Prebble v Commissioner of Taxation

Federal Court of Australia (Full Court)|2003-08-22|Before: Hely JJ, Allsop JJ, Spender J

REASONS FOR JUDGMENT SPENDER J: 1 I have had the considerable advantage of reading the reasons for judgment of Hill and Hely JJ. I agree that it has not been demonstrated that Harris v Commissioner of Taxation (2002) 50 ATR 410 ('Harris') was plainly erroneous, with the consequence that this Court should refuse to follow it. I agree with the orders proposed. 2 While the conclusion that it has not been shown that Harris was plainly or clearly wrong is sufficient to dispose of the appeal, I wish to express my respectful view that Harris was rightly decided. 3 The judgment of the Full Court in Harris (comprising Sackville, Kenny and Allsop JJ) relied on a number of factors to conclude 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). Those factors included a consideration of the words 'in regard to' in the definition of 'eligible employee' in s 82AAA; the legislative history in relation to ss 82AAE and 82AAA, and the unlikelihood of Parliament providing a regime that a controller/employee may make deductions unlimited in amount which are fully deductible and, unlike all other deductible superannuation contributions, are not assessable as taxable contributions. This last factor would have the further advantage, as the primary judge in Harris noted, that the payments might be made to a non complying fund, thereby enabling the fund and the taxpayer to side-step the rigorous supervisory and other requirements imposed on complying funds. 4 As the primary judge in Harris noted: '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.' 5 While there may be legitimate differences of opinion to the weight to be given to the first two of those factors I have referred to above, in my opinion the third is compelling. I certify that the preceding five (5) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Spender.

on appeal from a judge of the federal court of australia

AND: JEFFREY JAMES PREBBLE PTY LTD AS TRUSTEE FOR PREBBLE NO 2 SUPERANNUATION FUND

REASONS FOR JUDGMENT HILL AND HELY JJ: 6 Dr Prebble, the appellant in appeal Q192 of 2002, is a medical practitioner. He is the beneficial owner of the whole of the issued share capital of Jeffrey James Prebble Pty Ltd, a company which conducts a medical practice in Queensland and which has employed the doctor to serve it as a specialist medical practitioner. Dr Prebble contributed $300,000 to a superannuation fund known as 'The Prebble No 2 Superannuation Fund' ('the No 2 Fund'). That fund is a non complying superannuation fund, as defined in s 267(1) of Income Tax Assessment Act 1936 (Cth) ('the Act'). The appellant claimed, in the year ended 30 June 1999, a deduction for that contribution. The claim was denied. Dr Prebble objected against the assessment in which the deduction was disallowed. His objection was disallowed. He appealed to the Court against that objection decision. His appeal was unsuccessful. He now appeals to the Full Court of this Court. 7 The learned Primary Judge was bound to dismiss Dr Prebble's appeal. There was no relevant distinction between the facts surrounding Dr Prebble's claim for a deduction for the contribution he made and those considered by a Full Court of this Court. 8 The appeal brought by the Commissioner of Taxation (Q 190 of 2002) arises only if Dr Prebble is successful in his appeal (Q 192 of 2002). The Commissioner, but only in this event, seeks to argue that the respondent in that appeal, Jeffrey James Prebble Pty Ltd in its capacity as Trustee of the No 2 Fund, is liable to include in the assessable income of the superannuation fund the amount of the contribution which Dr Prebble made to the No 2 Fund. 9 The first issue which arises in the appeal is the proper test to be applied by the Full Court of this Court before it decides to depart from the reasoning in a case decided by a previous Full Court. That is a question which has been considered and decided in a number of previous Full Court decisions. Reference need only be made to two. 10 In Transurban City Link Ltd v Allan (1999) 95 FCR 553 a Full Court of five Judges (Black CJ, Hill, Sundberg, Marshall and Kenny JJ) considered whether not to follow a previous decision of a Full Court of this Court in a matter involving the same facts and indeed some of the parties, although not all of the parties to the second Full Court appeal. The Full Court in Transurban at 560-561 referred to a number of previous authorities and noted that much may depend on the circumstances of the case. However, their Honours noted that a differently constituted Full Court would decline to follow a decision of another Full Court if it concluded that the previous decision was 'clearly erroneous'. Their Honours noted, however, that '[i]t would be wrong to do this merely because the matter was one on which minds might differ'. 11 In Brooks v Commissioner of Taxation (2000) 100 FCR 117, a Full Court comprising Hill, RD Nicholson and Sundberg JJ declined to follow a previous Full Court decision on the basis that it was 'plainly wrong' and that the error should not be perpetuated, noting however that the Court should not be quick in declining to follow previous authority, particularly where it had been relied upon. Reference on this point was made to John v Commissioner of Taxation (1989) 166 CLR 417. 12 Senior Counsel for Dr Prebble submitted, however, that these Full Court decisions were contrary to the decision of the High Court in John. At 439-440 in John, it was said, there were special considerations applicable to the doctrine of stare decisis in cases of statutory construction. The judgment of Mason CJ, Wilson, Dawson, Toohey and Gaudron JJ refers with approval to a previous decision of Mason J in Babaniaris v Lutony Fashions Pty Ltd (1987) 163 CLR 1 at 13 where his Honour said, inter alia: 'The fundamental responsibility of a court when it interprets a statute is to give effect to the legislative intention as it is expressed in the statute. If an appellate court, particularly an ultimate appellate court, is convinced that a previous interpretation is plainly erroneous then it cannot allow previous error to stand in the way of declaring the true intent of the statute… It is no part of a court's function to perpetuate error and to insist on an interpretation which, it is convinced, does not give effect to the legislative intention.' (citations omitted) Their Honours then continued (at 440): 'But in the end the justification for not following an earlier decision construing a statute must be that in the view of the court that earlier decision was wrong, that it was wrong in a significant respect, and that the court should give effect to the intention of the Parliament.' 13 With respect to Senior Counsel for Dr Prebble we do not see that there is anything said by the High Court in John which differs from what was said in either Transurban or Brooks. The test that the previous decision must be 'plainly wrong' is the same as the test of 'plainly erroneous' stated in Babaniaris,which in turn was cited by the High Court with approval. The notion that the previous decision was 'wrong in a significant respect' emphasises the need for the appellate court reconsidering the previous decision to reach a standard of conviction which goes beyond saying that left to itself it might reach a different view. There is rather a need for a higher standard than that, whether it is expressed in the language of 'plainly wrong' or 'clearly wrong' or of conviction. We propose, therefore, to apply the test that we would only refuse to follow Harris if we were of the view that that decision was 'plainly' or 'clearly' wrong.

