Wood and Commissioner of Taxation [2003] AATA 17; (2003) 51 ATR 1227; 2003 ATC 2006 (10 January 2003)

Last Updated: 26 February 2009

Administrative

Appeals

Tribunal

DECISION AND REASONS FOR DECISION [2003] AATA 17

ADMINISTRATIVE APPEALS TRIBUNAL Nº VT2001/957
Nº VT2002/97-99

TAXATION APPEALS DIVISION

Re: TREVOR WOOD

Applicant

And: COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal: Mr W.G. McLean, Member

Date: 10 January 2003

Place: Melbourne

Decision: In relation to application number VT2001/957:

1. the Tribunal affirms the decision by the respondent regarding the superannuation contributions tax assessment, issued to the applicant for the year ended 30 June 1998; and
2. the Tribunal sets aside the decision by the respondent regarding the superannuation contributions tax assessment, issued to the applicant for the year ended 30 June 1999 and remits the matter to the respondent for reconsideration and amendment in accordance with the Tribunal's findings contained in these reasons for decision.

In relation to applications numbers VT2002/97-99:

1. the Tribunal sets aside the decision under review to issue amended income tax assessments to the applicant for the years ended 30 June 1997, 1998 and 1999 and remits the matter to the respondent for reconsideration and amendment in accordance with the Tribunal's findings contained in these reasons for decision; and
2. the Tribunal sets aside the decision under review to impose a shortfall penalty for the years ended 1997, 1998 and 1999, and remits the matter to the respondent for reconsideration in accordance with the Tribunal's findings contained in these reasons for decision.
   

. . . . . . . . . . . . . . . . . . .
Member

TAXATION — superannuation contributions tax – amended general tax assessments – salary sacrifice arrangement – decision partly affirmed and partly set aside and remitted to respondent with directions

Superannuation Contributions Tax (Assessment and Collection) Act 1997 (Cth) s.10, 13, 15

Income Tax Assessment Act 1936 (Cth) s.26AD, 170AA, 226G, 226Z, 227

REASONS FOR DECISION

10 January 2003 Mr W.G. McLean, Member

VT2001/957 RE SUPERANNUATION CONTRIBUTIONS TAX ASSESSMENTS

1. The Tribunal considered an application from Mr Trevor Wood (the applicant) for the review of a decision by the Commissioner of Taxation (the respondent) to disallow his objection against notices of assessment issued in respect of the years ended 30 June 1998 and 30 June 1999.

VT2002/97-99 RE PERSONAL INCOME TAX ASSESSMENTS

2. The Tribunal also considered this related matter concerning an application from Mr Wood for the review of a decision by the respondent to issue amended assessments in respect of the years ended 30 June 1997, 1998 and 1999.
3. The Tribunal received into evidence the documents lodged pursuant to s.37 of the Administrative Appeals Tribunal Act 1975 (Cth) in respect of both of the abovementioned files.
4. The applicant, who was self-represented at the hearing, gave oral evidence. The respondent was represented by Mr T. Mihail, a legal officer with the Australian Taxation Office, Legal Division.
5. Mr Wood, who is a qualified accountant, commenced employment with the Victorian Public Service on 13 February 1961. After approximately 37 years of service, Mr Wood retired from the position of executive director, Performance Audit in the Office of the Victorian Auditor-General, on 13 December 1998.
6. The applicant entered into a contract of employment with the Auditor-General of Victoria on 1 July 1995, in accordance with the Public Sector Management Act 1992 (Vic). The following letter, dated 2 April 2002, from the Organisational Development and Human Resources Division of the Department of the Auditor-General to the respondent, addresses the matter of the performance incentive payments which were made to the applicant by the Auditor-General's Office in accordance with the terms and conditions embodied in his contract of employment:

