Norris and Commissioner of Taxation [2002] AATA 749; (2002) 50 ATR 1250; 2002 ATC 2091 (2 September 2002)

Last Updated: 1 December 2009

DECISION AND REASONS FOR DECISION [2002] AATA 749

ADMINISTRATIVE APPEALS TRIBUNAL )

) No QT2001/249
TAXATION APPEALS DIVISION )
Re DAMIAN NORRIS
Applicant
And COMMISSIONER OF TAXATION
Respondent

DECISION

Tribunal Mr B J McCabe, Member

Date 2 September 2002

Place Brisbane
Decision The Tribunal sets aside the objection decision under review and remits the matter to the Commissioner of Taxation for determination in accordance with these reasons.

...................(Sgd)......................
Mr B J McCabe
Member
CATCHWORDS
TAXATION – deductions – whether contributions to private superannuation can be claimed as a deduction – whether applicant is an "eligible person" as defined in the Act – private ruling - effect of ruling where there has been a change in the factual circumstances upon which the ruling was based

Income Tax Assessment Act 1936
Taxation Administration Act 1953
Acts Interpretation Act 1901

Re Norris and Commissioner of Taxation (AAT 13006, 19 June 1998)
Re Thornton and Commissioner of Taxation (1997) 97 ATC 2117

Commissioner of Taxation v Executor of the Estate of Santha Thevy Subrahmanyam [2001] FCA 1836

Federal Commissioner of Taxation v McMahon (1997) 37 ATR 167

Re Edmonds-Wilson and Commissioner of Taxation (1998) 98 ATC 2276

REASONS FOR DECISION

2 September 2002 Mr B J McCabe, Member

Introduction
1. This case requires the Tribunal to decide whether Mr Damian Norris is entitled to a deduction in respect of superannuation contributions he made in Australia while working overseas. The Commissioner refused to allow the deduction, and Mr Norris lodged an objection. He now appeals the Commissioner's decision on the objection. In order to make its decision, the Tribunal must consider the interpretation and effect of ss 82AAS and 82AAT of the Income Tax Assessment Act 1936 (Cth).
2. There was no hearing in this matter. The parties were able to reach agreement on the facts and have submitted the file for a ruling on the papers.
The Facts
3. Mr Norris was an employee of the Australian Tax Office (the ATO). He tendered his resignation, which took effect on 5 January 2000. He had been on leave without pay from the ATO from December 1991 until December 1999. He was working (and continues to work) for the Fiji Islands Revenue and Customs Authority. He did not receive any superannuation support from the ATO while on leave. He decided it would be appropriate to arrange his own superannuation, and commenced making contributions to a private fund managed by Bankers' Trust.
4. He claimed a deduction in 1996 in respect of the superannuation contributions. The respondent agreed he was entitled to a deduction on the basis that he was an 'eligible employee' within the meaning of s 82AAS of the Act. But the respondent insisted the deduction be apportioned against all of Mr Norris's income, including Australian taxable income (derived in Australia from rent, dividends, interest and so forth) and exempt foreign income (the remuneration paid by the Fiji government).
5. The Tribunal decided in Re Norris and Commissioner for Taxation (AAT 13006, 19 June 1998) (a confidential decision) that the respondent's apportionment of the deduction was inappropriate. The respondent was required instead to allow the deduction against the applicant's Australian assessable income.
6. During 1999, the applicant decided to resign from the ATO and commit himself to working in Fiji for the foreseeable future. He sought a private ruling on the deductibility of his superannuation contributions in light of the expectation he would receive a payout in respect of long service and other entitlements upon resignation. The respondent was asked in the request for a private ruling if:

"...a Commonwealth public servant on leave without pay [was] an eligible person under s 82AAS and therefore entitled to claim a deduction in respect of his personal superannuation contributions?"

