Deductibility under s 82AAE
38 Counsel for the Commissioner contended that the contribution to the IS & PL Fund was not an allowable deduction under s 82AAE of the Act because the discretionary provisions governing the IS & PL Fund, in particular cl 53(b) of the Trust Deed, which is set out at [3] above, precluded it from coming within what is connoted by a "provident, benefit, superannuation or retirement fund".
39 Although that expression is not defined in the Act, Hill J in Walstern v Commissioner of Taxation (2003) 138 FCR 1 at 15 considered that assistance in understanding its meaning can be derived from this observation of Windeyer J in Scott v Commissioner of Taxation (No.2) (1966) 40 ALJR 265, at 278:
'There is no definition in the Act of a superannuation fund. The meaning of the term must therefore depend upon ordinary usage, the attributes of a thing thus denominated being those which things ordinarily so described have…the connotation of the phrase in the Act must be determined by one's general knowledge of the extent of the denotation of the phrase in common parlance…I have come to the conclusion that there is no single attribute of a superannuation fund established for the benefit of employees except that it must be a fund bona fide devoted as its sole purpose to providing for employees who are participants money benefits (or benefits having a monetary value) upon their reaching a prescribed age.'
40 Hill J in Walstern also noted that a similar view of the meaning of the expression "provident, benefit or superannuation fund" had been taken by Kitto J in Mahony v Commissioner of Taxation (1967) 41 ALJR 232 where his Honour said, at 232;
'There was no definition in the Act of 'a provident, benefit or superannuation fund', and the meaning of the several expressions must therefore be arrived at in light of ordinary usage and with only one piece of assistance to be gathered from the immediate context. Since a fund, if its income was to be exempt under the provision, was separately required to be one established for the benefit of employees, each of the three descriptive words 'provident', 'benefit' and 'superannuation' must be taken to have connoted a purpose narrower than the purpose of conferring benefit, in a completely general sense, upon employees. Precise definition may be difficult, and in any case is unnecessary for present purposes. All that need be recognised is that just as 'provident' and 'superannuation' both referred to the provision of a particular kind of benefit' - in the one case a provision against contemplated contingencies, and in the other case a provision, to arise on an employee's retirement or death or other cessation of employment, of a subvention for him or his estate or persons towards whom he may have stood in some kind of relation commonly giving rise to a legal or moral responsibility - so 'benefit' must have meant a benefit, not in a general sense, but characterized by some specific future purpose. A funeral benefit is a familiar example.'
41 In the Commissioner's submission, the IS & PL Fund is not, as far as it provides for Discretionary Class members, a superannuation fund because its governing deed does not provide that individual employees will benefit from the moneys set aside. Rather, the terms of the deed confer upon the Trustee an absolute discretion as to whether to pay any benefit to or for the benefit of a Discretionary Class member, when any benefit will be paid in relation to such a member in respect of whom a benefit payment event has occurred and the amount, proportion or value of any benefit which the Trustee may determine to pay.
42 It was acknowledged on behalf of Cameron Brae that the discretionary nature of the trusts on which funds are held under the IS & PL trust was one of the matters which initially attracted it to contribute to what, it contended, was a superannuation fund within the meaning of the legislation because it was being established for the benefit of two of its employees, David Hazlett and Andrew Hazlett.
43 Counsel for Cameron Brae submitted that discretionary powers conferred on the Trustee by cl 53(b) in respect of Discretionary Class members are consistent with the provisions of superannuation funds generally, the trustees of which commonly determine the extent to which beneficiaries with interests in the fund will become entitled (see Lord Foscote writing extrajudicially in The Fetters on Trustees' Discretions (2002) 16 Trust Law International 214 at 214). It was also submitted for Cameron Brae that the present right of a member of a superannuation fund is no more than an expectancy; Re Coram; Ex parte Official Trustee (1992) 36 FCR 250, at 254. Nevertheless, it was pointed out, in the same submission, that, upon the occurrence of a benefit payment event in the present case, the catalogue of "benefit events" in cl 53(c)(i) reproduced at [3] above makes it clear that one or other or both of the employees would ultimately receive a benefit.
44 However, even if the IS & PL Fund can properly be regarded as a superannuation fund for the purposes of s 82AAE, that will not be determinative of the question of whether Cameron Brae was entitled to a deduction pursuant to that section. Thus, it is necessary to consider the Commissioner's further or alternative argument that a contribution to the IS & PL Fund in respect of Discretionary Class members fails to qualify for a deduction under s 82AAE because the legislation requires the contribution to have been made for the sole purpose of making provision for superannuation benefits for employees.
