In the decision of Stern v Commissioner of Taxation [2024] FCAFC 21 the Full Federal Court found against the taxpayer, who raised an argument that Division 294 of the Income Tax Assessment Act 1997 (ITAA 97) should not be interpreted such that both his pension was to be commuted under a commutation authority issued by the Australian Taxation Office (ATO) due to his pensions exceeding his transfer balance cap, and that he also must pay excess transfer balance tax for exceeding his transfer balance cap.

The relevant part of Division 294 in this case is Subdivision 294-D which modifies the transfer balance account calculations where the taxpayer has defined benefit pensions. The taxpayer in this case had two defined benefit pensions: one with the Commonwealth Superannuation Scheme (valued at $1,826,422.46) and one with UniSuper (valued at $1,371,642.72) and he also had a market linked flexi-pension with UniSuper (valued at $243,955.48). This resulted in excess transfer balance earnings of $10,287.91 and an excess transfer balance of $254,243.39. His general transfer balance cap was $1.6 million and his defined benefit income cap was $100,000 for the 2017/18 financial year.

The taxpayer received an “excess balance determination” dated 3 January 2018. It stated that he 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.

In reading this decision it is of use to consider the previous arguments before the Administrative Appeals Tribunal (AAT) AAT decision made by the taxpayer where he claimed, among other things, that the ability for the ATO to issue the commutation authority to his superannuation fund amounted to un-constitutional acquisition of property on unjust terms and that the Commissioner should have been compelled to act on his preference as to which of his pensions to commute. The taxpayer’s arguments ultimately failed before the AAT, which among other things found that the application of Division 294 amounted to a taxation mechanism and not a direct acquisition of property.

The taxpayer’s arguments before the Full Federal Court in appealing against the AAT decision focused on his interpretation of sections 294-10 and 294-120 of the ITAA 97, which are not operative provisions but rather serve as mere guides to assist in interpreting the operative provisions.

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.

Section 950-150(2) of the ITAA 97 was referred to in the AAT decision to find that the relevant provisions of Division 294 of the ITAA 97 were not ambiguous and should therefore not be read down by references to the guide sections.

950-150 (2) 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.

The Full Federal Court closely linked its conclusion to the same conclusion made by the AAT stating at paragraph 45 that the provisions of Division 294 were to be read as-is by the Court:

“Counsel for Mr Stern argued that it was unfair or unreasonable to take Mr 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.”

The Federal Court stated at paragraph 43 that in applying the taxpayer’s intended interpretation that could render Subdivision 294-D redundant:

“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).”

A key takeaway from this decision is that the ITAA 97 is to be interpreted in accordance with the wording of the operative provisions of the legislation and not the guides (unless the operative provisions are ambiguous or obscure).

Phil Broderick
Principal
T +61 3 9611 0163 l M +61 419 512 801
E pbroderick@sladen.com.au

Terence Wong
Senior Associate
T +61 3 9611 0112 l M +61 0458 846 022
E twong@sladen.com.au