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[2002] FCA 1434
Federal Court of Australia
2002-11-22
The JJ, Cooper J
Original judgment source is linked above.
background 1 Jeffrey James Prebble ("the Doctor") is a specialist medical practitioner. 2 On 6 January 1982 : (a) The Doctor and Robyn Ann Prebble ("RAP") : (i) each became the holder of one of the two ordinary $1.00 shares of the issued share capital of Shelf Company No 354 Pty Ltd; (ii) each became a director of the company; (b) RAP executed a declaration of trust declaring that she held her share on behalf of the Doctor and agreed to deal with it as he may instruct from time to time. 3 On 7 January 1982, the Doctor and Shelf Company No 354 Pty Ltd entered into a written agreement, whereby the company employed the Doctor to serve it as a medical practitioner in the conduct of a medical practice which the company had acquired, or agreed to acquire. 4 On 9 February 1982, Shelf Company No 354 Pty Ltd changed its name to Jeffrey James Prebble Pty Ltd ("P Co"). 5 On 11 November 1992, a superannuation fund known as "The JJ Prebble Pty Ltd Superannuation Fund" ("the No 1 Fund") was established. The Doctor was the trustee of the fund and a member of it. P Co made contributions to this fund from the time of its establishment. 6 On 30 October 1998, the Doctor was employed by P Co in terms of a letter of that date, to provide administrative and management services to the company. 7 On 5 November 1998, a second superannuation fund was formed known as "The Prebble No 2 Superannuation Fund" ("the No 2 Fund"). P Co was, and remains, the trustee of the No 2 Fund. The Doctor became a member of the No 2 Fund on 5 November 1998. 8 The No 2 Fund is a non-complying superannuation fund, as defined in s 267(1) of the Income Tax Assessment Act 1936 (Cth) ("the ITAA"). 9 On 6 November 1998, the Doctor paid a contribution of $300,000 to the No 2 Fund. The Doctor claimed the payment of $300,000.00 as a deduction in his income tax return for the year ended 30 June 1999. The deduction was claimed in reliance upon s 82AAE of the ITAA. 10 On 2 October 2000, the Doctor received a notice from the respondent Commissioner of Taxation ("the Commissioner"), being a determination by a delegate of the Commissioner made under s 177F(1)(b) of the ITAA disallowing the sum of $300,000.00 as a deduction in the relevant year of income. A Notice of Assessment bearing the date 21 November 2000 was issued in respect of the Doctor's income for the year ended 30 June 1999, which included the sum of $59,400 as an Understatement Penalty. The Notice also recorded an adjustment to deductions as follows : "Non-employer sponsored superannuation $ ˘ contributions - Adjustment as a result of audit or investigation - 300,000.00" 11 The Doctor filed an objection on 28 December 2000. On 13 February 2001, the Commissioner, by a delegate, again made a determination under s 177F(1)(b) of the ITAA in the same terms as the determination made on 2 October 2000. 12 The Commissioner disallowed the Doctor's objection on 19 February 2001. 13 On 27 February 2001, the Commissioner issued a Notice of Amended Assessment to P Co as trustee of the No 2 Fund, to include the sum of $300,000.00 in the assessable income of the fund for the year ended 30 June 1999. The Commissioner also imposed a penalty of $70,724.54 on the trustee of the No 2 Fund. 14 On 6 April 2001, the Doctor applied to this Court under s 14ZZ of the Taxation Administration Act 1953 (Cth) ("the TAA") by way of appeal against the objection decision of the Commissioner to have it set aside or waived. 15 On 12 April 2001, P Co objected to the amended assessment of the Commissioner in respect of the income of the No 2 Fund for the year ended 30 June 1999. 16 The objection of P Co was disallowed by the Commissioner on 5 June 2001, except to the extent that : (a) penalty imposed under s 226L of the ITAA was remitted to 20 per cent under s 226K and s 226Y of the ITAA; and (b) the Commissioner no longer relied on Part IVA of the ITAA as an alternative argument to support the assessment. 17 On 6 July 2001, P Co applied to this Court under s 14ZZ of the TAA by way of appeal against the objection decision of the Commissioner to have it set aside or waived. 18 By order of the Court the appeals of the Doctor and P Co ("the Taxpayers") were heard together.
