Ward and Commissioner of Taxation (Taxation)
[2015] AATA 919
•30 November 2015
Ward and Commissioner of Taxation (Taxation) [2015] AATA 919 (30 November 2015)
Division
TAXATION & COMMERCIAL DIVISION
File Number(s)
2013/3760
Re
Colin Ward
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Deputy President Gary Humphries
Date 30 November 2015 Place Canberra The decision under review is affirmed.
...............................[sgd].........................................
Deputy President Gary Humphries
Catchwords
TAXATION – excess contributions tax – non-concessional contributions to superannuation – bring forward rule – excess contributions made – whether special circumstances – no special circumstances – decision affirmed.
Legislation
Income Tax Assessment Act 1997 (Cth) ss 292-5, 292-85, 292-230, 292-240, 292-310, 292-465
Taxation Administration Act 1953 (Cth) s 8AAZC
Cases
Baker v The Queen (2004) 223 CLR 513
Batagol v Commissioner of Taxation (1963) 109 CLR 243
Bentivoglio and Commissioner of Taxation [2014] AATA 620
Griffiths v The Queen (1989) 167 CLR 372
Groth v Secretary, Department of Social Security (1995) 40 ALD 541
Liwszyc v Commissioner of Taxation (2014) 218 FCR 334
Lynton and Commissioner of Taxation (2012) 90 ATR 950Stokes v Federal Commissioner of Taxation (1996) 136 ALR 632
Secondary Materials
Practice Statement Law Administration PS LA 2008/1 (Australian Taxation Office)
REASONS FOR DECISION
Deputy President Gary Humphries
30 November 2015
Background
Mr Colin Ward and his wife, Joan, have been married for over 40 years. They both worked in low paid jobs throughout their lives prior to retiring at about the same time, each for health reasons (Mrs Ward in September 2007, Mr Ward in February 2008). At the end of his working life Mr Ward was a truck driver for Australia Post, and Mrs Ward worked in a factory.
At retirement, Mr Ward had superannuation assets of some $198,223.73 in two superannuation schemes, APSS and CSS. Mrs Ward had some $202,234.84 in the APSS scheme. Together with termination payments, holiday and long service leave payments, savings and proceeds from the sale of a former home in Perth, the Wards had a nest egg of about $470,000. However, their retirement coincided with the onset of the Global Financial Crisis (the GFC).
As the GFC unfolded, Mr and Mrs Ward became fearful that their superannuation funds – largely based on shares – would diminish in value and would not provide the retirement income they needed. Accordingly, in early 2008, they withdrew the combined amounts standing in the superannuation schemes and put them into bank term deposits.
On about 9 July 2008, they sought advice from the Westpac branch at Dickson, ACT, where they were persuaded to put the proceeds of the superannuation funds into a BT “cash only” pension fund with a tax-free interest rate of 7.25 percent. They knew that the Federal government had guaranteed deposits held by certain deposit-taking institutions, and felt that the investment would be more secure in this form. The fund was called BT Super for Life. The sum of the amounts they transferred into this fund was exactly $450,000; clearly they were acting on advice to take advantage of the bring forward rule in s 292-85 of the Income Tax Assessment Act 1997 (the ITAA). As Mr Ward was under the age of 65, and the amounts so deposited were non-concessional contributions, the bring forward rule was triggered for the 2008/2009 financial year.
A taxpayer is generally limited to making non-concessional contributions to his or her superannuation to a maximum of $150,000 in any financial year. Under the bring forward rule, payments may be made above this cap, up to $450,000, but the effect of such a payment is that no non-concessional contributions can be made in the subsequent 2 financial years.
Soon after opening the BT Super for Life account, a change appears to have occurred in the nature of the account. In early documentation it is referred to by the bank as the BT Super for Life Savings Account, but later it is referred to as the BT Super for Life Retirement Account. The reason for this change in treatment is not clear, but may relate to the account paying Mr Ward a superannuation income stream.
Mr Ward’s evidence was that he and his wife had believed that this BT account enjoyed a fixed interest rate, when in fact it did not. As the GFC continued, interest rates fell, as in turn did the income from the BT account. Alarmed, they withdrew the money in the BT account progressively from October 2008 to April 2009, and returned it to term deposit accounts.
In 2010 the Wards decided to seek professional financial help from Ms Catherine Smith, the principal of Wholistic Financial Solutions (Wholistic). She advised them to establish a self-managed superannuation fund. They took that advice and in June 2010 the Parr Post Superannuation Fund was established, with Mr and Mrs Ward as trustees and members.
