Prebble v Commissioner of Taxation [2004] HCATrans 387 (8 October 2004)

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Prebble v Commissioner of Taxation [2004] HCATrans 387 (8 October 2004)

Last Updated: 14 October 2004

[2004] HCATrans 387

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Brisbane No B73 of 2003

B e t w e e n -

JEFFREY JAMES PREBBLE

Applicant

and

COMMISSIONER OF TAXATION

Respondent

Application for special leave to appeal

GUMMOW J
CALLINAN J

TRANSCRIPT OF PROCEEDINGS

FROM BRISBANE BY VIDEO LINK TO CANBERRA

ON FRIDAY, 8 OCTOBER 2004, AT 12.24 PM

Copyright in the High Court of Australia

MR F.L. HARRISON, QC: May it please your Honours, I appear with my learned friend, MR M.L. ROBERTSON, for the applicant. (instructed by Ebsworth & Ebsworth)

MR G.T. PAGONE, QC: If the Court pleases, I appear with MR S.H. STEWARD for the respondent. (instructed by Australian Government Solicitor)

GUMMOW J: Yes, Mr Harrison.

MR HARRISON: Your Honour, as your Honours will have seen, the applicant taxpayer seeks a deduction under section 82AAE of the Income Tax Assessment Act 1936 for a contribution he made in 1999 to a non-complying superannuation fund. The relevant sections are listed as item 4 in the respondent’s list of material.

GUMMOW J: Yes, we have puzzled over the sections.

MR HARRISON: Your Honour - - -

GUMMOW J: One can see that one could take various views of them, I suppose, but, in the end, can we be sufficiently confident that we should depart from what they did in Harris [2002] FCAFC 226; (2002) 125 FCR 46 in the Full Federal Court?

MR HARRISON: Yes, your Honour. In my submission - - -

GUMMOW J: That does at least have the wisdom of achieving what seems a sensible result.

MR HARRISON: Your Honour, our submission is that it is only achieving what is a sensible result if one looks at the 1994 amendments and looks at the dysfunction allegedly caused by the changing of the test for taxing a contribution to a fund. Could I just very briefly go back to the definition of “eligible employee”.

GUMMOW J: Yes, we should look at the text, really. It appears in the application book at page 27, does it not? Definition of “eligible employee”.

MR HARRISON: Yes, your Honour. Your Honour, it defines three classes of persons. The first is an easy definition:

(i) an employee of the taxpayer –

I should have said, the definition functions as - - -

GUMMOW J: One plainly contemplates different person.

MR HARRISON: Yes, your Honour. Question two, well, we know that there is a dispute about the meaning of that. I would like to refer to paragraph (iii) because - - -

GUMMOW J: Different person, though.

MR HARRISON: No, your Honour, that is – sorry, it is, but it is interesting the way it does it, because if one omits a number of words that are irrelevant to this particular question, what it reads is:

an employee of a company in which the taxpayer if the beneficial owner of shares but in which the taxpayer does not have a controlling interest (not being an employee who –

and if one then omits words –

has set apart of paid . . . amounts . . . to a fund for the purpose of providing superannuation benefits for . . . the taxpayer) –

So the drafter of subsection (iii) was conscious of the fact that, without that exception, it would include a contribution being made for the person’s own benefit. One may infer that there was a deliberate decision by the drafter to say, it is necessary to exclude a contribution for yourself from subsection (iii) in the case of company in which the contributor has an interest, but not a controlling interest, but it also - - -

GUMMOW J: What do you say about paragraph 21 in Harris [2002] FCAFC 226; (2002) 125 FCR 46 at 52? Read with paragraph 72 as well, on page 66. We are focused immediately on paragraphs 20, 21 and 22, I think. The real question is, how substantial is the prospect of overthrowing those paragraphs, I suspect.

MR HARRISON: With respect, their Honours are wrong in treating the definition as looking at a relationship between people. What one is doing is saying the expression “eligible employee” in relation to a particular taxpayer covers a particular class of people. So the issue is – rather, we would put it as being, is there anything in that to exclude just one person from that class, namely, an employee who happens to be the person who has the controlling interest?