legislative framework 19 In the 1999 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) 20 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 first question IN Q69 OF 2001 21 The first issue for determination is whether the Doctor, as the director/employee of P Co having the controlling interest in the company, was by virtue of paragraph (a)(ii) of the definition of an "eligible employee" in s 82AAA(1) and subs 82AAA(2), to be regarded as an "eligible employee" for the purposes of s 82AAE of the ITAA.
resolution of the first question IN Q69 OF 2001 22 The Taxpayers submitted that : (a) the Doctor was a taxpayer; (b) he paid $300,000.00 as a contribution to a non-complying superannuation fund as defined for the purpose of making provision for superannuation benefits for an eligible employee; (c) he was an eligible employee because he was an employee of P Co, in which he had a controlling interest. In those circumstances, they submitted, s 82AAE operated to allow to the Doctor a deduction of the sum of $300,000.00 paid in the year ended 30 June 1999. 23 The Commissioner submitted that, as a matter of construction a "taxpayer", for the purposes of s 82AAE, was a different entity to an "eligible person". Thus, it submitted, a contribution in respect of which a deduction arises is one which is paid by the taxpayer in respect of another party who is also an "eligible employee" as defined. Similarly, for the purposes of the definition of "eligible employee", the Commissioner submitted that the "taxpayer" was a person or entity other than the employee of a company in which the taxpayer had a controlling interest. 24 In support of the construction contended for, the Commissioner relied upon a decision of Merkel J in Harris v Commissioner of Taxation (2001) 48 ATR 434; (2002) ATC 4017; [2001] FCA 1689. His Honour concluded with respect to the construction of s 82AAE, that : "[30] ... 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 [sic] 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)." 25 At the time of the hearing before me, an appeal had been lodged by the taxpayer Harris from the judgment of Merkel J. The appeal in Harris has been heard and judgment given. The Full Court (Sackville, Kenny and Allsop JJ) [2002] FCAFC 226 dismissed the appeal. Their Honours, under the heading "Construction of s 82AAE" held at [70] - [73] : "[70] In the statutory context presently under consideration, what do the words "in relation to" signify? There is nothing in this context, including the legislative history, that would support the proposition that they signify a relationship between two different capacities of the same taxpayer. On the contrary, throughout the legislative history of the Commonwealth income tax law, there have been two streams of deductions for superannuation contributions, and each stream has been treated as exclusive of the other: see, e.g., s 82AAR introduced by the 1964 Act. One stream has concerned contributions by an employer (or someone who stands in the place of the employer for this purpose) to a fund for the benefit of another who is an "eligible employee". The history of Subdiv AA, in particular, confirms that the employer contribution provisions have, since their inception, been premised on a relationship between two different persons. There is nothing in the legislative history between 1915 and the end of the 1998 year of income that supports the proposition that a taxpayer may utilise an employer contribution provision to secure a deduction in respect of a contribution to a superannuation fund for his or her own benefit. The history of this branch of the law shows that any provision for the taxpayer's own benefit fell within the second stream of personal benefit contributions which, in the 1998 year of income, found expression in Subdiv AB, and had earlier found expression in ss 159N and 159R of the 1975 Act, s 82H of the 1950 Act (and par 160(2)(f) of the 1942 Act, par 79(e) of the 1936 Act, par 23(1)(g) of the 1922 Act and par 18(g) of the 1915 Act). [71] To the extent that par (a)(ii) of the definition of "eligible employee" in s 82AAA(1) may be read as covering the same individual in two different capacities, the statutory context requires that it be read down. Hence, in order to satisfy s 82AAE (and s 82AAC), there must be a contribution by one person (an employer or a person who, for these purposes, can be regarded as acting in the stead of the employer) and a different person (the employee) for whose benefit the contribution is made. That is, these provisions refer to an act by one person (making payment to a