Stern v Commissioner of Taxation

STATUTORY CONTEXT 3 Superannuation may be accessed as a superannuation lump sum or as an income stream or by a combination of both. Superannuation received in the form of a retirement income stream is generally tax-free - see: s 301-10. A further advantage associated with drawing a regular income stream is that the fund's investment income and capital gains on segregated pension assets are also tax-free - see: s 295-385. The concessionary treatment of income earned on segregated assets used to support a retirement income stream was perceived to have enabled "high wealth" taxpayers to use their superannuation to obtain concessions in circumstances where those taxpayers would "almost certainly never be reliant on the age pension" - see: explanatory memorandum to Bills including the Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 (Cth) at [3.1] to [3.7], which introduced Div 294 with effect from 1 July 2017. The solution decided upon was to limit the amount that a person can have in superannuation that supports a retirement income stream that receives an earnings tax exemption. 4 Division 294 introduced such a limit called the "transfer balance cap" - see: s 294-5; s 294-35. The "general transfer balance cap" was $1.6 million from 1 July 2017 to 30 June 2018 - see: s 294-35(3)(a). 5 A person has "excess transfer balance" (the legislation generally eschews the use of a definite or indefinite article when speaking about "excess transfer balance") if the "transfer balance" (s 294-30(2)) in the person's "transfer balance account" (s 294-15) exceeds the "transfer balance cap" (s 294-35) at the relevant time: s 294-30(1). A "transfer balance" is the sum of "transfer balance credits" (s 294-25) less "transfer balance debits" (ss 294-75 to 294-95). In general terms, a superannuation interest that supports a superannuation income stream results in a credit to a transfer balance account if a taxpayer starts to be a recipient of a superannuation income stream that is in the retirement phase. 6 If a person's "transfer balance account" exceeds the "transfer balance cap", two consequences flow: (1) the excess must be reduced; and (2) until the excess is reduced, tax will be imposed on the income from the fund's segregated assets that resulted in the excess transfer balance. 7 To elaborate on the first consequence, Div 294 operates together with Div 136 of Schedule 1 to the TAA 1953, which provides for the Commissioner to make a written determination where a person has "excess transfer balance" - see: s 136-10 of Schedule 1. If the person's "transfer balance account" exceeds "the transfer balance cap", the excess must be reduced by commuting in full or in part the superannuation income streams that are in the retirement phase. If the person has more than one superannuation income stream, the person may choose which one to commute - see: s 136-20 of Schedule 1. 8 As to the second consequence, Subdiv 294-F "neutralises the earnings tax exemption on retirement phase income streams that result in excess transfer balance": s 294-225 (which is the Guide to Subdiv 294-F). It does this by imposing a liability to pay "excess transfer balance tax" imposed by the Superannuation (Excess Transfer Balance Tax) Imposition Act 2016 (Cth) - see: s 294-230(1) of the ITAA 1997. Deemed earnings calculated under s 294-235 accrue on any excess transfer balance and are credited to the transfer balance account: s 294-25(1) item 3. For first breaches of the transfer balance cap, the tax rate is 15% and is intended to replicate what the tax outcome would have been had the excess capital been in the accumulation phase. The rate is increased to 30% for second and subsequent breaches from 1 July 2018 - see: s 5 of the Imposition Act. 9 Accordingly, the general scheme of Div 294 is to limit the amount of capital used to support a superannuation income stream by: (a) forcing a commutation of any excess over the transfer balance cap; and (b) imposing a tax on retirement phase income streams that have resulted in excess transfer balance. 10 This general scheme only works where commutation is possible. 