Brighton RV Syndication Pty Ltd and Anor and Australian Securities and Investments Commission

[2007] AATA 1305

CATCHWORDS –  MANAGED INVESTMENTS SCHEME – exemption from registration – scope of discretion – relevance of any taxation implications of registration – relevance of any burden in requirement to be both a responsible entity and an approved provider under the Aged Care Act 1997 – relevance of consequences of winding up – decision affirmed.

PRACTICE AND PROCEDURE – REVIEW – whether consider merits of decision on date of application for exemption, date of decision or date of review – date on which decision made.

A New Tax System (Tax Administration) Act 1999 s 3

Acts Interpretation Act 1901 s 15AB
Administrative Appeals Tribunal Act 1975 s 37

Aged Care Act 1997 ss 7-1, 8-1, 8-3 and 9-1

Australian Securities and Investments Commission Act 2001 s 1

Corporations Act 2001 ss 9, 65, 68, 101A, 207, 319, 340, 342, 601E, 601EA, 601EB, 601ED, 601EE, 601FA, 601FB, 601FC, 601FD, 601FE, 601FG, 601GA, 601GB, 601GC, 601HA, 601HC, 601HE, 601HG, 601JA, 601JB, 601KA, 601KB to 601KE, 601LA to 601LE, 601MA, 601MB, 601NA, 601NB, 601NC, 601ND, 601NE, 601NF, 601NG, 601QA, 601QB, 601PA, 601PB, 601PC, 760A, 761A, 766A, 780, 783, 784, 911A, 911B, 912A, 913A, 913B, 914A, 915B, 915C, 915F, 1010B, 1011A, 1012A, 1012B, 1012C, 1012D to 1012DA, 1020A, 1020D, 1020F, 1020G and 1339; Parts 5C, 7.6, 7.9 and 7.12

Financial Services Reform Act 2001
Financial Services Reform Amendment Act 2003
Income Tax Assessment Act 1936 s 170; Part IVA
Managed Investments Act 1998
Taxation Administration Act 1953 s 14ZAAE; Part IVAAA

Alexandra Private Geriatric Hospital Pty Ltd v Blewett (1984) 2 FCR 368; 56 ALR 265
Armitage v Nurse [1998] Ch 241
Austin v Austin (1906) 3 CLR 516
Australian Securities and Investments Commission v Knightsbridge Managed Funds Ltd [2001] WASC 339
Australian Securities and Investments Commission v Pegasus Leveraged Group Pty Ltd (2002) 41 ACSR 561
Australian Securities and Investments Commission v Primelife Corporation Limited [2006] FCA 1072
Australian Securities and Investments Commission v Takaran Pty Ltd (2002) 43 ACSR 46
Breen v Williams (1996) 186 CLR 71
Burrows v Walls [1855] 5 De GM & G 233; 3 ER 859
CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384; 141 ALR 618
Cowan v Scargill [1985] 1 Ch 270
Fouche v Superannuation Fund Board (1952) 88 CLR 609
McMillan v McMillan (1891) 17 VLR 33
Minister for Aboriginal Affairs v Peko-Wallsend Ltd (1986) 162 CLR 24
Minister for Immigration and Multicultural and Indigenous Affairs v SZAYW [2005] FCAFC 154
Pikos Holdings (Northern Territory) Pty Ltd v Territory Homes Pty Ltd [1997] NTSC 30
R v Australian Broadcasting Tribunal; Ex parte 2HD Pty Ltd (1979) 144 CLR 45
Rankine, Pountney Ors v Rankine [1998] QSC 48
Re Drake and Minister for Immigration and Ethnic Affairs (No. 2) (1979) 2 ALD 634

Re Gray and Australian Securities and Investments Commission [2004] AATA 1235

Re SAQ and Australian Securities and Investments Commission [2005] AATA 553
Re VBN and Others and Australian Prudential Regulation Authority [2006] AATA 710
Speight v Gaunt (1883) 9 App Cas 1
Tanti v Carlson [1948] VLR 401
TCN Channel Nine Pty Ltd v Australian Mutual Provident Society (1981) 148 CLR 1; 37 ALR 317
Wacando v The Commonwealth (1981) 148 CLR 1; 37 ALR 317
Water Conservation and Irrigation Commission (NSW) v Browning (1947) 74 CLR 492

DECISION AND REASONS FOR DECISION [2007] AATA 1305

ADMINISTRATIVE APPEALS TRIBUNAL     )          
  )          V2006/57
GENERAL ADMINISTRATIVE DIVISION     )          

Re                BRIGHTON RV SYNDICATION PTY LTD and

BRIGHTON RV HOLDINGS PTY LTD

Applicants

AndAUSTRALIAN SECURITIES & INVESTMENTS COMMISSION

Respondent

DECISION

Tribunal:                   Deputy President S A Forgie
Date:  7 May 2007
Place:  Melbourne

Decision:The Tribunal affirms the decision of the respondent dated 23 December 2005.

S A FORGIE
  Deputy President

REASONS FOR DECISION

The applicants, Brighton RV Syndication Pty Ltd (Brighton Syndication) and Brighton RV Holdings Pty Ltd (Brighton RV Holdings) are parties, signatories and the named custodians under various Joint Venture Agreements dated 10 February 2000.  Those agreements establish an investment syndicate known as the Brighton Joint Venture (Brighton JV).  Under them, Primelife Corporation Limited would build an aged care facility in Brighton.  Ultimately, that facility would be sold and any profits returned to the investors in Brighton JV.  After variation of some of the agreements, the date for completion of the aged care facility has been extended to 30 June 2007.  Following transfer and sale of the property, it is contemplated that Brighton JV will come to an end shortly afterwards.

1. On the assumption, but without any concession to that effect, that Brighton JV should have been registered as a managed investment scheme under Part 5C of the Corporations Act 2001 (Act), Brighton Syndication and Brighton RV Holdings applied to the respondent, the Australian Securities and Investments Commission (ASIC) for exemption from the requirement to be registered.  They have done so under s 601QA of the Act.  In addition, they have sought exemption under s 911A(2)(l) that they not be required to hold an Australian Financial Services Licence (AFSL) in acting as Custodian for the Brighton JV under the provisions of Part 7.6 of the Act relating to Licensing of Providers of Financial Services.  Finally, they applied under s 1020F(1)(a) from their having to issue a Product Disclosure Statement under the Provisions of Part 7.9 relating to Financial Product Disclosure.  I have decided that Brighton Syndication and Brighton RV Holdings should not be exempted from any of these requirements of the Act and have affirmed ASIC’s decision to that effect dated 23 December 2005.

BACKGROUND

1. A number of factual matters forming the background to the application were not in dispute between the parties.  This is apparent from their respective Statements of Facts and Contention.  In light of that and on the basis of the evidence in the affidavit of Mr William Lionel Lewski, I have made the findings of fact set out in the following paragraphs.  Mr Lewski is a director of both Brighton Syndication and Brighton RV Holdings.  He is also a director of Australian Commercial Property Syndications Pty Ltd (ACPS) which was not a party to these proceedings but was a party to proceedings which occurred in the Federal Court and to which I refer later in these reasons.

The company structure, the joint venture and the investment syndicate

1. Brighton Syndication and Brighton RV Holdings are parties, signatories and the named custodians under various Joint Venture Agreements dated 10 February 2000. 

1. Brighton Syndication entered into a series of agreements with Primelife Corporation Limited and related companies (Primelife) (Original Primelife Agreements).  Primelife is a publicly listed aged care provider.  Those agreements provided that:

   (1)Primelife would build an Aged Care Hostel on the property (the hostel);[1]

   [1] Construction Agreement – Stage One and Construction Agreement – Stage Two between Primelife and Brighton Syndication referred to in Contract of Sale of Real Estate between them and dated 10 February 2000.

   (2)on completion of the hostel, Primelife would sell:

   (a)the property to Brighton Syndication;[2] and

   (b)the business to Brighton Syndication on the earlier of 31 December 2001 (or eight months after the issue of the Certificate of Completion as defined in the Construction Agreement – Stage One if that occurs at a later date) and the date on which Primelife has received Accommodation Bonds from no fewer than 30 residents for first time occupancy of serviced apartment;[3]

   (i)     in order to carry out the terms of the Business Sale Agreement – Stage One, Brighton Syndication undertook, as soon as practicable after the execution of the agreement on 10 February 2000 to apply to the relevant Department (Department of Health and Aged Care) to be granted status as an Approved Provider under the Aged Care Act 1997 (Aged Care Act).[4]

   (ii)     Each contract provided for Brighton Syndication to perform each of Primelife’s obligations in relation to the Resident Agreements should it, Brighton Syndication, not be granted Approved Provider status.[5]

   (3)the outcome would be that:

   (a)Brighton Syndication would own the property and the business;

   (b)Primelife would operate and manage the hostel according to a Marketing and Management Agreement between it and Brighton Syndication dated 10 February 2000 and Brighton Syndication would pay Primelife a percentage share of the profit during the course of the Marketing and Management Agreement;[6] and

   (c)Brighton Syndication would receive a return on its investment through the operation of the hostel and by a return on capital

   [2] Contract of Sale of Real Estate; settlement to be 12 months after the issue of Certificate of Completion Stage Two.

   [3] Business Sale Agreement – Stage One Brighton Aged Care Hostel and Business Sale Agreement – Stage Two Brighton Aged Care Hostel.  The Tie-in Deed executed on behalf of Primelife and Brighton Syndication stated that the parties had agreed that Brighton Syndication would acquire the Project for the total consideration of $36,000,000 on the terms and conditions in the Agreements to which I have referred as well as the Marketing and Management Agreement and the Profit Share Agreement all of which are interdependent: cl 3.

   [4] Business Sale Agreement – Stage One Brighton Aged Care Hostel and Business Sale Agreement – Stage One and Business Sale Agreement – Stage One and Brighton Aged Care Hostel and Business Sale Agreement – Stage Two, [3.1]-[3.6] in each.

   [5] Business Sale Agreement – Stage One Brighton Aged Care Hostel and Business Sale Agreement – Stage One and Business Sale Agreement – Stage One and Brighton Aged Care Hostel and Business Sale Agreement – Stage Two, [4.1]

   [6] Profit Share Agreement between Primelife and Brighton Syndication dated 10 February 2000

1. Once the construction of the hostel has been completed, it was contemplated that the Brighton JV would sell the property.  Brighton JV would be wound up with the return to the investors. 

1. The parties to the primary joint venture agreement, the Brighton Aged Care Hostel JV Joint Venture Agreement (Primary Joint Venture Agreement), were Brighton Syndication and the investors described in Schedule One to it.  There were eight investors listed in that schedule.  They were Brighton RV Holdings as custodian for each of Brighton Aged Care Hostel JV Nos 1 to 8 (the eight investors). 

1. The Primary Joint Venture Agreement established an investment syndicate.  That syndicate is called Brighton JV.  It related to the development and management of an aged care facility situated in East Brighton in Victoria (the Project).  It began with a recital that Brighton Syndication had executed an agreement to acquire land in East Brighton (the property) and that it had declared that it held the benefit of that agreement and its interest in the property on trust for the investors listed in Schedule One.  Those eight investors were Brighton RV Holdings Pty Ltd as custodian for each of the Brighton Aged Care Hostel Joint Ventures numbered 1 to 8.

1. The Primary Joint Venture Agreement went on to recite that the eight investors wished to contribute moneys to assist Brighton Syndication to acquire the property and that they had asked it to obtain finance to further assist it to acquire the property.  Brighton Syndication had agreed with the eight investors to complete the purchase of the property and to act as the custodian of the joint venture on the terms set out in the Primary Joint Venture Agreement.  Each of the eight investors held a 12.5% interest in the joint venture as tenants in common.  The eight investors were Brighton RV Holdings as custodian for each of eight joint ventures named Aged Care Hostel JV No. 1 to No. 8.

