PLATELL v FC of T

Members:
PW Johnston DP
TE Barnett SM
RD Fayle M

Tribunal:
Administrative Appeals Tribunal

Decision date: 23 January 1992

PW Johnston (Deputy President), TE Barnett (Senior Member), RD Fayle (Member)

This is an application under s. 29 of the Administrative Appeals Tribunal Act 1975 for review of an objection decision made pursuant to s. 186 of the Income Tax Assessment Act 1936 (the Act). The decision under review related to a notice of objection under s. 185 of the Act against a notice of assessment of income tax in relation to the year of income ended 30 June 1988 issued by the respondent pursuant to s. 174 of the Act.

At the commencement of the hearing the applicant through his counsel, Mr R Sceales, applied pursuant to s. 14ZF of the Taxation Administration Act 1953 for the proceedings to be heard in public. Counsel for the respondent, then Mr W Martin did not object but requested that the Tribunal not disclose the names of persons who were not party to the proceedings but who were or had been members of the

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superannuation fund in question and who might be mentioned in relation to certain aspects of the matter. Subject to that reservation the Tribunal ruled that the hearing be open to the public.

The objection

Even though this matter was heard over seven sitting days and involved many witnesses as well as many exhibits the compass of the matter is in the end quite small. The applicant had objected to the following-

(a) the inclusion of $6,804 as assessable income, being 95% of an amount of $7,161.86 paid to him in a lump sum on or about 31 August 1987;
(b) the failure of the respondent to allow a rebate pursuant to s. 160AA in relation to an amount of $10,696.87 paid to the applicant in a lump sum at the same time; and
(c) the inclusion of $173,357 as assessable income not being an eligible termination payment.

It may be noted that the applicant's income tax return for the year ended 30 June 1988, lodged on or about 26 August 1988 [T180], disclosed the last amount as assessable income. It made no claim that it was an eligible termination payment so to that extent the respondent's assessment was consistent with the return. There is no bar under the Act to objecting against an assessment which conforms with the disclosures in a tax return.

The Tribunal delivered an oral decision after adjourning to make relevant calculations and, subject to minor changes in paragraph numbering, rounding the cents to the dollar amounts and wording (as highlighted by emphasis in the decision which follows at the end hereof), these written reasons were prepared in anticipation of a request by counsel for them.

The issues

The applicant claimed that he terminated his employment with, or retired from The West Australian Newspapers Limited (WAN) on 31 August 1987 and in consequence received the following amounts on or about that date:

$10,696.87 for unused long service leave;
$7,161.86 for unused annual leave; and
$88,411.25 being a payment from the West Australian Newspapers Limited Pension Fund (the Pension Fund).

The payment of the last amount was accompanied by a group certificate which indicated that $84,944.75 had been paid by the Pension Fund to the respondent in respect of group tax deducted from the entitlement. These two amounts make the disputed amount assessed as $173,357.

On 31 August 1987 the Pension Fund made payments to various institutions upon instruction of the applicant to roll-over the sum of $234,154.75.

On 23 September 1987 the Trustees of the Pension Fund made a further payment of $4,812.25 to a roll-over institution at the direction of the applicant.

The amounts paid by the Pension Fund to the applicant and to roll-over institutions totalled $412,323.00.

The respondent determined that the applicant had neither retired from nor terminated from any office or employment with WAN and therefore the provisions of ss. 26AC, 26AD and 160AA did not apply. Those provisions, so far as relevant read:

``26AC(1) This section applies to any amount paid after 15 August 1978 (whether voluntarily, by agreement or by compulsion of law) to a taxpayer in a lump sum in consequence of the retirement of the taxpayer after that date from any office or employment or in consequence of the termination after that date of any office or employment of the taxpayer, being an amount that is paid in respect of unused annual leave or in respect of unused annual leave and a bonus, loading or other additional payment relating to that leave.''

``26AD(1) This section applies to any amount paid after 15 August 1978 (whether voluntarily, by agreement or by compulsion of law) to a taxpayer in a lump sum in consequence of the retirement of the taxpayer after that date from any office or employment or in consequence of the termination after that date of any office or employment of the taxpayer, being an amount that is paid in respect of unused long service leave.''

``160AA(1) Where-

(a) an amount or amounts (which amount, or the aggregate of which amounts, as the case may be, is in this sub-section referred to as the `lump sum

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amount') is or are included in the assessable income of the taxpayer of a year of income under one or more of the following provisions:

(i) section 26AC;

(ii) sub-sections 26AD(2), (3) and (4);

(iii) sub-section 27B(1);

(b) if the taxpayer is a resident taxpayer in relation to the year of income and Division 16 does not apply to the income of the taxpayer of the year of income - the taxable income of the taxpayer of the year of income exceeds the tax threshold;

(c) the relevant tax amount in relation to the taxpayer in relation to the year of income exceeds the notional tax amount in relation to the taxpayer in relation to the year of income; and

(d) the additional tax amount in relation to the taxpayer in relation to the year of income exceeds the sum of-

... (sets out the tax thresholds)

the taxpayer is entitled in his assessment in respect of the year of income to a rebate of tax of an amount equal to the excess referred to in [sub-paragraphs (i), (ii) and (iii).]''

In the result, the amounts paid as accrued long service leave and annual leave entitlements were assessed as ordinary income in accordance with either s. 25(1) or s. 26(e). So far as is relevant those provisions state-

"25(1) The assessable income of a taxpayer shall include-

(a) where the taxpayer is a resident - the gross income derived directly or indirectly from all sources whether in or out of Australia;
...

which is not exempt income, an amount to which section 26AC or 26AD applies or an eligible termination payment within the meaning of Subdivision AA."

"26 The assessable income of a taxpayer shall include-

...
(e) the value to the taxpayer of all allowances, gratuities, compensations, benefits, bonuses and premiums allowed, given or granted to him in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by him, whether so allowed, given or granted in money, goods, land, meals, sustenance, the use of premises or quarters or otherwise, not being-
- (i) an eligible termination payment within the meaning of Subdivision AA;
- (ii) an amount to which section 26AC or 26AD applies
- ..."

The respondent further determined that the sum of $412,323 was a payment from a superannuation fund which was either (a) a benefit that the applicant had no right to receive from the Pension Fund, or (b) if it was a benefit to which the applicant had a right to receive, then it was an excessive benefit in terms of s. 23F(2)(h). That provision states:

``23F(2) Subject to the succeeding provisions of this section, this section applies, in relation to a year of income, to a superannuation fund, not being a fund of a kind referred to in paragraph 23(jaa), if-

...

(h) the benefits that any employee has, or the dependants of any employee have, the right to receive from the fund are not excessive in amount having regard to-

(i) the remuneration paid to the employee for services rendered by him to his employer;

(ii) the period of the service rendered by the employee to his employer;

(iii) the benefits, pensions and allowances that have been, are being or may be provided for the employee or his dependants from any other fund to which this section or section 23FA applies in relation to the year of income or has applied in relation to a previous year of income;

(iiia) the benefits that have been, are being or may be provided for the employee or his dependants from roll- over annuities within the meaning of Subdivision AA of Division 2; and

(iv) any other matters that the Commissioner considers relevant; and

...''

In reply the applicant maintained that he did retire from or terminated his office or

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employment with WAN and therefore the provisions of ss. 26AC, 26AD and 160AA apply. Further, he contended that the sum of $412,323 was an amount that he ``had a right to receive'' from the Pension Fund and, to the extent that it was deemed excessive - having regard to s. 23F(2)(h) - the provisions of s. 26AFA(2) should be applied to treat the amount as an amount to which the provisions of s. 26AFA(1) should not apply. Section 26AFA relevantly states-

"26AFA(1) Where-

(a) in a year of income and on or after 7 December 1983, a taxpayer receives or obtains a benefit of any kind out of, or attributable to assets of, a section 23F fund;
(b) the benefit-
- (i) is not a benefit that the taxpayer has a right to receive from the fund; or
- (ii) is an excessive benefit; and

(i) by reason that the taxpayer was, or had been, a member of the fund;

...

26AFA(2) Where-

(a) sub-section (1) would, but for this sub-section, apply to the amount or value of an excessive benefit received or obtained by a taxpayer out of, or attributable to assets of, a section 23F fund; and
(b) the Commissioner, having regard to-
- (i) the nature of the fund;
- (ii) the circumstances by reason of which the benefit is an excessive benefit; and
- (iii) such other matters relating to the receiving or obtaining of the benefit by the taxpayer as the Commissioner considers relevant,

is satisfied that it would be unreasonable for sub-section (1) to apply to the whole or part of the benefit,

that sub-section does not apply to the benefit, or to that part of the benefit, as the case may be.

26AFA(3)... (not relevant)...

26AFA(4) In this section-

`dependant' , in relation to a taxpayer, includes the spouse and any child of the taxpayer;

`excessive benefit' means a benefit of any kind that is excessive in amount or value having regard to the matters mentioned in sub-paragraphs 23F(2)(h)(i), (ii), (iii) and (iv).

..."

Should the applicant succeed in these latter contentions, the entire amount of $412,323 falls to be treated as an ``eligible termination payment'' as defined in s. 27A(1) and would qualify partly for concessional treatment under s. 27C and partly for assessment under s. 27B upon which a rebate under s. 160AA would apply. Set out below is the relevant part of the definition of ``eligible termination payment'' in s. 27A(1)-

"27A(1) In this Subdivision, unless the contrary intention appears-

...
` eligible termination payment ', in relation to a taxpayer, means-
- (a) any payment made in respect of the taxpayer in consequence of the termination of any employment of the taxpayer, other than a payment-
  - (i) made from a superannuation fund in respect of the taxpayer by reason that the taxpayer is or was a member of the fund;
  - ...
  - (iv) of an amount to which section 26AC or 26AD applies; or
  - ...

(b) any payment made from a superannuation fund in respect of the taxpayer by reason that the taxpayer is or was a member of the fund, not being a payment-

(i) that is income of the taxpayer;

...

(iii) that is a benefit to which subsection 26AF(1), 26AFA(1) or 26AFB(2) or (3) applies,

reduced by any amount that has been or will be included in the assessable income of the taxpayer under

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subsection 26AF(2), 26AFA(3) or 26AFB(5) in respect of the transfer by the taxpayer of a right to receive the payment or any part of the payment;

..."

The respondent, in assessing the applicant on the $412,323, made a determination under s. 26AFA(2) to treat $238,967 as a ``reasonable benefit'' and assessed it as an ``eligible termination payment''.

The respondent took the position before the Tribunal that none of the $412,323 should be treated as an amount to which a discretion should be exercised pursuant to s. 26AFA(2), or if it was an amount which the applicant had a right to receive from the Pension Fund then it was excessive (p. 17 transcript).