THE RELEVANT STATUTORY PROVISIONS AS AT THE TIME OF CONTRIBUTION 14 The deductibility of contributions to superannuation funds for the benefit of employees was, at the time the contribution was made, governed by Subdivision AA of Division 3 of the Act. Which section applied to permit a deduction for contributions depended upon whether the contribution was to a complying fund or as here, a non complying fund. Where the contribution was to a complying fund the operative provision allowing a deduction was s 82AAC. If that provision applied there was a limit upon the amount of the deduction allowable. It is not relevant here to set out the manner in which that limit was to be calculated. Where the contribution was to a non complying fund (as was the present case and also in Harris) the operative provision allowing a deduction was s 82AAE. No limit was imposed upon the amount of the deduction allowable for a contribution to which s 82AAE applied. That section read as follows: '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 other than such an employee who is an exempt visitor to Australia for the purposes of section 517 in relation to the year of income in which the amount is paid.' 15 Definitions relevant to s 82AAE and which are to be found in s 82AAA(1) are as follows: '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; 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.' 16 Section 82AAA(2) provides: '[Director employed by company] For the purposes of this Subdivision, a director of a company shall be deemed to be employed by the company.' Relevant to the case of contributions either to a complying fund or to a non complying fund is section 82AAQ which we shall discuss later, but which for completeness we set out here: 'SECTION 82AAQ AMOUNT PAID FROM FUND TO TAXPAYER TO BE INCLUDED IN RECIPIENT'S ASSESSABLE INCOME 82AAQ(1) [Assessable income to include value of benefit] Where a taxpayer who has, under this Act or the previous Act, been allowed in an assessment in respect of income of any year of income a deduction in respect of an amount or amounts set apart or paid as or to a fund or funds for the purpose of making provision for superannuation benefits for, or for dependants of, an employee receives in the year of income a payment or benefit from that fund or any of those funds, as the case may be, his assessable income of the year of income shall include the amount of the payment or an amount equal to the value of the benefit, as the case may be. 82AAQ(2) [Recipient receives payment or benefit other than as fund member] If: (a) a taxpayer has, under this Act or the previous Act, been allowed in an assessment in respect of income of any year of income a deduction in respect of an amount set apart or paid as or to a fund (the 'original fund') for the purpose of making provision for superannuation benefits for, or for dependants of, an employee; and (b) either: (i) a person (the 'recipient') other than the taxpayer receives in the year of income a payment or benefit from the original fund or a successor fund of the original fund, other than in the capacity as a member of the fund; or (ii) the taxpayer (also the 'recipient') receives in the year of income a payment or benefit from a successor fund of the original fund, other than in the capacity as a member of the fund; and (c) the making of the payment or providing of the benefit reasonably represents the return to any extent of the amount, or earnings on the amount, set apart or paid as mentioned in paragraph (a); the amount of the payment, or value of the benefit, is, to the extent that it reasonably represents the return as mentioned in paragraph (c), included in the recipient's assessable income of the year of income.' 82AAQ(3) [Successor fund of original fund] A fund that provides superannuation benefits (the 'test fund') is a 'successor fund' of the original fund if: (a) the original fund, or any other fund that is a successor fund of the original fund because of another application of this subsection, has transferred any of its assets to the test fund; or (b) an eligible termination payment (within the meaning of section 27A) made in relation to a member of: (i) the original fund; or (ii) any other fund that is a successor fund of the original fund because of another application of this subsection; is, because of the payment of an amount to the test fund, taken to be rolled-over within the meaning of that section.' 17 The taxation of superannuation funds at the time of the contribution was governed by Part IX of the Act. Division 3 of the Part is concerned with complying funds and Division 4 with non complying funds. While both classes of fund attract tax upon their taxable incomes, a non complying fund attracts tax at the maximum rate of tax, whereas a complying fund attracts tax at a concessional rate of 15 per cent. In the case of both, their assessable income will include taxable contributions (ss 281 and 288). Taxable contributions are defined in s 274(1) and in the case of a resident superannuation fund, being either complying or non complying, only contributions made for the purpose of making provision for superannuation benefits 'for another person' will be taxable contributions. This is said to lead to the conclusion that the contributions which Dr Prebble made to the No 2 Fund were not taxable to that fund. That submission is inconsistent with what the Full Court described in Harris at par [66] as 'the better view' of s 274, namely that all contributions which are deductible under s 82AAC and s 82AAE are taxable in the hands of the fund. That was the position established in 1989, and the 1994 amendments to s 274 were not intended as a significant modification of that position. 18 Finally reference should be made to the provisions of s 27A to H, which in general terms provide that upon the retirement of an employee amounts paid in consequence of the termination of any employment of the taxpayer, including amounts within the meaning of the expression 'eligible termination payment[s]' and certain payments from superannuation funds, will be included in assessable income. It is unnecessary here to trace the history relating to the taxation of benefits on retirement or death where paid from superannuation funds. It may be said that generally either no tax or very little tax was payable until the introduction of the group of provisions, much amended, dealing with eligible termination payments and like payments. Indeed until the year of income commencing 1 July 1983 there was included in assessable income only five percent of a benefit paid in a lump sum (see s 26(d) of the Act). That concessional treatment is still to be found in s 27AA(1) which still applies to the pre 1 July 1983 component of lump sum receipts. 19 The detail of the provisions dealing with the taxation of benefits from superannuation not being annuities or pensions is complicated but for present purposes it suffices to say that a benefit paid from a complying superannuation fund not representing undeducted contributions and not rolled over would be subject to tax: s 27B. Lump sum benefits paid from a non complying fund resident in Australia would not be included in assessable income: s 27CE.