1. The Primary Joint Venture Agreement went on to agree that the capital would be contributed by the eight investors.  Each would contribute capital in the respective proportions set out in Schedule 1 to the agreement.[7]  That proportion was 12.5% for each.  Provision was also made for each of the eight investors to contribute a further $4,000,000.[8]  In all, the eight investors each contributed $5,125,000.[9]  It was the intention that Brighton Syndication would own the property on behalf of the investors, the property would be developed, the developed property would be managed and operated as a business undertaking and parts or all of the developed property would be either leased and/or sold.[10]  Brighton Syndication would be entitled, if it wished, to appoint a manager to manage the Joint Venture on such terms as it thought fit.[11]

   [7] Primary Joint Venture Agreement, cl. 7.2

   [8] Primary Joint Venture Agreement, cl 8.1

   [9] Applicants’ Contentions of Fact and Law, [19]

   [10] Primary Joint Venture Agreement, cl 3.3

   [11] Primary Joint Venture Agreement, cl 3.4

1. Each of the agreements required a deposit.  On the basis of Mr Lewski’s affidavit, I find that they were provided by ACPS and, for the purposes of this case, by a promoter. 

1. In addition to the Primary Joint Venture Agreement, there were eight other joint venture agreements executed on 10 February 2000.  The parties to each were Brighton Syndication and Brighton RV Holdings and the parties described in Schedule 1 to each agreement.  Their investments in a bank account in the name of Brighton Syndication.

1. Taking the Brighton Aged Care Hostel JV No 1 Joint Venture Agreement (First Joint Venture Agreement) as an example, there were nineteen investors listed in Schedule One to the agreement (the nineteen investors).  The First Joint Venture Agreement began with a recital of that which had been set out in the Primary Joint Venture Agreement.  Each of the nineteen investors then agreed to contribute an amount of capital to assist Brighton RV Holdings to assist in the completion of the acquisition of the property and to do so in the proportions shown in the Schedule.[12]  That was to be done on the date of the agreement.  Each was required to contribute additional capital of $25,000 by 31 December 2001 and that would be taken into account in determining the initial contribution of capital to ensure the proportions remained constant.[13]  The investors could be called upon to provide additional capital if Brighton Syndication required additional funds that it was unable to borrow.[14]  At the outset, eighteen contributed 5% of the capital.  That was a sum of $50,000.  The nineteenth contributed $100,000 and so 10% of the capital.

   [12] First Joint Venture Agreement, cl 7.2

   [13] First Joint Venture Agreement, cl 8.1

   [14] First Joint Venture Agreement, cl 8.2

1. The other seven Brighton Aged Care Hostel Joint Venture agreements were in similar terms.  Schedule 1 to Brighton Aged Care Hostel JV No 2 was not completed on 10 February 2000 but there were again nineteen investors.  Eighteen of them each contributed $50,000 or 5% of the capital and the nineteenth contributed $100,000 or 10% of the capital.  Schedule 1 to Brighton Aged Care Hostel JV No 3 listed fourteen investors.  Eleven of them contributed $50,000 or 5% of the capital raised.  One contributed $100,000 or 10%, another $150,000 or 15% and the third $200,000 or 20%.  Brighton Aged Care Hostel JV No 4 listed sixteen investors.  Thirteen contributed $50,000 or 5%, two invested $100,000 or 10% and one held $150,000 or 15%.  That meant that a total of $1 million was contributed according to each of the Brighton Aged Care Hostel JV agreements Nos 1 to 4.

1. Another $4 million was contributed by investors listed in the Schedules to each of Brighton Aged Care Hostel JV Nos 5-8.  They were one at each of $250,000, $450,000, $1.3 million and $1.35 million, four at $100,000 and five at $50,000.  Each of the investors in Brighton Aged Care Hostel JV Nos 5-8 acquired interests in multiples of 5%.

1. After the initial deposit that was payable to Primelife, there was a further deposit totalling $3,750,000 payable in respect of the agreements by 30 April 2000.  That was extended to 30 June 2000 and paid before that day from funds contributed by the investors in Brighton Aged Care Hostel JV Nos 5-8.

Taxation

1. After previously releasing it in draft form,[15] the Commissioner of Taxation (Commissioner) issued Taxation Ruling TR 94/24 on 30 June 1994.  That ruling was concerned with the:

   “… taxation treatment under the Income Tax Assessment Act 1936 (the Act) of lump sum payments received under the terms of various arrangements used by owners of commercial retirement villages to grant occupancy rights to village residents. …”[16]

The Commissioner dealt with arrangements under strata title, lease premiums with and without a non-assignable lease, loan/lease, loan/licence, prepaid rental and redeemable preference shares.[17]  The ruling did not trespass on the application of Part IVA of the Income Tax Assessment Act 1936 (ITAA 36).[18]

[15] Taxation Ruling TR 93/D27

[16] TR 94/24, [1]

[17] TR 94/24, [1]

[18] TR 94/24. [3]

1. On 19 April 2000, the Commissioner issued a draft Taxation Ruling TR 2000/D5 and indicated that TR 94/24 was withdrawn.  He did so in a Media Release of the same date:

   “Our review of TR 94/24 was caused by evidence of aggressive tax planning arrangements which seek to exploit the Ruling. …

   ‘Today’s draft brings the tax treatment of retirement village operators into line with other taxpayers who invest a business for the long term,’ Tax Commissioner Michael Carmody said.

   TR 94/24 dealt with taxation treatment of commercial retirement village operators who recovered the costs of developing or acquiring a retirement village by granting long term occupancy rights to income residents ….  The Ruling only applied in situations where aged person could afford to fully fund their retirement accommodation.

   Government subsidised nursing homes and retirement villages run by charitable institutions will not be affected as these are not covered by TR 2000/D5 issued today or by TR 94/24 that is being replaced.

   The key Tax Office views expressed in today’s draft ruling are:

   Costs of developing or acquiring a retirement village to operate an ongoing business are treated as outgoings of capital or of a capital nature;

   Proceeds of sale of such a retirement village are treated as capital;

   Rent, management fees (including deferred management fees) and other fees are assessable income in the year earned.  The entry price paid by a resident will generally be treated as a capital receipt;

   Contributions made by residents to village owners towards the operation or maintenance of a village are assessable income of the owner when earned.”[19]

   [19] Media Release, Nat 2000/35

1. Even though TR 94/24 had been withdrawn and the new Taxation Ruling issued, the Commissioner pursued what he saw as the “… more aggressive planning arrangements seeking to exploit TR 94/24 ….”[20]  He and his office would:

   “… be challenging these arrangements, as appropriate, including:

   investments with highly leveraged non-recourse funding involving artificial prepayments to bring forward deductions ahead of construction of the retirement village;

   investments involving a payment of a deposit for purchase of land and retirement village package, where a deduction for the full purchase price is claimed immediately, even though settlement will not occur until construction of the retirement village is completed.”[21]

   [20] Nat 2000/35

   [21] Nat 2000/35

1. After consultation with members of the retirement industry and interested parties, the Commissioner issued TR 2002/14 on 28 June 2002.  Consistent with the Commissioner’s Media Release and the date of effect of the draft ruling, it had effect from 19 April 2000.[22]

   [22] TR 2002/14, [80]

1. There continued to be discussions between officers of the Australian Taxation Office (ATO) and other interested parties in order to find a way for investors to meet their taxation obligations.  In October 2003, the ATO then sent letters, known as “Offers of Closure”, to taxpayers who had invested in retirement villages.  Those letters indicated that the ATO:

   “… would settle its dispute with these taxpayers on the following basis:

   a deduction would be allowed for the deposit paid on signing the contract in the year of income in which it was paid;

   a deduction would be disallowed for the balance of purchase monies in respect of the retirement village claimed in the year the contract of sale was signed;

   a deduction would be allowed equal to the cash payment contributed by way of the balance of purchase monies in the year of income that Certificates of Completion and Occupancy were/are issued in respect of the retirement village;

   a tax shortfall penalty of 5 per cent would apply; and

   the pre-amended assessment interest charge would be remitted for the period up to 19 April 2001.”[23]

   [23] Report of Inspector-General of Taxation on 18 November 2004: Review of the Remission of the General Interest Charge for Groups of Taxpayers in Dispute with the Tax Office, Appendix 6, [A6.9]

1. Each of the investors in the Brighton JV accepted the offer and entered a Deed of Settlement with the ATO in December 2003.  The Deed read in part:

   “4.      I agree that in settling this matter I shall:

   …

   claim deductions only in respect of any Retirement Village expressly covered in Taxation Ruling TR 94/24 [withdrawn 20 April 2000] including hostels where the basis of returning income has substantially the same taxation outcomes – as per the attached Schedule which details the breakdown and timing of the claiming of deductions for my syndicate/partnership.

   5.The ATO, in accepting this offer, will:

   allow me a deduction equal to the cash payment contributed to the syndicate by way of deposit in the year of income in which the contract of sale was signed;

   disallow a deduction for the balance of purchase monies in respect of the Retirement Village claimed in the year the contract of sale was signed;

   allow me a further deduction equal to the cash payment contributed to the syndicate by way of the balance of purchase monies in the year of income that Certificates of Completion and Occupancy were/are issued in respect of the Retirement Village;

   remit tax shortfall penalty to 5%;

   remit tax shortfall interest and General Interest Charge in respect of the period up to 19 April 2001 in full; and

   impose General Interest Charge from 20 April 2001 in full up to the date of acceptance of this offer; and

   impose General Interest Charge from 20 April 2001 in full up to the date of payment of the tax liability if the liability was not paid when it was due and payable.”[24]

   [24] Documents lodged under s 37 of the Administrative Appeals Tribunal Act 1975 (T documents), 91-92

1. On 24 November 2004, the Commissioner issued a draft Taxation Determination: TD 2004/D78.  As with all such drafts, it represented the “preliminary, though considered views” of the ATO.[25]  The draft answered the question it posed at the outset:

   “Income tax: is the income derived from a property syndicate that is structured to comply with the requirements of the managed investment scheme provisions of the Corporations Act 2001 taxable as net income of a trust estate under Division 6 of Part III of the Income Tax Assessment Act 1936?”[26]

   [25] TD 2004/D78, Preamble

   [26] TD 2004/D78, Heading

1. The question was answered in the affirmative.[27]  The reasoning was as follows:

   “4.      The property investments held by an MIS [Managed Investment Scheme] syndicate are ‘scheme property’.  The responsible entity is in the position of trustee in respect of the scheme property of the MIS syndicate.  Income earned on these investments is income of a trust estate.  The assessable income and allowable deductions of the MIS syndicate compose the net income of the trust estate for the purposes of Division 6 of Part III of the Income Tax Assessment Act 1936, dealing with the taxation of trust income (the trust provisions).

   5.        The responsible entity and scheme members are taxable in accordance with these provisions as trustee and beneficiaries, respectively, of the trust estate comprising the scheme property of the MIS syndicate.  The responsible entity is required to lodge a trust return, and the scheme members (and the responsible entity, if applicable) are taxable on the net income of the MIS syndicate in accordance with the rules applicable to the taxation of trusts.

