Re Commissioner of Taxation of the Commonwealth of Australia v PR Arklay [1989] FCA 34; 22 FCR 157 (28 February 1989)

FEDERAL COURT OF AUSTRALIA

Re: THE COMMISSIONER OF TAXATION FOR THE COMMONWEALTH OF AUSTRALIA
And: P.R. ARKLAY
No. G253 of 1988
FED No.326
Income Tax
[1989] FCA 34; 22 FCR 157

COURT

IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
Sheppard(1), Wilcox(1) and Hartigan(1) JJ.

CATCHWORDS

Income Tax - taxpayer recently employed by Queensland Railways as a casual employee - casual employees entitled to certain retirement benefits after long periods of service - taxpayer contributing to superannuation scheme not provided by employer - taxpayer claimed deduction for contribution to scheme - whether, during the whole or a part of the year of income circumstances existed by reason of which it was reasonable to expect that superannuation benefits would be provided for the taxpayer - discussion of considerations appropriate to be taken into account by Commissioner in determining whether deduction allowable.

Income Tax Assessment Act 1936, ss. 82AAS and 82AAT

HEARING

BRISBANE
28:2:1989

Counsel for the Applicant: Mr. R.W. Gotteson, Q.C. and

Mr. R. Traves

Solicitors for the Applicant: Australian Government Solicitor,
Level 13,
294 Adelaide Street,
Brisbane. Q'ld. 4000.

Counsel for the Respondent: Mr. C. Brabazon, Q.C. and
Mr. M.J. Noud

Solicitors for the Respondent: F.K. Brown & Brown

DECISION

The applicant, the Commissioner of Taxation for the Commonwealth of Australia, appeals to this Court against a decision of the Administrative Appeals Tribunal ("the Tribunal") made on 1 June, 1988 in which the Tribunal allowed the objection of the respondent taxpayer.

2. The appeal raises a question of law pursuant to s.44 of the Administrative Appeals Tribunal Act, 1975. Put shortly the question that is raised by this appeal is the meaning to be given to the expression "circumstances existed by reason of which it was reasonable to expect" as it appears in s.82AAS(2)(a) of the Income Tax Assessment Act, 1936 ("the Act").

3. Section 44 of the Administrative Appeals Tribunal Act restricts proceedings in this Court to an appeal on a question of law. As a Full Court of this Court said in Brown v. Repatriation Commission (1985) 60 ALR 289 at p 291:

"The existence of a question of law is not merely a
qualifying condition to ground an appeal from a
decision of the (Repatriation Review) Tribunal,
rather it, and it alone is the subject matter of
the appeal, and the ambit of the appeal is confined
to it."

4. This approach was affirmed with reference to the Administrative Appeals Tribunal by another Full Court of this Court in Federal Commissioner of Taxation v. Brixius (1987) 16 FCR 359. The question of the construction of s.82AAS(2)(a) of the Act is a question of law.

5. During the 1982 year of income the respondent had paid $120 to a superannuation fund (then known as the Wales Retirement Fund). In his income tax return for that year the respondent claimed a deduction under s.82AAT of the Act for that amount. It was not disputed in the Tribunal nor at the hearing of the appeal that the Wales Retirement Fund was a qualifying fund within s.82AAT. The Commissioner rejected the respondent's claim for the deduction when assessing the respondent to tax for the 1982 tax year.

6. Entitlement to such a deduction is dependent upon the taxpayer qualifying as an "eligible person" as that term is defined in s.82AAS of the Act. The Commissioner had formed the opinion that the respondent was not an "eligible person" as that term is defined. As a consequence the Commissioner determined that the respondent was not entitled to the deduction under s.82AAT. For the purposes of the definition in s.82AAS the Commissioner had decided that during 1982 it was reasonable to expect that superannuation benefits would be provided to the respondent upon his retirement other than from contributions made wholly by him.

