FEDERAL COURT OF AUSTRALIA Secretary of the Department of Families, Housing, Community Services and Indigenous Affairs v Jones [2012] FCA 639 Citation: Secretary of the Department of Families, Housing, Community Services and Indigenous Affairs v Jones [2012] FCA 639 Appeal from: Jones v Secretary, Department of Families, Housing, Community Services and Indigenous Affairs [2012] AATA 77 Parties: SECRETARY OF THE DEPARTMENT OF FAMILIES, HOUSING, COMMUNITY SERVICES AND INDIGENOUS AFFAIRS v DEBRA JONES File number: NSD 355 of 2012 Judge: JACOBSON J Date of judgment: 21 June 2012 Catchwords: ADMINISTRATIVE LAW – question of law – construction of clause 2 of Schedule 3 of A New Tax System (Family Assistance) Act 1999 (Cth) – power to waive debt in "special circumstances" Legislation: Administrative Appeals Tribunal Act 1975 (Cth), s 44 A New Tax System (Family Assistance) Act 1999 (Cth), s 58, Schedule 3, cll 1, 2, 3 A New Tax System (Family Assistance) (Administration) Act 1999 (Cth), ss 71, 101 Superannuation Industry (Supervision) Regulations 1994 (Cth) Tax Laws Amendment (2009 Measures No. 1) Act 2009 (Cth) Cases cited: Commonwealth v Verwayen (1990) 170 CLR 394 Groth v Secretary, Department of Social Security (1995) 40 ALD 541 Kertland v Secretary, Department of Family and Community Services (1999) 95 FCR 64 Kirkbright v Secretary, Department of Family and Community Services (2000) 106 FCR 281 Secretary, Department of Social Security v Smith (1991) 30 FCR 56 Secretary to the Department of Family and Community Services v Allan (2001) 116 FCR 1 Date of hearing: 14 June 2012 Place: Sydney Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 63 Counsel for the Applicant: R Henderson Solicitor for the Applicant: Australian Government Solicitor Counsel for the Respondent: TT Baw IN THE FEDERAL COURT OF AUSTRALIA NSW DISTRICT REGISTRY GENERAL DIVISION NSD 355 of 2012 ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL BETWEEN: SECRETARY OF THE DEPARTMENT OF FAMILIES, HOUSING, COMMUNITY SERVICES AND INDIGENOUS AFFAIRS Applicant AND: DEBRA JONES Respondent JUDGE: JACOBSON J DATE OF ORDER: 21 June 2012 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The appeal be dismissed. 2. The applicant pay the respondent's costs. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. IN THE FEDERAL COURT OF AUSTRALIA NSW DISTRICT REGISTRY GENERAL DIVISION NSD 355 of 2012 ON APPEAL FROM THE ADMINISTRATIVE APPEALS TRIBUNAL BETWEEN: SECRETARY OF THE DEPARTMENT OF FAMILIES, HOUSING, COMMUNITY SERVICES AND INDIGENOUS AFFAIRS Applicant AND: DEBRA JONES Respondent JUDGE: JACOBSON J DATE: 21 June 2012 PLACE: SYDNEY REASONS FOR JUDGMENT Introduction 1 This is an appeal by the Secretary of the Department of Families, Housing, Community Services and Indigenous Affairs on a question of law under s 44(1) of the Administrative Appeals Tribunal Act 1975 (Cth) from a decision of the Administrative Appeals Tribunal (the Tribunal) given on 12 January 2012. On that date the Tribunal decided to set aside an earlier decision of the Social Security Appeals Tribunal (the SSAT) made on 1 July 2011. 2 The decision made by the SSAT concerned the calculation of a family tax benefit paid to Mrs Debra Jones under the provisions of an Act entitled A New Tax System (Family Assistance) Act 1999 (Cth) (the Act). 3 Under the Act, the determination of a family tax benefit is based, inter alia, upon the calculation of an individual's "adjusted taxable income". That concept involves the adding back of certain items to an individual's taxable income for a given year. 4 With effect from 1 July 2009, when the Tax Laws Amendment (2009 Measures No. 1) Act 2009 (Cth) (the 2009 Act) came into force, the items which were required to be added back to the individual's taxable income included the individual's reportable superannuation contributions (within the meaning of the Income Tax Assessment Act 1997), for that tax year. 5 The issue which arose before the SSAT, and the Tribunal, concerned the effect of adding back the relevant individual's reportable superannuation contribution for the year ending 30 June 2010, to the individual's taxable income for that year. 6 The relevant individual was Mrs Jones' husband, Mr Jones. He was a self employed insurance broker who made a salary sacrifice of $45,950 into a superannuation fund which was recorded as a reportable employer superannuation contribution in his income tax return for the year ended 30 June 2010. 7 Mr Jones was at that time 60 years old and was eligible under the Transition to Retirement arrangements introduced in 2005, in the Superannuation Industry (Supervision) Regulations 1994 (Cth), to withdraw part of his superannuation benefit from his fund provided he did so in the form of an income stream which could not be converted to a lump sum. 8 Having made the salary sacrifice of nearly $46,000, Mr Jones then withdrew from his superannuation fund an amount of $46,884 by way of income pursuant to the Transition to Retirement arrangements and that amount was recorded as income in his 2010 income tax return. 