Because the controller is not the employer of the person, one is not looking at the relationship between people, one is simply defining the class of employees. So there is no warrant to approach the matter the way the court did there. Rather, we would submit one should approach it the way Justices Hill and Hely did, if I could go to page 33. Perhaps one should start at the bottom of 32:

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...’ - - -

GUMMOW J: Where do their Honours in this case, in that joint judgment you have just been reading from – where do they deal with paragraph 72 in Harris? The time is long past where one just looks at the words of the section or, in this case, the definition without attending to the subject, scope and purpose of the legislation. Paragraph 72 at page 66 of Harris is saying, well, look - - -

MR HARRISON: Their Honours go through the legislative history and conclude that - - -

GUMMOW J: Yes, what I am asking you is, in the joint judgment in the present case, is there any refutation of paragraph 72 in Harris? You quite rightly point to what their Honours say where they fix on the word “ambiguity”, but do they attempt to resolve it by the considerations that the Full Court resolved it in the earlier decision in Harris?

MR HARRISON: No, your Honour. They say – and I am paraphrasing it – one cannot really draw a conclusion as to the legislative purpose in the way that - - -

GUMMOW J: It is not legislative purpose, it is legislative harmony. Forget about what they were trying to do. Looking at what they did, how does one give a harmonious operation to it, if one can?

MR HARRISON: In my submission, there is no disharmony, because firstly we submit that the main distinction is between contributions by a self-employed taxpayer and contributions by an employed taxpayer, but, in any event, there is no disharmony from the legislature taking the view that they will put contributions by a controller in an entirely separate category as they have done from contributions by others. So that one should not start to read the Act with a view to saying that particular subdivision is intended to be restrictive of the deduction that is given in section 82AAE or 82AAC. The legislative intention is to be drawn from the way the drafters crafted the definition of “eligible employee”.

In effect, the scheme is this, that where you are a controller, you can make contributions for all employees of your company, but, if you are not a controller, then there are various restrictions, because of the abuses identified in the Ligertwood Report as to people making, as it were, cross-contributions for the benefits of others and so on, for getting around the various restrictions that have been placed from time to time on the availability of deductions. At the same time, the purpose is to encourage people to make contributions for employees. So I cannot say that the court in our case specifically refuted that particular paragraph, your Honours.

My learned junior points out that AB was only introduced in 1980, that is, after the introduction of the provision that we are seeking to have construed, and therefore should not be referred to to restrict the meaning of that particular definition. In our submission, in dealing with the merits as opposed to the reasons that we have identified for asking for special leave in this case, one simply approaches the section as a simple matter of construction, sees that the drafter in paragraph (iii) has excluded - - -

GUMMOW J: A simple matter of construction that has had the Federal Court in schism.

CALLINAN J: We are not laughing at you, Mr Harrison.

MR HARRISON: Well, your Honour, it only becomes complicated when one throws in distractions. What has happened is that there has been one constant in this legislation, and that is that definition, and then the legislation has chipped away here and turned around there and so on, and made really what appears to be a long course of events, a whole lot of ad hoc decisions.

CALLINAN J: When it covers a thousand pages, they ought to get it right, Mr Harrison.

MR HARRISON: The more pages the harder it is, I am afraid, your Honour.

GUMMOW J: That undoubtedly is so with any legislation.

MR HARRISON: My learned junior does point out that in Harris the court has in fact misunderstood paragraph (iii) entirely at paragraph 21 on pages 52 to 53.

GUMMOW J: That is why we have been taking you to it, because it seems to us that that is where the battleground is, really.

MR HARRISON: Yes, where the court in Harris is mistaken is in saying:

In other words, the only sensible reason for not expressly excluding the taxpayer from subpar (iii) would seem to be –

et cetera, whereas in fact the legislature does in fact expressly exclude the taxpayer from subparagraph (iii). So the whole basis for their analysis of the problem is affected by this misreading of paragraph (iii).

GUMMOW J: I think we will hear from Mr Pagone, Mr Harrison.

MR PAGONE: If the Court pleases. I hope your Honours may have a cope of the bundle of materials that we have filed in respect of this matter. Your Honours, may I embark upon the matter in the way that my learned friend is seeking to do, namely, by saying that the critical question is the definition that was inserted in 1964. In 1964, what your Honours need to know is that there was a provision, being section 82H, which provided that a person, any person – including, obviously, the economic owner of a company or of business – could make a contribution by way of superannuation for himself or herself.