The evidence

The material filed with the Tribunal pursuant to s. 37 of the Administrative Appeals Tribunal Act 1975 was taken into evidence. Throughout proceedings 70 further documents were admitted. Evidence was given by the following witnessess in addition to the applicant himself-

Mr JAS Mews, a chartered accountant;
Mr EL Woodward, the WAN paymaster;
Mr RE Cronin, Editor-in-Chief of WAN;
Mr J Slattery, Managing Director of WAN from 1975 to 1983 and a chairman of trustees of the Pension Fund and a director of WAN until 1986;
Mr EDP Cooney, Chief Executive of WAN from October 1986 and succeeded Mr Slattery as chairman of trustees of the Pension Fund;
Mr DE Barton, a consulting actuary; and
Mr NE Hunt, an advising officer, class 6, of the Australian Taxation Office.

Events leading up to 31 August 1987 change of employment status

The applicant gave evidence of the history of his employment with WAN. Unless otherwise indicated, the Tribunal accepts this evidence. He started in October 1941 when he was 15 years of age. He progressed to become a competent journalist specialising in housing and motor vehicles. He was given the responsibility for motoring in about 1957 and for housing (architecture) in about 1960. He was never officially appointed an editor but evidence was provided which showed reports written by him under his name as ``Homes Editor'' and ``Motoring Editor''. He was directly responsible to a sub-editor and a features editor and indirectly to the editor-in-chief. It was possible that articles which he submitted to the sub-editor could be changed before publication or even rejected. He gave no instances of where that had occurred. For the last 25 years or so the applicant was in a supervisory position and directed the work of several other journalists. It was his responsibility to ensure that there was sufficient copy to allow publication of the housing supplement published each Saturday. He was responsible to ensure that there was a stock of quality articles written by his team, as he called them, to last for a few weeks ahead. The applicant's usual pattern was to work from Monday to Friday. He concentrated on houses from Monday afternoon to Thursday, on testing motor cars on Friday and writing up the resulting article on Monday morning.

The applicant joined the Pension Fund from its outset in 1961. The life policy which had been taken out by WAN on his life as a form of superannuation was transferred to the credit of the applicant's Member's account with the Pension Fund. The applicant contributed approximately 5% of his salary, as determined by the Schedule to the Pension Fund Deed (the Deed), whilst this was matched by WAN.

The applicant's weekly salary for the year or so prior to 31 August 1987 was $802.

In December 1986 the applicant became aware that his Member's account under the Pension Fund was ``higher than allowed under the Taxation Guidelines'', to quote the memorandum of 31 December 1986 to him from Mr GA Kay, the secretary of the Pension Fund. In February 1987 the applicant received a cheque from the Pension Fund together with a further memorandum from Mr Kay stating ``The attached cheque represents a refund of Pension Fund Contributions for this financial year''. In consequence the applicant made certain enquiries of Mr Kay and as a result sought advice of Mr Mews, a partner of Price Waterhouse, Chartered Accountants. The advice was fairly general since the applicant had no detailed knowledge about the state of his then Member's account with the Pension Fund. In May 1987 the applicant wrote a memorandum to Mr O'Sullivan, the Editor-in- Chief advising of his meeting with Mr Mews and said, inter alia:

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``In superannuation situations like mine the trustees pay out the maximum amount and the employer makes up the balance with a golden handshake. For the employee this handshake attracts the same taxation as the superannuation fund and it is OK with the Taxation Department.''

Then followed the series of events critical to this case. On 29 June 1987 the applicant received a memorandum from Mr Black, Personnel and Industrial Relations Manager of WAN. The content of this is set out in full:

``Dear Frank,

On pay day, Thursday 2nd July, a general notice will be distributed to all employees advising of a change in the company policy regarding the compulsory retirement age.

As from Monday 13th July, 1987, the retirement age will be lowered from 65 to 60 years.

This change in Company policy will apply equally to all employees.

As this change in policy effects [sic] yourself, I would like to meet with you personally to discuss your retirement plans and benefits.

Can you please contact myself or Hanne Cunningham on extension 2217 to arrange a convenient time.''

On the same day the applicant sent a memorandum to Mr Smith, the editor, with a copy to Mr Black:

``The company letter on the compulsory retirement age of 60 years, operative July 13, makes it plain that I must submit my retirement notice.

But as I have no intention of giving up work, I would like you to consider this as a Clayton's notice `of a retirement notice when you are not retiring.'

Because of my expertise and continued enthusiasm for homes and cars, I wish to maintain my active writing interest in both. I am sure that we can find a solution that is amicable, and fruitful to all concerned. I AM TOO YOUNG TO RETIRE.

Regards,

Frank Platell.''

The applicant informed the Tribunal that under the Journalists' (Metropolitan Daily Newspapers) Award (the award) it was necessary to give or receive three months' notice of termination unless that condition is waived. This was verified by reference to a copy of the award.

On 9 July 1987 a circular memorandum was sent to all employees by Mr Black which retracted the earlier policy decision to lower the retirement age and in effect reinstated the compulsory retirement age to 65 years.

On 12 August 1987 the applicant wrote a further memorandum to Mr Smith with copies to Mr Cooney, the then General Manager and Mr Cronin-

``After nearly 46 years with WA Newspapers it is with some sadness that I submit my retirement notice, to take effect from the end of this month, if possible.

My superannuation consultant has worked out where best to invest my `roll-over' funds till 65, and I would like to get that money working to best advantage as soon as possible.

Of course, I am too young to retire and I regard this as something of a Clayton notice. I would be very happy to continue running housing and motoring on a three-day casual contract basis, as suggested by Mr Cronin. It is just a matter of making the change-over work to our mutual advantage.

Regards,

Frank Platell.''

By that time Mr Cronin had become Editor- in-Chief succeeding Mr O'Sullivan. Mr Cronin gave evidence that he was agreeable to having the applicant work as a journalist on housing as a casual for three days a week and to be paid an additional amount to submit copy for motoring. The amount which was paid was governed by clause 36 of the award and was limited to no more than 24 hours in any week. The end result was that the applicant received $180 per day for three days casual employment and $250 for the motoring copy which was submitted each week. This totalled $790 per week.

The applicant gave evidence, substantiated by that of Mr Woodward, that in consequence of the applicant's new status he no longer received or was entitled to receive certain perquisites of office: nor, as was confirmed by Mr Cronin, was he responsible for supervising other journalists or making decisions about

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which journalist would cover a particular project.

When asked what he thought of the arrangement entered into with the applicant, Mr Cooney stated in evidence-

``I believe that other people, sir, could do the job not as well as Mr Platell, but reasonably well, and I thought that if he was retiring he should retire. But after a number of discussions with the editor in chief and the advertising manager, I bowed to the editor in chief's recommendation that Mr Platell, because of his unique position, especially in the new housing industry, be allowed to be retained on a casual basis.''

(p. 380 transcript).

On 26 August 1987, Mr Murray, Chief of Reporting Staff sent the following memorandum to Mr Cronin with copies to the Editor, Paymaster and Personnel Manager:

``Mr Frank Platell has resigned. He will finish work on Monday, August 31, 1987.''

It was on the authority of this memorandum that action was taken by WAN and the Pension Fund trustees to make the various payments in question.

In keeping with custom, WAN held a farewell function for the applicant on the evening of 31 August 1987.

On Tuesday 1 September 1987 the applicant came to the offices of WAN and worked there on the housing supplement in much the same manner as he had done previously with the exception that he no longer assumed any supervisory responsibility. He has submitted housing and motoring copy to the sub-editor at all material times since 31 August 1987. He altered his work routine to attend the office on three days per week only, writing the motoring copy at home, usually on a Sunday. After 31 August 1987 the applicant's name appeared on the articles published but omitted the previously occasional embellishment that he was either ``Homes Editor'' or ``Motoring Editor''.

The Tribunal is satisfied that the decision of the applicant to retire on 31 August 1987, in the sense of ending his previous full-time engagement with WAN, was largely driven by his desire to gain access to the funds standing to the credit of his Member's account with the Pension Fund. It is clear that he understood that as his account was in excess of what the Commissioner of Taxation allowed then there may be no further accumulations. The above summary of events is clear from the evidence and constitutes findings of fact by this Tribunal.

Events relating to the Pension Fund

The Pension Fund was established in 1961. Mr Slattery, the Managing Director previous to Mr Cooney, gave evidence that prior to the establishment of the Pension Fund, employees were covered by life insurance policies held in trust. This system commenced in 1938 and in 1961 these policies were transferred to the trustees of the Pension Fund and those members were categorised as the ``Service Division'' to distinguish them from other members. The Service Division members under the Pension Fund became entitled to a pension upon retirement. The amount of the pension depended upon each member's years of service and the average remuneration for the last three years of service. Alternatively there was an arrangement where the retired member could take a lump sum amount and after a period of time they would then qualify for a pension. The time period was calculated as the time it would have taken to make regular pension payments equal to the lump sum amount.

The Pension Fund was an accumulation fund, that is, the benefits accumulated to each member's account from year to year based on the performance of the fund in terms of net income and increases in (or decrements of) the value of investments. Some time in either 1979 or 1980 an actuary reported that the fund would not be able to meet its liabilities in respect of the Service Division and as a result the trustees were able to have WAN increase its contributions from 5% to 6%. This operated for a couple of years before the fund was ``back on its feet'' to quote Mr Slattery. From then the contributions reverted to 5%, at least until suspended in 1986.

The Pension Fund's assets were principally shares in listed public companies and debentures. It had no real estate. The profits for the years up to the early 1980s were modest. Then by 1986 it became evident that the assets had appreciated considerably and something needed to be done to adjust the fund to deal with these reserves. The problem faced by the trustees was the contingent liabilities in relation to Service Division members as there was no way of accurately calculating the amount of reserves necessary to meet future pension obligations once the ``lump-sum'' periods had

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expired since these contingent liabilities related not only to retired members but also to employed members such as the applicant.

Acting on advice first from Morrow Australia Pty Ltd and later from Mr Barton, the Service Division members were given an option of commuting their pension entitlements to lump sum amounts. All agreed. This enabled the trustees to distribute the reserves across all members. The earnings of the Pension Fund in the years of income ended 30 June 1984, 1985 and 1986 enabled the trustees to distribute amounts based on 25% of members' balances for 1984 and 1985, and 50% for 1986. There is no doubt that the principal reason for this turn around in the fortunes of the Pension Fund was the boom times experienced by the share market and the then rising interest rates.

At 30 June 1986 the Pension Fund balance sheet disclosed a total valuation of the fund, net of liabilities, to be $67,769,735. This was an increase of $19,080,845 for the year. This increment was due mainly to the increase in market value of the investment portfolio.