...
I refer to a letter you wrote to Mr Trevor Wood, an ex-employee of this Office, your reference OCTC/SYD/MyM 9981 dated 5 October 2001, concerning performance related incentive payments made by the Victorian Auditor General's Office to Mr Wood.
The above mentioned letter refers to a statement made by the payroll officer of this Office and I quote: "The payroll officer further indicated that the Applicant was entitled to a bonus amount after each financial year. The Applicant chose to let the bonuses accumulate rather than collect the amounts at the end of each year. No bonuses are shown in any of the Applicant’s group certificate."
Subsequent to the above being provided to you a review of the relevant documents, including Mr Wood's employment contract indicates that our previous advice requires correction. Clause 5 of Mr Wood's employment contracts for the periods between 1 January 1995 to 30 June 1997 set out that performance was assessed annually but there was no entitlement to be paid unless certain conditions were met. These conditions were set out in the contract and included retrenchment, retirement or expiry of contract. These conditions are relevant because one of these conditions was met and caused the bonus payment to be realised – retirement. Please find attached copies of the relevant clauses of the employment contracts (Attachment 1). Further, this provision was consistent with the then Victorian Government's advice on the matter of dealing with the entitlement of performance bonuses, also attached for your records (Attachment 2).
Effective 1 July 1997, amendments to the existing employment contracts were agreed to, which fundamentally changed the provision for the payment of performance bonuses. This change provided a performance related incentive payment, paid within one month, or as soon as practicable thereafter, for work performance determined by the employer annually. This is particularly relevant, as the performance bonuses were no longer cumulative but paid or directed annually. The amendments further provided for the treatment of any accrued performance payment entitlements determined under the previous version of the contract as well as any prior employment contracts. The conditions precedent, mentioned earlier, covering payment of the incentives accumulated under that previous contract continued under the new contract. A copy of the amendments to Mr. Wood's employment contract is attached (Attachment 3). Clauses 5.1 to 5.5 are the relevant clauses. In particular clause 5.3, which states that if the contract other than the reasons specified in clause 5.2, no performance related bonus shall be payable.
If you have any questions in relation to this matter please do not hesitate to contact me on telephone number [phone].
[signature]
Andrew Prestage
Organisation Development & Human Resources Manager

7. Mr Wood was assessed by his employer to be entitled to receive on his retirement the following bonuses:

BONUS PERIOD AMOUNT

1 January 1995 to 30 June1995 4,403.00

1 July 1995 to 31 December 1995 3,368.00

1 January 1996 30 June 1996 7,783.00

1 July 1996 to 30 June 1997 13,071.00

________

SUB TOTAL $28,625.00

1 July 1997 to 30 June 1998 10,137.00

1 July 1998 to 14 December 1998 4,108.00

_________

$42,870.00

8. There is no dispute between the parties that between the period 1 January 1995 to 30 June 1997, the applicant could have forfeited his abovementioned bonus assessments, totalling $28,625.00, unless certain conditions set out in clause 5 of his employment contract were met. These conditions were met when Mr Wood terminated his employment due to his retirement. An amendment to the applicant’s employment contract, effective 1 July 1997, changed the conditions concerning the payment of bonuses, so that Mr Wood became entitled to be paid his - annual bonuses within one month, or as soon as practicable thereafter, following assessment by his employer.
9. It is also an agreed fact that, during the applicant’s 37 years employment with the Victorian Public Service, he progressively accrued an increasing entitlement to long service leave, which he could have taken periodically as paid long service leave or accrued and received as a payment in lieu of long service leave upon the termination of his employment. In this case, Mr Wood elected to be paid the following payments in lieu of long service leave upon retirement:

Pre 16 August 1978 46,082.86

Post 17 August 1978 53,521.86

________

$99,604.72

10. On 25 November 1998, approximately two weeks preceding his retirement, Mr Wood wrote the following memorandum "Subject – Retirement Benefits" to Ms Irene Hutchinson, human resources consultant, Victorian Auditor-General's Office:

...
Dear Ms Hutchinson,
As I have elected to retire from the Public Service, effective from 14 December 1998, can you please facilitate the following arrangements in relation to termination payments:

1. payment of accumulated performance bonuses under my previous contract direct to VICSUPER as soon as possible. It is understood that this treatment is acceptable as per advice from Peter Salway, Public Service Commissioner;
2. arrange for the post 1978 component of my accumulated long service leave to be paid also to VICSUPER; and
3. pay the pre 1978 component of my accumulated long service directly to me.

Thanking you for your assistance.
Yours faithfully,

[signature]
TREVOR WOOD
Executive Director, Performance Audit

As a consequence of Mr Wood's memorandum, dated 25 November 1998, to Ms Hutchinson:

1. the applicant’s superannuation fund (VicSuper) received the following payments:

(i) Mr Wood's accrued performance bonus entitlements

from 1 January 1995 to 14 December 1998, totalling $42,870.00

(ii) Mr Wood's post 17 August 1978 accrued long

service leave entitlement amount to $53,521.86

________

$96,391.86

2. the applicant received payment in respect of his pre 16 August 1978 accrued long service leave entitlement, amounting to $46,082.86, which he declared as assessable income in his taxation return for the year ended 30 June 1999.
11. The applicant provided the following details of his formal written remuneration package that he negotiated with his employer, as at 1 July 1997, in respect of the financial year ended 30 June 1998 (Schedule C):

