Case U106

Members:
RK Todd DP

Tribunal:
Administrative Appeals Tribunal

Decision date: 5 May 1987.

R.K. Todd (Deputy President)

This is the review of objection decisions which disallowed claims by the applicant, made in respect of each of the years of income ended 30 June 1983 and 30 June 1984, that an amount of $1,689 should be excluded from the assessable income of the applicant pursuant to the provisions of the former sec. 26AA(1) of the Income Tax Assessment Act 1936 ("the ITAA") on the footing that the amounts in question constituted the undeducted purchase price of an annuity.

2. At the relevant times sec. 26AA (now repealed) read as follows:

"26AA(1) The assessable income of a taxpayer shall include the amount of any annuity, excluding, in the case of an annuity which has been purchased, that part of the amount of the annuity which represents the undeducted purchase price.

26AA(2) Subject to sub-section (3), the amount to be excluded under sub-section (1) from the amount of an annuity derived by a taxpayer during a year of income -

(a) in the case of an annuity payable until the death of the taxpayer or for a term that will not end before his death - is an amount ascertained by dividing the undeducted purchase price of the annuity by the number of years in the complete expectation of life of the taxpayer, as ascertained by reference to the prescribed Life Tables, at the time when the annuity first commenced to be derived, and

(b) in the case of an annuity payable for a term of years certain - is an amount ascertained by dividing the undeducted purchase price of the annuity by the number of years in the term.

26AA(3) Where the amount of an annuity derived by the taxpayer during a year of income is more than, or less than, the amount payable for a whole year, the amount to be excluded from the amount so derived is the amount which bears to the amount which, but for this sub-section, would be the amount to be so excluded the same proportion as the amount so derived bears to the amount payable for a whole year.

26AA(4) For the purposes of this section, `the undeducted purchase price', in relation to an annuity, means so much of purchase price of the annuity paid by the taxpayer as has not been allowed and is not allowable as a deduction, has not been, and is not to be, treated as a rebatable amount for the purposes of section 159N and 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."

3. The applicant was born in February 1922 and commenced employment with the Commonwealth Public Service in January 1939. He commenced contributing to the superannuation fund established by the Superannuation Act 1922 ("the 1922 Act") in August 1939 and retired, aged 60 years and

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three months, in May 1982. On his retirement the applicant was entitled to a "standard age retirement pension" under Pt V Div. 1 of the Superannuation Act 1976 ("the 1976 Act"), under which Act a new superannuation scheme had been established, effective from 1 July 1976 and by virtue of which the former scheme had been superseded. The applicant also received a "lump sum benefit equal to his accumulated contributions" (see sec. 65 of the 1976 Act) pursuant to an election made under sec. 64 of that Act to commute his entitlement to an "additional age retirement pension". Behind this simplistic description of what happened lies great complexity, which I shall attempt so far as possible to summarise.

4. Essentially, the respondent contends in defence of the assessments:

(i) that the amounts of $1,689 claimed in respect of undeducted purchase price in each of the years ended 30 June 1983 and 30 June 1984 respectively are not excluded from the applicant's assessable income for those years pursuant to the former sec. 26AA(1) of the ITAA;
(ii) that as in any event the applicant "elected to receive a lump sum amount of his accumulated contributions" no amount can be described as "undeducted purchase price" as defined in the former sec. 26AA(4) of the ITAA, the applicant not having purchased his pension;
(iii) that alternatively, if there is some amount of undeducted purchase price to be excluded from the applicant's assessable income by virtue of the operation of the former sec. 26AA(1) of the ITAA, the fact that the applicant received an amount of his accumulated contributions makes it impossible to calculate the amount of undeducted purchase price as defined in the former sec. 26AA(4).

