Coronica and Commissioner of Taxation (Taxation)
[2021] AATA 745
•1 April 2021
Coronica and Commissioner of Taxation (Taxation) [2021] AATA 745 (1 April 2021)
Division:TAX AND COMMERCIAL DIVISION
File Number: 2018/7159
Re:Giuseppe Coronica
APPLICANT
AndCommissioner of Taxation
RESPONDENT
File Number: 2018/7160
Re:Trustee for G Coronica Superannuation Fund
APPLICANT
AndCommissioner of Taxation
RESPONDENT
DECISION
Tribunal:Senior Member K James
Date:1 April 2021
Place:Melbourne
The Tribunal:
1.Affirms the decision under review made under section 40(1) of the Superannuation Industry (Supervision) Act 1993, in relation to application 2018/7160; and
2.Reserves its decision in relation to application 2018/7159 and refers that matter to be listed for a further directions hearing.
...[sgd]....................................................................
Senior Member K James
Catchwords
SUPERANNUATION – self-managed superannuation fund – trustee’s failure to comply with regulatory requirements in relation to in-house assets – acquisition of an asset from a related party – loan to a related party – sole purpose test – decision to issue notice of non-compliance – meaning of money-decision affirmed
SUPERANNUATION – self-managed superannuation fund – decision to disqualify Applicant as trustee of self-managed superannuation fund – nature, seriousness and number of contraventions – whether Applicant fit and proper person to be a trustee – whether breach by trustee of Trust Deed – whether breach by trustee of covenants – decision reserved
Legislation
Bills of Exchange Act 1909 (Cth)
Corporations Act 2001 (Cth)
Estate Duty Assessment Act 1914 (Cth)
Gift Duty Assessment Act 1941 (Cth)
Income Tax Assessment Act 1997
Instruments Act 1958 (Vic)
Superannuation Industry (Supervision) Act 1993 (Cth)Taxation Administration Act 1953 (Cth)
Cases
Australian Prudential Regulation Authority v Derstepanian (2005) 60 ATR 518
Australian Prudential Regulation Authority v Holloway (2000) 104 FCR 521
Aussiegolfa Pty Ltd v Federal Commissioner of Taxation (2018) 264 FCR 587
Cooper Brooks (Wollongong) Pty Ltd v Federal Commissioner of Taxation (1981) 147 CLR 297
Davies v Australian Securities Commission (1995) 59 FCR 221
Federal Commissioner of Taxation v Radilo Enterprises Pty Ltd (1997) 72 FCR 300
Fitzmaurice and Federal Commissioner of Taxation, Re (2019) 110 ATR 440
Hughes and Vale Pty Ltd v The State of New South Wales (No 2) (1955) 93 CLR 127
JNVQ and Commissioner of Taxation, Re [2009] AATA 522 (14 July 2009)
Montgomery Wools Pty Ltd as trustee for Montgomery Wools Pty Ltd Super Fund and Commissioner of Taxation, Re [2012] AATA 61 (6 February 2012)
Normandy Finance Pty Ltd v Commissioner of Taxation (2015) 333 ALR 339
Pabian Park Pty Ltd and Commissioner of Taxation, Re [2012] AATA 375
Preuss and Australian Prudential Regulation Authority, Re (2005) 60 ATR 113
Rich v Australian Securities and Investments Commission (2004) 220 CLR 129
Shail Superannuation Fund and Commissioner of Taxation, Re [2011] AATA 940
Thompson and Commissioner of Taxation, Re [2014] AATA 339 (29 May 2014)
The Taxpayer and Commissioner of Taxation, Re (2002) 51 ATR 1192The Trustee for the R Ali Superannuation Fund and Commissioner of Taxation, Re [2012] AATA 44 (30 January 2012)
Vivian (Deputy Commissioner of Taxation (Superannuation)) v Fitzgeralds (2007) 51 ATR 834
Secondary Materials
Agnes, Michael, Webster’s New World College Dictionary (4th ed, 2005)
Butt, P, et al, Encyclopaedic Australian Legal Dictionary (LexisNexis, online, 2016)
CCH Macquarie Dictionary of Business, The (CCH Australia, 1993)
Collins English Dictionary (online, 2021) < Memorandum, Superannuation Industry (Supervision) Bill 1993
Explanatory Memorandum, Superannuation Legislation Amendment Bill (No 4) 1999
Hill, D G, Stamp, death, estate and gift duties (New South Wales, Commonwealth and Australian Capital Territory) (1970)
Hogan-Doran SC, Dominique, Current thinking on the Sole Purpose Test (Law Council of Australia, Superannuation Lawyers Conference 2019)
Nygh, Peter E and Peter Butt, Butterworths Australian Legal Dictionary (LexisNexis, 1997)
Pannam, Dr CL, The Law of Money Lenders in Australia and New Zealand (1965)
Shillinglaw, Gordon et al, Accounting A Management Approach (R D Irwin, 6th ed, 1979)
Superannuation Industry (Supervision) Regulations 1994Willis, David, Accounting and Bookkeeping Principles (Mcgraw-Hill, 2010)
REASONS FOR DECISION
Senior Member K James
1 April 2021
This matter concerns two applications under section 344(8) of the Superannuation Industry (Supervision) Act 1993 (the Act) to set aside the Respondent’s decision made on 5 September 2018 and affirmed internally on 23 November 2018:
(a)give the Trustees of the G Coronica Superannuation Fund (the Fund) a Notice of non-compliance for the 2009 income year under section 40(1) of the Act (the Non-Compliance decision);[1] and
(b)disqualify Mr Giuseppe Coronica, the First Applicant, from acting as a trustee of a superannuation Fund under sections 126A(1), (3) of the Act (the Disqualification decision).[2]
[1] Application number 2018/7160. Initial decision dated 5 September 2018.
[2] Application number 2018/7159. Initial decision made 5 September 2018.
Counsel for the Commissioner submitted in closing submissions that there were 45 relevant contraventions of the Act. In the important 2009 financial year, it was put to the Tribunal there were contraventions of eight sections of the Act on seventeen separate occasions. The 45 alleged contraventions require consideration as to whether they justify the decisions made by the Commissioner in respect to the Fund’s compliance, and to Mr Coronica’s ongoing eligibility to act as a trustee of his or any other superannuation Fund.
The Applicants’ Counsel submitted to the effect that the alleged breaches did not occur, and that the Commissioner had incorrectly applied the relevant law to the fact situation underlying the Commissioner’s determinations.
LEGISLATIVE FRAMEWORK
There is a complex framework of sections of the Act relevant to this review.
A key concept of the Act was that a fund that elects to be a regulated fund and complies with the requirements of the Act it becomes eligible for concessional tax treatment contained in the Income Tax Assessment Act 1997.[3]
[3] Vivian (Deputy Commissioner of Taxation (Superannuation)) v Fitzgeralds (2007) 51 ATR 834 at 839. Explanatory Memorandum to the Superannuation Industry (Supervision) Bill 1993 paragraph 4, section 5.