In about August 2010, the Wards sold their home in Watson, ACT for $460,000. In September 2010, Mr Ward made a personal contribution (non-concessional) of $450,000 to the Parr Post Fund. At about the same time, Mrs Ward made a similar non-concessional contribution of $450,000 to the Parr Post Fund. Mr Ward’s contribution was sourced from the monies held in bank term deposits, which had been established when the BT Super for Life account was closed. Mrs Ward’s contribution was sourced from the sale proceeds of the Watson property.
On 23 November 2012, an excess contributions tax Notice of Assessment was issued to Mr Ward for the 2010/2011 financial year. It detailed excess non-concessional contributions by him of $450,000 and stated a liability for excess contributions tax of $209,250. Mr Ward lodged an application the following month asking the Commissioner to disregard or allocate to another year all or part of his non-concessional contributions in question. Mr Ward then objected, unsuccessfully, to the Commissioner’s refusal to do so. An application to review the Commissioner’s decision was lodged with the Tribunal on 2 August 2013.
The Commissioner contended that Mrs Ward’s non-concessional contribution to the Parr Post Fund was within her non-concessional contributions cap for the 2010/2011 financial year. He further contended that Mr Ward’s non-concessional contribution caused him to exceed his contributions cap, which was set at ‘nil’ for that financial year by virtue of the contributions made to the BT Super for Life account in July 2008.
Did the “Notice of Assessment” of 26 November 2014 render the Commissioner functus officio?
In interlocutory proceedings before the Tribunal, Mr Ward argued that a document issued to him dated 26 November 2014 and purporting to be a Notice of Assessment for the 2013/2014 tax year was evidence that the Commissioner had amended Mr Ward’s excess contributions tax liability for the 2010/2011 year. He argued that this “amended assessment” reduced his liability from $209,250 to “nil”. He further argued that this act of the Commissioner, constituting a valid notice of assessment under the Act which was communicated to Mr Ward as the taxpayer, rendered the Commissioner functus officio with respect to Mr Ward’s liability for excess non-concessional contributions tax.
Attached to this “Notice of Assessment” was a document headed “Income Tax Account Statement of Account”, which purported to confer a credit of $209,250, described as “Tax Office initiated amended Excess Contributions Tax Form – Excess Contributions Tax for the period from 01 Jul 10 to 30 Jun 11”.
This “Notice of Assessment” appears to derive from an amended member contributions statement on behalf of the Parr Post Fund sent to the Commissioner in July 2012. This amended statement sought to amend an earlier statement (of 19 January 2012, reporting $450,000 in personal contributions for 2010/2011 on behalf of Mr Ward to the fund) by reporting that there were no personal contributions for 2010/2011, but that there were “inward rollover amounts” of $450,000. The Commissioner had rejected this amended statement as false or misleading, and did not initially process it. However, the Commissioner contended that the amended statement was “processed in error”, leading to the “credit” of $209,250 in the Statement of Account of 26 November 2014.
Mr Ward’s legal advisers maintained that with the exercise of the power to reduce their client’s liability to “nil”, the issue was disposed of. In turn, the Commissioner argued that the “Notice of Assessment” of 26 November 2014 did not in fact amend Mr Ward’s liability for excess contributions tax.
Mr Ward’s Running Balance Account was credited $209,250 on 21 November 2014, but this was reversed on 14 January 2015 and a new Statement of Account was issued to Mr Ward, reflecting that adjustment, on 5 February 2015.
The Commissioner’s argument – that the Notice of Assessment of 26 November 2014 was not an amended assessment with respect to excess contributions tax – proceeds on the following basis. Section 292-230(2) of the ITAA (as then in force – it has since been amended) provided for assessments of excess contributions tax:
292-230 Commissioner must make an excess non-concessional contributions tax assessment
(1)The Commissioner must make an assessment (an excess non-concessional contributions tax assessment) of:
(a) if a person has *excess non-concessional contributions for a *financial year—the amount of the excess non-concessional contributions; and
(b) amount (if any) of *excess non-concessional contributions tax which the person is liable to pay in relation to the financial year.
(2)The Commissioner must give the person notice in writing of an *excess non-concessional contributions tax assessment as soon as practicable after making the assessment.
(3)The notice may be included in a notice of any other assessment under this Act.
In turn, s 292-305 conferred a power on the Commissioner to amend such an assessment. Section 292-310 set out the effect of an amended excess contributions tax assessment:
292-310 Amended assessments are treated as excess non-concessional contributions tax assessments
(1)Once an amended *excess non-concessional contributions tax assessment for a person for a *financial year is made, it is taken to be an excess non-concessional contributions tax assessment for the person for the year.
(2)If the Commissioner amends a person’s *excess non-concessional contributions tax assessment, the Commission must give the person notice in writing of the amendment as soon as practicable after making the amendment.
(3)The notice may be included in a notice of any other assessment under this Act.
