Re Mills v FCT – post-Ward’s case but still no “special circumstances” to remit excess super tax – UK pension into another fund, a year later than intended, pushed the $180k contribution over the limit without the fund knowing

The AAT has confirmed that there were no “special circumstances” to permit the Commissioner to exercise his discretion to remit excess contributions tax (ECT) of some $30,000 imposed on the taxpayer.

This was despite the fact that the taxpayer received an email from his superannuation fund that he had not exceeded the non-concessional contributions limit for the relevant year – when in fact he had done so because the fund had overlooked a contributed amount comprising the transfer of his UK pension assets to a different fund which the taxpayer intended to take place in an earlier income year and which would not have triggered the ECT.

The case revolved around the operation of s292-465 of the ITAA97, which provides (relevantly) that the excess contributions tax can be avoided if there are “exceptional circumstances” (s292-465(3)(a)).

In finding that there were no “special circumstances” warranting the remission of the excess ECT imposed, the AAT found that there was nothing which took the taxpayer’s circumstances out of the “usual” or “ordinary” case.

In doing so, the AAT agreed with the Commissioner that the taxpayer knew, or should have known, that the contribution of the UK pension assets was received by the other fund in the earlier year before he made the contribution of some $180,000 in the following year that gave rise to the ECT. In short, the AAT found that the taxpayer should have taken into account the fact that his UK pension fund assets had been transferred to the other fund and that that this occurred in a later year than intended.

The case had significance in that it was argued before the Full Federal Court, in Ward’s case [2016] FCAFC 132, held that another AAT had misunderstood the ‘special circumstances’ test as articulated, by the Federal Court, in the Groth case [1995] FCA 1708 (or that the AAT had misapplied the test). The fact that this favourable case, in an, otherwise, barren area of case law (for taxpayers) is, naturally, disappointing for taxpayers. [Personally, I think Member Lazanas has strayed close to the edge, in making the same kinds of mistake as were made in Ward’s case – but see the underlined portions from the extract below and make your own decision.]

(Re Mills and FCT [2017] AATA 362, AAT, File No: 2016/1667, Lazanas SM, 23 March 2017.)

[FJM, TT article on Ward’s Case; LTN 57, 27/3/17]

Extract from AAT decision

39. In the Ward AAT Case, Deputy President Humphries found at [46] that, notwithstanding that Mr Ward acted honestly and in good faith, he was not satisfied that Mr Ward had established the existence of “special circumstances” pursuant to s 292-465. The Tribunal had made a number of findings of fact, including [that] Mr Ward did not make a conscious and informed decision to breach the bring forward rule; even if Mr Ward had some basic understanding of the bring forward rule, which might have suggested that he could not put more money into his superannuation account at the time, that understanding was displaced by the “firm and authoritative advice proffered by Wholistic Financial Solutions”[. As a result,] the ECT wiped out the entirety of Mr Ward’s superannuation savings at retirement. The Tribunal stated at [46] and [47] that the effect of the amount of ECT on Mr Ward was oppressive or had catastrophic consequences. At [49], the Tribunal said the imposition of the ECT was the natural and foreseeable consequence of the decisions that Mr Ward and his advisers made, albeit in ignorance. At [52], the Tribunal referred to the ECT laws operating as they were intended to and also expressed the view that the fact Mr Ward did not deliberately set out to defy the ECT laws did not transform the tax into something unintended (emphasis in original). The Tribunal further stated at [54] that the strict application of the law to Mr Ward’s situation produced a situation which was “harsh and unfair”.
40. On appeal, the Full Court held in Ward as follows, at [40] – [43]:
    40. In our opinion, the Tribunal erred at [49] and following in proceeding on the basis that because the imposition of the tax was the natural and foreseeable consequence of the decisions of Mr Ward and his advisers, it was necessarily outside the scope of “special circumstances”. This misconception also pervades the following paragraph, [50], leading the Tribunal to interpret what Kiefel J had said in Groth as meaning that there could not be “special circumstances” unless something unintended had occurred, that is, on the Tribunal’s approach, something other than the natural and foreseeable consequence of the decisions Mr Ward and his advisers made. Then, at [52], the notion of “unintended” is given a further application by the Tribunal in its statement that the legislative provisions operated as they were intended to. On those bases, the Tribunal found it could not exercise the discretion because special circumstances were absent.
    41. In our opinion, it was open to the Tribunal to find that there were “special circumstances” if it found that the provisions operated on Mr Ward, in his individual circumstances, in an unfair or unjust way because, through a misunderstanding of an adviser by virtue of the misleading notice provided by BT Super for Life, Mr Ward, acting honestly and carefully, accidentally breached the bring forward rule which had consequences disproportionate to the intended operation of the statute.
    42. Contrary to the applicant’s submissions, it is not to the point, or within the Commissioner’s notice of contention, that the Tribunal’s finding that the notice provided by BT Super for Life was misleading may have been contestable. We also note that at the forefront of the submissions in reply on behalf of Mr Ward was an attempt, later abandoned, to contend that BT Super for Life “had misled Mr Ward and his advisor, Ms Smith, by providing one page of a four page account statement for the super retirement account, thereby denying them any useful information about the true statutory character of the $450,000 before it was contributed to a new fund.” (Emphasis in original.) The Tribunal did not proceed on this basis, as is made clear at [43] of its reasons. It also appears that the applicant’s case was not put before the Tribunal on this basis.
    43. In our opinion, the Tribunal erred in law by taking too narrow a view of what may constitute “special circumstances” within the meaning of the statute. This may have been caused by unnecessarily considering factors in isolation before focusing on the entirety of the circumstances said by the applicant to be special. It was certainly caused, in our opinion, by looking at expressions in other decisions and taking those expressions out of their factual and legal context.
41. Mr Mills relevantly submitted in relation to the relevance of the Ward case:

Like Mr Ward, the transfer here was a few days late by dint of living overseas, otherwise I was acting honestly seeking no tax advantage in circumstances; I prudently sought advice assiduously from two highly reputable advisers only to be slapped and I received a penalty far in excess of any tax advantage I was said to have inadvertently obtained. Thus, there are some uncanny parallels between the two cases for it at least to be open to the Tribunal to exercise the discretion in my favour;

…

Despite having declared the result unfair or unjust, the Court noted at [43] the Tribunal took a too narrow view of what constituted special circumstances …

42. The Commissioner submitted that the decision in Ward turned upon the particular idiosyncratic facts of that case, and the particular reasoning adopted by the Tribunal under review and it was against that background that the Court found that the Tribunal took too narrow a view of “special circumstances”. The Commissioner also emphasised that no general proposition can be extrapolated from Ward that the receipt of incorrect advice constitutes “special circumstances”.

WERE THERE SPECIAL CIRCUMSTANCES?

43. Mr Mills argued at the hearing that there were “special circumstances” in his case. In summary, he submitted that this was due to the following factors:

(a)      The ECT is due to the fact that the transfer of his UK pension fund asset happened in the year ending 30 June 2010 which triggered the “bring forward rule”.

(b)      Mr Mills had received advice that he had to transfer his UK pension fund asset within six months of relocating to Australia. Had he done so, that is, had he transferred it by 30 June 2009, he would not have incurred the ECT. The fact that he did not manage the transfer within the requisite six-month period was beyond his control because of the complexities associated with meeting the QROPS requirement and certain personal investment criteria.

(c)      Mr Mills was not aware of the fact that the transfer of his UK pension fund asset would count as a non-concessional contribution especially as he had on numerous occasions beforehand rolled over funds between superannuation funds and none of those roll overs had been treated as a “new” contribution. He said it was not unreasonable for him to consider that transfers of funds from one fund to another would not be treated similarly to all previous rollovers.

(d)      The inclusion of the transfer of the UK pension asset in the calculation of the non-concessional contributions is in itself a “special circumstance” because it is an uncommon event.

(e)      Mr Mills acted in good faith on advice from professional advisers who advised him about the complexities of Australian taxation and superannuation system but they overlooked the fact of him having made the transfer of his UK pension asset when advising as to the amount of the optimal contribution that he could make in the year ended 30 June 2012. He said that his advisers should have known about the transfer in September 2009, as they were involved in advising him about the possibility of transferring his UK pension asset to an Australian superannuation fund. Mr Mills had not specifically told them or sought advice about the implications of the transfer made in September 2009, as he said he did not even think about it.