11 Certain superannuation income streams cannot be commuted. Because the resolution of an excess transfer balance is generally to require commutation of the excess over the transfer balance cap, the standard rules cannot apply to these superannuation income streams. The resolution to this problem is addressed by Subdiv 294-D and Subdiv 303-A. 12 Subdivision 294-D applies to a "retirement phase recipient" of a "capped defined benefit income stream": s 294-125. Section 294-130 defines when a "superannuation income stream" is a "capped defined benefit income stream" and includes a table describing the pensions and annuities which are covered by that definition. The pensions and annuities listed in the table each have commutation restrictions. As was explained at [3.219] of the explanatory memorandum, "the definition is based on a list of superannuation income stream products that are subject to commutation restrictions under the [Superannuation Industry (Supervision) Regulations 1994 (Cth)] or the [Retirement Savings Accounts Regulations 1997 (Cth)]". As will be seen later, Dr Stern was in receipt of two "capped defined benefit income streams" and a third superannuation income stream which was not a "capped defined benefit income stream". 13 Subdivision 294-D operates such that a "capped defined benefit income stream" cannot of itself result in an "excess transfer balance". This is necessary because a person who only has a "capped defined benefit income stream" cannot commute the excess to a lump sum even if the transfer balance cap were exceeded. 14 However, the value of a "capped defined benefit income stream" will cause a person to have "excess transfer balance" if the balance in their transfer balance account exceeds both their "transfer balance cap" and their "capped defined benefit balance". Section 294-140 provides: 294-140 Excess transfer balance - special rule for capped defined benefit income streams (1) Despite section 294-30, you have excess transfer balance at a particular time if, at that time, the *transfer balance in your *transfer balance account: (a) exceeds your *transfer balance cap at that time; and (b) exceeds your capped defined benefit balance from subsection (3) of this section at that time. (2) The amount of excess transfer balance is the lesser of the 2 excesses. Note: For modifications of the tax treatment of benefits paid from capped defined benefits income streams, see Subdivision 303-A. Your capped defined benefit balance (3) You have an amount under this subsection (a capped defined benefit balance) at a time equal to: (a) the sum of the *transfer balance credits in your *transfer balance account at that time in respect of *capped defined benefit income streams; less (b) the sum of the *transfer balance debits (if any) in your transfer balance account at that time in respect of capped defined benefit income streams. 15 A statutory formula is used to work out the value (called the "special value") of the superannuation interest that supports a capped defined benefit income stream, and this is credited to the "transfer balance account": s 294-135, read together with s 294-25. Accordingly, where (a) a person has a "capped defined benefit income stream"; (b) the person has another superannuation income stream which is not a "capped defined benefit income stream"; and (c) the transfer balance cap is exceeded, then the (or a) superannuation income stream which is capable of being commuted must be commuted, in full or in part, to reduce the amount of excess transfer balance, and excess transfer balance tax will accrue on that amount until such reduction. This reflects Dr Stern's situation. 16 While a capped defined benefit balance of itself cannot result in excess transfer balance (because both limbs of s 294-140(1) must be satisfied in order to have excess transfer balance), the benefits from a capped defined benefit income stream are "instead" (see s 294-120) subject to specific taxation provisions contained in Subdiv 303-A. Subdivision 303-A applies to "defined benefit income", which is defined in s 303-2(2) to mean "a superannuation income stream benefit that is paid from a capped defined benefit income stream". 17 The taxation treatment accorded to "defined benefit income" depends on whether the "defined benefit income cap" is exceeded. The "defined benefit income cap" under Subdiv 303-A is a different concept from the "capped defined benefit balance" under Subdiv 294-D. 18 The "defined benefit income cap" is the "general transfer balance cap" divided by 16: s 303-4. As noted earlier, the general transfer balance cap from 1 July 2017 to 30 June 2018 was $1.6 million, such that the "defined benefit income cap" for that year was $100,000. 19 If the "defined benefit income cap" is exceeded, then: (a) excess amounts of defined benefit income that would otherwise be non-assessable, non-exempt income may be included in assessable income; and (b) tax offsets which were otherwise available in respect of any untaxed element of defined benefit income may be reduced. 