Commissioner of Taxation v Douglas [2020] FCAFC 220
On 4 December 2020, the Full Court of the Federal Court delivered judgment in Commissioner of Taxation v Douglas as a combined hearing of the Commissioner’s appeals of the following decisions from the AAT constituted by Judicial President Logan:
| ● Douglas and Commissioner of Taxation [2020] AATA 494 (“DJ”);
● Burns and Commissioner of Taxation [2020] AATA 671 (“BJ”); and
● GDGR and Commissioner of Taxation [2020] AATA 766 (“WJ”). |
In essence, these proceedings concerned the categorization as either superannuation income stream or superannuation lump sum payments arising from invalidity benefits paid from pensions to Mr Douglas under the Defence Force Retirement and Death Benefits Scheme (“DFRDB Scheme”) and to Mr Walker (GDGR) and Mr Burns under the Military Superannuation and Benefits Scheme (“MSB Scheme”).
Although there are differences between the DFRDB Scheme and the MSB Scheme, they share the common purpose of providing invalidity benefits to veterans while they are classified as either Class A or Class B with respect to their incapacity. Relevantly, both of these schemes allow for the rate of incapacity to be reviewed and consequential variation or cancellation of benefits. The ability for benefit entitlements to be adjusted becomes relevant to the Full Court’s decision that invalidity benefits paid from pensions to individuals after 20 September 2007 under the MSB Scheme and the DFRDB Scheme are superannuation lump sum payments.
As a summary of each of the taxpayer’s circumstances:
Mr Burns
On 12 December 1994 Mr Burns was discharged on medical grounds. On 13 December 1994, Mr Burns was classified by the Board then administering the MSB Scheme as having Class A invalidity, effective from that date. Since the initial classification determination, Mr Burns has been reclassified as follows:
(1) from 5 July 1996, reclassified as Class B;
(2) from 13 December 2002, reclassified as Class C;
(3) from 14 October 2003, reclassified as Class B; and
(4) on 11 August 2008, reclassified as Class A.[1]
Mr Walker
On 12 November 2009, Mr Walker was discharged from the Australian Army on medical grounds. On 13 November 2009, Mr Walker was classified by the Board then administering the MSB Scheme as having a Class A invalidity, effective from that date. That classification has remained the same during the relevant income years.[2]
Mr Douglas
On 4 November 2014, Mr Douglas was classified by the Commonwealth Superannuation Corporation (“CSC”) as having a Class A invalidity, and the CSC determined that the effective date of that classification was 2 September 2002. Mr Douglas received a lump sum arrears payment on 10 December 2014, calculated by reference to the effective date of 2 September 2002. Following the determination of invalidity on 4 November 2014, he also received ongoing invalidity benefits.
It was conceded that each of the payments made to the taxpayers satisfied the definition of “pension” at s. 10 of the Superannuation Industry (Supervision) Act 1993[3] and there were fourteen grounds before the Full Court; however, they can be summarised into the following broad issues:
- Whether reg 995-1.01(2) of the (fmr) Income Tax Assessment Regulations 1997 (Cth) (“ITAR 1997”), as it was prior to the 2018 Amendment Regulations, provided the specification for the purposes of s 307-70(1) of the ITAA 1997? (“Issue A”)
- Whether Treasury Laws Amendment (Miscellaneous Amendments) Regulations 2018 (Cth) (which retroactively purported to provide a specification for the purposes of s 307-70(1) of the ITAA 1997) had effect on the taxpayers in these proceedings and whether ss. 7(2) and 12 of the Acts Interpretation Act 1901 (Cth) was engaged? (“Issue B”)
- Whether the invalidity benefit pension was a superannuation income stream under subparagraph 995-1.01(1)(a)(ii) of the ITAR because it was a pension under the Superannuation Industry (Supervision) Act 1993 (SISA Act) where the rules under which the benefits were paid complied with the pension standards set out in the Superannuation Industry (Supervision) Regulations 1994 (SISR)? (“Issue C”)
- Whether the invalidity pension, in relation to Mr Burns and Mr Walker, was a superannuation income stream under paragraph 995-1.01(1)(b) of the ITAR because it was an income stream that had commenced before 20 September 2007? (“Issue D”)
As the Court found, “at the heart of the issues on the appeals are ss 307-65 and 307-70 of the ITAA 1997, which provide:
307‑65 Meaning of superannuation lump sum
(1) A superannuation lump sum is a *superannuation benefit that is not a *superannuation income stream benefit (see section 307‑70).