The Pension Fund trustees, concerned about the possibility that the Pension Fund might breach the requirements of s. 23F of the Act and, with a view to preserving its tax exempt status, wrote to the Deputy Commissioner of Taxation, Perth, on 19 January 1987. That letter set out a brief history of the Pension Fund and the declared rates of credits to the Members' accounts for the three years to 30 June 1986, being 25%, 25% and 50% as mentioned, and then proceeded to state:

``In addition, at 30 June 1986 the Trustees decided to distribute the bulk of the Investment Fluctuation Reserve amongst the Fund members, and declared an additional 20% interest to be added to account balances as at June 30, 1986.

As a result of these very high rates of return, totalling 120% over the past 3 years, many longer-serving members are, or will be, entitled to benefits which breach the `excessive benefits' guidelines. This situation may well be further aggravated in 1986/87 year, because the Fund is experiencing continuing high returns as a result of the overall increase in share prices. A declared rate well in excess of 30% is possible again this year.

The Trustees have taken action to cease contributions as from July 1, 1986, for all members immediately affected, that is, all members whose account balances at July 1, 1986, are in excess of the guidelines. However, the 1985/86 effective declared rate of 70% has meant that some members approaching retirement will still be entitled to benefits in excess of the guidelines, even though contributions have ceased.

Paragraph 5 of IT2274 states that if an excessive benefit `arose fortuitously or in other circumstances beyond the effective control of the recipient or the employer' then the Commissioner will exercise a discretion to exempt payments from Section 26AFA tax. Would you please confirm that in the case of the West Australian Newspapers Limited Pension Fund the excessive benefits arising from the unexpected increase in the rate of return will not be taxed under Section 26AFA.

We look forward to receiving your advice in this matter in the near future.

Yours faithfully

EPD Cooney

Chairman of Trustees.''

No reply was received before a further letter was sent by the trustees of the Pension Fund on 9 February 1987 seeking clarification of the effect of the decision of the Board of WAN at a meeting that day to lower the compulsory retiring age to 60 years. (It may be noted that the applicant was not informed of the Board's action in this regard until 29 June 1987.) The clarification sought was in relation to the calculation of ``reasonable benefit'' limits which ordinarily were based on age 65 under the Commissioner's guidelines.

Another letter was sent by Mr Cooney, dated 7 May 1987 apparently following telephone discussions on 6 and 7 May 1987. The purpose of this was to further explain the historical development of the Pension Fund leading to the position it now found itself in. And on 18 May 1987, Mr Kay, in his capacity as the secretary of the Pension Fund, wrote to Mr N Hunt at the Australian Taxation Office providing particular information about the investment in Queensland Press Limited. This disclosed that at 30 June 1986 the Pension Fund held 154,000 convertible notes which had cost them $3.25 in

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September 1982 and which were shown at market value of $1,232,000 at 30 June 1986. These were subsequently sold to News Limited when that company took over both the Queensland Press Limited and Herald and Weekly Times Limited, in early 1987. The notes realised $5,313,000. Also 57,000 shares in Queensland Press Limited, which had been taken up by the trustees pursuant to a rights issue in January 1986 at a cost of $346,500 in February 1987, realised $1,328,250 when News Limited acquired the company.

News Limited also acquired contemporaneously all the issued shares in Herald and Weekly Times Limited in early 1987. The trustees had acquired 1,866,562 shares in that company in consequence of an exchange for its shares in WAN when it was taken over by Herald and Weekly Times Limited in 1969. These shares (plus a bonus allotment of 373,312 and acquisition of 40,000 at a cost of $197,960 in 1985) grew in value from $1,039,868 to $14,454,401 as at 30 June 1986. News Limited paid the trustees $34,198,110 in early 1987 as a consequence of its take-over of Herald and Weekly Times Limited.

The increase in value in the two portfolio holdings of the trustees in Queensland Press Limited and Herald and Weekly Times Limited were the principal contributors to the increase in value of the Pension Fund between 30 June 1984 and 30 June 1986 and the profit realised in early 1987 at the time of the News Limited take-over.

On 18 June 1987 the Acting Deputy Commissioner wrote to Mr Cooney as chairman of trustees of the Pension Fund advising that reasonable benefit limits would be based on a 60 years compulsory retirement age but otherwise no concession would be granted to the Pension Fund which would have to take action to bring down the overall benefits level to an amount calculated on this basis. Then followed three suggestions to bring this about. The letter foreshadowed the Commissioner's intention to assess the respective retiring members on the untaxed amounts of excessive benefits paid to them from a fund separately set up to receive the excessive amounts. Apparently the trustees had not informed the Commissioner that the decision to make the compulsory retirement age 60 years had been rescinded on 9 July 1987.

Mr Barton, called by the applicant, gave evidence in relation to calculations he had made concerning the Pension Fund. His report (Exhibit 58) contains the following information and in relation to the level of reserves:

``3.2 Results

                       RESERVES         ACCUMULATED
YEAR ENDED              FUNDS            RESERVES
30 JUNE                 $'000             $'000       % OF ACCUMULATED
1985                    48,689            9,807              20
1986                    67,770           12,118              18
1987                    79,957             NA                NA

I am unable to comment on the level of reserves in 1987 because it was distributed to members and no accounts were available prior to the distribution.

3.3 Comment

Public Information Bulletin Number 6 makes a fairly general statement to the effect that the fund should not have monies substantially in excess of that necessary to provide the fund's benefits. It makes no specific reference to what would be substantially in excess.

In Mr Hunt's memo there is a statement to the effect that the national office of the Australian Taxation Office had verbally indicated that a reserve level under 25% of the funds assets would be acceptable. The above table shows that in the period we are concerned with the level of reserves falls within acceptable limits. This conclusion was supported in Mr Hunt's memo.

The latter reference is to the following paragraph contained in an Australian Taxation Office internal memorandum of 18 May 1987 from Mr Hunt specifically dealing with the Pension Fund:

``This Department's rulings on reserves are at paragraphs 159 and 160 of C.M. 849 and

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at page 18 of Public Information Bulletin No. 6 of May 1965. Copies of both rulings are attached (sic). National Office's previous verbal advice on reserves has been that each case should be treated on its merit but generally reserves not exceeding 25% of the assets of the fund would be accepted. On this basis the reserve in this fund would be acceptable.''

Mr Barton's report then continues:

``It is my opinion that if there was not a need to distribute the General Reserve prior to 1986 and if the decision to commute members pension entitlements had taken place in say 1985, then the members balances would have approached the maximum permissible under the guidelines in that year and at the worst would have been only marginally excessive.''

Both Mr Barton and Mr Hunt gave evidence from which it was clear that there was disagreement on the most appropriate methodology to employ to ascertain whether an accumulation fund, such as the Pension Fund, may not comply with the provisions of s. 23F(2)(i). That sub-paragraph is one of the nine conditions which must be satisfied for a superannuation fund to qualify as a fund whose income is exempt from income tax under s. 23F. It reads:

``(i) the amount of the fund is not substantially in excess of the amount that is necessary for the purpose of providing benefits that employees and their dependants have rights to receive from the fund having regard to the contributions that are expected to be made to the fund in succeeding years of income in relation to those employees and their dependants and to the income that is expected to be derived by the fund in succeeding years of income.''

Mr Barton on the one hand maintained that any calculation of a fund's excessive benefit status must take all members into account, not a selection or sample, and project the calculations to the normal retirement dates of each. Mr Hunt agreed that any calculation for the purpose of s. 23F(2)(i) should proceed on the basis of all members but maintained that the calculation should be made on the assumption that the fund would be wound up, as if all members retired, at the relevant time. That is, there would be no speculation about future events. Mr Hunt gave evidence that this was the way it was done by the Australian Taxation Office. With respect in the opinion of the Tribunal, it is clearly not as appropriate as the method mentioned by Mr Barton since the sub-paragraph postulates a future commitment to meet members' payouts as and when each becomes eligible to receive it on retirement.

In response to questions from counsel about this aspect of the Pension Fund's level of benefits in 1985 and 1986 Mr Barton said:

``So, in those two major tests of paying excess benefits and having too much in the fund, were not being breached in any way in those times. I might say that the big difference between my calculations and those of the ATO was, again, the fact that the ATOs computer was talking about benefits if paid now.''

(p. 445 transcript).

In evidence Mr Barton explained that he used this basis to make calculations specific to the applicant, adopting assumptions that members' account balances would grow at a net rate of 9% per annum and salaries at a rate of 8% per annum and that the normal retirement age is 65 years. These assumptions are implicit in the respondent's Taxation Ruling IT 2201. The result of these calculations are set out in an appendix to Exhibit 58 and essentially show that if the employer and employee each continued to contribute the standard contribution of 5% then the excessive benefit would be $15,090 as at 30 June 1986, that is, using the known information contained in the Pension Fund's accounts at that date. If the calculations were made on the assumption that contributions had ceased then the excess is $11,565. The calculations for the period to 30 June 1987 results in excessive benefits of $150,436 for each method. Mr Barton's general comment in this regard was:

``As at 1985 he (the applicant) was quite clearly going to be comfortably under the limits. By 1986 if he stopped contributing there was going to be a modest excess and by 1987, through no fault of his, the benefits had pushed up so that there was going to be a substantial excess but there was nothing could be done.''

And in another place he stated:

``So then the situation was clearly that even with no further contributions the benefit was going to be excessive but that excess is attributable to a 50 per cent and 72 per cent

ATC 2030
crediting rate in 1987. Those two crediting rates are attributable to the performance basically of the stock market in that time.''

(p. 454-455 transcript).

Mr Barton was extensively examined on his report (Exhibit 58) and the calculations contained therein. Throughout he maintained their appropriateness as projections of benefit limits and in relation to the applicant, based on his actual member's balance as at 30 June 1985 and 1986, after the crediting of the reserve transfers (p. 461-464 transcript).

Mr Barton also gave evidence in relation to the performance of the principal holdings in the investment portfolio of the Pension Fund. This information, being part of Exhibit 58, was presented in graph form showing time on the horizontal axis and market value on the vertical axis. The investment in ANZ Capital Unit Trust [ANZCAP] which cost over $17.4 million, at $1.00/unit in April 1987, rose to just under $1.60/unit by 31 May 1987 to a peak of just under $1.80/unit before the October 1987 stock market crash. Similarly the other principal investment in the Equitylink Unit Trust which cost over $17.3 million moved slowly from about $2.50/unit on 30 June 1985 until September 1986 and then rose steadily to a peak of around $4.10 just before the crash of October 1987. These results coupled with the sale of the Herald and Weekly Times Limited shares and the Queensland Press Limited shares and notes to News Limited in early 1987 for profits of $33,158,242 and $5,794,250 respectively, of which $13,414,533 and $1,162,700 had been brought to account as at 30 June 1986, accounted for an extraordinary rise in the value of the investment portfolio during the 12 month period prior to the resignation of the applicant on 31 August 1987. It is noted that the market value of the investment portfolio fell dramatically after the October 1987 crash as is evident from the graphs referred to above.