9 Mr Jones' taxable income for the 2010 year consisted of the sum of $45,000 which was earned as wages together with the sum of $46,884 of income drawn from his superannuation fund, less certain other items, resulting in a taxable income of approximately $87,000. 10 However, the effect of adding back his reportable superannuation contribution of $45,950 (and another item consisting of a net investment loss of $4,095) was that his adjusted taxable income amounted to approximately $137,000. 11 Mr Jones contended in the SSAT and the Tribunal that the amount on which his wife's family tax benefit should be calculated was approximately $87,000, that is to say the total of his $45,000 wages and his $46,000 withdrawal from superannuation (less the investment loss) and that the inflation of the base calculation had come about by reason of adding back his superannuation contribution which was approximately equal to the amount he had withdrawn. 12 The SSAT rejected Mr Jones' contention, finding that the effect of the relevant provision of the Act was to require the reportable superannuation contribution to be added to the wages and income withdrawn from the superannuation fund. 13 However, on review, the Tribunal found that the ameliorating provisions of s 101 of an Act entitled A New Tax System (Family Assistance) (Administration) Act 1999 (Cth) (the Administration Act) applied so that the discretion to waive the right to recover the amount of the overpayment should apply by reason of "special circumstances". 14 In coming to that view, the Tribunal considered that "unfairness" came about in the adding back of the salary sacrifice sum which resulted in that item of Mr Jones' income being "calculated twice" in the assessment of his income for determination of the family tax benefit. The Questions of Law 15 The Secretary contends that three questions of law arise from the Tribunal's decision. 16 The first question is as to the proper construction of cl 2 of Schedule 3 of the Act. That is to say, whether Mr Jones' reportable superannuation contribution was required to be added to his taxable income for that year. 17 The second question is said to be a "no evidence" point which arises from the Tribunal's finding that Mr Jones' reportable superannuation contributions had been calculated twice in the assessment of income for family tax benefit purposes. 18 The third question is whether the Tribunal misinterpreted and misapplied the "special circumstances" waiver power contained in s 101 of the Administration Act. The Statutory Scheme 19 Section 58 of the Act provides that, subject to certain exceptions which are not presently relevant, an individual's annual rate of family tax benefit is to be calculated in accordance with the "Rate Calculator" contained in Schedule 1. 20 The relevant part of Schedule 1 of the Act for present purposes is cl 1(2)(a)(i) which calls for a calculation to be made by reference to the individual's adjusted taxable income. 21 Clause 1 of Schedule 3 also provides that an individual's adjusted taxable income is relevant to eligibility for, and the rate of, family tax benefit and child care benefit. 22 Clause 2(1) of Schedule 3 prescribes the method by which an individual's adjusted taxable income for a particular year is to be calculated. It is the sum of a number of specified "income components" set out in para (a) to (f). 23 I will set out the whole of Schedule 3, cl 2(1) as follows: (1) For the purposes of this Act and subject to subclause (2), an individual's adjusted taxable income for a particular income year is the sum of the following amounts (income components): (a) the individual's taxable income for that year; (b) the individual's adjusted fringe benefits total for that year; (c) the individual's target foreign income for that year; (d) the individual's total net investment loss (within the meaning of the Income Tax Assessment Act 1997) for that year; (e) the individual's tax free pension or benefit for that year; (f) the individual's reportable superannuation contributions (within the meaning of the Income Tax Assessment Act 1997) for that year; less the amount of the individual's deductible child maintenance expenditure for that year. 24 The relevant paragraphs of cl 2(1) for present purposes are (a), (d) and (f). Clauses 2(1)(d) and 2(1)(f) were added by the 2009 Act. 25 Reference should also be made to cl 3 of Schedule 3 the effect of which in the present case is that, for the purpose of determining Mrs Jones' adjusted taxable income for the 2010 year, her income was taken to be that of Mr Jones. 