The Full Court Judgment in Harris 20 In Harris a Full Court of this Court affirmed the decision of the Primary Judge, in disallowing to Mr Harris a deduction to his non complying superannuation fund. The grounds of the decision can be said to be both contextual (that is to say their Honour considered the construction of s 82AAE and the related definitional provisions) and also historical (that is to say their Honours considered the legislative history leading to the state of the legislation in the 1999 year of income and concluded that that history supported the view that there were two streams of deductibility for contributions to superannuation funds). 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 [28], [67]). 21 Their Honours concluded from an examination of the legislative history that it showed no evidence of an intention in 1994 to bring about a result that contributions made to non complying funds by and for the benefit of controlling shareholders who were employees or deemed to be employees because they were directors, could be deductible without limit and yet subject to no taxation. Their Honours said at [66]: 'The better view is that, when Parliament introduced new paras (a) and (aa) into subs 274(1) in 1994, it merely intended to restate the connection between the taxation of contributions in the hands of the fund trustee and the deduction of contributions in the hands of the contributor. Since the introduction of s 82AAE necessitated amendment to para 274(1)(a), the Parliament might have chosen simply to incorporate a reference to s 82AAE in para 274(1)(a). Instead, it chose to deal with the matter compendiously, by reference to an element common to both ss 82AAC and 82 AAE (and not s 82AAT) - namely, that the contributor's contributions were not for his or her own benefit but for the benefit of another (i.e., an employee of the taxpayer, or the employee of a company in which the taxpayer had a controlling interest, or in respect of which, in the relevant circumstances, the taxpayer had a less than controlling interest).' 22 Their Honours concluded (at [67]): '… that the Commonwealth income tax law rests on a dichotomy between the provisions dealing with employer contributions on the one hand and contributions for the taxpayer's own benefit on the other, all of which were to be taxed in the hands of the trustee of the relevant superannuation fund.' 23 Their Honours then turned to a contextual analysis of the legislation as it existed in the year of income, particularly the use of the words 'in relation to' in s 82AAA(1) definition of 'eligible employee'. Their Honours concluded that these words supported the interpretation that the taxpayer and the employee were intended to encompass two different persons and not to include the situation where the same person had two different capacities, for example, controlling shareholder and employee. This interpretation was reinforced by the legislative history and the policy their Honours found inhered in that history. Their Honours expressed their conclusion at [72] as follows: '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).'