In response to questions put by Mr Sceales to Mr Hunt as to whether the trustees could have anticipated the rise in stock prices at the time (particularly the rise in the Herald and Weekly Times shares), he said: ``The trustees would not be able to anticipate the rise'' (p. 537 transcript). Mr Hunt's opinion was confirmed by a series of similar questions put to him immediately thereafter. And then followed this exchange about why Mr Hunt had in recommending that amounts payable to retiring members of the Pension Fund in circumstances similar to those of the applicant should not be treated as amounts to which a discretion should be exercised under s. 26AFA(2) to the extent that those payments were in excess of the respondent's reasonable benefit limits:

``Mr Sceales:... You were satisfied, I take it, that the rate of increase in the value of the Herald and Weekly Times shares was unprecedented? - Yes, I think you'd have to say that.

And would you agree that the rate of increase in the Herald and Weekly Times shares would have been spectacular? - Yes.

Yes. And again if you would have a look at page 168 [Exhibit 64; memorandum dated 25 May 1987] which is the same letter from the Deputy Commissioner to the Commissioner in Canberra following your report, in the first paragraph he has set out the sentence: `As you know we have recently been considering the position of the abovenamed fund in relation to the benefits potentially available to its members and the restriction put by our guidelines - notably the seven to one ratio of exit benefit to final average salary. Although there seems to be a general campaign afoot in W.A. and elsewhere, for the relaxation of the guidelines this fund has locally assumed a high profile largely because of the spectacular increase in the value of its investments in media stock.' - you agree with that proposition? - Yes, yes.''

(p. 539 transcript)

and later on the same point Mr Sceales and Mr Hunt had the following exchange:

``Mr Sceales: And would it be correct to say that the large amount resulting from the revaluation of the Herald and Weekly Times shares could be construed as a windfall profit? - Yes, I think I agree with that.

And that profit arose within the last 12 months of Mr Platell's employment? - I don't - well, the profit actually arose, yes - that the sale of the shares you were talking to? Yes? - Yes.

Profit arose in the last 12 months, you agree with that? - Yes''

(p. 549 transcript).

ATC 2031

Dr Carr, counsel for the respondent during the last three days of the hearing, raised the following questions in re-examination:

``Dr Carr: You hesitated a moment ago when you were talking about the profit. Do you remember the question from my learned friend - the second or third last question a moment ago where he put to you the proposition about the large amount of revaluation of the Herald and Weekly Times shares could be construed as a windfall profit, then led into the question about the sale of the shares? - Yes.

You had some reservations there. What were they based on? - Well, I was going to say the profit itself, of course that occurred when the shares were sold so that would have - and the question was: did the profit on sale of shares occur in the year that Mr Platell left the employ or received his benefit, whatever you like to say, from the fund? Yes, of course it did because they were disposed of within that year, but of course the appreciation of the shares has been distributed to members over something like the past three or four years, or the large appreciation.''

(p. 550 transcript).

The Tribunal, in an effort to clarify the matter of the timing of credit accruals to members' account in the Pension Fund, in relation to the Herald and Weekly Times Limited shares and the notes in Queensland Press Limited, had the following exchange with the witness at the conclusion of his re- examination:

``Mr Fayle: Could we turn to the Fund's accounts which are in the bundle at page 183 [Exhibit 54]. It has been given in evidence that what we have here is a reconciliation of the operations for both 1986 and 1987 and on page 183 there is a figure there for net gain in revaluation for (year ended 30 June) 1986, of $15,158,410.... That represents 1986 does it? - Yes it does.

Now, we also understand that that is attributable to the share price rise, particularly in Herald and Weekly Times and Queensland Press option (sic)? - Yes.

So the amount is impounded in the balances as at end of June 86? - Yes... I might explain why the funds did this. If, for example, the funds weren't excessive, and a member left in say, the 84, 85, 86 year, if the funds had kept the assets down at the cost price and didn't revalue them each year, the members leaving during that time would suffer - they wouldn't get their full share, so as to speak, of the fund. Only the members who were there when the assets were realised would get it...

So a prudent trustee would do two things. He would revalue the assets according to what they might realise on the market and he would also provide an amount for a reserve? - That's correct.''

Later:

``Mr Fayle: So if you go back to page 182 [Exhibit 54] you will see under the (30 June) 1987 column there is a line for contributions, $1.6 million or thereabouts for 1987 and right beneath it, and this is a funds statement - bear that in mind - is an amount of $97 million or thereabouts? - Yes.

And that figure sticks out fairly much in that statement, does not it? - Yes, that's true.

That is the proceeds, basically, from the sale of the Herald and Weekly Times shares and the options, I think, in the Queensland Press, options or notes? - True.

However, over the page, back on 183, the gain from that particular disposal is reflected at $29.9 million, or close to $30 million, in the 1987 column? - Yes.

So we would assume that of the $97 million received in 1987, $29 million or $30 million of it was a profit in 1987. And $15 million of it in effect related to an unrealised gain brought to account in the previous year - in the previous years? - That's correct.

That profit, that unrealised gain of $15 million I think was taken into account in the members' balances and if I can take you to Mr Barton's report, Exhibit 58,... there is a schedule called appendix B which is somewhere about the middle or two-thirds through. It is projected benefits for Mr Platell? - Yes.

Now putting aside for the moment the obvious difference in the methodology which the Department adopted in arriving at these figures and accepting that the information on which the figures have been based is the same information that the Tax

ATC 2032
Office used anyway, if we go down the 1986 column to the excessive benefits line where it has got: `nil conts' that means `nil contributions', assuming they have stopped contributions? - That's correct.

We see there a figure of $11,565? - Yes.

Now that figure, if I understand it correctly, represents what Mr Barton calculates to be the excessive benefit existing at 30 June 1986 in relation to Mr Platell, using his methodology? - Yes. He's projected forward the 86 balance assuming that there's no contributions and also disregarding any profit that would have been distributed in 87.

No. He has used these figures that we referred to just a moment ago which includes the appreciation and the value of all those shares. Correct me if I am wrong. I am not surprised that you are having trouble with this because you are not a party to these figures and I think it could be considered to be unfair, but what I am going to ask you eventually is to express an opinion, that's all.

In the next column, 87, Mr Barton calculated that the excessive amount using the same criteria was $150,436 and that is after the realisation of the shares in question? - Yes.

If you look at the figure below: excessive benefit - standard conts. (contributions) - I think that means contributions were assumed to continue? - Yes.

You see the figure $11,565 has actually become $15,090? - Yes.

Right. Whereas the other figure has not changed. So that's okay. Assuming that those figures are reasonable - and I know that you disagree that they are - assuming they were reasonable, it seems fair to conclude that the amount of the excess benefit existing at 30 June 1986 is $11,565 on one assumption or $15,090 on another? - Yes.

Now you gave evidence about the methodology used for calculating excessive benefits in terms of section 23F(2)(i)? - Yes.

Now that particular provision, of course, refers to the employees as a whole, in other words the fund? - That's right, yes.

And clearly you cannot actually get to that unless you look at employees individually? - Yes, that's correct.''

(p. 551-554 transcript).

Later, in reference to the disagreement which Mr Hunt had in relation to the methodology adopted by Mr Barton to calculate the estimated levels of members' excessive benefits, Mr Hunt agreed that the only difference between his, or more correctly, the Tax Office's method and that of Mr Barton is the assumption made by Mr Barton that the member continues through to normal retirement. The Tax Office's approach is to assume that the members leave the fund at the relevant date to which the benefits are being estimated. Mr Hunt, in responding to a question as to which method he thought was more reasonable, said: ``Well, I think the Tax Office policy is.'' adding ``I am probably a little bit biased that way.'' (p. 555 transcript).

The Tribunal observes that the method adopted by Mr Barton is preferred on the basis that sub-paragraph (i) of s. 23F(2) refers to excess benefits having regard to contributions to be made to the fund and income that is expected to be derived by the fund in future years. The provision is set out below.

Whether the Pension Fund complied with s. 23F

The Pension Fund is a superannuation fund of the kind which must conform with the provisions of s. 23F for its income to remain exempt from income tax. Sub-section 23F(2) sets out the nine tests which must be met. That sub-section states:

"23F(2) Subject to the succeeding provisions of this section, this section applies, in relation to a year of income, to a superannuation fund, not being a fund of a kind referred to in paragraph 23(jaa), if-

(a) the fund is an indefinitely continuing fund established and maintained solely for either or both of the following purposes:-
- (i) the provision of superannuation benefits for employees in the event of their retirement or in other circumstances of a kind approved by the Commissioner; and
  
  ATC 2033
- (ii) the provision of superannuation benefits for dependants of employees in the event of the death of the employees;

(b) an employer of each employee who has, or whose dependants have, a right to receive benefits from the fund contributed to the fund during the year of income;

(c) the fund was not authorized by the terms and conditions applicable to the fund at any time during the year of income to accept contributions, and did not at any time during the year of income accept contributions, other than contributions in respect of an employee who has, or whose dependants have, a right to receive benefits from the fund, being contributions made by:-

(i) the employee;

(ii) an employer of the employee;

(iii) a company in which an employer of the employee has a controlling interest; or

(iv) if an employer of the employee is a company - a person who is associated with that company;

(d) the rights of employees and dependants of employees to receive benefits from the fund are fully secured;

(e) the right of each employee and his dependants to receive benefits from the fund is defined by the terms and conditions applicable to the fund and notice in writing of the existence of that right was given to the employee not later than the time when contributions were first paid to the fund in respect of the employee or of his dependants or 31 March 1966, whichever is the later, or before such later date as the Commissioner approves in relation to the employee;

(f) where a right of an employee or of the dependants of an employee to receive benefits from the fund has ceased during the year of income and, at the time of the cessation of the right, a specific part of the amount of the fund was appropriated for the provision of benefits for the employee or his dependants - the amount of the benefits the right to receive which has so ceased is applied in the year of income or in the period of 2 months after the year of income, or is to be applied after the year of income in accordance with an undertaking by the trustee of the fund given to, and approved by, the Commissioner, being an undertaking that has the effect in relation to the year of income, for all or any of the following purposes-

(i) the provision of the benefits that other employees or their dependants have rights to receive from the fund;

(ii) the provision for other employees or their dependants who have rights to receive benefits from the fund or additional benefits on a basis that is reasonable, having regard to all the circumstances; and

(iii) any other purposes approved by the Commissioner;

(h) the benefit that any employee has, or the dependants of any employee have, the right to receive from the fund are not excessive in amount having regard to-

(i) the remuneration paid to the employee for services rendered by him to his employer;

(ii) the period of the service rendered by the employee to his employer;

(iii) the benefits, pensions and allowances that have been, are being or may be provided for the employee or his dependants from any other fund to which this section or section 23F applies in relation to the year of income or has applied in relation to a previous year of income;

(iiia) the benefits that have been, are being or may be provided for the employee or his dependants from roll- over annuities within the meaning of Subdivision AA of Division 2; and

(iv) any other matters that the Commissioner considers relevant; and

(i) the amount of the fund is not substantially in excess of the amount that is necessary for the purpose of providing benefits that employees and their dependants have rights to receive from the fund having regard to the contributions that are expected to be made to the fund in succeeding years of income in relation to those employees

ATC 2034

and their dependants and to the income that is expected to be derived by the fund in succeeding years of income."

