Re Commissioner of Taxation of the Commonwealth of Australia v Eric J Unger [1991] FCA 15; 91 Atc 4103/21 Atr 1252 (6 February 1991)

FEDERAL COURT OF AUSTRALIA

Re: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
And: ERIC J. UNGER
No. V G101 of 1990
FED No. 3 [1991] FCA 15; 91 ATC 4103/21 ATR 1252

COURT

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIAN DISTRICT REGISTRY
GENERAL DIVISION
Jenkinson J.(1)

HEARING

MELBOURNE
6:2:1991

Counsel for the Applicant: Dr R.A. Sundberg QC and Mr F.J. Power

Solicitor for the Applicant : Australian Government Solicitor

No Appearance for the Respondent

DECISION

Appeal from a decision of the Administrative Appeals Tribunal.

2. During the year ended 30 June 1984 a payment was made to the respondent in pursuance of s.64 of the Superannuation Act 1976 (Cwth), being a payment in relation to the commutation of a superannuation pension that was payable to him. It was a payment which fell within the meaning ascribed, in Subdivision AA of Division 2 of Part III of the Income Tax Assessment Act 1936, to the expression "eligible termination payment". Section 27B of that Act, which falls within that Subdivision, requires that where an eligible termination payment is made to a taxpayer in a year of income his assessable income of that year shall include an amount to be ascertained in accordance with a formula set out in sub-section 27B(1). The applicant and the respondent are in disagreement about the proper construction of the provisions of the Subdivision which give expression to the formula. The decision of the Administrative Appeals Tribunal, on a reference of the applicant's decision on the respondent's objection against the assessment in respect of that year of income, was grounded upon a construction of those provisions which differs in one respect from the construction for which the applicant contends. The difference has only a small monetary effect in this case, and the respondent did not appear on the hearing of the appeal in this court. But the applicant, like the court, is obliged to seek the proper construction of the provisions.

3. Each of several descriptions of payment is declared by s.27A(1) to be, unless the contrary intention appears, within the meaning of the expression "eligible termination payment" in Subdivision AA. One of those descriptions is given in paragraph (d) of the definition of the expression, in these terms:
"any payment made in respect of the taxpayer in

relation to the commutation, in whole or in part, of a
superannuation pension that was payable to the
taxpayer, reduced by the unused undeducted purchase
price in relation to the superannuation pension."

The payment made in respect of the respondent taxpayer in the year of income, $52,962, was at all times treated by both parties and by the learned Deputy President constituting the Administrative Appeals Tribunal as one made in relation to the commutation of a superannuation pension that was payable to the respondent. In that they were clearly right, in my opinion, for reasons to be stated hereafter. The expression "unused undeducted purchase price" is defined for the purposes of Subdivision AA in sub-sec. 27A(1). The relevant definitional provisions, all of which are preceded by the qualification "unless the contrary intention appears", are of three expressions. "Purchase price" is defined to mean, in relation to a superannuation pension,

"the sum of -
(i) contributions made by any person to a
superannuation fund to obtain superannuation benefits
consisting only of the superannuation pension; and
(ii) so much as the Commissioner considers reasonable
of contributions made by any person to a superannuation
fund to obtain superannuation benefits including the
superannuation pension."

The other two definitions are:

"`undeducted purchase price', in relation to an annuity
or superannuation pension, means the sum of -
(a) so much of the purchase price of the
annuity or superannuation pension as was paid before 1
July 1983 and -
(i) has not been, and will not be, an
allowable deduction;
(ii) has not been, and is not to be,
treated as a rebatable amount for the purpose of
section 159N; and
(iii) is not an amount in respect of
which a rebate of income tax has been allowed, or is
allowable, in assessments for income tax under this Act
or any previous law of the Commonwealth, and
(b) so much of the purchase price of the
annuity or superannuation pension as was paid on or
after 1 July 1983 and has not been, and will not be, an
allowable deduction, reduced by so much of the purchase
price of the annuity or superannuation pension as is
taken, by virtue of section 27D, to consist of an
amount to which sub-sub-paragraph 27D(1)(b)(iii)(A)
applies;
`unused undeducted purchase price', in relation to an
annuity or superannuation pension, means so much of the
undeducted purchase price of the annuity or
superannuation pension as has not been excluded from
the assessable income of any taxpayer of any year of
income -
(a) under section 26AA of this Act as in force
before the commencement of the Income Tax Assessment
Amendment Act (No. 3) 1984 (including that section as
continued in force by that last-mentioned Act); or
(b) under section 27H."