The Commissioner contended that an amended assessment under s 292-310 must provide, in respect of the amended assessment, the same particulars that s 292-230(2) requires to be set out in the original assessment, that is, the amount of the excess non-concessional contributions the taxpayer has made and the amount of any excess contributions tax to which the taxpayer is now liable. It was contended that a document which fails to satisfy both these requirements cannot be considered a “notice” of the amended excess contributions tax assessment for the purposes of ss 292-310(2) and (3).
The Notice of Assessment of 26 November 2014 does not meet this test, as postulated by the Commissioner. It contains no reference to excess contributions tax, either with respect to amounts contributed or tax payable. The Statement of Account, attached to this Notice of Assessment, does make reference to excess contributions tax, as described in paragraph 13 above. The Commissioner contended that it is the (amended) Notice of Assessment – and not the Statement of Account – which is the vehicle for determining or amending the taxpayer’s liability for excess contributions tax, and that a failure for it to meet the requirements of s 292-230 or s 292-310 means that it cannot constitute a legally valid assessment of liability for this tax.
Mr Ward, in turn, relied on the provisions of s 292-240:
292-240 Validity of assessment
The validity of an *excess non-concessional contributions tax assessment is not affected because any of the provisions of this Act have not been complied with.
He contended that, pursuant to this section, the substance of the advice to the taxpayer is what matters, not the form, and “a mere deficiency in form, or some other technical deficiency, or some other omission, does not deprive an amended assessment of its legal force”.
There are attractions in both arguments. However, I consider that the Commissioner’s position is to be preferred. The making of valid assessments of taxpayers’ liability to pay tax is a fundamental underpinning of the tax system. The ITAA sets out specific and detailed requirements for the validity of an assessment, and I do not consider that the latitude conferred by s 292-240 allows those specific and detailed requirements to be dispensed with.
In Batagol v Commissioner of Taxation (1963) 109 CLR 243, Kitto J placed emphasis on the formality of a notice of assessment as a basis for tax liability (at 252):
On this construction of the Act nothing done in the Commissioner’s office can amount to more than steps which will form part of an assessment if, but only if, they lead to and are followed by the service of a notice of assessment.
In a similar vein, Davies J in Stokes v Federal Commissioner of Taxation (1996) 136 ALR 632 said (at 639):
Because the making of an assessment involves a determination and fixing of the taxpayer’s liability to tax, subject to the taxpayer’s right to object and to seek administrative review or to appeal to this court, a process which fails to specify what is the amount of the taxable income which has been assessed and what is the tax payable thereon is not an assessment for the purposes of s 166 or of s 170 of the Act.
It follows that the form of the notice of assessment assumes some importance, and the failure to include essential elements is fatal to its validity, notwithstanding s 292-240. Mr Ward argued that to “give a taxpayer a notice in writing which tells him the result of an amendment is to give him notice of the amendment”, and that what matters is “the substance of what is objectively conveyed to the taxpayer as to his tax liability.” If one applies the logic of this proposition to other contexts, its unsoundness becomes evident. Is the Commissioner able to make a valid assessment of tax liability via an ordinary letter? By email? Via a telephone call?
The reference to “Excess Contributions Tax” in the Statement of Account which accompanied the “Notice of Assessment” of 26 November 2014 does not, in my opinion, fix the deficiency in the Notice. The Commissioner is empowered to prepare and issue a Running Balance Account in respect of a taxpayer under s 8AAZC of the Taxation Administration Act 1953, of which a Statement of Account is an example. There are evidently fewer formalities associated with this document than with a Notice of Assessment. However, I see nothing in the architecture of the tax legislation which allows a Statement of Account to cure a defect in a Notice of Assessment which it accompanies. Even if there were, I am not convinced that the Statement of Account here does so, since it fails to refer either to the amount of the excess non-concessional contributions made by the taxpayer or to the amount of excess contributions tax to which he is now liable. It is true, as Mr Ward argued, that an amount of “zero” with respect to both provisions might be inferred from the granting of the “credit” of $209,250, but a mere inference is not sufficient in light of the strict requirements alluded to in the cases cited above.
This is a somewhat technical argument advanced on behalf the Commissioner. Equally, the interlocutory challenge advanced by the taxpayer has a technical flavour. I have little doubt that Mr Ward’s advisers immediately saw the notice and statement of 26 November 2014 for what they were – an error on the part of the Tax Office.
Substantive issue to be determined
Having dealt with the functus officio issue, I turn now to the substantive issue to be determined by the Tribunal. There was no dispute between the parties that the Commissioner had correctly calculated the excess contributions tax under subdivision 292-B of the ITAA of the relevant year. What was in dispute, and what now falls to the Tribunal to determine, is whether the Commissioner’s decision not to make a determination under s 292-465 of the ITAA, disregarding or allocating to another financial year all or part of Mr Ward’s non-concessional contributions for the 2010/2011 year, should have been made differently.