7. Officers acting on behalf of the respondent answered "yes" in a private ruling dated 21 April 1999. The explanation accompanying the ruling said:

"...should the taxpayer remain on leave without pay, there would be no obligation on behalf of the employer to make superannuation contributions in respect of the taxpayer and that the taxpayer would be therefore an 'eligible person' for the purposes of [the legislation]."

The explanation continued:

"Should the taxpayer take the long service or annual leave payments in service rather than as a lump sum on termination, then the situation may be different. The leave periods would then count as periods of employment service and attract a notional contribution and a productivity contribution. It would then be necessary to examine the taxpayer's income from eligible employment and the application of s 82AAS(3)...to determine whether the taxpayer would be an 'eligible person'."

8. The applicant subsequently contributed $25,500 to a superannuation fund. He said in his statement that he expected to obtain a deduction in respect of the contribution in light of the favourable private ruling.
9. When negotiating over the terms of his severance from the ATO, the applicant says he was informed he would be required to return to work if he wished to claim his long service leave. He did so: he returned from Fiji and reported for work for two days before resigning. He also claimed several days of annual leave as part of the required notice period. His resignation took effect on 5 January 2000.
10. The respondent disallowed the applicant's claim for a deduction in respect of the superannuation contributions made in the financial year ending 30 June 2000. The respondent said the applicant was not an 'eligible person' within the meaning of s 82AAS because he had worked during the relevant year and took leave and received superannuation support (albeit for a period of two days). The respondent says he should be covered by the terms of the private ruling that he was an 'eligible person'. In the alternative, he says he should come within the exemption provided for in s 82AAS(3) which permits the taxpayer to retain 'eligible person' status when they derive less than 10% of their taxable income from 'eligible employment'. The applicant says he was paid a total of $1,686.67 for his two days work and holiday. That is less than 10% of his total assessable income of $35,198. But the respondent has counted the amounts paid to the applicant in respect of long service leave and annual leave, even though superannuation contributions were not made in respect of those amounts. If those amounts are counted, the total amount derived is well in excess of 10% of the applicant's assessable income during the relevant period. The result – according to the respondent – is that the applicant does not qualify as an 'eligible person', and is therefore unable to claim a deduction. The respondent says the private ruling does not assist the applicant because the conduct contemplated in the ruling is materially different to the conduct of the applicant.
11. The applicant argues in the alternative that if the amounts paid in respect of leave are to be considered for the purposes of the calculation under s 82AAS(3), they should be apportioned over the life of his employment. The respondent says there is no basis for doing so.
12. It is necessary to examine the legislation to determine how (a) the private ruling affects the situation, and (b) the monies received by the applicant upon severance ought to be treated – in particular, to determine the amount of the applicant's eligible employment income.
The Law
13. Section 82AAT permits an eligible person (as defined in s 82AAS) to claim a deduction in respect of contributions made by the person to a superannuation fund in defined circumstances. The deduction is designed to assist the self-employed who do not receive the benefit of employer contributions. Section 82AAS(2) says a person will not be an eligible person if he or she receives superannuation support during the year of income in which the deduction is sought. The fact the support was only provided for part of a year does not matter: Re Thornton and Commissioner of Taxation (1997) 97 ATC 2117 at 2119 per Senior Member Pascoe.
14. In this case the applicant did receive superannuation support during the year of income because he went back to work. His salary included superannuation contributions. The respondent is right to argue the applicant does not qualify as an eligible person within the meaning of s 82AAS(2). It is therefore necessary to consider whether the applicant is able to take advantage of s 82AAT notwithstanding the fact he has failed to bring himself within s 82AAS(2).

