Vernik and Commissioner of Taxation (Taxation)

[2019] AATA 3754

Vernik and Commissioner of Taxation (Taxation) [2019] AATA 3754 (9 August 2019)

Division:TAXATION AND COMMERCIAL DIVISION

File Number(s):      2019/0086

Re:Rudolph Vernik

APPLICANT

AndCommissioner of Taxation

RESPONDENT

DECISION

Tribunal:Deputy President Britten-Jones

Date:9 August 2019

Place:Adelaide

In accordance with s 43 of the Administrative Appeals Tribunal Act 1975 (Cth), the Tribunal affirms the respondent’s decision.

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Deputy President Britten-Jones

CATCHWORDS

TAXATION — Superannuation — Retirement phase superannuation income streams — Capped defined benefit income streams — Excess transfer balance — Excess transfer balance tax liability — Whether notice of assessment is excessive or otherwise incorrect — Whether Commissioner has any discretion to adjust the amount of the excess transfer balance tax liability assessed — Income Tax Assessment Act 1997 (Cth), Div 294

LEGISLATION

Income Tax Assessment Act 1997 (Cth)
Income Tax (Transitional Provisions) Act 1997 (Cth)
Superannuation (Excess Transfer Balance Tax) Imposition Act 2016 (Cth)

Taxation Administration Act 1953 (Cth)

SECONDARY MATERIALS

Law Companion Ruling 2016/9, Superannuation reform: transfer balance cap

REASONS FOR DECISION

Deputy President Britten-Jones

1. Dr Vernik (“the applicant”) objected to a Notice of Assessment issued by the respondent (“the Commissioner”) for a superannuation excess transfer balance tax liability of $2,867.85. The Commissioner decided to disallow the objection. The applicant lodged an application for review of the Commissioner’s decision with the Tribunal.

2. This application requires consideration of Division 294 of the Income Tax Assessment Act 1997 (“the ITAA 1997”)[1] which provides for a cap on the total amount that can be transferred into the retirement phase of superannuation. The cap relevant to this matter is $1,600,000. If the balance in the account exceeds the cap, the excess must be removed and there will be a liability to pay excess transfer balance tax. In this case, there was an excess which was removed but the applicant disputes the liability to pay the excess transfer balance tax.

   [1] All references to legislation are references to the ITAA 1997 unless otherwise stated.

   THE FACTS

3. There is no dispute with respect to the facts which arise from the documents tendered before the Tribunal. No oral evidence was given. The applicant was self-represented and clearly articulated his argument.

4. The applicant is the recipient of three retirement phase superannuation income streams (collectively “the Super Funds”):

   (a)Defence Force Retirement and Death Benefits Scheme (“DFS”) – a capped defined benefit income stream (“DFS Account”);

   (b)Public Sector Superannuation Scheme (“PSS”) – a capped defined benefit income stream (“PSS Account”); and

   (c)Australian Super (“AusSuper”) – an account based income stream (“AusSuper Account”).

5. On 12 December 2017, the Commissioner became aware that the applicant had, as at the effective date of 1 July 2017, exceeded the cap on the total amount that can be transferred into the retirement phase of superannuation. This was based on information provided to the Commissioner from the Super Funds who reported  the special value and value of the applicant’s capped defined benefit income streams and account based income stream as follows:

   (a)14 November 2017 – DFS – Special Value of $271,447.37;

   (b)14 November 2017 – PSS – Special Value of $1,181,381.94; and

   (c)12 December 2017 – AusSuper – Value of $508,576.47.

6. On 3 January 2018, the Commissioner issued the applicant with an excess transfer balance determination in the amount of $376,646.72 (“the First Determination”). The calculation of this figure is not in dispute.

7. On 31 January 2018, the applicant commuted $376,646.00 from the AusSuper Account (“the First Commutation”).

8. On 7 February 2018, the Commissioner became aware of the First Commutation following the receipt of a Transfer balance account report from AusSuper.