20 Section 301-10 provides: 301-10 All superannuation benefits are tax free If you are 60 years or over when you receive a *superannuation benefit, the benefit is not assessable income and is not *exempt income. Note 1: Your superannuation benefit may be a superannuation lump sum or a superannuation income stream benefit: see sections 307-65 and 307-70. Note 2: If your superannuation benefit includes an element untaxed in the fund, see Subdivision 301-C Note 3: If your superannuation benefit is a superannuation income stream benefit that is defined benefit income, see Subdivision 303-A. 21 Section 303-2(1) provides: 303-2 Effect of exceeding defined benefit income cap on assessable income (1) Despite sections 301-10 and 302-65, if: (a) during a financial year, you receive one or more *superannuation income stream benefits: (i) that are *defined benefit income; and (ii) to which either section 301-10 or 302- 65 applies; and (b) the sum of all of those benefits (other than any * elements untaxed in the fund of those benefits) exceeds your * defined benefit income cap for the financial year; 50% of that excess is assessable income. 22 Section 307-275 provides: 307-275 Element taxed in the fund and element untaxed in the fund of superannuation benefits (1) The *taxable component of a *superannuation benefit consists of an element taxed in the fund or an element untaxed in the fund, or both. (2) The *taxable component of a *superannuation benefit consists wholly of an element taxed in the fund except as provided in a later section of this Subdivision. (3) Despite subsection (2), the *taxable component of any of the following kinds of *superannuation benefit consists wholly of an element untaxed in the fund: (a) a *small superannuation account payment; (b) a *superannuation guarantee payment 23 Section 301-100 provides: 301-100 Superannuation income stream - element untaxed in fund attracts 10% offset (1) If you are 60 years or over when you receive a *superannuation income stream benefit, the *element untaxed in the fund of the benefit is assessable income. (2) You are entitled to a *tax offset equal to 10% of the *element untaxed in the fund of the benefit. Note: If your superannuation income stream benefit is defined benefit income, see Subdivision 303-A. 24 However, if the untaxed element exceeds the "defined benefit income cap" for the financial year, no tax offset applies to the excess: s 303-3. 25 In summary: (a) defined benefit income which is "untaxed in the fund" is assessable income, with a 10% offset up to the defined benefit income cap, and the balance of defined benefit income which is "untaxed in the fund" being fully assessable; and (b) 50% of defined benefit income above the defined benefit income cap which is "taxed in the fund" is assessable income, with the defined benefit income which is "taxed in the fund" up to the defined benefit income cap otherwise not assessable and not exempt.

FACTUAL CONTEXT 26 Dr Stern was a "retirement phase recipient" (s 294-20) of three pensions, the first two of which were "lifetime pensions" within the meaning of item 1 of the table to s 294-130(1) and thus "capped defined benefit income streams", and the third of which was not a capped defined benefit income stream. These pensions were: (1) a defined benefits pension through the Commonwealth Superannuation Scheme (CSS) under the Superannuation Act 1976 (Cth); (2) a defined benefits pension from UniSuper; and (3) a market-linked flexi-pension from UniSuper. 27 Dr Stern received an "excess balance determination" dated 3 January 2018. It stated that Dr Stern needed to commute an amount of $254,243.39 out of his superannuation income streams by 6 March 2018 and that, if he did not do so, the Commissioner would send a commutation authority to UniSuper instructing it to commute $254,243.39 from his flexi-pension. 28 The notice stated that Dr Stern's transfer balance was $3,452,308.57. This amount was derived by adding the following: the CSS and UniSuper defined benefit pensions valued under s 294-135 as having a "special value" of $1,826,422.46 and $1,371,642.72 respectively; the UniSuper flex-pension valued under s 294-25 at $243,955.48; and excess transfer balance earnings of $10,287.91. The excess transfer balance of $254,243.39 comprised the sum of the latter two amounts, being the amount by which Dr Stern's transfer balance in his transfer balance account exceeded his capped defined benefit balance in respect of the CSS and UniSuper defined benefit pensions.