In addition to that, there was what was Division AA, which we have extracted for your Honours behind tab 8. If I could take your Honours to tab 8, that is the 1964 Act that our learned friends say is the explanation for all of their position. At that stage, the critical provision, your Honours, was section 82AAC, which provided that:

Where a 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 –

certain moneys, was entitled to get a deduction. At that stage, there was a maximum amount allowable under that provision. Indeed, the maximum amount your Honours will see in 82AAE. As originally enacted, it was either:

(i) Two hundred pounds; [or]
(ii) five per centum of the total remuneration paid to the employee –

Your Honours will see that over the page at 508. So if one pauses there for a minute, the scheme provided that there was a contribution that an individual could make for himself or herself, with a maximum contribution of £400 at that stage, or a contribution could be made on behalf of an eligible employee with a maximum contribution at that stage of either £200 or 5 per cent of the total remuneration.

Now, it is in relation to that operative provision in 82AAC that one has the definition of “eligible employee”, and that your Honours will find either at page 27 of the appeal book or at the very first page of tab 8. What your Honours will see there is the definition of “eligible employee”, and, unsurprisingly, the very first category of eligible employee is:

(i) an employee of the taxpayer –

Unsurprising. That then gets extended by the subsequent provisions. It gets extended at first instance to a person who is not the direct employee of the taxpayer, but indirectly an employee of some related company. So the second category, for example, is:

(ii) an employee of a company in which the taxpayer has a controlling interest –

The third category extends it a bit further to people who have a beneficial ownership of shares but who are not controlling interests; (b) then extends the class a little way the other way. So that, broadly speaking, what one sees at this point, your Honours, is - - -

GUMMOW J: We have seen this distinction between controlling interest and beneficial ownership in the linter sections that we have been grappling with and the loss provisions.

MR PAGONE: I believe so, your Honours.

GUMMOW J: Yes. Anyhow, (iii) builds on (ii) by looking at beneficial ownership without controlling interest.

MR PAGONE: That is right, your Honour, and what (b) then does is to look at it the other way, that is to say, one looks at the person and whether the person has:

a controlling interest in the taxpayer –

So whereas one was looking at whether the taxpayer had a controlling interest in the person paying the money, now one asks the question, does the person have a controlling interest in the taxpayer? So it is just the arrows are going the other way.

Your Honours, if I can just sort of pause there and paint a broad picture, in the case where you have a group of companies where the employer might be an employing company, but the person making the cash payment might be an operating company, might be a subsidiary, might be a parent company, it is those arrows, as it were, in the chart that the provision is designed to capture. Throughout all of this, there is one important factor that our learned friends - - -

GUMMOW J: Just explain (iii) again, an employee of the company - - -

MR PAGONE: That is where the taxpayer has an ownership in the company that is the employer.

GUMMOW J: Yes.

MR PAGONE: But not a controlling interest in the company.

GUMMOW J: Yes. What is the force of the words in brackets, then, in (iii)? It is saying it goes this far in (iii), but it does not go for the bracketed area.

MR PAGONE: To the bracket. The reason for that, your Honour, is that it imposes an absolute prohibition in respect of associates, but it is only one of several prohibitions. That is the point that our learned friends need to grapple with. The relevant provision for this purpose, your Honour, is 82AAD. What that provision says is that, if I may abbreviate it in a nutshell, where an amount is paid to:

an eligible employee, being an employee associated with the taxpayer –

then the amount that is allowable as a deduction is restricted to the amount which:

in the opinion of the Commissioner –

would be the amount paid had there not been an association.

GUMMOW J: Yes.

MR PAGONE: Now, if I can take your Honours back for a moment to the definition, one asks, in the case of the human being the economic owner of the employer, what would happen? So I own the company, the company employs me as a director, superannuation can be made by the company on my behalf because I am an employee. In those circumstances, the question is, “Am I an associate so that the total amount which the company, my company, can pay me is limited?” And the answer, your Honours, is, “You bet”. The reason it is “You bet” is because of the definition of “associated person” in section 82AAB. Your Honours will see that an associated person:

For the purposes of this Subdivision, an employee is associated with a person if –

(a) the employee is a relative of the person –

that is understandable enough –

(b) the person is a company –

well, in the ordinary case, I have assumed that –

that is a private company in relation to the year of income and, at any time during the year of income –

(i) the employee, or a relative of the employee, was a director of the company –

So in the usual case where I own - - -

GUMMOW J: So that would attract 82AAD?