The Contextual Analysis 24 It is well accepted that the task of statutory interpretation requires close attention to be paid to the language used by Parliament in the context in which that language appears, using the word 'context' in the broadest sense as including matters such as the mischief which Parliament intended to address, the object of the legislation and its legislative history: CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384 at 408. Further, resort should be had to context at the outset and not merely at a later stage when ambiguity might be thought to arise. The modern approach to statutory interpretation makes it clear, even without the statutory direction in s 15AA of the Acts Interpretation Act 1901 (Cth), that the Courts will give effect to the intention of Parliament as that is to be found in the legislation itself or where it may appear from extrinsic materials to which the Court may have recourse. 25 The Courts will depart from the literal meaning of a statutory provision where that literal meaning leads to absurdity or where it produces a result which is capricious or irrational. It will do so also where the literal meaning of the words used by Parliament do not conform with the legislative intention as ascertained from the statute itself: Cooper Brookes (Wollongong) Pty Ltd v Commissioner of Taxation (Cth) (1981) 147 CLR 297 at 321. It is true that subject to the above principles the language of the statute will generally be given its ordinary and grammatical reading, even where the result may, perhaps, be thought to be 'inconvenient'. Courts should not readily depart from the ordinary meaning of the words used where there is no ambiguity, for to do so might, as Gibbs CJ said in Cooper Brookes at 305, lead Judges to approach the task of interpretation by reference to their own ideas of justice or social policy. But ambiguity will often be present. It is here. And hence the search will be for that construction which will give effect to the real intention of the legislature so far as that can be gleaned from the legislation. 26 It must be said that the definition of 'eligible employee' is ambiguous. It is open to the interpretation that the taxpayer could be both the controlling interest shareholder and the employee referred to in the definition. Perhaps the fact that the definition has, immediately after the words defined ('eligible employee') the words 'in relation to a taxpayer' can be used to support the view that taxpayer and employee are intended to be different persons, but it is possible to argue, with respect to the Full Court in Harris that this is really neutral and that the words 'in relation to a taxpayer' do no more than identify the subject of which the defined expression is an object. The opening part of the definition might simply be paraphrased as follows: 'Where the words "eligible employee" are used in a provision in the subdivision which refers to or concerns a taxpayer they will have the following meaning:..' 27 We find little assistance from the numerous cases which have concerned the word 'in relation to' for the meaning of the expression must be found from the context in which it appears. To say that the words require 'a relationship between two subject matters' will usually be true. This, however, does not necessarily lead to the conclusion here that taxpayer and employee must be two separate persons. 28 What is perhaps more significant in the present circumstances is not the use of the words 'in relation to' but rather that neither subparagraphs (i) or (iii) of paragraph (a) of the definition or paragraph (b) of the definition could ever have the result that the taxpayer and the employee were the same person. This in the case of subparagraph (i) comes about because a person could not employ himself or herself and in the case of subparagraph (iii) not merely because of the exclusion of a person associated with the taxpayer but rather because there is excluded as the relevant employee the employee who has paid or set apart amounts to a superannuation fund for the taxpayer. Obviously paragraph (b) could have no operation for it applies only where the taxpayer is a company. 29 The need for a specific exclusion in paragraph (a)(iii) of the employee who has contributed to the fund may, on the other hand, support the view that otherwise in the case to which paragraph (a)(iii) applies the employee and taxpayer could be the same person. If it could, then it could just as easily apply in the case of paragraph (a)(ii) where no specific exclusion is to be found. Why there should be a difference between the two cases is far from easy to comprehend.

