Stern and Commissioner of Taxation (Taxation)

[2023] AATA 2010

Stern and Commissioner of Taxation (Taxation) [2023] AATA 2010 (4 July 2023)

Division:TAXATION AND COMMERCIAL DIVISION

File Number(s):      2021/9670

Re:Steven Stern

APPLICANT

AndCommissioner of Taxation

RESPONDENT

DECISION

Tribunal:Deputy President Bernard J McCabe

Date:4 July 2023

Place:Melbourne

The decision under review is affirmed.

....................[SGD]......................

Deputy President Bernard J McCabe

CATCHWORDS

Review of objection decision - superannuation - commutation of excess transfer balance - where taxpayer recipient of capped defined benefit income streams - whether commutation results in acquisition of property - whether s 51(xxxi) of the Australian Constitution engaged - whether Commissioner required to consult taxpayer over commutation - decision under review affirmed

LEGISLATION

Acts Interpretations Act 1901 (Cth)

Australian Constitution
Income Tax Assessment Act 1997 (Cth)

Taxation Administration Act 1953 (Cth)

CASES

Georgiadis v Australian and Overseas Telecommunications Corporation [1994] HCA 6; (1994) 179 CLR 297

Greville v Williams (1906) 4 CLR 694
Johnston Pear & Kingham & The Offset Printing Company Pty Ltd v Commonwealth (1943) 67 CLR 314
JT International SA v The Commonwealth [2012] HCA 43
Mutual Pools and Staff Pty Limited v The Commonwealth  [1994] HCA 9; (1994) 179 CLR 155
PJ Magennis Pty Ltd v The Commonwealth (1949) 80 CLR 382

Smith v ANL Limited (2000) 204 CLR 493

SECONDARY MATERIALS

Explanatory memorandum to the Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016

Superannuation (Excess Transfer Balance Tax) Imposition Bill 2016

Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016

REASONS FOR DECISION

Deputy President Bernard J McCabe

4 July 2023

1. Australia’s system of compulsory superannuation is designed to ensure workers make provision for their retirement. Self-funded retirees enjoy greater financial freedom and impose less of a burden on the public purse over the longer term. With that desirable end in mind, the Commonwealth provides taxation concessions for superannuation. The concessions apply at the contribution, investment, and earnings stages of the superannuation life cycle.  But there are limits to that concessional treatment. This case concerns the limits of one of those limits.

2. The applicant taxpayer’s arguments focus on the limit contained in Division 294 of the Income Tax Assessment Act 1997 (Cth) (ITAA97) and related provisions in Schedule One of the Taxation Administration Act 1953 (Cth) (TAA). Division 294 purports to limit the concessions available at the earnings stage of the superannuation cycle. The purpose of Division 294 of the ITAA97 is succinctly explained in s 294-1, which provides:

   There is a cap on the total amount you can transfer into the retirement phase of superannuation (where earnings are exempt from taxation).

   Credits are added to a transfer balance account when you transfer amounts.

   If the balance in your account exceeds the cap, you will be required to remove the excess from the retirement phase, and you will be liable to pay excess transfer balance tax.

3. The taxpayer is an experienced lawyer and scholar who spent most of his career in the public sector. He retired from full-time work prior to 1 July 2017. He was (and is) in receipt of two ‘capped defined benefit income streams’ (ie, defined benefit pensions) from two different schemes. (He also receives a third pension from one of the schemes that he purchased after he left full-time work, but nothing appears to turn on that detail for present purposes.) A problem arose when the Commissioner concluded the taxpayer’s balance in his transfer balance account exceeded the cap. The Commissioner made a ‘transfer balance determination’ in January 2018 which referred to the balance in the period 1 July 2017-20 December 2017. That balance exceeded the cap.

4. A transfer balance determination is made pursuant to s 136-10(1) of Schedule One to the TAA. It is necessarily accompanied by a ‘default commutation notice’ directed to at least one of the superannuation income stream providers. The notice purports to oblige that provider to commute (ie, pay out to the pension holder as a lump sum) the amount of the excess referred to in the determination: s 136-10(6), (7). (The notice is described as a default commutation notice because a taxpayer with more than one superannuation income stream has the limited right to elect which of the streams should be commuted: s 136-20(2).) The lump sum payout is taxed at a different, non-concessional rate. The amount of earnings in the fund(s) that were deemed to be attributable to the excess amount before it was commuted would then be subject to an excess transfer balance tax.

5. The taxpayer says the Commissioner did not have the power to issue the determination and commutation notice or – if the Commissioner formally had the power – he is effectively obliged to revoke the determination.