   6.        If some or all of the scheme members comprise a partnership for income tax purposes, the income derived by the partnership will be in the form of a share of the net income of the trust estate of the MIS syndicate.”[28]

   [27] TD 2004/D78, [1]

   [28] TD 2004/D78

1. TD 2004/D78 went on to state that:

   “7.      When the final Determination is issued, it is proposed to apply both before and after its date of issue.  However, the Determination will not apply to taxpayers to the extent that it conflicts with the terms of settlement of a dispute agreed to before the date of issue of the Determination …”[29]

   [29] TD 2004/D78

1. On 29 June 2005, the Commissioner issued TD 2005/28 that he had previously issued as TD 2004/D78.  The question was posed in slightly different terms:

   “Income tax: is the income of a property syndicate taxable as net income of a trust estate under Division 6 of Part III of the Income Tax Assessment Act 1936 where the syndicate is a registered managed investment scheme under the Corporations Act 2001 and the responsible entity holds the income producing property of the syndicate for scheme members as scheme property?”

1. The determination applied to:

   “This determination applies to structured real estate investment schemes (commonly called property syndicates or unlisted property trusts) which have the following features:

   the scheme is a registered managed investment scheme under Chapter 5C of the Act;

   an exemption under section 601QA of the Act from the provisions of Chapter 5C of the Act is not current in relation to the scheme;

   the scheme invests in real estate and derives income by way of rent and it may also make profits from the eventual sale of real estate;

   the real estate has been acquired with the proceeds of contributions, borrowings or other money that forms part of the scheme property; and

   the responsible entity holds the real estate for scheme members as part of the scheme property.”[30]

   [30] TD 2005/28, [4].  These schemes are called “MIS syndicates”: [5].

1. Paragraphs [6]-[8] of TD2005/28 went on to deal with the taxation treatment of income on the            investments in terms similar to those used in the draft TD 2004/78.[31]  It applied to years commencing both before and after its date of issue on 29 June 2005.  It did not, however, apply to taxpayers to the extent that it conflicted with the terms of settlement of a dispute agreed before it was issued.[32]

   [31] TD 2004/D78, [6]-[8]

   [32] TD 2005/28, [14]

1. TD 2005/28 also dealt with transitional arrangements as had its predecessor, TD 2004/D78.[33]  They were in similar terms but TD 2005/28 expressed it in this way:

   “9.      Some MIS syndicates, and their investors, may have been lodging income tax returns on a basis that does not include syndicate income as income from a trust estate.  For example, the Commissioner is aware that some MIS syndicates have been lodging partnership returns.

   10.      In cases where the correct amount of net income was returned by an MIS syndicate as a partnership, despite lodging returns incorrectly, and returning income on an incorrect basis, the correct amount of taxable income will have been returned.  However, where the MIS syndicate incurred losses for tax purposes, the amount of tax that has been paid by scheme members may be less than the amount properly payable (that is, because of the incorrect distribution of these losses of the syndicate for inclusion in members’ returns).  The Tax Office will advise the relevant industry body on the circumstances under which the corrective action (if any) will be taken in relation to MIS syndicate losses distributed to members as partnership losses.”

   [33] TD 2004/D78, [8]-[10]

ASIC proceedings

1. In either September or October 2004, ASIC instituted proceedings against Primelife and a number of parties including Brighton Syndication and Brighton RV Holdings. It alleged that they have been involved in promoting and managing schemes that are not registered as required by the Act. In relation to Brighton JV, ASIC alleged that it is and was a managed investment scheme for the purposes of s 601ED of the Act or of its predecessors, that Brighton JV is and was required to be registered under s 601ED and that Brighton JV should be wound up under s 601EE of the Act. ASIC also asked the Federal Court to make an interlocutory order appointing an investigating accountant. The proceedings remain on foot.

Variation of Original Primelife Agreements

1. Primelife failed to commence work on building the hostel in accordance with the Original Primelife Agreements.  As a consequence, Brighton JV commenced proceedings in the Supreme Court of Victoria against Primelife.  Those proceedings were resolved in early 2005 on the basis that Primelife and Brighton JV agreed to vary the Original Primelife Agreements (Varied Primelife Agreements).  They now provide that the hostel will be completed and settlement of the sale to take place on 31 July 2007. 

1. The Varied Primelife Agreements, entered on 1 April 2005, will lead to the outcome I have set out in [5] above.  That is to say, Brighton JV would then own the property and the benefit of the Management Deed.  Consequently, it would have an income stream but, in addition, would then be able to sell the property at its full market value.

Withdrawal of investments from 2005

1. In early 2005, eight of those investors who had invested in Brighton Aged Care Hostel JV Nos 1-8 indicated that they did not support the continuation of the Brighton JV beyond 10 February 2006.  As a consequence, a strategy was devised to enable investors in Brighton Aged Care Hostel JV Nos 1 to 8 to withdraw their investments.  That was implemented on 16 January 2006.  It was aimed at those investors who had not endorsed the Varied Primelife Agreements and other investors who wanted to withdraw before the completion date.  Under the strategy, Brighton Syndication and Brighton RV Holdings gave each of the investors in Brighton Aged Care Hostel JV Nos 1 to 8 an option to realise his, her or its investment by receiving the original investment monies and so at par value.  If he, she or it opted to do so, an entity associated with Brighton Syndication and Brighton RV Holdings had an opportunity to acquire his, her or its investment.  That entity then became a “wholesale client”.

1. Since the implementation of the strategy, the Brighton JV has been closed to new investors other than to a wholesale client.  Neither Brighton Syndication nor Brighton RV Holdings have permitted new investors to acquire interests, or further interests, in Brighton JV.  Only the entity associated with those two companies has had an opportunity to acquire existing interests as existing investors realise them.  At the date of the hearing,  some 70 investors had withdrawn from the Brighton JV and redeemed their investments at part value.  Brighton RV Holdings then held approximately 93% of the interests in the Brighton JV.

Application for exemption

1. On 29 June 2005, Brighton Syndication and Brighton RV Holdings applied under s 601QA of Chapter 5C of the Act asking that Brighton JV be exempted from registration. They did so on the basis that Brighton JV was a managed investment scheme that had to registered under the Act. At the same time, they recognised that ASIC had asserted that it did require registration but they maintained their position that it did not.[34]  They also applied under s 911A(2)(l) that they not be required to hold an Australian Financial Services Licence (AFSL) in acting as Custodian for the Brighton JV under the provisions of Part 7.6 of the Act relating to Licensing of Providers of Financial Services).  Finally, they applied under s 1020F(1)(a) from their having to issue a Product Disclosure Statement under the Provisions of Part 7.9 relating to Financial Product Disclosure.

   [34] T documents, 10,  Application for exemption/relief, [1.5]

1. In broad outline, Brighton Syndication and Brighton RV Holdings gave the following reasons for their application:

   “(a)     the Proceedings would be able to be resolved avoiding further cost to ASIC and … [Brighton Syndication and Brighton RV Holdings];

   (b)… [Brighton Syndication and Brighton RV Holdings] believes… the Investors in the Brighton JV would not suffer the detriment or burden that they would suffer if:

   (i)the Brighton JV was registered under Chapter 5C; or

   (ii)the Brighton JV was wound up prematurely now, rather than at its intended time in the second half of 2007.”[35]

   [35] T documents 10-11, Application for exemption/relief, [1.6]

1. Brighton Syndication and Brighton RV Holdings stated their belief that the application was minor and technical and neither a standard application nor a new policy application.  Therefore, they addressed ASIC’s Policy Statement PS51.

LEGISLATIVE FRAMEWORK

1. Brighton Syndication and Brighton RV Holdings have applied for exemption from three separate licensing or registration schemes within the Act.  In this section, I will deal with each by first setting out the relevant legislative provisions applicable to the application for exemption followed by the relevant passages from ASIC’s Policy Statement.

Managed Investment Scheme: regulation of a prescribed interest scheme before 1 July 1998 and reasons for amendment

1. Divisions 5 and 5A of Part 7.12 of the then Corporations Law regulated prescribed interest schemes.  Subject to certain exceptions, a “prescribed interest” meant:

   “(a)     a participation interest; or

   (b)a right, whether enforceable or not, whether actual, prospective or contingent and whether or not evidenced by a formal document, to participate in a time-sharing scheme;

   …”[36]

   [36] Corporations Law, s 9

1. On 1 July 1998, the Managed Investments Act 1998 came into effect to insert Chapter 5C into the Corporations Law. Those amendments replaced the prescribed interest schemes in Divisions 5 and 5A of Part 7.12. When presented in the Managed Investments Bill 1997, they represented the Government’s response to recommendations made by the Australian Law Reform Commission and the Companies and Securities Advisory Committee in a report entitled Collective Investments: Other People’s Money (Review) as well as the Final Report of the Financial System Inquiry.[37] 

   [37] Explanatory Memorandum to Managed Investments Bill 1997, cl 1

Managed Investment Scheme: what is a managed investment scheme?

1. Chapter 5C of the Act regulates managed investment schemes. A “managed investment scheme” means:

   “(a)     a scheme that has the following features:

   (i)people contribute money or money’s worth as consideration to acquire rights (interests) to benefits produced by the scheme (whether the rights are actual, prospective or contingent and whether they are enforceable or not);

   (ii)any of the contributions are pooled, or used in a common enterprise, to produce financial benefits, or benefits consisting of rights or interests in property, for the people (members) who hold interests in the scheme (whether as contributors to the scheme or as people who have acquired interests from holders);

   (iii)the members do not have day-to-day control over the operation of the scheme (whether or not they have the right to be consulted or to give directions); or

   (b)       a time-sharing scheme;

   but does not include the following:

   (c)a partnership that has more than 20 members but does not need to be incorporated or formed under an Australian law because of regulations made for the purposes of subsection 115(2);

   (d)a body corporate (other than a body corporate that operates as a time sharing scheme);

   (e)a scheme in which all the members are bodies corporate that are related to each other and to the body corporate that promotes the scheme;

   (f)a franchise;

   (g)a statutory fund maintained under the Life Insurance Act 1995;.

   (h)a regulated superannuation fund, an approved deposit fund, a pooled superannuation trust, or a public sector superannuation scheme, within the meaning of the Superannuation Industry (Supervision) Act 1993;

   (i)a scheme operated by an Australian ADI in the ordinary course of its banking business;

   (j)the issue of debentures or convertible notes by a body corporate;

   (k)a barter scheme under which each participant may obtain goods or services from another participant for consideration that is wholly or substantially in kind rather than in cash;

   (l)a retirement village scheme operating within or outside Australia:

   (i)under which the participants, or a majority of them, are provided, or are to be provided, with residential accommodation within a retirement village (whether or not the entitlement of a participant to be provided with accommodation derives from a proprietary interest held by the participant in the premises where the accommodation is, or is to be, provided); and

   (ii)which is not a time-sharing scheme;

   (m)a scheme that is operated by a co-operative company registered under Part VI of the Companies (Co-operative) Act 1943 of Western Australia or under a previous law of Western Australia that corresponds to that Part;

   (n)a scheme of a kind declared by the regulations not to be a managed investment scheme.”[38]

   [38] s 9

Managed Investment Scheme: registration of a managed investment scheme

1. There are certain circumstances in which a managed investment scheme must be registered.  If it must be registered, a person must not operate it[39] in this jurisdiction[40] unless it is registered.  Should a person operate a managed investment scheme when it must be registered, an application may be made to the Court to have the scheme wound up.  The application may be made by ASIC, the person operating the scheme or a member of the scheme.[41]

   [39] A person is not “operating a scheme merely because: (a) they are acting as an agent or employee of another person; or (b) they are taking steps to wind up the scheme or remedy a defect that led to the scheme being deregistered: s 601ED(6).

   [40] The expression “in this jurisdiction” means, in broad terms, the geographical area consisting of the States and Territories as described in the definition in s 9.