Much evidence was led in relation to whether the Pension Fund had complied at all material times with the provisions of s. 23F and was therefore exempt from tax. There was no dispute to the claim by counsel for the applicant that the trustees of the Pension Fund, in respect of which all but Mr Cooney changed in 1987 after Bell Group took over WAN from News Limited, acted properly at all relevant times. The evidence shows, and the Tribunal accepts, that the trustees were diligent in administering the business of the Pension Fund, held regular meetings the procedures of which were properly minuted, ensured that the trust deed was amended from time to time to accommodate changed circumstances such as the termination of the ``Service Division'', sought expert actuarial advice and acted prudently in relation to this. The applicant was never a trustee nor was ever in a position to influence the trustees. He was one of over 1,100 members and given no special treatment. The employer, WAN, was at all times since the applicant came on staff either a public company whose shares were traded on a stock exchange or a wholly owned subsidiary of such a company.

The Tribunal also accepts, in the light of the evidence, that the trustees acted reasonably in relation to the position in which the Pension Fund found itself when its investments began to appreciate rapidly. In 1986 they called in a consultant to advise if the appreciation would cause the reserves and members' balances to exceed the level of investment needed to comply with the respondent's guidelines in relation to ensuring that the Pension Fund overall was not carrying reserves or providing potential benefits in excess of those limits. They had been previously advised in 1984 that there was no problem in this regard and indeed in the case of the Service Division members the balances were inadequate.

On advice from the actuary in 1986 the Service Division pension entitlements were commuted to lump sums for those who had retired and for those remaining in the employ of WAN their members' accounts were credited with amounts transferred from reserves.

The reserves accumulated because the annual accounts took up any market value appreciation (or depreciation) in investments and added these to the returns from dividends and interest after deducting an amount credited to members' accounts as ``interest''. The trustees kept the reserves to a level below the recommended guideline, suggested in evidence as 25%, by distributions to members' accounts pro rata on balances.

The actuary alerted the trustees to what seemed to be a potential problem emerging in 1986 as a result of the stock market boom. This triggered off the exchange of correspondence between Mr Cooney and the respondent referred to earlier. It is reasonable to conclude, as the Tribunal sees it, that the respondent understood that the trustees would establish what is called an ``excess benefits fund'' whose net income would be assessable in terms of s. 121DAB. The Tribunal finds that the perceived need for this arose about the time of the sale of the shares in Herald and Weekly Times Limited and the notes in Queensland Press Limited coupled with increase in market value of the ANZCAP and Equitylink units as a result of the spectacular stock market rises in that year, 1987. Apparently nothing was put in place before the Pension Fund was adversely affected by the October 1987 crash which presumably corrected the situation. The Tribunal is satisfied that although the trustees were alerted to the potential problem in late 1986 they were not aware that had actually materialised until after the 30 June 1987 accounts were produced. At that time the Pension Fund benefits to many of the longer serving members, like the applicant were known to be far in excess of what would be considered reasonable according to the respondent's guidelines. As it happened it was about that time that the applicant withdrew from the Pension Fund. It is clear that whilst the trustees accepted the prospect of having to establish a s. 121DAB fund to receive the excessive balances in respect of the older members, events overtook the need to do this. Those events were firstly the retirement of some of the older members who, on the basis of the respondent's letter to Mr Cooney of 18 June 1987 (Exhibit 66) were not required to forfeit benefits in excess of the reasonable level, and secondly the sizeable drop in the value of securities held by the trust in the latter part of 1987.

The Tribunal accepts the evidence that at all times the trustees of the fund admitted to membership only full-time employees of WAN.

ATC 2035

At no time has a casual employee been admitted and whenever a member resigned from full- time employment then the trustees paid out the member's entitlement and if appropriate, forfeited the excessive benefit. The procedure whereby the trustees became aware of resignations from WAN was by memorandum from the management of WAN and through the same source they became aware of applications for membership. This was a routine matter and at no time had any of these advices been queried or found to be erroneous.

Reasons - The s. 26AC and s. 26AD matters

So far as it is relevant, s. 26AC applies to:-

``26AC(1)... any amount paid after 15 August 1978 (whether voluntarily, by agreement or by compulsion of law) to a taxpayer in a lump sum in consequence of the retirement of the taxpayer after that date from any office or employment or in consequence of the termination after that date of any office or employment of the taxpayer, being an amount that is paid in respect of unused annual leave or in respect of unused annual leave and a bonus, loading or other additional payment relating to that leave.''

Such amounts received by a taxpayer qualify for a rebate under s. 160AA which has the effect of limiting the rate of tax applicable. And the same words are used in s. 26AD but in relation to amounts paid in respect of unused long service leave. Such amounts are assessed concessionally, part being assessed as to only 5% and the balance qualifying for a rebate under s. 160AA similar to those amounts assessed under s. 26AC.

There is no disagreement that the applicant received the sum of $10,696.87 (an amount in relation to accrued entitlements to annual leave) as well as $7,162 in respect of unused long service leave, both on 31 August 1987.

The matter to be decided is whether, on the facts, the payments were made in consequence of the retirement of the applicant from either an office or employment with WAN.

Sections 26AC and 26AD were inserted into the Act in 1978. Prior to that the assessment of lump sums received for accrued annual leave and unused long service leave in circumstances where a taxpayer retired from an office or employment were governed by s. 26(d) (which was repealed in 1984 when a new code for taxing retirement payments, other than accrued annual leave and unused long service leave payments, was enacted). The operative words of s. 26(d), so far as this case is concerned, were:-

``... where that amount is paid (whether voluntarily, by agreement or by compulsion of law) in a lump sum in consequence of retirement from, or the termination of, any office or employment...''

Whilst the wording of the two provisions is not exactly the same, the similarity is significant and it is reasonable for the Tribunal to be guided by case law on the former provision.

In Case C103
(1953) 3 TBRD 602 Board of Review Member Mr Nimmo (as he then was) said, at p. 606:

``... that to establish that a man has retired from an office or employment it must be proved that (a) the taxpayer has relinquished, in fact, his office or employment, and (b) at the time he relinquished it he had no intention of ever returning to it or resuming it.''

The Tribunal adopts these comments.

On the evidence of the applicant and the Exhibits referred to above, particularly memorandums from the applicant to Mr Smith of 29 June 1987 (Exhibit 9) and 12 August 1987 (Exhibit 13), the Tribunal finds that the conditions precedent as set out by Mr Nimmo were not met. The applicant had every intention of returning to, and resuming work with WAN, albeit under different conditions. Indeed the very next day after his resignation from the full- time staff he was working. The Tribunal is satisfied that prior to the retirement date of 31 August 1991, the applicant had reached an agreement with the Editor-in-Chief, endorsed somewhat reluctantly by the General Manager of WAN, to retain the applicant's specialised services exclusively, at least in the immediate future, in return for a remuneration, which in the aggregate approximated what he was then being paid on a weekly basis but without any perquisites, entitlements to annual leave, sick leave or superannuation contributions.

Counsel for the applicant submitted that even if the applicant had not effectively retired as an employee of WAN he had retired from an ``office'', that being the position of Homes Editor and/or Motoring Editor. The words ``office'' and ``employment'' are used

ATC 2036

disjunctively in s. 26AC and s. 26AD. To establish that there was such an office, counsel led the applicant through the perusal of several extracts from The West Australian newspaper where before 31 August 1991, there were articles written by the applicant which occasionally bore the words ``Homes Editor'' or ``Motoring Editor'' whereas similar articles appearing after that date did not. Under cross- examination by Mr Martin, the applicant confirmed that if there was such a position as Homes Editor or Motoring Editor it did not exist independently of himself (p. 168 transcript).

In
FC of T v Sealy 87 ATC 5076 at p. 5080 Pincus J said that he doubted if the term ``office'' confined to cases in which the position involved was that of a public character or one involving any high degree of permanency. So it is possible that an official position, established under the authority of the Board of Directors and designated ``Homes Editor'' could well constitute an office. But for an editor to simply use the designation as an appendage to the name of the journalist who wrote a published article is not sufficient. The Tribunal finds that there was no specific office of either ``Homes Editor'' or ``Motoring Editor'' in the WAN organisation.

In Case U163,
87 ATC 948, Mr Beddoe, Senior Member, at p. 952, applied
Edwards v Clinch (1982) AC 845, a House of Lords' decision, and said:

``... an office involved a degree of continuance and an independent existence in the nature of a position to which a person could be appointed and which did not depend for its existence on the appointment of the person for the time being occupying the position. In other words if the position disappeared upon the resignation... of the occupant then the position was personal to the occupant and did not constitute an office.''

As the designations of ``Homes Editor'' and ``Motoring Editor'' ceased to appear in the publications of WAN after 31 August 1987 then, even if there was such an official position, which was not established, the conditions referred to above were not met. The applicant neither retired from any office of or employment by WAN nor terminated from any office or employment of WAN in the sense that those words are used for the purpose of s. 26AC.

The pivotal words of s. 26AD, in relation to the conditions under which a lump sum is received are the same as those in s. 26AC as quoted above. It follows that the same conclusion as was reached in relation to the application of s. 26AC to the applicant, is reached in relation to the application of s. 26AD. In neither case was there a requisite retirement from an office or employment.

Whether the amount of $412,323 was not a benefit that the applicant had a right to receive from the Pension Fund

The relevant provisions of s. 26AFA are set out above.

The Tribunal has to decide, in terms of s. 26AFA(1)(b) whether the benefit of $412,323 was a benefit that the applicant had a right to receive from the Pension Fund and if so, whether it was an excessive benefit.

