal has been brought with respect to his Honour's decision as to the 1973 year. Relevant provisions of the Income Tax Assessment Act 1936 (Cth) ("the Act") have been amended. I shall refer to the Act as it read in the subject years.

The critical provision is s.82AAC(1) which provided:-

"Where a taxpayer, for the purpose of making provision for superannuation benefits for, or for dependants of, an eligible employee, sets apart or pays in the year of income an amount or amounts as or to a fund or funds from which the benefits are to be provided, and the right of the employee or dependants to receive the benefits is fully secured, the amount or the sum of the amounts, as the case may be, so set apart or paid is, subject to the succeeding provisions of this Subdivision, an allowable deduction."

Section 82AAE specified the maximum deduction allowable for all taxpayers in respect of the one employee and s.82AAM provided for the determination by the Commissioner of an appropriate amount where the employer did not specify what part of an amount set apart or paid to a superannuation fund was so set apart or paid in respect of a particular employee. Those provisions should be read in the context of other provisions of the Act, such as s.23F and s.79, which dealt with the taxation of superannuation funds established for the benefit of employees.

The word "purpose" has a meaning which is readily understood. It refers to the end in view. When used in a statute, the term requires an act or transaction to have the object of achieving the end specified by the statute. Nevertheless, the term has a variable effect according to the context in which it is used. When the word "purpose" is used in and in relation to s.51(1) of the Act, it refers to the effects to be expected of the relevant act or transaction. In this context, the purpose of an act or transaction is what it achieves or would be expected to achieve. See Ronpibon Tin N.L. and Tongkah Compound N.L. v Federal Commissioner of Taxation (1949) 78 CLR 47 at 55-7. On the other hand, the term "purpose" in s.26(a) of the Act looked to the dominant purpose actuating a transaction. Its ascertainment therefore required the identification of and a weighing up of the factors which influenced the entry into of the transaction. See Admin Exploration Pty Ltd (in liq) v Federal Commissioner of Taxation (1972) 72 ATC 4253 at 4259-60; cf. Cox v Smail (1912) VLR 274 at 278-84.
In s.82AAC(1), the word "purpose" required that the sum set apart or paid in the year of income effected a contribution towards superannuation benefits for or for a dependant of an eligible employee. The term did not look primarily to the subjective factors actuating the setting aside or payment of the sum claimed. Thus, in the ordinary case, it was sufficient to found a deduction that a superannuation fund had been established solely for the provision of superannuation benefits for employees and their dependants, that the fund had been maintained for that purpose, that a sum appropriate, having regard to the provisions of ss.82AAE and 82AAM, had been set aside or paid into the fund for the fund's purposes and that the rights of the employees and dependants to receive benefits from the fund were fully secured. If such were the case, it was not pertinent that the sum was set apart and paid into the fund not out of beneficence but out of a duty imposed by law or by an industrial award and not of consequence that the employer had taken into account in establishing and maintaining the fund that incidental benefits such as taxation benefits or the borrowing of sums from the fund at a low rate of interest could be obtained.
In Mahony v Federal Commissioner of Taxation (1965) 39 ALJR 62, (1967) 41 ALJR 232, Compton v Federal Commissioner of Taxation (1966) 116 CLR 233, Scott v Federal Commissioner of Taxation (No. 2) (1966) 40 ALJR 265, Rollason v Federal Commissioner of Taxation (1966) 40 ALJR 291 and Driclad Pty Ltd v Federal Commissioner of Taxation (1968) 121 CLR 45, it was pointed out that, to determine whether a fund was established for the benefit of the employees, regard should be had primarily to the terms of the trust deed, for it was from those terms that the purpose of the trust was to be ascertained. However, in those cases, it was also pointed out that, to ascertain whether a fund was being maintained and applied for the benefit of employees, it was proper to examine not merely the terms of the deed under which it was managed and controlled, but also the use made by the trustee of the trust funds and of the powers and discretions conferred on the trustee, the extent to which employees actually received benefits from the fund and the extent to which the funds went to the benefit of persons who were not employees. In Mahony's case, Compton's case (per Taylor J. and Kitto J.) and Scott's case, it was held that a fund was in fact being applied for the benefit of the employer company or others rather than for the benefit of employees.
In the present case, the evidence discloses a similar situation. The evidence given in proceedings in the Supreme Court of New South Wales, heard by Wootton J., shows that the fund was being maintained to provide taxation deductions and low interest loans to employer companies and benefits to only a few key personnel. In the years in issue, although the fund had built up to $2,853,330.65, only one payment was made to a retired employee and that was to a Mr Newton, who had been a director of an employer company and was one of the key personnel. Most of the employees were short term employees who were not expected to qualify. But even the long term employees were not informed that they had an entitlement under the fund. Management even kept an eye on those employees who might qualify for benefits. Thus, a list was drawn up on 21 February 1977 setting out the names of the eleven employees who could attain ordinary retiring age within the following five years. None of the eleven employees remained in employment until that age.
The allocation of benefits to short term employees while failing to advise employees of their entitlements under a scheme has generally been regarded as a guide that the fund has not been maintained for the benefit of employees. See e.g. Case A11 (1969) 69 ATC 53. Most recently, in Bayton Cleaning Company Pty Ltd v Federal Commissioner of Taxation (1990) 91 ATC 4076, in which the facts were of this nature, Sweeney A.C.J. upheld a decision of the Administrative Appeals Tribunal on the ground that the facts disclosed that the taxpayer and the trustee expected that the employees would never qualify for benefits.
It is desirable to add that, although s.82AAM empowers the Commissioner to determine the amount of a deduction where the taxpayer set apart or paid an amount to a fund but did not specify the part of the amount set apart or paid in respect of a particular employee, Sub-division AA of Division 3 was very much concerned with the relationship between the sum set apart or paid and an individual employee or employees. Section 82AAC(1) uses the expressions "an eligible employee" and "the employee". Section 82AAE specifies the amounts allowable in respect of the amount set aside or paid "for the purpose of making provision for superannuation benefits for, or for dependants of, any one employee". These provisions, which reflect the concept in s.66 of the former, namely "individual personal benefits", are concerned to ensure that moneys are set aside or paid for the purpose of providing benefits for individual employees who have rights in the fund and that those rights are fully secured. It is not necessary that an employer should turn his attention to the particular circumstances of each employee when making a contribution for it is sufficient that the contribution is made for the purpose of benefiting all or identifiable members of the fund. If no allocation has been made, the Commissioner may determine a sum deemed to be "the part of the amount set apart or paid in respect of a particular employee." It is not, however, sufficient that the employer has in mind that the moneys in the superannuation fund will ultimately go to the benefit, not of the general members of the fund, but of a remaining employee or employees such as a managing director/principal shareholder. Funds which are managed for such an ultimate end are not funds maintained for the benefit of the employees in respect of whom the contributions have, in the formal sense, been set apart or paid into the fund.
The trial Judge reviewed the evidence bearing upon the purpose of the payments made by the employers into the Raymor Contractors Pty Ltd Superannuation Fund and took into account the manner in which the payments were made, namely as undifferentiated lump sums. His Honour held that he was "unable to conclude that the amounts paid to the fund were amounts paid in respect of eligible employees." This finding was well based on the evidence before the trial Judge. The fund was not being maintained for the benefit of employees and the purpose of the contributions was not that specified by s.82AAC(1).
I would dismiss the appeal with costs.