26 In his Second Reading Speech in the House of Representatives for the Tax Laws Amendment (2009 Measures No 1) Bill 2009, the then Minister described the reforms which were introduced by the 2009 Act as follows: Schedule 3 introduces reforms to income tests which were announced in the 2008-2009 budget. The reforms expand income tests used in determining eligibility for a range of government financial assistance programs to include certain salary sacrificed contributions to superannuation, total net investment losses and adjusted fringe benefits. 27 The Minister went on to refer to the affected programs which included family assistance payments and various means tested tax benefits. 28 Where an individual receives payment of a family tax benefit to which a person is not entitled the amount so paid is a debt due to the Commonwealth by the person: see the Administration Act, s 71(1). 29 Notwithstanding the apparent strict liability to which a person may be subject under s 71 of the Administration Act, the Secretary is given power under a number of provisions to waive the Commonwealth's right to recover the debt. 30 The relevant power of waiver in the present case is contained in s 101 of the Administration Act which provides that the Secretary may waive the right to recover all or part of the debt if the Secretary is satisfied that: "(b) there are special circumstances (other than financial hardship alone) that make it desirable to waive …" The SSAT's Reasons 31 The SSAT was of the view that the effect of the provisions of the Act referred to above was that for the purpose of determining Mrs Jones' rate of family tax benefit, her adjusted taxable income for the 2010 year consisted of the sum of Mr Jones taxable income for the year of approximately $87,000, his net rental income loss of approximately $4,000 and his reportable superannuation contribution of $45,950, giving a total of $137,157. 32 The SSAT stated that the effect of this determination was that Mrs Jones had been overpaid $6,069.15 by way of family tax benefit under the Act. 33 Notably, the SSAT acknowledged the difficulty which arises from the application of the statutory provisions. It said at [64] that there was no discretion to disregard any of the components of the adjusted taxable income. The SSAT considered that the Act had been applied correctly. 34 The SSAT went on to say at [65]: The Tribunal accepts that the drafters of the legislation may not have expressly contemplated the application of the adjusted taxable income definition to a person accessing superannuation benefits through the transition to retirement scheme while remaining employed and also salary sacrificing from that employment into superannuation. The Tribunal is unable to say whether that is an unusual situation. What is clear is that the Parliament intended the definition of adjusted taxable income for family tax benefit purposes to be broader than the definition of taxable income used for tax purposes. The Tribunal is unable to conclude that the legislation has not operated as intended in Mrs Jones' case. The Tribunal does not consider that the operation of the legislation in her particular case is a special circumstance that would justify waiving the debt. The Tribunal's Reasons 35 The Tribunal accepted at [8] of its reasons that the amount of Mrs Jones' adjusted taxable income was correctly calculated as approximately $137,000 under cl 2(1) of Schedule 3 of the Act and, as a result Mrs Jones had been overpaid the sum of approximately $6,000 which constituted a debt to the Commonwealth by virtue of s 71 of the Administration Act. 36 However, the Tribunal considered that the power to waive the debt by reason of "special circumstances" as provided in s 101 of the Administration Act should be applied. In coming to this view the Tribunal considered and applied its view of the principles stated in the leading authorities including Groth v Secretary, Department of Social Security (1995) 40 ALD 541 and Secretary, Department of Social Security v Smith (1991) 30 FCR 56. 37 The Tribunal considered that the effect of these authorities was that "unfairness" could constitute special circumstances because it may demonstrate that there is some feature of the case that takes it out of the ordinary. The Tribunal also referred to other authorities which it considered to support that view. 38 The critical findings of the Tribunal are at [12] and [13] as follows: [12] To my mind the applicant has suffered from unfairness, in that her husband's superannuation, by way of salary sacrifice, a provision which has been encouraged by the government on the basis that a person should be encouraged to contribute to their own retirement, and hence in future be less of a drain on the public purse, has been calculated twice in the assessment of income for Family Tax Benefit purposes. That is to say, it was calculated as part of the husband's taxable income when withdrawn from his superannuation fund — a perfectly legitimate