6. The taxpayer’s argument about the operation of the limit imposed by Division 294 and related provisions is intricate, and it involves constitutional issues. The taxpayer insists he is not asking the Tribunal to find the relevant legislation is constitutionally invalid. He acknowledges questions of constitutional validity are reserved for the courts – as indeed they are. But he says the Tribunal must interpret and apply the legislation, and the Tribunal’s interpretation of the text of the statute must be informed (and necessarily limited) by the Constitution in accordance with s 15A of the Acts Interpretation Act 1901.

   THE TAXPAYER’S EMPLOYMENT HISTORY AND THE HISTORY OF HIS SUPERANNUATION CONTRIBUTIONS

7. The facts in this case are not in dispute. The account which follows is mainly derived from the taxpayer’s statement of facts, issues and contentions and his witness statement.

8. The taxpayer has been a member of three different superannuation schemes over his working life. Those schemes are:

   ·The Commonwealth Superannuation Scheme (the CSS). The taxpayer became a member of the CSS when he commenced his permanent employment in the Australian Public Service (the APS) in 1975. He remained with the APS until his resignation in 1990. He made compulsory contributions into the scheme from his fortnightly pay during this period. The APS did not make employer contributions because retirement benefits under the CSS scheme were paid out of consolidated revenue rather than the earnings of a fund. The taxpayer remained a member of the CSS after he ceased employment in the APS although he did not make further contributions. At the end of 2015, the taxpayer was informed he could only remain a member after January 2016 when he turned 65 if he took out a pension from that date. He elected to take the pension and continues to receive it. The taxpayer points out the pension is a lifetime pension that is not capable of commutation.

   ·The Mallesons Stephens Jaques Superannuation Scheme. The taxpayer commenced employment at Mallesons in 1990 after leaving the APS. He became a member of the firm’s superannuation scheme. He made regular contributions until he ceased employment with Mallesons in 1992.

   ·UniSuper. The taxpayer commenced employment with Victoria University after leaving Mallesons in 1992. He became a member of UniSuper and thereafter made contributions to the Unisuper define benefits scheme. He also transferred the amount in credit in the Mallesons scheme into his UniSuper superannuation account. His membership of UniSuper was backdated to the date on which he joined the Mallesons scheme. The taxpayer remained in full-time employment at Victoria University until 28 August 2015 when he was made redundant, and he made regular contributions from his salary throughout that period of employment. The university also made regular employer contributions.  After being made redundant, the taxpayer took a pension from the Unisuper defined benefits indexed pension scheme. He emphasised that pension was a lifetime pension which was not capable of commutation. The taxpayer thereafter continued to work for the university on a casual basis and made irregular voluntary superannuation contributions to Unisuper. He applied those contributions and remaining credits towards the purchase of a ‘Flexi-pension’ from Unisuper. He continues to receive that pension as well.

   Excess balance determinations

9. I have already explained Division 294 of ITAA97 provides for limits on the total amount of an individual’s superannuation income streams that receive concessional treatment. It is necessary to engage with the detail of the rules to understand the taxpayer’s argument.

10. The limits are brought about through the use of a legislated device known as the transfer balance account which applies to a ‘retirement phase recipient’ pursuant to s 294-15 of ITAA97. (The expression ‘retirement phase recipient’ is defined in s 294-20 but nothing turns on that for present purposes since the taxpayer clearly qualifies.) In most cases, the value of the underlying ‘superannuation interest’ (defined in s 995(1) but, crudely speaking, the amount standing to the taxpayer’s credit in their superannuation account with the provider) is treated as a ‘transfer balance credit’ in the transfer balance account pursuant to s 294-25. There is also provision for ‘transfer balance debits’ which affect the amount of the transfer balance. Transfer balance debits are calculated in accordance with s 294-80. The applicable ‘transfer balance cap’ is then worked out in accordance with s 294-35.

11. Complications arise in relation to ‘capped defined benefit income streams’ like the pensions in issue in this case that include commutation restrictions. The commutation restrictions are imposed by legislation: a list of the legislative provisions imposing commutation restrictions is set out in a table in s 294-130(1). The restrictions exist because of the way these funds operate. The operation of these funds makes it difficult to calculate the value of (a) the transfer balance credits in accordance with s 294-25 given the nature of the underlying superannuation interest, and (b) the value of any transfer balance debits within the meaning of s 294-80.

12. Section 294-135 modifies the operation of s 294-25 which governs the calculation of the transfer balance credit in the case of capped defined benefit income streams. Section 294-135(1) says that, in relation to a capped defined income stream governed by Div 294D, the reference in s 294-25 to the ‘value’ of a ‘superannuation interest’ should be read as a reference to the ‘special value’ of the superannuation interest. Section 294-135(2) goes on to explain how the ‘special value’ is to be calculated. Section 294-145(1) explains how transfer balance debits in a capped defined benefit income stream should be calculated for the purposes of s 294-80.

