Siegfried Boyn and Commissioner of Taxation
[2012] AATA 660
•28 September 2012
Administrative Appeals Tribunal
ADMINISTRATIVE APPEALS TRIBUNAL )
) No: 2012/2169
Taxation Appeals Division )
Re: Siegfried Boyn
Applicant
And: Commissioner of Taxation
RespondentCORRIGENDUM TO DECISION [2012] AATA 660
TRIBUNAL: Professor R Deutsch, Deputy President
DATE: 9 October 2012
PLACE: Sydney
The Tribunal directs the Registrar, pursuant to subsection 43AA(1) of the Administrative Appeals Tribunal Act 1975 (Cth), to alter the text of the decision as follows:
- In paragraphs 14 and 33, by deleting the word “eligible” and inserting the word “employment”.
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Professor R Deutsch
Deputy President
[2012] AATA 660
Division TAXATION APPEALS DIVISION File Number
2012/2169
Re
Siegfried Boyn
APPLICANT
And
Commissioner of Taxation
RESPONDENT
Decision
Tribunal Professor R Deutsch, Deputy President
Date 28 September 2012 Place Sydney The decision under review is set aside and the matter is remitted to the Respondent to recalculate the tax payable in accordance with the finding that the deductions are to be first set against the employment termination remainder and the balance of the deductions should be set against the employment termination payment cap amount.
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Professor R Deutsch, Deputy President
Catchwords
TAXATION – whether amended assessed tax payable had been correctly calculated – correct method of calculation taxable component of employment termination payment – most favourable allocation of deductions – decision set aside.
Legislation
Income Tax Assessment Act 1997 ss 82, 960
Income Tax Rates Act 1986 ss 3, 12, Schedule 7Cases
Customs and Excise Commissioner v Top Ten Promotions Limited [1969] 1 WLR 1163
MacCormick v Commissioner of Taxation (1984) 158 CLR 622REASONS FOR DECISION
Professor R Deutsch, Deputy President
28 September 2012
Background
This case concerns the question of whether the Applicant’s amended assessed tax payable for the year ended 30 June 2010, as set out in the Notice of Amended Assessment dated 30 January 2012, has been correctly calculated. According to the Respondent it has been correctly calculated; however the Applicant considers it to be incorrect .
The Applicant has reached his preservation age for superannuation purposes.
At all times during the year ended 30 June 2010, the Applicant was a resident of Australia for taxation purposes.
On 30 July 2009, the Applicant received an employment termination payment (‘ETP’) from his employer.
According to the relevant PAYG payment summary, the item referred to as ETP comprises of the following two components:
·a taxable component of $250,880; and
·a tax-free component of $144,120.
issues
The issue for determination in this case is the correct method of calculating the tax payable in respect of the taxable component of the ETP.
The law
Subsection 82–10(1) of the Income Tax Assessment Act 1997 (‘ITAA 1997’) provides that the tax-free component of an ETP is not assessable income and is not exempt income. Thus, it is agreed between the parties that the tax-free component is excluded from the Applicant’s assessable income.
Subsection 82–10(2) of the ITAA 1997 provides that the taxable component of the payment is assessable income.
Subsections 82–10(3) and (4) of the ITAA 1997, provides more extensively that:
(3)You are entitled to a *tax offset that ensures that the rate of income tax on the amount mentioned in subsection (4) does not exceed:
(a) if you are your *preservation age or older on the last day of the income year in which you receive the payment – 15%; or
(b) otherwise – 30%.
Note: the remainder of the taxable component is taxed at the top marginal rate in accordance with the Income Tax Rates Act 1986.
(4)The amount is so much of the *taxable component of the payment as does not exceed the lesser of:
(a) the *ETP cap amount, reduced (but not below zero) by the amount worked out under this subsection for each life benefit termination payment you have received earlier in the income year; and
(b) the ETP cap amount, reduced (but not below zero) by the amount worked out under this subsection for each life benefit termination payment you have received earlier in consequence of the same employment termination, whether in the income year or an earlier income year.
…
The ETP cap for the 2009–10 year of income is specified in subsections 82–160 and section 960–285 of the ITAA 1997 as $150,000.
Thus, it is clear up to this point that the taxable component is itself to be divided into two further parts:
·the ETP cap amount, and
·the remainder of the taxable component.
When one looks to the relevant Tax Rates legislation, the terminology is somewhat different thereby adding considerable confusion.