arrangement, again encouraged by the government and referred to as "Transition to Retirement", and then added yet again for the purposes of Family Tax Benefit. [13] In other words, the legislation enables double-dipping on the part of the respondent. As stated, I accept special circumstances do exist in the case of this applicant. The decision under review is set aside and remitted to the respondent for recalculation of Family Tax Benefit for the period 1 July 2009 to 30 June 2010 on the basis that the sum of $45,950 does not form part of that calculation. Consideration 39 It is plain that on the proper construction of cl 2(1) of Schedule 3 of the Act, Mrs Jones' adjusted taxable income for the 2010 year was $137,157. That sum comprised the total of the income components required to be brought to account under cll 2(1)(a), 2(1)(d) and 2(1)(f). That is to say the amount of $137,157 was the sum of Mr Jones' taxable income, his net investment loss and his reportable superannuation contribution. 40 Indeed, that was the finding made by the Tribunal and it was not put in issue by either party on the appeal. 41 However, what was put in issue by the Secretary in raising the second question of law was whether there was any evidence before the Tribunal to support the "finding" made by the Tribunal that Mr Jones' superannuation contribution, by way of salary sacrifice, had been "calculated twice" in the assessment of Mrs Jones' adjusted taxable income. 42 Ms Baw, who appeared for Mrs Jones, submitted that it was not open to the Secretary to take the "no evidence" point because the advocate who appeared for the Secretary in the Tribunal had made a concession which is recorded as page 16 of the Transcript, Appeal Book page 247, that the effect of the Act was to permit double counting of that amount. 43 This concession was said to amount to a waiver in the sense referred to in the Commonwealth v Verwayen (1990) 170 CLR 394, by Toohey J at 473 and by Gaudron J at 484–485. Detriment to the other party, that is to say, to Mrs Jones, is not an essential element of waiver in the sense referred to by their Honours. Rather, the doctrine is one of fair dealing in litigation which aids the efficient administration of justice and is particularly relevant to the Secretary as a model litigant. 44 There is some force in this submission but I do not need to deal with it because in my opinion the "no evidence" point may be disposed of quite simply. 45 It seems to me that the short answer to the point is that the "no evidence" ground does not really arise. This is because the finding made by the Tribunal was really one which addressed the effect of the legislation. That is to say, the effect of it was found to be to result in a double counting of Mr Jones' receipt of income drawn from the superannuation fund and his reportable superannuation contributions. 46 There was ample evidence to demonstrate that this was the way in which the legislation treated these elements of Mr Jones' reportable taxation affairs in the evidence. The most compelling evidence may be found in Mr Jones' tax return. 47 In addition, Mr Jones gave evidence at the hearing, as recorded at pages 6 to 8 of the Transcript, of the salary sacrifice contribution of $45,950 and the contemporaneous withdrawal of a similar amount from the fund as permitted by the Transition to Retirement arrangements. 48 Thus, it seems to me that the only real issue in the appeal is whether the Tribunal correctly construed and applied the power to waive the debt under s 101 of the Administration Act by reason of the existence of special circumstances. 49 As I have said, the Tribunal referred to the leading authorities on the meaning of "special circumstances" in reaching the view that the double counting of Mr Jones' reportable superannuation contribution and his drawing from the fund operated in a way that was unfair to Mrs Jones, thereby amounting to special circumstances. 50 In my opinion the overwhelming effect of the authorities to which the Tribunal referred supports the conclusion that it applied the correct test in making the finding that special circumstances existed in the facts of the present case. 51 The effect of the authorities is that the phrase "special circumstances", although lacking in precision, is sufficiently understood as including events or things that render the operation of the statue in a particular case as unfair, unintended or unjust. What is required is something that takes the case out of the ordinary, and unfairness or unintended consequences may show that this exists. Moreover, the circumstances of the case are not confined to matters that are external to the operation of the statutory scheme: see Smith per von Doussa J at 60, 61–62; Groth per Kiefel J at 545, Kertland v Secretary, Department of Family and Community Services (1999) 95 FCR 64 per Merkel J at 71, 73; Kirkbright v Secretary, Department of Family and Community Services (2000) 106 FCR 281 per Mansfield J at [22], [26]-[27] and [31]-[32]; see also Secretary to the Department of Family and Community Services v Allan (2001) 116 FCR 1 per Heerey J at [17]. 