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[2002] AATA 785
respondent. The objection decision disallowing the deduction was affirmed; the Applicant's claim for deduction of $25,476.92 (employer superannuation contributions) was disallowed.
2 cited instruments linked from this judgment.
The AAT held that a university professor's payment (by way of reimbursement of an employer superannuation contribution) to preserve defined-benefit superannuation entitlements was capital in character and not deductible under the general deduction provision. The Tribunal found no sufficient connection between that payment and the income derived from the Commonwealth appointment. It followed established authorities (Lunney, Ronpibon, Markey) and affirmed the Commissioner's disallowance of the deduction.
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The Applicant, a long-serving professor and member of a defined-benefit State Superannuation Fund (SSF), accepted a Commonwealth statutory agency appointment and obtained leave without pay (LWOP) from his university. The university required that, because LWOP longer than six months affected superannuation entitlements, the Applicant pay both the employee and employer superannuation contributions in order to preserve his SSF entitlements (see the university letter, exhibit R1, and the LWOP guidelines quoted at the hearing). The parties agreed arrangements that included a brief notional salary increase to Dean level immediately before LWOP and a later retirement date, and the Applicant ultimately retired and received a lump-sum payout from which both employee and employer contribution amounts were deducted and rolled into the fund. The Applicant, being a cash basis taxpayer for the year ended 30 June 1999, claimed a deduction for the employer-contribution-equivalent amount (AUD 25,476.92). The Commissioner disallowed that claim, and on objection and appeal to the Administrative Appeals Tribunal the Tribunal (Mr J Block DP) affirmed the Commissioner's objection decision and disallowed the deduction.
Procedurally, the matter came before the AAT on the Commissioner's decision to disallow an objection to an assessment for the 1999 year. The Applicant was self-represented; the ATO was represented. The Tribunal had documentary exhibits including the university letter of 24 July 1997 and the LWOP guidelines. The Applicant did not give oral evidence; facts were essentially undisputed and the dispute concerned legal characterisation: whether the reimbursement-equivalent payment was deductible as an outgoing incurred in gaining assessable income under s 8-1(1) ITAA 1997.
The Tribunal applied three controlling principles from established authorities.
Essential character test (Lunney). The Tribunal reiterated the Lunney test: whether an outgoing has the essential character of a deduction depends on the nature of the expenditure itself rather than on the fact that it was incurred in order to engage in income-producing activity. The Tribunal quoted Lunney to emphasise that the correct characterisation is central to deductibility.
Nexus test (Ronpibon). The Tribunal required a sufficient nexus between the outgoing and the assessable income such that the outgoing is incidental and relevant to gaining that income. It concluded the reimbursement had no relevant nexus to the Applicant's Commonwealth Agency income: the payment was not made to produce that income nor incidental to its production.
Capital nature of superannuation contributions (Markey). The Tribunal relied on Full Federal Court authority in Markey, which held that contributions to a superannuation scheme that operate to secure defined benefits are payments to purchase an annuity and are capital in nature, not deductible. The Tribunal emphasised the "true legal character" point in Markey: when the payment's real substance is to secure superannuation rights, it is capital expenditure even if some actuarial features resemble insurance or other benefits.
Applying those principles to the facts, the Tribunal found that although the Applicant reimbursed what was in substance an employer contribution, the effect was that he (indirectly) paid that amount into the SSF and thereby purchased the enhanced final‑salary superannuation entitlement. The payment therefore had the character of a capital contribution to acquire annuity rights and lacked the necessary nexus to the Commonwealth Agency income. Alternative arguments (analogy to rent because payments could have been recurrently scheduled, or that the reimbursement was merely a convenient mechanism that could have taken other forms) were rejected. The Tribunal noted no apportionment was advanced on the papers and treated the small salary increase as de minimis.
For those reasons the Tribunal concluded the employer-contribution-equivalent payment was not deductible and affirmed the Commissioner's objection decision.
Before this decision:
After this decision:
Tribunal quote of Lunney (plain): "Whether or not it should be so characterised depends upon considerations which are concerned more with the essential character of the expenditure itself...", Translation: You must look at what the payment actually is, not just why the taxpayer made it. If the payment is essentially a capital outlay, calling it something else does not make it deductible.
Tribunal application of Markey (plain): The Tribunal accepted Markey's point that "the true legal character of the taxpayer's payment to the fund is a periodical payment to purchase an annuity" and therefore capital. Translation: Even if part of the calculation of a payment looks like insurance or is actuarially complex, if the payment is in substance buying a pension or enhancing a defined benefit it is a capital purchase, not a tax-deductible expense.
Tribunal finding on nexus (plain): "There was no nexus of any kind between the payment... and the income that the Applicant derived from the Commonwealth Agency." Translation: The reimbursement did not help earn the Commonwealth income. It was not spent in or incident to producing that assessable income, so it cannot be deducted against it.
Reimbursement treated as payment to fund (plain): The Tribunal treated reimbursement-to-employer as economically equivalent to paying the fund and therefore falling within Markey. Translation: The route the money took (reimbursement to employer then paid into the fund) did not change what it was: money used to secure the defined-benefit entitlement.