Part 5 of the Act has the object of providing for a system of notices about complying fund status and to provide for those notices to be used to determine complying fund status for tax purposes.[4]
[4] The Act section 37.
In Division 2 of Part 5 of the Act, section 40(1)(a) provides that the Respondent may give written notice to a trustee stating that the fund is not a complying superannuation fund.
Subsection 42A(5)(a) of the Act provides that a fund will not be a complying fund if any of its trustees contravene any regulatory provisions of the Act during the year of income. Section 39 of the Act relevantly states that for the purposes of Division 2 ‘a contravention of a regulatory provision is to be ignored unless the contravention is;
(a)an offence; or
(b)a contravention of a civil penalty provision.
Relevant regulatory provisions that are either an offence or a civil penalty provisions include:
(a)section 35A — Accounting records;
(b)section 62 — Sole Purpose Test;
(c)section 65 — Lending to members of regulated superannuation fund prohibited;
(d)section 66 — Acquisitions of certain assets from members of regulated superannuation funds prohibited; and
(e)Part 8 of the Act — In‑house asset rules applying to regulated superannuation funds.
These provisions are described further in paragraphs below.
Section 42A(5)(b) of the Act provides:
(5)An entity passes the test in this subsection in relation to a year of income or part of a year of income if: (a) no trustee of the entity contravened any of the regulatory provisions in relation to the entity during the year of income or part of the year of income; or
(b)if a trustee of the entity contravened one or more of the regulatory provisions in relation to the entity during the year of income or the part of the year of income, the Regulator, after considering:
(i) the taxation consequences that would arise if the entity were to be treated as a non‑complying superannuation fund for the purposes of the Income Tax Assessment Act 1997 in relation to the year of income concerned; and
(ii) the seriousness of the contravention or contraventions; and
(iii) all other relevant circumstances;
thinks that a notice should nevertheless be given stating that the entity is a complying superannuation fund in relation to the year of income concerned.
Part 4 of the Act concerns accounts, statements and audits of superannuation entities. Relevantly section 35A(1) of the Act as in force during 2009 financial year provided that each trustee of a Self-Managed Superannuation Fund (SMSF) must ensure that:
(a)accounting records that correctly record and explain the transactions and financial position of the entity are kept; and
(b)…
(c)… the accounting records of the entity are kept in a way that enables the following to be prepared:
(i) the accounts and statements of the entity referred to in section 35B;
(ii) the returns of the entity referred to in section 35D; and
(d)the accounting records of the entity are kept in a way that enables those accounts, statements and returns to be conveniently and properly audited in accordance with this Act.
Part 7 of the Act sets out ‘special rules which apply only to a regulated superannuation fund.’[5]
[5] The Act section 61.
Section 62 of the Act, under the heading ‘Sole Purpose Test’, provides that each trustee of a regulated fund must ensure that the fund is maintained for one or more core purposes, or for one or more core purposes and for one or more ancillary purposes. These purposes essentially relate to the provision of retirement, death or incapacity benefits.
Section 65(1) of the Act provides that a trustee of a regulated fund must not:
(a)lend money of the fund to:
(i) a member of the Fund; or
(ii) …
(b)give any other financial assistance using the resources of the fund to:
(i) a member of the fund…[6]
[6] As discussed later at paragraph 135, the section contains grandfathering rules where the deed that applied to the period before the enactment of the Act permitted loans. The Fund’s deed Adopted in 1993 in clause 23.3 contained a covenant in similar terms to the section.
Section 66(1) of the Act prohibits a trustee from intentionally acquiring an asset from a member. Section 66(2) of the Act excludes certain acquisitions from the prohibition contained in subsection (1), being the acquisition of listed shares and business real property, if acquired at market value. Section 66(2A) excludes the acquisitions of certain ‘in-house’ assets that are acquired at market value where the acquisition would not breach the level of in-house assets permitted by Part 8 of the Act.
Part 8 of the Act provides rules which limit the proportion of ‘in-house assets’ that a regulated superannuation fund can hold. Section 70(1) provides, under the heading ‘basic meaning’, that an in-house asset of a superannuation fund ‘is a loan to, or an investment in, a related party of the fund.’ Section 10 of the Act defines ‘related party’ to include a member of a fund and a Part 8 associate of a fund. Section 70B states that for the purposes of Part 8 a company that is sufficiently influenced by or in which majority voting interests is held by an individual member of the fund is a Part 8 associate of that member.
Section 71(1)(f) of the Act proscribes that the basic meaning of an in-house in section 71 does not included an asset which the Regulator[7] by legislative instrument (or regulation) determines not to be an in-house asset. The relevant regulation in these matters is Division 13.3A of the Superannuation Industry (Supervision) Regulations1994 (the Regulations). This Regulation permits the Part 8 Associate entity (a company or trust) to own real property used for business purposes and also allows business real property to be leased to members and employer sponsors. It provides that other assets may be owned by the Part 8 associated entity, provided certain conditions apply. One of the conditions contained in sub regulation 13.22C(f) of the Regulation is that the Part 8 associated entity does not hold an interest in or maintain a loan to another entity.[8]
[7] The definition in section 10 of the Act defines ‘Regulator’ for these purposes to be the Commissioner of Taxation.
[8] APRA Superannuation Circular NO.II.D.6 November 2000 [63]–[67].
Section 83(2) of the Act provides that, if the market value ratio of the fund’s in-house assets exceeds 5%, the trustee must not acquire an in-house asset. If the ratio of in-house assets is below 5%, section 83(3) prohibits the trustee from acquiring further in-house assets if the acquisition would result in the fund’s in-house assets exceeding 5%.
Section 82 provides if at 30 June of any year the market value ratio of a fund’s in-house assets exceeds 5%, the trustees of the fund must prepare a written plan setting out the steps the trustees propose to take to ensure that one or more of the in-house assets is disposed of to ensure that at the end of that next year the 5% rule is complied with. They are also required to carry out that plan.
Section 85 of the Act is a prohibition of an avoidance scheme that would result, or be likely to result, in the artificial reduction in the market value ratio of the funds in-house assets.
In both section 66 and Part 8 of the Act, there is a requirement that to fit within the exclusions to those provisions related party transactions must take place at arm’s length as defined in section 10 of the Act.
Part 15 of the Act sets out rules about the eligibility of trustees of superannuation entities. Section 126A(1) of the Act provides that a Regulator may disqualify an individual from being a trustee if:
(a)the individual contravenes the Act; and
(b)the nature and seriousness of the contravention or contraventions, or the number of contraventions, provides grounds for disqualifying the individual.
Section 126A(3) of the Act provides that the Regulator may disqualify an individual if satisfied that the individual is otherwise not a fit and proper to be a trustee.
