CASE 24/97
Members:GL McDonald DP
Tribunal:
Administrative Appeals Tribunal
GL McDonald (Deputy President), DL Elsum and WG McLean (Members)
This is an application for review of a decision concerning an income tax assessment. The taxpayer (``the applicant'') claimed a deduction of $45,750 for a contribution to a non-employer sponsored superannuation fund of $60,000 in his tax return for the year ended 30 June 1994. The deduction was claimed pursuant to s 82AAT of the Income Tax Assessment Act 1936 (Cth) (``the Tax Act''). The Commissioner of Taxation (``the respondent'') disallowed the deduction, on the basis that the applicant was not an eligible person for the purposes of s 82AAT. The applicant has sought review of that decision. At the hearing, the applicant was represented by Mr C. Wallis of counsel, and Ms J. Batrouney of counsel appeared for the respondent.
2. Many of the facts surrounding this application were not in dispute. They are as follows. The applicant had a long involvement in the EH Loans Pty. Ltd. (``the Company''). He was a director of the company from 27 February 1969 until 26 October 1993. The applicant was also the secretary of the company, and owned 2203 of the total of 2204 shares issued by the company. The business of the company was to provide loans for people to buy homes. During the last recession, the company encountered problems associated with the general decline in economic conditions. Many of its customers failed to make the scheduled payments on loans owing to the company. By 1993 the company began to experience severe liquidity problems, and its future was uncertain. The company was involved in extensive litigation in the Supreme Court of Victoria, which is not presently relevant. As a result of continued defaults by borrowers of the company, litigation costs, and the refusal of the Supreme Court of Victoria to order a stay in one case involving the company, the directors of the company sought to appoint a liquidator. Mr Leo Lumsden was appointed administrator of the company in early 1994.
3. During the early period of Mr Lumsden's administration, no employer funded superannuation contribution was made in respect of the applicant. The applicant tendered a deposit slip, which indicated that the payment was made on June 24 1994 (see exhibit B). By a letter dated 13 February 1995, the applicant's tax agent informed the respondent that the administrator had refused to make an employer funded superannuation in respect of the applicant. The respondent made a contribution of around $60,000 to another fund (``the J Super Fund''), and claimed the deduction noted above. On 6 February 1996, the Administrator sent a Superannuation Guarantee Statement, and a cheque for $1,726.22 to the respondent. On 1 March 1996, a Superannuation Guarantee Credit voucher was issued for this amount. The administrator made the payment some time after one would expect it to be done. In a letter that accompanied the payment, the administrator explained that he was unaware of the outstanding charge, and requested that the Deputy Commissioner exercise his discretion to waive any further penalties in respect of the payment (see annexure C to exhibit 2). The overlapping superannuation payments create a difficulty in respect of the applicant's attempt to claim a deduction for the $60,000 contribution. The Tribunal will return to this issue later, but it should be noted that, subject to minor exceptions and other limits upon deductions contained in s 82AAT(1E)-(2C), a taxpayer cannot claim a deduction for a personal
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contribution in respect of a period for which an employer funded contribution was properly made. In addition, there was dispute between the parties as to whether, in the period before the applicant made his personal contribution, the applicant believed that there was any prospect that Mr Lumsden would make any superannuation guarantee payment for the applicant on behalf of the company. The Tribunal will first examine the relevant legislation before returning to those facts.4. Some explanation of the Superannuation Guarantee (Administration) Act 1992 (Cth) (``the Superannuation Act'') is useful. The Superannuation Act creates a scheme designed to ensure that employer funded superannuation payments are properly made. The Act requires that employers provide a minimum level of superannuation contribution for employees, in the form of employer funded contributions to a ``complying fund'', (defined in s 7 of the Superannuation Act). It was not disputed between the parties that the applicant was an employee for whom payments had to be made. Part VI of the Superannuation Act establishes a mechanism for collection of the charge. An employer is required to lodge an annual statement, before August 14, in respect of any responsibilities under the Act for the most recent financial year. The Act makes provision for the payment of employer funded contributions where an employer company has been placed into liquidation. For the purposes of the ranking and payments of debts by a liquidator, unpaid employer funded superannuation contributions are deemed to have the same standing as unpaid wages as provided by the Corporations Law: Superannuation Act ss 52-3.
5. Where a taxpayer does not receive employer funded superannuation contributions, the Tax Act provides that he or she may claim a deduction for personal contributions, if he or she is an ``eligible person''. Section 82AAS(2) of the Tax Act defines ``eligible person'' in a negative sense. So far as is relevant, subsection (2) provides that a person is not a relevant person if:
``... during the whole or a part of the year of income, circumstances existed by reason of which it was reasonable to expect that superannuation benefits would be provided for the relevant person... by someone other than the relevant person.''
