Harris v Commissioner of Taxation

REASONS FOR JUDGMENT THE COURT: introduction 1 This is an appeal from a judgment of a judge of the Court, dismissing an appeal under s 14ZZ of the Taxation Administration Act 1953 (Cth) by the present appellant against an appealable objection decision of the respondent ("the Commissioner"). The issue for determination is whether a contribution of $315,600 made by the appellant to a non-complying superannuation fund for the purpose of providing superannuation benefits to himself is deductible under Div 3 of Pt III of the Income Tax Assessment Act 1936 (Cth) ("the Act"). In particular, the question is whether the amount of $315,600 paid by the appellant as a contribution to the non-complying fund was for the purpose of making provision for superannuation benefits for an "eligible employee" as that expression is defined in s 82AAA of the Act. The resolution of the question depends on the interaction between ss 82AAA and 82AAE of the Act, the latter allowing a deduction in respect of a contribution to a non-complying superannuation fund for the purpose of making provision for superannuation benefits for an "eligible employee". 2 Section 82AE was repealed by the Taxation Laws Amendment (Superannuation Contributions) Act 2001 (Cth), which is applicable to contributions made after 30 June 2000. The issue in the present appeal therefore cannot arise in respect of contributions made after that date. factual background 3 The facts are not in dispute. At all material times, the appellant was a director of G Harris Automobile Pty Ltd ("the company") and held a controlling interest in it. The company, as trustee of The Harris Wood Unit Trust, carried on business as a motor vehicle dealer. The appellant established the POHA Superannuation Fund ("the Fund") on 16 September 1997, for the purpose of providing superannuation benefits for, amongst others, himself. The Fund is a "non-complying superannuation fund", as defined in s 267(1) of the Act. For this reason alone, the appellant would not be entitled to an allowable deduction under s 82AAT of the Act, which provides for deductions for superannuation contributions by an "eligible person" for his or her own benefit. 4 During the year ended 30 June 1998 ("the 1998 year of income"), the appellant, as the controller of the company, contributed $315,600 ("the contribution") to the Fund for the purpose of making provision for superannuation benefits for himself. The appellant became entitled to the contribution as a result of distributions made to him in his capacity as a beneficiary of the Trust. The Assessments 5 On 14 October 1998, the Commissioner assessed the appellant's income for the 1998 year of income under s 169A of the Act, based upon a return of income that the appellant had furnished to the Commissioner. The assessment allowed a deduction in the sum of $315,600 which was claimed by the appellant, being the amount of the contribution. On 3 December 1999, however, the Commissioner issued an amended assessment for the 1998 year of income, disallowing the deduction for the contribution and imposing a penalty (including interest) of $19,748.52 under s 226L of the Act. The Objection 6 The appellant objected to the Commissioner's amended assessment by notice of objection dated 1 February 2000. The appellant claimed that the contribution constituted an allowable deduction pursuant to s 82AAE of the Act. The Commissioner disallowed the appellant's objection on or about 30 November 2000. Also on that date, a delegate of the Commissioner made a determination under s 177F(1) of the Act that, if otherwise allowable, the contribution, in its entirety, should not be allowable to the appellant in relation to the 1998 year of income. The appellant appealed to this Court against the Commissioner's decision. legislative framework 7 In the 1998 year of income, s 82AAE was in the following terms: A deduction is allowable under this Subdivision in respect of an amount paid by a taxpayer as a contribution to a non-complying superannuation fund (as defined by subsection 267(1)) for the purpose of making provision for superannuation benefits for an eligible employee … in relation to the year of income in which the amount is paid. (Emphasis added) 8 Section 82AAA relevantly provided that: (1) In this Subdivision, unless the contrary intention appears: … 'eligible employee', in relation to a taxpayer, means: (a) in the case of a taxpayer whether a company or a person other than a company: (i) an employee of the taxpayer; (ii) an employee of a company in which the taxpayer has a controlling interest [emphasis added]; or (iii) an employee of a company in which the taxpayer is the beneficial owner of shares but in which the taxpayer does not have a controlling interest (not being an employee who is associated