13. Section 294-140(3) introduces the concept of the ‘capped defined benefit balance’. That amount is equal to the sum of the transfer balance credits in the transfer balance account in respect of capped defined benefit income streams less the sum of the transfer balance debits in that account in respect of capped defined benefit income streams. Section 294-140(1) modifies the definition of ‘excess transfer balance’ in respect of these income streams so that a taxpayer is deemed to have an ‘excess transfer balance’ if the amount of the transfer balance exceeds both (a) the amount of the transfer balance cap and (b) the capped defined benefit balance calculated in accordance with s 294-130(3). Section 294-140(2) clarifies that the final amount of the excess transfer balance is the lesser of those two excesses.

14. It follows that an individual in this taxpayer’s position (ie, a recipient of a capped defined benefit income stream that is subject to a commutation restriction) will include the value of the capped defined income stream (calculated in accordance with s 294-25) in their transfer balance account however that individual will only have an excess transfer balance if the balance exceeds both their transfer balance cap and the capped defined benefit balance. The Commissioner explained this legislated modification to the general rules was necessary to ensure that only commutable superannuation interests are subject to the mandatory release provisions in Division 136 of Schedule One to the TAA.

15. Ms Schilling, counsel for the Commissioner, explained the practical implications of the modification in her oral submissions (transcript at p 55) as follows:

    …the simple rationale for that is because if the rule wasn’t here, and we simply had a requirement to commute an amount over [$]1.6 million of a transfer balance account in any circumstances, that would have required [the taxpayer] to commute [$]1.842 million [being the difference between the cap and the balance in his transfer balance account], which he would not have been able to do – well, it would have been difficult because of the nature of his income streams which related to defined benefit income streams, essentially, which are not susceptible to commutation. So that’s sort of a simple rationale of the provision and the way it operates and the effect is simply to identify an amount over the cap which is capable of being commuted…

16. On the face of it, the operation of the special rules would leave recipients of capped defined benefit income streams in a more favourable position compared to other recipients of superannuation. As the Commissioner explained in his submissions, another set of special rules contained in Division 303A of the ITAA97 level the playing field by imposing higher tax rates on superannuation income stream benefits that are defined benefit income where the amount of those benefits exceeds the defined benefit income cap defined in s 303-4.

17. I do not understand there to be any dispute between the parties as to the way in which the various amounts were calculated in this case.

18. That brings us to Division 136 of Schedule One to the TAA. Division 136 sets out the operative provisions that govern the issue of excess transfer balance determinations and commutation notices.

19. The power to issue an excess balance determination is contained in s 136-10(1). That sub-section provides:

    If you have excess transfer balance in your transfer balance account at the end of a day, the Commissioner may make a written determination stating the amount of that excess transfer balance.

    [Emphasis added]

20. In this case, the Commissioner issued an ‘excess balance determination’ in January 2018 in respect of the period 1 July 2017-20 December 2017 (document T3 at p 19) pursuant to s 136-10. The determination said the taxpayer had a transfer balance of $3,452,308.57. The transfer balance cap at the time was $1.6 million. After performing the calculations required under the legislation, the Commissioner identified an excess transfer balance amount of $254,243.39. (The determination noted that the amount included excess transfer balance earnings in the amount of $10,287.91.) I do not understand there to be any dispute over the accuracy of the calculations.

21. The notice of determination included a default commutation notice as required. The notice was directed to UniSuper. The taxpayer was informed that, in the absence of him making an election as contemplated in s 136-20(2) identifying an alternative superannuation fund, UniSuper would be required to commute (ie, pay out to the taxpayer as a lump sum) the excess transfer balance amount (ie, $254,243.39) by 6 March 2018. The notice added the taxpayer would continue to be liable to pay excess transfer balance tax on the earnings attributable to the excess transfer balance until the commutation occurred and the excess balance was eliminated.

22. The taxpayer wrote to UniSuper on 24 January 2018 instructing it not to commute the pension. Shortly thereafter, he lodged an objection against the determination.

23. In March 2019, before the objection had been determined, UniSuper advised the taxpayer it had received a commutation authority from the Commissioner requiring that UniSuper commute the pension within 15 days. The taxpayer repeated his instruction that the pension must not be commuted, however UniSuper advised the pension would be commuted on 24 April 2019 in accordance with the commutation notice provided by the Commissioner. The taxpayer repeated his instructions not to commute. He commenced proceedings in the Federal Court to enjoin the commutation.