7. The Tribunal in its reasons for decision made observations that set out the factual background of the case:

"6. During the 1982 year of income, the applicant
was employed as a temporary porter with the
Queensland railways. He had commenced this
employment with the Railways on 9 June 1981, having
previously worked with a bank for 12 years.
Apparently, the applicant had suffered health
problems and had some difficulty in coping with his
position at the bank. He had therefore taken a less
demanding position with the Railways.
7. The applicant gave evidence that, while he
intends to work until he is 60 or 65, he has no
particular intention of remaining with the Railways
until he reaches that age; he did not rule out the
possibility that he would in fact continue with the
Railways. He said in evidence, having referred to
medical problems from which he was still
suffering:-
'I am still having a few troubles with
nervous dyspepsia of the stomach, and I
will just, sort of, see what comes up. It
does not mean to say I will stay with the
railway until I retire. I could leave in
two years; five years; 10 years. I am
just undecided at the moment'.
8. In March 1983, that is to say, after the tax
year with which the present question is concerned,
the applicant was appointed to the permanent staff
of the Railways, but has not yet been invited to
join the State superannuation scheme. A letter
dated 25 January 1983 from the Office of the Chief
Accountant, Queensland Railways, recited:-
'This is to advise that Peter Ross Arklay
is employed as a Temporary Porter with
the Railway Department at the Mayne
Carriage Shed.
As a temporary employee he is not
eligible (sic) to contribute, to the
"State Service Superannuation Scheme"
however, once placed on the permanent
staff, he can elect to join the Fund.
Temporary employees however, are entitled
to be paid a Retiring Allowance, if
applicable upon Retirement from the
Railway Department'".

8. To the extent that they are presently relevant s.82AAS and s.82AAT of the Act provide as follows:

"82AAS (1) ...
(2) Subject to sub-section (3), a person (in this
sub-section referred to as the 'relevant person')
is an eligible person in relation to a year of
income for the purposes of this Subdivision unless-
(a) during the whole or a part of the year of
income circumstances existed by reason of which it
was reasonable to expect that superannuation
benefits would be provided for the relevant person
upon retirement or for dependants of the relevant
person in the event of death of the relevant person
(whether or not any condition other than the
retirement or death of the relevant person would be
required to be satisfied in order that those
benefits be provided); and
(b) .......".
"82AAT
(1) Subject to sub-section (2), there shall be
allowed as a deduction from the assessable income
of an eligible person of a year of income the
amount of of any contribution, or the sum of the
amounts of any contributions, made by the eligible
person during the year of income and after 19
August 1980 to a qualifying superannuation fund,
being contributions made to obtain superannuation
benefits for the eligible person or, in the event
of death of the eligible person, for the dependants
of the eligible person.
(2) The deduction allowable to a taxpayer under
this section from the assessable income of a year
of income shall not exceed $1,200".

9. Section 6(1) of the Act defines "superannuation benefits" as follows:

"6(1)'superannuation benefits' means individual
personal benefits, pensions or retiring allowances".

10. The case concerns the effect of a scheme for the payment of retiring allowances to certain railway employees under railway by-laws. Paragraph 26 of by-law 690 made by the Queensland Commissioner of Railways, so far as relevant, provided as follows:

"(a) .........
(b) Should it become necessary for any employee to
be retired from the service for any of the
foregoing causes, or because he has attained the
age fixed by the Government as the age at which
employees of the Commissioner shall be retired,
there shall be paid to him as a retiring allowance
a sum equal to salary or wages at the rate he was
receiving at the date of his retirement for a
period according to the following scale, but in no
case, excepting with the special approval of the
Commissioner, shall such rate be more than the rate
applicable to his permanent classification:-
To any such employee who has for a period
of at least fifteen years continuously
been in the service, three months; to any
such employee who has for a period of at
least twenty years continuously been in
the service, four and a-half months; to
any such employee who has for a period of
at least twenty-five years continuously
been in the service, six months; a
proportionate time and pay being allowed
for intermediate service between the
periods: Provided that the Commissioner
may grant to any such employee who has for
a period of at least ten years but not
more than fifteen years continuously been
in the service a retiring allowance for a
period equal to that proportion of three
months that the periods such employee has
continuously been in the service bears to
fifteen years: Provided further that an
employee who at 31st March, 1965, was an
employee who had attained the age of 30
years shall be paid a Retiring Allowance
for a period, extending beyond 25 years of
continous service as prescribed, according
to the following scale- after 30 years of
continuous service, 7 1/2 months on full
pay; after 35 years of continuous service,
9 months on full pay; after 40 years of
continuous service, 10 1/2 months on full
pay; after 45 years of continuous service,
12 months on full pay; with proportionate
time being allowed for intermediate
service between the periods, including
intermediate service between 25 years and
30 years: Provided, also, that for any
such period herein referred to no employee
shall be entitled to receive any
emoluments other than salary.
Under no circumstances shall an employee
who has had more than one period of
service with the Commissioner, be paid
retiring allowance (inclusive of any
retiring allowance which may have been
paid to him in respect of any previous
period or periods of service) for a
greater period than that to which he would
have been entitled had his periods of
service with the Commissioner been
aggregated and had such aggregated period
been regarded as continuous service."