SCHEDULE C
As at 1 July 1997
REMUNERATION PACKAGE

1. The Remuneration package is $112,635 per annum
2. The annual rate of monetary remuneration is $63,068
3. The Employment Benefits are:

Private super Fund (VicSuper) $ 35,100
Car cost (inc FBT) $ 10,524
Professional Subs $ 350
Health fund (inc. FBT) $ 3,592
_____
Total Benefits $ 49,567
Annual Cost to employer $ 49,567
Signed (Auditor-General): [signature] Date: 11/6/98
Signed (Executive Officer): [signature] Date: 11/6/98
Prepared on 28/05/98

It is clear from Schedule C above that the applicant reached an annual negotiated written agreement with his employer concerning the salary sacrifice payments, totalling $49,567, to be deducted from his annual remuneration package amounting to $112,635. The applicant was subsequently advised by his employer of his overall annual performance-related incentive payment percentage. Mr Wood said that this percentage was then applied to his annual remuneration package amount in order to determine the amount of his annual performance bonus. It, therefore, follows that the annual remuneration package amount did not include the amount of annual performance bonus paid to the applicant.

12. Mr Wood opined that his above memorandum to Ms Hutchinson, dated 25 November 1998, requesting her to facilitate certain arrangements in relation to termination payments, represented an additional salary sacrifice arrangement (SSA). Mr Wood contends that as a result, the payments to VicSuper of his accrued performance bonuses and post-August 1978 long service leave, totalling $96,391.86, are not subject to personal income tax. Taxation Ruling TR2001/10 "Income tax; fringe benefits tax and superannuation guarantee: salary sacrifice arrangements" sets out the respondent's views on SSA. The term is defined in paragraph 19 of the ruling to mean an arrangement under which an employee agrees to forego part of his or her total remuneration, that he or she would otherwise expect to receive as salary and wages, in return for the employer providing benefits of a similar value. The ruling at paragraphs 21 and 22 then distinguishes between effective and ineffective SSA. An effective SSA involves the employee agreeing to receive part of his or her total amount of remuneration as benefits before the employee has earned the entitlement to receive that amount of salary and wages. Paragraph 22 of the ruling defines an ineffective SSA to involve an employee directing that an entitlement to receive salary or wages that has been earned, is to be paid in a form other than salary or wages.
13. In this case, the applicant did not reach a formal written SSA with his employer, in respect of the payment to VicSuper of his total performance bonuses amounting to $42,870 and his post-17 August 1978 accrued long service leave entitlement amounting to $53,521.86, as he customarily did in respect of the payment of his annual remuneration package. Mr Wood simply wrote to his employer and requested that his accrued bonus and long service leave entitlements totalling $96,391.86 be paid to VicSuper instead to himself.
14. The Tribunal concurs with the respondent's above views regarding effective and ineffective SSA, set out in tax ruling TR2001/10, and finds that an effective SSA was not made between the applicant and his employer in respect of payment to VicSuper of the applicant’s accrued performance bonuses and accrued long service leave, totalling $96,391.86. During Mr Wood's period of employment with the Victorian Public Service he earned and accrued entitlements to salary and wages in the form of performance bonuses assessed by his employer between 1 January 1995 and 14 December 1998, totalling $42,870 and untaken accrued long service leave. It is clear that Mr Wood acknowledged this fact when he wrote to his employer on 25 November 1998 "Subject – Retirement Benefits" requesting his employer to pay his accumulated performance bonuses and post-1978 accumulated long service leave to VicSuper. The Tribunal finds that Mr Wood's memorandum of 25 November 1998 simply purported to direct his employer to remit his accrued bonus and post-1978 long service leave assessable earned income entitlements amounting to $96,391.86 to VicSuper on his behalf, when he derived this income upon his retirement on 14 December 1998. Accordingly, Mr Wood directed that an entitlement to receive salary or wages that had been earned, be paid in the form other than salary or wages.
15. During the hearing the parties reached an agreement that in the absence of a SSA the accrued performance bonuses and post-1978 long service leave amounts totalling $96,391.86, which were paid to VicSuper at Mr Wood's request, would represent tax assessable income of the applicant derived by him during the year ended 30 June 1999. Their agreement recognises the uncertainty created by clause 5 of the applicant’s original contract of employment, concerning his entitlement to receive payment for bonuses accrued between the periods 1 January 1995 to 30 June 1997 totalling $28,625, until the date of his retirement. This agreement is acknowledged and accepted by the Tribunal as being appropriate in this case.
16. Section 13 of the Superannuation Contributions Tax (Assessment and Collection) Act 1997 (the SCT Act) requires each superannuation provider to provide the respondent, after the end of each financial year, with specified details concerning its members. VicSuper reported an amount of $35,100.00 as the applicant’s surchargable contribution for the year ended 30 June 1998 and $70,676.73 for the year ended 30 June 1999. VicSuper initially included in its 1999 surchargable contribution advice only the amount of $53,521.86 received by VicSuper in respect of Mr Wood's post-August 1978 unused long service leave. VicSuper, however, subsequently advised the respondent that Mr Wood's surchargable contribution amount had been increased from $70,676.73 to $112,599.07 to also include Mr Wood's performance bonus payments and apparently other minor adjustments.
17. The applicant does not dispute the mathematical accuracy of the abovementioned amounts of surchargable contribution reported by VicSuper to the respondent for the years ended 30 June 1998 and 30 June 1999. Mr Wood's statement of facts and contentions dated 26 July 2002 includes the following comments concerning his principal reason for objecting to the surcharge assessments issued by the respondent for the years ended 30 June 1998 and 1999.