4. The reduction for which paragraph (d) of the definition of "eligible termination payment" makes provision was by the sum of two amounts. One of them, $6,137, was so much of the contributions made by the respondent to the superannuation fund to obtain his superannuation pension as had been paid before 1 July 1983 and as satisfied the descriptions contained in sub-paragraphs (i), (ii) and (iii) of paragraph (a) of the definition of "undeducted purchase price" and had not been excluded from the assessable income of any taxpayer of any year of income under any of the provisions of the Income Tax Assessment Act 1936 specified in paragraphs (a) and (b) of the definition of "unused undeducted purchase price". The other, $1,314, was so much of the contributions made by the respondent to the superannuation fund to obtain his superannuation pension as had been paid on or after 1 July 1983 and has not been, and will not be, an allowable deduction. The circumstances of this case did not require any reduction of the kind which is contemplated in paragraph (b) of the definition of "undeducted purchase price", nor work any diminution of the amount of $1,314 by reason of any provision of the definition of "unused undeducted purchase price". The sum of those two amounts, $7,451, is the amount by which the payment to the respondent taxpayer of $52,962 is to be reduced to give the amount, $45,511, which answers the description of "eligible termination payment" afforded by paragraph (d) of the definition of that expression.

5. Section 27B, so far as presently relevant, provides that -

"where in a year of income an eligible termination
payment is made in relation to a taxpayer, the
assessable income of the taxpayer of the year of income
shall include the amount
(if any) ascertained by deducting from the amount (in
this sub-section referred to as the `relevant amount')
ascertained in accordance with the formula
A-A B-D,
C where -
A is the amount or value of the eligible
termination payment reduced by the amount of the
concessional component in relation to the eligible
termination payment;
B is the number of whole days (if any) in
the eligible service period that occurred before 1 July
1983;
C is the number of whole days in the
eligible service period; and
D is the amount of undeducted
contributions in relation to the eligible termination
payment,
so much of the relevant amount as is deemed to have
been applied in accordance with section 27D."

6. The value of component A in this case is $45,511. The expression "concessional component" is defined in s.27A(1). There was no concessional component in relation to this eligible termination payment. The value of component B is 17,515 and the value of component C is 17,695. No part of the "relevant amount", in the sense in which that expression is used is s.27B, is "deemed to have been applied in accordance with section 27D". Accordingly, if the value of component D were assumed to be nil, the application of the formula -

45 511 x 17 515
45 5111 - 17 695 = 463

- would result in the inclusion in the assessable income of the respondent of $463, by force of the provisions of s.27B.

7. It was, however, the respondent's contention, and the Administrative Appeals Tribunal decided, that the value of component D was 1314, the number of dollars of one of the two amounts of which the sum was $7,451, which is the amount by which the payment to the respondent of $52,962 was reduced to give the amount of the "eligible termination payment" described in paragraph (d) of the definition of that expression.

8. The expression "undeducted contributions", the amount of which in relation to the eligible termination payment is the value of component D in the formula, is also defined in s.27A(1), in these terms:

"`undeducted contributions', in relation to an eligible
termination payment made in relation to a taxpayer,
means so much of the eligible termination payment as is
attributable to contributions made by the taxpayer, or
by any other person, after 30 June 1983 to a
superannuation fund in order to obtain superannuation
benefits, being contributions in respect of which no
deduction is allowable or has been allowed to the
taxpayer or the other person."