ISSUES
The primary issue before the Tribunal in application number 2018/7160 is whether the notice issued under section 40(1)(a) of the Act, to give the trustees of the Fund a Notice of non-compliance for the 2008-2009 income year, on 5 September 2018 and affirmed internally on 23 November 2018, should be set aside. Such a notice is to be upheld where the Fund fails to demonstrate that it is a complying fund and where the discretion under section 42A(5)(b) of the Act ought not be exercised.
The primary issue before the Tribunal in application number 2018/7159 is whether to set aside the decision to disqualify Mr Coronica from acting as a trustee of a superannuation fund under sections 126A(1) and (3) of the Act.
Consistent with the submissions of the parties, these reasons follow a structure of what in fact happened, how the Act applied to those findings, and finally, what is the correct and preferable decision on those facts.
CONTENTIONS OF THE PARTIES
As mentioned above, in relation to the Non-Compliance decision, the Commissioner submitted there were 17 contraventions across eight sections of the Act in the 2009 financial year.
There are two pivotal factual matters to the 2009 contraventions. The first concerns the Fund’s acquisition on or around 7 April 2009 from Mr Coronica of all the shares in a company G Coronica Nominees Pty Ltd (Nominees) for consideration of $100,000. These matters are considered below under the heading ‘Acquisition of Nominees’.
The Commissioner submitted the market value was a much higher figure and there were contraventions of section 66 and Part 8 of the Act, the in-house asset rules.
Mr Coronica’s evidence was that he valued the shares at $100,000 and it was submitted that this was a valuation of ‘market value’.[9] It was further submitted that if the market value was $100,000 then the acquisition by Nominees did not contravene the Act. It was also submitted that in the alternative Nominees was not an in-house asset as defined.[10]
[9] Applicants’ Amended Statement of Facts, Issues and Contentions dated 22 July 2019, 15 [69] (ASFIC).
[10] Applicants’ Outline of Submissions, 9 September 2019, [59]–[69].
To support this submission, the Tribunal was encouraged to accept the following assertions:
(a)Mr Coronica was an experienced accountant and tax agent;[11]
(b)Mr Coronica was an experienced valuer;[12]
(c)Mr Coronica interpreted and applied an Australian Taxation Office (ATO) publication, particularly ‘The ATO’s View on the Meaning of “In-House Assets” – New Draft Determination’,[13] suggesting it was possible to consider investments in related private companies;[14]
(d)Having read Regulation 13.22C of the Regulations, and an article written by legal practitioners in ‘CLEARDOCS’, an online service, Mr Coronica believed and had good reason to believe, Nominees was not an in-house asset;[15]
(e)His valuation consequentially was not influenced by the in-house asset rules
(f)The valuation was in accordance with Accounting Standard AASB 1033;[16]
(g)That the Fund had been audited in the relevant years by an approved auditor and was given ‘an unqualified opinion that the Fund has complied with the requirements of the Act and the Regulations’; and[17]
(h)The acquisition was to provide for his retirement benefits in accordance with the objects of the Act.[18]
[11] ASFIC 1 [3].
[12] Ibid 2 [4].
[13] Applicants’ Witnesses Statement dated 30 March 2019, exhibit GC-5B.
[14] ASFIC 10 [53]; ibid 10 [68].
[15] ASFIC [53]–[54].]
[16] See, eg, Amended Witness statement of Mr Coronica, [75]; ASFIC [25]; Applicants Outline of Submissions, 9 September 2019, [27].
[17] ASFIC 3 [11].
[18] ASFIC 84–85; Applicants’ Outline of Submissions dated 9 September 2019, 69,74, 75.
The second group of factual matters, in relation to the Non-Compliance decision, concern the operation of the Fund, its accounting practices and, whether the trustees complied with the sections of the Act outlined above namely: section 35A (Accounting records),
section 62 (the sole purpose test), and section 65 (prohibition against lending assets of the fund to members). These matters are considered below under the heading ‘Issues Concerned with the Operation of the Fund’.[19]
[19] Explanatory Memorandum, Superannuation Industry (Supervision) Bill 1993.
At the centre of Mr Coronica’s explanation of his compliance with the Act was his use of a ‘suspense account’ which was submitted to be:
(a)a ‘simplified record keeping for the Fund’;[20]
(b)maintained in accordance with the legislative intention of the Act;[21]
(c)compliant with the Commissioner’s published practice for recording member contributions;[22]
(d)in conjunction with the Fund’s other records, explained the transactions and financial position of the Fund;[23]
(e)at any point in time, the asset position of the Fund could be distinguished from the asset position of Mr Coronica;[24] and
(f)was approved in the unqualified opinion of an approved auditor.[25]
[20] Applicants’ Witness Statement dated 30 March 2019, 6 [41].
[21] ASFIC 16 [76].
[22] Applicants’ Outline of Submissions dated 9 September 2019, 33 [150].
[23] Ibid 37 [173].
[24] Ibid 35 [161].
[25] Ibid 3 [10].
Submissions from the Respondent included;
(a)Mr Coronica took a primary, if not exclusive, role of managing the fund’s investment and accounts during the relevant period;[26]
[26] Respondent’s Amended SFIC, 29 May 2019, [73.1].
(b)As a tax agent with over 50 years’ experience as a Certified Practising Accountant, Mr Coronica knew, or should have known that the acquisition by the fund of the shares in Nominees would contravene the Act;[27]
(c)That Mr Coronica continued to maintain accounts in a manner that mixed fund assets with his own assets;[28]
(d)That the accounting ‘demonstrates unequivocally that Mr Coronica maintained the Fund for his own personal benefit;[29]
(e)That the payment of fund assets to Mr Coronica at a time when he was already indebted to the fund established that the fund was being maintained for a purpose other than the provision of retirement benefits to members -namely as an ongoing source of finance for Mr Coronica;[30]
(f)That inaccuracies and inconsistencies identified in his accounts ‘disclose at the very least, a serious lack of competency on the part of Mr Coronica. The seriousness of the errors is magnified by the fact that Mr Coronica … had more than 50 years’ experience as a CPA’;[31]
(g)That in regard to his interpretation of a Regulation his explanation ‘beggars’ belief’ for ‘a tax agent of 50 years standing;[32]
(h)That the purported suspense account was not a ‘suspense account as that term is commonly understood’;[33]
(i)That “Mr Coronica’s practice of undertaking a global reconciliation of fund assets paid to or received by him personally against payments purportedly made by him on behalf of the Fund did not comply with his obligations as a trustee and resulted in records for the fund which comprehensively failed to meet the requirements of section 35(1) and 35AE of the SIS Act”; [34]
(j)Mr Coronica knowingly contravened subsection 65(1) of the Act by loaning fund assets to himself, or alternatively by providing himself with financial assistance using resources of the fund, and that the amounts were substantial;[35] and
(k)That Mr Coronica used ‘the assets of the Fund as an undifferentiated source of personal funding, in clear contravention of section 62(1) of the SIS Act’.[36]
[27] Ibid [73.2].
[28] Ibid [73.4].