with the taxpayer or who, or a relative of whom, has set apart or paid, or entered into a contract, agreement or arrangement under which he is, or will or may be, required to set apart or pay, amounts as or to a fund for the purpose of providing superannuation benefits for, or for a relative of, the taxpayer); and (b) in the case of a taxpayer being a company: (i) an employee of a person that has a controlling interest in the taxpayer; or (ii) an employee of a company in which a controlling interest is held by a person who also has a controlling interest in the taxpayer; 'employee' means a person who is employed by a taxpayer and: (a) is engaged in producing assessable income of the taxpayer; or (b) is a resident of Australia and is engaged in the business of the taxpayer. (2) For the purposes of this Subdivision, a director of a company shall be taken to be employed by the company. The question for determination is whether the appellant as a director who had a controlling interest in the company was, by virtue of par (a)(ii) of the definition of "eligible employee" in s 82AAA(1) and by virtue of subs 82AAA(2), to be regarded as an "eligible employee" for the purposes of s 82AAE of the Act. decision at first instance 9 There were two issues before the learned primary judge. The first was whether the contribution was deductible under s 82AAE of the Act, and the second, whether the Commissioner was entitled to rely on s 177F of the Act. His Honour held, amongst other things, that a director of a company in which the director has a controlling interest cannot contribute to a non-complying superannuation fund under s 82AAE for his own benefit as an "eligible employee" in order to obtain an allowable deduction to the extent of the contribution. 10 Since his Honour held that the contribution was not deductible under s 82AAE, it was unnecessary for him to deal with the s 177F issue. On this appeal, the parties agreed that, if the appeal was successful, the issues arising in connection with s 177F should be remitted to the primary judge for determination. 11 His Honour's reasons for judgment ([2001] FCA 1689) are reported in (2002) ATC 4017 and in (2001) 48 ATR 434. At [9]-[10] of his reasons, the primary judge described the parties' respective positions in the following terms: The taxpayer's case is remarkably simple. He was an eligible employee because he had a controlling interest in the company. Accordingly, as a taxpayer, he was entitled to a deduction under s 82AAE for the contributions he made to the Fund during the year of income for the purpose of providing benefits to himself as an eligible employee. The Commissioner's riposte is equally simple. He contends that s 82AAE is concerned with deductions for superannuation contributions made by one person (the taxpayer) for the benefit of another person (the eligible employee). He supports that contention by referring to the definition of an 'eligible employee' in s 82AAA(1) which he contends signifies a relationship between one person (the eligible person) and another (the taxpayer); the eligible person and the taxpayer therefore cannot be the same person. The Commissioner states that this is made clear from the terms of s 82AAE which the Commissioner contends provide, implicitly if not explicitly, for a person (the taxpayer) to be entitled to a deduction for superannuation contributions paid to a fund for the benefit of another person (the eligible employee). The Commissioner's construction of the relevant provisions, so it is said, gives effect to the ordinary and natural meaning of the language used in ss 82AAA and 82AAE and is consistent with the legislative purpose of, in general, limiting the deductibility of superannuation contributions made by self employed persons for their own benefit to complying superannuation funds. 12 The primary judge considered the manner in which the Act provides for the deductibility and assessability of superannuation contributions: see [12]-[22]. His Honour observed, at [19]-[20]: The attraction to the taxpayer (and others in his situation) of paying superannuation contributions for his own benefit, purportedly pursuant to s 82AAE, is obvious; such deductions may be unlimited in amount, are fully deductible and, unlike all other deductible superannuation contributions, are not assessable as taxable contributions. Further, the payments may be made to a non-complying fund thereby enabling the Fund and the taxpayer to sidestep the rigorous supervisory and other requirements imposed on complying funds. The only factor that the taxpayer's counsel could point to that made persons in the taxpayer's situation beneficiaries of such fiscal largess was that they were directors or employees of a company which they controlled. The identity of the company they control is irrelevant to the superannuation contribution as it need not be the source, directly or indirectly, of that contribution. Prima facie, control of a company appears to be irrelevant to the purposes for which the legislature has provided deductibility and other tax incentives to persons to make superannuation contributions. The resulting beneficence, allegedly bestowed on directors or employees who happen to be controllers of a company, is not bestowed on any other company controllers, on any non-controlling directors or employees, or on self employed persons. It would not be a misuse of language to describe that outcome as extraordinary or, at the least, anomalous. 