11. The question of who is an eligible person for the purposes of s. 82AAS of the Act has been considered by Taxation Boards of Review and the Tribunal in a number of cases; see Case R44 84 ATC 365; Case R77 84 ATC 532; Case R78 84 ATC 538; and Case V42 88 ATC 359. We have considered the views expressed in those cases.

12. Some assistance can be gained as to the meaning of the expression "by reason of which it is reasonable to expect" as it appears in s. 82AAS of the Act from the judgments of the Full Court of this Court in Attorney-General's Department & Anor v. Cockcroft (1986) 64 ALR 97. In that case the Full Court considered the meaning to be given to the expression "could reasonably be expected to prejudice the future supply of information" as it appears in s.43 of the Freedom of Information Act 1982. In the joint judgment of Bowen C.J. and Beaumont J. it was said (at p 106) that:

"(I)n our opinion, in the present context, the
words 'could reasonably be expected to prejudice
the future supply of information' were intended to
receive their ordinary meaning. That is to say,
they require a judgment to be made by the
decision-maker as to whether it is reasonable, as
distinct from something that is irrational, absurd
or ridiculous, to expect that those who would
otherwise supply information of the prescribed kind
to the Commonwealth or any agency would decline to
do so if the document in question were disclosed
under the Act. It is undesirable to attempt any
paraphrase of these words. In particular, it is
undesirable to consider the operation of the
provision in terms of probabilities or
possibilities or the like. To construe
s.43(1)(c)(ii) as depending in its application upon
the occurrence of certain events in terms of any
specific degree of likelihood or probability is, in
our view, to place an unwarranted gloss upon the
relatively plain words of the Act. It is preferable
to confine the inquiry to whether the expectation
claimed was reasonably based (see Kioa v Minister
for Immigration & Ethnic Affairs [1985] HCA 81; (1985) 62 ALR 321
per Gibbs CJ and Mason J)".

Sheppard J., said (at pp 111-112):

"I do not myself feel able to derive from the
presence of the word 'reasonably' in the relevant
expression a great deal of assistance. The
difficulty is to give full weight to the meaning of
the word 'expected'. It is only then that one can
turn one's mind to the question of the significance
of the qualification of it by the word
'reasonably'. The words are expressed in the
passive voice- 'could reasonably be expected'. What
is required is that the decision-maker act
reasonably. For the document to be exempt his
conduct must be taken to be that of the reasonable
man. But then comes the difficulty. So acting, the
decision-maker must expect that disclosure of the
document could prejudice the future supply of
information. In my opinion he will not be justified
in claiming exemption unless, at the time the
decision is made, he has real and substantial
grounds for thinking that the production of the
document could prejudice that supply. But,
stringent though that test may be, it does not go
so far as to require the decision-maker to be
satisfied upon a balance of probabilities that the
production of the document will in fact prejudice
the future supply of information."

13. We are of the opinion that the phrase with which we are concerned in the context of s. 82AAS of the Act requires a determination whether or not circumstances exist by reason of which the decision maker is able to expect on reasonable grounds that superannuation benefits would be provided as stipulated in the section. That test is an objective one. However, in applying the test the decision maker,in considering the circumstances, should have regard to any relevant matters concerning the taxpayer personally. Put another way our understanding of the meaning of the expression is one which involves the application of an objective test, but, as one of the concomitant elements of that test, the subjective intentions of the taxpayer may be relevant.