9. On 8 February 2018, the Commissioner sent the applicant a letter advising that the First Determination had been revoked. This information was incorrect and the Commissioner has since explained that the letter was sent in error as a result of a system issue at the time. The letter caused some confusion in the mind of the applicant which is regrettable but otherwise it does not impact upon the matters I need to decide.

10. On 1 July 2018, the Commissioner issued the applicant with an excess transfer balance determination in the amount of $3,841.96 (“the Second Determination”).

11. On 9 August 2018, the applicant commuted $3,841.96 from the AusSuper Account (“the Second Commutation”).

12. On 7 September 2018, the Commissioner became aware of the Second Commutation following the receipt of a Transfer balance account report from Australian Super.

13. On 13 September 2018, the Commissioner issued the applicant with an excess transfer balance tax notice of assessment assessing him liable for excess transfer balance tax in the amount of $2,867.85 (“the NOA”).

14. On 9 October 2018, the applicant lodged an objection against the NOA (“the Objection”).

15. On 30 November 2018, the Commissioner made a decision disallowing the Objection (“the Objection Decision”).

16. On 7 January 2019, the applicant lodged an application for review of the Objection Decision with the Tribunal (“the Application”).

17. The issues in the Application are:

    (a)whether the NOA is excessive or otherwise incorrect and, if so, what the NOA should have been; and

    (b)if the NOA is not excessive or otherwise incorrect, whether the Commissioner has any discretion to adjust the amount of the excess transfer balance tax assessed in the NOA.

    CALCULATION OF THE EXCESS TRANSFER BALANCE UNDER DIVISION 294

18. The calculation of the applicant’s excess transfer balance is not contentious but it forms the basis for the contentious issue of whether the applicant is liable to pay tax on that balance.

19. The object of Division 294 is to limit the total amount of an individual’s superannuation income streams that receive an earnings tax exemption.[2]

    [2] Section 294-5

20. Subdivision 294–B creates a transfer balance account and credits it if there is a superannuation income stream in the retirement phase. It also provides for a transfer balance cap and identifies when there is an excess transfer balance.[3]

    [3] Section 294-10

21. Section 294–15 provides:

    When you have a transfer balance account

    (1)   You have a transfer balance account if you are, or have at any time been, the retirement phase recipient of a superannuation income stream.

    (2)   You start to have the transfer balance account on the later of:

    (a)1 July 2017; and

    (b)the day you first start to be a retirement phase recipient of a superannuation income stream.

22. There is no dispute that the applicant is the retirement phase recipient of a superannuation income stream for the purposes of s 294-15(1). Pursuant to s 294–15(2) the applicant’s transfer balance account started on 1 July 2017.

23. The table in s 294–25(1) sets out when a credit arises in a person’s transfer balance account. Item 1 of the table deals with the situation where a person is the retirement phase recipient of a superannuation income stream just before 1 July 2017. The amount of the credit is equal to the value just before 1 July 2017 of the superannuation interest that supports the superannuation income stream. Because the applicant was the retirement phase recipient of superannuation income streams from the Super Funds just before 1 July 2017, a credit arises in his transfer balance account on 1 July 2017 equal to the value just before 1 July 2017 of the superannuation interests supporting those income streams.  I deal with the quantification of that value below.

24. Section 294–30 provides:

    Excess transfer balance

    (1)  You have excess transfer balance at a particular time if, at that time, the transfer balance in your transfer balance account exceeds your transfer balance cap at that time. The amount of the excess transfer balance is the amount of the excess.

25. Section 294–35 imposed a transfer balance cap from 1 July 2017 to limit the amount of capital individuals can transfer into the retirement phase of superannuation. The limit for the 2017/2018 financial year is $1,600,000. In accordance with s 294–35(1), a person’s transfer balance cap for the financial year in which they first start to have a transfer balance account is equal to the general transfer balance cap for that financial year. Therefore, because the applicant’s transfer balance account commenced in the 2017/18 financial year, the relevant general transfer balance cap for his purposes is $1,600,000.