   [41] s 601EE(1)

1. The circumstances in which registration of a managed investment scheme is required are set out in s 601ED of the Companies Act. Section 601ED(1) provides that:

   “Subject to subsection (2), a managed investment scheme must be registered under section 601EB[42] if:

   (a)it has more than 20 members; or

   (b)it was promoted by a person, or an associate of a person, who was, when the scheme was promoted, in the business of promoting managed investment schemes; or

   (c)a determination under subsection (3) is in force in relation to the scheme and the total number of members of all of the schemes to which the determination relates exceeds 20.”

The qualification in s 601ED(2) is to the effect that a managed investment scheme need not be registered if, had the scheme been registered under Chapter 5C at the time, there would not have been any need to give a Product Disclosure Statement under Division 2 of Part 7.9 in respect of all of the issues of interests in the scheme.

[42] Section 601EA sets out the manner in which a person may apply to ASIC to register a managed investment scheme. Once the person lodges an application, ASIC must register that managed investment scheme unless the application or the scheme itself does not comply with specified sections of Chapter 5C: s 601EB(1).

1. It may be that, standing alone, two or more managed investment schemes do not need to be registered as they do not come within the terms of s 601ED(1). They may, however, have a relationship of such a sort that:

   “ASIC may, in writing, determine that a number of managed investment schemes are closely related and that each of them has to be registered at any time when the total number of members of all of the schemes exceeds 20. …”[43]

   [43] s 601ED(3)

1. The number of members in a managed investment scheme is calculated on the basis that:

   “(a)     joint holders of an interest in a scheme count as a single member; and

   (b)an interest in the scheme held on trust for a beneficiary is taken to be held by the beneficiary (rather than the trustee) if:

   (i)the beneficiary is presently entitled to a share of the trust estate or of the income of the trust estate; or

   (ii)the beneficiary is, individually or together with the other beneficiaries, in a position to control the trustee.”

1. ASIC is required to register a scheme within 14 days of lodgement of the application for registration unless it appears that the application does not comply with s 601EA or the scheme, once registered, will not meet the requirements of ss 601FA, 601GA, 601GB, 601HA, 601HC or 601HG.[44]

   [44] s 601EB

Managed Investment Scheme: the responsible authority

1. Each registered managed investment scheme must have a “responsible entity”.[45]  The responsible entity of a registered managed investment scheme (registered scheme) must be a public company holding an Australian financial services licence (AFSL) authorising it to operate a managed investment scheme.[46]  It may engage an agent to undertake anything it is authorised to do.[47]  The duties of the responsible entity are specified in the Corporations Act[48] as are those of its officers[49] and its employees.[50]  The responsible entity’s duties include those to ensure that the registered scheme’s constitution meets the requirements of ss 601GA and 601GB[51] and that its compliance plan meets the requirements of s 601HA.[52]  It must act in the best interests of the members[53] and must treat members who hold interests of the same class equally and members who hold interests of different classes fairly.[54]  The responsible entity must ensure that the scheme property is valued at regular intervals appropriate to the nature of the property[55] and ensure that all payments out of the scheme property are made in accordance with the scheme’s constitution.[56]  If there is a breach of the Act relating to the registered scheme and that has had, or is likely to have, a materially adverse effect on the interests of the members, the responsible member must report that breach to ASIC as soon as practicable after becoming aware of it.[57]

   [45] ss 601EB(1)(d) and 601FA

   [46] s 601FB(1)

   [47] ss 601FB(2)-(4)

   [48] s 601FC

   [49] s 601FD

   [50] s 601FE

   [51] s 601FC(1)(g)

   [52] s 601FC(1)(h)

   [53] s 601FC(1)(c)

   [54] s 601FC(1)(d)

   [55] s 601FC(1)(j)

   [56] s 601FC(1)(k)

   [57] s 601FC(1)(l)

Managed Investment Scheme: the constitution

1. Part 5C.3 regulates the constitution of a registered managed investment scheme (registered scheme) and its contents.  The constitution must be contained in a document that is legally enforceable as between the members and the responsible entity.[58] 

   [58] s 601GB

1. Section 601GA is concerned with the contents of the constitution.  It begins by providing that:

   “The constitution of a registered scheme must make adequate provision for:

   (a)the consideration that is paid to acquire an interest in the scheme; and

   (b)the powers of the responsible entity in relation to making investments of, or otherwise dealing with, scheme property; and

   (c)the method by which complaints made by members in relation to the scheme are to be dealt with; and

   (d)winding up the scheme.”[59]

If the responsible entity is to have any rights to be paid fees out of scheme property or to be indemnified out of that property for liabilities or expenses incurred in relation to the performance of its duties, specific provision for it to be paid must appear in the constitution.[60]  Specific provision must also be made if the responsible entity is to have power to borrow or raise money for the purposes of the registered scheme[61] or if members are to have a right to withdraw.[62] 

[59] s 601GA(1)

[60] s 601GA(2)

[61] s 601GA(3)

[62] s 601GA(4)

1. The constitution of a registered scheme can be changed by either a special resolution of the members of the scheme or, if the responsible entity considers the change will not adversely affect members’ rights, by the responsible entity.[63]  A copy of the changes or of the new constitution must be lodged with ASIC.[64]  If directed to do so by ASIC, the responsible entity must lodge a copy of the registered scheme’s constitution with it.

   [63] s 601GC(1)

   [64] s 601GC(2)

Managed Investment Scheme: the compliance plan

1. The compliance plan of a registered scheme must set out adequate measures that the responsible entity is to apply in operating the scheme to ensure compliance with the Act and with its constitution.  That is the effect of s 601HA(1) which then goes on to set out specific matters that must be dealt with in the compliance plan.  One of those specific matters is to ensure that there are arrangements for ensuring that all scheme property is clearly identified as scheme property and held separately from the responsible authority’s other property and from the property of any other scheme.[65]  A responsible entity of a registered scheme must establish a compliance committee if fewer than half of its directors are external directors.[66]  A registered scheme’s compliance committee must have at least three members and the majority of them must be external members.[67]  The registered scheme’s compliance plan must include adequate arrangements relating to matters such as the committee’s membership, meetings, access to the scheme’s information that is relevant to its compliance with the Act and its making reports and recommendations.[68] 

   [65] s 601HA(1)(a)

   [66] s 601JA(1).  An “external director” is defined in s 601JB(2).

   [67] s 601JB(1)

   [68] s 601HA(1)(b)

1. The responsible authority may modify the compliance plan or replace it.[69]  ASIC itself may require modifications[70] and the responsible entity must lodge a copy of the modification with ASIC.[71]  The responsible authority must ensure that a registered auditor company is engaged to audit compliance with the registered scheme’s compliance plan.[72]

   [69] s 601HE(1)

   [70] s 601HE(2)

   [71] s 601HE(3)

   [72] s 601HG(1)

Managed Investment Scheme: members’ rights to withdraw from a scheme

1. A responsible entity must not allow a member to withdraw from a registered scheme unless, if the scheme is liquid, otherwise than in accordance with its constitution or, if the scheme is not liquid, otherwise than in accordance with that constitution and ss 601KB to 601KE.[73]

   [73] s 601KA(3)

Managed Investment Scheme: related party transactions

1. Chapter 2E of the Act is entitled “Related Party Transactions” and is intended to protect the interests of a public company’s members as a whole by requiring their approval if financial benefits are to be given to related parties in circumstances that could endanger their interests.[74]  Section 601LA provides that, subject to modifications in ss 601LA-601LE, Chapter 2E applies to a registered scheme.  So, for example, the purpose of the purpose of the rules in Chapter 2 becomes:

   “The rules in this Chapter, as they apply to a registered scheme, are designed to protect the interests of the scheme’s members as a whole, by requiring member approval for giving financial benefits to the responsible entity or its related parties that come out of scheme property or that could endanger those interests.”[75]

[74] s  207

[75] s 601LB

Managed Investment Scheme: effect of contraventions of the Act

1. If the conduct of a registered scheme’s responsible entity contravenes Chapter 5C and, as a result, a member suffers loss or damage, that member may recover the amount of the loss or damage by action against the responsible authority. That is so whether or not the responsible authority has been convicted of an offence or had a civil penalty order made against it in respect of the contravention.[76]  If a managed investment scheme is not registered when required to be registered, a contract to subscribe for an interest in that scheme is voidable at the option of the person subscribing to the interest.[77]

   [76] s 601MA(1)

   [77] s 601MB

Managed Investment Scheme: winding up

1. Part 5C.9 is concerned with winding up of a registered scheme.  The time for winding up may be provided for in its constitution.  That time may be specified as a particular time or as a particular circumstance.[78]  Members of a registered scheme may take action under Division 1 of Part 2G.4 for the calling of a members’ meeting to consider and vote on an extraordinary resolution directing the responsible authority to wind up the scheme.[79]  If the responsible authority considers that the purpose of the registered scheme has been accomplished or cannot be accomplished, it may take steps set out in s 601NC to wind up the scheme.[80]  The Court may direct the responsible entity of a registered scheme to wind up the scheme if it thinks it just an equitable to do so or if there is an unsatisfied judgment or process within three months of the application to the Court.[81]  The responsible entity or one of its directors, a member of the registered scheme or ASIC may apply for an order by the Court[82] or, in the case of an unsatisfied judgment or process, by a creditor.[83]

   [78] s 601NA

   [79] s 601NB

   [80] s 601NC(1)

   [81] s 601ND(1)

   [82] s 601ND(2)

   [83] s 601ND(3)

1. The responsible entity must ensure that a registered scheme is wound up in accordance with its constitution and any orders made by the Court under s 601NF(2).[84]  If there is any undistributed property or money at the end of a winding up, the person who is winding up the company must pay or transfer the property to ASIC to be dealt with under Part 9.7.[85]  Part 9.7 provides that ASIC holds unclaimed property on trust in accordance with its provisions and for the purposes set out in them.[86]

   [84] s 601NE(1)

   [85] s 601NG

   [86] s 1339(1)

Managed Investment Scheme: deregistration of a registered scheme

1. The responsible entity of a registered scheme may lodge an application for deregistration with ASIC.[87]  It may only apply if:

   “(a)     the scheme:

   (i)has 20 or less members (calculated in accordance with subsection 601ED(4)) and all the members agree that the scheme should be deregistered; and

   (ii)is not required to be registered by paragraph 601ED(1)(b) or (c); or

   (b)because of subsection 601ED(2) (exemption based on Division 2 of Part 7.9 not applying), the scheme is not required to be registered and all the members agree that the scheme should be deregistered; or

   (c)the scheme is not a managed investment scheme.”[88]

   [87] s 601PA(1)

   [88] s 601PA(2)

1. Apart from these forms of voluntary deregistration, ASIC may decide to deregister a registered scheme in certain circumstances.[89]  It may do so if, for example, the scheme does not have a constitution or compliance plan that meets the statutory requirements[90] or if the responsible entity does not meet other statutory requirements.[91]  Another example occurs if the scheme’s property is not being clearly identified as its property and held separately from other property in accordance with the scheme’s compliance plan.[92]  ASIC must follow the procedures set out in ss 601PB (2) and (3).

   [89] s 601PB

   [90] ss 601PB(1)(b) and (c)

   [91] s 601PB(1)(a)

   [92] s 601PB(1)(d)

1. ASIC may reinstate the registration of a managed investment scheme if “… satisfied that it should not have been deregistered or if the defect that led to the scheme being deregistered has been remedied.”[93]  In addition, the Court may order that ASIC reinstate the registration if, on an application made by a person aggrieved by the winding up or by a person winding up the scheme, it is satisfied that it is just that the scheme’s registration be reinstated.[94]  The Court may give directions intended to put the scheme and other people in the same position, as far as possible, as if the scheme had not been deregistered.[95]

   [93] s 601PC(1)

   [94] s 601PC(2)

   [95] s 601PC(3)

Managed Investment Scheme: exemptions and modifications

1. Section 601QA(1) provides exemption or modification of the requirements of Chapter 5C when it states that:

   “(1)     ASIC may:

   (a)exempt a person from a provision of this Chapter; or

   (b)declare that this Chapter applies to a person as if specified provisions were omitted, modified or varied as specified in the declaration.”