If it should decide that the benefit was not one to which the applicant had a right to receive then the entire amount is assessable income.

If the payment was one to which the applicant had a right to receive but was an excessive benefit then it is necessary for the Tribunal to have regard to the provisions of s. 26AFA(2) to decide whether s. 26AFA(1) applies to the benefit or to part of it. To such an extent the amount would be an eligible termination payment as defined in s. 27A(1) part (b) of the definition.

It was an agreed fact that on or about 31 August 1987 the taxpayer received $412,323 from the Pension Fund, of which $84,944.75 was remitted to the respondent as group tax.

It was an agreed fact that the applicant was a Member of the Pension Fund and that his Member's balance as at 31 August 1987 was the said $412,323.

If the payment to the applicant was not paid in breach of the Pension Fund Trust Deed then it would be a payment that he had a right to receive.

There is nothing in the Pension Fund Trust Deed which expressly stipulates that casual employees are precluded from membership. Nor is there any express provision for their inclusion. Evidence was given by both Mr Slattery (p. 307 transcript) and Mr Cooney (p. 383 transcript) that only full-time employees of

ATC 2037

WAN were treated as eligible for membership and permitted to remain members. The Staff Manager, by a memorandum dated 25 August 1987 (Exhibit 30) advised the Trustees that the applicant had resigned and would finish work on 31 August 1987. It was the Trustees' customary practice to act upon such notices. In consequence they made the payments to the applicant, the nominated roll-over funds and the respondent for the group tax. There was nothing extraordinary or unusual about this resignation so far as the Trustees were concerned. At least one of the Trustees, Mr Cooney, in his capacity as General Manager, was aware of the fact that there was in place an arrangement between WAN and the applicant to continue to employ him on a casual basis under terms and conditions that conformed with the engagement of casuals under the Journalists' (Metropolitan Daily Newspapers) Award. It is the view of the Tribunal that that knowledge of itself, even if known by all the Trustees as a result of an official advice to them from WAN, would not have altered their decision to terminate the membership of the applicant.

Membership of the Pension Fund, at material times, was governed by clause 2 of the Trust Deed dated 19 May 1961, which states inter alia:

``2(1) An employee in the employ of the Company on the effective date or who becomes so employed after the effective date who is then or thereafter eligible for membership shall become a Member on a date specified by the Trustees provided that he signs an Application... Provided that no person who is re-employed by the Company after the effective date and who was previously a member at any time shall be eligible for readmission to membership except with the approval of the Trustees and upon such special terms and conditions as the Trustees see fit to impose.

2(2) Except as is otherwise expressly provided in this Deed any employee in the employ of the company who becomes a Member shall remain a Member so long as he remains in such employ.

2(3) No Member who has retired from the employ of the Company on or after reaching his normal retiring age as aforesaid shall re- enter the employ of the Company except upon such special terms and conditions relating to his being or not being eligible to rejoin the Fund as the Directors and the Trustees see fit to impose.''

So far as WAN was concerned the applicant had resigned. This is the evidence of both Mr Cronin (p. 263 transcript) and Mr Cooney (p. 379-380 transcript). The special terms and conditions of the applicant's re-employment on a casual basis were specific and did not include any understanding that the applicant would be readmitted to the Pension Fund: indeed the evidence which the Tribunal accepts, was to the contrary, that is, that the applicant resigned to enable the Trustees to pay him out. Notwithstanding clause 2(3), in any event the Trustees would have been within the bounds of the Trust Deed not to re-admit the applicant to membership once he had been re-employed, albeit on a casual basis, by reason of the proviso in clause 2(1). Sub-clause (2) of clause 2 would be subject to sub-clause (1). No such approval as is required by the Trustees in the proviso to clause 2(1) was ever given.

The applicant always had a right to resign from WAN. If he resigned after having reached ``normal retiring age'' then the Trustees were obligated to pay him the accumulated benefits in terms of the deed.

The payment made by the Pension Fund to the applicant was pursuant to clause 14(B) of the Trust Deed (Exhibit 1 - T.21):

"14(B) The Trustees shall pay or cause to be paid the net balance to a Member if he shall cease to be in the employ of the company-

(1) on or after the anniversary date next following the date on which he reaches his normal retiring age;..."

Clause 3(1) provides that a Member shall retire from the employ of the Company:

``on the anniversary date next following the date on which he reaches his normal retiring age.''

By a variation to the Trust Deed dated 24 August 1973 clause 3(1) was amended to enable male Members to elect to retire at any time before their 65th birthday once they reached the age of 60 years.

The applicant had reached 61 years as at 31 August 1987 so his retirement payment by the Trustees was in terms of the deed. There was some doubt as to whether adequate proof of the applicant's date of birth had been admitted but

ATC 2038

ultimately counsel for the respondent indicated to the Tribunal that, as a matter of fact, it was not disputed that the applicant was 61 years at 31 August 1987.

The Tribunal concludes that the payments amounting to $412,323 were, in total, benefits that the taxpayer had a right to receive from the Pension Fund.

Whether the amount of $412,323 was an excessive benefit?

This question turns on the concept of what is an ``excessive benefit''. The term is defined in s. 26AFA(4) of the Act as:

``26AFA(4) In this section-

`excessive benefit' means a benefit of any kind that is excessive in amount or value having regard to the matters mentioned in subparagraphs 23F(2)(h)(i), (ii), (iii) and (iv);''

The notion ``excessive benefit'' therefore derives from s. 23F(2)(h), one of the nine conditions which must be satisfied if the Pension Fund is to remain exempt from tax on its income. That sub-paragraph is stated above.

It was an accepted fact that the applicant was not a member of any other superannuation fund nor had he a right to be paid any benefits from any other superannuation fund.

In order to assist in the determination of what constitutes a benefit which is not excessive, at least insofar as the Commissioner is concerned, information has been provided by way of Taxation Ruling IT 2201, issued on 21 October 1985 and which replaced, in effect, Public Information Bulletin No. 6 issued in October 1965. There was agreement between the parties that the tenor of these should be accepted as reasonable and that the Tribunal would be within its rights to be guided by them. This is accepted. Essentially the basis of calculating a reasonable benefit for the purpose of IT 2201 is contained in paragraph 13 which states:

``Irrespective of salary a member of a lump sum fund will be permitted a pre-tax benefit of 7 times final average salary at normal retirement age. An employee who retires at normal retirement age may, in accordance with para. 4 of Taxation Ruling IT 2067, receive an additional benefit from the fund calculated at the rate of.5% for each year of service in excess of 40 years, subject to a maximum of 5%.''

The ruling makes no mention of the case where an employee retires before the normal retirement age of 65 years but who has nevertheless completed more than 40 years of service, as is the case in point.

IT 2201 provides a formula for the calculation of a maximum lump sum benefit to be paid by a s. 23F fund where the member retires before the normal retirement age, which is stated in paragraph 2 to be taken to be 65 years in the case of males unless it is mandatory for a lower compulsory retiring age in a particular firm. The evidence shows that whilst WAN had applied for a reduction in the normal retirement age to 60 years and the respondent agreed that that would be acceptable, the respondent was never notified that WAN had rescinded the particular resolution to give effect to the change and reverted to a compulsory retirement age of 65 years.

In evidence Mr Barton, by reference to Exhibit 58, expressed the view that the increase in the maximum current multiplier in the excess benefits formula, as set out in paragraph 4 of IT 2067, should be permitted in circumstances such as existed for the applicant where retirement occurred before 65 years but in respect of an employee who had completed more than 40 years of service. The respondent also accepted that proposition as a general matter. The Tribunal therefore adopts it as reasonable.

The applicant gave evidence of his commencement date with WAN as 20 October 1941 (p. 55 transcript). The Tribunal finds that the applicant completed 45 years and 316 days to 31 August 1987, his date of cessation from the Pension Fund. This becomes 45.87 years in decimals to two places.

Mr Barton gave evidence as to how he calculated the applicant's level of benefits at 31 August 1987 to be $238,420.

The respondent's comparative figure was $238,967. There were minor differences in the data used. The respondent used for the age variable a rounded figure of 62 years and two months' service, compared with Mr Barton's of 61 years and two months. Accepting the applicant's date of birth as 26 June 1926 Mr Barton's figure is correct to the nearest month. Also, the respondent used a slightly different figure for the variable of final average salary of the last three years; $36,544. This compared with Mr Barton's figure of $35,865. The

ATC 2039

difference arises because the respondent made adjustments for the salary paid from 1 July to 31 August in each of the first and last years, which added $2,038 to the amount to be averaged. The Tribunal accepts that this is the correct approach and adopts that amount in preference to Mr Barton's figure which made no adjustment for the periods from 1 June to 31 August for each of the three final years of service.

On the basis of the evidence the Tribunal accepts that the proper calculation of the current multiplier, in terms of IT 2201 as modified to take account of the 0.5% per year over 40 years of service at retirement is:

7(1 − 0.025 [65 − 61.18]) × (1 + 0.005 [45.87 − 40])

= 6.3315 × 1.0294

= 6.52 (rounded to two decimal places)

Using the respondent's final average salary figure of $36,544 which is preferred then the maximum benefit according to IT 2201 is:

6.52 × $36,544 = $238,266

This compares with the respondent's calculation of $238,967 [T. 223], a difference of $701. On the basis of the calculations it is clear that the payment of $412,323 to the applicant by the Pension Fund on 31 August 1991 was a payment of an excessive benefit as measured by the respondent's ruling IT 2201, which this Tribunal sees no reason to resile from.

In the absence of s. 26AFA(2), the respondent would be required to assess the entire $412,323 as assessable income without treating any of it as an eligible termination payment.

Sub-section 26AFA(2) states:

"26AFA(2) Where-

(a) sub-section (1) would, but for this sub-section, apply to the amount or value of an excessive benefit received or obtained by a taxpayer out of, or attributable to assets of, a section 23F fund; and
(b) the Commissioner, having regard to-
- (i) the nature of the fund;
- (ii) the circumstances by reason of which the benefit is an excessive benefit; and
- (iii) such other matters relating to the receiving or obtaining of the benefit by the taxpayer as the Commissioner considers relevant,

is satisfied that it would be unreasonable for sub-section (1) to apply to the whole or part of the benefit,

that sub-section does not apply to the benefit, or to that part of the benefit, as the case may be."

Section 26AFA was inserted into the Act by the Income Tax Assessment Amendment Bill (No. 2) 1984.

The proposed amendment was first introduced to Parliament by Income Tax Assessment Amendment Bill (No. 5) 1983. That provision was in the present legislated form of s. 26AFA except that it proposed retrospectivity to 1 July 1977. It was as a result of the retrospectivity that the Bill was rejected by the Senate. Bill No. 2 referred to above became first applicable to assessments after 7 December 1983.