[29] Respondent’s Supplementary Submissions, 3 October 2019, [36].
[30] Ibid [21].
[31] Ibid [37(d)].
[32] Ibid [62(b)].
[33] Ibid [3(a)].
[34] Ibid [3(b)].
[35] Ibid [16(b)]–[(c)].
[36] Ibid [17].
BACKGROUND
Mr Coronica started his accounting practice as a sole trader in 1970 and became registered tax agent from that time. In 1974 he incorporated ‘G Coronica & Associates Proprietary’, (G Coronica Pty) an unlimited liability company carrying on the accountancy practice under the business name ‘G Coronica & Associates’. On 16 May 1975,[37] G Coronica Pty settled a deed establishing the Fund for selected employees of that company in compliance with the then Occupational Superannuation Standards Act 1987. On 21 November 1994, G Coronica Pty and the trustees executed a replacement deed in compliance with the enactment of the Act in 1993.
[37] T72 of the documents filed in matter 2019/7159 pursuant to s 37 of the Administrative Appeals Tribunal Act 1975, 638 (T documents 2019/7159).
At all material times, Mr Coronica has been the only member with an account balance.
In accordance with the SMSF rules, Mr Coronica has also always been a trustee of the Fund. The other trustee at all material times was Mr Coronica’s personal assistant who had a nil account balance in the Fund.
The evidence before the Tribunal is that up until 1 July 2008, Mr Coronica had been: the trustee making all the important investment decisions,[38] the sole beneficiary with an account balance, professional accountant, investment advisor and tax agent to the Fund, and, importantly, auditor signing off on the Fund’s compliance with its deed and the Act.[39] The only change of importance in the 2009 financial year being that Mr Coronica was replaced as auditor by his 25-year-old daughter,[40] who at the time worked for a ‘public company’[41] and whose address on the audit certificate was G Coronica Pty’s Post Office Box.[42] The quality of her audit opinions is discussed at paragraphs 202–207 and 291–294 below.
[38] Transcript of Proceedings on 16 September 2019, page 48 line 5.
[39] Applicants’ Witness Statement dated 30 March 2019, 4 [25].
[40] Ibid [26]. See also Transcript of Proceedings on 16 September 2019, 51 line 33.
[41] Transcript of Proceedings on 16 September 2019, 51 line 35.
[42] T18, T Documents 2018/7159, 181. See also Exhibit Gc-2A, exhibited to the Applicants’ Amended Witness Statement dated 24 July 2019.
As a witness Mr Coronica demonstrated that he was a professional that had a passion for his work and pride in what he had achieved. He displayed a confidence in his own professional experience, capability and competence.
When questioned about whether he sought advice from anyone else (about the Fund acquiring shares in Nominees from himself) he answered:
‘No. basically, I’m a, you know, one-man band, basically. I try to take my own views, you know, and advice on matters. I do a lot of reading’.[43]
[43] Transcript of Proceedings on 16 September 2019, 63 line 15.
The Tribunal finds, as discussed below, his opinions and or conclusions on a number of provisions of the Act and Regulations, ATO rulings, ATO Interpretive Decisions (ATOID), ATO advice guidelines, Minutes of the ATO GAAR Panel, Australia Prudential Regulatory Authority (APRA) Circulars and an Accounting Standard (collectively, the Regulators’ Guidance Documents), are not ones that an accountant and tax agent of his experience should reasonably be expected to form.[44] His misplaced opinion of his capability and competence together with a governance model where there was no opportunity for an independent review of his decisions, was the major contributor to the compliance difficulties the subject of these applications.
[44] Paragraph 190 below
The Tribunal accepts Mr Coronica had experience in giving valuations as evidenced by his engagement, relevantly, in June 2010, by the administrators of Timbercorp Limited (KordaMentha) to perform an investigation into that company’s financial reporting with attention to its reporting of asset valuations. The engagement letter and opinion were attachments to his witness statement.[45]
[45] Exhibit GC-1B, exhibited to the Applicants’ Amended Witness Statement dated 24 July 2019.
It is difficult to reconcile the professional acumen of the author of that report with Mr Coronica expressing his professional opinions as a witness. In his KordaMentha opinion, he expressed expertise on the duties of directors, responsible managers and auditors, and opined that they were in breach of their duties to follow professional accounting and auditing standards in that matter.
This is in contrast with his evidence that he had little regard to the Fund’s Trust Deed and the provisions of the Act prescribing duties of trustees. He did not satisfactorily explain why the Fund, contrary to provisions of the deed and the Act, advanced funds to him and received extended credit from him. He could not explain why he banked in his own account significant amounts that were paid to the Fund, contrary to provision in the Fund deed and trustee covenants in the Act, and why records of decisions of the trustee were not recorded as required by the deed and the Act. He did not consider himself to be bound by the covenant in section 52(2) of the Act (which was supported in clause 12.4 of the Trust Deed) to keep assets of the Fund separate from his personal assets until his new independent Fund auditor pointed out that the SIS Regulations had been altered in the 2013 financial year to make intentional or reckless non-compliance with the requirement an offence.[46] As will be discussed in some detail below, the provisions of the deed and the Act in relation to proper accounting were also not adhered to.
[46] Transcript of Proceedings on 17 September 2019, 153 lines 40–45; see also, 228 line 22–23.
In re-examination, Mr Coronica was asked to explain why the Fund’s 30 June 2009 tax return did not disclose that, at year end, the Fund owed him $264,243.25 (interest free and unsecured) as recorded in the Fund’s ‘multi-column spread sheet’[47] which was in the nature of a trail balance. In this re-examination, he explained the interest free, undocumented, and at-call liability to him had been set off against the Fund’s interest earning, fixed-term, secured loans to third parties.[48] The same offset appears in the Fund’s audited financial statements.[49] This accounting treatment of assets and liabilities is at odds with the provisions of the deed and the Act. It also stands in contrast with his expert KordaMentha opinion of the duties of the Timbercorp directors, officers and auditors, to accurately record the value of assets in financial accounts. The Tribunal finds this very questionable offset destroys any suggestion that Mr Coronica was unaware that his management of the Fund, including his use of a member loan account in which its acquisition of Nominees was recorded, contravened the Act. The Tribunal finds that this offset from what was recorded in his multi-column worksheet (in the form of a trail balance) was an attempt to disguise the Fund’s indebtedness to a member, from the Commissioner and/or the Fund’s auditor.[50]
[47] Mr Coronica’s description of his accounting in his response to the ATO’s reasons for decision dated 5 September 2016. ST11, Supplementary T documents, page 88.
[48] Transcript of Proceeding on 8 October 2019, 280 line 35 to 284, line 25.
[49] T84, T documents 2019/7159, 791.
[50] Commissioner only became aware of the offset at the hearing: Transcript of proceedings on 16 September 2019.