5. In fact, a good deal of the applicant's very careful and knowledgeable submission was devoted to establishing that he had not, as the respondent had asserted in some earlier documentation, received "a refund of [his] superannuation contributions". The applicant's submission on this point is set out in detail on pp. 1-4 of his written submission (Exhibit B) and I will not go through it all here. It deals with the way in which the "old" superannuation fund, which was a "unitised" scheme, was allocated between pensioners and contributors for the purposes of the "new" scheme. In the result, as the applicant put it, "the Commonwealth retained some portion of the contributions, and interest thereon, of contributors who transferred to the New Scheme, to meet the liability for existing pensioners, and... other contributors were subsidised by longer serving contributors". I accept that this was so. But, of course, what sec. 65 of the 1976 Act speaks of is not "a refund of superannuation contributions" but rather "a lump sum benefit equal to... accumulated contributions" was not, so far at least as those who had been contributors to the old fund were concerned, synonymous with the expression "contributions with interest". The phrase "a lump sum benefit equal to... accumulated contributions" has in my view to be regarded as a composite expression having a meaning governed by the very complex provisions referred to. For the allocation of the assets of the fund existing under the 1922 Act was made according to the provisions of sec. 175-177 of the 1976 Act, involving certain Ministerial Directions and giving effect to what in
F.C. of T. v. Knight 83 ATC 4096 at p. 4106 Kelly J. referred to as "the alchemy of the 1976 Act". The allocation of the amounts to be treated as basic contributions made by existing contributors fell to be made according to those provisions, and they were so made.

6. The critical part of the applicant's argument was centred on what he called the "voluntary limitations" contained in the old Act, and he put it as follows:

(i) Subsection 20(6) allowed a contributor who was not less than forty years of age on becoming a contributor to, at any time up until 30 June 1976, elect to reduce the number of units for which he was contributing to a number not less than 2, subject to certain criteria in relation to any non-contributory units held.
(ii) Subsections 20A(1) and (2) allowed a contributor who had attained the age of forty years not to contribute for (to "reject") all or any of the units for which he became eligible to contribute, subject to an election within a prescribed period after becoming eligible to contribute for the unit(s).
(iii) Section 21 allowed the Superannuation Board to exempt a contributor from

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contributing for more than two units of pension provided the contributor satisfied the Board that adequate provision had been made for himself and his family.
Result: Where a contributor held less than his maximum unit entitlement at 30 June 1976, having "rejected" units under any of these subsections, retired under the Superannuation Act 1976, and by virtue of an election was entitled to a standard age retirement pension, the annual rate of pension was determined under Pt XII, Div. 8 of the 1976 Act by deducting from the pension that would otherwise have been payable the amount in dollars ascertained in accordance with the formula -

65A(30-B)/30

(This formula is derived from the Superannuation (Former Contributors for Units of Pension) Regulations (S.R. 1978 No. 281). These Regulations were made pursuant to sec. 183 of the 1976 Act. They have the effect, inter alia, of amending many sections of that Act, of adding a whole new Div. 8 to Pt XII of the 1976 Act, and of making H.M. King Henry VIII blush in his grave. See the comments of Mr C.F. Fairleigh Q.C. (Member) in Case M29,
80 ATC 191 at pp. 208-209.)
Retirement before age 65 resulted in a small decrease in the amount ascertained by the formula, by the application of a reduction factor taking account of the extent of the early retirement.
In the formula -
- A is the number of units of pension which the contributor had "rejected",
- B is the number of complete years in his contributory service that commenced on 1 July 1976 and ended on his last day of service.
If a greater benefit would have been payable had the contributor commenced as a contributor on 1 July 1976, then that greater benefit applied.

7. The applicant then referred to Knight's case for the proposition that in law the pension which he received was an annuity, and that he had purchased that pension/annuity. With these propositions established, he saw his remaining need as being only to solve the problem, left unsolved in Knight's case, of demonstrating what part of the annuity represented its undeducted purchase price.