This decision is directly triggered when:
Practically, if the payment's economic effect is to purchase or enhance future retirement income under a defined-benefit regime, expect this precedent to preclude a deduction.
Within the decision the Tribunal follows and applies Markey and Lunney principles; the treatment is orthodox with respect to those authorities. The AAT did not purport to overrule or refine Markey; rather it applied its ratio to the reimbursement variant and explicitly held the reimbursement equivalent should be treated as payment within Markey. The decision therefore can be cited as authority that reimbursement to an employer of a superannuation contribution is not a means of converting capital superannuation contributions into deductible outgoings where the underlying economic effect is to buy defined-benefit entitlements.
Because this is an AAT decision, it is not binding on courts, but it is persuasive as an application of established High Court and Full Federal Court principles. Where a taxpayer tries to rely on form (reimbursement to employer) to change character, this decision is directly on point for tribunals and practitioners seeking to predict outcomes.
Apportionment in mixed fact situations: The Tribunal emphasised that no apportionment was argued or proved. The decision leaves ambiguous the circumstances in which an apportionment will be accepted when a payment has mixed purposes or mixed effects. Practitioners should note the burden on taxpayers to provide evidence and calculation for apportionment if they intend to argue a deductible component exists.
Payments related to accumulation-style funds: This decision rests on the defined-benefit character of the SSF and reliance on Markey. Whether the same outcome follows for payments to accumulation-style funds that do not operate to secure annuity-like rights may require separate analysis; Markey focusses on the annuity-character of defined-benefit contributions.
Distinguishing employer-mandated payments that are incidental to producing income: The Tribunal cited Cooper to show an employer's direction alone does not make expenditure deductible. There remains scope for close factual inquiry where employer-imposed expenditure is more directly required for income-producing activities (for example, where the outlay is necessary to perform duties that generate assessable income), and the line between incidental/necessary and capital may require careful evidence.
Character where contributions fund non-pension benefits: If a payment reimburses an employer for contributions that fund non‑pension benefits (for example, payments that purchase services or benefits of a revenue nature), the present decision does not close the door on deductibility, but the taxpayer must establish the payment's essential character and nexus.
Conclusion: Flint (AAT) applies established authorities to hold that reimbursements effectively purchasing defined-benefit superannuation entitlements are capital and not deductible. Practitioners should focus on substance, supply clear evidence for any proposed apportionment, and be cautious in relying on form-based characterisations when dealing with employer-reimbursed superannuation contributions.
(b) to derive increased income from the University, as I have said, for the brief period involved;
(d) The Applicant contended (as I have said) that the payments in question could have been made periodically and recurrently and so that they should be regarded as analogous to rent.
(e) The Applicant argued also that he received not only the small increase in salary previously referred to but also the leave entitlements set out in clause 9 of the Respondent's Statement.
"Other than the course of action adopted by the Applicant in paragraph 13 above, it was open to the Applicant to choose any one of the following options:
(1) You can deduct from your assessable income any loss or outgoing to the extent that:
(a) it is incurred in gaining or producing your assessable income; or
(b) it is necessarily incurred in carrying on a *business for the purpose of gaining or producing your assessable income.
Note: Division 35 prevents losses from non-commercial business activities that may contribute to a tax loss being offset against other assessable income."
(b) Lunney v FC of T; Hayley v FC of T (1958) 100 CLR 478 establishes that for a loss or outgoing to be deductible, it must have the essential character of an outgoing incurred in gaining assessable income. At page 499 the High Court said:
"Whether or not it should be so characterised depends upon considerations which are concerned more with the essential character of the expenditure itself than with the fact that unless it is incurred by an employee or a person pursuing a professional practice will not even begin to engage in those activities from which their respective incomes are derived."
(c) Ronpibon Tin NL v FC of T [1949] HCA 15; 8 ATD 431 establishes that there must be a nexus between the outgoing and the assessable income such that the outgoing is incidental and relevant to the gaining of the assessable income.
(d) The fact that something is done by direction of an employer does not necessarily have the effect that the expenditure is deductible. In FC of T v Cooper 91 ATC 4396 Hill J said at page 4414:
" Assuming that that letter was a direction lawfully given under Mr Cooper's contract, it does not follow that the expenditure must be deductible. An employer may require an employee to travel to and from work by a particular mode of transport...
An employer may require an employee to travel to and from work by a particular mode of transport, but the fact that the employee is required, as a term of his employment, to incur a particular expenditure does not convert expenditure that is not incurred in the course of the income-producing operations into a deductible outgoing. If it did, then, no doubt, employers would be besieged by employees with requests that the employer should require the particular expenditure to be incurred. There may be cases where the fact that expenditure is required to be made assists an employee to show the relevant connection between the outgoing and the activities which produce assessable income, but the decision of the High Court in FC of T v Finn [1961] HCA 61; (1961) 12 ATD 348; (1961) 106 CLR 60, shows that there was no difference in the availability of a deduction for overseas travel expenditure, between those expenses which the taxpayer there incurred in travelling to South America at the request of his employer, and those which he incurred in travelling to Great Britain and Europe in his own vacation time. There was, in each case, the necessary connection between the expenditure and the taxpayer's income-earning activities as an architect."