It is also noted that Mr Coronica conceded that he did not return the capital gain on the sale of Nominees in his personal 2009 tax return, as he should have.[51] While he brushed this aside with a comment that he had carried forward capital losses, as an experienced accountant and registered tax agent he should have known better. It is evidence of an attitude that accurate compliance in his own affairs had a low priority.
[51] Transcript of Proceedings on 16 September 2019, 67 line 7.
He also gave evidence that his use of a ‘suspense account’ to record advances to and from him and the Fund was an acceptable accounting practice sanctioned in documents issued by both APRA and the Commissioner in their roles as regulators of superannuation funds. In paragraphs 192–196 below the Tribunal finds these opinions to be without any merit.
Mr Coronica also gave evidence that he ‘saw an ATO circular on the internet’, entitled ‘Private Company Dividends received by a superannuation fund’, which ‘suggested it was possible for a superannuation fund acquire [sic] the shares in a private company’.[52]
The circular was an attachment to his witness statement. The sub-heading to the document is ‘Supporting document requirements for private rulings’.
[52] Applicants’ Witness Statement dated 30 March 2019, 10 [67].
On the Tribunal’s reading of the document an experienced and competent tax practitioner would understand that the document had the purpose of indicating to trustees, and their tax agents, that the ATO was extremely concerned about superannuation funds receiving dividends from private companies closely associated with SMSF members. Importantly, it telegraphed the hurdles the ATO placed before trustees if they acquired related private company shares. These include questions around the history of dividends, the relationship between members/trustees/directors, who the trustees acquired the shares from and significantly ‘[t]he value of the shares at the time of…sale, the basis of the valuation and who performed the valuation’. Having exhibited the document to his witness statement, Mr Coronica did not explain why such a document encouraged, rather than discouraged, him to sell his shares in Nominees to the Fund and perform the valuation himself, especially in the Fund’s governance arrangement then in place.
There were many examples of Mr Coronica bending positions to be what he wanted them to be, not what they were. An example was his interpretation of his attendance at an ATO GAAR Panel meeting. In cross-examination his evidence was the ATO:
GAAR Panel knocked back the Commissioner’s application under the anti-avoidance rule. If you look at the last sentence, it suggested that basically 75(a)(e) would be applied. In other words, the GAAR Panel didn’t accept the Commissioner’s submission that there was any Part 4A arrangement, and there wasn’t any dividend stripping.[53]
[53] Transcript of Proceedings on 16 September 2019, 79 lines 30–35.
And further: his exchange with Counsel continued
Mr Coronica, what it says at the end of that letter is:
The Panel concluded that primarily the breaches of the SIS Act should be investigated further. However, a determination under section 177E(a)(5) should be made, with arguments included in the ATO team’s position to that effect, as an alternative
?--Yes, it’s an alternative – has never been made. You know what’s - - -
But Mr Coronica, the position hasn’t been knocked back, has it? The GAAR Panel decided that it did fall within – it was appropriate to make a determination? --No. 177(5)(a), all the section say to treat the dividends going back the last four or five years just on the G. Coronica Nominees. And the ATO never did – to cancel that as a dividend, the Commissioner didn’t do the determination, because that would not have been successful, because the company was still continuing and making money and paid tax. So if they would have cancelled the franking credit, which was a small amount anyway, they probably would not have been successful. And I asked the auditing, ‘Why don’t you go ahead and do a determination?’ They said, you know, ‘We don’t have to follow the advice of the GAAR Panel’.[54]
[54] Ibid 79–80 lines 33–47 and 1–9.
Another example of Mr Coronica bending positions to be what he wanted it to be, was his evidence that the loan to him from the Fund of $248,842.25 as at 30 June 2008 did not need to be disclosed to the incoming auditor (his daughter) because it was ‘immediately repaid’.[55] As discussed below, his indebtedness to the Fund was increased to around $400,000 before being extinguished late in the 2009 financial year.[56] Similarly, as discussed at paragraph 237 below, the credit loan from him at end of the 2009 financial year was not converted to a member contribution at the beginning of the next financial year, as was his evidence. It was repaid from funds generated by the sale of listed shares and income receipts.[57] A credit advanced from him at the end of the 2011 financial year was again not converted into a member contribution in the 2011–12 financial year, as his evidence and explanations inferred,[58] but offset against Fund’s loan repayments that were banked in his personal account, early in that financial year.[59]
[55] Transcript of Proceedings on 16 September 2019, 57.
[56] See paragraph 171 below.
7[57] See paragraph 237 below.
[58] Applicants’ Witnesses Statement dated 30 March 2019, 7 [52]–[53].
[59] See paragraph 257 below.
The Tribunal emphasises that the major root cause of the Fund’s compliance problems especially in the 2009 and 2012 financial years was the sustained practice of Mr Coronica banking receipts of the Fund, for both principal and interest payments to the Fund, in his personal account in contravention to the covenant in section 52 of the Act and clause 12 of the Trust Deed as discussed above.
Mr Coronica’s constant assertion was that maintaining a running loan account (which he called a suspense account) between himself and the Fund was both normal and an acceptable practice. Trustees that have the discipline of ensuring that all receipts and payments of a fund are made through the fund’s bank accounts should have source accounting records that comply with the Act and will not cause situations where members have loans over extended periods to or from the fund.
In a similar example, Mr Coronica sought to explain his decision to acquire Nominees after reading an article in a tax service ‘CLEARDOCS’ dealing with regulation 13.22C of the Regulations (the Article), which proscribed certain assets as being excluded from being in-house assets as provided in section 71(1)(j) of the Act.
The regulation enables an SMSF to jointly invest with employer sponsors and members provided that ‘certain conditions’[60] are maintained. These conditions exclude an investment in a private company if the company is a party to a lease, or a lease arrangement, with a related party,[61] and the company has outstanding borrowings. Nominees did not hold any of these excluded assets or liabilities.
[60] APRA Superannuation Circular No. II.D.6 In-house Assets (November 2000) 14 [63].
[61] Regulation 13.22C(2)(d) of the Regulations. Regulation 13.22D also includes tracing provisions.
Regulation 13.22C goes on to state a further condition that:
(f)the assets of the company…do not include:
(i) an interest in another entity; or
(ii) a loan to another entity, unless the loan is a deposit with an authorised deposit‑taking institution within the meaning of the Banking Act 1959; or
(iii) an asset over, or in relation to, which there is a charge; or
(iv) an asset that was acquired from a related party of the superannuation fund after 11 August 1999, unless the asset was business real property acquired at market value; or
(v) an asset that had been at any time (unless it was business real property acquired by the company, or a trustee of the unit trust, at market value) an asset of a related party of the superannuation fund since the later of:
(A) the end of 11 August 1999; and
(B) the day 3 years before the day on which the fund first acquired an interest in the company or unit trust.