The Historical Background - 1964 30 An analysis of the history of the relevant provisions is important in understanding the context of the present law. 31 The definition of 'eligible employee' was inserted into the Act in 1964 and remained unchanged until 1999. We were taken to the Report of the Commonwealth Committee on Taxation chaired by Mr G C Ligertwood ('the Ligertwood Report') submitted in 1961 and which prompted the amendments to the Act in 1964 so far as they concerned superannuation. The report is far from helpful in resolving the present problem. It notes that in the legislation at the time of the report there were two sections: s 66 which permitted a deduction by an employer for contributions on behalf of his own employees and s 79 which permitted a deduction in respect of employees of persons other than the taxpayer and recommended that the two sections be combined. It noted too that there were anomalies which permitted multiple contributions being made for which deductions were available and which circumvented the then limit on contributions in respect of any one employee. The first of these two matters led, to the insertion of Subdiv AA containing ss 82AAA to 82AAR inclusive. However, otherwise the report casts no light on whether the definition of eligible employee was intended to extend as Senior Counsel for Dr Prebble contends to a case such as the present or whether it does not, as Senior Counsel for the Commissioner submits. 32 The Explanatory Memorandum to the 1964 amending act was expressed in language which might generally be said to support the submissions of the Commissioner and more importantly not to support the submissions made on behalf of Dr Prebble. Thus it said: '2. Contributions to a superannuation fund will be deductible only if they are made for the benefit of an employee or his dependants by - (a) the employer of the employee; (b) a contributor who owns a controlling interest in the employer; (c) a company in which a controlling interest is owned by the employer; (d) a company in which a controlling interest is owned by a person who owns a controlling interest in the employer; (e) a partner in a partnership which is the employer; or (f) a contributor who owns shares in a company employing the employee, if the Commissioner of Taxation is satisfied that the employee and the contributor are not, either directly or indirectly associated, or have not entered into arrangements to make contributions for the benefit of each other, or for relatives of each other. This limitation on the classes of persons who may contribute to a superannuation fund for the benefit of an employee is designed to remove the opportunity that exists under the present law for a person to obtain deductions in respect of such contributions for the benefit of an employee with whom he has no business relationship.' 33 It can be accepted, as the written submissions filed on behalf of Dr Prebble say, that there is nothing in the Ligertwood Report or the Explanatory Memorandum which suggests that the fact that an employee could make contributions for employees including himself which were deductible under the former s 79 was a mischief to be remedied. But that hardly supports the argument that there was an intention that the definition of 'eligible employee' was to cover persons who were both employees and contributors. 34 The situation after the 1964 amendments can be summarised as follows. 35 First, s 82H allowed as a deduction to a taxpayer 'payments for the personal benefit of the taxpayer or his spouse or child made to - a superannuation …fund' subject to the limitations on amount contained in s 82H(2) (a maximum deduction of $800). 36 Second, s 82AAC provided that a deduction would be allowable where, subject to certain conditions not presently relevant the taxpayer 'for the purpose of making provision for superannuation benefits for, or for dependants of, an eligible employee, sets apart or pays in the year of income an amount or amounts as or to a fund'. 37 Third, s 82AAD provided that where the eligible employee is associated with the taxpayer, the amount is allowable as a deduction only to the extent to which, in the opinion of the Commissioner, the amount would have been set aside if the employee had not been associated with the taxpayer. One might have expected that if it was intended that contributor and eligible employee could be the same person s 82AAD would have provided that the deduction in such case would likewise be reduced to an amount that would have been contributed had the contributor not been the taxpayer. It would be surprising if the deduction could be reduced where the employee and the contributor were associated but not where they are the same person. 38 Fourth, s 82AAE then provided that the deduction allowable under Subdivision AA of Part III of the Act for contributions or the aggregate of contributions in respect of 'amounts set apart or paid by the taxpayer or taxpayers as or to a fund or funds for the purpose of making provision for superannuation benefits for, or for dependants of, any one employee' was to be limited to $400, or five per cent of the total remuneration of the employee, whichever was the greater, but with the power in the Commissioner to allow a greater deduction in an amount the Commissioner considered reasonable. 39 Fifth, s 82AAR provided that except as provided by s 82H a deduction for superannuation contributions was allowable only under Subdivision AA of Part III of the Act. 40 The definition of 'eligible employee' was to be found in s 82AAA(1) as set out earlier. 41 It can be seen that in the period immediately after the 1964 amendments there was no possibility that a deduction unlimited in amount could be allowed for a contribution made to a superannuation fund. On the interpretation for which Dr Prebble would contend Dr Prebble under the law then prevailing would have been entitled to a deduction only of 5 per cent of his salary or $400 or such amount as the Commissioner considered reasonable under s 82AAC when read together with s 82AAE. Although literally, he would be entitled to deduct up to $800 for a contribution he made for his personal benefit under s 82H that section would not permit him a double deduction having regard to the provisions of s 82(1) which would restrict a deduction allowable under more than one section to the deduction allowable under whichever provision the Commissioner would consider to be the more appropriate. On the interpretation for which the Commissioner would contend Dr Prebble would only have been entitled to a deduction for $800 under s 82H. Neither interpretation would produce a result which was absurd or capricious. 42 It is difficult to reach a conclusion as to the policy which ran through the legislation in the form it took in 1964. It can be argued that the legislature distinguished between two cases where a taxpayer contributed for his own benefit. The first, and normal case was where the contribution was made by the taxpayer for his own personal benefit. That was the case to which s 82H would apply. The second case would be where the taxpayer made the contribution for his benefit but did so in his capacity as the owner through his shareholding of his employer. That would then be argued to be the case to which s 82AAC (as it then stood) applied. The argument would depend also upon there being no reason in policy why an individual in those circumstances should not get a deduction whereas a corporate taxpayer owning shares in the employer would be entitled to a deduction for contributions made to benefit employees of its subsidiary. 43 Ultimately recourse to policy provides no solution to the issue of interpretation.

