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CASE 26/96

Members:
BM Forrest DP

Tribunal:
Administrative Appeals Tribunal

Decision date: 21 March 1996

BM Forrest (Deputy President)

This is an application for review of a decision of the Commissioner of Taxation (``the Commissioner'') to disallow an objection against a private ruling made on 8 December 1994 under Part IVAA of the Taxation Administration Act 1953.

The issue in dispute is whether the pre 1 July 1983 component of the undeducted purchase price (``UPP'') of the pension received by the applicant from his personal superannuation fund can be recalculated at the time that he elected to convert his lump sum payment entitlement to a pension.

At the hearing of this matter the applicant appeared on his own behalf. The Commissioner was represented by Mr Foley, an officer of the Australian Taxation Office (``ATO'').

The background facts are not in dispute. In June 1991 the applicant, an accountant, established a personal superannuation fund. The fund is governed by a Trust Deed. Under the deed the applicant is a Category 1 Member. A Category 1 Member retiring from the workforce on or after his 55th birthday is entitled to have the whole or any part of his lump sum benefit applied in the purchase of a pension or annuity or paid to him in a lump sum. In February 1992 the applicant ``rolled over'' into the fund eligible termination payments from two other superannuation funds, the details of which do not raise any matter of controversy. In addition to these two payments he made other contributions to the fund from time to time. In September 1993 the amount standing to the credit of the applicant in the fund was $565,000. He withdrew $165,000 which represented a withdrawal of undeducted contributions. The amount of $400,000 remaining in the fund was also, at the time, the amount of the reasonable benefit limit. On 6 September 1993 the applicant elected to receive from that day his lump sum benefit in the form of a pension, he having satisfied the retirement and age preconditions under the Fund Rules to enable that pension to be paid.

In relation to the $400,000 the applicant completed a statement of termination payment dated 6 September 1993 in which the $400,000 was said to be the amount ``rolled over'' and the fund from which the payment was said to have been made was also nominated in the statement as the roll over institution.

Correspondence ensued between the applicant and the ATO as to the calculation of the annual deductible amount the applicant

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claimed in relation to the pension he was receiving from the fund from 6 September 1993.

Subsequently in the private ruling which is under challenge in this review the Commissioner denied a request by the applicant for a recalculation of the amount of the pre 1 July 1983 component of the ``UPP'' as that expression is defined in s. 27A(1) of the Income Tax Assessment Act 1936 (``the Act'') of a pension purchased with rolled over termination payments.

``27A(1) In this Subdivision, unless the contrary intention appears:

...

`eligible termination payment' , in relation to a taxpayer, means:

  • ...
  • (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;
    • (ii) to which paragraph (d), (da), (e) or (ga) applies; or
    • (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 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;

...

`undeducted purchase price' , in relation to an annuity or superannuation pension, means the sum of-

  • (a) so much of the purchase price of the annuity or superannuation pension as was paid before 1 July 1983 and-
    • (i) has not been, and will not be, an allowable deduction;
    • (ii) has not been, and is not to be, treated as a rebatable amount for the purpose of section 159N as in force at any time before the commencement of the Taxation Laws Amendment Act (No. 2) 1985; and
    • (iii) is not an amount in respect of which a rebate of income tax has been allowed, or is allowable, in assessments for income tax under this Act or any previous law of the Commonwealth; and
  • (b) so much of the purchase price of the annuity or superannuation pension as was paid on or after 1 July 1983 and has not been, and will not be, an allowable deduction, reduced by so much of the purchase price of the annuity or superannuation pension as is taken, by virtue of section 27D, to consist of an amount to which sub-subparagraph 27D(1)(b)(iii)(A) or (B) applies;''

``27H(1) The assessable income of a taxpayer of a year of income shall include-

  • (a) the amount of any annuity derived by the taxpayer during the year of income excluding, in the case of an annuity that has been purchased, any amount that, in accordance with the succeeding provisions of this section, is the deductible amount in relation to the annuity in relation to the year of income; and
  • (b) the amount of any payment made to the taxpayer during the year of income as a supplement to an annuity, whether the payment is made voluntarily, by agreement or by compulsion of law and whether or not the payment is one of a series of recurrent payments.