JUDGE2

I agree with Davies J.

JUDGE3

The appellant, Raymor Contractors Pty Limited, appeals against the decision of a judge of this court (Spender J.) dismissing appeals brought by the applicant in respect of the disallowance by the respondent Commissioner of Taxation of objections to assessments of income tax in respect of the years of income ended 30 June 1973 to 1977 respectively. However, the appellant did not proceed with the appeal in respect of the 1973 year and accordingly that appeal must, whatever the outcome in other years, be dismissed with costs.

At issue in the appeals was whether certain amounts, admittedly paid by the appellant in the relevant years of income, were allowable deductions pursuant to the provisions of s.82AAC of the Income Tax Assessment Act 1936 (as amended) ("the Act"). If they were, and the provisions of s.82AAE apply to them, the consequence would be that the matter would need to be remitted to the Commissioner of Taxation to exercise his discretion pursuant to s.82AAE(b) of the Act as it then stood, it being admitted that the Commissioner had not exercised the discretion conferred upon him by that section. If no amount were an allowable deduction pursuant to s.82AAC of the Act the assessments must stand. It is agreed that, in that event an amount of additional tax imposed in those assessments pursuant to s.226 of the Act was properly assessed.

S.82AAC as then in force provided: "Where a taxpayer, for the purpose of making provision for superannuation benefits for, or for dependants of, an eligible employee, sets apart or pays in the year of income an amount or amounts as or to a fund or funds from which the benefits are to be provided, and the right of the employee or dependants to receive the benefits is fully secured, the amount or the sum of the amounts, as the case may be, so set apart or paid is, subject to the succeeding provisions of this Subdivision, an allowable deduction." S.82AAE provided:

"The deduction, or the sum of the deductions, allowable under this Subdivision in an assessment or assessments of a taxpayer or taxpayers in respect of income of the year of income in respect of amounts set apart or paid by the taxpayer or taxpayers as or to a fund or funds for the purpose of making provision for superannuation benefits for, or for dependants of, any one employee -

(a) shall not exceed whichever is the greater of the following amounts:

(i) Four hundred dollars; and

(ii) five per centum of the total remuneration paid to the employee by taxpayers during the year of income of the employee that, in the opinion of the Commissioner, corresponded to the first- mentioned year of income in respect of his employment by those taxpayers; or

(b) if the Commissioner is of the opinion that there are special circumstances that justify the allowance of a greater deduction, or of deductions of a greater sum, than the amount ascertained in accordance with the last preceding paragraph - shall be such amount, being greater than the amount so ascertained, as he considers reasonable."