26. Subdivision 294–D modifies the operation of the transfer balance cap regime outlined above in relation to certain defined benefit income streams, referred to as capped defined benefit income streams. Section 294–130 defines certain superannuation income streams as capped defined benefit income streams. There is a special rule for capped defined benefit income streams in s 294–135 which provides:

    Transfer balance credit—special rule for capped defined benefit income streams

    (1)   Section 294–25 applies in relation to a capped defined benefit income stream as if a reference in that section to the value of a superannuation interest were a reference to the special value of the superannuation interest.

27. The applicant’s superannuation interest in the DFS Account and PSS Account are capped defined benefit income streams.

28. The value of the applicant’s superannuation interests is based upon:

    (a)the income stream paid by AusSuper from the AusSuper Account; and

    (b)the capped defined benefit income streams from DFS and PSS.

29. The value of the AusSuper income stream was $508,576.47. That amount, backdated to 1 July 2017, was credited to the applicant’s transfer balance account. 

30. The combined special value of the capped defined benefit income streams from DFS and PSS was $1,452,829.31. That amount, backdated to 1 July 2017, was also credited to the applicant’s transfer balance account.

31. There is no dispute with respect to the quantification of the value of the applicant’s superannuation interests and the amounts credited to the applicant’s transfer balance account as at 1 July 2017. The applicant therefore had a transfer balance of $1,961,405.78 as at 1 July 2017, being the credits that arose in relation to his superannuation interests in the Super Funds. As this amount exceeded the applicant’s transfer balance cap of $1,600,000.00, he had an excess transfer balance of $361,405.78 on that day.

32. The dispute is with respect to the tax liability arising from the excess transfer balance.  This requires a consideration of subdivision 294–F which neutralizes the earnings tax exemption on retirement phase income streams that result in excess transfer balance.[4]

    [4] Section 294-225

33. The operative provisions in this subdivision provide as follows:

    294–230 Excess transfer balance tax

    (1)If there is an excess transfer balance period for your transfer balance account, you are liable to pay excess transfer balance tax imposed by the Superannuation (Excess Transfer Balance Tax) Imposition Act 2016 for the period.

    (2)An excess transfer balance period for a transfer balance account is a continuous period of one or more days during which, at the end of each day, there is excess transfer balance in the account.

    (3)Your excess transfer balance tax is worked out by reference to the sum of:

    (a)   your excess transfer balance earnings for each day in the excess transfer balance period; and

    (b)   for each day in the excess transfer balance period that is also a day in the period mentioned in subsection 294–25(2) (the determination period)—the amount worked out by multiplying the rate mentioned in subsection 294–235(2) for the day by the sum of your excess transfer balance earnings for each previous day in the determination period.

    294–235 Your excess transfer balance earnings

    (1)Your excess transfer balance earnings for a day is worked out by multiplying the rate mentioned in subsection (2) for that day by the amount of your excess transfer balance at the end of that day.

    (2)The rate is the lower of:

    (a) the rate worked out under subsection 8AAD(1) of the Taxation Administration Act 1953 for the day; and

    (b) a rate determined under subsection (3) for the day.

    (3)    The Minister may, by legislative instrument, determine a rate for a day.

    294–240 When tax is payable—original assessments

    Your assessed excess transfer balance tax is due and payable at the end of 21 days after the Commissioner gives you notice of the assessment of the amount of the excess transfer balance tax.     

34. Excess transfer balance earnings are calculated daily on a person’s excess transfer balance in accordance with s 294–235. They are credited to the transfer balance account at the start of the next day under Item 3 in the table in subsection 294–25(1). This process continues until either the Commissioner issues an excess transfer balance determination to the person or they no longer have an excess transfer balance, whichever is earlier.

35. The applicant had an excess transfer balance at the end of each day in the period from 1 July 2017 until the Second Commutation. The relevant period for the calculation of excess transfer balance earnings is therefore from 1 July 2017 to 8 August 2018, as the applicant no longer had an excess transfer balance by the end of 9 August 2018.