27H(2) Subject to sub-sections (3) and (3A), the deductible amount in relation to an annuity derived by a taxpayer during a year of income is the amount (if any) ascertained in accordance with the formula 

                  A (B - C),
                  ---------
                     D

where-

  • A is the relevant share in relation to the annuity in relation to the taxpayer in relation to the year of income;
  • B is the amount of the undeducted purchase price of the annuity;
  • C is-
    • (a) if there is a residual capital value in relation to the annuity and that residual capital value is specified in the agreement by virtue of which the

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      annuity is payable or is capable of being ascertained from the terms of that agreement at the time when the annuity is first derived - that residual capital value; or
    • (b) in any other case - nil; and
  • D is the relevant number in relation to the annuity.

27H(3) Subject to sub-section (3A), where the Commissioner is of the opinion that the deductible amount ascertained in accordance with sub-section (2) is inappropriate having regard to-

  • (a) the terms and conditions applying to the annuity; and
  • (b) such other matters as the Commissioner considers relevant,

the deductible amount in relation to the annuity derived by the taxpayer during the year of income is so much of the annuity as, in the opinion of the Commissioner, represents the undeducted purchase price having regard to-

  • (c) the terms and conditions applying to the annuity;
  • (d) any certificate or certificates of an actuary or actuaries stating the extent to which, in the opinion of the actuary or actuaries, the amount of the annuity derived by the taxpayer during the year of income represents the undeducted purchase price; and
  • (e) such other matters as the Commissioner considers relevant.''

The Fund Rules relevantly provide:

``R1.6 Category 1 Members In the event of a Category 1 Member retiring from the work-force on or after his 55th birthday he shall, subject to Clause C9.8, be entitled to a lump sum Benefit equal to the amount standing to the credit of his Member's Account. The benefit shall be payable pursuant to Rule R.1.8(a).''

``R1.8 Payment of Retirement Benefits

  • (a) A Category 1 Member retiring pursuant to Rule R1.6 shall instruct the Trustee whether he wishes his Benefit to be payable in accordance with paragraph (i) or (ii) of this Rule R1.8(a) or a combination of them and, unless the Trustee is aware of some overriding reason for not complying with the Member's request, his instructions shall be carried out. The Member's lump sum Benefit shall be:
    • (i) applied in the purchase of a Pension or an annuity pursuant to Clauses C9.15 and C9.16 or Clause C9.17; or
    • (ii) paid to the Member.''

``C9.15 Benefit in the form of a Pension.

At the request of a Member or at the option of the Trustee in the case of a Benefit payable to a Beneficiary, the whole or any part of a lump sum Benefit may be paid instead in the form of a Pension, subject to any such conversion being acceptable to the Commissioner and being made at the absolute and sole discretion of the Trustee who may take into account any matters it considers appropriate.

Whether payable pursuant to this Clause or in terms of the Rules, any Pension shall, subject to Clause C9.17, be paid from the Member's Account. Any such Pension will be payable only to the extent the Member's Account will permit and no instalment of Pension will be payable which would exceed the amount standing to the credit of the Member's Account immediately prior to such payment.

The amount of the Pension and the conditions under which it will be payable shall, subject to any requirements of the Commissioner, be determined by the Trustee on the advice of the Actuary.

C9.16 Conditions applicable to Pension payments.

If any Benefit under the Fund is payable in the form of a Pension, the Pension shall be payable in such manner, being acceptable to the Commissioner, as the Trustee shall, with the approval of the Employer, decide, including payment for a term certain, and shall be payable by instalments which may be equal or unequal (subject to any law to the contrary), and on such dates as the Trustee determines.

C9.17 Trustee may effect annuity.