Section 292-465 confers on the Commissioner a discretion allowing him to disregard, or allocate to another financial year, all or part of the person’s non-concessional contributions for a financial year. The conditions governing this discretion, relevantly to the present matter, are set out in the following terms:
292-465 Commissioner’s discretion to disregard contributions etc. in relation to a financial year
(3)The Commissioner may make the determination only if he or she considers that:
(a) there are special circumstances; and
(b) making the determination is consistent with the object of this Division.
(4)In making the determination the Commissioner may have regard to the matters in subsections (5) and (6) and any other relevant matters.
(5)The Commissioner may have regard to whether a contribution made in the relevant *financial year would more appropriately be allocated towards another financial year instead.
(6)The Commissioner may have regard to whether it was reasonably foreseeable, when a relevant contribution was made, that you would have *excess concessional contributions or *excess non-concessional contributions for the relevant *financial year, and in particular:
(a) if the relevant contribution is made in respect of you by another person—the terms of any agreement or arrangement between you and that person as to the amount and timing of the contribution; and
(b) the extent to which you had control over the making of the contribution.
Thus the determination may only be made where ‘special circumstances’ exist in relation to an applicant and the making of a determination would be consistent with the object of the Division.
For the purposes of subsection 292-465(3)(a), the object of the Division is set out in s 292-5:
292-5 Object of this Division
The object of this Division is to ensure, in relation to non-concessional contributions to superannuation, that the amount of concessionally taxed *superannuation benefits that an individual receives results from contributions that have been made gradually over the course of the individual’s life.
One way the object is met is by imposing a tax on excessive contributions, above the concessional level permitted in the legislation.
Mr Ward contended that there are special circumstances present here which warrant the exercise of the discretion, and that this exercise would be consistent with the object of the Division. I will deal first with the latter argument, the test in s 292-465(3)(b).
“…consistent with the object of this Division”
The Commissioner argued that the contribution of $450,000 made by Mr Ward to the Parr Post Fund in September 2010 did not represent superannuation contributions made by him over the course of his working life. He pointed to the fact that Mr Ward cashed in his benefits in his two superannuation schemes, APSS and CSS, in early 2008, invested them in BT Super for Life for a period and later deposited them into term deposit accounts. In this way, it was said that the $450,000 invested in BT Super for Life in July 2008 was not “the same money” as the $450,000 invested in the Parr Post Fund in September 2010. The Commissioner put it to the Tribunal that the non-concessional contributions for that later year “was not a rollover nor can it be treated as one in effect”. These transactions meant that the money sitting in the Wards’ self-managed superannuation fund does not represent “superannuation contributions that have been made gradually over the course of the person’s life”.
I cannot accept the Commissioner’s characterisation of these funds. A “Flow of Funds” chart (with variations thereupon) was presented to the Tribunal during the hearing; although the parties disagreed on what construction should be placed on certain transactions in the chart, what it demonstrated was that the $450,000 invested in the Parr Post Fund in September 2010 was essentially the proceeds of Mr and Mrs Ward’s superannuation accounts, plus the proceeds of the sale of a former home in Perth. This corpus of funds passed through several superannuation and term deposit accounts – no doubt adding some interest payments and subtracting some bank charges on the margins along the way – before being deposited in the self-managed superannuation fund. They were, clearly, the same funds he had withdrawn in early 2008. The Commissioner did not advance a hypothesis as to where else the funds so deposited might have come from, if not from the original superannuation accounts, and on the evidence before the Tribunal it is difficult to see how any such hypothesis could be mounted. It is well established that the passing of sums of money through financial institutions does not “bleach” the sums of their origin or essential characteristics. To take another example, if a sum of money is taken to a casino and “laundered” at the roulette table, the Commissioner would readily declare that the winnings were not new money but were essentially the same money the taxpayer had taken into the casino to begin with. Similarly, the fact that Mr Ward deposited and withdrew his superannuation assets several times in desperate attempts to maintain their value does not detract from the reality that these were the same assets, more or less, from start to finish.
I am satisfied that the funds so deposited were the same monies and do represent superannuation contributions made gradually over the course of Mr Ward’s life. Therefore if I were to make the determination under s 292-465 sought by Mr Ward, it would be “consistent with the object of this Division” (paragraph (3)(b)).