The Legislative History and Policy between 1964 and 1994 44 The legislative history of the relevant provisions, including amendments made after 1964, is set out in the judgment in Harris. There is no point in repeating it here. With respect to the submissions made to us it provides no real assistance, save that nowhere is there any suggestion in that history that it was intended that an unlimited deduction be available to contributions made by a person for his or her own benefit where the person was both an employee and the controlling shareholder of the company of whom he or she was an employee. 45 It can be said that the course of legislation showed a general intention to encourage deductions by employers to funds for the benefit of employees and initially at least for deductions, then rebates for persons contributing on their own behalf to superannuation funds subject generally to limits on both categories of deduction. 46 In 1989 s 82AAC was re-enacted so as to allow a deduction for contributions made to an eligible superannuation fund for the benefit of eligible employees. Both complying funds and non complying funds were eligible superannuation funds. Sections 82AAD and 82AAE were repealed, thus removing the statutory restrictions on the amount that may be allowed as a deduction to an employer in respect of an employee. 47 However, for the first time, contributions to superannuation funds were treated as taxable income of the fund. Section 274, introduced in 1989, defined 'taxable contributions' as including amounts deductible under s 82AAC. The assessable income of both a complying fund (s 281) and a non complying fund (s 288) included taxable contributions made to the fund in the year of income, although the rate of tax applicable to complying funds was 15 per cent, whereas the applicable rate in the case of a non complying fund was 49 per cent. 48 Thus, where a contribution was made by a taxpayer for the benefit of an eligible person as defined in s 82AAA(1) to a non complying fund and was, in consequence, an allowable deduction without limit to the contributor under s 82AAC it was at the time it was made taxable to the non complying fund and at the maximum rate of tax. Although the contributor obtained a deduction, that deduction was immediately negated by causing the amount of the contribution to be taxable in the same year of income at the maximum rate of tax to the superannuation fund. 49 There were still some controls on the amounts that may be contributed to a concessionally taxed (at 15 per cent) complying superannuation fund since the fund would need to satisfy the Insurance & Superannuation Commission that it is providing benefits within reasonable benefits limits. 50 At the same time the deduction available for superannuation contributions made to personal funds by self-employed persons and employees without superannuation support was increased from $1500 to $3000 (subdivision AB). 51 In 1994, the then s 82AAC was divided into two sections, s 82AAC relating to contributions to complying funds and s 82AAE to contributions to non complying funds. Contributions to complying funds were to be restricted to limits depending upon age; contributions to non complying funds were unrestricted. 52 The relevant legislative changes in 1994 came about as a result of the legislature giving consideration to the relationship between superannuation benefits arising from contributions to non complying funds and fringe benefits tax. It is impossible to see that these amendments could affect the interpretation of sections which were unaffected by the amendments, including the definition of 'eligible employee' which by then had been untouched for some thirty years. At most they might indicate Parliament's understanding of the law as at the time of the amendments, which could be right or wrong. 53 However, it will be noted that the situation after these amendments differed from that which pertained before so far as concerned the taxability of superannuation funds. The definition of 'taxable contributions' in s 274 was amended, relevantly, so that the taxability of the contribution depended not upon whether the contribution had been the subject of deduction under s 82AAC, but rather upon whether, in the case of a resident fund contributions were made for the purpose of providing superannuation benefits 'for another person'. Further, s 277A was introduced into the Act to provide a deduction to the trustee of a superannuation fund of an amount equal to the total of taxable contributions if these constituted fringe benefits. Excluded from the relevant definition of 'fringe benefit' in s 136(1) of the Fringe Benefits Tax Assessment Act 1986 (Cth) ('the FBT') were, relevantly, benefits constituted by the making of a contribution to a complying superannuation fund. If the interpretation of 'eligible employee' and the construction of s 274 urged on behalf of Dr Prebble are correct the contribution he has made would not be a taxable contribution within s 274, because it was not made to provide superannuation benefits for a person other than himself. It would not be excluded from the payment of fringe benefits tax by s 136(1) of the FBT. Any liability, accordingly to tax on the benefit would depend upon the fringe benefit tax law. No liability for income tax would be incurred by Dr Prebble should he receive a benefit from the fund upon his retirement as a result of s 27CE of the Act, although it is possible that there could be a liability for tax in this event under s 82AAQ of the Act, a section to be discussed shortly. 