Special circumstances - unfairness and injustice may be enough

Although the Commissioner is more often than not successful when challenged in the AAT on the question of whether special circumstances exist in relation to an Excess Contributions Tax assessment, an emerging line in the decisions go against the Commissioner and suggest that 'special circumstances' can be established by showing that injustice or unfairness will arise without the need to find that the circumstances are out of the ordinary.

In a previous post I mentioned the matter of Bornstein.  Since that case, 2 further AAT decisions have favoured the taxpayer.  In Longcake v Commissioner of Taxation the Tribunal found that special circumstances existed where an employer failed to follow a salary sacrifice agreement, and instead made contributions in a subsequent financial year, which gave rise to excess contributions in that year.

In Hamad v Commissioner of Taxation special circumstances were found to exist where an employer did not remit salary sacrifice contributions until after the end of the relevant quarter to which they related, despite the employer showing the reduced salary in payment advices during the quarter.  The finding of special circumstances arose notwithstanding that there was no formal agreement between the taxpayer and the employer.

More importantly in that case, Senior Member Allen was critical of earlier Tribunal decisions saying that "the members comprising the Tribunal seem to have adopted an unduly narrow interpretation of what may constitute special circumstances. In particular, the suggestion in Tran and Commissioner of Taxation [2012] AATA 123 that circumstances will not be special unless they are out of the ordinary is, in my respectful opinion, misconceived."  He went on to quote extensively from his earlier decision in Jones and Secretary, Department of Families, Housing, Community Services and Indigenous Affairs [2012] AATA 77 which examined the line of decisions in this area.  The quote concludes: "It is but another way of putting the proposition that injustice or unfairness by the strict application of the Act cannot of itself amount to a special circumstance ... That is a proposition which, as I have noted, has been rejected by a number of decision of the courts..."

This decision indicates that where a taxpayer can demonstrate that injustice and unfairness would otherwise result from the strict application of the provisions, it will be open to the Commissioner to find that special circumstances exist, and to allocate contributions to another financial year or to disregard them in order to address the injustice or unfairness.

These cases also show an increasing emphasis on the need to have regard to the object of Division 292 - to ensure that the amount of concessionally taxed superannuation benefits that a person receives results from superannuation contributions that have been made gradually over the course of the person's life.

Positive news on pension ruling

Although its title doesn't provide any hint, in a press release issued today the Minister for Financial Services and Superannuation announced that the law would be amended to allow the pension earnings tax exemption to continue following the death of a pension recipient until the member's benefits have been paid our of the fund.

This announcement might explain the long delay in the finalisation of TR 2011/D3 which has been out since July 2011.

 

We will need to wait to see how the ATO proceeds, although it seems the most likely approach will be for the draft ruling to be withdrawn, and a new draft ruling issued addressing matters that will not be affected by the proposed amendments to the law.

ECT: a glimmer of hope for taxpayers

The Americans use the expression "Batting 1000" to describe someone who has a perfect strike rate.

Before last Friday, the ATO was Batting 1000 on appeals against disallowed Excess Contributions Tax objections.  Then along came Benjamin Bornstein.

In what seem to be unremarkable circumstances, the AAT has allowed Mr Bornstein's appeal against the ATO objection decision, and decided that contributions made to a superannuation fund on 10 July 2007 should be attributable to the 2006/07 financial year.

Mr Bornstein made a contribution to his fund on 10 July 2007 after returning from overseas 2 days earlier, believing that the contribution would count for the previous financial year.  He reached this belief after contacting his accountant, and reviewing material on the ATO website prior to departing for an overseas trip on 21 June. 

The AAT was satisfied that special circumstances existed on the basis that:

• Mr Bornstein took advice from his accountant - this demonstrated he was conscious he had obligations and that he was attempting to comply with them;
• Mr Bornstein visited the ATO website before making the contribution.  The website described the employer obligations but not the employee's obligations.  This ambiguity gave rise to confusion;
• Mr Bornstein argued that he was denied the opportunity to fix the error because the ATO did not alert him to the true position before further contributions were made in the 2007/08 year.

The AAT concluded that these matters together created "what might be described as a "perfect storm" of events, miscommunications and misunderstandings that combined to leave the taxpayer in an unusual and unfortunate position", and that special circumstances were made out, even though any fault attached to the taxpayer or his agent.

It will be interesting to see whether this case is followed in the future.