6. The Tribunal heard detailed submissions from both parties as to whether, in the circumstances of this application, it was ``reasonable to expect'' that superannuation benefits would be provided for the applicant. It is useful to preface the consideration of this evidence with an explanation of the approach that the Tribunal is required to take to determine whether it is ``reasonable to expect'' that superannuation benefits would be provided for the purposes of s 82AAS(2). Several of the decisions brought to the attention of the Tribunal on the interpretation of this section are important to this application. It is clear that the issue of whether, in any particular case, it is ``reasonable to expect'' that benefits will be provided, is to be decided by application of an objective test:
FC of T v McCabe 90 ATC 4968, per Davies J. Counsel for the respondent submitted that, as the test is an objective one, the relevant question for the Tribunal is whether the Commissioner was entitled to expect that the charge would be paid (see paragraphs 8-9 of the respondent's outline of argument). The Tribunal would hesitate to accept such a submission, if it was understood as suggesting that the Commissioner would somehow apply a subjective standard. The Tribunal is of the opinion that the Commissioner must ask what the facts of the case at hand demonstrate, in an objective sense. The Tribunal must adopt a similar approach upon review of a decision of the Commissioner.
7. The respondent further submitted that the Tribunal should take a cautious approach to the decision of the Full Court of the Federal Court in
FC of T v Arklay 89 ATC 4563. There the Full Court held that, although the test for the purposes of s 82AAS(2) is an objective one, the subjective intention of the taxpayer could be relevant. The Full Court was also of the view that the stated intention of the taxpayer, and any possible receipt of a superannuation benefit, would very often be the most important issues in any such case. The Court stated (at 4568) that:
``When applying sec. 82AAS the Commissioner should consider all the relevant facts and circumstances, including the taxpayer's subjective intentions, if they shed light on the matter, that pertain to the particular year of income which is in question. The existence of a potential superannuation benefit and the expressed
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relevant intentions of the taxpayer will usually be the most important facts and circumstances to be considered in a given case.''
8. The Court was of the opinion that, where the taxpayer remained in a particular employment for along period, but always expressed an intention to leave that employment (as was alleged in Arklay's case), any expression of such an intention might be given less weight by a decision maker than would normally be the case in respect of any expression of intention by a taxpayer. On the same vein the Court added (at p 4568) that:
``... the mere fact that a superannuation benefit is available on the occurrence of some contingency, however remote, although relevant, will not have the significance it would have in a case where there is a real prospect of the taxpayer receiving a benefit...''
9. The applicant filed a witness statement in support of his claim for the deduction (exhibit A). In his statement the applicant summarised the various problems experienced by the company in 1993. He posted his resignation as a director of the company on 31 December 1993. He stated that he believed that, upon the appointment of a administrator to the company, the directors no longer had effective control of the company, and that the company was in the hands of the administrator (para 16). The applicant stated that the administrator said that he would not pay the applicant any money or director's fees in relation to any service as a director after 1 January 1994 (para 17). According to the applicant, the liquidator also indicated that he would not make any superannuation payments on behalf of the company to the applicant for either payments that were due to be paid, or would become due, to the applicant (para 19). The applicant stated that the administrator confirmed this advice both orally and in writing, somewhere in the period of February to May 1994 (paras 17-19). The applicant further stated that the administrator had told him that he did not believe that the company was liable to pay any superannuation in respect of the applicant and that, in any case, there were insufficient funds to make any such payment (para 21). The applicant stated that he then made a payment of his own funds into a personal superannuation fund. He stated that he made the payment in reliance on the administrator's advice. The applicant also stated that, at the time he made his own payment, he believed that no-one would make a payment on his behalf.
10. The applicant also gave evidence before the Tribunal, most of which confirmed the substance of his statement. The applicant did, however, provide some useful further explanations. The applicant was at pains to explain that he had done everything possible to avert the liquidation of the company. He also explained that, for a period, he had hoped that the company could somehow continue trading in some form or another. The applicant gave evidence that, in the period leading up to the appointment of a liquidator, he had hoped that the company might somehow be commercially revived and eventually sold as a going concern. In his written statement the applicant asserted that he had made a personal superannuation contribution partly in order to obtain a benefit for him, and his dependants in the event of his death (para 24, exh A). In his evidence to the Tribunal, the applicant frankly admitted that he was very mindful of the potential tax advantage that he stood to gain from his significant contribution. The Tribunal is also mindful of the fact that the applicant has 30 years of experience in the law, and should have been aware that payments of directors fees gives rise to an obligation in the company to pay a superannuation guarantee charge, and that such a payment would have priority to the company's creditors.