Special circumstances: the applicable law
I set out in full the circumstances which Mr Ward asserts constitute “special circumstances” pursuant to s 292-465(3)(a):
The following combination of circumstances clearly shows why this case is so special:
a)Because Mr Ward was (1) a low income earner and (2) both he and his wife were forced to retire early, they were particularly sensitive to even a very small declines [sic] in the APSS bond option account and were “obsessed” (as Ms Smith put it) with securing a fixed income in order to be self-sufficient well into the future, come what may;
b)Because of the deleterious health effects of working night shifts, Mr Ward had to retire into the GFC (which started in late 2007), and in doing so, found that his APSS investment was tanking, with APSS even having collapsing crediting rates. Coupled with rumours of worse to come, Mr Ward saw no retirement income from APSS, unlike government-guaranteed fixed interest bank deposits;
c)Due to a mis-communication, Mr Ward was mis-sold into a BT super product which had a floating and not fixed rate of interest. Mr Ward would not have opened the account with BT had he known that it did not have a fixed rate of interest;
d)The bank deposit guarantee and the dramatic reduction in interests, in response to the GFC, were themselves unprecedented policy actions in Australian economic history;
e)Had Mr Ward, by the accident of history, opened his account with BT only 11 days earlier he would never have invoked the “three year” bring forward rule;
f)Neither he nor Miss Smith ever knew there were 2 BT accounts;
g)BT misled him and Miss Smith by producing only one final statement showing “rollover”;
h)BT never corrected that statement nor issued a sister one for the “phantom account”. Even if one was alert to its existence, no one ever knew what, if anything, went into this account. BT never issued a Statement of Account for this “phantom account” – it was an account without any accounting;
i)BT never sent amended member contribution statements to him before the offending contribution;
j)FCT concedes that he could not have known member contribution statement had been amended away from “rollover” before the offending contribution was made [sic];
k)Factors (a) to (j) not only have some relevant relationship with the offending contribution, but a direct causal relationship with the offending contribution: “but for” the GFC and his “obsession” with a fixed secure income over time, Mr Ward never have withdrawn his funds from APSS and would never have gone to BT [sic]. “But for” the mis-communication about BT in subparagraph (c) above, Mr Ward would never have opened an account with BT, which ultimately led to the disaster. Equally, if Mr Ward made the BT contribution 11 days earlier there would have been no problem. Furthermore, if BT had made its amendments in a timely fashion and/or sent Mr Ward a Statement of Account relating to the second “phantom account”, the SMSF offending contribution would never have been made;
l)Mr Ward was not your average client: he was very assiduous, repeatedly asked questions to ensure that everything was right. Ms Smith was not your average financial adviser: her CV speaks for itself.
m)Mr Ward prudently sought advice in order to comply with the law, repeatedly seeking advice on at least four separate occasions. Each time he was assured it was 100% OK to do what Ms Smith told him to do;
n)Factors l) and m) create the expectation that Ms Smith would get something so simple and un-risky easily right. There should be no problems. However, factors f) to j) explains the existing disconnection between theory and reality: before the contribution was made no one had any active notice that an “internal rollover” had ever taken place between two BT accounts [sic];
o)There is no other tax case we can find in the history of the Commonwealth where a taxpayer has suffered a penalty of 19,527% of any “tax advantage” – which in this case was even unsought!
I summarise these claimed circumstances as follows:
(a)Mr Ward was obliged, for health reasons, to retire at the time of the GFC;
(b)the GFC was an exceptional circumstance in Australian economic history;
(c)through miscommunication, Mr Ward made an inappropriate investment decision by depositing the proceeds of his superannuation accounts with BT Super for Life;
(d)BT Super for Life misled him and his financial adviser as to the true nature of his investment in it;
(e)the ignorance that this induced led him to invest in his SMSF in breach of the bring forward rule;
(f)this accidental breach of the bring forward rule occurred despite Mr Ward being an extremely cautious and conservative investor;
(g)the invoking of the bring forward rule for this investment was an accident of timing;
(h)the Commissioner’s imposition of excess contributions tax amounts to a penalty on Mr Ward which is oppressive and unprecedented.
There has been extensive judicial and Tribunal commentary on the meaning of the phrase “special circumstances” and words of like import, both in the context of s 292-465(3)(a) and in other contexts. In Baker v The Queen (2004) 223 CLR 513 at 573, Callinan J said:
Speaking of the expression “exceptional circumstances” in s 2 of the Crime (Sentences) Act 1997 (UK) required for a decision not to impose a sentence of life imprisonment, Lord Bingham of Cornhill CJ said in R v Kelly (Edward) (249):
“We must construe ‘exceptional’ as an ordinary, familiar English adjective, and not as a term of art. It describes a circumstance which is such as to form an exception, which is out of the ordinary course, or unusual, or special, or uncommon. To be exceptional a circumstance need not be unique, or unprecedented, or very rare; but it cannot be one that is regularly, or routinely, or normally encountered.”
“Special reasons” in my opinion share those characteristics.
In the same case Gleeson CJ offered this observation (at 523):
That which makes reasons or circumstances special in the particular case might flow from their weight as well as their quality, and from a combination of factors.