13 The primary judge considered, at [27]-[29], that: [T]he Commissioner's construction, which gives operative effect to the words 'in relation to', has a powerful advantage in an ordinary and grammatical sense and also gives effect to the intended operation of s 82AAE. The words 'in relation to' signify some connection or relation between the two persons referred to; the taxpayer and the eligible employee. … Although the ambit of the matters to which such words (ie 'in relation to' or 'in respect of') of relationship or connection extend may be a matter of contention, depending upon the context in which such words are used, there can be no doubt that they pertain to a relationship or connection between distinct subjects or subject matters. It is inherent in the use of those words that each of the subjects or subject matters in question is distinct. In the present context the use of the words 'in relation to' is not apt to refer to a relationship or connection between the same person, albeit in his or her respective capacities as a taxpayer and as an employee. 14 His Honour noted, at [30]: The specific context in which the definition in s 82AAA(1) is to be applied supports the Commissioner's construction. Section 82AAE refers to an amount paid by a taxpayer to provide superannuation benefits for an eligible employee. It is implicit that the section is referring to amount paid by one person (the taxpayer) for the benefit of another person (the employee) who is an 'eligible person' only if that other person's, direct, or indirect, employment relationship with the taxpayer falls within one of the classes described in s 82AAA(1). the parties' submissions on appeal 15 On this appeal, the appellant contended (and the Commissioner denied) that the primary judge had erred in finding that the contribution was not an allowable deduction under s 82AAE of the Act. Both parties submitted that the ordinary and natural reading of ss 82AAE and 82AAA supported their respective positions. The appellant contended that "[a]s a matter of simple syntax of the sections", the requirements of s 82AAE were met. The Commissioner submitted that the language of s 82AAE showed that "[t]he same person is not two subject matters but one", referring, in this context, to the common law rule (as stated in Rye v Rye [1962] AC 496, at 507 per Lord MacDermott and in Farrar v Farrars, Limited (1888) 40 Ch D 395, at 409 per Lindley LJ) that a person could not convey real or personal estate to himself or herself. 16 The Commissioner submitted that the opening words of the definition of "eligible employee", namely, "eligible employee, in relation to a taxpayer", "reinforces the requirement that is implicit in the language of s 82AAE that there must be a relationship of a particular type between the taxpayer who makes the contribution and the eligible employee for whose benefit the contribution is made, in order for the contribution to be deductible". He contended that the content of the relevant relationship in the present statutory context was employment, and that "[i]t [was] straining the English language to suggest that the relationship which a person has with him or herself may be described as one of direct or indirect employment". 17 One difficulty with the Commissioner's submission, as thus expressed, is that it tends to disregard the significance, for s 82AAE, of the definition of "eligible employee" in s 82AAA(1): cf Federal Commissioner of Taxation v Prestige Motors Pty Ltd (1998) 153 ALR 19 at 43 per Hill and Sackville JJ. Plainly enough, as the Commissioner contends, there is no employment relationship between the appellant as the contributor and the appellant as the person for whose benefit the contribution is made. Equally plainly, the definition of "eligible employee" in s 82AAA(1) contemplates that, in addition to the paradigm case where the contributing taxpayer is the employee's employer (expressed in par (a)(i) of the definition), a person for whose benefit a contribution is made may be an "eligible employee", though not employed by the contributor, if the contributor has a controlling interest in a company that does have an employment relationship with the employee. This is the situation contemplated by par (a)(ii) of the definition. Similarly, a person for whose benefit a contribution is made may be an "eligible employee", though not employed by the contributor, if the contributor is a shareholder with less than a controlling interest in the employer company and is at arm's length from the employee (as described in par (a)(iii) of the definition). It does not, of course, follow that a contributor who has a controlling interest in a company of which he is also a director is entitled to a deduction under s 82AAE for contributions made for his own benefit. This is the issue for determination. 