    CALCULATION OF THE EXCESS TRANSFER BALANCE TAX

36. The Commissioner calculated the excess transfer tax liability on the NOA with reference to the applicant’s excess transfer balance earnings amount of $19,119.13 and the 15% excess transfer balance tax rate imposed by s 5 of the Superannuation (Excess Transfer Balance Tax) Imposition Act 2016. The applicant did not seek to challenge the quantification of, or the method used to calculate, the tax liability. 

37. On 3 January 2018, the Commissioner issued the First Determination in accordance with s 136–10 of the Taxation Administration Act 1953 (“the TAA 1953”). The determination advised the applicant that he had exceeded his transfer balance cap by $361,405.78. The First Determination also advised that the applicant was required to commute an amount of $376,646.72 by 6 March 2018. This amount consisted of the excess transfer balance of $361,405.78 plus excess transfer balance earnings of $15,240.94 which accrued during the excess transfer balance period from 1 July 2017 to 20 December 2017.

38. On 7 February 2018, AusSuper reported to the Commissioner that, on 31 January 2018, it had performed the First Commutation. AusSuper did so in response to a ‘Request a partial withdrawal of your Choice Income account’ form that the applicant lodged with AusSuper. This commutation did not have the effect of reducing the applicant’s excess transfer balance to nil on account of the $0.72 not being commuted, and as such, excess transfer balance earnings continued to accrue on the applicant’s transfer balance account. The dispute does not centre around the shortfall payment of $0.72 because, as will be explained, it had a minimal effect on the calculation of the excess transfer tax liability.

39. On 1 July 2018, the Commissioner issued the Second Determination in accordance with s 136–10 of the TAA 1953. The determination advised the applicant that, following the First Commutation, he had now reduced his transfer balance cap to $15,240.22 (the $361,405,78 excess of the First Determination minus the $376,646.00 amount of the First Commutation) but that, once excess transfer balance earnings of $19,082.18 (which had continued to accrue) had been taken into account, he was required to commute $3,841.96 by 30 August 2018 so as to return his transfer balance account to below the transfer balance cap. The $19,082.18 of excess transfer balance earnings was inclusive of:

    (a)$15,240.94 for the period 1 July 2017 to 20 December 2017 (per the First Determination);   

    (b)$3,704.66 for the period 21 December 2017 until 30 January 2018 (the period between the First Determination and the First Commutation); and

    (c)$136.58 for the period 31 January 2018 to 30 June 2018 (the period between the First Commutation and the Second Determination).

40. On 7 September 2018, AusSuper reported to the Commissioner that on 9 August 2018 it had performed the Second Commutation. This commutation had the effect of reducing the applicant’s excess transfer balance to nil.

41. On 13 September 2018, the Commissioner issued the NOA for an excess transfer balance tax liability of $2,867.85 being 15% of $19,119.13 of excess transfer balance earnings. These excess transfer balance earnings were comprised of those amounts particularised in subparagraphs 39(a)–(c) above and a further $36.95 for the period 1 July 2018 to 8 August 2018 (the period between the Second Determination and the Second Commutation).

42. I note that only $173.51 of excess transfer balance earnings ($136.58 plus $36.95) accumulated following the First Commutation resulting in $26.03 of excess transfer balance tax out of the total $2,867.85 of excess transfer balance tax assessed on the NOA.

    CONTENTIONS OF THE PARTIES

43. The Commissioner contends that, as the applicant had an excess transfer balance during the period 1 July 2017 to 8 August 2018, he was liable for excess transfer balance tax.  The Commissioner says that the excess transfer balance tax liability of $2,867.85 in the NOA has been calculated in accordance with Division 294 and there is no discretion for the tax to be waived.

44. The applicant contends that it is unfair to be taxed with respect to a period from 1 July 2017 in circumstances where he was first informed on 3 January 2018 that he had an excess transfer balance. He says that the Commissioner took six months to inform him that the transfer balance cap had been exceeded. He says:

    Although I knew that a transfer balance cap had been introduced by government, I (nor my tax agent) were aware of the “special value” amount had been calculated and provided to the ATO for my non-commutable Defence Pension and my ComSuper Pension. These are fortnightly government lifetime pensions which cannot be commuted and so I have never been provided with a net value amount. If the ATO had informed me earlier, I would have taken action immediately and so would not have incurred the taxation amount of $2867.85 for the period 1 July 2017 to January 2018.