relevant fund) for the benefit of another person. Bearing in mind the legislative history of these provisions, this reading is readily accommodated in s 82AAE (and s 82AAC), both of which refer to a contribution made by "a taxpayer … for the purpose of making provision for superannuation benefits payable for an eligible employee" (emphasis added). In the absence of the definition of "eligible employee" in s 82AAA, these provisions would naturally be read as referring to a taxpayer on the one hand and a different person, an employee, on the other. [72] Further, in light of the legislative history, it is tolerably clear that the object of Subdiv AB would be frustrated in part if s 82AAE were construed in the manner for which the appellant contends. The object of Subdiv AB is to specify and limit the circumstances in which a person (whether employed or not) may obtain a deduction for a contribution made for his or her own benefit. There is nothing in the Act or in the legislative history that would provide a rational basis for permitting a contributing taxpayer (who happened to be a controlling shareholder and director of a corporate employer) to secure an unlimited deduction under s 82AAE, in respect of a contribution to a fund to make provision for himself. The Act makes it plain that there is a difference between the legislative policy underlying Subdiv AA, which is designed to encourage employers (and those who stand in their place) to make provision for their employees, and the policy underlying Subdiv AB, which is designed to encourage individuals to make provision for themselves on their retirement. If the appellant is correct, a controlling shareholder who happened to be a director of a corporate employer has, at least since 1964, been able to circumvent the limitations imposed on the deductibility of contributions made by a person for his or her own benefit. The legislative history of these provisions makes it difficult to accept that this result conforms to the legislative scheme, which has evolved since 1915 and substantially reached the form with which this appeal is concerned in 1989 (albeit subject to subsequent amendments). summary [73] In summary, no error is shown in the judgment of the primary judge. The appellant was not entitled to an allowable deduction pursuant to s 82AAE of the Act in respect of the contribution made to a non-complying fund for his own benefit in the 1998 year of income. In that year, s 82AAE did not entitle a taxpayer, who happened to hold a controlling interest in a corporate employer and who was a director of it, to claim a deduction in respect of a contribution to a superannuation fund for the provision of a benefit for himself." 26 In the light of the decision in the Full Court, the parties were given the opportunity to make further submissions. The Taxpayers made further submissions. 27 The Taxpayers submitted that the decision of the Full Court was in error because the Court had not been referred to certain statutory provisions in its analysis of the legislative history of the precursors to s 82AAE and s 82AAA as an aid to the construction of those sections. In particular, it was submitted that the Full Court was not referred to s 121C of the ITAA introduced by the Taxation Laws Amendment Act (No 2) 1985 (Cth). They submitted that the failure by the Full Court to consider s 121C left it in the erroneous belief that there was no legislative provision in favour of the construction of s 82AAE and s 82AAA contended for by the Taxpayers. 28 I have read the transcript of the proceedings before the Full Court in Harris and I am satisfied that the relevant statutory provisions commencing with s 18(g) and s 18(j) of the Income Tax Assessment Act 1915 (Cth) were put to the Full Court. In particular, s 121C as introduced by the 1985 amending Act, was the subject of submissions by counsel for the taxpayer Mr Harris wherein each of the matters which the Taxpayers set out in their further written submissions was expressly put to the Full Court. 29 I am bound by the decision of the Full Court in Harris. The decision in Harris requires me to hold that the Doctor was not an "eligible employee" as defined in s 82AAA and thus was not an eligible employee for the purposes of s 82AAE of the ITAA. The payment of $300,000 by the Doctor to the No 2 Fund was not an allowable deduction to the Doctor. 30 The Taxpayers fail in respect of the first issue.
the second QUESTION IN Q69 OF 2001 31 Was the Commissioner correct when it determined to impose an Understatement Penalty of $59,400 in respect of the tax shortfall in the 1999 return?