24. The Federal Court proceedings were dismissed by consent after the Commissioner agreed to withdraw the authority to commute that had been provided to UniSuper. But the objection process remained on foot.

25. After internal facilitation and the provision of further information and amendments to the grounds of objection, the taxpayer’s objection was disallowed on 5 November 2021.

26. The taxpayer continues to receive his pensions. He insists it is appropriate to read down the provisions of Division 294 of the ITAA97 and the related provisions in Div 130 of Schedule One to the TAA in a way that prevents the Commissioner from requiring the taxpayer to commute.

    THE TAXPAYER’S PRINCIPAL ARGUMENT

27. In his written submissions, the taxpayer lays out his argument for reading down the legislation in a way that prevents the Commissioner from requiring commutation of the pension. In summary, he contends:

    …the discretion granted to the Commissioner in s 136-10 of Sch. 1 of the [TAA] must be read and construed such that it is only capable of exercise if requested and by the authorised holder of a superannuation interest…

    because to construe it otherwise would cause it to be “a law with respect to the acquisition of property otherwise than on just terms…”. He argued such a construction was impermissible because it would be contrary to the provisions of the Constitution.

28. The taxpayer developed his argument as follows:

• The High Court has long held that a pension is property of the pension holder for the purposes of s 51(xxxi) of the Constitution which gives the Commonwealth power to legislate for the acquisition of property “on just terms”: see Greville v Williams (1906) 4 CLR 694.

• If a pension is property, then any legislation with respect to the acquisition of that property must provide for that acquisition to occur “on just terms”: see Bank of New South Wales v The Commonwealth (1948) 76 CLR 1 at 349-350 per Dixon J.

• An ‘acquisition’ will include a legislated requirement that the owner dispose of the property to a non-Commonwealth party. That would include a law requiring disposal of a beneficial interest in a private superannuation fund to the fund itself: see PJ Magennis Pty Ltd v The Commonwealth (1949) 80 CLR 382.

• Section 136-55(1) in Schedule One to the TAA says the Commissioner must issue a commutation authority to a superannuation income stream provider if an excess transfer balance determination has been issued and not revoked and the taxpayer has not made an election to identify a different superannuation provider pursuant to s 136-20(4). (If the taxpayer does make a valid election identifying superannuation providers, the commutation notice(s) must be directed to those providers in accordance with the taxpayer’s election: s 136-55(2).) The superannuation income stream provider is obliged to commute the income stream in compliance with the notice unless the specified stream is a capped defined benefit income stream: s 136-80(1).  In that event, the provider – rather than the taxpayer - may choose not to comply with the commutation authority: s 136-80(2). The taxpayer says the issue of an excess benefits determination effectively deprives the taxpayer of the opportunity to decide whether there is to be a commutation.  That might cause the taxpayer financial disadvantage because he is denied the opportunity to rearrange his affairs – and amounts to an acquisition on unjust terms.

1. As I understand the taxpayer’s argument, the Commissioner’s discretion to issue an excess benefits determination under s 136-10(1) (which triggers the issue of a commutation authority under s 136-55(1)) is conditioned on consulting the individual taxpayer over his preference regarding commutation or incurring excess transfer benefit tax. (I understand the taxpayer would prefer to pay excess transfer balance tax rather than commute.) To interpret the discretionary power in a different way would have the effect of acquiring his property otherwise than on just terms in contravention of the Constitution because that acquisition does not take account of his special loss: see Johnston Pear & Kingham & The Offset Printing Company Pty Ltd v Commonwealth (1943) 67 CLR 314 at 322-323 per Latham CJ; see also Smith v ANL Limited (2000) 204 CLR 493 at 501 per Gleeson CJ; submissions of the taxpayer at [12]-[13]; transcript at pp 38-39.

1. That argument assumes the provisions in question are laws with respect to the acquisition of property falling within s 51(xxxi) of the Constitution. Mr Bearman, counsel for the taxpayer, acknowledged the law in question might incidentally effect an acquisition of property without falling foul of s 51(xxxi) if the law is properly characterised as not being a law with respect to the acquisition of property but, rather, a law of a different kind that is authorised under another head of power: Georgiadis v Australian and Overseas Telecommunications Corporation [1994] HCA 6; (1994) 179 CLR 297at [10] per Mason CJ, Deane and Gaudron JJ. Obvious examples include a law imposing taxation, or providing for the sequestration of the estate of a bankrupt, or a law imposing forfeiture of prohibited goods: see Mutual Pools and Staff Pty Limited v The Commonwealth [1994] HCA 9; (1994) 179 CLR 155 at [21] per Mason CJ. It is accepted that laws of that character which authorised the taking of property or rights might not be subject to the ‘just terms’ requirement.