(2) Treat a lump sum payment arising from a partial commutation of a *superannuation income stream as a superannuation lump sum for the purposes of this Act (other than Subdivision 295‑F).
307‑70 Meaning of superannuation income stream and superannuation income stream benefit
(1) A superannuation income stream benefit is a *superannuation benefit specified in the regulations that is paid from a *superannuation income stream.
(2) A superannuation income stream has the meaning given by the regulations.
Note: For the purposes of the transfer balance cap, the meaning of superannuation income stream is affected by subsection 294‑50(2).
307‑70 Meaning of superannuation income stream and superannuation income stream benefit
(1) A superannuation income stream benefit is a *superannuation benefit specified in the regulations that is paid from a *superannuation income stream.
(2) A superannuation income stream has the meaning given by the regulations.
Note: For the purposes of the transfer balance cap, the meaning of superannuation income stream is affected by subsection 294‑50(2).”[4]
The Tribunal held that “reg 995-1.01(2) of the ITAR 1997 did not contain the specification referred to in s 307-70(1) of the ITAA 1997. The Tribunal provided three reasons for this conclusion:
(a) the definition of superannuation income stream benefit in reg 995-1.01(2) of the ITAR 1997 did not “even purport to be a specification at all” (DJ at [54], BJ at [30]-[31] and WJ at [27]);
(b) the definition in reg 995-1.01(2) of the ITAR 1997 did not fit the numerical pattern of other “specifications” provided in the ITAR 1997 (DJ at [54], BJ at [30]-[31] and WJ at [27]); and
(c) the definition in reg 995-1.01 of the ITAR 1997 was limited for use within the ITAR 1997 themselves as reflected in the introductory phrase “In these Regulations” (DJ at [54], BJ at [30]-[31] and WJ at [27]) (emphasis added).”[5]
Subdivision 995-1.01(1) and (2) relevantly provided that:
“(1) In these Regulations, unless the contrary intention appears:
superannuation income stream means:
(a) an income stream that is taken to be:
(i) an annuity for the purposes of the SIS Act in accordance with subregulation 1.05(1) of the SIS Regulations; or
(ii) a pension for the purposes of the SIS Act in accordance with subregulation 1.06(1) of the SIS Regulations; or
(iii) a pension for the purposes of the RSA Act in accordance with regulation 1.07 of the RSA Regulations; or
(b) an income stream that:
(i) is an annuity or pension within the meaning of the SIS Act; and
(ii) commenced before 20 September 2007.
superannuation income stream benefit: see subregulations (2) to (5)….
(2) In these Regulations:
superannuation income stream benefit:
(a) means a payment from an interest that supports a superannuation income stream, other than a payment to which regulation 995-1.03 applies; and
(b) for the purposes of sections 295-385, 295-390, 295-395, 320-246 and 320-247 of the Act—includes an amount taken to be the amount of a superannuation income stream benefit under subregulation (3) or (4)….”[6]
(my emphasis)
The Full Court observed that “amendments [were] made to the ITAR 1997 by the 2018 Amendment Regulations, which inserted a new Subdiv 307-B into the ITAR 1997 as follows (these amendments were made during the course of the three proceedings in the Tribunal which are now the subject of these appeals):
307-70.01 Superannuation income stream benefits
(1) For the purposes of subsection 307-70(1) of the Act (definition of superannuation income stream benefit), all superannuation benefits are specified, apart from a superannuation benefit covered by subregulation (2).
(2) A superannuation benefit is covered by this subregulation if:
(a) the superannuation benefit was paid:
(i) on or after 1 July 2007; and
(ii) before 1 July 2017; and
(b) the superannuation benefit was paid from a superannuation interest that supported a superannuation income stream; and
(c) the superannuation income stream met the requirement in paragraph 995-1.03(a) (as in force before the commencement of Schedule 6 to the Treasury Laws Amendment (Fair and Sustainable Superannuation) Regulations 2017) when the superannuation benefit was paid; and
(d) the person to whom the superannuation benefit was paid made an election in relation to that payment under paragraph 995-1.03(b) (as in force before the commencement of that Schedule).”[7]
At the Hearing, the Commissioner “frankly acknowledged, reg 995-1.01 is not well drafted”[8]. However, the Full Court accepted the Commissioner’s argument that, adopting what Gageler and Keane JJ said in Taylor v The Owners – Strata Plan No 11564, “if the target of a legislative provision is clear, the court’s duty is to ensure that it is hit rather than to record that it has been missed”[9] and found that Issue A was resolved favourably to the Commissioner in that reg 995-1.01(2) of the ITAR 1997 (as it was pre-2018) specified a “superannuation income stream benefit”.