In Groth v Secretary, Department of Social Security (1995) 40 ALD 541 at 545 Kiefel J gave this interpretation:
The phrase “special circumstances”, it has been said, although imprecise is sufficiently understood not to require judicial gloss: Beadle's case (at ALR 229; ALD 674), and for present purposes it is sufficient to observe that it would require something to distinguish Mr Groth's case from others, to take it out of the usual or ordinary case. That was, I consider, the only enquiry to be undertaken in this case. It would of course follow that if one were to conclude that something unfair, unintended or unjust had occurred that there must be some feature out of the ordinary.
The High Court has indicated that, individually, circumstances might not be regarded as special, but in combination with other circumstances can reach that threshold: United Mexican States v Cabal (2001) 209 CLR 165 at 186. In Griffiths v The Queen (1989) 167 CLR 372, Brennan and Dawson JJ considered a legislative provision which entitled either a parole board or a court to specify a shorter non-parole period than that required under another section only if it determined that the circumstances justified that course. They said (at 379):
Although no one of these factors was exceptional, in combination they may reasonably be regarded as amounting to exceptional circumstances.
Whether circumstances are special is a matter of looking at the relevant circumstances in their entirety: Dowling and Commissioner of Taxation [2014] AATA 474 at [26]. In Bentivoglio and Commissioner of Taxation [2014] AATA 620, Senior Member Frost considered a lace bug infestation on an olive producer’s property could constitute a special circumstance because, although it might be experienced by other participants – even by many other participants – in the olive industry, his organic certification restricted the way he could respond to the problem (at [82]). He commented further (at [78]):
A fire that sweeps through an entire region, damaging several adjacent properties, is an occurrence that is unusual, uncommon or out of the ordinary for each of the affected properties, even though it is experienced more or less equally on all of them. Drought can still be a special circumstance even though it occurs reasonably commonly in Australia, and then often for extended periods. It is no less “special” for spanning multiple income years or for impacting multiple entities in a similar way…
The authorities make it abundantly clear that poor judgement or ignorance of the law on a taxpayer’s part, or poor professional advice received by that taxpayer, do not in themselves constitute special circumstances. McKerracher J in Liwszyc v Commissioner of Taxation (2014) 218 FCR 334 summarised this position as follows (at 355):
An innocent mistake or ignorance of the law does not in itself constitute a “special circumstance” nor do simple errors, albeit innocent errors or other mistakes which are made in good faith. Equally, the fact that an error was made by another person does not in itself constitute “special circumstances”.
The Australian Taxation Office’s Practice Statement Law Administration PS LA 2008/1 is not binding on the Tribunal, but does contain what appears to be a reasonable summary of the common law with respect to the discretion in s 292-465. At paragraph [36] it says:
The following factors in isolation would not generally amount to the existence of special circumstances that make the imposition of the tax unjust, unreasonable or inappropriate:
•Financial hardship - it is common or usual, rather than 'special' for some degree of financial hardship to occur as a result of excess contributions tax being assessed. The imposition of the tax and corresponding liability to pay the amount assessed is an intended consequence of the law designed to discourage excess contributions. The financial hardship may be ameliorated if a person uses the release authority given by the Commissioner to release the amount of the excess contributions tax from the fund to pay the liability. A claim of financial hardship should generally be considered in light of the PS LA 2011/17 Debt Relief.
•Ignorance of the law - a claim that a person was ignorant of the law would not, generally speaking, be regarded as 'special circumstances' unless other factors exist which would make the ignorance or misconception reasonable or understandable in the circumstances, such as where incorrect advice was provided to the person by the ATO.
•Incorrect professional advice - as with ignorance of the law, this would not generally amount to special circumstances, unless there were other special factors leading to the mistake. For example, if the incorrect professional advice was based on a widely understood view of the law that was ultimately found by a court to be incorrect, the incorrect advice may constitute special circumstances. However, the mere fact that a particular mistake is of a type that is 'not uncommon' or results from an incorrect interpretation of a provision which some may find hard to apply, would not generally make the circumstances sufficiently special to warrant exercise of the Commissioner's discretion.
•Retrospectivity of law or adverse effect of legislative changes - claims such as these would not be considered 'special circumstances'.
Special circumstances: consideration
The Tribunal wishes first to make comment on what the evidence suggests was Mr Ward’s state of mind in these transactions. Counsel for the Commissioner put it to the Tribunal that Mr Ward was aware, at some point after investing $450,000 in BT Super for Life, that by doing so he had invoked the bring forward rule, but that he was not necessarily aware of the consequences of making further payments into his superannuation account before the end of the 2009/2010 financial year.