The statement by Hill J in Cooper's case is, even if obiter, strongly persuasive.
(e) In FC of T v Markey 89 ATC 4600 the Full Federal Court said at page 4605:
"Upon the analysis we have made of the scheme embodied in the Superannuation Act, we are of opinion that it was not open to the Tribunal to reach the conclusion that a portion of the contribution made to the fund by the taxpayer in each of the years of income was an allowable deduction under subsec.51(1) of the Income Tax Assessment Act as an outgoing incurred in gaining or producing the assessable income of the taxpayer. The true nature of the contribution to the superannuation fund was that of an investment to secure rights under the Superannuation Act. As such it was in the nature of capital expenditure. The taxpayer's argument that payments from the fund may be received upon retirement from employment on the ground of invalidity or incapacity does not assist the taxpayer in ascertaining the true nature of the payment to the fund. Entitlement to a superannuation pension after a retirement brought on by invalidity or incapacity is an entitlement to the receipt of an accelerated pension and not to income in lieu of anticipated income. The true legal character of the taxpayer's payment to the fund is a periodical payment to purchase an annuity. The fact that, in actuarial terms, the calculation of the amount to be paid as a contribution includes provision for an accelerated payment of the annuity in the case of invalidity or incapacity does not convert the nature of the contribution into two components of, firstly, an outgoing incurred in gaining or producing the assessable income of the taxpayer and, secondly, an instalment of the purchase price required to be paid to acquire the annuity. Nor can it be said that in truth any part of the payment was in the nature of a premium to secure an indemnity in the event of invalidity or incapacity. Apportionment is as inappropriate as Kitto J. held it to be in F.C. of T v Western Suburbs Cinemas Ltd, [1952] HCA 28; at pp.107-108 and for essentially the same reason. The taxpayer is not entitled to a deduction for a notional expenditure upon disability insurance, which he might have obtained, when his actual expenditure related to something quite different, the superannuation rights he did obtain." (Emphasis added)
The essential point is that emphasised; that is that the true legal character of the taxpayer's payment to the fund was a periodical payment to purchase an annuity and therefore of a capital nature.
(f) Perhaps the point most strongly argued by the Applicant was that, as he saw it, Markey's case is distinguishable in that Markey made a payment directly to the fund; by contrast he made a payment equivalent to the employer contribution. He argued that the University could equally have stipulated for some other payment, such as a contribution towards the cost of the law library or his own office.
(b) The Applicant's leave entitlements would have been derived in any event. It is conceivable that the entitlements were greater that they would have been without the arrangement in question but there was no evidence of any kind as to what, if any, the additional amount might have been, and as I have said, the Applicant did not endeavour to establish an apportionment.
(c) The increased salary was as I have said small and referable to a brief period; no amount was specified and there was no evidence as to an apportionment. It was treated as I have said as de minimis.
(d) The Applicant certainly did not incur the expenditure to preserve his position because one concomitant of the arrangement was that he was obliged to retire earlier than he might otherwise have done.
(e) I do not accept the argument that the payments could have been made periodically and were thus analogous to rent. Even if they had been made periodically (and they were not) they were made within Markey's case in order to fund a superannuation benefit and thus were made on capital account.
(f) Nor do I accept the argument that the employer benefit was simply a convenient measure which might have taken a different form. The Applicant made a brief and passing reference to "duress". At the request of the Applicant, the University agreed to advance the Applicant (notionally except for a very brief period) to the level of Dean in order to improve his superannuation benefit. The University stipulated that during the LWOP the Applicant should pay (inter alia) an amount equivalent to the employer contribution. There was no evidence of any element of duress; the Applicant could have elected to take up another option but chose the one perceived by him to be most advantageous to him. Nor would another type of payment have suited; the University required only the reimbursement of the relevant contribution. There is thus a clear nexus between the payment and the benefit and to nothing else, and the essential character test is satisfied by that characterisation.
(g). The fact that the Applicant paid an amount equivalent to the employer contribution does not in my view have the effect that Markey's case is distinguishable. Albeit that the University made the employer contribution to SSF and received reimbursement in accordance with its arrangement with the Applicant, the effect is that the Applicant paid that amount (indirectly) to the Fund and so that that payment falls within Markey's case and is thus of a capital nature. (I agree with the Applicant's contention that it is neither private nor domestic).
I certify that the 11 preceding paragraphs are a true copy of the reasons for the decision herein of Mr J Block, Deputy President.
Signed: H Sim .....................................................................................
Solicitor for the Respondent Ms J Gatland of the ATO Legal Practice
Ronpibon Tin NL v FC of T [1949] HCA 15; 8 ATD 431
(1958) 100 CLR 478
(1961) 106 CLR 60
(1952) 86 CLR 102
The objection decision disallowing the deduction was affirmed; the Applicant's claim for deduction of $25,476.92 (employer superannuation contributions) was disallowed.