52 I reject the submission of Miss Henderson, who appeared for the Secretary, that the abovementioned authorities are inapplicable to s 101 of the Administration Act. Miss Henderson submitted that those cases were concerned with the waiver of a disentitlement to statutory compensation and that this is to be distinguished from the power to waive the right to recover a crown debt, as stated in s 101 of the Administration Act. I see no relevant difference between the particular effect of the ameliorating power in any of the statutes to which Miss Henderson referred. 53 It follows in my opinion that there was no error in the way in which the Tribunal applied the special circumstances test in the present case. It formed the view that the provisions of cl 2(1) of Schedule 3 of the Act operated unfairly because of what it called double counting of Mr Jones' reportable superannuation contribution and his contemporaneous withdrawal of an amount that was almost identical to the amount of the contribution. 54 It is true that, strictly speaking, the salary sacrifice contribution was not counted twice in the assessment of Mrs Jones' income but in practical terms that is what took place. The contribution was counted once when it went into the fund and virtually the same amount was counted again when it was withdrawn, in a way which complied with the Transition to Retirement arrangements under which Mr Jones made the contribution and withdrawal. 55 It is Mr Jones' entitlement under the Transition to Retirement arrangements which takes Mrs Jones' case out of the usual or ordinary case and gives rise to special circumstances within the test stated by Kiefel J in Groth and the other authorities to which I have referred. 56 In the ordinary case the taxpayer with an "FTB" child or children under the Act would not be of an age which entitles him or her to take advantage of the approved Transition to Retirement arrangements. Thus, in the ordinary case the taxpayer's adjusted taxable income would be approximately equal to his or her actual income and there would be no "double counting" as occurred in the present case. 57 This may be seen by reference to an example. A 45 year old taxpayer on a wage of $90,000 who salary sacrifices $45,000 of his salary into superannuation would still have an adjusted taxable income of $90,000, that is to say $45,000 of taxable income comprising his salary and $45,000 of reportable superannuation contributions. 58 But a 60 year old taxpayer who makes the same arrangements, save that he also immediately withdraws the $45,000 would have an adjusted taxable income under cl 2(1) of Schedule 3 of the Act of $135,000 because his contribution into the fund, and his ability to withdraw it at an earlier point of time than the 45 year old, gives rise to an artificial inflation of his adjusted taxable income for family tax benefits purposes. 59 The SSAT recognised in [65] of its reasons that the drafters of the Act may not have intended this consequence but the SSAT does not then appear to have taken the next step of considering the authorities which have construed the special circumstances test. 60 However, on review, the Tribunal went on to consider the application of those authorities in a way which in my opinion produced a result which is unaffected by any error of law. 61 It is no answer to say that the calculation of Mrs Jones' adjusted taxable income at the figure of $137,000 comes about by a correct application of the provisions of cl 2(1) of Schedule 3 of the Act. The fallacy in that approach is, as von Doussa J said in Smith, to fail to read s 101 of the Administration Act as part of the overall statutory scheme. Once that is done, the unfairness to Mrs Jones can be seen in the "double counting" in the manner referred to above. 62 Indeed, if, as was urged upon me by counsel for the Secretary, the special circumstances must arise from matters external to the operation of the statutory scheme, the present case satisfies the requirement. This is because it is the eligibility of Mr Jones to withdraw his contribution under the Transition to Retirement arrangements that takes the present case out of the ordinary. That can be seen as a matter which is external to the operation of the scheme rather than part of it. However I should emphasise that in any event, the Secretary's submission that the circumstances must be confined to external matters is contrary to the weight of authority. Conclusion 63 The appeal must be dismissed with costs. I certify that the preceding sixty-three (63) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jacobson. Associate: Dated: 21 June 2012