RESOLUTION OF THE SECOND QUESTION IN Q69 OF 2001 32 The Commissioner imposed a penalty on the Doctor relying upon the provisions of s 226K of the ITAA. That section provides : "226K Subject to this Part, if : (a) a taxpayer has a tax shortfall for a year; and (b) the shortfall or part of it was caused by the taxpayer, in a taxation statement, treating an income tax law as applying in relation to a matter or identical matters in a particular way; and (c) the shortfall or part, as the case may be so caused exceeded whichever is the higher of : (i) $10,000; or (ii) 1% of the taxpayer's return tax for that year; and (d) when the statement was made, it was not reasonably arguable that the way in which the application of the law was treated was correct; the taxpayer is liable to pay, by way of penalty, additional tax equal to 25% of the amount of the shortfall or part." 33 A "tax shortfall" is defined in s 222A(1) : " 'tax shortfall', in relation to a taxpayer and a year, means the amount, if any, by which the taxpayer's statement tax for that year at the time at which it was lowest is less than the taxpayer's proper tax for that year;" 34 A statement as to the application of the law is reasonably arguable of being correct for the purposes of s 226K if it satisfies s 222C of the ITAA. That section provides : "222C(1) For the purposes of this Part; (a) the correctness of the treatment of the application of a law; or (b) another matter; is reasonably arguable if, having regard to the relevant authorities and the matter in relation to which the law is applied or the other matter, it would be concluded that what is argued for is about as likely as not correct. 222C(2) For the purposes of this Part, if the treatment of the application of a law assumed that the Commissioner would exercise a discretion in a particular way, the correctness of the treatment is reasonably arguable, in so far as it consisted of the assumption, if the exercise by the Commissioner of the discretion in that way would be reasonably arguably in accordance with law. 222C(3) For the purposes of this Part, the exercise, or assumed exercise, by the Commissioner of a discretion is reasonably arguably in accordance with law if, having regard to the relevant authorities and the matter in relation to which the discretion is or would be exercised, it would be concluded that a court would be about as likely as not to hold that the exercise is or would be in accordance with law. 222C(4) In this section : 'authority' includes : (a) an income tax law; or (b) material for the purposes of subsection 15AB(1) of the Acts Interpretation Act 1901; or (c) a decision of a court (whether or not an Australian court), the Tribunal or a Board of Review; or (d) a public ruling within the meaning of Part IVAAA of the Taxation Administration Act 1953. 222C(5) For the purposes of this section, the Commissioner exercises a discretion if the Commissioner: (a) forms an opinion; or (b) refuses or fails to form an opinion; or (c) attains a state of mind; or (d) refuses or fails to attain a state of mind; or (e) makes a determination; or (f) refuses or fails to make a determination; or (g) exercises a power; or (h) refuses or fails to exercise a power.": 35 Section 226Y of the ITAA provides : "226Y If: (a) under a shortfall section a taxpayer is liable to pay additional tax in respect of a year of income because of a tax shortfall or part of a tax shortfall; and (b) after the Commissioner had informed the taxpayer that a tax audit relating to the taxpayer in respect of the year was to be carried out, the taxpayer voluntarily told the Commissioner, in writing, about the shortfall or part; and (c) telling the Commissioner could reasonably be estimated to have saved the Commissioner a significant amount of time or significant resources in the audit; the amount of the additional tax is reduced by 20%." 36 Section 226V of the ITAA provides : "226VIf: (a) apart from this section, a taxpayer has a tax shortfall for a year of income; and (b) the shortfall or part of it was caused by the taxpayer, in a taxation statement, treating an income tax law as applying in a particular way; and (c) that way agrees with : (i) advice given to the taxpayer by a taxation officer; or (ii) a general administrative practice under this Act; the shortfall is not a tax shortfall, or the part is not part of a tax shortfall, for the purposes of section 226G, 226H, 226J, 226K or 226L." 37 The Commissioner submitted that in September 1999 when the Doctor lodged his income tax return, the construction of s 82AAA and s 82AAE he contended for would not be concluded as being "about as likely as not correct", as required by s 222C(1) of the ITAA. This was so because such a construction gave rise to an "extraordinary" or "anomalous" outcome as found by Merkel J in Harris: paragraph [20]. 38 Further, the Commissioner submitted that any general administrative practice of the Commissioner to allow a deduction for payments made to a superannuation fund by persons in the same situation as the Doctor, terminated in March 1999 and that public notice of such termination was given in Media Release "Nat 99/16" dated 19 May 1999. 