The facts

At the hearing the appellant relied primarily on documentary evidence. His counsel called only one witness, a Mr Cook, who was the Finance Director of the appellant and a number of other companies in the Raymor group of companies. Mr Cook had been between 1969 and 1979 a partner with Cox Johnson and Co., Chartered Accountants, and was responsible for auditing the accounts of the Raymor group of companies. Since 1979 he had had responsibility for the custody and control of all of the business and financial records of the Raymor group. The appellant did not call either Mr W.M. Kelly or Ms Mawson who were directors and the latter of whom was the secretary of the appellant.
In his case the respondent Commissioner tendered extracts from the transcript of proceedings brought in the Supreme Court of New South Wales in its Equity Division by Paul Raymond Kelly and George Anthony Hardgrove who were members of the superannuation fund with which the present appeal is concerned, and various companies which were members of the Raymor group. To those proceedings, at least ultimately, Mr W.M. Kelly, Ms Mawson and the appellant were parties. In them the plaintiffs alleged that the trustee of the superannuation fund had acted in breach of its fiduciary duty to them in various respects.
The appellant, in its notices of appeal, claimed that Spender J. had wrongly admitted into evidence these transcript extracts. However, this ground was not pressed before us, counsel limiting themselves to argument as to the extent to which these extracts advanced the Commissioner's case.
His Honour found that the appellant was one of a number of related companies in the Raymor group. In 1973 those controlling the group determined, after taking advice as to the income tax advantages, to establish a non-contributory superannuation fund. A deed was prepared and forwarded to the Commissioner of Taxation for approval of the fund and for confirmation that contributions made to it would be allowable deductions under the provisions of subdivision AA of Division 3 of the Act. Approval and confirmation were ultimately given. It seems that as at 30 June 1973 there were at least 260 employees of companies within the Raymor group.
The trust deed although bearing the date 25th June 1973 was, his Honour found, not executed until after the letter of approval from the Commissioner of Taxation had been received, that is to say until sometime in the 1974 year, although prior to execution a payment had been made to the company which ultimately became trustee of the fund. It is no doubt because of the date of approval that the appeal in respect of the 1973 year of income was not pressed.
The superannuation fund deed provided for membership of the fund to be open to employees who were nominated by Raymor Pty Limited, referred to in the deed as "the principal employer". Accounts were to be opened by the trustee in the name of each member of the fund. Contributions were to be made by the employer in respect of each member in such amount as the employer might determine, and when made, the contribution in respect of a member was to be credited to that member's contribution account to which also a proportionate share of profits and losses arising from investment were to be credited or debited as the case might be. The deed provided for benefits to be payable upon retirement of a member from the service of his or her employer upon reaching, in the case of male members, the age of 65, and in the case of female members, the age of 60 or such other date as might be agreed between the member and the trustee. If a member were to leave the service of the employer before reaching the normal retirement date, the amount standing to the credit of his or her account was to be dealt with by the trustee at its discretion either by paying the amount or a part of it to the member or by treating the benefit as a forfeited benefit. A similar discretion arose under the deed in the event of the death of a member. Forfeited benefits could be applied under the trust deed for various purposes including the provision of added benefits to other members in the fund.
It seems that in the relevant years payments were made to the trustee out of the bank account of a partnership of which a number of the Raymor group of companies were partners. Nothing turns upon the identity of the partners. The partnership bank account was in essence used as a banker for the group of companies. By way of illustration, in the 1974 year of income a cheque was drawn in favour of the trustee of the superannuation fund in the amount of $354,000 on 27 June 1974. Amounts of $560,000, $768,594 and $1,125,000 were paid on or near the end of each of the years of income 1975 to 1977 inclusive. In each of the respective years of income the proportion of the cash contribution that was to be attributed to any particular employee, was not determined until after the end of the year. At that time, a schedule was drawn up and amounts were credited to separate ledger cards of each employee. In respect of the year 1974 it was determined, (but in the calendar year 1975) that of the total payment of $354,000 that had been made, $178,724 represented a contribution to the superannuation fund. The remaining $175,276 was a part repayment of loans from the Raymor group of companies to the trustee of the fund. Of the sum of $178,724, $13,908 was attributed as the contribution made by the appellant to the fund in respect of its employees. The sum of $13,908 was in turn broken up in respect of the members of the fund who were employees of that company.