As a consequence of finding favourably for the Commissioner on Issue A, the Court was not required to consider whether the 2018 amendments to the ITAR were made with retrospective application to specify superannuation benefits to be superannuation income stream benefits and thus Issue B was not determined.
In determining Issue C, the Full Court found favourably for the taxpayers on the basis that the MSB Scheme[10] and DFRDB Scheme[11] do not “ensure” that “the pension is paid at least annually throughout the life of the primary beneficiary as required pursuant to reg 1.06(2) of the SISR.
The point of difference, acknowledging the concession that payments made to the taxpayers were sourced from a pension, between the taxpayers arose in relation to Issue D as the Full Court found that:
- in relation to Mr Douglas (where a retrospective entitlement to a payment occurred on 4 November 2014 – after 20 September 2007[12]), the second limb of the definition of subparagraphs (b)(i) and (ii) of the definition of “superannuation income stream” in reg 995-1.01(1) of the ITAR 1997, being that the payment was required to commence before 20 September 2007, was not established and thus the benefits were superannuation lump sum payments.
- in relation to Mr Walker (where payments commenced on 13 November 2009), the second limb of the definition of subparagraphs (b)(i) and (ii) of the definition of “superannuation income stream” in reg 995-1.01(1) of the ITAR 1997, being that the payment was required to commence before 20 September 2007, was not established and thus the benefits were superannuation lump sum payments.
- in relation to Mr Burns (where payments commenced at a classification of Class A on 13 December 1994 and were subsequently adjusted), the second limb of the definition of subparagraphs (b)(i) and (ii) of the definition of “superannuation income stream” in reg 995-1.01(1) of the ITAR 1997, being that the payment was required to commence before 20 September 2007, was established and thus the benefits were superannuation income stream payments.
Consequently, the notices of appeal in Mr Walker and Mr Douglas’ matters were dismissed and the Tribunal’s decision in BJ (Mr Burns) was set aside[13] and there was no order as to costs as these appeals were conducted as “test cases”. The Full Court’s decision was not the subject of an application for special leave.
Following the Full Court’s decision, the Commissioner released a guidance note (with reference QC 62497) that provides for a “simplified” process for determination as to whether invalidity benefit recipients are affected by this decision. It has been interesting to observe that process and, at least in relation to Mr Walker, was significantly protracted and the guidance note continues to observe that:
“CSC has seen a large increase in individuals requesting a determination for a disability benefit. Due to the potential delay in receiving a determination, we have decided to postpone the mailout which will allow you to receive your determination before taking part in the process”.
One can only imagine how much more significant this decision, and the delay in addressing its impact, would be had the Full Court determined that the 2018 Amendment was unlawful as that issue had significantly further reaching consequences…
Angus Murray, Partner & Trade Marks Attorney
Irish Bentley Lawyers
24 November 2021
Note: the above was presented to the Diocletian Club at Brisbane by Angus Murray on 24 November 2021 and does not constitute legal advice. There is no substitute for tailored legal advice and our friendly team is able to assist with all aspects of tax litigation. Please feel free to contact us should you require any assistance at mail@irishbentley.com.au or on 07 3229 4060.
[1] Commissioner of Taxation v Douglas [2020] FCAFC 220 at [45].
[2] Commissioner of Taxation v Douglas [2020] FCAFC 220 at [54].
[3] Commissioner of Taxation v Douglas [2020] FCAFC 220 at [114].
[4] Commissioner of Taxation v Douglas [2020] FCAFC 220 at [4].
[5] Commissioner of Taxation v Douglas [2020] FCAFC 220 at [79].
[6] Commissioner of Taxation v Douglas [2020] FCAFC 220 at [111].
[7] Commissioner of Taxation v Douglas [2020] FCAFC 220 at [85].
[8] Commissioner of Taxation v Douglas [2020] FCAFC 220 at [92].
[9] Commissioner of Taxation v Douglas [2020] FCAFC 220 at [90] citing Taylor v The Owners – Strata Plan No 11564 [2014] HCA 9; 253 CLR 531 at [60] (with reference to what was said in Newcastle City Council v GIO General Ltd [1997] HCA 53; 191 CLR 85 at [113].
[10] Commissioner of Taxation v Douglas [2020] FCAFC 220 at [133].
[11] Commissioner of Taxation v Douglas [2020] FCAFC 220 at [168] – [169].
[12] Commissioner of Taxation v Douglas [2020] FCAFC 220 at [161].
[13] Commissioner of Taxation v Douglas [2020] FCAFC 220 at [176].