It is accepted that the $1,314 answer the description "contributions made by the taxpayer .... after 30 June 1983 to a superannuation fund in order to obtain superannuation benefits, being contributions in respect of which no deduction is allowable or has been allowed to the taxpayer". The learned Deputy President concluded "that the amount of $1,314 fulfils the requirements of the definition of `undeducted contributions' and that it should be included under item D accordingly". I cannot agree. The expression "undeducted contributions" is not defined to mean contributions of the description which the definition affords. The expression is defined to mean so much of the eligible termination payment in relation to which the expression is being used as is attributable to contributions so described. No part of the eligible termination payment here in question can in my opinion be said to be attributable to the contributions totalling $1,314 which were made after 30 June 1983. Those contributions, which are of a description contained in the definition of "undeducted contributions", fall also within the description contained in sub-paragraph (a) of the definition of "purchase price", and the description contained in the definition of "unused undeducted purchase price", and the amount of "the eligible termination payment" has accordingly been ascertained as that which the respondent received in relation to the commutation of the superannuation pension less, or "reduced by", those contributions, as well as other amounts within the defined meaning of "unused undeducted purchase price". In those circumstances no part of the eligible termination payment, so ascertained, can in my opinion be regarded as "attributable to" those contributions.

9. The legislative scheme embodied in the Superannuation Act 1976 is within the meaning in Subdivision AA of the expression "superannuation fund", because that scheme answers the description given by paragraph (b) of the definition of that expression contained in s.27A(1). The expression "superannuation pension" is defined in s.27A(1) to mean, in Subdivision AA, "a pension payable from a superannuation fund." Section 64 of the Superannuation Act 1976 confers on a person entitled to a particular kind of pension payable under that Act a right to make "an election to commute that pension into a lump sum benefit payable to him". The respondent made such an election. Section 65 provides that where such an election is made by a person "there shall be paid to the person a lump sum benefit equal to his accumulated contributions". The expression "accumulated contributions" is so defined in s.3(1) of the Superannuation Act 1976 as to comprehend not only what is meant by the word "contributions" in Subdivision AA, namely contributions made to a superannuation fund to obtain superannuation benefits, but also, as the definition provides, "the amount of any interest that, in accordance with the regulations, is payable in respect of those contributions". The evidence before the Administrative Appeals Tribunal did not indicate with certainty whether any such interest formed part of the "accumulated contributions" of the respondent. If it did, there is a sense in which it might be said that a part of the eligible termination payment was "attributable to" the contributions made after 30 June 1983 and aggregating $1,314: although the amount of $1,314 itself had been deducted in the course of ascertaining the amount of the eligible termination payment, any interest on any part of the $1,314 would form part of the eligible termination payment and that interest might be said to be "attributable to contributions made .... after 30 June 1983". But no such a conception was advanced before the Tribunal, or before the court. It seems improbable that, if the expression "attributable to" had been intended to comprehend a relationship between eligible termination payment and contributions which required a consideration of interest on each contribution, the legislation would make no more explicit provision than can be derived from that expression. I do not think the expression should be understood as extending to an attribution by reference to interest accrued, or deemed to have accrued on contribution.

10. As Dr. Sundberg QC, who appeared with Mr. Power for the applicant, pointed out, there are circumstances in which the component D will have a value. Paragraph (c) of the definition of "eligible termination payment" brings within the meaning of that expression "any payment made by the trustee of an approved deposit fund in respect of the taxpayer by reason that the taxpayer is or was a depositor with the fund, not being a payment that is income of the taxpayer". An eligible termination payment of that description which formed the subject of the application of sub-section 27B(1) might require the attribution of a value to component D of the formula. There are other examples.

11. My conclusion is that the applicant's application of sub-section 27B(1) was correct in denying any value to component D. The decision of the Administrative Appeals Tribunal must be set aside. However, an amount of $105.36 paid to the respondent as a refund of contributions which should not have been deducted from his salary had been wrongly treated as a part of his eligible termination payment. The assessment was therefore incorrect. I propose to order that the appeal be allowed and that the decision of the Administrative Appeals tribunal be set aside and that the decision of the applicant which was the subject of the Administrative Appeals Tribunal review be set aside. I will declare that the value of component A of the formula specified in sub-section 27B(1) of the Income Tax Assessment Act 1936 in relation to the assessment of income tax payable by the respondent in respect of the year ended 30 June 1984 is $45,511, and I will order that the said assessment be amended to give effect to the said declaration.