MR PAGONE: It would attract it, your Honour, absolutely so. So in the case where Dr Prebble owns a company – in 1964 I am talking about – this is not modern stuff, we have gone back to the hardest case I have to meet. In 1964, Dr Prebble owns a company, the company makes a payment for me, its director/employee, 82AAD kicks in. There is a limit. But if our learned friend’s argument is right, then in the case of a payment under (ii), there would be no restriction whatsoever, with the consequence that the very prohibition sought to be carefully crafted and in fact carefully crafted, would be completely and totally defeated by this simply construction.

Now, your Honours, I have not dealt with what is our primary case. Our primary case is that one needs only look at the word “eligible employee” and ask the question, what in, let us say 1964, was the proper construction to be given to the word “employee”? And we would say, it plainly contemplates a relationship between two different people, that is to say, the employer and the employee.

The ordinary case, your Honours, is absolutely, perfectly clear, highly unremarkable and entirely obvious. That is, it is designed to ensure that the person who is entitled to get a deduction – that is say, the people that we want to encourage – because this is what this is about, how do we encourage superannuation payments? We want to encourage superannuation payments being made by employers. There was no need to encourage the economic owner, who was not an employer, making contributions for themselves. Why? Because 82H was there.

What is more, to the extent that there might have been a preferred payment to associates, it is positively discouraged by subdivision AA. But we do want to encourage people to make these contributions and we encourage them by saying, well, if you are the employer, you can have it, or if you are a related company, as it were, then you can get it as well, or if you are not a controlling taxpayer but nonetheless you have an ownership interest in the company that is the employer, you can as well, and vice versa.

GUMMOW J: You make it sound much simpler than the Full Court did in Harris.

MR PAGONE: Your Honours, with respect, no. In Harris, they took the same approach; they looked at the language, they analysed it in that way. The problem was that there was debate about the relevance of the history and the relevance of the context, and there were lots and lots of arguments that were raised one way or another. All of these arguments were addressed, picked up in Harris, in particular, and then rehearsed at great length by the Prebble court. Indeed, if I can take your Honours very briefly to what the Prebble court said about it, at page - - -

CALLINAN J: Page 41?

MR PAGONE: I thought it was about 38, your Honour, but it may be 41.

CALLINAN J: Yes, you may be right.

MR PAGONE: It is the passage, your Honours, where what the Prebble court says – no, it is before the conclusion. Yes, it is page 30, your Honour, at paragraph 20. They say that the Harris 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 Honours considered the construction of s 82AAE and the related definitional provisions) and also historical –

That is absolutely true. The court did deal with it in the Harris Case in precisely that way. It looked at the words and then dealt with all of the other arguments that had been put up, and the Prebble court did likewise. It looked at it contextually, that is to say, what do the words mean? Then they said, well, but what about all these other arguments that are being put up? And they diligently undertook their proper function by considering them one at a time.

Your Honours, that is, in a sense, all that one wanted to say about the construction point. The contrary conclusion is, we would say, extraordinary because of the consequences that would flow. All that happens after 1964 is consistent with a view about the proper construction in 1964 and produces the same correct outcome, we would say.

Now, your Honours, our learned friends also have an argument about the court not having undertaken the task of reviewing the earlier decision in the correct way, that is to say, whether John’s Case had been misapplied. May I perhaps go to that briefly. Our submissions on that, your Honours, are short. First of all, we wish to note what seems to be, if I may put it this way, a change of position of our learned friends. What the Full Court notes in its reasons in the application book at page 26 is that:

Senior Counsel for Dr Prebble submitted, however, that these Full Court decisions were contrary to the decision of the High Court in John.

When one looks at what the decisions were that were being referred to, going back a page, it is clear that what was being referred to was Transurban and Brooks. In other words, what was said below was, “Transurban is inconsistent with John”. Well, that is odd, because if one looks at what is put in the application book here, the summary of argument at page 52 and the notice of appeal at page 50 both say that what the Full Court got wrong was that they did not apply Transurban. In other words, here they are saying, “Transurban and John are right, but the Full Court in Prebble did not apply it”. That does not seem to be what they were saying below.

What they now seem to be saying is that the Full Court somehow or rather applied cases like Telstra. Well, your Honours, there is absolutely no reference anywhere to the cases that they complain about. What the Full Court did in the Prebble Case was that it referred to John, and your Honours can see that at page 26 of the application book; it referred to Transurban; it articulated a principle; it said the principle is that it must be plainly wrong or plainly erroneous; and it then did exactly what the Court had done in John.