8. I confess to having the most profound difficulty, with the greatest respect, with Knight's case. It seems to me to be very difficult indeed, accepting that that part of the benefits to which the applicant became entitled represented by pension constituted an annuity, to find that he as a contributor to the scheme purchased that annuity. The 1976 Act, pursuant to which the pension/annuity was received, stipulated for a complex of entitlements, made up partly of pension, and partly of commutable pension, with those entitlements flowing because of the applicant's rights under a statute which imposed upon him the duty to make contributions but in turn conferred upon him those and other possible forms of entitlement depending upon what circumstances occurred. In Knight's case; Kelly J., having stated that he was satisfied that in all the circumstances the pension payable to Mr Knight was an annuity, dealt entirely with the point whether he had purchased the annuity as follows at p. 4107:

"The next question is whether Mr Knight purchased the annuity. I think that on its true construction sec. 26AA(1) of the Act is concerned with the purchase price in money of the annuity and is not concerned with any other consideration such as service which might have been paid for the annuity. I am satisfied that Mr Knight purchased his pension. I adopt, with respect, the reasoning of Jacobs J.A. (as he then was) in
Wayne v. Commr of Stamp Duties (1966) 85 W.N. (Pt 1) (N.S.W.) 301 at pp. 311-312, particularly at p. 312 where he said:

`... where the scheme is a contributing scheme, even though the contributions are compulsory, I think that the interest created must be regarded as one which is purchased or provided by the employee.'

Cf.
Just v. F.C. of T. (1949) 8 A.T.D. 419; (1949) Argus L.R. 438. It is to be noted that counsel for the Commissioner did not contend that the pension payable to Mr Knight was not an annuity."

His Honour then went on to the question whether it was possible to determine what was the undeducted purchase price.

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9. The problem was adverted to by Mr P.M. Roach (then a Member of Taxation Board of Review (No. 1), now a Senior Member of this Tribunal) in Case S63,
85 ATC 454, at pp. 459-460:

"4. The taxpayer contributed moneys to the Commonwealth Superannuation Fund. Thereby he, and his dependants, acquired potential entitlements which could become actual entitlements depending upon the happening of future events. Throughout the periods of his contribution the identity of his `dependants' might have varied. Some, who were dependants initially, might have ceased to be so, and others, who were not previously dependent, might have come to be so. In the circumstances which happened the first entitlement to receive money from the fund vested in the taxpayer because he survived a period of contribution as an `eligible employee' to become a `retirement pensioner' of the Fund. Having so survived he was entitled to amounts by way of pension. Further, in relation to portion of his pension entitlements, he was entitled to elect to commute that pension to a lump sum. In fact he elected to do so. His pension entitlement, whether commuted in part or not, gave rise to an annuity. But the taxpayer's entitlement to the annuity, even without commutation, did not exhaust the rights acquired in relation to the superannuation fund because upon the death of the taxpayer further rights would, or could, vest in others.

5. So if it be true (although I doubt it) that the taxpayer's contributions constituted a `purchase price', they constituted the price paid by the taxpayer to provide all of the benefits conferred on himself and others by reason of his membership. On that basis the question which would have arisen pursuant to sec. 26AA would be one of apportionment. It would then have been the responsibility of the Board to `make an apportionment which the facts of the particular case may seem to make just... (to) decide as a matter of fact what part or proportion (of the amounts to be apportioned) is fairly and properly attributable to gaining the assessable income' (
Ronpibon Tin N.L. v. F.C. of T. (1949) 78 C.L.R. 47 at p. 60).

6. However, I am faced with the situation that in F.C. of T. v. Knight 83 ATC 4096, on essentially the same facts, his Honour, Kelly J., held that the contributions did constitute a `purchase price' in the relevant sense, but that no allowance could be made in respect of the `undeducted purchase price' because the taxpayer failed to establish just what that was.

7. With all due respect to his Honour, I am not persuaded that the contributions were aptly described as a `purchase price' of the annuity at all. As each contribution was made by the taxpayer, no entitlement to any annuity by way of pension or otherwise arose or came into existence, whether it be an annuity in favour of the taxpayer or any other person. Further, there was no bargain whereby the taxpayer would have been entitled to recover his contributions as on a total failure of consideration if no annuity came to be paid or payable to him. Again, unless the taxpayer survived to become a `retirement pensioner' he should never have been entitled to an annuity. In my view the contributions made by the taxpayer were no more the `purchase price' of the benefits actually paid to date and yet to become payable (whether to the taxpayer or others) than the cost of an art union ticket can be said to be `the purchase price' paid for the first prize by the ticket buyer fortunate enough to win first prize.