2. Mr Bearman said the taxpayer’s interpretation of s 136-10 of Schedule One – an interpretation which required the Commissioner to take account of the taxpayer’s preferences before exercising the discretion - was consistent with the law being characterised as a law with respect to taxation which would be authorised under s 51(ii) of the Constitution. But he argued that interpreting the provision as if it invested the Commissioner with the right to compel the taxpayer to commute without reference to the taxpayer’s preferences was not a valid exercise of the taxation power but must be justified under another head of power – a head of power that may attract the operation of the ‘just terms’ requirement referred to in s 51(xxxi). Mr Bearman argued the Commissioner’s interpretation of s 136-10 of Schedule One to the TAA was untenable because “the legislation no longer has anything to do with taxation; it becomes a law concerning the prohibition of excess superannuation”: transcript at p 40. He explained (transcript at p 42) the law was properly understood in that event as vesting in the Commissioner:

   …the role of compelling you to take money out of superannuation because – then it becomes a law about excess superannuation. It’s got nothing to do with taxation.

3. Mr Bearman noted s 136-80(2) allows the superannuation provider to elect not to comply with a commutation notice. Mr Bearman suggested (transcript at p 39) that was surely a nod to the ‘just terms’ requirement, which he argued lent force to the taxpayer’s interpretation of the operation of the Commissioner’s discretion in s 136-10. In any event, he says the Commissioner (and the Tribunal on review) should accept he was required to consult with the taxpayer before exercising the discretion to issue an excess benefits determination. If the taxpayer was not amenable, the Commissioner’s discretion was not enlivened – and if it was enlivened, the Commissioner was bound to exercise the discretion in the taxpayer’s favour.

4. The taxpayer says this approach to s 136-10 is consistent with – indeed, is mandated by – s 15A of the Acts Interpretation Act 1901. Section 15A provides:

   Every Act shall be read and construed subject to the Constitution, and so as not to exceed the legislative power of the Commonwealth, to the intent that where any enactment thereof would, but for this section, have been construed as being in excess of that power, it shall nevertheless be a valid enactment to the extent to which it is not in excess of that power.

5. Mr Bearman did not really develop the point in written and oral submissions, but I understand the taxpayer to say the provision reinforces his general point that it is necessary to interpret the legislation in conformity with the Constitution. If the taxpayer’s point about ‘just terms’ is right, s 136-10 of Schedule One may need to be read down.

6. The taxpayer had a second argument which did not directly invoke the Constitution. In written submissions, the taxpayer pointed out s 294-120 of the ITAA97 – the guide to the operation of Subdivision 294D - expressly provides:

   Certain defined benefit lifetime pensions that are subject to commutation restrictions cannot result in excess transfer balance (instead, Subdivision 303-A applies the superannuation income stream benefits). …

7. He argues in written submissions at [20] that the introduction of Subdivision 303A:

   …ensures that the overall legislation operates only within the express ambit (s 294.1 ambit), and only for the express purpose (s 294.5 object) of the legislation.

8. The taxpayer then argues the object has implications for the interpretation of s 294-140. Whereas that section provides for the calculation and identification of excess transfer balances, the taxpayer says it is necessarily construed to exclude from the calculation the capped defined benefit income streams that are subject to a commutation restriction. If the taxpayer’s two defined benefit income streams in this case (or even one of them) are excluded from the calculation required under s 240-140 because the references to ‘capped defined benefit income streams’ in ss 294-140(3)(a) and (b) are read down to achieve conformity with the object in s 294-5, the taxpayer would not actually have an excess transfer balance.

   Interpreting the legislation in light of the Constitution

9. We have already seen s 136-10 of Schedule One affords the Commissioner a discretion over whether to issue an excess transfer balance determination. But the text of the legislation does not support the taxpayer’s argument that the Commissioner’s discretion is conditioned on him consulting, much less giving effect to, the taxpayer’s preferences with respect to commutation apart from a limited right of election about which income stream should be commuted if the taxpayer is in receipt of more than one. That power of election is provided for in s 136-20. If the Commissioner were required to consult the taxpayer more widely, one would have thought the legislation would have said so explicitly. It does not. Indeed, a textual analysis of the balance of the provisions of Division 136 of the Schedule One points away from the taxpayer’s argument in this case.

10. I turn firstly to the Guide to Division 136 at s 136-1. It makes clear on its face the taxpayer has no discretion in the face of the operation of these provisions. The section provides:

    If you have excess transfer balance in your transfer balance account the Commissioner may require you and your superannuation income stream provider to reduce the total amount of your superannuation income streams that are in the retirement phase.