18 The appellant propounded two views of the words, "eligible employee, in relation to a taxpayer". These words were, he said, used to supply the context for the operation of the definition. In other words, they were a point of reference. Alternatively, if, as the Commissioner submitted, they expressed some substantive notion, then they did not require a relationship between two different individuals. Referring to Lee v Lee's Air Farming Ltd [1961] AC 12 and Salomon v A Salomon & Company Limited [1897] AC 22, the appellant argued that these words were capable of referring to the one individual in two different capacities (i.e., as controlling shareholder of an employer and as employee). 19 If attention is confined to the language of s 82AAE and of the relevant definitions in s 82AAA, the better view is that s 82AAE does not apply where the taxpayer making a contribution is one and the same as the person who is said to be the eligible employee. The use of the expression "in relation to" in the definition of "eligible employee" clearly enough contemplates that there is some relationship between the taxpayer and the eligible employee. As the primary judge observed, it is difficult to see what work that expression has to do, if the intent is that the taxpayer and the eligible employee can be the same person. The suggestion made by counsel for the appellant that the words supply the "context" for the operation of the definition is a less than satisfying answer. 20 The difficulty facing the appellant's argument is compounded when one looks at the structure of par (a) of the definition of "eligible employee". Paragraph (a) identifies three categories of employee. Sub-paragraph (i) ("employee of a taxpayer") plainly contemplates that the employee and the taxpayer will be different persons. Counsel for the appellant did not suggest that a taxpayer can be his or her own employee. 21 Sub-paragraph (iii) also plainly contemplates that the employee and the taxpayer will be different persons. It is true that the opening words of sub-par (iii) ("employee of a company in which the taxpayer is the beneficial owner of shares"), if read in isolation, could be understood as applying to the case where the taxpayer and the employee are one and the same person. But the balance of sub-par (iii) excludes from the definition (among others) an "employee who is associated with the taxpayer". It is difficult to imagine why the drafter would exclude from the definition an associate of the taxpayer but not the taxpayer himself or herself, unless it was assumed that the exclusion was unnecessary. In other words, the only sensible reason for not expressly excluding the taxpayer from sub-par (iii) would seem to be because the taxpayer was thought not to be an employee for the purposes of the definition in any event. When the point was put to counsel for the appellant, counsel could not identify any other reason. 22 If what has been said thus far is correct, it is but a small step to conclude that sub-par (ii) is drafted on the same assumption as both sub-pars (i) and (iii). That is, although the relevant words ("an employee of a company in which the taxpayer has a controlling interest"), taken in isolation, could be read as applying to the case when the taxpayer and the employee are the same person, the sub-paragraph is drafted on the basis that the taxpayer and the employee will be different persons. 23 While this is the better construction of the definition, it cannot be said that the definition is entirely free from ambiguity. In these circumstances it is appropriate to examine and take into account the statutory context and legislative history of ss 82AAE and 82AAA to resolve possible ambiguity: see, e.g., K and S Lake City Freighters Pty Ltd v Gordon & Gotch Ltd (1985) 157 CLR 309 at 312-313 per Gibbs CJ, 314-315 per Mason J, 319 per Brennan J and 321-322 per Deane J and Cooper Brookes (Wollongong) Pty Ltd v Federal Commissioner of Taxation (1981) 147 CLR 297 at 304-5 per Gibbs CJ and 310-11 per Stephen J. In CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384, Brennan CJ, Dawson, Toohey and Gummow JJ observed, at 