By at least the year of income ended 30 June 1977, over 1,000 employees were members of the fund.
The evidence shows that there was a very large turnover of employees in the Raymor group of companies. Most employees left their employment before reaching the retiring age and as a result were not paid benefits under the fund. Rather their benefits were forfeited and added to the benefits available for the continuing members of the fund. Those persons included Mr William Kelly and members of his family. In the years 1973, 1974, 1975 and 1977 no amount was paid out to any member on retirement. In 1976, however, an amount of $23,050 was paid out to a Mr Newton, who was a director of at least one of the companies in the group and who had been associated with the group for a considerable time. The balance sheet of the fund as at 30 June 1977 showed that its assets consisted of cash at bank of $200.58 and loan accounts to three of the companies in the group totalling $2,853,330.65. As at that date the forfeited benefits reserve stood at $675,469.47 and the amount standing to the credit of members contribution accounts stood at $2,149,012.00. The forfeited benefits reserve was allocated among existing members of the fund after the end of the year of income. In the 1976 year, the forfeited benefits reserve was $263,566.52, for the 1975 year it was $110,386.06 and in the 1974 year the accounts show no figure for forfeited benefits. In each of the years the assets of the fund substantially consisted of a loan account to one or other of the companies in the group.
An important document upon which the respondent relied below was a handwritten note from Ms Mawson to Mr William Kelly dated 21 February 1977 in which she listed employees who were within five years of the ordinary retirement age under the fund and who were members of it. That document also listed the balance standing to the credit of those employees in the fund as at 30 June 1976.
The extracts of evidence in the Supreme Court were clearly admissible to the extent that they contained admissions by the directors of the appellant. In those extracts, Ms Mawson referred to the circumstances surrounding the establishment of the fund and of its administration. That evidence made it clear that it was essential to the establishment of the fund that it would give benefits to the employer companies by way of taxation deductions. She said that the group could not afford to be without the money that was to be contributed. It had to come back again as working capital in the form of loans. She agreed that without deductibility for tax there was no point in having the fund. High contributions were allocated in respect of older employees and it was agreed "as a general thing" that anyone who left after a short period of membership or left before the age of 60 for a female and 65 for males, would not qualify for any benefit.
Ms Mawson, apparently without discussion with other directors, forfeited the benefits of employees who left the service of the group before the relevant retiring age. Routinely, however, she showed the workbook in which she performed this task to Mr William Kelly. On one occasion she had a discussion with a member of the fund whom she had known for a considerable time about that member's future, but made no mention of the fact that were she to stay with the group until retirement she would be entitled to superannuation benefits. Ms Mawson said that it was not her practice to mention the superannuation fund generally to employees. Ordinary employees who left before retiring age were not considered for payment of retirement benefits. Ms Mawson did say that a person who had given "particularly meritorious service or service beyond average" would be considered. But she said that the situation never arose of inquiring whether workers had given long and meritorious service so as to be considered for retirement benefits (presumably other than in respect of Mr Newton). Again and again throughout her evidence she emphasised that the group needed working capital and that the agreement in relation to the fund was that money contributed to it would immediately be lent back to the company for working capital.
Mr Kelly also gave evidence in which he conceded that the whole point of the fund was that contributions were to be lent back to the operating companies or the contributing companies or key people in the companies. His reference to key people was a reference to his brother and himself, Mr Newton and Ms Mawson. When asked about discussions concerning the establishment of the fund he replied:

"In setting up the fund we primarily regard the fund as a form of - as a fund for key people and primarily as a tax benefit and seeking deduction for a sizeable amount of money which in turn was ploughed back into the company and cause the company to grow and in fact employ more people ..... without that working capital we could not have just employed those people. We knew we have to find some way of funding the company; ..."

He agreed that as a general rule he was not going

to permit ordinary workers before their retirement date to walk away with large sums from the fund.

Later in his evidence Mr Kelly agreed that in 1975 he had participated in a discussion involving removing members of the fund by terminating the services of those members as employees. The question of whether an employee, who was reengaged, might automatically become a member of the fund was also discussed. Certainly Mr Kelly agreed that by October 1975 he was aware that members could be removed by terminating their employment, causing them to cease to be members, and re-engaging them without admitting them to membership of the fund. However, he denied that he had ever considered whether it would be improper to remove a person from membership of the fund.
Mr Kelly was asked by Wootten J.:

"Does it not seem very strange to provide very large benefits in a very short time to people with very short service, people in an ordinary job?" To this question he replied: "We had a relatively high turnover. Other people, I am told, had not stayed as a general rule very long."

It seems from the evidence of Mr Kelly that his infant children at some stage became members of the fund. In reply to a further question from his Honour, Mr Kelly said:

"...the whole basic concept of the fund - there was no way we could have put $3M in the fund on the basis that we had to either secure it or get commercial interest rates back on it. There would have been very little in the fund at all. We probably would not have even been here."

Mr Kelly emphatically denied that he had determined that the only people to receive any benefit out of the fund were himself and those he designated key persons. He also denied that he had ensured by instructions to his staff that persons who were close to the retiring date, so that they might otherwise benefit under the terms of the deed, were to be dismissed before that time.
The judgment appealed against
It was the appellant's case below, as it was before us, that the taxpayer's purpose of making the payments was to be determined solely by reference to the terms of the superannuation deed and that the motivation of the taxpayer in making the payments was irrelevant to the determination of purpose. It was said to be irrelevant that the taxpayer did not, in the year of income in which a deduction was claimed, determine in respect of any particular employee what amount was paid in respect of him or her for that year. Counsel said that the allocation of amounts made in the year of income immediately preceding the year of payment was a reasonable estimate of the amount paid in respect of each individual employee for the purposes of s.82AAC, with the result that the Commissioner was obliged to consider under s.82AAE(b) whether there were special circumstances which justified the allowance of a deduction greater than that referred to in s.82AAE(a).
Spender J. accepted the appellant's submission that the relevant question was not the motive of the appellant in making the payment but the purpose for which the payment was made. However, he rejected the contention that purpose was to be determined solely by reference to the terms of the trust deed. His Honour held that evidence of the context in which the payments were made and the way in which the fund was formed and conducted was relevant to the characterisation of that purpose. In so holding,his Honour considered a number of authorities as to the relevance of purpose in the context of s.51(1) of the Act. He said that the purpose of a payment was an attribute of the transaction in question rather than an attribute of the state of mind of a person. His Honour referred to Robert G. Nall v Federal Commissioner of Taxation (1937) 57 CLR 695 at 711-712 in support of this view.
Spender J. expressed the view that the evidence was insufficient to permit any conclusion that any amount paid to the fund on behalf of any of the employer contributors was paid in respect of any particular employee. Rather, his Honour said:

