SMITH v FC of T

Members:
MD Allen SM

Tribunal:
Administrative Appeals Tribunal, Sydney

MEDIA NEUTRAL CITATION: [2011] AATA 563

Decision date: 16 August 2011

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MD Allen (Senior Member)

1. By application made 3 December 2010 the Applicant sought review of objection decisions made by the Respondent in relation to the 2008 and 2009 tax years.

2. The Respondent included in the Applicant's assessable income for the 2008 tax year the sum of $50,000.00, and for the 2009 tax year the sum of $37,000.00, which sums had been paid to the Applicant by the Smith Investment Superannuation Fund ("the Fund").

3. The said Fund is a self-managed superannuation fund for the purposes of the Superannuation Industry (Supervision) Act 1993.

4. There was no dispute in these proceedings that the payments to the Applicant from the Fund were paid in breach of the legislative requirements under the Superannuation Industry (Supervision) Act 1993 and the Superannuation Industry (Supervision) Regulations 1994.

5. Notwithstanding the apparent breach of the legislative requirements, Section 304-10 of the Income Tax Assessment Act 1997 ("ITAA") provides for circumstances where relief may be granted against the consequences of payments made contrary to legislative authorisation.

6. So far as is relevant, s 340-10 ITAA states:

• "(1) Include in your assessable income the amount of a * superannuation benefit if:
  • (a) any of the following applies:
    • (i) you received the benefit from a * complying superannuation fund or from a * superannuation fund that was previously a complying superannuation fund;
    • (ii) the benefit is attributable to the assets of a complying superannuation fund or from a superannuation fund that was previously a complying superannuation fund; and
  • (b) any of the following applies:
    • (i) the fund was not (when you received the benefit) maintained as required by section 62 of the Superannuation Industry (Supervision) Act 1993
    • (ii) you received the benefit otherwise than in accordance with payment standards prescribed under subsection 31(1) of the Superannuation Industry (Supervision) Act 1993.
• (2)…
• (3)…
• (4) However, you do not have to include the amount in your assessable income to the extent that the Commissioner is satisfied that it is unreasonable that it be included having regard to:
  • (a) for subsection (1) or (2) - the nature of the fund; and
  • (b) any other matters that the Commissioner considers relevant."

7. The provisions of subsection 304-10(4) prima facie invest the Commissioner of Taxation with a broad discretion regarding the circumstances in which he or she could decide that amounts received were not to be included in assessable income. It is this discretion that the Applicant submits should be applied to her so that the sums of $50,000.00 and $37,000.00 are not included in her assessable income.

8. For the Commissioner of Taxation it was submitted that the apparently unfettered discretion granted by s 304-10(4) must be constrained by the context in which it appears in the ITAA 1977.

9. In
Wilson v State Rail Authority of New South Wales [2010] NSWCA 198 Allsop P commencing at paragraph 12, discussed the modern approach to the interpretation of statutes. His Honour said:

"I am mindful that any initial engagement with enactment history and context might be misunderstood as part of any enquiry as to the subjective intent of legislators or policy advisers so that such divined intent can be transferred to the words used by Parliament. Such an enquiry would be misdirected. It is the language of Parliament that must be interpreted and construed: However, as is now beyond dispute, in construing an Act, a court is permitted to have regard to the words used by Parliament in their legal and historical context. Context is to be considered in the first instance, not merely when some ambiguity is discerned. Context is to be understood in its widest sense to include such things as the existing state of the law and the mischief or object to which the statute was directed. These are legitimate means of understanding the purpose of the Act and of the relevant provisions, against which the terms and structure of the provisions and the Act, and a whole, are to be understood. Fundamental to the task, of course, is the giving of close attention to the text and structure of the Act, as the words used by Parliament to effect its legislative purpose. Nevertheless, general words, informed by an understanding of the context, and of the mischief to which the Act is directed, may be constrained in their effect. (Authorities omitted)."

10. As pointed out by Counsel for the Respondent, s 304-10 of the 1997 Act is no more than a rewrite of the former 26AFB in the Income Tax Assessment Act 1936, and the section should be interpreted in light of its occurring within Division 304 of the 1997 Act, which Division deals with the tax treatment of payments from complying superannuation plans which payments are in breach of legislative requirements.

11. There was no dispute in these proceedings regarding the circumstances in which the Applicant received the payments from the Fund.

12. The Applicant and her husband conduct a real estate agency. In previous years the Applicant and her husband incurred considerable expense in regard to legal costs arising from actions in the New South Wales Supreme Court, the District Court and the Administrative Decisions Tribunal.