54 The question whether the FBT would be payable in the present case is not a question before us and not one on which it would be appropriate for us to express an opinion. However, two decisions of the Court, J & G Knowles & Associates Pty Ltd v Federal Commissioner of Taxation (2000) 96 FCR 402 and Essenbourne Pty Ltd v Commissioner of Taxation (2002) 51 ATR 629 would suggest that fringe benefits tax might not be payable. If this were not so then the result on the Commissioner's interpretation of the income tax law would be that Dr Prebble would obtain no deduction for the contribution he made, yet the company employing him would be taxed at the maximum rate of tax upon the amount of the contribution regarded as being a fringe benefit granted to him by his employer. The Explanatory Memorandum (par 7.101) asserts that contributions paid by an employer for eligible employees to a non complying superannuation fund will be fringe benefits, and subject to tax under the FBT. 55 Senior Counsel for Dr Prebble in written submissions criticised the discussion of the legislative history contained in Harris. The criticism turned, it was said, upon whether the legislative amendments revealed three strands of deductibility or two. According to the submission there were said to be three streams the first and third of which, according to the Commissioner's submissions merged into one stream. The so-called three streams were summarised in the written submissions as follows: 'from 1915 to 1985 there were provisions that allowed any taxpayer, whether employee, self-employed or not in employment, to make tax-advantaged superannuation contributions (advantaged either by deductions or by rebates to a certain level) for himself and for his dependants; (a) from 1915 to 1964 there were provisions that allowed for tax-advantaged contributions to be made by any person for the benefit of employees; from 1964 the range of persons able to make such contributions for employees was narrowed to those referred to in the definition of 'eligible employee' in subsec 82AAA(1), i.e., the employer and those within a defined connexion with the employer; (b) from 1980 there were provisions that allowed for tax-advantaged contributions to be made generally by self-employed persons for themselves.' 56 With respect to the submission it is not particularly helpful to assert the three streams or to complain of two of them being merged into one for ultimately the question whether there are three streams or but two depends upon the answer to the question of construction which arises here, rather than assisting in arriving at the answer to that question. Nor do we find any assistance in the criticisms that are advanced on behalf of Dr Prebble of the legislative history as stated by the Full Court in Harris. Those criticisms seem to relate more to the conclusions sought to be drawn from the history than the historical survey itself. We are of the view that the history is ultimately neutral save that it does not provide any foundation for an argument that the result in the present case is one that came about as a result of any clear legislative policy. 57 There is, however, one matter raised by Senior Counsel for Dr Prebble in written submissions that was not, apparently, advanced before the Full Court in Harris or if it were was not dealt with by that Court. The provisions of s 82AAQ of the Act are set out earlier in these reasons. One situation with which they deal is clearly the case of a contributor to a fund who has obtained a deduction for a contribution but later receives in a year of income a payment or benefit from the fund. That could arise, for example, where a surplus arose in a fund and in consequence the surplus was returned to the employer because it was not necessary to provide the benefits for which the fund deed provided. It is possible that the language of s 82AAQ is broad enough to cover the present case in that Dr Prebble is a taxpayer who has been allowed a deduction for superannuation benefits for 'an employee', that employee being himself. It is also true that the section was intended to ensure that a taxpayer who obtained a deduction for a contribution, but then received the contribution back 'otherwise than as a member of the fund' would be required to include that contribution in assessable income. The words 'otherwise than as a member of the fund' is not inconsistent with the submissions made on behalf of Dr Prebble, but nor is s 82AAQ in any way determinative of the present issue. Certainly, s 82AAQ does not point to Harris having been wrongly decided.