39 Prior to the decision of Merkel J in Harris, delivered on 3 December 2001, there was no decision of a Court, the Administrative Appeals Tribunal or a Board of Review which dealt with the interpretation of the sections in issue. Nor was there anything in textbooks which would indicate that the interpretation contended for was, or may be, in error. However, there was in the texts, and in some Board decisions noted in the texts, consideration of the payment by a company employer of contributions to a pension fund for the benefit of a working director or a shareholder/employee. For example, in "Commonwealth Income Tax Law and Practice" by JAL Gunn 1st Ed Sup (1947) at [780], the author states : "Under new s 66(2)(c) and s 79(2)(c) the Commissioner shall determine in respect of any sum set apart or paid as or to a provident fund after 30 June, 1943, the part, if any, of that sum which is attributable to the provision of benefits, etc., for any person who is both a shareholder and an employee (which term, as stated above, includes a director) of a private company, as defined by s 103, if, in the opinion of the Commissioner, the benefits, etc., are provided for that person as a shareholder. Any amount so determined by the Commissioner is not an allowable deduction to the company (s 66(3)(b) and s 79(3)(b)). The writer is of opinion that unless the Commissioner is in a position to determine that the whole of a contribution for the benefit of a shareholder-employee should be disallowed, the above provisions are inoperative and no portion of the contribution can be disallowed. The official attitude, as expressed in replies to submissions of deeds for approval, is that the whole of the contribution made to a fund for the benefit of shareholder-employees of private companies should be disallowed if, by virtue of their shareholdings, they are in a position to cause the company to appropriate profits for their benefit in the form of contributions to the fund. If this attitude is correct, it means that benefits for persons, who occupy in a private company the dual position of shareholders and employees or directors, can never be provided for them in a case where they hold a preponderance of the voting power in the company. With the greatest respect the writer expresses disagreement with the Departmental attitude. A person may, by virtue of his shareholding, cause a provision to be made for himself; but the question still remains whether he causes it to be made for himself as a shareholder or as an employee. If a provision is made for a class of employees, including one who is also a shareholder with a controlling interest in the company, and he is treated for the purpose of such provision on the same footing as the other employees, it is considered that the provision is made for him as an employee, even if it be conceded that it is made by him as a shareholder." (Emphasis added) See also the Gunn, 2nd Ed (1948) at [963]. 40 As appears from the extract cited, a shareholder employee who controlled the employer company was treated as making a payment for his or her benefit because he or she controlled the company. The only matter of controversy as reflected in the text and in the legislation was whether the payment was made by the shareholder for himself or herself as a shareholder or as an employee. If it was made in respect of the latter category, then there was no objection as a matter of policy that the shareholder, because he or she controlled the company, made a payment to a superannuation fund for his, or her own benefit as an employee. 41 The object of the provisions in the ITAA dealing with compulsory and voluntary contributions to superannuation funds for the benefit of employees of a business was, according to Gunn [779] citing the Commonwealth Treasurer on the occasion of the introduction of the Income Tax Assessment Act 1944 (Cth) : "... to encourage the establishment and maintenance of provident funds for the benefit of the general body of the employees of the taxpayer ... and for the benefit of employees in any business or class of business, or the dependants of any such employees". 42 From the introduction of the ITAA in 1936, that encouragement was reflected in the exemption of the income of such funds from taxation: s 23(j); and the allowance of the contributions to such funds as deductions: s 66 (compulsory contributions) and s 78(1)(b) (voluntary contributions). 43 Section 78(1)(b) of the ITAA did not require the taxpayer to be the employer in order to obtain the benefit of a deduction for sums paid or set aside for employers engaged in "his or any business or class of business ...". It was sufficient if the payments were made for the benefit of employees. The statutory scheme in the ITAA from its inception, has been to grant a deduction in respect of voluntary contributions made to a superannuation fund for the benefit of employees of any business or class of business. So much appears from the reasons of the Full Court in Harris. 44 The construction of s 82AAA and s 82AAE contended for by the Doctor in September 1999 was based on the fact that the ITAA then, and since its inception, has acknowledged that where company employers are concerned, an individual may have two or more capacities each including special rights and duties in relation to the same thing or matter or in relation to the same persons. One of those capacities is as an employee of the company. The common law also makes the same distinction in like circumstances: Anderson v James Sutherland (Peterhead) Ltd [1941] SC 203, per Lord Normand at 218. 