(a) The Private Ruling System

15. Part IVAA of the Taxation Administration Act 1953 establishes a private rulings system. The Commissioner gives his opinion in the ruling as to how the tax laws will apply to a specific arrangement. Where the individual seeks a ruling in relation to his or her private affairs, the application is made under s 14ZAF. If the Commissioner's view of the law in the ruling is mistaken and the correct view would result in a higher tax liability, the taxpayer is only required to pay the amount that would have been payable had the ruling been correct: s 170BB Income Tax Assessment Act 1936.
16. The expression "arrangement" in s 14ZAF is defined to include a course of action or course of conduct: s 14ZAAA; see also Commissioner of Taxation v Executors of the Estate of Santha Thevy Subrahmanyam [2001] FCA 1836 at para 40. But the Commissioner will only be bound by the ruling if the arrangement or conduct proceeds as contemplated in the ruling. The Commissioner's opinion is offered in relation to an identified set of facts. If the factual assumptions upon which the opinion is based turn out to be inaccurate in the sense that they do not describe the true situation as it evolved, the Commissioner may act without regard to the opinion offered in the ruling. That much is clear from the decision of the Full Federal Court (Lockhart, Beaumont and Emmett JJ) in Federal Commissioner of Taxation v McMahon (1997) 37 ATR 167. Lockhart J explained in that case:

"The assessment process continues notwithstanding the application for and making of private rulings, subject to the constraint that, if a private ruling has been made, the facts as identified by the Commissioner which constitute the relevant arrangements will govern the assessment that issues in due course. If the facts turn out to be different from those identified by the Commissioner, then the ordinary assessment process applies and in that sense the private ruling becomes academic."

17. The Commissioner points out the ruling in this case was prepared on the assumption the applicant would not return to work in Australia before resigning. He did return to work. It follows there is a difference between the way in which the facts turned out and the assumptions in the ruling. But the applicant says that working for a few days and taking holidays while he gave notice ought to be disregarded. He says, in effect, that minor discrepancies between the assumed facts and the facts as they turned out should be taken into account.
18. The Commissioner's reference to the concept of 'material' difference in para.14(2) of TR 93/1 acknowledges that the Commissioner will not attempt to exploit minor differences between the assumed facts and the facts as they turn out in order to avoid being bound by the ruling. That seems fair enough: the purpose of the rulings system would be frustrated, and its credibility destroyed, if the Commissioner were to behave in that way.
19. I am satisfied the difference in this case is a material one. The taxpayer only worked for a few days, but the Commissioner specifically explained in the explanatory notes accompanying the ruling that his attitude may be different if the applicant worked or took part of his leave entitlements otherwise than in cash. That assumption, on its face, went to the heart of the ruling.
20. That result seems hard for the applicant given he only returned to work (and departed from the facts assumed in the application for a ruling) at the insistence of his employer – the ATO. It was unclear from the evidence why the ATO imposed this requirement. One can only assume the ATO had a good reason for doing so in the absence of evidence to the contrary.
21. It follows the Commissioner is not bound to treat the applicant as an 'eligible person' by reason of the private ruling.
(b) Is the exemption in s 82AAS(3) available?

22. An applicant who is not otherwise an eligible person within the meaning of s 82AAS may nonetheless be entitled to a deduction under s 82AAT if he or she is able to establish that s 82AAS(3) applies. The sub-section says:

"If:

(a) during a period, or a combination of periods, in a year of income, a person was engaged in particular eligible employment; and

(b) either:

(i) both:

(A) the person's assessable income, or the person's exempt income, of the year of income, or the person's reportable fringe benefits total for the year of income, includes one or more amounts attributable to that eligible employment; and

(B) the total of the amounts mentioned in sub-subparagraph (A) is less than 10% of the total of the person's assessable income of the year of income and reportable fringe benefits total (if any) for the year of income; or

(ii) the person's assessable income, or the person's exempt income, of the year of income, or the person's reportable fringe benefits total for the year of income, does not include any amount attributable to that eligible employment;

a reference in subsection (2) to superannuation benefits does not include a reference to superannuation benefits to the extent to which:

(c) they would be attributable to, or paid out of money representing:

(i) contributions made in relation to the person in connection with that eligible employment; or

(ii) income or accretions arising from such contributions; or

(d) they would otherwise be attributable to that eligible employment."