In the absence of any legislative guidance as to how the expression ``the circumstances by reason of which the benefit is an excessive benefit'' is to be understood and applied, the Tribunal may have regard to relevant extrinsic materials. In this respect the accompanying Second Reading Speech gives some insight into the mischief which the section set out to remedy. It is set out in full:

``This Bill - unlike many Bills to amend the Income Tax law - covers but one subject.

Its need arises because of the decision taken by the opposition parties in the Senate and some other Senators to reject outright measures contained in a Bill passed by this House as the Income Tax Assessment Amendment Bill (No. 5) 1983.

The measures would counter some tax avoidance practices associated with employees' superannuation funds which are, by any test, blatant and contrived.

As I explained in my Second Reading Speech on the introduction of the earlier Bill, some proprietors of businesses, after establishing superannuation funds purportedly to provide superannuation benefits for their employees, wind-up the funds in circumstances where the accumulated assets of the funds are paid out,

ATC 2040
not to the employees, but to the proprietors themselves.

This happens after advantage has been taken of the considerable tax concessions provided for superannuation contributions and the income of the funds.

One technique adopted is to terminate the employees' employment under some pretence shortly before they would otherwise become entitled to substantial superannuation benefits from the funds.

Another is to make tax deductible contributions for workers who, in the ordinary course of events, do not stay long with their employer.

The benefits that are forfeited are then allocated to the proprietors who, technically as the sole remaining employees, take the whole of the accumulated assets.

The funds having been wound-up in this way, are not then able to meet any tax liability which, under the existing law, may fall to be met by them.

Not only does the revenue, and therefore the Australian taxpayer, suffer by these particularly distasteful practices, but the unsuspecting ordinary employees of companies are deprived of superannuation benefits accumulated in their name and ostensibly for their benefit.

It is difficult to imagine a more brazen abuse of the Taxation law.

Ingeniously planned to give the appearance of bona fide superannuation arrangements, these practices involve clear raids against the revenue and the unsuspecting employees, who are used as mere pawns in this particular unsavoury practice.

It is one where the losers are the taxpayers of Australia and the winners are those who seek to enjoy the benefits and privileges of living in this country without meeting their rightful share of the tax burden.

A policy of retrospective application of anti- avoidance legislation was one which we put before the people of Australia on 5 March last year and on which we were elected to Government.

That policy was confirmed by my colleague, the Minister for Finance, in a statement he made shortly after we came to office.

In the Government's view these tax avoidance practices are clearly in that category of schemes which we intended would be covered by our retrospectivity policy.

Not only are they of a most blatant kind, but they contain elements of fraud against employees, many of whom stood to benefit from many years' membership of a superannuation scheme which has been afforded substantial taxation benefits.

A technical explanation of the proposed section 26AFA is contained in the memorandum that was circulated to Honourable Members at the time of introduction of the Bill containing the original measures.

I commend the Bill to the House.''

The Explanatory Memorandum which accompanied the original Bill (No. 5) made similar references to the intended purpose of the section to counter the schemes mentioned in the Second Reading Speech above.

The respondent issued Income Tax Ruling 2274 on 10 April 1986. It sets forth the circumstances in which the respondent applies s. 26AFA(2) to mitigate the operation of subsec. (1) of s. 26AFA. The ruling sets out, in paragraph 2, certain conditions precedent for it to apply. These are, so far as is relevant, that:

"- the benefit is received after 7 December 1983;
- it was a benefit out of the assets of a superannuation fund to which s. 23F applied in relation to any year of income;
- the benefit is either a benefit that the taxpayer has no right to receive from the fund (sic) or an `excessive benefit'; and
- the Commissioner is satisfied that the benefit was received or obtained because the taxpayer was, or had been, a member of the fund."

The ruling qualifies the third point above in paragraph 3 by stipulating that s. 26AFA(2) cannot apply to a benefit that the taxpayer had no right to receive and to this extent the ruling is obscure.

ATC 2041

Paragraph 3 sets out the conditions where subsec. (2) would apply. These are that the benefit is excessive and:

"the Commissioner is satisfied that it would be unreasonable for subsec. (1) to apply, having regard to-

- the nature of the fund;
- the circumstances by reason of which the benefit was excessive; and
- other relevant matters relating to the receiving or obtaining of the benefit."

Paragraph 5 is particularly relevant as a guide in this instance. It provides:

" Ruling

5. Provided that it is a bona fide situation, with no tax avoidance connotations, subsec. 26AFA(2) should be applied where the excessive benefit arose fortuitously or in other circumstances beyond the effective control of the recipient or the employer. For example, subject to the proviso mentioned, the subsection would be applied where:

• the excessive benefit was accumulated during the period immediately preceding the time that the recipient ceased to be a member of the fund and it arose as a result of an unexpected increase in the rate of return from the fund's normal investments;

• (not relevant as it refers to a situation where the fund is being wound up); or

• (not relevant as it refers to a situation where the excessiveness arose as a result of a reduced final salary)."

Paragraph 6 is incidental only so far as it considers the situation where the excessive benefit is paid from a taxable fund but notwithstanding it does state in this respect:

``In such cases, where there are no tax avoidance connotations and where there has been no interference with the rights to benefits receivable by arm's length employees, subsec. (2) should be applied to override the operation of subsec. (1).''

Paragraph 7 provides that subsec. (2) may be applied to only part of the benefit.

The concluding paragraph, 8, makes it clear that subsec. (2) is not to be applied in circumstances where there has been an arrangement designed to abuse the exemption of the income of a superannuation fund provided by s. 23F or the provisions of the Act under which deductions are allowable for superannuation contributions. To that extent this aligns with the context of the Second Reading Speech above.

Counsel for the respondent conceded that the Pension Fund had no tax avoidance connotations. The Tribunal accepts that the Pension Fund was not arranged or conducted so as to abuse the exempt status under s. 23F nor the tax deductibility of contributions made to it by WAN. Indeed WAN suspended contributions in respect of the applicant and other members in similar positions to him when it became evident that their Members' accounts might become excessive as a result of transfers from reserves and the high earnings rate in 1986. The situation with the Pension Fund at all material times could only be regarded, on the evidence, as ``bona fide''. The Tribunal accepts that the applicant had no control over the conduct of the Pension Fund, nor was he in a position to influence the decisions on policy of WAN.

The Tribunal accepts that the Pension Fund was not structured to provide excessive benefits - on the evidence it was a conservative fund based on a contribution rate of 5% from each of the employer and the employee. Mr Barton expressed in evidence, a view not challenged by counsel for the respondent, that such a fund would not ordinarily become an excess benefits fund.

The critical question, in terms of IT 2274, is whether the excessive benefit, or some part of it, accumulated during the period immediately preceding the time that the recipient ceased to be a member of the fund and if so, whether it arose as a result of an unexpected increase in the rate of return from the fund's normal investments. The Tribunal finds that these circumstances prevailed.

The rate of return of a superannuation fund is measured by reference to its net income from investments (which in the case of the Pension Fund was from interest and dividends), its profits realised from disposal of its investments and the increase in market value of its assets. In the case of the Pension Fund the profits proximate to 31 August 1987 arose from disposal of its shares in Herald and Weekly Times Limited and notes in Queensland Press Limited. The increase in market value of the investments proximate to 31 August 1987 primarily related to the investments in

ATC 2042

ANZCAP Unit Trust and Equitylink Unit Trust since the majority of other securities had been disposed of by 30 June 1987 leaving a relatively minor investment in equities and mortgages, which accounted for an insignificant increase over cost at that time (Exhibit 54 at p. 181 of the bundle).

Mr Hunt in evidence, conceded that as a practical matter the respondent would regard, for the sake of IT 2274, events occurring within 12 months as those relevant to the period immediately preceding the time that the recipient ceased to be a member. In this respect reference was made during cross-examination to Exhibit 69 (p. 134 bundle) which is a copy of an internal Australian Taxation Office memorandum from the Acting Deputy Commissioner dated 7 May 1987 and states in relation to IT 2274:

``The ruling refers to instances where a benefit arose fortuitously e.g. a windfall profit in the last period and the large amount resulting from the revaluation of the Herald and Weekly Times shares following the takeover could be construed as a windfall profit arising in last 12 months.''

(p. 549 transcript).

The Tribunal regards such an interpretation as reasonable.

The respondent, through its witness Mr Hunt, argued that the large profit on disposal of the Herald and Weekly Times Limited shares and the notes in Queensland Press Limited was not unexpected. The respondent conceded that the gain from the take-over by News Limited was fortuitous. To ascertain the common understanding or ordinary use meaning of a word one may refer to an accepted dictionary definition of that word. The Macquarie Dictionary defines ``unexpected'' as ``unforeseen; surprising''.

Similarly, ``unexpected'' is defined in the Penguin English Dictionary as ``not expected, unforeseen''.

The Tribunal is satisfied on the evidence that the size of the gain from the realisation of the Herald and Weekly Times Limited shares and the notes in Queensland Press Limited, taken over by News Limited, could not have been expected as it could not have been foreseen - especially at the beginning of September 1986 which is the commencement of the prior 12 month period in question. Similarly, the gain in market value of the ANZCAP units and the Equitylink units, funded primarily from the proceeds of the disposal to News Limited, which was achieved around 31 August 1987 was not expected at the time of their acquisition at the beginning of 1987. The evidence illustrated by the graphs in Exhibit 58, which the Tribunal accepts as a proper illustration of the relative movement in market prices, shows a phenomenal rise in the value of these investments between May/June 1987 and the end of August 1987. Just as it would be folly to say it was foreseeable that the subsequent crash would occur in October 1987, so it is to say that the rise in market value as occurred between May and August 1987 was foreseeable. By their very nature such events are unexpected in the ordinary sense of that word. Actuarial predictions of the expected growth in superannuation fund investments are predicated on the basis of an assumption of an annual growth rate varying from 9% to 15%, that is, a 9% to 15% annual rate of return. These assumptions are fundamental to the respondent's Taxation Ruling IT 294 which sets guidelines for determining the level of contributions by employers to s. 23F funds so as to preserve their exempt status by not providing excessive benefits. Mr Barton gave evidence that the industry accepted these sort of guidelines. The rates of return experienced in the later part of 1986 and in 1987 prior to 31 August were fortuitous, unprecedented and largely unexpected.