    [Emphasis added]

11. It is true the taxpayer can take steps to effectively reduce the transfer balance excess by notifying the Commissioner of a transfer balance debit that is available pursuant to s 136-25, but that is not the same thing as giving the taxpayer a right to require that there be no commutation.

12. Subdivision 136B deals with the issue of commutation authorities once an excess balance determination has been made which identifies a commutable amount. The Guide in s 136-50 explains:

    The Commissioner must issue a commutation authority to a superannuation income stream provider, unless you have notified the Commissioner that you have already reduced your excess transfer balance by the crystallised reduction amount.

    A superannuation income stream provider will usually be required to commute the superannuation income stream stated in the authority.

    [Emphasis added]

13. The mandatory language is repeated in the provisions that follow dealing with the obligations of the Commissioner. In particular s 136-55(1) says “[T]he Commissioner must issue a commutation authority under this section…” in particular circumstances (emphasis added).

14. The text of these provisions appears clear on their face. They do not contemplate the Commissioner being required to accommodate the preferences of a taxpayer beyond allowing the taxpayer to choose which income stream is to be commuted.

15. That is where the taxpayer’s Constitutional argument comes in. I turn then to the characterisation question which lies at the heart of that argument – namely, that the discretion in s 136-10 is at least implicitly conditioned on obtaining the consent of a taxpayer in this individual’s circumstances because to interpret the provision otherwise would amount to an acquisition of property that would attract the ‘just terms’ requirement in the Constitution.

16. This complicated and nuanced argument ultimately admits of a simple answer. Section 136-10 of Schedule One is a law with respect to taxation.  The fact the provision does not of itself impose a tax does not preclude it from being characterised as a law with respect to taxation provided there is a sufficient connection between the provision and the taxation power in the Constitution. Section 136-10 is a machinery provision which gives effect to the substantive provisions in Division 294 of the ITAA97. Division 294 creates a cap beyond which taxation concessions cease to be available. The relevant provisions of Division 294 are not laws with respect to superannuation as such, or property more generally; they are laws which provide for the appropriate taxation of (superannuation) income streams. That much is clear from the scheme of the legislation and the text of its provisions, but is also clear from the statement of object in s 294-5 which says:

    The object of this Division is to limit the total amount of an individual's superannuation income streams that receive an earnings tax exemption.

17. Ms Schilling referred to statements contained in the explanatory memorandum which accompanied the introduction of the transfer balance provisions: see Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016; Superannuation (Excess Transfer Balance Tax) Imposition Bill 2016. She said the explanatory memorandum reinforced (at [3.7]) the conclusion that the provisions were designed to:

    …ensure the superannuation tax concessions are better targeted and reduce the extent to which superannuation is used for tax minimisation and estate planning.

18. Section 136-10 of Schedule One is part of the machinery that gives effect to the earnings tax exemption provided for in Division 294 of ITAA97. If there is to be a cap which defines the limit of that earnings tax exemption, a necessary incident of the law imposing the cap is the mechanism of enforcing the cap and achieving the taxation consequence intended by the legislation. To put it differently, the provision facilitates the earnings tax exemption (and therefore the extent of the liability to pay tax) by legislating the concept of the transfer balance account and the other machinery provisions which operate to give effect to the limit on the earnings tax exemption in a variety of different circumstances. In that sense, it is like provisions elsewhere in Schedule One of the TAA which provide for the collection and recovery of tax, and the imposition of administrative penalties. Those provisions are all clearly incidental to the imposition of the tax. They are necessary to make the system of taxation work, even if they also result in a ‘taking’ from the taxpayer.

19. That interpretation of the legislation is supported by the explanatory memorandum, which says at [3.22]:

    The value of lifetime pensions and other defined benefit income streams is counted towards an individual’s transfer balance cap. Excess transfer balance tax is not imposed for a breach of the transfer balance cap that is attributable to certain defined benefit income streams. Excess defined benefit income is instead subject to additional income tax rules.

20. Mr Bearman pointed out there are other provisions of the legislation which apparently contemplate the possibility of compensation being paid in response to action by the Commissioner which impacted on superannuation entitlements, or which may have diminished the taxation advantages attaching to superannuation. An example of such a provision can be found at s 131-60 of Schedule One which applies when the Commissioner issues a release authority pursuant to s 131-35 that requires the release of an amount from the taxpayer’s superannuation. Section 131-60(1) provides:

    If the operation of section 131-35 would result in an acquisition of property (within the meaning of paragraph 51(xxxi) of the Constitution) from an entity otherwise than on just terms (within the meaning of that paragraph), the Commonwealth is liable to pay a reasonable amount of compensation to the entity.