The exemption or declaration may apply to all or specified provisions of Chapter 5C, persons or specified persons or class of persons or securities or specified securities or class of securities. It may relate to any other matter generally or as specified.[96] 

[96] s 601QA(2)

1. An exemption may apply unconditionally or subject to specified conditions.[97]  If a condition specified in an exemption applies to a person, that person must comply with the condition.  ASIC may apply to the Court for an order that the person comply with the condition in a specified way.[98] 

   [97] s 601QA(3)

   [98] s 601QA(3)

1. The exemption or declaration must be written and ASIC must publish notice of it in the Commonwealth Gazette (Gazette).

1. Regulations may modify the operation of Chapter 5C or any other provisions of the Act relating to securities in relation to a managed investment scheme or all managed investment schemes of a specified class.[99]

   [99] s 601QB

Managed Investment Scheme: Policy Statements

1. ASIC has issued a number of Policy Statements (PS) indicating how it will administer the Act and other legislation for which it is responsible.  Two that are relevant in the context of a Managed Investment scheme are PS 51 and PS 136.

1. I will begin with PS 136 which is entitled “Managed Investments: Discretionary powers and closely related schemes”.  Among the matters it addresses are the circumstances in which ASIC will give relief from the Act on managed investment schemes.[100]  In relation to them, ASIC has stated that it:

   “… will consider giving relief to address atypical or unforeseen circumstances and unintended consequences of the Law relating to managed investment schemes.”[101]

   [100] [PS 136.1] A

   [101] [PS 136.2]

1. After giving specific examples of situations in which relief has been granted, PS 136 goes on to set out the principles underlying its decisions when considering applications for relief:

   “When considering relief we will assess whether or not:

   (a)strict compliance with the Law would be impossible or disproportionately burdensome;

   (b)people acquiring or holding interests in a scheme would still have the protection that they were intended by Parliament to have; and

   (c)there would be commercial benefit to the parties to the scheme.”[102]

   [102] [PS 136.12]

1. ASIC also indicated that it might impose additional obligations or restrictions[103] and might give exemptions or make modifications even though it had not received an application to do so.[104]  Part B of PS 136 was concerned with the application of the managed investment scheme provisions to schemes that would previously have been regarded as prescribed interest schemes.[105]  If practicable, relief would be available on the same terms, as before 1 July 1998, as it had previously been available but would reflect the changes in regulation.[106]

   [103] e.g. s 601QA

   [104] [PS 136.17]

   [105] [PS 136.18]

   [106] [PS 136.32]

1. Those seeking relief were referred to PS 51 entitled “Applications for relief” and giving general guidance on how to make the application and the information that should be provided.[107]  It distinguishes between standard applications, minor and technical applications and new policy applications.  Standard applications are those seeking relief precisely in accordance with the terms of published ASIC policy and pro forma documents.[108]  Minor and technical applications are applications that are not standard but are clearly within the policy of the Act or of an existing ASIC policy statement and do not raise issues of such significance as to require its extensive consideration.[109]  They can concern relief from requirements of the Act.[110]

   “Minor and technical applications typically concern unusual situations or new developments which are not anticipated in the Law nor in existing … [ASIC] policy.  In particular, the policies published by … [ASIC] cannot specify every possible set of circumstances to which they may be applied.  Rather, they set out general principles and illustrates them by way of common examples.  [ASIC]  officers therefore often consider applications which, although not specifically covered by published policy, can be determined using the general principles set out in that policy.”[111]

New policy applications require the formulation of new policy.[112]

[107] [PS 136.14].  PS 51 was later re-issued on 14 September 2006.  In view of my conclusion at [108-109] that I am reviewing the matter as at the date of APRA’s decision, I have had regard to the earlier version of PS 51 as it existed on 23 December 2005.

[108] [PS 51.6]

[109] [PS 51.7]

[110] [PS 51.24]

[111] [PS 51.9]

[112] [PS 51.10]

1. ASIC states that it will consider and determine all applications for relief on the basis of facts, circumstances and merits of each.[113]  It seeks to ensure that it “… exercises its discretions consistently and on the basis of consistent regulatory objectives (ie, policies), without turning its administrative policies into inflexible rules.”[114]  In addition, it seeks to ensure that it “… decides applications (especially new policy applications) on the basis of principles which are definite and whose limits are clearly defined.”[115]  This is intended to ensure that each decision can be used as a precedent when other applications arise for decision and so that decisions can be distinguished and not followed when inapplicable to another set of circumstances.[116]

   [113] [PS 51.34]

   [114] [PS 51.35]

   [115] [PS 51.37]

   [116] [PS 51.37]

1. Each applicant is required to explain any legal or commercial constraints the consider support its application.  PS 51.39 states that:

   “… In general, if there is a lawful and effective way of doing a thing without relief (or with standard relief only), … [ASIC] will be inclined to refuse relief (or non-standard relief) as unnecessary.”[117]

   [117] [PS 51.39]

1. When considering new policy applications, ASIC:

   “[PS 51.41] … attempts to weigh the commercial benefit and any net regulatory benefit or detriment which would flow from granting the sought relief on the conditions proposed.  … [ASIC] will generally grant relief where:

   (a)it considers that there is a net regulatory benefit; or

   (b)the regulatory detriment is minimal and is clearly outweighed by the resulting commercial benefit.

   [PS 51.42]    … [ASIC] will scrutinise very carefully any argument that the ordinary costs associated with, or the ordinary inconvenience of compliance with, the Law or existing published … [ASIC] policy is excessive.  Any applicant who claims to be particularly affected by compliance costs will need to explain why the effect on them in their circumstances is anomalous.

   [PS51.43]    … [ASIC] will also refer to the purpose of the particular provisions in relation to which relief is sought.  … [ASIC] will not consider individual provisions in a vacuum. Rather, it will promote policy objectives underlying the Law and exercise its powers in accordance with the criteria in s 1(2) of the ASC Law (Cth) [Australian Securities and Investments Commission Act 2001]. …”

1. Among the objects set out in s 1(1) of the Australian Securities and Investments Commission Act 2001 (ASIC Act) is the object to provide for ASIC to administer those laws conferring powers and functions upon it.

   “In performing its functions and exercising its powers, ASIC must strive to:

   (a)maintain, facilitate and improve the performance of the financial system and the entities within that system in the interests of commercial certainty, reducing business costs, and the efficiency and development of the economy; and

   (b)promote the confident and informed participation of investors and consumers in the financial system; and

   (c)[no paragraph]

   (d)administer laws that confer functions and powers upon it effectively and with a minimum of procedural requirements; and

   (e)receive, process and store, efficiently and quickly, the information given to ASIC under the laws that confer functions and powers on it; and

   (f)ensure that information is available as soon as practicable for access by the public; and

   (g)take whatever action it can take, and is necessary, in order to enforce and give effect to the laws of the Commonwealth that confer functions and powers on it.”[118]

   [118] ASIC Act, s 1(2)

1. Finally, regard should be had to PS 51.45:

   “… [ASIC] has a general policy of not using its discretionary powers to effect law reform; ie, relief will not be given to reverse the usual and intended effect of the Law.  Relief will be given, however, to overcome the disproportionate effects of provisions in exceptional cases, the anomalous effects of old provisions in novel cases for which they were not designed and the unintended side effects of provisions.”

Australian Financial Services Licence: requirement to hold a dealer’s licence before 11 March 2002 and reasons for amendment

1. Before its amendment by the Financial Services Reform Act 2001 (FSR Act) with effect from 11 March 2002, Chapter 7 of the Corporations Act provided for the licensing of, among others, those who carried on a securities business.  Such people was required to hold a “dealers licence” or to be an exempt dealer.[119]  A dealers licence could be granted to a natural person or to a body corporate provided they met the statutory criteria.[120]

   [119] s 780.  An “exempt dealer” was either an “eligible money market dealer” or an “exempt public authority”: ss 9 and 68(1).  An “eligible money market dealer” is a “body corporate in respect of which there is a declaration in force under s 65(1)(a)”: s 9.  A “body corporate in respect of which there is a declaration in force under s 65(1)(a)” is a body corporate declared by the then Commission to be an authorised dealer in the short term money market” ss 9 and 65(1)(a).

   [120] ss 783 and 784

1. The FSR Act introduced a new regime for licensing followed a review of the financial services industry and recommendations of the Financial System Inquiry (FSI).  The FSI had:

   “… found that financial system regulation was piecemeal and varied, and was determined according to the particular industry and the product being provided. This was seen as inefficient, as giving rise to opportunities for regulatory arbitrage, and in some cases leading to regulatory overlap and confusion.

   1.4      To address these deficiencies, the FSI proposed that there be a single licensing regime for financial sales, advice and dealings in relation to financial products, consistent and comparable financial product disclosure, and a single authorisation procedure for financial exchanges and clearing and settlement facilities.”[121]

   [121] Explanatory Memorandum to the Financial Services Reform Bill 2001

1. The objects of Chapter 7 reflect this new approach.  They are found in s 760A, which provides that its:

   “… main object … is to promote:

   (a)confident and informed decision making by consumers of financial products and services while facilitating efficiency, flexibility and innovation in the provision of those products and services; and

   (b)fairness, honesty and professionalism by those who provide financial services; and

   (c)fair, orderly and transparent markets for financial products; and

   (d)the reduction of systemic risk and the provision of fair and effective services by clearing and settlement facilities.”

1. Chapter 7 does not define a “financial service” as such.  Rather, s 766A sets out the circumstances in which a person “provides a financial service”.  Those circumstances occur if the person:

   “(a)     provide[s] financial product advice (see section 766B); or

   (b)deal[s] in a financial product (see section 766C); or

   (c)make[s] a market for a financial product (see section 766D); or

   (d)operate[s] a registered scheme; or

   (e)provide[s] a custodial or depository service (see section 766E); or

   (f)engage[s] in conduct of a kind prescribed by regulations made for the purposes of this paragraph.”[122]

   [122] s 766A(1)

1. Regulations may be made that expand the range of persons who are taken to provide a financial service by prescribing that regulations may set out circumstances in which those facilitating the provision of a financial service may also be taken to provide that service.[123]  Regulations may also be made setting out the circumstances in which persons are taken to provide, or not provide, a financial service.[124]  A person is not taken to provide a financial service if that person’s conduct is done in the course of work ordinarily done by clerks.[125]

   [123] s 766A(2)(a)

   [124] s 766A(2)(b)

   [125] s 766A(3)

1. Part 7.1 develops the circumstances in which a person provides a financial service.  Subject to s 911A, a person who carries on a “financial services business in this jurisdiction” must hold an AFSL covering the provision of the financial services.[126]  A “financial services business” is a business of providing financial services.[127]  There are exemptions to the requirement to be licensed[128] and regulation of the circumstances in which a person may provide a financial service on behalf of another person who carries on a financial services business.[129]  Those who are licensed to provide financial services must comply with the obligations set out in Division 3 of Part 7.6.  The general obligations are set out in s 912A of the Corporations Act.

   [126] s 911A(1) Section 911D prescribes when a financial services business is taken to be carried on in this jurisdiction.