(f)      The ECT is a penalty tax and should not apply as any reasonable person would agree that it is unjust, unreasonable and inappropriate;

(g)      Mr Mills is a genuine taxpayer and did not set out to deliberately derive a favourable tax benefit. He estimated that the only tax benefit that he arguably inadvertently enjoyed based on the period of time between his excess contribution in 2012 and late 2015, when he paid the ECT to the Commissioner, was about $3,360 assuming an above market rate of interest.

(h)      The ECT of $29,539.90 that he incurred is excessive having regard to his circumstances.

44. In his written submissions received on 24 January 2017 after the decision of the Court in Ward, Mr Mills submitted that his circumstances resulted in an “unfair or unjust result” sufficient to enliven a conclusion that there were special circumstances, because, amongst other factors:

… despite seeking advice from PWC prior to my relocation back to Australia I did not receive advice that my overseas pension fund would not be considered in the same way as a normal rollover. Therefore, it can be strongly argued that the adviser at Perpetual Trustees provided me with advice based on a misunderstanding, which had consequences disproportionate to the intended operation of the statute. Moreover, like Ward I have acted honestly and carefully by seeking advice from at least two highly credible providers of advice. On itself, this is unusual when compared to your typical case where no advice whatsoever is usually sought prior to making an offending contribution.

45. I do not consider that the circumstances, either alone or together, constitute “special circumstances” as required by s 292-465(3)(a) of the ITAA 1997. Adopting the test in Groth, as recently affirmed in Ward at [39], I find that there is nothing, which takes Mr Mills’ circumstances out of the “usual” or “ordinary” case.
46. I accept that Mr Mills intended to make the transfer of his UK pension asset of $149,281.77 in the 2009 financial year. However, I agree with the Commissioner’s position that, the fact that the contribution was received by VicSuper, in the 2010 financial year, was a fact that Mr Mills knew about before the contribution of $181,410 [that] was made in the 2012 financial year which led to the ECT. That is, in 2012, when seeking Perpetual’s advice, Mr Mills should have taken into account the fact that his UK pension fund asset had been transferred to VicSuper, including the fact that it was made in the 2010 financial year and not the 2009 financial year.
47. Furthermore, while I accept that Mr Mills intended to transfer his UK pension fund asset to VicSuper in early to mid June 2009, he only authorised VicSuper to progress the transfer on 29 June 2009. It was therefore reasonably foreseeable, as Mr Mills acknowledged at the hearing, that the transfer would not take place until after 30 June 2009. An intention to make a contribution in a different financial year does not itself amount to special circumstances: Re Chantrell and Commissioner of Taxation [2012] AATA 179 at [30]- [31].
48. The fact that the ECT imposed on Mr Mills was due in part to the non-concessional contribution made in the 2010 financial year which, in turn, triggered the “bring forward rule” in 2010 is the result of the legislative framework. As set out above, the “bring forward rule” is automatic in its application. That is to say, once Mr Mills exceeded the non-concessional contributions cap in the 2010 financial year, the “bring forward rule” was triggered. But it was the contribution that he made in the 2012 financial year that led to the ECT liability and Mr Ward was in total control of that event.
49. The fact that Mr Mills was ignorant as to the application of the law with respect to the transfer of his UK pension fund asset to a superannuation fund is not a “special circumstance”. He said that he was unaware that the transfer of his UK pension fund asset would be counted as a contribution for the purposes of calculating his non-concessional contributions especially as he had done numerous rollovers on other occasions without any adverse tax issues. But he relied, as many taxpayers do, on experts to advise him. Consequently, he should have sought specific advice. He said he did not do so as he did not think about the transfer of his UK pension fund asset after it was made. In this regard, Mr Mills’ circumstances are very different to those of Mr Ward who the Tribunal found had received “firm and authoritative advice” and that advice could be described as “careless” (Ward AAT Case [44] – [45]).
50. Moreover, the fiscal consequences that flow from an excessive contribution do not, of themselves, make for “special circumstances”. This is because “special circumstances need to be found beyond the actual rate imposed and beyond the specific conditions which give rise to that rate being imposed”: Re Verschuer and Commissioner of Taxation [2013] AATA 12 at [61]. Nothing said in Ward detracts from that conclusion.

[Emphasis added]