CASE 35/95

Members:
DJ Trowse M

Tribunal:
Administrative Appeals Tribunal

Decision date: 10 May 1995

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DJ Trowse (Member)

The issue in this reference is whether the applicant has been assessed to the correct amount of income tax in respect of a lump sum payment received during the 1992 financial year. The amount received is composed of accruals from earlier years of income and thus the necessity to consider whether the applicant is entitled to a rebate of tax in accordance with the provisions set out in Subdivision AB of Division 17 of Part III of the Income Tax Assessment Act 1936 (``the Act''). The notion of the instalment deduction previously made from the lump sum at the time of payment being a ``final'' tax was also advanced by the applicant and, in fact, it seems that such a proposition is the cornerstone of his appeal. There is no dispute that the lump sum payment represents assessable income; what is in contention is the method to be applied in the making of the assessment.

2. The Tribunal received in evidence the documents lodged by the respondent pursuant to s. 37 of the Administrative Appeals Tribunal Act 1975 (T1-T11), together with five exhibits, two tendered by the applicant (Exhibits A1-A2) and three by the respondent (Exhibits R1-R3). The applicant represented himself and the respondent was represented by one of his officers.

3. The lump sum receipt is related to the applicant's employment with the Australian Army which, because of a military-induced injury, was terminated on 19 June 1985. The services rendered entitled the applicant to an Invalid Class A pension which at first instance was to be effective from 15 March 1988. Ultimately, it was decided that the date of effect be back dated to 19 June 1985 and it was that decision which gave rise to an entitlement of pension arrears totalling $64,594. It was accepted that this amount had accrued during the period 19 June 1985 to 11 March 1988 and that the apportionment between the relevant financial years was as follows:

     1985 & 1986              $21,990
     1987                     $23,579
     1988                     $19,025
                              -------
                              $64,594
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4. Acting in accordance with the provisions contained in s. 221C of the Act and regulation 82 of the Income Tax Regulations, the employer deducted from the entitlement an instalment of $14,372; that is, an amount ascertained by multiplying 22.25 cents by $64,594. What remained was paid to the applicant in December 1991.

5. The purpose of Subdivision AB of Division 17 is to overcome possible inequities where more tax may be payable in the year of the receipt than would have been payable had the entitlement been taxed in the years of accrual. Such a position is rectified by means of a rebate which, in general terms, is calculated as being the difference between the extra amount of tax payable in the year of receipt because of the lump sum and the amount of tax which would have been payable had the lump sum been taxed as it accrued.

6. The Tribunal has considered the definitions contained in s. 159ZR(1) of the Act and is satisfied that:

• • the years 1985, 1986, 1987 and 1988 are ``accrual years'';
• • the years 1987 and 1988 are ``recent accrual years'';
• • the years 1985 and 1986 are ``distant accrual years'';
• • the ``annual arrears amount'' for each of the years is as stated in paragraph 3;
• • the pension accrued is ``eligible income'';

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  ATC 326

• • the lump sum payment of $64,594 is an ``eligible lump sum''.

Furthermore, the Tribunal accepts that the lump sum which accrued in the earlier years is not less than 10% of the taxable income in the year of receipt after excluding the lump sum, and on this basis the threshold eligibility for rebate test set out in s. 159ZRA is satisfied.

7. The Tribunal has had due regard to the formulas contained in ss. 159ZRB, 159ZRC and 159ZRD, all of which relate to the calculation of the equalizing rebate. That information when applied to the facts of this reference indicates that the tax attributable to the receipt of the lump sum in the 1992 year is less than the aggregate of taxes that would have been payable on the accruals had they been brought to account in the accruals years. A surprising result but one explained by a decline in the marginal rates of tax over the years being considered. In that circumstance, the amount of the rebate calculated in accordance with Subdivision AB is nil.

8. The applicant's submission that the instalment deduction of $14,372 should be regarded as a final tax lacks substance. An examination of Division 2 of Part VI of the Act, and in particular s. 221H, makes it abundantly clear that amounts collected by way of instalments are no more than payments on account of tax to be assessed at some time in the future. Taxpayers are required to furnish a return on a yearly basis. Items of assessable income from all sources are brought to account and aggregated, and from this total allowable outgoings are deducted. In this way an amount known as the taxable income is calculated and it is on this figure that tax is assessed. Instalment deductions previously collected during the year are then credited against the tax assessed and what remains, subject to other possible adjustment which are of no concern here, is either the amount payable or refundable.

9. For the purpose of ascertaining the taxable income of the applicant for the 1992 year, the lump sum payment must be added to the other items of assessable income derived during that year. After due allowance for qualifying outgoings incurred in that same period, the amount of taxable income is arrived at, and it is that figure that determines the rate of tax to be assessed. The tax assessed is then reduced by the instalment deductions made either from the lump sum payment or any other receipts of salary and wages, and by this means the actual amount payable or refundable is determined. There is no statutory authority which permits any other basis for the annual assessment of income tax and for this reason the submission that the lump sum, having already been subjected to an instalment deduction, be excluded from the annual assessment process is rejected.

10. In making the above submission, the applicant placed considerable emphasis on the advice, allegedly forthcoming from the respondent at an earlier point in time, that the instalment deduction of $14,372 was the only tax payable on the lump sum. It was the applicant's contention that the respondent should be bound by that prior notification. The Tribunal accepts that the applicant spoke with a representative of the employer regarding the correct amount of tax to be withheld from the lump sum entitlement and that the representative then sought instructions from the office of the respondent as to method to be applied in arriving at the instalment deduction. Moreover, the Tribunal is satisfied that the respondent confirmed the instalment to be an amount equivalent to 22.25% of the gross entitlement and that such method was then communicated to the applicant by the representative of the employer. Apparently the applicant interpreted that communique to mean that, having borne the instalment deduction, no further tax liability would arise in respect of the lump sum payment.

11. The Tribunal is of the opinion that the advice supplied by the respondent to the employer contained no error. The rate advised was in accordance with that prescribed in regulation 82 and thus the deduction of $14,372 was in fact the correct amount. The only error occurred when the applicant made the assumption that the instalment deduction represented a final tax. The Tribunal finds that there was no foundation for the assumption so made. In any event, the Tribunal is of the view that in the circumstances of this reference, the respondent is not bound by erroneous advice. As Kitto J stated in the case of
FC of T v Wade (1951) 9 ATD 337 at 344; (1951) 84 CLR 105 at 117 - ``No conduct on the part of the commissioner could operate as an estoppel against the operation of the Act''.

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ATC 327

12. For the reasons enunciated above, the Tribunal affirms the respondent's decision on the objection.