Where a Benefit is payable in the form of:

  • (a) a lump sum; at the request of and after consultation with the Member or at the discretion of the Trustee in the case

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    of a lump sum payable to a Beneficiary; or
  • (b) a Pension;

the Trustee may purchase an annuity of such type, and on such terms and conditions as it may decide, subject to being acceptable to the Commissioner, with an insurance company or other body in satisfaction of part or all of the entitlement otherwise payable to the Member or Beneficiary under this Deed.''

``Benefit'' is defined in C1.1 as:

``C1.1 In this Deed unless the context otherwise requires:

Benefit means any amount paid or payable by the Trustee out of the Fund pursuant to this Deed to or in respect of a Member.''

In seeking to have the pre 1 July 1983 component of the UPP of the pension he received from the fund calculated at the time (6 September 1993) he elected to convert the lump sum benefit to a pension, the applicant contended that the conversion of the lump sum to a pension effected an eligible termination payment (``ETP'') as defined in s. 27A(1) and therefore the UPP deductible amount should be calculated by reference to the components of this ETP. The argument advanced by the applicant was that when his benefit was applied in the purchase of the pension, there was a payment to him of a lump sum, in accordance with the Fund Rules, which was an ETP. It would follow on this analysis that the number of days in the eligible service period would be greater resulting in a higher deductible amount.

Mr Foley maintained that the pre 1 July 1983 components are not recalculated at the time the pension commenced to be payable in determining the UPP of the pension.

The practical effect of the applicant's contention, if accepted, would be to entitle him to a deduction of $16,961 per annum instead of a deduction of $14,086 per annum after applying the formula in s. 27H(2), which is the contention of the Commissioner.

Subdivision AA of Division 2 Part III of the Act governs the tax treatment of eligible termination payments, which are usually lump sums and pension and annuity payments. An exhaustive definition of the payments which are ETPs is contained in s. 27A(1). The various components of an ETP are set out in s. 27AA.

Section 27H deals with pension and annuity payments which first commenced to be payable on or after 1 July 1983. It provides that the assessable income shall include the amount of any annuity (which by definition includes a superannuation pension), less the ``deductible amount'' as ascertained in accordance with the formula in s. 27H(2). One of the components of the formula is the UPP and in essence the greater the UPP, the greater the deduction. The deductible amount is usually calculated by dividing the total UPP by the life expectancy in years of the person. In the present case the UPP includes the components of the two ETPs ``rolled over'' into the applicant's personal superannuation fund in February 1992 together with the undeducted contributions; that is, the balance of the applicant's contributions to the fund for which no benefit by way of deduction is allowable.

In support of his argument the applicant referred to an ATO publication, ``Statement of Termination Payments (July 1994)''. Under the heading, ``What is an ETP?'' it is stated that:

``Payments to a member or ex-member, or following the death of a member, from a superannuation fund that is, or has been, a complying superannuation fund, where the payments are made in accordance with the fund's rules (but not payments that are income according to ordinary concepts, such as pension or annuity payments).''

The applicant cannot gain much comfort from that extract. The words in parenthesis seem to make that clear. Nor do the passages to which he referred in another guide, the ATO publication ``Superannuation and Other Eligible Termination Payments'' assist his argument. However, neither publication contains any legislative prescription. Under the Act the payment of the pension is income of the applicant and as such falls within the exclusion (sub-para (1)) to the category of payments from a superannuation fund falling within the definition of ETP in para. (b) of s. 27A(1).

The argument that the applicant is receiving a lump sum benefit irrespective of whether it is paid as a lump sum or applied in the purchase of a pension cannot be sustained. The election which the applicant made on 6 September 1993 had the effect of converting his lump sum benefit from the Fund into a pension. It was not withdrawn from the Fund or ``rolled over'' to another fund. It was paid instead in the form of

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a pension (Rule C9.15). It was not a payment which fell within the definition of an ETP.

As a consequence of my finding that no ETP took place on 6 September 1993 the applicant is not entitled to use the formula in s. 27D5(c), which in operation would result in a higher pre 1 July 1983 component and in turn a higher UPP than is the case with the Commissioner's contention.

For these reasons the decision under review will be affirmed.


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