   [127] s 761A

   [128] s 911A(2)-(6)

   [129] s 911B

1. The manner in which a person applies for a licence is set out in s 913A of Division 4 of Part 7.6.  Section 913B(1) provides that:

   “ASIC must grant an applicant an Australian financial services licence if (and must not grant such a licence unless):

   (a)the application was made in accordance with section 913A; and

   (b)ASIC has no reason to believe that the applicant will not comply with the obligations that will apply under section 912A if the licence is granted; and

   (c)The requirement in whichever of subsection (2) or (3) of this section applies is satisfied; and

   (ca)the applicant has provided ASIC with any additional information requested by ASIC in relation to matters that, under this section, can be taken into account in deciding whether to grant the licence; and

   (d)the applicant meets any other requirements prescribed by regulations made for the purposes of this paragraph.”

As Brighton Syndication is a body corporate, only s 913B(3) is relevant for the purposes of s 913B(1)(c).  It provides that:

“If the applicant is not a single natural person, ASIC must be satisfied:

(a)that:

(i)if the applicant is a body corporate - there is no reason to believe that any of the applicant’s responsible officers are not of good fame or character; or

(ii)if the applicant is a partnership or the trustees of a trust – there is no reason to believe that any of the partners or trustees would perform duties in connection with the holding of the licence are not of good fame or character; or

(b)if ASIC is not satisfied of the matter in paragraph (a) – that the applicant’s ability to provide the financial services covered by the licence would nevertheless not be significantly impaired.”

ASIC may impose conditions on an AFSL it issues.[130]

[130] s 914A

1. Division 4 of Part 7.6 is also concerned with the suspension and cancellation of licences.  Where an AFSL is a body corporate, s 915B(3) provides that:

   “ASIC may suspend or cancel and Australian financial services licence held by a body corporate, by giving written notice to the body, if the body:

   (a)ceases to carry on the financial services business; or

   (b)becomes an externally administered body corporate; or

   (c)is a responsible entity of a registered scheme whose members have suffered, or are likely to suffer, loss or damage because the body has breached this Act; or

   (d)lodges with ASIC an application for ASIC to do so, which is accompanied by the documents, if any, required by regulations made for the purposes of this paragraph.”

Section 915B(4) makes similar provision in relation to an AFSL held by trustees of a trust.

1. There is no requirement in s 915B that ASIC give the person any notice of the suspension or cancellation.  Section 915C provides for other circumstances in which ASIC may cancel or suspend an AFSL after giving the licensee an opportunity to appear, or be represented, at a private hearing before ASIC and to make submissions to ASIC on the matter.[131]  Those circumstances occur if:

   “(a)     the licensee has not complied with their obligations under section 912A;

   (aa)ASIC has reason to believe that the licensee will not comply with their obligations under section 912A;

   (b)ASIC is no longer satisfied of the matter in whichever of subsection 913B(2) or (3) applied at the time the licence was granted (about whether the licensee, or the licensee’s representatives, are of good fame and character);

   (c)a banning order or disqualification order under Division 8 is made against a representative of the licensee and ASIC considers that the representative’s involvement in the provision of the licensee’s financial services will significantly impair the licensee’s ability to meet its obligations under this Chapter.”[132]

   “(a)     the application for the licence was false in a material particular or materially misleading; or

   (b)there was an omission of a material matter from the application.”[133]

The cancellation or suspension takes effect when written notice of it is given to the licensee.[134] 

[131] s 915C(4)

[132] s 915C(1)

[133] s 915C(2)

[134] s 915F

Australian Financial Services Licence: Policy Statement

1. ASIC’s Policy Statement PS 167, which is entitled “Licensing: Discretionary powers”, (PS 167) sets out the way in which ASIC will consider applications for relive from compliance with, among others, Part 7.6 of the Act.  Consistent with its approach in PS 136, PS 167.3 provides that ASIC:

   “… will consider giving relief under s 911A(2)(l) … to address atypical or unforeseen circumstances and unintended consequences of the licensing provisions of the Corporations Act.  We may give relief on our initiative or on application.”

1. ASIC will only exercise its powers in a way that is consistent with Parliament’s intention.[135]  The Act, as amended by the FSR Act and by the Financial Services Reform Amendment Act 2003 are intended to harmonise and raise standards of conduct, ASIC continues.  It will give weight to the value of promoting international harmonisation where relevant.

   [135] [PS 167.5]

1. In addition to its overall approach, ASIC sets out the specific regulatory goals that it will keep in mind when deciding whether to give relief:

   “[PS 167.3B]     When considering using these powers to give relief, we will keep in mind the regulatory goals of:

   (a)promoting consumer confidence in using financial services (including informed decision making);

   (b)promoting the provision of efficient, honest and fair financial services by all licensees and their representatives; and

   (c)supporting confident use of financial markets by consumers and market participants.

   We suggest that applicants address these goals in their applications.

   [PS 167.3C]      Factors that we may consider when deciding whether to exercise our relief powers include whether:

   (a)strict compliance with the FSR regime would be impossible or disproportionately burdensome;

   (b)persons to whom financial services are provided would still have the protection intended by Parliament;

   (c)those to whom the relief applies (eg the applicant) will receive any benefits;

   (d)a reasonable person would think that the predominant purpose of the product to which the service relates is not a financial product purpose;

   (e)the service is subject to adequate alternative regulation;

   (f)the likelihood and extent of potential consumer detriment resulting from the proposed relief is minimal; and

   (g)the service is only provided to wholesale clients (or in some cases only to professional investors as defined in s9).”

1. [PS 167.9] requires ASIC to have regard to the overall benefits and detriments that will follow from an exercise of its power to grant relief:

   “Any exercise of power has to be justified by the net benefits that will arise.  We will carefully consider the impact of any relief on consumer protection.”

Product Disclosure Statement: when it must be given

1. Part 7.9 of the Act is concerned with financial product disclosure and with other provisions relating to the issue, sale and purchase of financial products.  Subject to some exceptions, the provisions of the Part do not apply to securities[136] or to debentures, stocks or bonds issued or proposed to be issued by a government.[137]  Generally, Part 7.9 does not apply to a financial product that is not, or was not, issued or that will not be issued in the course of a business of issuing financial products.[138]

   [136] s 1010A(1)

   [137] s 1010A(2)

   [138] s 1010B(1)

1. Sections 1012A, 1012B and 1012C apply only in relation to offers and recommendations if they are of the type referred to in those sections and that are received in this jurisdiction.[139]  Section 1012A sets out the circumstances in which a person is obliged to give another person a Product Disclosure Statement when giving finance product advice including a recommendation to acquire a financial product.[140]  Section 1012B is concerned with the obligation to give a Product Disclosure Statement in situations in which an offer relating to the issue of a financial product has been made or a financial product has been issued.[141]  Section 1012C is concerned with situations in which an offer relating to the sale of a financial product gives rise to an obligation on a regulated person to give another person a Product Disclosure Statement for the product. 

   [139] s 1011A(1)

   [140] s 1012A(1)

   [141] s 1012B(1)

1. In relation to a financial product, a “regulated person” means:

   “(a)     an issuer of the financial product; or

   (b)a seller of the financial product if the sale takes place in circumstances described in subsection 1012C(5), (6) or (8) (secondary sales that require a Product Disclosure Statement); or

   (c)any financial services licensee; or

   (d)any authorised representative of a financial services licensee; or

   (e)[no subsection]

   (f)any person who is not required to hold an Australian financial services licence because the person is covered by:

   (i)paragraph 911A(2)(j); or

   (ii)an exemption in regulations made for the purposes of paragraph 911A(2)(k); or

   (ii)an exemption specified by ASIC for the purposes of paragraphs 911A(2)(l); or

   (g)any person who is required to hold an Australian financial services licence but who does not hold such a licence.”

1. I will take s 1012A as an example of all three sections.  Subject to the sections specified in s 1012A(4), s 1012A(3) provides that:

   “A regulated person must give a person a Product Disclosure Statement for a financial product if:

   (a)the regulated person provides financial product advice to the person that consists of, or includes, a recommendation that the person acquire the financial product; and

   (b)the person would acquire the financial product by way of:

   (i)the issue of the product to the person (rather than the transfer of the product to the person); or

   (ii)the transfer of the product to the person in the circumstances described in subsection 1012C(5), (6) or (8) (secondary sales that require a Product Disclosure Statement); and

   (c)the financial advice is provided to the client as a retail client; and

   (d)the financial product advice is personal advice to the client.

   The Product Disclosure Statement must be given at or before the time when the regulated person provides the advice and must be given in accordance with this Division [2 of Part 7.9].”

Product Disclosure Statement: when it need not be given

1. Sections 1012D to 1012DA deal with circumstances in which a Product Disclosure Statement are not required.  Section 1012D, for example, provides that the regulated person does not have to give a Product Disclosure Statement if the client has already received one, already holds a financial product of the same kind and the regulated person believes that the client has access to all of the relevant information in the Product Disclosure Statement and the financial product is an interest in a self-managed superannuation fund and the regulated person believes that the client has access to all of the information that would be required in a Product Disclosure Statement.[142] 

   [142] s 1012D

Product Disclosure Statement: conduct that is prohibited

1. In certain circumstances, offers relating to certain managed investment schemes may not be made.  They are set out in s 1020A(1):

   “A person must not engage in conduct of a kind referred to in subsection (2) in relation to a financial product described in paragraph 764A(1)(ba) (which relates to certain managed investment schemes that are not registered schemes) if the managed investment scheme concerned needs to be, or will need to be, registered and has not been registered.  This is so even if it is proposed to register the scheme.”

The conduct that is prohibited is:

“(2)     Subject to subsection (3), the kinds of conduct that must not be engaged in in relation to such a managed investment product are as follows:

(a)making a recommendation, as described in subsection 1012A(3), that is received in this jurisdiction;

(b)making an offer, as described in subsection 1012B(3) or 1012C(3), that is received in this jurisdiction;

(c)accepting an offer, made as described in subsection 1012B(3) or (4), that was received in this jurisdiction.

(3)Subsection (2) does not apply to a recommendation or offer made in a situation to which a subsection of section 1012D, other than subsection 1012D(1) applies.”[143]

[143] ss 1012D(2) and (3)

Product Disclosure Statement: failure to give may render contract void

1. A condition of a contract for the acquisition of a financial product is void if it provides that a party to the contract is required to waive compliance with Part 7.9 of the Act.  It is also void if it provides that a party is taken to have notice of matters not specifically referred to in a Product Disclosure Statement given to that party in circumstances in which that party was required to be given such a statement for the financial product.[144]

[144] s 1020D

Product Disclosure Statement: modification of obligation to give statement

1. The requirements of Part 7.9 may be modified by ASIC under s 1020F or by regulations under s 1020G.  I am concerned only with s 1020F which provides that ASIC may:

   “(a)     exempt a person or class of persons from all or specified provisions of this Part; or

   (b)exempt a financial product or a class of financial products from all or specified provisions of this Part; or

   (c)declare that this Part applies in relation to a person or a financial product, or a class of persons or financial products, as if specified provisions were omitted, modified or varied as specified in this declaration.[145]

Exemptions may apply unconditionally or subject to conditions.[146]  A person must comply with any condition and ASIC may apply to the Court for an order that the person does so in a specified way.[147]  ASIC must publish notice of an exemption or declaration in the Gazette.[148]  Conduct contrary to a declaration made by ASIC will not be an offence unless ASIC has made its text available on the Internet or has given the person concerned written notice of it.[149]

[145] s 1020F(1)

[146] s 1020F(4)

[147] s 1020F(5)

[148] s 1020F(5)

[149] s 1020F(6)

Product Disclosure Statement: Policy Statement

1. Policy Statement PS 169 is entitled “Disclosure: Discretionary powers”.  It is concerned with a number of matters including the way in which ASIC will approach relief from compliance with the financial product disclosure provisions of Part 7.9 of the Act.[150]  Consistent with the other Policy Statements to which I have referred, PS 169 states that ASIC will consider giving relief under s 1020F of the Act to address atypical or unforeseen circumstances and unintended consequences.  Relief may be given on its own initiative or on application.[151]  The overall approach that ASIC will adopt in considering relief and the regulatory objectives it will take into account mirror those it set out in PS 167.  I have set them out above.[152]

   [150] [PS 169.1]

   [151] [PS 169.3]

   [152] [PS 169.3B], [PS 169.3C] and [PS 169.5]: see [85-87above]

Each of the subsidiary joint venture agreements, being the First to the Eighth Joint Venture Agreements contained the same clause.  They were between Brighton Syndication and Brighton RV Holdings and various of the eighty or so investors I have described above. 