14. An example of an objective test which nevertheless accommodates the subjective intentions of a particular person is to be found under the Social Security Act, 1947; cf. the decision of the Full Court of this Court in Secretary, Department of Social Security v. Copping (1987) 73 ALR 343 at 348 and see Dineen v. Secretary, Department of Social Security (Federal Court of Australia, Woodward J. 6 December 1988, unreported).

15. We also mention the decision of the High Court in Shapowloff v. Dunn [1981] HCA 21; (1981) 148 CLR 72. In that case one question which arose was whether a person had at the time of contracting a debt "no reasonable or probable expectation", after considering his other liabilities, of being able to pay the debt. Although the language of the statute there under consideration was phrased in somewhat different words from that here in question, the approach of the High Court to the construction of the phrase there being considered is instructive. Thus Wilson J. said (at p 85):

"The prosecution must prove beyond a reasonable
doubt that at the time of contracting the debt the
defendant himself had no expectation, reasonably
grounded in the whole of the circumstances then
existent as he knew them, of being able to pay the
debt. It will be seen that the test involves a
blending of subjective and objective
considerations. The test of reason imports an
objective standard, but it is to be applied to the
facts as known to the defendant."

16. When applying s.82AAS the Commissioner should consider all the relevant facts and circumstances, including the taxpayer's subjective intentions, if they shed light on the matter, that pertain to the particular year of income which is in question. The existence of a potential superannuation benefit and the expressed relevant intentions of the taxpayer will usually be the most important facts and circumstances to be considered in a given case. In a case where the taxpayer remains in employment for a considerable period of time, but expressing always an intention to leave that employment, less weight may well be given by a decision maker to those expressed intentions when applying the section. Conversely, the mere fact that a superannuation benefit is available on the occurrence of some contingency, however remote, although relevant, will not have the significance it would have in a case where there is a real prospect of the taxpayer receiving a benefit under a provision such as the by-law here in question.

17. With these matters in mind, we are quite unable to perceive how it could be said that the Tribunal fell into error in the way it applied s. 82AAS to the facts before it. The Tribunal in its reasons for decision stated:

" ...... the question of whether there is "reason
to believe" that superannuation benefits will be
payable on retirement to a person is whether there
are grounds, presently existing, on which one can
predict with confidence that the event will happen.
In the present context " to expect " means "to
regard as likely to happen". In other words, there
is "reason to believe", when there are grounds
presently existing on which one can regard the
payment of a retiring allowance to the applicant as
likely to happen.
18. In the opinion of the tribunal, this test of
who is "an eligible person" accords with the
statements of intention in the explanatory
memorandum. In our view, it gives effect to the
perceived purpose of subdivision AB of Division 3
of the Act.
19. The circumstances against which the question is
to be answered, are those existing in the relevant
year of income.
20. So understood, the question becomes one of
whether a person is an "eligible person" is one of
fact and degree."

18. The Tribunal's reasons make it plain that the Tribunal considered objectively whether the circumstances of the case, including relevant matters personal to the respondent, should lead it to conclude that it was reasonable to expect that superannuation benefits would be provided for the applicant. That appears from the following passage from the Tribunal's reasons for decision:

"that the applicant was, in the 1982 year, an
'eligible person'. At that time, he was a temporary
porter in the Railways. He had started in the
Railways only on 9 June 1981. Whether he would
remain with the Railways until retirement, i.e. at
least 31 years, was one very serious aspect of
whether there was reason to believe he would be
paid a retiring allowance. That question also
involved whether he would be appointed to the
permanent staff; and, if so, whether he would elect
to join the State superannuation scheme. Such
joining would disentitle him to any entitlement to
the retiring allowance. Given the background of the
applicant, his status during the relevant tax year,
his expressed uncertainty as to his future
employment by the Railways, the uncertainty at that
time as to his attaining permanent status, the
prospect in reality of his continuing in the
service of the Railways until at least age
60 years, and whether, during that service, he would
have chosen to join the State superannuation
scheme, the tribunal is of the opinion that the
applicant was not a person of whom there was reason
to believe that a retiring allowance would be
provided for him on his retirement."

19. We consider that the Tribunal correctly construed and applied ss.82AAS and 82AAT to the facts of the case before it. The Tribunal did not fall into error on any question of law and we dismiss the appeal with costs.