21. The key to understanding this provision lies in the explanatory memorandum which accompanied the amending legislation. It turns out the provision was likely included in light of the risk that a clever individual (like the taxpayer in this case) might mount a constitutional challenge. As the explanatory memorandum explained at [12.77]:

    Issuing and acting upon a release authority has never been found to involve an acquisition of property by the Commonwealth. However, historically provisions creating release authorities have provided for the payment of compensation should their operation be found to involve an acquisition of property, to ensure that the provisions would not be invalidated as an acquisition of property on unjust terms. For the avoidance of doubt, the TLA Bill similarly provides for the payment of compensation should the operation of the release authority provisions result in an acquisition of property. It is not expected that this provision will ever operate.

22. In any event, the absence of a compensation clause equivalent to s 131-60 (or s 135-80, which is in similar terms) that explicitly applies to commutation notices issued under s 136-10 suggests the parliament did not anticipate a commutation (as opposed to a release) would amount to an acquisition that triggered the ‘just terms’ requirement.

23. Ms Schilling pointed out there must be considerable doubt over whether there could be an ‘acquisition of property’ within the meaning of s 51(xxxi) of the Constitution if a superannuation fund elected to commute in response to a commutation notice. (Recall the provider can elect not to commute in response to a notice pursuant to s 136-80(2), although that election will have taxation consequences.) Ms Schilling acknowledged the fund might commute to avoid adverse tax consequences – but she pointed out the trust deed which governed the taxpayer’s interest in the fund permitted the trustee of the fund to commute in those circumstances. She argued (transcript at p 68):

    There’s no property capable of being acquired where the applicant’s property right were always subject to the possible exercise of the trustee’s power where it was dictated by taxation consequences under the superannuation law.

24. A copy of the UniSuper trust deed was included in the supplementary T documents filed in connection with these proceedings. Ms Schilling took me to clause [F.5] in Division Five of the deed which deals with the topic of commutation. The clause reads (relevantly):

    (a) Subject to Superannuation Law and such other terms and conditions as the Trustee may determine:

    …

    (ii) the Trustee may commute a pension payable under this Division F at any time as it considers appropriate.

25. There does not seem to be any doubt that the trustee may consider adverse taxation consequences when deciding whether to commute the pension. If the trustee does elect to commute, the taxpayer receives a payout equal to the value of his interest in the fund. That might lead to disadvantageous taxation consequences (or the loss of taxation or other advantages) for him, but I accept that is not the same thing as an ‘acquisition of property’ in the sense contemplated in the Constitution.

26. One must not lose sight of the fact the Commonwealth Constitution refers to ‘acquisition of property’ in contrast to the so-called ‘takings clause’ in the fifth amendment to the United States Constitution which provides: “Nor shall private property be taken for public use, without just compensation.” The distinction is important, as French CJ explained in JT International SA v The Commonwealth [2012] HCA 43 at [42]:

    Taking involves deprivation of property seen from the perspective of its owner. Acquisition involves receipt of something seen from the perspective of the acquirer....

27. JT International involved a challenge brought by a tobacco company against plain packaging laws which limited the use of valuable trademarks. The owners of the trademarks claimed their intellectual property had been acquired. The High Court disagreed. French CJ held (at [44]):

    …the [Tobacco Plain Packaging Act 2011] is part of a legislative scheme which places controls on the way in which tobacco products can be marketed. While the imposition of those controls may be said to constitute a taking in the sense that the plaintiffs’ enjoyment of their intellectual property rights and related rights is restricted, the corresponding imposition of controls on the packaging and presentation of tobacco products does not involve the accrual of a benefit of a proprietary character to the Commonwealth which would constitute an acquisition.

28. That reasoning applies here. The effect of the commutation might cut off the taxpayer from taxation concessions that would otherwise be available to him, but he is not deprived of his property nor does the Commonwealth ‘acquire’ anything from him. While I acknowledge Greville v Williams says a pension is property that is capable of being acquired by the Commonwealth subject to the ‘just terms’ requirement, I am not satisfied the commutation contemplated under this legislation amounts to an acquisition.

29. I do not accept the taxpayer’s Constitutional argument that the Commissioner’s discretion in s 136-10 is conditioned on consulting and giving effect to the taxpayer’s preferences on commutation beyond that provided for in s 136-20.