Considerable attention was devoted during the hearing to the final statement from BT Super for Life to Mr Ward, dated 30 April 2009 (T14-71). Although this is a four page document, apparently only the first page was supplied to Ms Smith by Mr Ward, and this fact was said to have contributed to a misapprehension on her part as to the legal nature of the $450,000 payment. The Commissioner contended that the document was not misleading as to the treatment of the $450,000 payment by BT Super for Life; Mr Ward contended that it was. It appears to the Tribunal, however, that the secondary purpose of this contention – though never explicitly put to the Tribunal – was to demonstrate that Mr Ward made a conscious and informed decision to breach the bring forward rule.
If that was indeed the Commissioner’s contention, the Tribunal rejects it. Mr Ward strikes me as an exceedingly cautious decision maker, one who sought to act on the basis of qualified advice. This was the purpose of his entering into a client relationship with Wholistic. I am satisfied that he felt “out of his depth” in dealing with these matters (he had after all been a truck driver for most of his life), and was heavily reliant on the advice of others in making such decisions. Even if he had some basic understanding of the bring forward rule, which might have suggested that he could not put more money into his superannuation account at that time, that understanding was readily displaced by the firm and authoritative advice proffered by Ms Smith of Wholistic.
There is simply no credible evidence that Mr Ward set out intentionally to breach the bring forward rule, nor to bring excess contributions tax down on his head. Similarly, it beggars belief that Ms Smith would have acted with such an intention, though the worst that might be said of her is that her advice to Mr Ward was careless. It is difficult to see how either could have acted with the intention of avoiding the cap on superannuation contributions, or of obtaining some tax advantage for the Wards, given the requirements of the Wards’ self-managed superannuation fund to file member contributions statements to the Tax Office.
Notwithstanding that Mr Ward acted honestly and in good faith, I am not satisfied that he has established the existence of special circumstances pursuant to s 292-465. It does not appear that, individually, any of the elements of Mr Ward’s particular circumstances amounts to “special circumstances”. The misleading notice provided by BT Super for Life and the incorrect advice this, in turn, induced on the part of Ms Smith of Wholistic were unfortunate but do not equate with “special circumstances”. Nor does Mr Ward’s own ignorance of the taxation consequences of his innocently-undertaken investments, as the authorities amply demonstrate. I do not regard the GFC – though clearly an exceptional event in Australia’s economic history – as a special circumstance for the purpose of the tax laws. The GFC, in this context, was not a factor which per se caused the catastrophic consequences of Mr Ward’s excess contribution decision, but rather was a factor which induced the decision, in much the same way that the misleading information from BT Super for Life and Wholistic also induced the decision. The fact that the GFC impacted adversely on billions of people does not mean it cannot amount to a special circumstance (Bentivoglio), but in Mr Ward’s case it was more of a background factor than a significant cause of excess contributions tax being imposed on him.
Individually, none of these factors can amount to “special circumstances” in this case. Taken together, these factors might constitute “special circumstances”, particularly when the oppressive effect of the amount of the excess contributions tax on him is taken into account. In the language of his closing submission:
There is no other case which has a combination of “special circumstances” such as Mr Ward’s. It is an error of law to say that this combined agglomeration of circumstances is not special. If this case is not special, what case ever could be?
In Lynton and Commissioner of Taxation (2012) 90 ATR 950, the Tribunal considered the circumstances of a taxpayer who had mistakenly exceeded the maximum superannuation contribution under the bring forward rule by $23,627. The Commissioner had issued an excess contributions tax assessment to the taxpayer for $10,986.55. The Tribunal there observed, in finding that special circumstances did not exist (at [15]):
The legislation contemplates circumstances which are inconsistent with a natural and foreseeable sequence of events. It does not contemplate circumstances which are of special significance to the taxpayer but not unique to an individual in the taxpayer's position.
That the circumstances facing Mr Ward were exceedingly unfortunate, and not of his own making, is not to be doubted. But the imposition of excess contributions tax on him was the natural and foreseeable consequence of the decisions he and his advisers made, albeit in ignorance. His intention was not, at any point, to gain a taxation advantage to which he was not entitled – and in fact the advantage he did obtain was relatively small, particularly set against the size of the excess contributions tax then imposed upon him. But the character of a taxpayer’s intention with respect to tax implications does not appear to be an element in the imposition of excess contributions tax under the legislation.
The sheer size of the excess contributions tax levied here on Mr Ward – $209,250 – weighs heavily on the Tribunal’s thinking. Its effect is to wipe out the entirety of Mr Ward’s superannuation savings at retirement. The enormity of its impact seems to evoke the spirit of the test for special circumstances postulated by Kiefel J in Groth (at 545): If … something unfair … or unjust had occurred … there must be some feature out of the ordinary. But there was a third arm of Her Honour’s test in Groth: special circumstances may be established if something unintended had occurred. This was expressed as an alternative rather than a necessary precondition of special circumstances, but nonetheless has a bearing on how the test should be applied.