GUMMOW J: It is not really, if I can put it this way, necessarily for us to sort out how the intermediate courts of appeal operate their stare decisis systems.

MR PAGONE: We would, with respect, agree with that, your Honour.

GUMMOW J: Anyhow, if it is, this does not seem a very attractive vehicle - - -

MR PAGONE: No, your Honour, may I therefore just - - -

GUMMOW J: - - - to embark on that sort of inquiry.

MR PAGONE: In that event, your Honour, may I just confine myself to one very small additional point about that, and that is the elision or the jump, the leap perhaps, in paragraph 20 of our learned friend’s argument at page 57. What they say in paragraph 20 is that:

The High Court in John . . . treated the decision as to the proper construction of the relevant provision as logically anterior to the decision whether to over-rule a long standing earlier decision –

That, your Honour, is simply not what John’s Case decides. What John did - - -

GUMMOW J: I think John’s Case was talking about the High Court.

MR PAGONE: Of course, your Honour, but even if one were to say that the principles were the same for the Federal Court, what the Federal Court did was the same as what the High Court had done in John. It asked itself, did the earlier court get it wrong? It did not ask, well, I am free, let us deal with the statutory construction question at large. It plainly did not do that, and what this Federal Court did was exactly the same. If your Honours please.

GUMMOW J: Yes. Yes, Mr Harrison.

MR HARRISON: .....to AAD and a suggestion that it is odd that there is no restriction on a taxpayer making donations for himself. Could I take your Honours to what Justices Hill and Hely said about the legislation in 1964 at page 36, paragraph 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 –

Now, the point of section 82AAD was this. There was a limit on the amounts of contributions you could make for yourself, but it dealt with the fact that taxpayers otherwise would have, as it were, lined up all their relatives and made contributions for the benefit of their relatives. So there was no reason at all to make section 82AAD deal with a person’s making contributions for himself. Therefore, because there was perfect harmony in 1964, it is the removal subsequently of the limit that creates the results that my learned friend complains about.

In relation to his submissions on section 82H, your Honours, the effect of section 82H is set out at page 35, paragraph 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).

Then if we go across to paragraph 39 on page 36:

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.

So the legislative scheme was to allow everybody a deduction of a limited amount for himself, in addition to whatever deductions could be obtained for contributions under other provisions of the Act. So it is wrong to infer that there is some inconsistency when the legislature in section 82AAR has itself pointed out the relationship between the two sections.

Your Honours, a matter that I did not deal with in the primary submissions or, rather, two matters. The first relates to what my learned friend says about – or our submissions in relation to John. If one goes to John, which is the first case in our bundle at page 438, one finds that the approach that the Court takes is to list four matters to be taken into account in determining whether or not to follow an earlier decision, and then goes on to the special situation of statutory construction.

GUMMOW J: If we were to grant special leave, Mr Harrison, it would be to work out whether the earlier decision was right or wrong, I would have thought.

MR HARRISON: Thank you, your Honour. The other matter is this, your Honour. We have complained about the reliance on the subsequent amendments, and our complaint arises in this way. If one goes to page 41 in their Honours’ judgment, at about the middle of the page just above 1455, their Honours say, in considering the points in our favour:

It can be accepted that the amendments made in 1994 could not determine the construction of the definition of ‘eligible employee’ –

which is perfectly orthodox. Then their Honours go on to consider the arguments in favour of Harris, and in doing that, however, they list only arguments that relate to the oddities that result in subsequent amendments. So that although their Honours have, as it were, paid lip service to the idea that one cannot refer to the earlier decisions, we lost this appeal because their Honours relied on reasons relating to the odd results that have come from the subsequent amendments.

GUMMOW J: Yes.

MR HARRISON: And there is no guidance there for as to when one looks at the subsequent amendments, but their Honours seem to contradict each other in the two adjacent paragraphs. Those are our submissions, your Honour.

GUMMOW J: Thank you.

The Court is not persuaded that there are sufficient prospects of success in demonstrating error either in Harris v The Commissioner [2002] FCAFC 226; (2002) 125 FCR 46 or in the treatment of Harris by the Full Court in the present case. Accordingly, special leave is refused and refused with costs.

AT 1.04 PM THE MATTER WAS CONCLUDED