8. Be that as it may, I must accept that my reasoning is inconsistent with that in F.C. of T. v. Knight (ante). I accept the authority of that decision. Accordingly I hold on the evidence before us, as I would have held but for that decision, that the decision of the Commissioner on the objection is in all respects to be upheld."

10. Prior to Knight's case, the matter had been before Taxation Board of Review (No. 1) in Case M29 (above) and Case M30,
80 ATC 220. These two decisions were cited by the Commissioner's representative in the present case for the proposition that the undeducted purchase price was incapable of calculation. But I find them of greater value in approaching the critical question of whether the applicant's annuity was purchased.

11. In Case M29, as in Case M30, H.P. Stevens (Chairman) found himself in a

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minority, but his setting out of the problem remains illuminating and repays study. C.F. Fairleigh Q.C. and J.R. Harrowell (Members) formed the majority. Both held, inter alia, for reasons there extensively set out, that the pension there payable (a pension paid on retirement on invalidity grounds under the 1976 Act) could not be said to have been purchased by him.

12. It is quite clear that a contributor to the old fund or to the new scheme acquired no equitable interest in the moneys standing to the credit of the fund. In
Superannuation Fund Investment Trust v. Commr of Stamps (S.A.) 79 ATC 4429 at p. 4441 Mason J. said:

"The argument for the respondent rested chiefly on the submission that the moneys standing to the credit of the Fund belong in equity to the contributors. I do not agree with this submission. The Act prescribes the amounts of the benefits to which contributors become entitled but it does not, as I read its provisions, give them any property or equitable interest in the Fund. To a very substantial extent benefits payable under the Act are payable out of the Consolidated Revenue Fund, that Fund being reimbursed in appropriate cases by the Superannuation Fund. The moneys standing to the credit of the Superannuation Fund are Commonwealth public moneys in an account within the Treasury (sec. 60 of the Audit Act 1901 (as amended)). To the extent to which the Trust is a trustee of the moneys it is a trustee for the Commonwealth, not for the contributors."

13. The flow of payment under the 1976 Act is as follows:

• contributor pays 5 per centum of salary (sec. 46) to -
• the Commissioner for Superannuation who pays the contribution (sec. 53) into -
• the Superannuation Fund, out of which payments are, upon a person ceasing to be an eligible employee, made (sec. 112(1)) into -
• Consolidated Revenue from which payments are made (sec. 112(2)) as -
• superannuation benefits.

14. This process highlights what was said by Aickin J. in the Superannuation Fund Investment Trust case at pp. 4446-4447 but particularly at p. 4447:

"The Consolidated Revenue Fund is from its very nature a common fund in which are blended indistinguishably all payments made to or moneys received by the Commonwealth and payments are made out of the general mass by appropriation. No statute provides for the tracing of individual amounts that are paid into the Consolidated Revenue Fund, for they are by their very nature consolidated upon payment in. If it matters, there could never be an occasion for the application of
Clayton's case (1816) 1 Mer. 572, 35 E.R. 781 or the conceptions of tracing which have been developed in Equity. That which reaches the Consolidated Revenue Fund from the hands of the Trust thereby ceases to be trust moneys under the Superannuation Act or at all and becomes simply part of the general funds of the Commonwealth, consolidated together in a single fund pursuant to sec. 81 of the Constitution and the Audit Act 1901-1969 (Cth). In no sense, therefore, can it be said that the pensions are payable out of the Fund, though some lump sums are payable directly out of it. In this sense the Fund is held primarily, but not exclusively, for the purpose of making payments to the Commonwealth on the happening of the relevant events, i.e. the cessation of an eligible employee to be such."

15. What I have referred to as the complex of rights and duties involved in the Commonwealth Superannuation Scheme is now, I believe, exemplified. The procedure is one whereby contributions, made through the length of a person's employment by the Commonwealth, are made pursuant to a statutory obligation, with a prospect but absolutely no certainty of a future receipt of pension, and whereby in various circumstances and in various ways rights are created to receive various kinds of benefits. This seems to me to be a long way from being capable of being regarded as the purchase of an annuity. In particular it seems, with respect, to be a long way from the facts in Wayne's case, where there was a simple scheme under which the deceased had been a contributor to a compulsory superannuation scheme to which both employer and employees contributed and under which policies of assurance were effected

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on the life of the deceased in the name of the trustees of the fund.