In particular, subsection 12(1) of the Income Tax Rates Act 1986 (‘ITRA 1986’) provides that the rates of tax applicable in any given case are set out in Schedule 7 to that Act (except as otherwise provided by Subdivision B). No such other provision is made that is relevant to this case and thus Schedule 7 applies.
As a result, the rates of tax applicable in respect of a resident taxpayer are as follows:
·45% for the superannuation remainder (if any) of the taxable income;
·45% for the eligible termination remainder (if any) of the taxable income; and
·the relevant rates for each part of the ordinary taxable income specified in the following table:
$6000 – $35,000 15% $35,000 – $80,000 30% $80,000 – $180,000 38% $180,000 plus 45%
The two terms that are of particular relevance in the present case are – employment termination remainder (ETR) and ordinary taxable income.
ETR is defined in subsection 3(1) of the ITRA 1986 as follows:
employment termination remainder of taxable income means so much of the taxable income as:
(a) is included in assessable income under a maximum tax rate provision in Division 82 of the Income Tax Assessment Act 1997 or Division 82 of the Income Tax (Transitional Provisions) Act 1997; and
(b) does not give rise to an entitlement to tax offset under that maximum tax rate provision*.
ordinary taxable income means the taxable income, reduced by the superannuation remainder of the taxable income and by the employment termination remainder of taxable income.
“Maximum tax rate provision” is itself a defined term and means any of eight different named provisions, but most relevantly one of those named provisions is section 82-10 ITAA 19997.
The Applicant’s calculation
From the papers presented, it would appear that the Applicant has calculated his tax liability as follows:
ETP Cap Amount Interest Supplementary Income ETR Assessable Income $150,000 $3,252 $1,915 $100,880 Deductions* $79,853 - - $100,880 Taxable Income $70,147 $3,252 $1,915 Nil *Deductions:
Work-Related Car Expenses Work-Related Travel Expenses Other Work-Related Expenses Cost of Managing Tax Affairs Non-Primary Production Losses Carried Forward from earlier years Total $592 $339 $5,134 $1,223 $173,445 $180,733 Tax at marginal rates is $16,444.20 which is the tax payable worked out on the basis that the ETR is zero because the deductions were first set against the ETR. Therefore, all the remaining taxable income is ordinary taxable income.
Thus, the total tax payable before offsets is:
Tax on ETR Nil Tax on ordinary taxable income $16,444.20 Total tax before offsets $16,444.20
On this basis, the whole of the taxable income other than the interest and supplementary income is treated as part of the ETP cap amount. In other words, the taxable income of $75,314 is to be treated as follows:
·$5,167 as being ordinary taxable income subject to the relevant marginal tax rates; and
·$70,147 as being ordinary taxable income but subject to the maximum tax rate of 15% pursuant to subsection 82-10(3) of the ITAA 1997, as it does not exceed the ETP cap of $150,000.
According to the Applicant, tax of no more than $10,522.05 should have been paid on the ETP cap amount that being 15% of $70,147.
Accordingly, the Applicant considers that:
·the interest and supplementary income should have incurred no tax as it is under $6,000 tax free threshold;
·the ETP cap amount of $70,147 should have incurred a total tax liability of $10,522.05; and
·a spouse tax offset of $1,501 and medical expenses offset of $509 should have been allowed.
On that basis, the total tax liability (excluding the Medicare Levy) is $8,512.05.
The Respondent’s calculation
As indicated earlier, the Respondent takes a different view on the calculation that should be applied in this case.
In particular, according to the Respondent, when an ETR is included in assessable income, the legislative mechanism to determine the applicable tax is explicit and effectively requires the separation of the ETR. The extent of any losses are to be determined first by setting all deductions against all income other than the ETR. Once that is completed, if there is a taxable loss showing from that initial calculation the loss is used to reduce the ETR such that the 45% rate mandated by ITRA 1986 is only applied to the ETR after the loss has been deducted.
This is a materially different process to the one which the Applicant contends for and would result in a significantly higher tax liability as follows:
ETP Cap Amount Interest Supplementary Income ETR Assessable Income $150,000 $3,252 $1,915 $100,880 Deductions* $150,000 $3,252 $1,915 $25,566 Taxable Income Nil Nil Nil $75,314 *Deductions:
Work-Related Car Expenses Work-Related Travel Expenses Other Work-Related Expenses Cost of Managing Tax Affairs Non-Primary Production Losses Carried Forward from earlier years Total $592 $339 $5,134 $1,223 $173,445 $180,733 Tax applied at the 45% rate on the ETR is $33,891.30.
On that basis, there is no rebate to be given in respect of the ETP cap amount since that amount has been reduced to zero under the methodology used by the Respondent.