"the evidence in this case demonstrates that the payments bore no correlation with any such possible estimate of aggregations of individual amounts paid for the benefit of eligible employees. The payments to the bank account of the fund were in lump sums. At the time of payment that sum was undifferentiated. At the earliest, entries in respect of it were processed after the close of the taxation year, but in my opinion it is likely that they were made when the accounts for the group were prepared probably in October of each year. The amounts, if any, that could be attributed to particular employees was not known at the time when the payment was made. Any such allocations were not made until after the end of the taxation year, and it cannot be said that the payment made was, as to any part or parts of it, to provide benefits for employees as a whole or for any one or more particular employees." Finally his Honour said: "I am unable to conclude that the amounts paid to the Fund were amounts paid in respect of eligible employees. The evidence does not permit a conclusion that these payments represented a reasonable estimate of the amounts in respect of eligible employees. As a consequence, I am unable to consider what amounts are prima facie deductible or the question under s. 82AAE, namely, whether in respect of any employee the limit imposed by that section is exceeded."

In his Honour's view, if any amount at all were deductible, that amount could not be quantified on the evidence before the court.
It is not clear whether his Honour's conclusions were based upon a view as to the purpose of the taxpayer in making the payments to the fund or whether, as the appellant submitted, his Honour held for the respondent simply because each payment was made as a lump sum without allocation among employees and in circumstances where that allocation was made in the next year of income.
His Honour also held, in favour of the appellant, that the rights of the employees or dependants to receive benefits under the fund were fully secured. That finding was not challenged by the respondent in the appeal.
The submissions of the appellant
Before us the appellant submitted that his Honour had been correct to distinguish between the purpose of the payments and the motives of those who made them. However, counsel contended that his Honour erred in finding for the respondent. He did so, according to counsel, only because of his view that the proper construction of Subdivision AA of Division 3 of Part III of the Act excluded a deduction except where the taxpayer allocated a superannuation contribution payment amongst employees during the relevant year of income. It was submitted, contrary to this view, that provided a payment was made in the relevant year of income it was sufficient that the allocation between individual employees be made later.
As already indicated it is not clear whether his Honour did have the view ascribed to him by counsel. However, it is convenient to consider the question of the purpose of the payment before proceeding to consider, if it be necessary, whether the failure to allocate the sum paid to the fund during the year of income was fatal to the claim for deductibility
The legislative history
Subdivision AA (now repealed) was introduced into the Act by the Income Tax and Social Services Contribution Assessment Act (No. 3) 1964 following the report of the Commonwealth Committee on Taxation (The Ligertwood Committee) to the Treasurer of June 1961.
Previously, the deductibility of contributions to superannuation funds was governed by s.66 of the Act, sub-s.(1) of which provided:

"(1) Where a taxpayer, for the purpose of making provision for individual personal benefits, pensions or retiring allowance for, or for dependants of, employees of the taxpayer, being or including employees engaged in producing his assessable income, sets apart or pays in the year of income a sum as or to a fund from which such benefits, pensions or allowances are to be provided, and the rights of the employees or dependants to receive the benefits, pensions or allowances are fully secured, an amount ascertained in accordance with the provisions of this section shall be an allowable deduction."

The exemption of the income of a superannuation fund from tax was governed by s.23(j) which, so far as is relevant, provided:

"(j) the incomes of the following funds, provided that the particular fund is being applied for the purpose for which it was established -

(i) a provident, benefit or superannuation fund established for the benefit of employees;"

These provisions gave rise to various schemes designed to take advantage of anomalies that existed in the then law which are discussed at paragraphs 733 and 734 of the report. The Committee's recommendation, so far as is presently relevant, was that a new section for deductibility be inserted but that it be drafted broadly along the lines of the then s.66, save that the amount of the deduction available in respect of any particular employee should be limited particularly where two or more employers made contributions on behalf of the employee. It was against this background that the present provisions were enacted.
The determination of the taxpayer's purpose
The pre-1964 law was the subject of three High Court decisions to which counsel for the appellant referred in support of a submission that the purpose of the payment to a fund was to be ascertained solely by reference to the provisions of the trust deed of the relevant fund.
The first of these decisions was Mahoney v Commissioner of Taxation (1965) 39 ALJR 62. That case was concerned with the construction of the then s.23(j) exempting from tax the income of funds. It will have been noted that under s.23(j) two discrete issues arose for decision. The first was whether the fund in question was a superannuation fund established for the benefit of employees. The second was whether the fund in question was being applied for the purpose for which it was established. In Mahoney, Owen J. held that the fund was established for the benefit of employees but that it was not, on the facts of that case, applied for the purpose for which it was established. As to the first issue his Honour said (at 63):