45 For the contribution to the IS & PL Fund to be deductible under s 82AAE, the contribution must be "for the purpose of making provision for superannuation benefits for an eligible employee". In Walstern Hill J considered that the phrase "the purpose" in s 82AAE connotes a sole, rather than dominant or principal, purpose. His Honour noted that this view was also taken by Pincus J in Federal Commissioner of Taxation v Roche (1991) 105 ALR 95 at 103. On the other hand, Hill J noted in Walstern that a deduction would not be lost if the directors of a taxpayer/employer incidentally took into account, in making a contribution, the tax benefits which the Act makes available where a contribution is made to a superannuation fund properly so-called. In such a case, it may be that the tax deduction is a consequence, rather than a purpose, of the contribution.
46 An examination of the evidence related to Cameron Brae's purpose in contributing to the IS & PL Fund reveals that an actuating reason was the perception that an existing superannuation fund, the CBP Fund, which had been set up to provide superannuation benefits solely for David Hazlett, was "over funded". David Hazlett's explanation of this perception occurs in these terms at par 10 of his affidavit sworn 30 November 2004;
'In or about June 1993 Allen told me that the CBP Fund was "over funded". Allen explained to me that this meant that the Applicant should not make any further significant employer contributions to the CBP Fund because any extra benefits paid to me upon my retirement from the additional employer contributions would be taxed at the maximum personal tax rate. He explained to me that this was largely due to the relatively low reasonable benefits limit ("RBL") that I was entitled to. Since June 1993 it has therefore been the usual practice of the Applicant only to make contributions to the CBP Fund to the extent considered necessary to satisfy the minimum level of contributions required for superannuation guarantee charge purposes and/or to cover expenses of the CBP Fund which have accrued in the year of the contribution or in prior income years, and not to make tax deductible contributions up to the maximum level allowed under Australian tax laws. …'
47 In the same affidavit David Hazlett explained the reason for nominating Andrew Hazlett as a Discretionary Class member of the IS & PL Fund by referring to the fact that Andrew had worked part-time for Cameron Brae in 1998 and had become a full-time employee in 2001 ascending to gradually more responsible positions from then until 2003. The paragraphs of David Hazlett's affidavit sworn 30 November 2004 directed to the position of Andrew Hazlett include the following:
'19. At about the time the applicant made the contribution to IS & PL Allen and I had been working on a succession plan for the Group which would see Andrew succeeding me upon my retirement or death if he was up to the task. Under that plan, Andrew started as a junior employee of the Applicant on a part time basis performing mechanical work on boat engines for BWM, the position he held when the Applicant made the superannuation contribution to IS & PL in May 1998.
………
21. In consultation with Allen, I planned that the Applicant's contributions to IS & PL would assist in achieving the Applicant's objectives under the succession plan as the funds contributed to IS & PL could be used to provide retirement benefits either for Andrew or me. The funds contributed to IS & PL could be used to provide Andrew with an incentive to stay with the Group until his retirement. Allen and I also believed that if things didn't work out with Andrew, then IS & PL was structured in a way that the trustee of IS & PL was not locked into paying Andrew any particular amount or level of benefits. If Andrew left the Group before my retirement, the Applicant could apply to the trustee to pay most or all of the superannuation benefits to me on my retirement in addition to any superannuation benefits that I could receive from the CBP Fund. This flexibility appealed to me.'
48 An explanation for the nomination of David Hazlett and Andrew Hazlett as the beneficiaries of the IS & PL Fund established by Cameron Brae's contribution of $500,000 to that fund is also to be found in the affidavit sworn 7 November 2004 of another director of Cameron Brae, Peter George Currie where this passage occurs;
'The first I heard about the proposal that the Applicant should make a contribution to the IS & PL Superannuation Fund was when David Hazlett raised the idea during a meeting at the Ingleburn office of the Applicant. I recall discussing the proposal with Mr Hazlett. I recall that the Applicant relied on Mr Ken Allen for detailed professional advice in relation to the contribution. I also recall David Hazlett informing me at the time that Andrew Hazlett was a potential beneficiary of the superannuation fund. At the time I was aware that the Cameron Brae Pension Fund held benefits of approximately $1 million to which David Hazlett alone would be entitled on retirement, and that Andrew Hazlett had no interest in the Cameron Brae Pension Fund. I was also familiar with the Applicant's cash and working capital position and I believed that it was capable of funding a payment of $500,000 to the IS & PL Fund and that it was reasonable for it to do so for the benefit of David Hazlett and Andrew Hazlett.'
That evidence of David Hazlett and Mr Currie suggests that Cameron Brae had two related objectives which were not entirely consistent with an intention to provide superannuation benefits for either or both employees. The decision to nominate each of David and Andrew Hazlett as members of the discretionary class established by cl 45(ba) of the trust deed attracted to any contribution made in respect of either of those employees the restriction contained in cl 22(a)(ii) of the trust deed which provides:
'Discretionary Class Members shall not make, and the Trustee shall not accept, Contributions to the Fund from Discretionary Class Members in their capacity as such.'