408, that: It is well settled that at common law, apart from any reliance upon s 15AB of the Acts Interpretation Act 1901 (Cth), the court may have regard to reports of law reform bodies to ascertain the mischief which a statute is intended to cure. Moreover, the modern approach to statutory interpretation (a) insists that the context be considered in the first instance, not merely at some later stage when ambiguity might be thought to arise, and (b) uses 'context' in its widest sense to include such things as the existing state of the law and the mischief which, by legitimate means such as those just mentioned, one may discern the statute was intended to remedy. Instances of general words in a statute being so constrained by their context are numerous. In particular, as McHugh JA pointed out in Isherwood v Butler Pollnow Pty Ltd [(1986) 6 NSWLR 363 at 388], if the apparently plain words of a provision are read in the light of the mischief which the statute was designed to overcome and of the objects of the legislation, they may wear a very different appearance. Further, inconvenience or improbability of result may assist the court in preferring to the literal meaning an alternative construction which, by the steps identified above, is reasonably open and more closely conforms to the legislative intent. [Citations omitted] Each party supported his position by reference to legislative history. legislative history (a) Parties' submissions on legislative history 24 Before considering the legislative history in more detail, it may be helpful to outline the parties' contentions with respect to it. The Commissioner contended that, since 1915, there has been a dichotomy in Commonwealth income tax law between the deductibility of contributions to a superannuation fund made by a contributor for his or her own benefit and contributions made by a contributor for employees other than himself or herself. The appellant did not dispute that there were, in income tax law, two streams of deductibility, for employees and for others, but he did dispute that these streams were mutually exclusive. 25 The Commissioner contended that, in the 1998 year of income, the dichotomy to which he referred was expressed by Subdiv AA, headed "Contributions for Superannuation Funds for Benefit of Employees", and by Subdiv AB, headed "Contributions for Superannuation Funds by Eligible Persons", both which were found in Pt III of the Act: see also Acts Interpretation Act 1901 (Cth), s 13(1). In the 1998 year of income, s 82AAE formed part of Subdiv AA. 26 The Commissioner further contended that, when Parliament introduced s 82AAE into the Act in 1994, it did so as part of a legislative scheme which made all contributions to superannuation funds the subject of income tax in the hands of a recipient trustee. This latter matter was significant, so the Commissioner submitted, in light of the amendments made at the same time to s 274 of the Act. (Section 274 deals with the circumstances in which contributions to superannuation funds are taxable.) The Commissioner pointed out that, if the appellant were correct, then in respect of the 1998 year of income, a controlling shareholder and director who fell within par (a)(ii) of the definition of "eligible employee" in s 82AAA(1) would be entitled to a deduction for a contribution paid to a superannuation fund, although the contribution was made for his or her own benefit; yet by virtue of s 274(1), as amended in 1994, the contribution would not, so it seemed, be assessable in the hands of the trustee under Pt IX of the Act. This apparent anomaly should, so the Commissioner submitted, lead the Court to reject the appellant's submissions, especially considering that it had apparently been the Parliament's intention, both in 1989 and 1994, to impose a tax liability on all superannuation funds. 27 The appellant contended, however, that the amendments made to s 274 in 1994 could not provide a basis for construing s 82AAE, since s 82AAC (which was a counterpart provision to s 82AAE) had not materially changed since its introduction in 1989. Nor could these amendments provide a basis for construing the definition of "eligible employee" in s 82AAA, which had not materially changed since 1964. 28 In order to understand the parties' competing submissions, it is necessary to make a relatively detailed examination of the legislative history. Resort to this history makes it abundantly clear that there were indeed two streams of deductibility for contributions to superannuation funds and that, broadly speaking, there was one stream for contributions for the benefit of the taxpayer in his or her own right (or for his or her dependants) and another, for the benefit of employees (other than the taxpayer). (b) Early history of income tax provisions regarding superannuation