In his amended witness statement Mr Coronica stated:
I recall reading an article about in-house assets on the internet. Exhibit GC-5B is a copy of that article. It stated 'Further, an asset will be deemed not to be an in-house asset (regulation 13.22C) if that asset had been at any time (unless it was business real property acquired by the company, or a trustee of the unit trust, at market value) an asset of a related party of the SMSF since the later of:
(a) the end of 11 August 1999; and
(b) the day 3 years before the day on which the fund first acquired an interest in the company or unit trust.
I thought about whether the shares in G Coronica Nominees would be an in-house asset of my fund. I formed the view that the shares will be deemed not be an in-house asset under that rule because the shares had been an asset of a related party of the fund (me) in the preceding 3 years.[62]
[62] Amended Witness Statement of Mr Coronica, dated 24 July 2019, 11 [70]–[71].
The Tribunal accepts that the Article is poorly expressed as to how regulation 13.22C of the Regulations operates. There is an obvious error in the extract of Article being the paraphrasing of the operation of the regulation to be that
‘…an asset [shares in Nominees] will be deemed not to be an in-house asset (regulation 13.22C) if that asset [shares in Nominees rather than an asset held by Nominees] had been … an asset of a related party of an SMSF since the day 3 years before the day on which the fund first acquired an interest in the company…’
Taken literally that has the meaning all shares acquired from a member in a related private company would fall within the exemption, as by definition, the shares must have been acquired by the member before they were sold to the fund. The day before they were sold will by definition be a day three years before the shares were acquired by the fund. That being the case the preceding clauses in the Regulation would be of no effect.[63]
[63] The Tribunal notes that APRA issued Superannuation Circular No. II.D 6 IN-HOUSE ASSETS in November 2000. At paragraphs 63–67 there is a clear discussion of the regulation. Mr Coronica in other evidence stated he had regard to the APRA circulars in forming his opinions.
In his cross-examination Mr Coronica repeated that he read and considered the Regulation as well as the article.[64] His interpretation was that he came within subparagraph (v) of Regulation 13.22C(2)(f)(ii). His answer to a question:
Why did you not believe it was an in-house asset?---Because basically I found the transaction was covered under regulation 33(a) on section 32(c), where it said basically if you buy an asset from a related party and that related party has got an asset within its structure which has been an asset of that party within a period of three years, then you – it's not an in-house asset.
Okay. And did you check the regulations when you formed that view?---Yes, I checked - - -.[65]
[64] Transcript of Proceedings on 16 September 2019, 63 lines 1–16; see also Transcript of Proceedings on 17 September 2019, 188 lines 21–24, 193 lines 34–39 and 43–44.
[65] Transcript of Proceedings on 16 September 2019, 60 5–12.
Shortly thereafter Mr Coronica added, after reading to the Tribunal regulation 13.22C(2)(v) of the Regulations:
The related party is me, the company is G. Coronica Nominees and the asset it refer is to the loan of 175. If I go back three years that was around that amount they're owing to the company and I (indistinct) 13.22C.[66]
This explanation is significantly different to the statement in his witness statement, which was based on his shareholding in Nominees, not the Nominees loan to him.
[66] Transcript of Proceedings on 16 September 2019, 61 lines 27–29.
His answer to a separate question as to whether the assets of the company included a loan (per regulation 13.22C(2)(f)(ii) of the Regulations) was incomprehensible to the Tribunal.[67]
[67] Ibid 62 line 30.
In answer to a question: ‘“The assets of a company do not include a loan to another entity”, why didn’t that cover the asset of the company which was a lone to you?’, drew the response:
Because it – under 4 it got the word [“or”], in other words any of those one there that apply, that was – in the relation you see under 4 - - -
…
That's called [“or”]. So the way I read that is because of the [“or”, basically the “or” gives alternative,] in other words, if I met this condition of (v) then that's not really a related party [asset because the loan was, of] G. Coronica Nominees for a period of three years, that's the way I've read that.[68]
[68] Ibid 61 lines 31–40.
In re-examination, Counsel for Mr Coronica stepped him through what he thought about the application of regulation 13.22C of the Regulations. His explanation as to how he read the regulation and why it clarified that Nominees was not an in-house asset was not only quite different to his witness statement but also unconvincing. Mr Coronica’s evidence was that if the company satisfied any one of subparagraphs (i) to (v), its acquisition was exempted by the Regulations. He explained this in his re-examination:
So you think - did you think (v) applied in your favour?---That’s right.
So did you think you needed to satisfy any of the other, (i) to - - -?---No, I would say that it only need to certify the one.
Why do you only need to satisfy the one?---Because it’s basically in relation to asset gives alternatives and by giving - - -
Where does it give you - what indicates to you that it’s alternatives?---By - by - after each one there’s ‘or’. In other words, it say any of those.
So you thought that if you - if you satisfied any of those ?---Yes.
- - - you would satisfy the provision?---That’s - that’s correct.
So did you think that you needed to satisfy all of them?---No.
You said you thought (v) was the one that was valid to you?---That’s right, and - - -
So if we read the opening words of (f) and link it to (v) what does it say? (f)?
So the opening words of (f)?---’(f) The assets of the company do not include.’
And in terms of (v)?---’An asset that had been at any time; an asset of a related party’.
Since - okay?---Of the superannuation fund.
Yes?---’Since the later of the end of 11 August 1999 and the date three years before the day on which the fund first acquired and interest in the company or unit trust.’
So did the assets of the company include any assets that have been at any time an asset of a related party?---Well, the - - -
What were the assets of the company at the time?---The asset of the company was the shares and - and the related party loan, and then the - - -
Were any of those assets an asset of a related party of the fund at any time? Were the shares ever an asset of a related party?---Yes, it was. The - the shares were - belonged to me so I was a related party of the fund.
Do you mean the shares held by the company? Were they ever in your own name?---Yes, they were in my name. Therefore those - I was the related party, and the asset of that related party was - was that loan of one - an asset that there’d been at any time.
So paragraph (f), the opening words say, ‘The assets of the company do not include an asset that had been at any time - - -’?---In other words, it doesn’t include - it say that it doesn’t include all the - - -
Okay, so that’s the requirement. That - - -?---In my case it - it did include an asset that was an asset for more than three years.[69]
[69] Transcript of Proceedings on 17 September 2019, 190–1 lines 36–47 and 1–44.
After a further series of questions with confusing responses on how regulation 13C(2)(f)(v) of the Regulations applied to the acquisition of Nominees, Mr Coronica was asked:
So, okay, so the shares of the company held - - -?---Yes.
- - - they had been with the company for more than three years? Is that what you’re saying?---No, no. No, I mean that you - you buy the company shares and - and basically in the company there’s an asset that, that asset has been in the - that loan of 175, that asset that’s been an asset of the company for more than three year and that asset is an asset to a related party within that section. In other words, what it’s saying is, if a company had an asset which the asset was a loan to - to a related party, that - that it’s not treated within the in house asset, or that’s the way I - I understood that.
Okay. So you say the loan - - -?---The loan was - the loan was an asset of the - of the company for more than three years.