49 As the name indicates, "Discretionary Class Members" did not have a vested or assured entitlement to any payment out of the Fund even in the event of death, disablement or retirement from Cameron Brae after reaching a stipulated retiring age. The amount which each of David Hazlett and Andrew Hazlett should receive and, indeed, whether he should receive anything at all was entirely at the discretion of the Trustee.
50 Those circumstances strongly suggest that Cameron Brae's sole, or even its principal, purpose in making the contribution was not to make provision for either David or Andrew Hazlett or his dependants to enable him or them to cope with the exigencies of death, disablement or retirement from employment by Cameron Brae. Had the making of such a provision been Cameron Brae's sole or main concern, it would have been more appropriate for David Hazlett and Andrew Hazlett to have been nominated as members of the "Original Class" of members of the IS & PL Fund pursuant to cl 45(b) of the trust deed. A nomination in that form would have secured to each member, upon his retirement at or after attaining the age of 55 years or upon reaching the age of 65 years, payment of the amount standing to the credit of his accumulation account. It would also have enabled each of David and Andrew Hazlett to have made "member contributions" to the Fund. That facility is denied to Discretionary Class members by cl 22(a)(ii) reproduced at [48] above.
51 It is true, as Counsel for Cameron Brae pointed out, that no part of the contribution which it made to the IS & PL Fund has been lent back to Cameron Brae for use as working capital. That feature distinguishes the present case from Walstern where Hill J found, at 18, that the directors of the company had created a superannuation scheme in order to "give effect to their desire to take money out of Walstern to invest for their benefit." However, a purpose described in those terms is by no means exhaustive of those which may preclude a contribution to a superannuation fund or scheme from being one "for the purpose of making provision for superannuation benefits for an eligible employee" within the meaning of s 82AAE.
52 It may also be doubted whether a contribution to a fund administered with a view ultimately to providing benefits to a few of a wider class of employees in respect of whom the employer's contributions were purportedly made has been made for "the purpose" stipulated in s 82AAE; see Raymor Contractors Pty Ltd v Commissioner of Taxation (Cth) (1991) 21 ATR 1410.
53 I am prepared, for the purposes of the argument, to give effect to the presumption erected by s 23 of the Acts Interpretation Act 1901 (Cth)that the words "for an eligible employee" in s 82AAE import the plural and do not require each contribution to be made for the benefit of a single, identified, or specific employee. Nevertheless, if, in the present case, the contribution be regarded as having been made for the benefit of the two employees, David and Andrew Hazlett, it cannot, for the reasons already explained, be said to have been made solely for the purpose of making provision for superannuation benefits for them as a class. That is principally because one Discretionary Member could be totally deprived by an adverse exercise of the Trustee's discretion of any payment out of the Fund despite having satisfied one or other of the requirements on which superannuation benefits are normally conditioned.
54 I am reinforced in this conclusion by several further circumstances. In the first place, there is no evidence that the directors of Cameron Brae gave any consideration, before making the contribution, to what would be an appropriate benefit to be provided to either David or Andrew Hazlett by way of superannuation, if and when he qualified for it. It has to be borne in mind that, in 1998, David Hazlett was already aged 52 years and had, as Mr Currie has deposed, an existing entitlement on retirement to approximately $1 million from the CBP Fund. I accept that a permissible motive for making contributions to a superannuation fund may be the attraction and retention of suitable employees. It was therefore legitimate for the directors to structure a generous superannuation benefit for Andrew Hazlett in the event that he was "up to the task" of succeeding his father as managing director of Cameron Brae. However, for the reasons explained above, by nominating Andrew solely as a Discretionary Class member, the directors did not assure him of any superannuation benefit even if the succession plan were implemented as hoped. Nor was any attempt made to apportion the contribution to reward successful or improved performance or effort or fidelity by either David or Andrew Hazlett as contemplated by par 1(c) of the directors' resolution reproduced at [4] above.
55 The sole shareholder of Cameron Brae has at all times been Fincove Pty Ltd as trustee of the D C Hazlett Trust, a discretionary trust of which David Hazlett and his family are beneficiaries. I infer that, in 1998, the sole directing or controlling mind of Cameron Brae was that of David Hazlett. In the five years between 1997 and 2001 he had uniformly drawn a salary of, in round figures, $70,000 a year, a very modest remuneration for the managing director of a company claiming to work 60 hours a week whose taxable income (after claiming the disputed deduction) ranged in the same period between $376,700 and just over $1,577,000. The evidence does not indicate how the after tax income of Cameron Brae was distributed to the beneficiaries of the D C Hazlett Trust.
56 In these circumstances, I find that the purpose of Cameron Brae in making the contribution of $500,000 to the IS & PL Fund was to enable David Hazlett, and, if David Hazlett chose, Andrew Hazlett, to take money out of the company as what would be called superannuation benefits, it being recognised that David Hazlett's benefits under the existing CBP Fund could not be increased in a tax effective way. It follows that the contribution was not made for the sole purpose of providing superannuation benefits for eligible employees within the meaning of s 82AAE.