DR STERN'S SUBMISSIONS 29 Dr Stern accepted that the relevant calculations made by the Commissioner were correct on a literal reading of the text of s 294-140. 30 However, Dr Stern's counsel submitted that the text of s 294-140 must be read in context and not in isolation: AS[2]. Dr Stern submitted that a construction of s 294-140 excluding from the calculation of the "excess transfer balance" defined benefit lifetime pensions with commutation restrictions which are subject to Subdiv 303-A is not "too much at variance with the language in fact used by the legislature" and that this construction does no more than give effect to the language already adopted by the legislation, referring respectively to: Taylor v The Owners - Strata Plan No 11564 [2014] HCA 9; 253 CLR 531 at [38] and Cooper Brookes (Wollongong) Pty Ltd v Commissioner of Taxation [1981] HCA 26; 147 CLR 297. 31 Dr Stern's counsel submitted that ss 294-1, 294-5 and 294-120 "conflict" with s 294-140 and that the conflict "results in consequences that are more than unintended but give results that are manifestly absurd or unreasonable": AS[18]. This argument stems from an assertion that the object or intended operation of the legislative scheme as revealed by those provisions is that "excess transfer balance under s 294-30 results either in excess tax benefits being neutralised by excess benefits tax [sic] or by a commutation of the fund precluding that prospect but not both": AS[18]. Counsel for Dr Stern submitted that it was absurd or unreasonable for the legislation to be construed so as both to treat the income from his defined benefit lifetime pensions as assessable and also to include those pensions in the calculation of his excess transfer balance. 32 Finally, Dr Stern's written outline of submissions foreshadowed an argument that, if ss 294-1, 294-5 and 294-120 "are disregarded (enabling s 294-140 to be read and construed as if they did not exist), the prescribed basis for Division 136 of Schedule 1 … as part of a legislative scheme to cap excess taxation benefits is lost", and that this is "significant not only because it is difficult to see a constitutional foundation for Division 136 outside s 51(ii) of the Constitution but also because Division 136 compels an acquisition of property … without providing compensation on 'just terms' for the acquisition": AS[20]. In the course of oral submissions, counsel for Dr Stern framed this submission as providing "context" for his construction arguments and emphasised that he did not contend for the invalidity of any legislative provisions. Rather, he clarified that the submission was intended to do no more than emphasise that both Div 294 of the ITAA 1997 and Div 136 of Schedule 1 of the TAA 1953 are designed to limit and neutralise taxation benefits, and are therefore supported as laws with respect to taxation within the power conferred by s 51(ii) of the Constitution and should be construed accordingly. In such circumstances, counsel accepted that the question of law raised by the appeal can be resolved as a matter of statutory construction, and that it is unnecessary for us to give separate consideration to any constitutional issues.

CONSIDERATION 33 Dr Stern's submissions are predicated on assertions about the purpose and operation of the statutory scheme which are not borne out by an examination of its text and structure - as to which see: Certain Lloyd's Underwriters v Cross [2012] HCA 56; 248 CLR 378 at [25] and [26]. Contrary to Dr Stern's submissions, excluding defined benefit lifetime pensions that are subject to commutation restrictions from the calculation of "excess transfer balance" is not an object of the legislation which can be discerned applying ordinary principles of statutory construction. Rather, as explained further below, it is intended that: (a) the value of such pensions is counted towards the transfer balance cap; and (b) excess transfer balance tax: (i) is not imposed for a breach of the transfer balance cap that is attributable to certain defined benefit income streams, but excess defined benefit income is instead subject to additional income tax under Subdiv 303-A; (ii) is imposed for a breach of the transfer balance cap that is attributable to other superannuation interests. 34 It is not correct to say, as Dr Stern does, that "excess transfer balance under s 294-30 results either in excess tax benefits being neutralised by excess benefits tax or by a commutation of the fund precluding that prospect but not both". A taxpayer with excess transfer balance is subject to both excess transfer balance tax and commutation of the excess that is not referable to capped defined benefit income streams. 35 As mentioned, counsel for Dr Stern submitted that s 294-1, s 294-5 and s 294-120 are in "conflict" with s 294-140. These provisions are: Guide to Division 294 294-1 What this Division is about There is a cap on the total amount you can transfer into the retirement phase of superannuation (where earnings are exempt from taxation). Credits are added to a transfer balance account when you transfer amounts. If the balance in your account exceeds the cap, you will be required to remove the excess from the retirement phase, and you will be liable to pay excess transfer balance tax.

Note: Division 136 in Schedule 1 to the Taxation Administration Act 1953 contains rules about excess transfer balance determinations and commutation authorities. Subdivision 294-A - Object of this Division Operative provisions 294-5 Object of this Division The object of this Division is to limit the total amount of an individual's *superannuation income streams that receive an earnings tax exemption. … Subdivision 294-D - Modifications for certain defined benefit income streams Guide to Subdivision 294-D Section 294-120 What this Subdivision is about Certain defined benefit lifetime pensions that are subject to commutation restrictions cannot result in excess transfer balance (instead, Subdivision 303-A applies to the superannuation income stream benefits). Certain commutation-restricted income streams started before 1 July 2017 are covered by the same modification.

