A tribunal has implored the Tax Office to reconsider the imposition of a “catastrophic” penalty that stripped retired postal truck driver Colin Ward of $209,000 – the entirety of his superannuation savings.
Administrative Appeals Tribunal deputy president Gary Humphries said if Tax Commissioner Chris Jordan would not afford 71-year-old Mr Ward and his wife Joan some leniency, the responsible government minister should intervene to provide an “act-of-grace payment”.
The tribunal found that Mr Ward, who was unsure about whether to keep the couple’s money in cash or risk exposure to the sharemarket during the global financial crisis, deposited two lots of $450,000 into super within a three-year period.
In doing so, he breached the contributions cap, triggering pernicious penalties under a regime considered so harsh it has since been repealed by Federal Parliament.
“Setting out only to protect his and his wife’s superannuation nest egg after a lifetime of low-paid employment, and acting in good faith with professional advice, Mr Ward has unwittingly forfeited to the Tax Office the entire proceeds of his superannuation savings,” Mr Humphries said in an initial decision in 2015.
But both in 2015 and in a subsequent decision last Thursday week, Mr Humphries affirmed the ATO’s actions because they were in strict accordance with the law.
Yet he urged Mr Jordan to reconsider. “I urge the Commissioner to reconsider the fairness of enforcing this penalty on Mr Ward,” Mr Humphries said. “If he will not, I reiterate my commendation to the Minister for Finance to consider an act of grace payment.”
It was the culmination of a five-year battle for Mr Ward and his wife, who are almost out of options. They say they are emotionally and financially wrecked, and their health has suffered.
“We’ve been crushed and it’s all little bit too much for an ordinary bloke,” said Mr Ward, who added that the ATO’s approach had been “vicious”.
“I wasn’t a high-income earner and my last wage was $54,000 before tax. My wife worked part time and together we managed to save for our retirement and then they go and take it off you.”
Mr Ward’s lawyer, Terry Dwyer, has calculated the tax advantage the couple gained as $1066.
This is the difference between the Wards having their money in term deposits, the income on which would have been taxed at very low rates, and having it in super.
The penalty is therefore nearly 19,500 per cent, according to Mr Dwyer. The figure was not disputed by either the ATO or tribunal during hearings, he said.
“It is really a remarkable record for Australia to have achieved what seems to be a world tax record … upon a taxpayer who is admitted to be a completely innocent man who was not even looking for a tax saving,” Mr Dwyer said.
“What Mr Ward’s case proves beyond all doubt is that any relieving discretions in tax matters should be removed from the Commissioner of Taxation and given to a neutral tax ombudsman,” he said.
The ATO said it could not comment on the tax affairs of individuals.
A spokesman for Revenue and Financial Services Minister Kelly O’Dwyer acknowledged taxpayers were treated harshly under the old penalty regime.
“The Coalition government … passed legislation in 2015 which took effect to right this wrong for contributions made from 1 July 2013,” he said.
The ATO has been heavily criticised in other media reports for its heavy-handed tax collection and Ms O’Dwyer has ordered an inquiry. Mr Jordan has rejected claims of a systemic problem.
Canberra financial planner Catherine Smith advised the Wards and insists she did not receive the appropriate paperwork, which would have alerted her to the fact Mr Ward had already reached his allowable contributions limit.
A former ATO employee of 11 years, said she was bewildered by the commissioner’s apparent heartlessness.
“It’s just wrong. So wrong they’ve repealed the law. But the Tax Office is still holding Colin to this.”
Spooked by the GFC, the Wards withdrew about $400,000 in super (which was mostly in shares) and put it into term deposits.
After seeking advice from Westpac, in 2008 they moved their money into a BT for Life super account.
The amount was $450,000 in accordance with the “bring forward rule” which allowed non-concessional contributions up to that amount by somebody under 65 years of age, as Mr Ward was at the time.
The proviso of the bring-forward allowance was that he couldn’t make any additional contributions for the next two financial years.
Mr Ward wrongly believed he would get a fixed rate of interest from the money and as the GFC continued, interest rates fell, as did the couple’s income.
“Alarmed, they withdrew the money from the BT account progressively from October 2008 to April 2009, and returned it to term deposit accounts,” the AAT decision says.
Mr Ward then sought advice from Ms Smith, who recommended they set up an SMSF.
Mr Ward was adamant that his money be invested in fixed interest and she told him an SMSF would give him that level of control.
It was around this time that the Wards sold their Canberra home for $460,000 and, in 2010, Mr Ward made a contribution of $450,000 to the SMSF.
Determining that Mr Ward had deposited the proceeds of the sale into the SMSF, and therefore breached the contributions cap, the ATO issued a tax notice and calculated a penalty of $209,250.
Mr Dwyer argued it was superannuation money that was contributed in Mr Ward’s name, not the sale proceeds. As such, it was the same money as had been contributed in the past.
There were questions over whether Ms Smith received the appropriate paperwork, either because BT neglected to send it or because Mr Ward failed to pass it on.
In any case, Mr Humphries concluded: “Neither Ms Smith of Wholistic nor Mr Ward acted with the intention of avoiding the cap on super contributions or of obtaining some tax advantage for Mr and Mrs Ward.”
The law says there are two things the Tax Commissioner can consider when deciding whether to attribute non-concessional contributions to another financial year, thereby negating the penalty.
The first is “special circumstances”, which in light of the GFC the Federal Court on appeal said it was open for the tribunal to find.
And second whether discretion can be exercised because the contributions were “made over a lifetime”. Both need to be satisfied if the contributions are to assigned to another year.
Mr Humphries said it was with “considerable regret” that he found the contributions made by Mr Ward did not consist exclusively of super savings accumulated over Mr Ward’s lifetime.
Ms Smith said that under the normal tax penalty regime, if someone was found to be careless, the rate of penalty applied was 25 per cent of the tax benefit gained.
If the action was reckless the penalty rate was 50 per cent; for intentional disregard, 75 per cent.
“So if you’ve cheated and lied on your tax return and got an extra $1000 in your pocket the penalty would be $750,” she said.
“The penalty here is over 19,000 per cent, or virtually all of Colin’s entire super.”
Article Source: Financial Review