45 The contention of the Doctor was that a controlling shareholder or director who was also an employee of a company was, for the purposes of the ITAA and at common law, in the same situation as any other employee of the company. Thus, for the purpose of s 82AAA(a)(ii), the Doctor contended that notwithstanding in one capacity he was the taxpayer who held the controlling interest in P Co, nonetheless he was in another capacity an employee of that company. As such an employer, the ITAA sought, by providing for deductions under s 82AAE, to encourage the establishment and maintenance of a superannuation fund to provide benefits to him in his capacity as an employee. In terms of principle, and the underlying policy, there was no reason to exclude him from the definition of "eligible employee" when his situation as an employee was accommodated within the ordinary meaning of the language of s 82AAE of the ITAA. The contrary construction, it should be noted, required the insertion of the words "other than the taxpayer" to exclude him from the general category of employees of which shareholder/employees and director/employees would ordinarily form part. 46 If the Doctor satisfied the definition of "eligible employee", then the payment to the superannuation fund was for the purpose of making provision for him in his capacity of an eligible employee of P Co and neither s 82AAE nor the legislative precursors of that section required that the taxpayer be the employer of the eligible employee. The question then was whether there was any identifiable statutory objective which would require a construction of s 82AAE which drew a distinction between a controlling shareholder using his or her power to cause the company employer to make the contribution to the superannuation fund for the benefit of the shareholder/employee, and, the controlling shareholder making the payment directly to the fund for his or her own benefit as a shareholder/employee employed in the company's business. 47 Until the decisions in Harris, there was no obvious or compelling reason to draw such a distinction. As appears in the extract cited from Gunn, a payment made by a company to a superannuation fund, because a controlling shareholder had the power to cause the company to make such a payment, was treated as a payment of the individual qua shareholder made for that individual's benefit qua employee. Although regarded as a payment made by the individual for his own benefit, the payment was nevertheless capable of having the character of a payment made for the benefit of the individual as an employee. On the reasoning of the Full Court in Harris, a payment made by a company to a superannuation fund for the benefit of an employee, who also has a controlling interest in that company, is not a payment by the individual qua shareholder of a contribution to a superannuation fund for the individual's benefit qua employee; it is a payment of the contribution by the company employer for the benefit of an employee. That in itself would not have foreclosed the argument against the Doctor, as s 82AAE and its statutory precursors did not require that the taxpayer making the contribution be the direct employer of the employee for whose benefit the contribution was made. Thus, it was clearly arguable that the section allowed a deduction for a contribution to a superannuation fund for the benefit of employees of a business by a taxpayer who, in making the contribution, stood in the shoes of the employer (as the Full Court found in Harris at [70] ). If the Doctor, when he made the contribution to the superannuation fund to provide a benefit to himself qua employee of P Co was to be regarded as standing in the shoes of P Co, the employer because he held a controlling interest in the company, it was clearly arguable that the Doctor became entitled to the deduction when he made the payment just as if he would have obtained a deduction if he had been made the payment in respect of any employee of P Co other than himself. 48 The Full Court has found that a contribution by a person in the circumstances of Harris, and the Doctor, is a contribution to a fund by an individual for the benefit of the individual, and is not to be characterised as a contribution to a fund to benefit the individual in his or her capacity as an employee of a business. As the statutory objective of Division 3 of the ITAA was to deal with such contributions under subdivision AB and to deal with superannuation contributions for employees under subdivision AA of which s 82AAA and s 82AAE formed part, the Full Court held that those sections were to be given a construction which excluded the circumstances of the taxpayer in Harris from the operation of the sections: FC at [70] - [72]. That is, a construction which excluded the taxpayer standing in the shoes of the employer when dealing with himself qua employee. 49 The construction put on s 82AAA and s 82AAE in September 1999 was reasonably open on the language of the sections. There are in evidence a number of private rulings and advance opinions of the Commissioner made in the period 5 April 1991 to at least March 1999 applying the construction of the relevant sections contended for by the Doctor. On 11 March 1999, Michael Monaghan, Deputy Commissioner of Taxation, in a letter bearing that date, stated : "I refer to our conversation this morning concerning the treatment of superannuation contributions made by a person who has a controlling interest in the company in which they are employed. The ATO has been advising clients that a taxpayer with a controlling interest in the company can make contributions to a superannuation fund for his/her benefit as an eligible employee of the company. Provided the requirements of section 82AAC or 82AAE of the Income Tax Assessment Act 1936 (ITAA'36) are met, the taxpayer can claim a deduction for the contribution subject to the age based deduction limits in sub-section 82AAC(2A). The amount allowable under section 82AAE is the amount of the contribution. However, as the contributions were not made for the benefit of another person but for the person who made the contribution they are not taxable contributions for the purposes of section 274(1) of the ITAA'36. As these contributions are not taxable contributions under section 274, they are also not regarded as surcharge able contributions for the purposes of section 8 of the Superannuation Contributions Tax (Assessment and Collection) Act 1997. The ATO is following this matter with considerable interest and will be giving consideration as to whether these contributions should be taxable in the hands of the trustee and counted for surcharge purposes. I trust this information is of assistance." 