"In order to succeed the appellants must in the first place show that a fund was established. That, it seems to me, they have done by producing the deed of trust and proving that 500 was paid by the company to the trustees to be dealt with by them in accordance with the trust declared in the deed. Once it is conceded or proved that the payment was made and that the deed of trust was not a mere sham but a document intended to create and creating rights and obligations, it is not, in my opinion, open to the court to go behind it and investigate the motives of those who controlled or advised the company. Whether the fund that was established was a provident, benefit or superannuation fund established for the benefit of employees is also a matter which must be determined from the language of the deed and its meaning cannot vary according to the motives of those who established it... It is true that under the terms of the deed the company had a complete and unfettered discretion to decide whether any benefits at all should be conferred upon its employees, but it does not follow from that that the fund did not answer the description of a provident, benefit or superannuation fund established for the benefit of employees. It was, in my opinion, established for that purpose."

It must be noted that the first issue for decision was not the purpose of a payment made by a taxpayer but whether the fund was established for a particular purpose. It is easy to see that, in the absence of the deed being a sham, its language would determine the purpose of establishment of the fund without reference to the motives of those who established it. Whether the case can be distinguished from the later decision of the High Court in Brookton Co-operative Society Limited v Federal Commissioner of Taxation (1981) 147 CLR 441, need not be determined. In that case, which concerned whether a particular company was a company which "is established for the purpose of carrying on" a particular business, Mason J., with whom Wilson J. agreed, was of the view that in determining the purpose of establishment, the court was entitled to look not merely to the activities of the taxpayer and its directors but also to the intentions of its promoters. Aickin J. thought that regard should only be had to the actual operations of the company and Gibbs C.J. left open the question.
The second authority relied upon by the applicant was the decision of Taylor J at first instance in Compton v The Commissioner of Taxation (1966) 116 CLR 233. That case again concerned the issue whether the income of a particular superannuation fund qualified for exemption under the then s.23(j)(i) of the Act. His Honour expressed agreement with what had been said by Owen J. in Mahoney and added (at 239):

"If upon examination of the deed it is found to answer the statutory description then that is the end of the matter and, provided the fund is being applied for the purpose for which it was established, its income will be exempt from tax whatever motives its founder had."

His Honour, however, held that the fund was not applied for the purpose for which it was established. On appeal, the full court (at 116 CLR 244 ff) was of the view that the fund was not established for the requisite purpose, having regard to a provision in the deed establishing it, which enabled employers to be indemnified out of the fund against future liabilities for long service leave. However, Kitto J, without reference to what had been said in Mahoney expressed the view (at 246) that serious questions would have arisen "as to whether the fund was in truth constituted or applied as a superannuation fund for the benefit of employees" (emphasis added) in the circumstances of the case. The remainder of the court expressed no opinion on the matter.
The third decision to which reference was made was Driclad Pty Limited v Commissioner of Taxation (1968) 121 CLR 45. That case concerned both the exemption from income tax of a fund under s.23(j)(i) and the deductibility of contributions to it under the then s.66. At first instance Taylor J. was of the view that where a superannuation fund was divided into two sections each of those sections constituted a separate fund to be considered under both s.23(j) and s.66. A submission was made in respect of the "A" section of the fund, considered separately, that it was formed for the purpose of enabling the contributing companies to avoid tax upon a substantial part of their profits by making contributions to the fund. His Honour first considered s.23(j) and repeated the view he had taken in Compton. On appeal, the full High Court agreed with his Honour's conclusions as to the "A" section of the fund and proceeded to consider the provisions of s.66 in respect of the "B" section of the fund which Taylor J. had found did not satisfy either s.23(j) or s.66. Barwick C.J. and Kitto J. with whose joint judgment McTiernan and Menzies JJ. agreed, said (at 67-68):

"Turning to s.66 we find in that section a very precise requirement that the payments allowed as deductions must be for the purpose of making provision for individual personal benefits of employees and for that purpose only. If, therefore, it were the case that the payments were simply made to the trustees of a fund, and, that the fund had been established from which such benefits are to be provided and for another purpose as well, e.g. to return to the company as loans payments made by the company to trustees, we ourselves would think that the income of the fund would not be within 23(j) nor would payments to the fund be allowable deductions under s.66. So, for instance, if a deed were to contain a clause requiring the trustees to lend to taxpayers the payments made by them to the trustees as and when made, and to do so at favourable rates of interest, we would think that much could be said against treating such a deed as constituting a fund falling within either s.23(j) or s.66. In this case, evidence has shown that the bulk of the moneys in the hands of the trustees were lent to the taxpayers making the payments, but, although the deed permits this, it does not require it, and attention was not directed to the question whether or not there was, towards the end of a financial year, an arrangement whereby payments were made to avoid tax liability and moneys which would otherwise have had to be found to meet that liability were paid to trustees for the benefit of employees and also for return to the companies as loans, with the advantage of the payments being, by the terms of the deed, ultimately secured to the shareholders of the company." (emphasis added)