23. That means a person deriving less than 10% of his assessable or exempt income from eligible employment (such as working for the ATO) will not be prevented from being considered an eligible person within the meaning of s 82AAS(2). He would therefore be entitled to seek a deduction under s 82AAT for funding his own contributions.
24. The applicant says (and the respondent accepts) that he earned $1,686.67 for the ten days that he worked for the ATO. That period of service included four days of recreational leave. He says these earnings represent less than 10% of his income, which came to $35,198. The Commissioner says all of the money the applicant received from the ATO upon resignation – in other words, salary and amounts in respect of annual leave and long service leave – should be taken into account when calculating whether the 10% threshold has been breached. If those extra amounts are taken into account, the applicant would be taken to have earned a total of $24,591.85 – well in excess of 10% of his total assessable income of $35,198.
25. The respondent argued in its submissions that s 82AAS(3)(b)(i)(A):

"specifies that the person's assessable income, exempt income and reportable fringe benefit, of the year of income, attributable to the eligible employment is included in the numerator of the 10 per cent calculation."

26. The respondent then goes on to argue the assessable income attributable to the eligible employment includes all income received during the relevant period, including any payments in respect of annual leave or long service leave. The respondent conceded s 82AAS(3) itself does not define the expression "assessable income", but he relies on the fact that other provisions of the Act specifically include payments in respect of annual leave (s 26AC) and long service leave (s 26AD) in the taxpayer's assessable income.
27. On its face, a reference to payments of income includes payments made by an employer to the taxpayer in respect of annual leave and long service leave. That was the view of the Tribunal in Re Edmonds-Wilson and Commissioner of Taxation (1998) 98 ATC 2276. In Edmonds-Wilson, the applicant argued that only those salary amounts that attracted superannuation support should be considered when determining whether or not the 10% threshold has been exceeded. The Tribunal disagreed, saying (at 2279) "the totality of the salary received from the one employer must be brought to account in the arithmetic testing". The presiding Member concluded the legislation clearly required that the gross amount paid by the employer (as opposed to the amounts attracting superannuation support) be considered.
28. The Tribunal noted the result in that case was unfortunate given the policy objectives of the Act. The presiding Member quoted (at 2278) from the explanatory memorandum accompanying the section, which said the section was designed:

"...to expand the concept of a substantially self-employed person so that people who are substantially self-employed do not lose access to tax deductions for their personal superannuation contributions because they perform small amounts of paid employment through which they receive employment superannuation support."

29. The presiding Member went on to suggest (at 2279) the legislation ought to be revisited to avoid the perverse result that was dictated by the legislation in that case.
30. I take a different view. The reference to payments of income in s 82AAS(3) ought to be construed in light of the objectives identified in the explanatory memorandum: s 15AB of the Acts Interpretation Act 1901. If counting all of the payments made by the employer undermines the objectives of the section, but adopting a narrower interpretation will advance those objectives, the Tribunal should prefer the narrow definition. This case illustrates why a narrow definition is appropriate. Most of the amounts paid by the ATO did not include superannuation support, so Mr Norris made his own superannuation arrangements. Without the incentive of a deduction he might have preferred to rely on the social security system to provide for his retirement – which is precisely the burden the legislation is designed to avoid. It follows the decision-maker should only have regard to the amounts of income that attract "employment superannuation support" if the exception in s 82AAS(3) is to have its intended effect.
Conclusion
31. The private ruling might not assist the applicant, but he is entitled to claim the benefit of the exemption in s 82AAS(3). In the circumstances it is unnecessary to consider the applicant's alternative argument that payments in respect of long service leave and annual leave ought to be apportioned over the life of his employment.
32. The objection decision under review is set aside. The matter should be remitted to the Commissioner of Taxation for determination in accordance with these reasons.

I certify that the 32 preceding paragraphs are a true copy of the reasons for the decision herein of Mr B J McCabe, Member

Signed: Sarah Oliver

Associate

Matter Heard on the Papers

Date of Decision 2 September 2002

The Applicant Represented Himself

Solicitor for the Respondent Ms Lai, Australian Taxation Office