Thus, total tax payable before offsets is:
Tax on ETR $33,891.30 Tax on ordinary taxable income Nil Total tax before offsets $33,891.30
As the tax payable is in respect of the ETR, no offset is available under subsection 82-10(3) ITAA 1997.
The spouse tax and medical expenses offsets for a total of $2,010 would be allowed.
On that basis, the total tax liability (excluding the Medicare Levy) is $31,881.30.
Analysis
The position taken by the Respondent appears to be largely as a result of the wording of the ITRA 1986. The Respondent has interpreted those provisions as effectively requiring, through legislative direction, all available deductions to be used first so as to reduce the assessable income which is constituted by all classes other than the ETR. The Respondent takes this from the requirement that ordinary taxable income is to be reduced by the ETR.
However, in construing subsection 3(1) of the ITRA 1986, it is to be noted that the definitions do not refer to ordinary taxable income and ETR in the abstract. They clearly refer to taxable income such that the ordinary taxable income means the taxable income, reduced by the superannuation remainder of the taxable income and by the ETR of the taxable income. In other words, one needs to look to the taxable income after everything has been taken into account and ask the extent to which the taxable income contains an amount being the ETR. It is only at the level of taxable income that the analysis can be done.
The provisions are with respect confusingly drafted and simply beg the question as to what part of the eligible termination remainder remains after all deductions have been taken into account. The provisions do not do what the Respondent suggests they achieve. In particular, they do not call for an excision of the ETR as it stands within assessable income and require it to be reduced by the loss showing on all other income after the deductions have been taken wholly against that other income first. In my view, the statutory provisions as formulated do not achieve that outcome.
The provisions in question here are almost largely incomprehensible, but the approach taken by the Respondent in effectively setting all the deductions against the ETP cap amount and thereby leaving most of the ETR subject to tax, in my view, leads to a perverse outcome which does not seem to be supported by the legislation. In particular, in the circumstances confronted by the Applicant, the effect of the Respondent’s mode of calculation would largely erode the benefit of the 15% maximum tax rate applicable to the ETP cap amount since all deductions would be taken against that amount leaving a larger amount of ETR subject to the maximum tax rate of 45%. I do not believe that this was the legislative intention. Had the legislature intended such an outcome they could have used more direct and unambiguous language to the effect that in circumstances where there is both an ETP cap amount and an ETR within assessable income, all deductions must first be taken against the ETP cap amount. The legislature chose not to use language of that nature.
Taxation laws which lead to the imposition of a tax liability need to be drafted carefully and with as much precision as is reasonably possible. The imposition of tax is important and it is incumbent on the legislature to make its intentions as clear as possible (see the same principle expressed even more forcefully in D C Pierce and R S Geddes, Statutory Interpretation in Australia 7th ed. Chatswood, NSW. LexisNexis Butterworth: 2011. p315).
Further in MacCormick v Commissioner of Taxation (1984) 158 CLR 622 at 640 Gibbs CJ, Wilson, Deane and Dawson JJ stated:
For an impost to satisfy the description of a tax it must be possible to differentiate it from an arbitrary exaction and this can only be done by reference to the criteria by which liability to pay tax is imposed. Not only must it be possible to point to the criteria themselves, but it must be possible to show that the way in which they are applied does not involve the imposition of liability in an arbitrary or capricious manner.
In the circumstances presented here it is not at all clear as to exactly what the words of the Rating Acts do – the Respondent believes they establish a rule to give priority in allocation of deductions. More benignly, they may well just establish that ordinary taxable income is simply that part of taxable income which excludes the superannuation remainder and the ETR without specifying how these amounts are calculated having regard deductions. If they are establishing a priority rule for deductions they must be drafted in a clearer, more direct way – otherwise the Respondent is left to allocate in an arbitrary fashion which may not be fair to the Applicant.
In the circumstances, I am of the view that the Respondent should, in accordance with normal administrative practices adopted by the Respondent, allow the most favourable allocation of deductions and I believe that the Applicant’s calculations, as indicated above, correctly state the position.
Decision
The decision under review is set aside and the matter is remitted to the Respondent to recalculate the tax payable in accordance with the finding that the deductions are to be first set against the employment termination remainder and the balance of the deductions should be set against the employment termination payment cap amount.
I certify that the preceding 39 (thirty-nine) paragraphs are a true copy of the reasons for the decision herein of Professor R Deutsch, Deputy President.
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Associate
Dated 28 September 2012
Date of Hearing on the Papers 19 September 2012 Date of Decision 28 September 2012
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