16. With the greatest respect, I have to say that without Knight's case I would not feel able to consider finding that the applicant purchased his pension/annuity. I much prefer Mr Roach's view, and the views expressed in the reasoning of the majority in Cases M29 and M30. It is noteworthy that in the second column on p. 4107 Kelly J. states: "It is to be noted that counsel for the Commissioner did not contend that the pension payable to Mr Knight was not an annuity". This statement is made after that point had been decided, near the foot of column one on p. 4107, and after his Honour had commenced the discussion of the question whether Mr Knight purchased his pension. Perhaps the Commissioner did not there even contend that Mr Knight had not purchased his pension/annuity. If that were so, there are further grounds for considering that I am not bound by Knight's case, but the thought is speculative. Even, however, without that possibility, and although that decision is a decision of the Supreme Court of the Australian Capital Territory and therefore highly persuasive, I consider that I am, with the greatest respect, not bound to follow it. See Re Sterns Playland Pty. Ltd. and Collector of Customs (No. 1),
Re Matthey Garrett Pty. Ltd. and Collector of Customs (1981) 3 ALN N156 (21 October 1981, Decision No. 562) at p. 8 of the unreported reasons for decision. Accordingly I do not, and I find that the applicant did not purchase his pension/annuity.

17. This conclusion means that I need not proceed on to the question whether the applicant had been able to demonstrate what is the undeducted purchase price of his pension/annuity. In deference to the applicant's arguments, I consider that I should, however, advert to them. In Knight's case, Kelly J. found that that price could not be determined on the evidence and in the light of the submissions placed before him. The present applicant has, however, taken a different line.

18. A submission and finding, following a supposed conclusion that a person has purchased an annuity, that the amount of the undeducted purchase price cannot be determined, would have to be itself a matter of serious concern. In such circumstances a finding of such inability, in my opinion, would cast serious doubt on the integrity of the primary finding that the annuity was purchased. It seems almost impossible that, given such a primary finding, actuarial and legal skills should be left defeated, counselling despair. But accepting, contrary to what I have decided, that such a primary finding should be made, I shall now set out for the record what the applicant said on this point, and the response made for the Commissioner.

19. The applicant contended, in a submission incapable of being summarised, that the question of determining the undeducted purchase price of his pension/annuity should be approached as follows:

(i) The applicant said that he paid superannuation contributions and insurance premiums in excess of $1,200 per annum amounting to $25,785 during the years 1970/1971 through to 1981/1982. This figure was not in contention.

(ii) On 16 December 1970 the applicant was paying superannuation contributions and insurance premiums as follows:

      71 active units of
        pension               $35.32       per fortnight
      4 reserve units           2.52        "      "
      Insurance premiums        2.30        "      "
                              ------
      Total                   $40.14       per fortnight
                              ------
                             ($1,043.64 p.a.)

(iii) On 17 December 1970 the applicant became eligible, and required to contribute for, an additional 7 units at a cost of $1.02 per fortnight each, but being over 40 years of age at the time had the option of "rejecting" all or any of those units. By accepting all 7 units at a cost of $7.14 per fortnight ($185.64 p.a.) his contributions plus insurance premiums would have been $47.28 per fortnight ($1,229.28 p.a.) and would thus have exceeded $46.15 per fortnight ($1,200 p.a.); but, by "rejecting" 2 units and accepting only 5 units the cost would have been just under the $1,200 mark, to be precise, $1,176.24 per annum.
(iv) In making his decision to either accept or "reject" these and subsequent units for which he became eligible the applicant said that he had had regard to the fact that there would be a future concession under sec. 26AA of the ITAA and also to the fact that additional contributions, which would make