Counsel for the present appellant stressed the reference by Barwick C.J. and Kitto J. to the clause requiring the trustees to lend to taxpayers. They suggested that this clause supported the proposition that the question under s.66 of the taxpayer's purpose in setting apart or paying a contribution to the fund in the year of income was to be determined solely by reference to the provisions of the superannuation fund deed. But with respect, it is not possible to read what their Honours said in that way. Of course, if a fund deed did require the trustees to return funds to the employer as suggested in the example, it would be obvious that the payment in question was not one made solely for the purpose referred to in s.66. However, the subsequent reference in the decision to an arrangement, makes it clear that their Honours would not have confined the determination of purpose solely to the provisions of the trust deed. So if a trust deed were general in its terms, permitting the trustee to lend moneys back to the employer but at the time contributions were made there was an arrangement between the trustee and the employer whereby contributions were to be made to avoid tax liability and the money returned to the employer contributor by way of loans, it seems that Barwick C.J. and Kitto J. would have regarded the case as falling outside s.66. In the result, however, it was held in Driclad that a deduction was available for contributions to the fund under s66.
The words of s.66 and its successor, s.82AAC are quite clear. The section permits a deduction for a contribution that is paid by an employer (but subject to other provisions of subdivision AA) where the contributor's purpose is to make provision for superannuation benefits to, or for, dependants of an eligible employee. It is not the purpose of the fund which is to be considered, it is the purpose of the taxpayer. Counsel for the appellant referred us to ss.82AAD, 82AAE and 82AAF where the words "for the purpose of making provision of superannuation benefits for or for dependants of an employee" follow the reference to the fund rather than as in s.82AAC the reference to the taxpayer. It was said that each of ss.82AAD, 82AAE and 82AAF required consideration to be given to the purpose of the fund and that s.82AAC should be similarly construed. The argument is misconceived. It is true, that in the absence of s.82AAC there could be some ambiguity in ss.82AAD, 82AAE and 82AAF as to whether the relevant purpose was the purpose of the fund or the purpose of the taxpayer. That ambiguity does not infect s.82AAC, where the relevant words are:

"Where a taxpayer, for the purpose of making provision for superannuation benefits for ...an eligible employee, sets apart or pays... "

There is a fundamental distinction between purpose and motive just as there is ambiguity in the concept of purpose. However as Lord Wright observed in Crofter Hand Woven Harris Tweed Co. v Veitch (1942) AC 435 at 469, the words:

" 'motive', 'object', 'purpose' are in application to practical matters difficult strictly to define or distinguish"

This difficulty arises in part because "motive" is often used colloquially as meaning "purpose" and because in some cases at least a finding of motivation may lead inexorably to a finding of purpose.
In Magna Alloys and Research Pty Ltd v Federal Commissioner of Taxation (1980) 49 FLR 183, in the context of a discussion of the relevance of motive and purpose to the deductibility of a loss or outgoing under s.51(1) of the Act, Brennan J. said (at 185):

"Motive means ... the reason why a taxpayer decides to incur the expenditure. Purpose may be either a subjective purpose - the taxpayer's purpose - where it means the object which the taxpayer intends to achieve by incurring the expenditure; or it may be an objective purpose, meaning the object which the incurring of the expenditure is apt to achieve. Both motive and subjective purpose are states of mind and they are to be distinguished from objective purpose, which is an attribute of a transaction. An objective purpose is attributed to a transaction by reference to all the known circumstances; whereas subjective purpose and motive, being states of mind, are susceptible of proof not by inference alone but also by direct evidence for a state of mind may be proved by the testimony of him whose state of mind is relevant to a fact in issue."

