Case T53

Judges:
KL Beddoe Ch
GW Beck M

Court:
No. 3 Board of Review

Judgment date: 27 June 1986.

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K.L. Beddoe (Chairman) and Dr G.W. Beck (Member)

This taxpayer, the trustee of a superannuation fund which, on the basis of the terms of its deed qualifies for exemption from tax under sec. 23F, disputed an assessment levying tax on the income of the fund in 1981 tax year. The Commissioner assessed the taxpayer under sec. 121D which causes the trustees of funds falling under para. 23(ja) and sec. 23F to be assessed unless the income of the funds is exempt by virtue of sec. 121C.

2. There was verbal evidence that this fund was established in 1958 and the taxpayer's representative, Mr H, did not dispute that the so-called 30/20 rule applied to the fund from 1961. In this regard subsec. 121C(2) reads as follows:

``(2) The investment income of a superannuation fund derived during a year of income, being a superannuation fund that was established on or before 1 March 1961, to the extent to which the amount of that investment income exceeds the amount of the investment income of the fund derived during the year of income that commenced on 1 July 1960 is not exempt from income tax by virtue of paragraph 23(ja), or section 23F, unless the Commissioner is satisfied that, at all times during the first-mentioned year of income -

• (a) the assets of the fund included public securities the cost of which was not less than -
  • (i) 30% of the cost of all the assets of the fund; or
  • (ii) the cost of the public securities included in the assets of the fund as at 1 March 1961 together with 30% of the amount (if any) by which the cost of all the assets of the fund exceeded the cost of all the assets of the fund as at that day,

  whichever is the less; and

• (b) the assets of the fund consisting of public securities included Commonwealth securities the cost of which was not less than -
  • (i) 20% of the cost of all the assets of the fund; or
  • (ii) the cost of the Commonwealth securities included in the assets of the fund as at 1 March 1961 together with 20% of the amount (if any) by which the cost of all the assets of the fund exceeded the cost of all the assets of the fund as at that day,

  whichever is the less.''

It seems the fund complied with the 30/20 rule in every year from 1961 to 1966 but from 1967 to 1974 the assets included no public securities. According to Mr H, by 1976 8.99% of the assets consisted of public securities and the percentages at various times in the following five years were as set out below:

         At             %
      June 1977       13.93
      June 1978       14.30
      Oct. 1978       31.21
      Jan. 1979       13.90
      June 1979       12.84
      June 1980       10.30
      Dec. 1980       53.00
      June 1981       45.50
      

3. Mr H said it was always intended to achieve exemption for the fund by complying with the 30/20 rule and in September 1978 moneys were applied to this end. After the purchase of bonds the public securities percentage went to 31.21%. Scarcely had this been done, however, than there was a threat of takeover of the company in respect of whose employees the superannuation fund had been established. The trustees resolved to sell the public securities to obtain money to apply to the acquisition of the company shares to

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strengthen the hands of the directors to resist the takeover. As was seen from the list of percentages given above the percentage of public securities fell to 13.9% in January 1979 and fell further to 10.3% by 30 June 1980. The first day of the year under review was, of course, 1 July 1980 when the holding stood at this 10.3%.

4. In June 1979 the company sold a division of its operations and, following the inflow of the sale proceeds, reduced capital by a payment to shareholders on 8 December 1980. This repayment of part of the investment in shares put the superannuation fund in a position to acquire more investment assets and on 9 December 1980 it purchased Australian Savings Bonds which, as can also be seen from the percentages quoted earlier, increased the holding of public securities to 53% of total assets. The percentage remained well above the 30% required minimum holding throughout the remainder of 1981 tax year.

5. The picture to emerge from this evidence can be summarised:

• (a) in the fourteen years up to the commencement of the 1981 tax year the fund held the requisite percentage of public securities for a mere 2½ months, i.e. from 24 October 1978 to 8 January 1979;
• (b) at the start of the year under review the taxpayer held 10.3% of assets in the form of public securities and the holding remained well below 30% until 9 December 1980.

6. Subsection 121C(4) reads:

``(4) For the purposes of this section, the Commissioner shall disregard any failure of the assets of a superannuation fund to include, at all times during a particular year of income, assets as provided by any provision of this section if he is satisfied -

• (a) that the trustee of the fund made a genuine and bona fide attempt to ensure that the assets of that fund included, at all times during that year of income, assets as so provided; or
• (b) that the failure was by reason of a temporary delay in investment,

and that, in all the circumstances, it would be reasonable to disregard the failure.''

Mr H argued on the taxpayer's behalf that the Commissioner should have exercised his discretion and, in effect, treated the taxpayer as if the requisite 30% minimum holding had existed at all times throughout the 1981 tax year. One line of argument was based on what he regarded as the receipt of misleading information from the Tax Office in response to a question about tax treatment in a year in which a superannuation fund brings its holding of public securities up to the requisite percentage subsequent to 1 July. A paragraph in a letter to the tax office dated 18 July 1983 and signed by Mr H on behalf of the trustees, had made this point as follows:

``In September 1978, the Secretary telephoned the Superannuation Section of your office, asking how the Commissioner viewed the purchase of sufficient bonds to ensure compliance with the 30/20 rule. He was advised that the Commissioner recognised that the rule had to be met at some time and that, although the Act requires compliance to be for a full year, he normally would use his discretion and allow the Fund to be recognised as a non-taxable fund in the first year of purchase of sufficient Government bonds to ensure adherence to the 30/20 rule.''

(Emphasis in original.)

Leaving aside consideration of whether the Commissioner or the Board can be estopped from applying the Act by misleading information given by a Tax Office employee (in this connection
F.C. of T. v. Wade (1951) 9 A.T.D. 337; (1951) 84 C.L.R. 105 would be relevant) it is obvious that the answer to the enquiry in 1978 was in a very different set of circumstances to those that prevailed in 1981. No doubt the Tax Office was told, as the Board was told, by Mr H that in September 1978 ``the trustees decided to adhere to the 30/20 rule - to stick with it''. We would think it likely that for 1978-79 year the Commissioner would have exercised his discretion in favour of the taxpayer if the fund had, in fact, ``stuck to the 30/20 rule''. But the fund abandoned the rule within a few months for reasons that the trustees thought worthwhile or necessary. To abandon the rule in order to save the company from takeover is scarcely different from abandoning the rule so as to make more lucrative investments away from public securities. The trustees made a deliberate choice to place investable funds elsewhere. It is not possible to suggest that in this year they made ``a genuine and bona fide attempt to

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ensure that the assets of the fund included at all times'' the requisite percentage of public securities. And this is what subsec. 121C(4) requires. It follows that we consider that it would not have been reasonable for the Commissioner to disregard the failure.

7. In addition to those submissions Mr H put to the Board that part (b) of subsec. 121C(4) was also relevant in that the failure to comply with the 30/20 rule ``was by reason of a temporary delay in investment''. The evidence before us in no way sustains that proposition. Indeed, no satisfactory explanation was obtained as to why an amount of $11,010 held in ordinary bank and building society accounts at 1 July 1980 remained there instead of being invested in public securities. For a temporary delay to justify the exercising of a discretion by the Commissioner, the delay itself must be justifiable.

8. We have no option but to uphold the Commissioner's decision on the objection and to confirm the assessment for 1981 year.

Claim disallowed