36 Sections 294-1 and 294-120 are part of a "Guide". Section 950-150 of the ITAA 1997 explains what use can be made of Guides in the interpretation of the operative provisions. Section 950-150(2) provides: Guides form part of this Act, but they are kept separate from the operative provisions. In interpreting an operative provision, a Guide may only be considered: (a) in determining the purpose or object underlying the provision; or (b) to confirm that the provision's meaning is the ordinary meaning conveyed by its text, taking into account its context in the Act and the purpose or object underlying the provision; or (c) in determining the provision's meaning if the provision is ambiguous or obscure; or (d) in determining the provision's meaning if the ordinary meaning conveyed by its text, taking into account its context in the Act and the purpose or object underlying the provision, leads to a result that is manifestly absurd or is unreasonable. 37 Neither s 294-1 (which is a Guide) nor s 294-5 (which is an operative provision) provide support to Dr Stern's argument: The former is an unremarkable and accurate general description of what Div 294 is about. It does not purport to seek to deal with matters of detail or exceptions. The same may be said of the latter, which is an operative statutory expression of the general object of the Division. 38 The words on which counsel for Dr Stern relies in s 294-120 are: "[c]ertain defined benefit lifetime pensions that are subject to commutation restrictions cannot result in excess transfer balance (instead, Subdivision 303-A applies to the superannuation income stream benefits)". 39 The difficulty is that s 294-140 makes clear that capped defined benefit income streams are also taken into account in determining whether a person has excess transfer balance. In terms, s 294-140 addresses the situation in which a person has a "capped defined benefit income stream" and another superannuation income stream which is not a "capped defined benefit income stream". Section 294-140 works with s 294-130 which defines a "capped defined benefit income stream" by reference to certain products with commutation restrictions. Particularly having regard to ss 294-140(1)(b) and 294-140(3), one cannot sensibly read s 294-140 as excluding any "capped defined benefit income stream" with commutation restrictions when that is obviously one of the reasons for the enactment of s 294-140. Nor could one sensibly read it as excluding the specific kind of "capped defined benefit income stream" which Dr Stern has, being a lifetime pension within item 1 of the table to s 294-130(1): each "capped defined benefit income stream" in the table to s 294-130 has commutation restrictions of one kind or another. That is why they were included in the table to s 294-130, and are covered by the modifications in Subdiv 294-D. No attempt was made to distinguish Dr Stern's pensions (within item 1 of the table) from the various annuities and pensions in items 2 to 7 of the table. 40 In so far as Dr Stern suggested that the reference in s 294-120 to "[c]ertain defined benefit lifetime pensions" should be confined to the lifetime pensions referred to in item 1 of the table to s 294-130, that suggestion is untenable in circumstances where all of the capped defined benefit income streams covered by the table have commutation restrictions and are subject to the taxation of income stream benefits under Div 303-A. 41 Dr Stern's argument is inconsistent with the note to s 294-140(2) which points out that Subdiv 303-A provides modifications of the tax treatment of benefits paid from capped defined benefit income streams, in a context which expressly contemplates that the capped defined benefits income stream is one of the integers in the calculation of an excess transfer balance. 42 If Dr Stern's characterisation of the statutory object were correct, his argument would require not only that s 294-140 be read as excluding "capped defined benefit income streams" with commutation restrictions of a kind which Dr Stern had, but also that the "special value" of the superannuation interest (as determined under s 294-135) not be credited to his transfer balance account under s 294-25 or taken into account in the excess transfer balance calculation under s 294-30. This is entirely inconsistent with the statutory language. In order to achieve the outcome that Dr Stern seeks, he would need more than an exclusion from the special rule under s 294-140 that modifies the calculation of excess transfer balance for certain capped defined benefit income streams. He would need additional modifications of both Subdiv 294-B and Subdiv 294-D, requiring the interrelated provisions of Div 294 to be completely rewritten in respect of their application to the lifetime pensions covered by item 1 of the table. The argument is also inconsistent with the explanatory memorandum - see, for example: at [3.22], [3.215] and [3.244]-[3.246] (including Example 3.35). 