    The taxpayer’s alternative argument

30. That leaves the taxpayer’s argument over the interpretation of s 294-140. Mr Bearman sought leave to amend the taxpayer’s statement of facts, issues and contentions (and, I infer, his grounds of objection pursuant to s 14ZZK(a) of the TAA) to permit this argument to be raised. The Commissioner did not object, and I granted leave accordingly, although there was some confusion about the final form of the argument that emerged during the course of oral submissions.

31. As I understand it, the argument begins with a reference to the Guide to Subdivision 294D in s 294-120 which explains:

    Certain defined benefit lifetime pensions that are subject to commutation restrictions cannot result in excess transfer balance (instead, Subdivision 303-A applies to the superannuation income stream benefits).

32. Certain commutation-restricted income streams started before 1 July 2017 are covered by the same modification.

33. The taxpayer says both of his pensions are capped defined benefit lifetime pensions that are subject to commutation restrictions. The value of both pensions has been included in the calculation of the excess transfer balance identified in the excess transfer balance determination. But they should not have been so included, he argues, because the Commissioner has misinterpreted s 294-140(3).

34. I have already referred to the operation of s 294-140 which modifies the definition of ‘excess transfer balance’ in s 294-30 where an individual is in receipt of a capped defined benefit income stream. Recall that s 294-140(1) modifies the definition of ‘excess transfer balance’ in respect of these income streams so that a taxpayer is deemed to have an ‘excess transfer balance’ if the amount of the transfer balance exceeds both (a) the amount of the transfer balance cap and (b) the capped defined benefit balance calculated in accordance with s 294-130(3). Section 294-140(2) says the final amount of the excess transfer balance is the lesser of those two excesses. That brings us to s 294-140(3) which provides:

    (3)  You have an amount under this subsection (a capped defined benefit balance) at a time equal to:

    (a)  the sum of the transfer balance credits in your transfer balance account at that time in respect of capped defined benefit income streams; less

    (b)  the sum of the transfer balance debits (if any) in your transfer balance account at that time in respect of capped defined benefit income streams.

1. The taxpayer in this case says both of his pensions should be excluded from the calculation under s 294-140(3) because the income streams in question are subject to commutation restrictions. The Commissioner points out in written submissions (at [46]-[48]) that all the superannuation income streams which qualify as capped defined benefit income streams in s 294-130 have commutation restrictions. That being so, s 294-140(3) would be left with no work to do on the taxpayer’s interpretation because all capped defined benefit income streams would be excluded from its operation. That cannot be right.

2. That perplexing argument was disavowed when Mr Bearman interrupted Ms Schilling’s submissions at the hearing to point out he realised the taxpayer’s argument in written submissions had been misstated. After a brief adjournment during which he provided amended documents to the Commissioner, Mr Bearman clarified that ‘lifetime pensions’ - like that paid to the taxpayer – were the only type of capped defined benefit income stream mentioned in s 294-130 which was excluded from the operation of s 294-140(3). It was appropriate to adopt that interpretation to be true to the object of the legislation identified in the Guide in s 294-120.

3. I was referred to s 950-500 of the ITAA97 which explains what use can be made of Guides in the interpretation of the operative provisions. In particular, s 950-150(2) provides:

   Guides form part of this Act, but they are kept separate from the operative provisions. In interpreting an operative provision, a Guide may only be considered:

   (a)  in determining the purpose or object underlying the provision; or

   (b)  to confirm that the provision's meaning is the ordinary meaning conveyed by its text, taking into account its context in the Act and the purpose or object underlying the provision; or

   (c)  in determining the provision's meaning if the provision is ambiguous or obscure; or

   (d)  in determining the provision's meaning if the ordinary meaning conveyed by its text, taking into account its context in the Act and the purpose or object underlying the provision, leads to a result that is manifestly absurd or is unreasonable.

4. I am not satisfied the plain text of s 294-140 admits of any ambiguity, and there is no reason to doubt the literal meaning of the words lends itself to the interpretation proposed by the taxpayer. While s 294-120 offers guidance to the object, the plain meaning of s 294-140(3) is not ambiguous and does not lead to a result that is absurd or anomalous, particularly when understood in the larger context of the legislative scheme. The interpretation proposed by the taxpayer is impossible to square with the plain text of the provision.

   CONCLUSION

5. The objection decision under review is affirmed.

I certify that the preceding 68 (sixty-eight) paragraphs are a true copy of the reasons for the decision herein of Deputy President Bernard J McCabe

........................[SGD].............................................

Associate

Dated: 4 July 2023

Date(s) of hearing:	15 March 2023
Counsel for the Applicant:	Mr M Bearman
Counsel for the Respondent:	Ms M Schilling
Solicitors for the Respondent:	Australian Government Solicitors