1. It follows that, on the evidence that I have, I do not accept that registration would destroy any certainty in relation to the affairs of each investor for the Deeds of Settlement did not relate to their ongoing positions.  There would be no unfairness to them.

Managed investment scheme: burden of satisfying dual requirements to be an approved provider and a responsible entity

1. Brighton Syndication and Brighton RV Holdings have contended that it would be disproportionately burdensome for them to operate Brighton JV as a registered managed investment scheme because that would require them to hold both an AFSL, as the responsible entity of Brighton JV, and approved provider status under the Aged Care Act. The basis of their contention is that, in practical terms, it is unlikely that they would be in a position to obtain and combine the relevant licences and approvals before the completion date of the venture.[170] A further basis put during Mr Bick’s submissions was that there are no responsible entities holding an AFSL who are also approved providers under the Aged Care Act. Mr Bick advanced as a reason for that lack the focus of the Aged Care Act upon the provision of care for the aged and the tension between having that as a primary business on the one hand and, on the other, being the holder of an AFSL and dealing in financial products. Theoretically, it was said in the applicants’ Contentions of Fact and Law, it is possible to be both but ASIC’s approach ignores the proximity of the completion date and the significance of completion to maximising the return to investors.[171] 

   [170] Applicants’ Contentions of Fact and Law, [95]

   [171] Applicants’ Contentions of Fact and Law, [95]

1. In considering this submission, I have turned first to the Aged Care Act. Payments of a subsidy cannot be made to a person under Chapter 3 of that legislation for the provision of aged care unless that person is approved under Part 2.1 and so is an approved provider.[172]  Approved providers, s 53.1 provides, “… have responsibilities in relation to aged care they provide through their aged care services.”  The section then provides that those responsibilities relate to:

   “·the quality of care they provide (see Part 4.1);

   ·user rights for the people to whom care is provided (see Part 4.2);

   ·accountability for the care that is provided, and the basic suitability of their key personnel (see Part 4.3)…”

   [172] Aged Care Act, s 7.1

1. Those who may be approved as a provider of aged care and the manner in which approval is sought are set out in Part 2.1.  The Secretary must approve a person as a provider if that person meets the criteria specified in s 8.1(1).  Among those criteria is that the Secretary is satisfied that the person is suitable to provide aged care.[173]  In deciding whether a person is suitable to provide aged care, the Secretary must have regard to:

   “(a)     the suitability and experience of the applicant’s key personnel; and

   (b)the applicant’s ability to provide, and its experience (if any) in providing, aged care; and

   (c)the applicant’s ability to meet (and, if the applicant has been a provider of aged care, its record of meeting) relevant standards for the provision of aged care (see Part 4.1); and

   (d)the applicant’s commitment to (and, if the applicant has been a provider of aged care, its record of commitment to) the rights of the recipients of aged care; and

   (e)the applicant’s record of financial management, and the methods that the applicant uses, or proposes to use, in order to ensure sound financial management; and

   (f)if the applicant has been a provider of aged care – its record of financial management relating to the provision of that aged care; and

   (g)if the applicant has been the provider of aged care – its conduct as a provider, and its compliance with its responsibilities as a provider and its obligations arising from the receipt of any payments from the Commonwealth for providing that aged care; and

   (h)any other matters specified in the Approved Provider Principles.”[174]

   [173] Aged Care Act, s 8.1(1)(c)

   [174] Aged Care Act, s 8.3

1. Unless an approved provider is a State or Territory, the “key personnel” are each of the following people:

   “(a)     a member of the group of people who are responsible for the executive decisions of the approved provider;

   (b)any other person who is concerned in, or takes part in, the management of the approved provider;

   (c)any person who is responsible for the overall nursing care provided, or to be provided, by the aged care service conducted, or to be conducted, by the applicant;

   (d)any person who is responsible for the day-to-day operations of an aged care service conducted by the approved provider, whether or not the person is employed by the approved provider.

   …”[175]

A person who is responsible for the overall nursing care provided, or to be provided, within the meaning of s 9.1(2)(c) must hold a recognised qualification in nursing.[176]

[175] Aged Care Act, s 9.1(2)

[176] Aged Care Act, s 9.1(3)

1. It is clear from these provisions and from the remaining provisions of the Aged Care Act that they are intended to ensure that Australia’s aged uniformly receive a minimum standard of care when that care is provided by a person who seeks payment under that legislation. Any person who intends to provide aged care and who seeks payment under the Aged Care Act can be expected to be familiar with them and, indeed, it appears from the material that the connections of Brighton Syndication and Brighton RV Holdings are familiar with them. They would also, no doubt, be familiar with the standards that must be met in order to gain approved provider status.

1. Meeting the standards is not an easy task but to argue that the requirement to do so should be relevant in the consideration of an application to exempt Brighton Syndication and Brighton RV Holdings from does not follow.  The two pieces of legislation are directed at completely different outcomes.  One is directed at the maintenance of the standard of aged care when payment is made to the provider from the public purse and the other to the protection of those contemplating investment in a managed investment scheme and those who have made such an investment.  Some issues may be common to each but the questions whether a person meets the requirements under the two pieces of legislation remain entirely separate and unrelated.  The fact that there would be costs involved in registration under the Act and it is unlikely that both approval and licensing would be achieved by the completion date does not detract from that conclusion.  The fact that there is no evidence that there are any entities which are both holders of an AFSL and a responsible entity on the one hand and an approved provider on the other does not detract from that conclusion.

1. Mr Bick submitted that the requirement that Brighton Syndication or Brighton RV Holdings be the responsible entity if Brighton JV were registered could jeopardise the revised agreement with Primelife.  Under the Original Primelife Agreements, it is necessary for Brighton Syndication to settle as custodian, and so as trustee or agent, on behalf of the investors.  If the status were changed from custodian to responsible entity, Primelife might use that as a ground to avoid settlement of the Varied Primelife Agreements reached after the proceedings in the Supreme Court of Victoria.  If they were jeopardised, the benefits to investors would be jeopardised as Primelife would take advantage of the increase in value of the property since the Original Primelife Agreements between it and Brighton Syndication. 

1. Whether Primelife would take this view is unknown.  Whether it could is also a matter of conjecture.  Under the Act, a responsible entity must operate the managed investment scheme and perform the functions and fulfil the duties imposed by the Act.  Those functions and duties are not at odds with its being a trustee.  In significant aspects, they are even the same as those of a trustee and I refer particularly to the requirements to act honestly, to act in the best interests of the members, to treat the members who hold interests in the same class equally and those who hold interests in different classes fairly and to exercise the degree of care that a reasonable person would exercise if they were in the responsible entity’s position. 

1. These are mirrored in the general law.  A settlor or trustee can, in establishing a trust, specify the trustee’s powers, duties and discretions but may not derogate from what are always a trustee’s core duties.  Those core duties are to perform the trusts honestly and in good faith for the beneficiaries,[177] to keep and render accounts[178] and to act personally.[179]  These have been described as “irreducible core of obligations”.[180]  The trustee also has a duty to observe the terms of the trust:

[181]

“… It is a trustee's duty to adhere rigidly to the terms of the trust deed under which it is appointed, and that duty which modifies all other duties (apart from statutory duties and duties ordered by a court).  A trustee departs from the provisions of the trust deed at its peril of afterwards having to satisfy a Court that its departure was necessary or beneficial.”

[177] Rankine, Pountney Ors v Rankine [1998] QSC 48

[178] Burrows v Walls [1855] 5 De GM & G 233; 3 ER 859 per Lord Cranworth LC at 249; 866

[179] McMillan v McMillan (1891) 17 VLR 33 at 38-39

[180] Rankine, Pountney Ors v Rankine [1998] QSC 48

1. There are other duties that can generally be mitigated by the trust instrument.[182]  In general terms, they relate to the management of the trust affairs and the beneficiaries.  Senior Member Pascoe and I referred to them in Re VBN and Others and Australian Prudential Regulation Authority[183] and I will not reproduce the passage.  Suffice to say that, in relation to the management of a trust and subject to certain qualifications:

   “The authorities show that as a general rule a trustee sufficiently discharges his duty if he takes in managing trust affairs all those precautions which an ordinary prudent man of business would take in managing similar affairs of his own.”[184]

In relation to the trustee’s duties to the beneficiaries and again subject to certain qualifications:

“The starting point is the duty of trustees to exercise their powers in the best interests of the present and future beneficiaries of the trust, holding the scales impartially between different classes of beneficiaries.  This duty of the trustees towards their beneficiaries is paramount.  They must, of course, obey the law …”[185]

“In considering what investments to make trustees must put on one side their own personal interests and views.”[186]

“Trustees may even have to act dishonourably (though not illegally) if the interests of the beneficiaries require it.”[187]

[182] Mitigation does not extend to exempting a trustee from liability for acts of fraud or dishonesty for to do so would be contrary to public policy.  Abrogation of a trustee’s responsibility to exercise care and skill, prudence and diligence is not contrary to public policy.  (Armitage v Nurse [1998] Ch 241 at 254 per Millett LJ)

[183] [2006] AATA 710 at [272]-[281]

[184] Speight v Gaunt (1883) 9 App Cas 1 at 19 approved in Austin v Austin (1906) 3 CLR 516 at 525 per Griffith CJ and in Fouche v Superannuation Fund Board (1952) 88 CLR 609 at 641 per Dixon CJ, McTiernan and Fullagar JJ. Most recently, Gummow J has said in Breen v Williams (1996) 186 CLR 71 at 137:

[185] Cowan v Scargill [1985] 1 Ch 270 at 286-287. In Tanti v Carlson [1948] VLR 401 at 405 Herring CJ said that “It is also their duty to be impartial in the execution of their trust and not to exercise their powers so as to confer an advantage upon one beneficiary at the expense of all others.”

[186] [1985] 1 Ch 270 at 287

[187] [1985] 1 Ch 270 at 288

1. There are certainly additional statutory duties that a responsible entity must meet if it is to comply with its duties under Part 5C.2 of the Act but again these duties are directed to the same ends and are not inconsistent with the duties of a trustee.  They include regular valuation of the scheme property and reporting breaches of the Act to ASIC. 

1. There are also limitations upon a responsible entity’s acquiring and holding an interest in a scheme once it is registered.  They are found in s 601FG(1).  Brighton Syndication is the trustee holding the legal interest but not the beneficial interest.  It does so on behalf of the individual investors.  I do not consider that the reference to an “interest” in s 601FG(1) is to the legal interest held by the trustee.  The reference to a responsible entity’s acquiring and holding an interest in the scheme subject to terms and conditions that would not disadvantage other members indicates that the focus is upon the members and so what advantages and disadvantages them.  That leads to the conclusion that the “interest in the scheme” to which reference is made in s 601FG is to the beneficial interest alone.  So too does the reference to consideration payable for the interest.  Consideration paid for the interests in a managed investment scheme is paid by its members just as the consideration paid in Brighton JV was paid by the individual investors and not by Brighton JV. 