43 In the light of the express terms of ss 294-25, 294-30, 294-130, 294-135 and 294-140, it cannot sensibly be argued that non-commutable defined benefit lifetime pensions are excluded from the calculation of the transfer balance of a retirement phase recipient of one or more superannuation income streams, or in the determination of excess transfer balance. In so far as s 294-120 states (as a Guide to the operative provisions of Subdiv 294-D) that such pensions "cannot result in excess transfer balance", this can mean no more than that the capped defined benefit balance in respect of those pensions does not form part of the amount of any excess transfer balance: s 294-140(2). 44 While the Guide in s 294-120 may be considered in determining the purpose or object underlying the operative provisions in Subdiv 294-D, it does not itself purport to be a statement of that purpose or object, let alone a comprehensive summary of the operation of the Subdivision. Rather, s 294-120 provides a shorthand description of what Subdiv 294-D is "about". There is no ambiguity or obscurity in the meaning of s 294-140, and nor does the ordinary meaning of that provision (taking into account its context and purpose) lead to a result that is manifestly absurd or unreasonable. 45 Counsel for Dr Stern argued that it was unfair or unreasonable to take Dr Stern's defined benefit lifetime pensions into account in calculating whether he has an excess transfer balance, so as to require commutation of his other superannuation income streams and to impose excess transfer balance tax, because those pensions include untaxed elements that also constitute assessable income (in respect of which the tax benefits are limited or neutralised by Div 303-A). This is an argument that is directed more to the reasonableness or otherwise of the policy underlying the legislation, rather than demonstrating any manifest absurdity or unreasonableness in the relevant sense. Policy is a matter for the legislature and not a question for the Court. 46 In Taylor, the majority referred to four "conditions" which are often referred to in this context as at least relevant to the question of whether a court can construe a provision as if it contained additional words to give effect to its evident purpose: at [18], [22] to [25], and [39] to [40]. The "conditions" are, in summary: (1) the precise purpose of the provision can be identified - see: Taylor at [22]; (2) there has been an inadvertent failure to deal with an eventuality that must be dealt with if the provision is to achieve its purpose - see: Taylor at [23]; (3) the words that Parliament would have included can be clearly identified - see: Taylor at [24]; (4) the words that might be read into the text are consistent with the wording otherwise adopted - see: Taylor at [25]. 47 The first three "conditions" are intended to reflect the three conditions identified by Lord Diplock in Wentworth Securities Ltd v Jones [1980] AC 74. The fourth "condition" is intended to reflect a "condition" adopted by McColl JA in the Court of Appeal decision the subject of the appeal in Taylor, which her Honour took from Dawson J's statement of the relevant principles in Mills v Meeking [1990] HCA 6; 169 CLR 214 at 235 - see: Taylor v Owners - Strata Plan No 11564 [2013] NSWCA 55; 83 NSWLR 1 at [40]; Taylor at [25]. The High Court accepted that Lord Diplock's three conditions should be treated as prerequisites and, accordingly, necessary. The High Court did not decide whether Lord Diplock's three conditions are always, or even usually, "necessary and sufficient": at [39]. The High Court endorsed the fourth condition as at least relevant. The occasions on which the principles in Taylor and Cooper Brookes have been applied directly or by analogy are rare, but an example may be found in BBlood Enterprises Pty Ltd v Commissioner of Taxation [2022] FCA 1112 at [286] to [292]. 48 As to the considerations referred to in Taylor: (1) the applicant has not identified the precise purpose of s 294-140 in a way which permits exclusion of the lifetime pensions received by Dr Stern - see: Taylor at [22]; (2) it cannot be said that there has been an inadvertent failure to deal with an eventuality that must be dealt with if the provision is to achieve its purpose - see: Taylor at [23]; (3) Dr Stern was not able to identify the words that Parliament would have included (or excluded) to achieve the contended purpose - see: Taylor at [24]; (4) one is therefore not able to say whether the words that might be read into the text are consistent with the wording otherwise adopted - see: Taylor at [25]. 49 None of the considerations in Taylor favour construing s 294-140 otherwise than in accordance with the words in fact used.

CONCLUSION 50 The application must be dismissed with costs. I certify that the preceding fifty (50) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justices Thawley, Hespe and Horan .