...
I retired in December 1998. Obviously I was very surprised to receive a surcharge notice in May 2000. Upon contacting a senior officer in the Government Superannuation Office, I was advised that the surcharge was unenforceable as it would require complementary State Government legislation before it was valid. On this basis I objected against the assessment on June 6th, 2000.
Amending legislation was passed by the Victorian Government on 30th May, 2000. In introducing the Bill, the former Government Finance Minister at the time raised questions about the constitutional validity of the charge but nevertheless the legislation was passed. I acknowledge that the Superannuation Fund provided details to the A.T.O. of potential surchargeable amounts of members who had left the fund, including myself. It was on this basis that I belatedly received an assessment notice. The validity of the surcharge legislation however, still remains in doubt. From media reports and advice from the Government Superannuation Office, Victorian Judges have challenged the legislation in the High Court, particularly the constitutional validity of the surcharge. The outcome of this challenge, if successful, may have wider implications for all persons who received a surcharge.
On the above facts I believe I had reasonable justification to challenge the imposition of the surcharge. Nevertheless, I obviously do not have the capability to pursue this matter further, particularly given that challenges to the legislation are already proceeding by other parties. Folio 37 refers to the A.T.O. response to my question on the constitutional validity of the surcharge. The A.T.O. response was that I would have to make a challenge through the High Court. It is gratifying that such a challenge is now occurring.

18. The respondent made the following surcharge assessments pursuant to s.15 of the SCT Act, accepting the abovementioned 1998 and initial 1999 surchargable contributions for the applicant reported to the respondent by VicSuper. For every financial year where surchargable contributions are made in respect of a member of a superannuation fund, the respondent must calculate the member's adjusted taxable income (ATI). Where the ATI exceeds the prescribed surcharge threshold, the respondent assess a surcharge percentage rate that is applied to the member's surchargable contribution in order to determine the amount of the surcharge.

Formulae: adjusted taxable income = taxable income plus surchargable contribution less non-employer ETP

Surcharge Assessment for the year ended 30 June 1998

Taxable income originally assessed by the

respondent $61,269

plus surcharge contribution $35,100

______

ATI $96,369

______

Surcharge = 15% x $35,100 $5,262

Surcharge Assessment for the year ended 30 June 1999

Taxable income originally assessed by the

respondent $46,580.00

plus surcharge contribution originally

advised to respondent $70,676.73

less non-employer ETP (2,336.00)