11. The respondent submitted that the applicant was not an eligible person, for the purposes of the relevant provision, because during the financial year ended 30 June 1994 circumstances existed by which it was reasonable to expect that superannuation benefits would be provided to the applicant. The respondent raised the following facts in support: there was a payment of the superannuation guarantee charge in respect of the relevant period; by the operation of s 82AAS(4) of the Tax Act, this payment was regarded as an employer contribution for the purposes of s 82AAS(2); and, by operation of s 82AAS(4)(f), the payment was deemed to have been made in the year to which the charge relates; and there was no evidence to support the assertion of the applicant, that the administrator had refused to make a payment as
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required in respect of the applicant long before the payment was actually made.12. The respondent drew support from a letter written by Mr M, of May and Partners Pty Ltd, dated 3 March 1995 (exhibit 1). In the letter Mr M stated that he was instructed by the directors to write to the administrator about the issue of superannuation payments. The letter states that, before the company was placed in the hands of a liquidator, the directors had resolved not to make any payment of superannuation because of the ``severe financial difficulties facing the company''. The letter stated that the directors believed that it would be ``most improper for the company to pay the superannuation given the circumstances facing depositors [of the company]''. The letter added that the applicant and another director would ``assist [the administrator]... in resisting any claims in this regard''. It should also be noted that there is no mention in the letter of any alleged statements made by the administrator, or his agents, to the effect that the administrator refused to make the superannuation contribution on behalf of the directors of the company. This letter does not accord with some of the applicant's submissions. In the opinion of the Tribunal, the letter supports the view that the administrator had not made any statements to the directors about superannuation payments. Rather the letter suggests that the directors had determined to raise this issue of their own motion.
13. The respondent filed a witness statement by the administrator (exhibit 2). The administrator also gave evidence before the Tribunal, which was to substantially the same effect as his statement. The administrator did not believe that he had given any advice to the applicant which suggested that a superannuation payment would not be made in respect of the applicant. The administrator stated he had no recollection or record of having made any such statement. He further stated that he did not believe that any member of his staff had ever discussed the issue of superannuation with the applicant. According to the administrator, at about March 1994 the applicant proposed that he and the other directors of the company be retained on a monthly fee of $1,000 to assist the administrator. The witness statement of the administrator had a copy of the letter from the applicant, dated 24 May 1994, in which the applicant makes clear reference to such a proposal (see annexure B to exhibit 2). It should be noted that, in this letter, the applicant asserted that the liquidator had agreed to make such payments. The letter concludes with a statement that some accounts for disbursements rendered by Directors were enclosed.
14. In a letter dated 10 June 1994, the administrator refused to put this proposal to the company's creditors because he was of the opinion that the directors should only be paid for services that were expressly requested by an administrator. The administrator believed that there was no benefit in placing the applicant and the other director on some form of retainer (see annexure A to exhibit 2).
15. The Tribunal is not satisfied that the applicant has established the grounds for the deduction claimed. There is no doubt that the applicant bears the onus of proof in this application: Taxation Administration Act 1953 (Cth) s 14ZZK(b). The Tribunal adopts and applies the decision of
FC of T v Arklay 89 ATC 4563. In the opinion of the Tribunal, the decision of the Full Court of the Federal Court requires that any assessment of whether it was reasonable to expect that an employer funded contribution should be made upon a consideration of all of the relevant facts of a case. The Tribunal also accepts that both the existence of a potential superannuation benefit and the expressed relevant intentions of the taxpayer will normally be the most important matters to be considered. It was not suggested in Arklay's case, however, that any expressions of the intention of a taxpayer should be taken at face value. Indeed the Court emphasised that the test was ultimately an objective one, however one draws upon the expressed intentions of the taxpayer. Accordingly, the Tribunal turns to the evidence to determine what it was reasonable to expect in the circumstances of this case.
16. The applicant's case was effectively based on his own testimony. In the opinion of the Tribunal this evidence establishes, at best, a tenuous case in support of the deduction claimed. In the view of the Tribunal the evidence adduced by the respondent is much stronger than that of the applicant. The evidence of the applicant suggested that he had been told by the administrator that no employer funded superannuation contributions would be made. If this evidence is accepted, the applicant would
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have provided useful evidence to support the view that he was an eligible person for the purposes of s 82AAS(2) of the Tax Act. However, the Tribunal is not satisfied, on the evidence placed before it, that the administrator had stated to the applicant, or otherwise given any indication, that an employer funded superannuation would not be made for him.17. The Tribunal believes that much of the evidence placed before it supports the proposition that the applicant would have realised that the administrator would have eventually made any required employer funded superannuation contribution. By the applicant's own evidence the management of the affairs of the company involved a great number of tasks. It is clear that the role of the administrator has been long and arduous. Accordingly, it is not unnatural to expect that the payments of employer funded superannuation would have been made later than normal. It is another matter altogether to suggest that the payment would never be made.
18. The Tribunal is satisfied that the Directors made a suggestion to the administrator, that they be paid a sum of $1,000 per month for any services that they might be required to provide to the administrator. The Tribunal makes no comment on the propriety of that request. It does, however, draw an inference from the request. The Tribunal believes that the making of such a request by the Directors supports the proposition that it was not reasonable for the applicant to expect that the employer funded superannuation payment would not be made on his behalf. In the view of the Tribunal, the various letters that were annexed to the statement of the administrator demonstrate that funds were being disbursed to meet the obligations of the company. These facts, and the inferences drawn by the Tribunal, further support the case of the respondent.
19. For the reasons given above, the decision under review is affirmed.
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