1. Quite apart from the consistency of duties as a responsible entity and as the Brighton JV custodian, it is difficult to see how the assumption of the role of responsible entity of the joint venture would give Primelife a ground for rescinding the Varied Primelife Agreements.  Assuming that the parties to them remained as they were in the Original Primelife Agreements, and I have no reason to think otherwise was the case, Brighton Syndication remains the party to them.  They make no mention of Brighton Syndication’s acting as a custodian in entering the agreements.  Its role appears in the Primary Joint Venture Agreement and that also remains in place.  Clause 3.3 of the Primary Joint Venture Agreement states that the “the JV Custodian [Brighton Syndication] own the Joint Venture Property on behalf of the Investors [Brighton Aged Care Hostel JV Nos 1-8]”.  This fact is repeated in each of the Brighton Aged Care Hostel Joint Ventures numbered 1 to 8.[188]  Brighton Syndication’s underlying role as trustee does not alter its contractual responsibilities to Primelife and nor would any additional role it might have as a responsible entity.

   [188] Recital A and [3.3(a)] of each

Managed investment scheme: consequences of premature winding up

1. The next issue raised on behalf of Brighton Syndication and Brighton RV Holdings is that a premature winding up would be inimical to the investors’ interests.  The completion of the hostel and Brighton Syndication’s acquisition of the property are critical to the investors’ achieving the outcome they intended.  That is to say, at the moment, Brighton JV’s assets comprise contractual rights under the Varied Primelife Agreements.  On completion, Brighton JV’s assets will comprise the hostel and real estate on which it has been developed as well as the rights to management fees from Primelife.  Ultimately, they would realise its investment but, in the meantime, the investors’ investments have been “set and forget investments”.[189]  The investors, Mr Bick submitted, are well-protected by the statute and the general law as well as by the Joint Venture Agreements.[190]  There cannot be any concern about them in so far as their protection is concerned but there are concerns regarding the burden that will be placed upon them if Brighton JV must be registered.  Part of that burden would be the requirement that the custodian of Brighton JV become a responsible entity.  Mr Bick has submitted that the circumstances of Brighton JV are atypical.  The investors who remain wish to continue as investors in an unregistered management investment scheme.  They had given written notice that they intended to do so by ticking a box to that effect on a form that stated:

   “I/We understand that I am/we are free to withdraw from participation in the Joint Venture at any time by transferring my/our interest to a transferee nominated by the Custodians and on the same terms as contained in the letter from the Custodians dated 16 January 2006.”[191]

   [189] Transcript, 37

   [190] Transcript, 37

   [191] Tribunal Book, 783

1. I have already considered the consequences of the custodian’s becoming a responsible entity and I do not consider that it would be unreasonably burdensome.  No doubt there would be some expense involved in registration.  Whether that impact would be of any significance on the return to investors has not been addressed in the evidence and I cannot reach a conclusion on that aspect one way or another.

1. At the time of the hearing, some nine of the original investors remained.  The entity associated with Brighton Syndication and Brighton RV Holdings has purchased the interests of the remaining 70 or so investors, who have chosen to withdraw from the scheme.  The investors who withdrew received no more than the return of their capital after investing it for six years.  The reverse of that is that Brighton Syndication had the use of their capital on an interest free basis for six years. 

1. Although there is no direct evidence that the remaining investors have been fully informed as to the consequences of their investments, I accept that they have been for the purposes of this case.  Are they the only investors whose interests I should take into account?  I have already said that the date on which I should consider the application is 29 June 2005 when it was lodged.  At that time, there were far more than the eight remaining investors.  The 70 or so investors indicated that they wanted to withdraw from Brighton JV sometime after they received Brighton Syndication’s letter of 16 January 2006 as reference is made to that letter in the standard letters of withdrawal that they signed.[192]  There is no evidence regarding the information that the other 70 investors were given at that time and there is no evidence regarding the information that any of the investors received initially.  There is no direct evidence whether the Brighton JV was liquid or not liquid at the time.  If it was not liquid, the offer to permit withdrawal needed to comply with ss 601KB to 601KE of the Act and there is no evidence that it did so.  All that I have are the standard letters which the 70 or so individual investors have signed and have marked whether or not they wished to withdraw.

   [192] See, for example, those at Tribunal Book, 778-786.

1. Even if Brighton JV remains unregistered, there is no certainty that it will be wound up before the completion of the joint venture.  Section 601EE(1) provides that certain persons may apply to the Court for it to be wound up but s 601EE(2) does not oblige the Court to make a winding up order with immediate effect.  Instead it provides that the Court may make any orders it considers appropriate for the winding up.  The Court’s power under s 601EE(2) has been considered in previous authorities which have been considered by Goldberg J in Australian Securities and Investments Commission v Primelife Corporation Limited.[193]He did so after considering what a managed investment scheme. He referred to the definition in s 9 of the Act as well as to the descriptions and explanations of a managed investment scheme given in Australian Securities and Investments Commission v Knightsbridge Managed Funds Ltd[194] and Australian Securities and Investments Commission v Pegasus Leveraged Group Pty Ltd[195] and approved in Australian Securities and Investments Commission v Takaran Pty Ltd.[196]  Goldberg J concluded that:

   “Essentially a managed investment scheme that falls within this definition may be described as a network of contractual rights and contractual obligations. …”[197]

   [193] [2006] FCA 1072

   [194] [2001] WASC 339 at [45]-[49]

   [195] (2002) 41 ACSR 561 at [26]-[32]

   [196] (2002) 43 ACSR 46

   [197] [2006] FCA 1072 at [33]

1. His Honour then considered the Court’s power to wind up in light of that description:

   “… In the present case the network of rights and obligations within the scheme includes those under the sale contract which is presently executory and uncompleted.  That sale contract and the rights and obligations under it comprise an integral and important asset of the schemes.  Thus in considering whether the Court should exercise any power in relation to the sale contract pursuant to s 601EE(2), it is a mis-characterisation of it to describe it only, or simply, as the subject matter of a substantive third party right.  It comprises an asset of the schemes which has to be considered by the liquidator and resolved by him either by completion, termination or compromise.”[198]

While the purpose of the power given by s 601EE(2) is to wind up an unregistered management scheme, its scope is wide enough to permit the Court to grant an injunction to ensure that the assets of the scheme are preserved while the liquidator works out how best to deal with those assets for the purpose of the winding up and in the interests of the creditors and investors in the scheme.  Therefore, a Court could grant an injunction restraining a person with whom the investors or participants have contractual or property relationships from affecting, terminating or dealing with an asset of the scheme.[199]  Goldberg J suggested that an injunction should be given only for so long as the liquidator required to make an informed judgment as to how best to deal with an asset.[200]

[198] [2006] FCA 1072 at [33]

[199] [2006] FCA 1072 at [34]-[35]

[200] [2006] FCA 1072 at [36] and [42]

1. In view of these powers, it seems to me that it would be presumptuous of me to conclude in this case that the interests of the remaining nine investors would be prejudiced by the winding up of Brighton JV if it were not granted exemption from registration.  The resumption of the winding up proceedings that ASIC has already instituted in the Federal Court would be very close to the time at which the Varied Primelife Agreements will be fulfilled and Brighton JV is planned to conclude.  They will be matters that the Court will take into account in considering the orders it should make.  It will also be in a position to consider whether those 70 or so investors who withdrew at an earlier time retain any contractual rights despite their transferring their interests to the entity associated with Brighton Syndication and Brighton RV Holdings.

Managed investment scheme: should Brighton JV be exempt from registration?

1. Having regard to all of the matters that have been raised, I have concluded that Brighton JV should not be exempt from registration under Part 5C of the Act.  Its circumstances are not atypical.  Assuming that registration was required at the outset, they are those of any managed investment scheme that was required to be registered and was not.  Avoidance of registration and its requirements does not of itself lead to the conclusion that it is not required when a managed investment scheme is almost at its end.  Certainly, those requirements directed to informing would be investors are of no consequence once they have joined other than to tell them what they should have expected or, perhaps, to confirm what they otherwise knew.  The requirements related to the winding up of a registered management scheme remain relevant as do the provisions of Part 5C directed to ensuring the preservation of the joint venture property and the protection of the investors’ interests.

Australian Financial Services Licence: should Brighton Syndication and/or Brighton RV Holdings be exempt?

1. I have already referred to Mr Bick’s submission that it would be disproportionately burdensome to require Brighton Syndication and Brighton RV Holdings, or either of them, to hold both an AFSL, as the responsible entity of Brighton JV, and approved provider status under the Aged Care Act. I have given my reasons for not agreeing with that submission. No other ground is advanced for exempting Brighton JV from compliance with the licensing provisions.

1. I have considered whether an AFSL would be irrelevant now that it might be thought that the marketing of Brighton JV has concluded and the joint venture is nearing its conclusion.  Even at this stage, it would not be irrelevant if it were decided to register Brighton JV as a registered managed investment scheme.  Only nine investors remain in Brighton JV and it may be that they are well aware that they did not deal with the holder of an AFSL or it may not be.  There is no evidence on the point.  The obligations of the holder of an AFSL would have been to all of the original investors and not just to the remaining nine.

1. Certainly, it may seem pointless in commercial terms to go through the licensing process at this stage but that is a consequence of a failure to do so at the appropriate time.  There is nothing atypical about the circumstances in which the applicants find themselves.  It is consistent with that of any person who has failed to obtain an AFSL at the relevant time.  I do not consider that they should be granted relief under s 911A(2) from the licensing requirements for an AFSL. 

Product Disclosure Statement: should Brighton Syndication and/or Brighton RV Holdings be exempt from the requirement to issue it?

1. Again, no further grounds have been put forward to justify the application for exemption.  Clearly the intention of the provisions regulating Product Disclosure Statements is to ensure that those who consider purchasing or investing in financial products are fully informed.  For the purpose of these proceedings, I have assumed that interests in Brighton JV are financial products.

1. The exemptions expressly provided for in ss 1012D, 1012DA and 1012E underline that the statement is not required if the information is already available to potential purchasers or investors through other means.  There is no evidence that it was available in this case to any of the investors at any stage.  The fact that Brighton JV is almost at an end and the vast majority of investors have withdrawn does not of itself provide a sound basis for exemption from the requirement to give a Product Disclosure Statement.  To permit it on that basis alone would be to give legitimacy to a person’s ignoring the law for almost the entire life of the investment and that cannot have been Parliament’s intention.  There is nothing in the circumstances of this case that take the circumstances outside those contemplated by Parliament in requiring an AFSL to be held.

1. For the reasons I have given, I affirm the decision of the respondent dated 23 December 2005.

I certify that the one hundred and forty-six preceding paragraphs are a true copy of the reasons for the decision herein of Deputy President S A Forgie,

Signed:           ...............................................................

Jayne Rathjen  Associate

Date of Hearing  18 September 2006

Date of Decision  7 May 2007
Counsel for the Applicants           Mr P. Bick QC
Solicitor for the Applicants           Madgwicks Lawyers
Counsel for the Respondent         Mr R. Niall

Solicitor for the Respondent        Australian Securities & Investments Commission

“Where an express trust has been effectively constituted and under its terms the trustee is obliged to manage a trust business, the trustee is required both to observe the terms of the trust, and in doing so, to exercise the same care as an ordinary, prudent person of business would exercise in the conduct of that business were it his or her own.”

[181] Pikos Holdings (Northern Territory) Pty Ltd v Territory Homes Pty Ltd [1997] NTSC 30 at [9]