FEDERAL COURT OF AUSTRALIA Yates v Commissioner of Taxation [1999] FCA 1557 INCOME TAX – allowable deduction – contribution to complying superannuation fund – whether benefits attributable to year of income would be paid in whole or in part out of moneys not representing contributions by taxpayer or income arising therefrom Income Tax Assessment Act 1936 (Cth) s 82AAS(2) Findlay v Federal Commissioner of Taxation (1998) 39ATR 266 discussed JOHN YATES v THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA NO. V24 OF 1999 HEEREY J 11 NOVEMBER 1999 SYDNEY (HEARD IN MELBOURNE) IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V24 OF 1999 BETWEEN: JOHN YATES Applicant AND: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent JUDGE: HEEREY J DATE OF ORDER: 11 NOVEMBER 1999 WHERE MADE: SYDNEY (HEARD IN MELBOURNE) THE COURT ORDERS THAT: 1. The application is dismissed. 2. The applicant pay the respondent's costs, including reserved costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V24 OF 1999 BETWEEN: JOHN YATES Applicant AND: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent JUDGE: HEEREY J DATE: 11 NOVEMBER 1999 PLACE: SYDNEY (HEARD IN MELBOURNE) REASONS FOR JUDGMENT 1 The applicant appeals from a decision of the Administrative Appeals Tribunal which affirmed a decision of the Commissioner of Taxation disallowing a deduction for a contribution to a superannuation fund under s 82AAT(1) of the Income Tax Assessment Act 1936 (Cth) (the Act) during the 1992 tax year. 2 The Commissioner disallowed the deduction on the grounds that the applicant was not an "eligible person" within the meaning of s 82AAS(2). The facts 3 The applicant was born in 1927. For many years he was an employee of Prentice Builders Ltd (the Company). He was also a member of the Prentice Executive Superannuation Fund (the Fund). The Fund was at all material times a "complying superannuation fund" within the meaning of Pt IX of the Act. 4 On 11 September 1991 the applicant gave the Company three months notice of his intended resignation. On 11 November 1991 he made a contribution of $303,000 to the Fund. That contribution was the only one made by the applicant to the Fund throughout the period of his membership. 5 On 10 December 1991 the applicant resigned as an employee of the Company. On the same day the Fund paid him a benefit totalling $815,115 calculated as follows: Balance at 1 July 1991 $511,079 Allocated earnings 1 July – 10 December 1991 35,236 Contribution 303,000 Income tax on contribution (15% of $228,000) (34,200) $815,115 6 Part of the benefit (being all or part of the allocated earnings of $35,236) was income or the aggregate of accretions arising in the 1992 income year from the Company's contributions made in prior years. The Company did not make contributions to the Fund in respect of the applicant after the 1989 year of income. 7 In his return of income for the 1992 income year the applicant claimed a deduction of $228,000 in relation to his contribution to the Fund calculated pursuant to s 82AAT(2) as follows: Claim $3,000 75% of the amount over $3,000 225,000 $228,000 The legislation 8 By virtue of s 82AAT(1) a contribution to a complying superannuation fund by an "eligible person" is an allowable deduction. 9 Section 82AAS(2) provides: "A person (in this subsection 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 the 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) to the extent to which those benefits would be attributable to the year of income – (i) the benefits would be wholly or partly attributable to contributions made to a superannuation fund in relation to the relevant person by a person other than the relevant person; or (ii) the benefits would, in whole or in part, be paid out of moneys that would not represent – (A) contributions made by the relevant person to a superannuation fund; (B) contributions made by the relevant person under a scheme for the payment of benefits upon retirement or death, being a scheme constituted by or under a law of the Commonwealth or of a State or Territory; or (C) income or accretions arising from contributions referred to in sub-subparagraph (A) or (B)." The Tribunal's decision 10 After noting that there was no dispute that s 82AAS(2)(a) was satisfied, the Tribunal found, for the purposes of par (b), that part of the "benefits" referred to in par (a) were attributable to the Fund's earnings credited to the applicant in 1991-92. The Tribunal said (par 10): "The use of the word 'attributable' should be taken to mean no more than benefits being able to be ascribed, imputed, traced to or having a causal connection with the relevant year of income. Benefits arising from any superannuation fund would normally come from contributions to the fund and income and accretions thereon. There was no suggestion that the income of $35,236 credited for the period 1 July 1991 to date of payout did not, at least in part, arise from the balance of Mr Yate's[sic] account in the fund at 1 July 1991 which, in turn, arose from employer contributions plus earnings in prior years. It may well be that some part of the earnings related to the personal contribution of Mr Yates which was in the fund for some 29 days but there was no indication or likelihood that this contribution generated the whole of the $35,236 credited. As a consequence, it is difficult to see, on the plain wording of section 82AAS(2)(b), that benefits attributable to the year ended 30 June 1992 consisting of the whole or part of that $35,236 could be said as being other than from moneys not representing Mr Yates' contribution or income or accretions arising from that contribution." 