45. The applicant contends that in his circumstances he should have been afforded a grace period.

    CONSIDERATION

46. The applicant says that the commencement date should not be 1 July 2017 because he was first informed of his excess transfer balance on 3 January 2018. There was no way for the applicant to be aware of his excess transfer balance as at 1 July 2017 because he was only receiving a pension from DFS and PSS at that time and the DFS and PSS did not inform the Commissioner of the special value of his superannuation interests in these funds until 14 November 2017 and it was not until 3 January 2018 that this information was passed on to the applicant. Upon receipt of the excess transfer balance determination by letter dated 3 January 2018, the applicant made the payment as requested (albeit short by $0.72). If he had been informed earlier then he would have paid the required amount earlier and therefore would have not incurred, or at least would have reduced, his tax liability.

47. The applicant says that he did what was required of him by the 3 January 2018 letter and yet he is still liable for the excess transfer balance tax. That is true but the problem for the applicant is that the determination period on which the tax liability is based is not determined by reference to when the tax payer is first informed of his excess transfer balance.  Further, the applicant does not avoid a tax liability by complying with the request to commute funds out of his superannuation income streams. That is made clear by the letter from the Commissioner dated 3 January 2018 which requests the applicant to commute the necessary funds but goes on to say “when you are no longer in excess of your cap we will send you a separate ‘Excess transfer balance tax notice of assessment’ detailing the tax amount payable”.

1. The 3 January 2018 letter also says:

   Excess transfer balance earnings will continue to accrue until you commute your excess transfer balance. We will apply tax on those earnings and issue you a separate “Excess transfer balance tax notice of assessment”, so the sooner you act, the less tax you will pay.

2. There is no suggestion in the letter that if the request is complied with then there will be no tax payable. In fact, the letter makes it clear that a tax amount will be payable and that it will continue to increase until the excess is removed.

3. As for the complaint that the Commissioner took six months to inform him that the transfer balance cap had been exceeded, that is not correct. The DFS and PSS did not inform the Commissioner of the special value of the applicant’s superannuation interests in these funds until 14 November 2017. AusSuper informed the Commissioner on 12 December 2017. The Commissioner then made a determination on 20 December 2017 with respect to the excess transfer balance and wrote to the applicant on 3 January 2018. The Commissioner acted in a timely fashion.

4. The ITAA 1997 does not give the Commissioner a discretion to waive the tax payable.  There is no “special circumstances” provision applicable to a liability arising under Division 294. The grace period provided for by the Income Tax (Transitional Provisions) Act1997 does not apply to the applicant because the excess transfer balance was greater than $100,000.00 and was still in existence as at 1 January 2018.[5]

   [5] See s 294-30 of the Income Tax (Transitional Provisions) Act 1997

5. The operative provision of s 294-230(1) simply provides that “if there is an excess transfer balance period for your transfer balance account, you are liable to pay excess transfer balance tax … for the period.” The tax became payable under s 294-240 at the end of 21 days after the Commissioner gave notice of the assessment of the amount of the excess transfer balance tax. In this case the Commissioner gave his notice of assessment on 13 September 2018 and the due date for the tax payable of $2,867.95 was 4 October 2018.

6. I am satisfied that the Commissioner correctly determined the excess transfer balance period as commencing on 1 July 2017 and ending on 8 August 2018 and I am satisfied that the excess transfer balance tax liability of $2,867.85 in the NOA has been calculated in accordance with Division 294.

   DECISION

7. The Tribunal affirms the respondent’s decision.

55.     I certify that the preceding 54 (fifty-four paragraphs are a true copy of the reasons for the decision herein of Deputy President P Britten-Jones.

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Associate

Dated: 9 August 2019

Dates of hearing:	6 August 2019
Representative for the Applicant	Self-represented
Representative for the Respondent	Mr C Ziersch & Mr S Sargent from the Australian Taxation Office