The word "purpose" appears in s.51(1) of the Act only by reference to the purpose of a taxpayer's business. However, a taxpayer's purpose may have relevance in characterising a loss or outgoing as one falling outside the subsection (cf Fletcher v Federal Commissioner of Taxation (1990) 23 FCR 134, an appeal to the High Court in which is pending, and John v Federal Commissioner of Taxation (1989) 166 CLR 417). Nevertheless, the cases on s.51(1) afford little guidance to the construction of a section such as s.82AAC where the statute expressly refers to purpose in the context of the purpose of a taxpayer in making a particular payment or in setting aside a particular amount as or to a contribution to a fund.
The word "purpose" appears in various other contexts in the Act. For example in s.26(a) and s.25A, the assessability of the proceeds of resale of a property depend upon a taxpayer's purpose at the time of acquisition, being that of resale at a profit. In the context of the second limb of those sections (profit making scheme) the courts have distinguished between the concepts of purpose and motive: Xco Pty Limited v Federal Commissioner of Taxation (1971) 124 CLR 343 at 350-51, Loxton v Federal Commissioner of Taxation (1973) 73 ATC 4001 at 4006. The purpose of which that subsection speaks is the subjective purpose of the taxpayer rather than an attribute of the transaction itself. On the other hand, the Act in s.260 speaks of the purpose of a transaction, that is to say a purpose to be ascertained objectively by reference to the transaction itself into which a taxpayer enters and not by reference to subjective purposes of the taxpayer: Newton v Federal Commissioner of Taxation (1958) 98 CLR 1 at 8, Federal Commissioner of Taxation v Gulland (1985) 160 CLR 55 at 104 per Dawson J.
In the context of s.82AA, purpose is the object which the taxpayer has in view or in mind. There may be a fine distinction between purpose and intention but it is not necessary to explore that distinction, cf Plimmer v Commissioner of Inland Revenue (N.Z.) (1957) 11 ATD 480 at 483-484. Generally speaking a person will be said to intend the natural and probable consequences of his acts and likewise his purpose may be inferred from them. In the present case the taxpayer's purpose in making the payments in each year of income may be inferred from the objective evidence that in the years of income in question benefits were continually being forfeited and only one person was in fact paid out, that person being a director of the appellant. Coupled with the fact that virtually the whole of the contributions were lent back to the contributing companies these facts suggest that the appellant's purpose was not to benefit those persons who were members of the fund; or certainly that that was not the sole or dominant purpose in making the contributions in the years in question.
The failure of both Mr Kelly and Ms Mawson to give evidence, they being the persons responsible for the fund being established and for its administration, enables this inference more readily to be drawn: Jones v Dunkel (1959) 101 CLR 298. Unexplained, the memorandum from Ms Mawson to Mr Kelly of 21 February 1977 leads to an inference that as and when employees came within five years of retiring age consideration was given to terminating their services.
When resort is had to the admissions of both Ms Mawson and Mr Kelly contained in the evidence given in the Supreme Court of New South Wales, the inference becomes irresistible. The evidence makes it abundantly clear that the taxpayer's main purpose was to make tax deductible payments which would not diminish the working capital of the Raymor group of companies. This was to be achieved by making tax deductible payments to the fund and having the fund lend the monies so paid immediately back to the group. No doubt, the taxpayer also had a purpose of ensuring that the monies in the fund would be available to Mr Kelly and to members of his family and at least key employees but as the evidence given in the Supreme Court makes clear, such a purpose was certainly not the sole, nor even the dominant purpose.
It is not necessary in this case to determine whether the reference to purpose in s.82AAC is a reference to the sole purpose, or a reference to the dominant or principal purpose. There is however much to be said for the view that the section is concerned with sole purpose, cf Compton (supra) at 248 and 252.
As the appellant has not shown that the payments made by it in each of the years of income to the fund were made for the purpose of making provision for superannuation benefits for dependants of eligible employees who were members of the fund, it is unnecessary to consider in detail the appellant's further submission. This was, that his Honour erred in holding, if that is what his Honour did, that the scheme of subdivision AA required the appellant in the year of income to determine the allocation to be made in respect of each of employee out of the total sum paid in the year.
Two things only need be said in respect of this submission. The first is that his Honour's reference to an undifferentiated sum may, in the circumstances of this case, have been a reference to the fact that the payment made in each year of income as a lump sum included amounts which were said to be repayments of loan as well as contributions. No differentiation between these two categories was made in the year of income. If that was what his Honour meant then, taking each year of income separately at least, it could not be said until the differentiation between contribution and loan account was made, and the trusts of the superannuation deed attached to the moneys, that a particular amount was paid as a contribution to the fund for employees.
Given, however, that there were a number of years of income in question, that matter alone might not have been fatal to the appellant's case. Once the allocation was made as between contribution and loan account repayment then in the year of income in which that allocation was made there was an amount of money paid or set apart as or to the fund. The quantum of deductions might well be affected but it would not necessarily have followed that no deduction at all was available.
Second, to the extent that Spender J. may be thought to have suggested that a payment by way of contribution to a superannuation fund was not deductible unless in the year of income that payment was allocated by the contributor amongst the relevant employees, so wide a proposition could not be accepted. Many fund deeds require the employer contributor to pay an amount, actuarially calculated to be sufficient to fund the totality of benefits payable by the fund. In such a case no particular amount may be paid in respect of a particular employee although it would be possible on an actuarial basis to calculate how much of the total payment was referable to a particular employee.
There is no reason why the words "an eligible employee" in s.82AAC might not be read in the plural as well as in the singular. So read, it would be sufficient if a taxpayer, for the purpose of making provision for superannuation benefits for eligible employees, paid an amount in the year of income. If the amount were undifferentiated, in that sense, as the Act stood in 1977, s.82AAM would operate to enable the Commissioner to determine the allocation. The terms of that section reinforce the view that s.82AAC is capable of operation when an amount is paid without allocation to a fund in which benefits are to be provided for more than one employee. S.82AAM provides as follows:

"Where a taxpayer sets apart or pays an amount as or to a fund for the purpose of making provision for superannuation benefits for, or for dependants of, more than one employee but does not specify the part of the amount set apart or paid in respect of a particular employee, that part shall, for the purposes of this Subdivision, be deemed to be such amount as the Commissioner determines."

Since, however, in the present case, the payment by the appellant to the fund lacked the necessary purpose, it follows that the appeal must be dismissed and the appellant must pay the costs of it.

[1991] FCA 109

27 MARCH 1991