So that satisfy paragraph (v), does it?---That - that’s the way I understood it, and then there was the other - - -
And therefore that satisfies paragraph (f)?---Yes. Yes, and that would satisfy that, and then there was the other article there of Cleardocs, something similar.
Okay. Okay ,so let’s just stop here?---That’s the one that’s - I read that.
So you’ve just told us you read this regulation and you thought it was satisfied on that basis that you’ve just explained?---That’s right.[70]
[70] Ibid 193 lines 20–44.
This interpretation of regulation 13.22C of the Regulations was contrary to his explanation in his witness statement and difficult to follow and understand. A reading of the Regulation free of confusion from the CLEARDOCS article is that all of the conditions in subparagraph (f) of regulation 13.22C(2) need to be satisfied for the exemption in the Regulation from being an in-house asset to apply. The shares are not an in-house asset of the Fund if, when the shares are acquired, the assets of the company do not include assets listed from (i) to (v). Mr Coronica’s interpretation in the first instance misses the significance of the word ‘not’ before ‘include’. Nominees did not satisfy subclause (ii) due to its loan to Mr Coronica being a loan to another entity.
Subparagraph (v) of regulation 13.22C(2)(f) of the Regulations requires Nominees to not have acquired an asset, other than business property, that has been owned by a related party of the Fund in the previous three years (not including any period of ownership prior to 11 August 1999). The clause does not apply to the loan to Mr Coronica as it was never an asset acquired from a related party (Mr Coronica).
Mr Coronica’s reasoning that regulation 13.22C(2)(f)(v) of the Regulations applied because at the relevant time Nominees had held a Division 7A loan to him, for more than 3 years, is factually incorrect.[71] The loan agreement is dated 1 July 2008. As the Fund acquired the shares on 7 April 2009, the asset, even on Mr Coronica’s reading of the Regulation, had not been held for more than three years.[72] In summary, the Tribunal rejects the submission made that Mr Coronica made a reasonable mistake ‘about the application of the exceptions to the in-house asset rules’.[73] He was held out to be an experienced accountant with over 50 years’ experience. His interpretation of the Regulation to the facts and circumstances of the acquisition of Nominees were confused and demonstrated a lack of thoroughness, if not competence, for an accountant with his experience.
[71] Ibid 195 line 33.
[72] APRA, In-House Assets, Superannuation Circular No II.D.6, November 2000, 14 [64].
[73] Applicants’ Outline of Submissions dated 9 September 2019, 26 [120].
Mr Coronica also had great difficulty in advancing a reason as to why the Fund would want to acquire Nominees. At the time of purchase, it was a passive investment company in the nature of a cash box (see paragraphs 88–91 below). The Fund held interests in Futuris, a listed company, which fell within the exclusion to the in-house asset rules and section 66 of the Act. It held other interests in suspended listed entities. Mr Coronica’s evidence was that those investments were not a priority to him. Other than those securities, the remaining cash had recently been lent to him on ‘Division 7A’ terms.
Before making any discount the loan to Mr Coronica made up 82.5% of the net assets of the company. If the loan is valued at the range adopted by Mr Coronica, the percentage of value to net assets is in the range 62.5% to 71.5%.
It was not explained why a passive investment company or ‘cash box’ entity was a more attractive investment opportunity to investing the cash in the Fund. Mr Coronica conceded that the ‘franking credits’ were ‘also’ an attraction.[74]
[74] Transcript of Proceedings on 17 September 2019, 187 line 10. See also, Transcript of Proceedings on 16 September 2019, 79 line 30, 77 lines 45–46, 78 lines 1–2.
The Tribunal finds that when valuing Nominees, Mr Coronica was conscious of the requirement that the value had to comply with the 5% ratio of the in-house asset rules. At or around the valuation time, Mr Coronica was aware that the bond market was trading at significant discounts. From the charts attached to his witness statement, in April 2009 the bond market was at or around its depth. The Tribunal accepts that Mr Coronica in performing that valuation was influenced by his understanding of accounting standard AASB 1033 and a view that he could rely on the bond market to form a value of his recent borrowing from Nominees. Both views were mistaken.
The Tribunal finds that for an experienced tax agent and accountant Mr Coronica’s professional opinions and competence were not at a level that would be expected from a professional with his experience. The incestuous governance arrangements were a dangerous mix with that level of challenged competence.
Did the Acquisition of Nominees Contravene the Act?
With regard to the acquisition of the shares in Nominees, the Commissioner alleged the shares had a market value much higher than the consideration (as valued by Mr Coronica) and that if the ‘market value’ was substituted as proscribed by the Act, the acquisition contravened sections 66 and section 83 of the Act.
Section 66(1) of the Act, which, as referred to above, prohibits a trustee intentionally acquiring an asset from a related party of the Fund subject to the exceptions contained in later subsections. The second related contravention relates to the in-house asset rules in Part 8 of the Act and specifically section 83 restricting the acquisition of in-house assets if the ratio of in-house assets to total assets exceeds 5%.
Was the Acquisition of Nominees at Arm’s-length?
Central to the operation of both provisions, is a factual question as to what was the ‘market value’, as defined, of Nominees. Section 10 of the Act defines ‘market value’, in relation to an asset, as ‘the amount a willing buyer of the asset could reasonably be expected to pay to acquire the asset from a willing seller if the following assumptions were made’:
(a)That the buyer and sell dealt with each other at arm’s length in relation to the sale;
(b) That the sale occurred after proper marketing of the asset; and
(c) That the buyer and the seller acted knowledgeably and prudentially in relation to the sale.
The Tribunal notes that this definition of ‘market value’ is an objective measure of what a ‘willing buyer’ (the trustees of the Fund) could ‘reasonably’ be expected to pay a ‘willing seller’ (Mr Coronica, the only member of the Fund with an account balance). The objective nature of the value is reinforced by the three added objective assumptions that must be applied in reaching the assessment of value.
The Tribunal notes that the definition does not countenance a value a buyer with a tax profile different to the actual concessionally taxed taxpayer, the trustee of a related SMSF, would pay when acquiring that asset (with any associated liability). How assets of another type or class are valued is also of limited relevance to the definition.
The definition also requires an examination of whether the vendor would sell at that price to an arm’s length purchaser not holding the assets for their sole benefit.
Mr Coronica defended the valuation primarily on the basis that the market value of the net assets of Nominees should be discounted on two bases. One was a tax adjustment, the other related to the value of Nominees Division 7A loan to Mr Coronica.