In Groth the applicant argued that there were "special circumstances" which made it appropriate to disregard the whole or part of previous workers’ compensation payments in the assessment of his entitlement to the disability support pension. It was claimed that the interaction between Commonwealth and State workers’ compensation legislation (and amendments to both) and s 1168 of the Social Security Act 1991 affected Mr Groth adversely, giving rise to “special circumstances” relief. In rejecting that contention, Her Honour said (at 545):
An understanding of the provision, the application of which is sought to be relieved against, is obviously necessary. That latter purpose, that for which the discretion is conferred, is to be ascertained and understood in the context of the Act and the particular provision to which it refers: Giris Pty Ltd v Commissioner of Taxation (Cth) (1969) 119 CLR 365 at 384 (referred to in Trimboli at ALR 73; ALD 209). It would follow that, since an unintended consequence may amount to a special circumstance, it is necessary to understand the results it was intended to have. The emphasis upon the purpose of the provision in this case may be thought unnecessary, for what followed from the application of s 1168 to Mr Groth, in the view of the Tribunal, was only what was intended. That is to say, there was no other feature present beyond the fact that s 1168 applied to Mr Groth, and nothing which produced any effect different from that which would be felt by others qualified for the pension, namely that the amount received would be adjusted to permit only the receipt of the pre-determined level.
…[A]ll that the background facts tell us is that the Act applies to Mr Groth. In that sense the tribunal was correct in concluding that what here has taken place under the two legislative schemes was irrelevant. Whilst the means by which persons become qualified to compensation payments, the amount they receive and the legislation pursuant to which they become so entitled will vary, what they will all have in common is that s 1168 will then apply to them. Absent some other feature, the only question which can be said to arise in this case is that posed by the tribunal namely: what then would be the effect of applying s 1168 to a person in Mr Groth’s position?
The Tribunal considers that a similar approach should be taken to Mr Ward’s circumstances. Despite the harshness of its impact upon him, the excess contributions tax imposed on Mr Ward as a consequence of his decisions cannot be said to be anomalous, in the nature, say, of a double penalty or an outcome not reasonably foreseeable. The legislative provisions imposing the excess contributions tax have operated as they were intended to. Had Mr Ward set out deliberately and consciously to build up his superannuation in defiance of the cap, one might regard a “penalty” of $209,250 as a fair outcome; the fact that Mr Ward proceeded with no such defiance of the law in mind does not transform the tax into something unintended.
The Tribunal finds accordingly it cannot exercise the discretion in s 292-465 in the absence of special circumstances, even though such determination would be consistent with the object of the Division. The Tribunal affirms the Commissioner’s decision of 7 June 2013 to disallow Mr Ward’s objection against his excess contributions tax assessment for the 2010/2011 financial year.
Additional comment
However, the Tribunal comes to this conclusion with considerable regret. The strict application of the law to Mr Ward’s situation produces an outcome which is harsh and unfair. Setting out only to protect his and his wife’s superannuation nest egg after a lifetime in low paid employment, and acting in good faith with professional advice, Mr Ward has unwittingly forfeited to the Tax Office the entire proceeds of his superannuation savings. Had the original investment in BT Super for Life been made just days earlier than it was, no excess contributions tax would have been payable. As it transpired, he has suffered a penalty of 19,527 percent of any “tax advantage” (his advisers’ calculation), an outcome which cannot be regarded as conscionable.
I have found that “special circumstances”, permitting the reallocation of his superannuation contribution to another financial year, do not exist. This is the product of applying the statute and the caselaw to his situation. That his situation does not meet the stringent test for special circumstances, yet still amounts to grossly unfair treatment at the hands of the law, is a paradox on which legislators should reflect.
Of course, Mr Ward has the right to appeal this decision to the Federal Court. Should he do so, I can only add my blessing to his endeavour; no member of this Tribunal would ever be happier to have some flaw in his logic discovered and his decision overturned on appeal. Should he not do so his only avenue for redress, I was informed from the bar table during the hearing, is to apply for an act of grace payment from the Minister for Finance. If that is the course of action he adopts, I can only add my strongest commendation to the Minister that such a payment be considered.
I certify that the preceding 56 (fifty-six) paragraphs are a true copy of the reasons for the decision herein of Deputy President Gary Humphries ..................................[sgd]......................................
Associate
Dated 30 November 2015
Dates of hearing 10-11 September 2015 Date final submissions received 25 September 2015 Counsel for the Applicant Mr Steven Spadijer Solicitors for the Applicant Dwyer Lawyers Counsel for the Respondent Mr B C Kasep Solicitors for the Respondent Review & Dispute Resolution, Australian Taxation Office
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