IT 2274 goes no further. It leaves it open to the respondent to calculate the amount of the benefit in respect of which it would be regarded as appropriate to exercise the discretion in s. 26AFA(2) to not apply s. 26AFA(1). There was no evidence as to the Members' balances as at 1 September 1986. There was evidence of the increase in the value of the investments in ANZCAP units and Equitylink units as provided in Exhibit 58. But this alone would not provide a basis for an accurate measurement of the change in the value of the investments of the Pension Fund as a whole during the 12 month period to 31 August 1987.

The evidence shows that the Pension Fund was beginning to provide potentially excessive benefits, in relation to some individual members at least, if not in relation to the Pension Fund as a whole (the calculation was never made), around 30 June 1986. An

ATC 2043

indicative measure of that is found by reference to the schedules produced by Mr Barton in Exhibit 58, in relation to the applicant's hypothetical excessive balances at 30 June 1985, 1986 and 1987. That shows that on the basis of what is regarded by the Tribunal as the more appropriate methodology discussed above the applicant had a hypothetical excessive benefit of $2,788 at 30 June 1985, $15,090 at 30 June 1986 and was predicted to have an excess of $150,436 at 30 June 1987. These projections assumed a salary growth rate of 8% and an earnings rate (rate of return) of 9% per annum. They reflect the large transfers from reserves to the applicant's Member's account as experienced in the three years to 30 June 1986.

The Tribunal does not regard itself as precluded from making a determination just because there are no accurate measures of either the Pension Fund's level of benefits or those of the applicant at 1 September 1986 and for the Pension Fund as at 31 August 1987. The evidence available provides a basis to make a sufficient calculation apportioning the applicant's excessive benefit in the spirit of IT 2274.

In a paper presented on 7 May 1991 to a seminar for Officers of the Australian Taxation Office - Melbourne, Deputy President Thompson of this Tribunal had this to say:

``Finally, I think is (sic) necessary to refer to the decision of the Federal Court in Federal Commissioner of Taxation v Swift 89 ATC 5101 which reiterated, in the context of review by the Administrative Appeals Tribunal of objection decisions, the principle established by the Federal Court in Drake v Minister for Immigration and Ethnic Affairs (1957) 2 ALD 60 that, where the AAT is reviewing the exercise of a discretion, it is required to decide what is the preferable decision by having regard to the provisions of the Act under which it is made and all the relevant facts. In particular the Court observed:-

In the absence of any statutory direction, the Tribunal is not bound to apply the administrative policies by which the exercise of discretion under review is regulated at the primary decision-making level.

In particular it was not bound in Swift's case to apply Taxation Ruling IT 2063. It was generally entitled to take administrative policy into account as a relevant factor in the achieving, inter alia, of a desirable consistency in decision- making. The court acknowledged the desirability of such consistency and the part played by policy in achieving that but noted that it was possible to be consistently unjust or consistently wrong.''

(pp. 35-36)

The Tribunal accepts that this is an appropriate approach to the examination of the exercise of a discretionary power by the Commissioner of Taxation.

The Tribunal finds that even though the respondent was appraised of much of the evidence as has been given at the hearing it either ignored crucial aspects relating to the reasons for the level of benefits at 31 August 1987 or, it did not take such matters into account in exercising its discretion under s. 26AFA(2).

The Tribunal also finds that having regard to the evidence, especially in relation to the unexpected rise in the value of the Pension Fund's assets within 12 months of 31 August 1987, the respondent either did not apply or chose to ignore the provisions of its own administrative policy as contained in IT 2274, particularly with regard to paragraph 5.

Accepting that, under ordinary circumstances if a member's balance was in excess at 30 June 1986, using IT 2201 as a guide to measure that, then it is likely to remain in excess during the ensuing 12 months. The likely, or expected rate of increase in such an excess would be estimated by reference to the proportion of excess to the member's balance at the time. That is, it is reasonable to assume a trend over a 12 month or so period. Extrapolated this way, the excess, as a ratio of the total would be expected to be constant. So any extraordinary or unexpected increase (or decrease) in members' balances occurring in the ensuing 12 months would be reflected in what arose because of unexpected circumstances. The relevant unexpected circumstances in the present case have been fully discussed and comprise the increment arising in early 1987 as a result of the profit on disposal of the Herald and Weekly Times Limited shares and the Queensland Press Limited notes and the exceptional growth in the market value of the investments in ANZCAP units and Equitylink units.

ATC 2044

As an expedient to estimate the relative trend, under normal circumstances, of the ratio of the excess to the total benefit entitlement, the Tribunal resorts to the figures in Exhibit 58. These are applied as a basis for apportioning the excessive benefit of $412,323 between that which might have been foreseen and that which was unexpected as at 1 September 1986. For this purpose the closest proxies are the figures reflected in the schedule referred to for the applicant's hypothetical excess balances as at 30 June 1986 and 1987 of $15,090 and $150,436 respectively mentioned above.

The amount to be apportioned is the amount of $412,323 in excess of the hypothetical maximum benefit calculated by reference to IT 2201. Notwithstanding the earlier finding relating to reasonable benefit levels which indicated that the respondent had understated the amount by $701, the Tribunal adopts the amount of $173,357 as appropriate.

The amount of the expected increase therefore is pro-rated as:

$15,090/$150,436 × $173,357 = $17,389

The Tribunal finds that $17,389 is the appropriate amount which should not be treated as an amount to which s. 26AFA(2) should apply so as to take it from the operation of s. 26AFA(1). The balance is:

($150,436 − $15,090)/$150,436 × $173,357 = $155,968.

The Tribunal finds that $155,968, which, for convenience, it terms the unexpected excess portion, when added to the amount of $238,967 (calculated by the respondent as the maximum benefit), makes $394,935. The Tribunal finds that $394,935 is the amount which should be treated as an eligible termination payment by exercise of a discretion pursuant to s. 26AFA(2).

Counsel for the respondent placed some reliance on the decision of this Tribunal in Case Y44, 91 ATC 417, apparently the only known decision relating to the provision of s. 26AFA. Whatever may be said of that decision it is clear that it turns on very different facts from the present. Essential to the decision was the fact that the terms of the superannuation fund trust deed precluded a member from receiving a benefit which by reference to s. 23F was excessive.

This condition enshrined the purport of the respondent's guidelines, as embellished by the various Taxation Rulings, in the deed and gave them legal effect. The applicant in that case received a payment from the superannuation fund which was in excess of the maximum benefit level. In the present case there is no such condition in the Pension Fund trust deed. Therefore the various Income Tax Rulings remain policy guides only and do not have legal effect.

The other finding in Case Y44, that the applicant there did not resign or retire from his employment is not relevant to this decision so far as the payment from the Pension Fund is concerned. This Tribunal finds that the payment from the Pension Fund to the applicant was a payment to which the applicant had a right to receive, notwithstanding its finding that there was no sufficient retirement for the purposes of s. 26AC and s. 26AD. The definition of ``eligible termination payment'' in sub- paragraph (b) of subsec. (1) of s. 27A is quoted above and controls the classification of the amount for the purposes of assessment. The decision in McIntosh v FC of T 79 ATC 4325 is distinguished because it concerned the operation of the former s. 26(d) which was repealed when the present provisions of subdivision AA (s. 27A to 27J) were inserted by Act No. 47 of 1984.

The decision

The Tribunal decides:

(1) As to the sum of $6,804, this is assessable income pursuant to subsec. 25(1) or subsec. 26(e) as the amount, being 95% of the sum of $7,162 paid to the applicant as accrued long service leave, was not a payment in consequence of retirement from any office or employment or in consequence of the termination of any office or employment of the applicant. The respondent's objection decision pursuant, to s. 186 of the Act, is affirmed.

(2) As to the claim that $10,697 qualifies for a rebate under s. 160AA, because it was a lump sum amount received in respect of unused annual leave in consequence of the retirement of the taxpayer from an office or employment or in consequence of the termination of an office or employment of the applicant, the Tribunal finds that there was no relevant retirement from or termination of an office or employment. The respondent's objection decision pursuant to s. 186 of the Act is affirmed.

ATC 2045

(3) The sum of $173,357 (the total of payments made to the applicant on 31 August 1987 of $88,412 and to the Australian Taxation Office on his behalf of $84,945 [T221]) and together with two other payments made on 31 August 1987 ($234,155) and on 12 October 1987 ($4,812) respectively [T221] makes a total of $412,323 paid to the applicant from the Pension Fund. In this respect, the Tribunal decides:

(i) That the applicant ceased to be a Member of the fund on 31 August 1987.
(ii) At all material times the management and conduct of the Pension Fund was outside the control and influence of the applicant.
(iii) That the payment of the total benefit of $412,323 is an amount to which the applicant had a right to receive from the Pension Fund.
(iv) That the said amount of $412,323 is an excessive benefit received by the applicant out of the assets of a s. 23F fund.
(v) That the respondent was justified in being satisfied that it would be unreasonable for subsec. 26AFA(1) to apply to the whole of the excessive benefit.
(vi) That the calculation by the respondent that resulted in $238,967 [T223] being a proper amount of the benefit in terms of sub-paragraph 23F(2)(h) which would not be regarded as excessive is agreed but not so that it represents the entire portion which should be so treated.
(vii) That the benefit became excessive due to three principal factors affecting the fund; namely the crediting of the Members' Accounts with the Reserves; the increase in market value of the Pension Fund's investments in the years of income from 30 June 1985 and the capital profit realised upon the take-over in or about December 1986 of a principal part of the fund's investment portfolio; with the increment in the market value of the investment portfolio from that time.
(viii) That the Tribunal is satisfied that the profit realised on the shares (referred to in (vii) above), to the extent that it exceeded the market value of those securities as at 30 June 1986 and the increases in the market value of portfolio securities in ANZCAP and Equitylink unit trusts was unexpected.
(ix) That in addition to having treated the sum of $238,967 as part of the excessive benefit to which subsec. 26AFA(2) should apply, it is also proper to apply paragraph 5 of the respondent's Taxation Ruling IT 2274, to arrive at a further amount which should be excised from the excessive benefit in terms of subsec. 26AFA(2). This additional excision relates to the unexpected increase in the applicant's Member's Account due to the capital profit realised on disposal of the securities and the increase in market value of securities within 12 months of the time the applicant ceased to be a Member of the fund, but only to the extent that that capital profit and increase were not anticipated as at 30 June 1986.
(x) That this amount shall be $155,968 calculated as:
- ($150,436 − $15,090)/$150,436 × $173,356.

The respondent's objection decision pursuant to s. 186 to confirm the assessment of the sum of $173,357 pursuant to subsec. 25(1) or subsec. 26(e) is set aside and instead the Tribunal decides that the said sum of $412,324 be assessed as to $17,389 pursuant to subsec. 25(1) and the balance being $394,935, which includes the aforementioned $238,967, to be treated as an eligible termination payment as defined in subparagraph 27A(1)(b).

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