The Tax Adjustment
Mr Coronica’s evidence was:
Then I had to adjust for tax:
(a)firstly, I looked at the financial statements of the company for the 2009 year. At 7 April 2009, the G C Nominees had retained profits of $410,169.02 (before it paid the $35,000 dividend in 2009) (see Fund T Document 48 at page 314 and Supplementary T Document 2 at pages 6 and 8);
(b)secondly, the historical cost of the company's investments as at 30 June 2008 of $204,000 (see Fund T Document 48 at page 313). Those investments, on my analysis above, were only worth $42,000 in April 2009. The company had an unrealised loss of $162,000 on those investments. If those losses were realised, they would reduce the company's retained profits to $248,169.02;
(c)thirdly, a buyer who bought GC Nominees would have to inherit those retained profits. If the company paid out franked dividends from those retained profits, they would get 30% franking credit on those dividends. However, I assumed that the purchaser would not be a low income earner and would be on a marginal tax rate of 45%. This meant the purchaser would be subject to 15% ' top-up' tax on the dividend. That is, the purchaser would be subject to a tax detriment equal to 15% of the company's retained profits. This equals $37,225.35.
Subtracting the tax detriment away from the asset values above, I obtained net values for the company of $74,996.07 and $109,996.07. I adopted a $100,000 value from that range.
This valuation takes into account the franking credit balance in the company. Otherwise, if it assumed the retained profits were paid out as unfranked dividends, the purchaser's top-up tax would be 45%. I have assumed that the retained profits would be paid out as franked dividends, using up the company's franking credit balance, so the purchaser is paying 15% top up tax.[75]
[75] Amended Witness statement of Mr Coronica, 22 July 2019, 13 [78]–[80]
Complying superannuation funds do not pay tax at the maximum rate (the top up tax), as the valuation adjustment assumes. To the contrary, complying funds get a refund (credit) of tax as their tax rate is less than the franking credit attached to the dividend paid by the company. In accordance with the definition of ‘market value’, ‘reasonable’ willing buyers would not seek discounts for a non-existent future tax liability, especially when there are in fact valuable credits. To reinforce this, the definition requires an objective assessment of proper marketing of the asset, and the buyer and seller acting knowledgeably and prudently in relation to the sale.
Similarly, a well-informed ‘reasonable’ vendor, would never agree to giving a discount to a purchaser they knew would receive a future benefit, not a future impost allowed for in the discount. To the contrary a well-informed vendor would have sought some arbitrage for the benefit of refundable franking credits being acquired.
In addition, if the purchaser was a maximum-rate taxpayer and being subject to incurring the top up tax (the basis of the discount), that tax cost might be deferred indefinitely. The discount assumes the company will immediately dividend the pre-acquisition profits or be immediately liquidated. There would also have been significant unrealised capital losses that well-informed buyers and sellers would have discussed before agreeing to the assumption that the company would be immediately liquidated. As discussed above, in submissions, and in his evidence, Mr Coronica presents himself as an experienced accounting and tax practitioner.
The Tribunal finds that on the evidence as an experienced accountant and registered tax agent, Mr Coronica understood the tax discount was one he would only have agreed to if he was enjoying the upside. It was not one a reasonable willing seller would have agreed with a reasonable willing buyer, especially on the further assumptions that the asset was properly marketed, and the purchaser and vendor acted knowledgably and prudently.
The Tribunal finds this tax adjustment does not comply with the ‘market value’ definition as set out above.
The Loan Adjustment
The second discount disputed by the Commissioner related to the value of the assets of Nominees at the time of transfer.
The assets of Nominees consisted of Convertible Unsecured Notes in Futuris Corporation Ltd (now renamed Elders Ltd). No sale took place on 7 April 2009 and the last sale being on 30 March 2009 at the sale price of $27.50 per share. The Commissioner accepted that as being a reasonable valuation of their market value.
Nominees also held Perpetual Unsecured Notes issued by Willmott Forests Limited, Unsecured Notes in Timbercorp Limited and subordinated Notes in Gunns Limited. These were valued at a ‘conservative valuation of $20,000’.[76] All three being suspended listed companies. The Respondent accepted these valuations as an appropriate market valuation.
[76] Ibid 11 [74].
As at 7 April 2009, Nominees had cash at bank of $221.42. This again was accepted by the Respondent.
The remaining asset of Nominees was an unsecured loan (on Division 7A terms) receivable, owed by Mr Coronica. In his witness statement, Mr Coronica described the asset and his valuation as follows.
G Coronica Nominees had a loan receivable from me of $175,000 in April 2009. It was an unsecured loan. I made reference to Australian Accounting Standard AASB 1033 concerning 'Presentation and Disclosure of Financial Instruments'. Where an asset is not exchange traded, one of the valuation techniques referred to in the standard is the discounted cash flow valuation technique. The standard states at paragraph 5.6.6 that 'In applying discounted cash flow analysis, an entity uses a discount rate equal to the prevailing market rate of interest for financial instruments having substantially the same terms and characteristics, including the creditworthiness of the debtor'. It also states at paragraph 5.6. 7 that 'When it is difficult to determine net fair value for a financial instrument or for a class of financial assets or financial liabilities, it may be useful to disclose a range of amounts within which the net fair value of the financial instrument or class is reasonably believed to lie.' Exhibit GC-6 is that accounting standard. In relation to the unsecured loan to me, there is no frequently traded market for it. I considered that if the G C Nominees sold the loan to a third party, what would the third party pay for it? They wouldn't pay a purchase price equal to the entire principal outstanding, being $175,000. This is because the debtor was me. How could they be sure I would pay them back? The loan is unsecured. There needed to be discount which considered 'the creditworthiness of the debtor'. 2009 was the middle of the Global Financial Crisis. I've referred to the Unsecured Notes issued by Futuris Corporation Ltd above. Those notes had a face value of $100. They were trading at $27.50, a 72.5% discount. The other issuers I've referred to above are worth nothing. At that time, I recall even the unsecured loan instruments issued by APRA regulated banks such as CBA PEARLS and NAB Income Securities were trading at 50% discounts. Exhibit GC-7 are the ASX traded prices for a number of corporate bonds, each with a face value of $100. They show that around April 2009, Bendigo Bank bonds were trading at $47.20 (a 52.8% discount), Multiplex bonds were trading at $17.20 (a 82.8% discount), National Bank bonds were trading at $56 (a 44% discount) and Westpac bonds were trading at $60.50 (a 39.5% discount). In terms of my own credit-worthiness, I used a range of discounts – 40% (placing me at a better credit rating than Bendigo Bank, CBA and NAB) and 60% (placing me at a better credit rating than Multiplex and Futuris but worse than CBA and NAB). Using these discounts, I generated a value for the loan of between $70,000 and $105,000.[77]
(citations omitted.)
[77] Ibid 11–12 [75].
I certify that the preceding 371 (three-hundred and seventy-one) paragraphs are a true copy of the reasons for the decision herein of Senior Member K James
...[sgd]....................................................................
Associate
Dated: 1 April 2021
Dates of hearing: 16–17 September, 8 October, 21–22 November 2019 Date final submissions received: 22 April 2020 Counsel for the Applicant: Mr Matthew Meng Solicitors for the Applicant: Mr Terry O'Connor Counsel for the Respondent: Ms Meredith Schilling Solicitors for the Respondent: Mr Jack Clarke, Australian Taxation Office
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