11 It is apparent from the Tribunal's language that it was adverting to (b)(ii) rather than (b)(i). The Tribunal was saying that benefits attributable to the 1992 income year, at least in part, would not answer the description of either (A), (B) or (C). Conclusion on the appeal 12 Counsel for the applicant primarily directed his argument to par (b)(i). He contended that the reference to "contributions" by a person other than the relevant person had to be read as contributions in the year of income. Since nobody other than the applicant made a contribution to the Fund in the 1992 income year, then (b)(i) was not applicable. 13 Counsel for the Commissioner did not seek to argue that par (b)(i) applied. Without formally conceding the point, he was inclined to accept that accretions to the Fund arising from monies contributed by the Company in earlier years were not "contributions" by the Company. This seems to be correct. 14 However, counsel for the Commissioner argued that par (b)(ii) applied because the monies out of which the benefits would, in whole or in part, be paid would not represent contributions of the kind referred to in (A) or (B), or income or accretions arising from contributions of either kind ((C)). 15 In my view this latter contention is correct. The great bulk of the benefits which would be received by the applicant arose from the income or accretions arising from the earlier contributions by the Company to the Fund, that is to say not from a source identified in (A), (B) or (C). 16 It should be mentioned that the 1992 income year was something of an interregnum. Prior to that year s 82AAS(3) gave the Commissioner a discretion to treat a taxpayer as an eligible person. For the 1993 year onwards a new paragraph (D) was added to s 82AAS(2)(b) so as to exclude from disqualifying benefits "(D) income or accretions arising from contributions made to a superannuation fund in relation to the relevant person by a person other than the relevant person during an earlier year of income, where there is no reasonable likelihood that any such contributions will be made at any time after the beginning of the first-mentioned year of income." 17 Counsel for the applicant argued that this amendment was merely declaratory of the true position which already existed for the 1992 income year. The Explanatory Memorandum does not support that construction. It says (p 38) that 'a further amendment is necessary …'. More importantly, I think the plain words of s 82AAS(2)(b)(ii), when applied to the findings of fact made by the Tribunal, are unambiguous. 18 The applicant relied on Findlay v Federal Commissioner of Taxation (1998) 39ATR 266. In that case Sundberg J allowed an appeal against disallowance of a s 82AAT deduction for the 1994 income year. The employer of the taxpayer became subject to a deed of company arrangement. The administrator of the company paid a superannuation guarantee shortfall to the Commissioner pursuant to the Superannuation Guarantee (Administration) Act 1992 (Cth). Sundberg J held that this was not a "contribution" to a "superannuation fund" within the meaning of par (b)(i). Paragraph (b)(ii) did not apply because the Commissioner had not paid the shortfall to a complying fund nominated by the taxpayer. 19 In dealing with the par (b)(i) issue, his Honour held that "contributions made" meant contributions that have in fact been made, not contributions which it was reasonable to expect would be made. In that context, his Honour said (at 270): "Further, the introductory words of par (b) – 'to the extent to which those benefits would be attributable to the year of income' – seek to identify the extent to which the expected benefits are attributable to the year of income. Benefits will be so attributable only if contributions have been made in that year. The context thus supports the ordinary meaning of 'contributions made'." (Emphasis added) 20 I am inclined to agree with counsel for the applicant that this supports his argument or in par (b)(i). While the facts of Findlay are different, Sundberg J's reading of par (b)(i), with which I respectfully agree, is equally applicable to the present case. However, the problem for the applicant is that he cannot satisfy par (b)(ii). 21 The application will be dismissed with costs, including reserved costs. I certify that the preceding twenty-one (21) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Heerey. Associate: Dated: 11 November 1999 Counsel for the Applicant: N Rosenbaum Solicitor for the Applicant: Charlesworth Josem Partners Pty Ltd Counsel for the Respondent: G Davies QC with P Solomon Solicitor for the Respondent: Australian Government Solicitor Date of Hearing: 29 October 1999 Date of Judgment: 11 November 1999