13. As a result of these legal proceedings the Applicant and her husband lost possession of their then family home and the real estate business conducted by them deteriorated.

14. In 2007 the Applicant and her husband had purchased another home which was subject to mortgage. In 2008 their lender, Macquarie Bank, without notice, informed the Applicant and her husband that they no longer would extend credit to the real estate business. After seeking professional advice they were advised to place the real estate business into voluntary administration.

15. As explained by the Applicant in evidence, that course was not a realistic option as it would require the forced sale of their only real asset, the real estate company's rent role. In Exhibit A2, the Applicant stated that the only other option available was to access monies from the Fund to maintain the business.

16. The Applicant and her husband did not themselves directly benefit from the payments out of the Fund but the monies were used solely for the purpose of preserving the business. The business was preserved which enables the Applicant and her husband to return the monies, in effect borrowed from the Fund, to the Fund.

17. It is difficult not to have sympathy with the Applicant's dilemma. The use of the monies has allowed the real estate business to continue and that business has in turn paid wages to employees who have paid, and continue to pay, tax on those wages, as has the Applicant and her husband. I agree with the Applicant where she argues that if the business had been allowed to fail, the then employees of the business and both she and her husband would have been forced to seek Social Security benefits, so that the public purse has benefited by the payments out of the Fund.

18. Sub-regulation 6.17(2) and Schedule 1 of the Superannuation Industry (Supervision) Regulations 1994 provides that superannuation benefits can be paid out when certain conditions of release are met. These conditions include severe financial hardship and compassionate grounds. I did not understand the Applicant to be submitting that those grounds applied in her particular case and given the circumscribed provisions in which those grounds can apply on the Applicant's case, she cannot bring herself within Sub-regulation 6.17(2) and Schedule 1.

19. Logan J in
Deputy Federal Commissioner of Taxation (Superannuation) v Fitzgeralds & Anor 2007 ATC 5105 at 5109 discussed the concepts underlying self-managed superannuation funds, namely:

• "Our Parliament has deliberately constructed a scheme whereby, in return for submission to a regulatory regime found in the SISA, particular taxation benefits are given to the Trustee of a superannuation fund and its members. The public policy that seems to underlie that particular concession is to encourage prudent provision by Australians for their retirement. In so doing, the burden on other Australian taxpayers in the provision of social security benefits for the aged is thereby lessened. I can, I believe, responsibly take judicial notice that a contemporary phenomena is a recognition that Australia has, in terms of its demographics, a need for such provision to be encouraged.
• Part of the scheme found in the legislation is to enable what one might term small funds or, at least, funds which have fewer than five members, to be self-managed. That is a particular benefit conferred by the Parliament on those who would wish to make provision for their retirement. It enables self-management as opposed to becoming a member of a fund, the management of which may be remote from membership. It is a privilege. It is a privilege that should not be abused … "

20. More recently in
Triway Superannuation Fund and Commissioner of Taxation [2011] AATA 302, O'Loughlin SM, in discussing the discretion available in paragraph 42A(5)(b) of the Superannuation Industry (Supervision) Act 1933 said at paragraph 28 with regard to a fund that had been rendered non-compliant due to defalcations by one of its members:

"While tragic, the present circumstances are not those in which a discretion ought to be exercised consistently with the principles governing exercise of discretionary powers. To do so would frustrate the wider objects of the SIS Act by relieving those responsible for superannuation funds of tax imposts where all of the assets of a superannuation fund are deployed inappropriately and lost as a consequence. Exercising a discretion in these circumstances is not consistent with the objects of the SIS Act. "

21. To my mind, given the context in which Subsection 304-10(4) ITAA appears within the Act and the wider concept as expressed in Deputy Federal Commissioner of Taxation (Superannuation) v Fitzgeralds supra, the funds of a self-managed superannuation fund are not to be used as a lender of last resort. As was said by Redfern SM, in
ZDDD and Commissioner of Taxation [2011] AATA 3 at paragraph 104:

"Tax concessions are allowed to self-managed superannuation funds provided they comply with the regulatory provisions. If those regulatory provisions are contravened it would undermine the legislative scheme if a self-managed superannuation fund was allowed to be treated as complying simply because it would be in the best interest of members not to withdraw tax concessions and/or impose tax liabilities…"

22. The discretion the Applicant seeks the Respondent to exercise does not extend so far as to encompass the facts in this matter. The decision under review is therefore AFFIRMED.