50 In September 1999, the proper construction of s 82AAA and s 82AAE was not entirely free from ambiguity: Harris (Full Court at [23] ). For the reasons set out above, I am satisfied that at that time there were two reasonable constructions of the sections open. I am further satisfied that it was open as a matter of construction that when an individual taxpayer stood in the shoes of a company employer, which he or she controlled, and made a contribution to a superannuation fund, under the provisions of which he or she had an entitlement to benefits in his or her capacity as an employee of the company, he or she was acting in no different capacity than he or she would be acting when making a contribution to a superannuation fund on behalf of any other employee of the company. Having regard to the state of the authorities as defined in s 222C(4) and the matters to which I have referred in these reasons, I am satisfied that in September 1999 it would be concluded that the construction contended for by the Doctor was "about as likely as not correct". Accordingly, in September 1999 the construction of s 82AAA and s 82AAE contended for by the Doctor and their operation to allow to him a deduction of $300,000 in respect of the contribution to the No 2 Fund was reasonably arguably within the meaning of s 222C(1). Thus, he was not liable to the imposition of a penalty under s 226(K) of the ITAA for the tax shortfall in the 1999 financial year. 51 In referring to the private rulings and advance opinions given by the Commissioner which accorded with the construction contended for by the Doctor, it is not to be understood that he was entitled in any way to rely upon them to justify the arrangements into which he entered; they were not private rulings or advance opinions to which he was party. Rather, the rulings and advance opinions were referred to merely to demonstrate that other reasonable minds construing the sections in question came to the same conclusion as to their proper construction and operation with respect to controlling shareholder contributions as that contended for by the Doctor. Although there is some evidence of a general administrative practice of the Commissioner to assess all claims for deductions to a superannuation fund by persons in the circumstances of the Doctor on the basis of the reasoning in those private rulings and advance opinions, that practice ended prior to September 1999. The media release Nat 99/16 makes clear that an embargo on private binding rulings and advance opinions dealing with this subject matter had been imposed by the Commissioner in March 1999 and that previously issued advice was also withdrawn at that time. In these circumstances, there is no evidence that after March 1999 there existed, or there was applied, any general administrative practice to assess self-funded controlling shareholder contributions to a superannuation fund under which the shareholder had entitlement as an employee in the way contended for by the Doctor. Thus, the Doctor fails to make out the circumstances provided for in s 266V of the ITAA. Having regard to my finding that the construction of the sections contended for by the Doctor was reasonably arguable, the failure to make out the ground in s 266V is not fatal to this aspect of the Doctor's appeal. 52 The Doctor has succeeded to the extent of making out an entitlement to have the appealable objection decision varied by allowing the objection to the extent of excising the Understatement Penalty of $59,400 included in the amended assessment.
the question in v715 of 2001 53 Did the sum of $300,000 paid by the Doctor to the No 2 Fund constitute assessable income of P Co as trustee of that fund and thereby rendered P Co liable to income tax and penalty and interest as assessed and imposed in the Notice of Assessment issued on 27 February 2001?
resolution of the question in v715 of 2001 54 The Commissioner submitted that if it was held, as is the case, that the contribution of $300,000 by the Doctor to the No 2 Fund was not deductible by the Doctor against his assessable income then, an amended assessment should issue against the trustee to excise the contribution from its assessable income and also to excise the assessed penalty and interest imposed. I agree, and the Court will so order.
costs 55 I will hear the parties on what order should be made on the issue of costs in the light of the findings and orders to be made in each appeal. I certify that the preceding fifty-five (55) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Cooper.
Associate: Dated: 22 November 2002 Counsel for the Applicants: Mr FL Harrison QC with Mr W Robertson Solicitor for the Applicants: Ebsworth & Ebsworth
Counsel for the Respondent: Mr GJ Davies QC with Mr S Steward Solicitor for the Respondent: Australian Government Solicitor
Dates of Hearing: 11 February 2002, 12 February 2002
Date of Applicant's further 4 September 2002 written submissions:
Prebble
Commissioner of Taxation