_________

$114,920.73

Surcharge = 15% x $70,676.73 $10,601.50

19. Following the applicant’s retirement in December 1998, VicSuper advised the respondent that the applicant had retired and that they no longer held his superannuation funds. The original surcharge assessment sent to VicSuper for the year ended 30 June1998 was cancelled and a replacement surcharge assessment was sent by the respondent to the applicant on 22 May 2000. The original surcharge assessment for the year ended 30 June 1999 was also sent to the applicant on 22 May 2000. Mr Wood said that he did not dispute the correctness of the abovementioned formulae and surcharge benchmark percentage adopted by the respondent in the abovementioned surchargable calculations for 1998 and 1999.
20. The Tribunal notes that the respondent's surcharge assessment for the year ended 30 June 1999 is based upon the original surcharge contribution advised by VicSuper of $70,676.33 and not the amended surcharge contribution of $112,599.07. The Tribunal has already determined that a SSA was not made between the applicant and his employer in respect of the performance bonuses, totalling $42,870 and the post-August 1978 payment in lieu of long service leave amounting to $53,521.86 and that the total amount of $96,391.86 was paid by the applicant’s employer to VicSuper for and on behalf of the applicant. Accordingly, it is found that the total of $96,391.86 is not an employer contribution and is therefore not surchargable. VicSuper should be advised of this decision so that it can correct its records and lodge the necessary amended member's contribution statement for surcharge assessment with the respondent for the year ended 30 June 1999.
21. Arising from the applicant’s objection to the respondent's superannuation surcharge assessments for 1998 and 1999, the respondent decided to issue amended personal tax assessments to the applicant for the years ended 30 June 1997, 1998 and 1999. The respondent increased the applicant’s assessable income by including the post-August 1978 payment in lieu of long service leave and the derived accrued performance bonuses assessed by the applicant’s employer for five periods between 1 July 1995 and 14 December 1998. The respondent decided to spread this bonus income between the tax years ended 30 June 1997, 1998 and 1999, however, the Tribunal has determined that the whole of the performance bonus income assessed by the applicant’s employer between 1 January 1995 and 14 December 1998, amounting to $42,870.00 was assessable income derived by the applicant during the financial year ended 30 June 1999. Section 26AD of the Income Tax Assessment Act 1936 (Cth) (the Act) includes in the assessable income of the taxpayer amounts that are paid as a consequence of retirement in relation to unused long service leave. Since the applicant has already included his pre-16 August 1978 long service leave component amounting to $46,082.86 in his tax return for 1999, it follows that the post-17 August 1978 payment in lieu of long service leave amounting to $53,521.86 should also be included as assessable income derived by the applicant during the year ended 30 June 1999.
22. Section 227 of the Act provides for the imposition of an additional tax and gives the respondent the discretion to remit the whole or any part of the additional tax. The respondent determined that a tax shortfall was present as the amount of tax payable, after the inclusion of the applicant’s performance bonus and post-1978 long service leave assessable income, was greater than the amount of tax payable under the original income tax assessments for the years ended 30 June 1997, 1998 and 1999. The respondent considered that the applicant had failed to take reasonable care and additional tax was imposed under s.226G of the Act. Section 226Z of the Act (reduction of Penalty Tax - disclosure before tax audit notified) was applied by the respondent to reduce by 80 per cent the amount of tax shortfall penalty otherwise applicable. The respondent contends that it is not appropriate to disturb their decision to reduce the penalty by 80 per cent. The Tribunal finds that the applicant did take reasonable care in the preparation of his income tax returns for 1997, 1998 and 1999 all of which adopted the amounts shown on the group certificates provided to him by his employer. On the other hand, the applicant could have sought independent expert tax advice regarding his tax affairs in late 1998 when he prepared his written request to his employer to remit his performance bonuses and post-1978 long service leave to VicSuper.
23. The interest charge imposed by the respondent pursuant to s.170AA of the Act does not form part of the assessments and is therefore not considered to be a matter before the Tribunal for review. If the applicant believes that reasons exist that would justify a remission of the general interest charge, then an application to that effect should be submitted to the Australian Taxation Office for consideration. The Tribunal is of the view that further consideration by the respondent of the imposed general interest charge is warranted.

DECISION

24. In relation to application number VT2001/957 the Tribunal affirms the decision by the respondent regarding the superannuation contributions tax assessment, issued to the applicant for the year ended 30 June 1998. The Tribunal sets aside the decision by the respondent regarding the superannuation contributions tax assessment issued to the applicant for the year ended 30 June 1999 and remits the matter to the respondent for reconsideration and amendment in accordance with the Tribunal's findings contained in these reasons for decision.
25. In relation to applications numbers VT2002/97-99 the Tribunal sets aside the decision under review to issue amended income tax assessments to the applicant for the years ended 30 June 1997, 1998 and 1999 and remits the matter to the respondent for reconsideration and amendment in accordance with the Tribunal's findings contained in these reasons for decision. The Tribunal sets aside the decision under review to impose a shortfall penalty for the years ended 1997, 1998 and 1999, and remits the matter to the respondent for reconsideration in accordance with the Tribunal's findings contained in these reasons for decision.
    

I certify that the twenty-five preceding paragraphs are a true copy of the reasons for the decision herein of

Mr W.G. McLean (Member)

Signed: ..........................................................................

Diane De Andrade Administrative Assistant

Date/s of Hearing 6 November, 2002

Date of Decision 10 January, 2003

For the Applicant self

Solicitor for the Respondent Mr T. Mihail