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his contributions plus insurance premiums exceed $1,200 per annum, would attract no immediate taxation concession. He said that he chose the former option and accepted all the units that became available to him under the 1922 Act. Immediately preceding the changeover to the new scheme on 1 July 1976 the applicant was paying contributions of $164.73 per fortnight, and under sec. 185(1) of the 1976 Act he was required to continue to pay that amount of fortnightly contributions under the new scheme.
(v) Had the applicant "rejected" 2 of the 7 units for which he became eligible on 17 December 1970 and subsequently "rejected" all future units, which he was entitled to do, then out of his unit entitlement (152 units), at 30 June 1976 he would have been holding 76 active units and would have "rejected" 76 units; his contributions plus insurance premiums would then have been stabilised at $1,176.24 per annum ($45.24 per fortnight - $42.94 in contributions and $2.30 in insurance).
(vi) Application of the formula 65A(30-B)/30 (see para. 6(iii) above) at retirement would then have given the following result:
- 65 x 76(30-5)/30 = $4,116.67
Because the applicant retired at age 60 this amount would have had the reduction factor.9 applied to it:
- $4,116.67 x.9 = $3,705
His rate of pension, on retirement, would thus have been reduced by $3,705 from $17,955 per annum to $14,250 per annum.
(vii) The corollary, the applicant said, is that he paid $25,785 for $3,705 per annum of pension; but, had he not paid the additional contributions, then his pension at retirement would have been $3,705 per annum less.
(viii) The Commissioner for Superannuation had, in response to a letter from the applicant, confirmed the information set out above concerning "rejected" units and pension levels.

20. Based on the material set out above, the applicant submitted that the total amount of contributions and insurance premiums paid in excess of $1,200 per annum, $25,785, was "the undeducted purchase price", and that the amount of pension, $3,705 per annum, directly related was "that part of the annuity which represents the purchase price". Applying the factor of 15.27 gained from the life expectancy tables to the amount of $25,785, the resultant figure claimed in each of the returns before the Tribunal.

21. It is important to note the applicant's submission that had he "rejected" 76 units, it would not have been material whether or not, under sec. 64 of the 1976 Act, he had elected to commute his additional pension into a lump sum. In either circumstance, the standard age retirement portion of his pension would have been reduced by $3,705 per annum because of those "rejected" units.

22. On this footing the applicant submitted that, in the terms of Kelly J.'s judgment in Knight's case, he had "established what part of the amount of that annuity represents its undeducted purchase price".

23. I have already referred to the contrariety apparent between, on the one hand, a finding that a person has purchased a pension/annuity and, on the other hand, a finding that the undeducted purchase price thereof cannot be calculated. I have concluded that the applicant did not purchase his pension/annuity, so that any comment by me upon the applicant's argument on quantification would be made on what I regard as an unsatisfactory if not illogical footing. It should also be said that if the matter should be taken further, any comments by me on this alternative basis would be superfluous, since they relate to a matter of law. There was no dispute about the facts tendered by the applicant as to his situation as set out above, and I find accordingly in his favour in relation thereto.

24. The Commissioner's arguments in relation to quantification seemed to me to relate more to the question whether the applicant had purchased his pension/annuity: see para. 42-46 of the written submission (Exhibit 6). It seems to me that, on the footing that that question had been decided in his favour, the applicant certainly produced a highly rational calculation. A possible flaw however in his reasoning is that referred to by the respondent's representative, namely that, as set out in Exhibit B, the

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applicant had contended that his allocation was reduced by virtue of that allocation not having taken into account the old fund's accumulated earnings especially as they related to his contributions. The argument for the respondent was that the applicant's contention as to this was not valid since the allocation to the new scheme was achieved by actuarial calculation of the net assets of the old scheme and did not, it was said, take into account individual contributions and their previous earning rates. Reference was made to remarks made by C.F. Fairleigh Q.C. (Member) in Case M29 at p. 213, and the submission was made that although the applicant's contributions may have been earning interest at the rates described the benefit of that interest was not transferred to the new scheme. My only comment is that the difficulties presented by these arguments are a reflection of the unreality of finding that the applicant purchased his pension/annuity.

25. In all the circumstances the objection decisions under review will be affirmed.

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