Conclusion 58 At best, in support of Dr Prebble's case it can be said that on the literal wording of the definition of 'eligible employee' a taxpayer in the position of Dr Prebble could fall within that definition and so be entitled to a deduction for a contribution to a fund for his own benefit as an employee or director of a company in which he holds a controlling share interest. It can also be said in his favour that the legislative history is neutral and that, as at 1994 there would have been no anomaly in Dr Prebble's position in that, if he were entitled to a deduction unlimited in amount, the trustee of the fund would have been liable to tax at the maximum rate of tax upon that contribution with the result that there would be no revenue loss. It can be accepted that the amendments made in 1994 could not determine the construction of the definition of 'eligible employee' as it stood at the time of the amendments since that definition and s 82AAA(1) in which the definition appeared had been in the Act since 1964 and were not the subject of any amendment in 1994. It can also be said in support of Dr Prebble's position that in 1964 the interpretation urged by him did not produce any result clearly unsatisfactory in terms of policy, whatever might now be the case as a result of the amendments made in 1994. None of these matters singly or together, however, result in the conclusion that the decision in Harris was plainly or clearly wrong. 59 In favour of the view that Harris was correctly decided is the problem that the interpretation advanced upon behalf of Dr Prebble brings about the result that at the time of making his contribution he is entitled to a deduction unlimited in amount, yet when he receives a benefit (but subject, perhaps, to an interpretation unfavourable to his argument as to the meaning of s 82AAQ) no tax is payable on the benefit. By contrast, generally where an employer contributes for the benefit of an employee there will be a deduction limited in amount and the benefit will on retirement of the employee attract tax under s 27B, albeit on a concessional basis. One would not expect there to be a deliberate policy to enact legislation which has the result that a person could contribute to a fund for his own benefit in an unlimited amount and receive a deduction for the contribution yet neither the contributor nor the fund would pay income tax. In saying this we note the possibility, at least, that fringe benefits tax could be payable at the time the contribution was made. On the other hand, it can be said that the definition of 'eligible employee' formed part of the Act well before provisions such as 27A-H were enacted and the later legislation should not affect its construction. 60 We are left with the position that there are arguments both for and against the submissions advanced on behalf of Dr Prebble upon which a Court might either allow or dismiss his appeal. However, we are not convinced that Harris was plainly erroneous or that we should refuse to follow it. Accordingly we would dismiss the appeal and order the appellant to pay the Commissioner's costs of it. The Commissioner's appeal was defensive in that it was only to be pursued in the event that Dr Prebble's appeal was successful. In these circumstances we would dismiss the Commissioner's appeal. Since it occupied no time at all in oral argument and much of the material in the written submissions overlapped with submissions made in Dr Prebble's appeal we do not think that it would be appropriate to order the Commissioner to pay Dr Prebble's costs of the Commissioner's appeal. It would likewise be inappropriate for the costs of the Commissioner's appeal to be born by Dr Prebble, if only because the Commissioner was unsuccessful in the cross appeal and indeed need not have elected to file it. We think that the appropriate order would therefore be that there be no order of costs in respect of the Commissioner's 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 Hill and the Honourable Justice Hely.

Counsel for the Appellant in Q192/02 and the Respondent in Q190/02: D Jackson QC with M Robertson

Solicitor for the Appellant in Q192/02 and the Respondent in Q190/02: Ebsworth and Ebsworth

Counsel for the Respondent in Q192/02 and the Appellant in Q190/02: GT Pagone QC with GJ Davies QC and S Steward

Solicitor for the Respondent in Q192/02 and the Appellant in Q190/02: Australian Government Solicitor

Date of Hearing: 14 May 2003

Date of Judgment: 22 August 2003

Income Tax Assessment Act 1936(Cth)s 26(d), s27A-H,s

At a glance

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Judgment (16 paragraphs)

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Legislation Cited (3)

Cases Cited (8)

Cited By (3)