Driscoll and Commissioner of Taxation (Taxation)

[2021] AATA 3892

Driscoll and Commissioner of Taxation (Taxation) [2021] AATA 3892 (25 October 2021)

Division:TAXATION AND COMMERCIAL DIVISION

File Number(s):      2020/1018

Re:Peter Driscoll  

APPLICANT

AndCommissioner of Taxation

RESPONDENT

DECISION

Tribunal:Mr Rob Reitano, Member

Date:25 October 2021

Place:Sydney

The decision under review is affirmed.

...........................[SGD].........................................

Mr Rob Reitano, Member

CATCHWORDS

TAXATION - superannuation fund compliance - self-managed superannuation fund - discretion to issue Notice of Compliance - whether the trustee contravened regulatory provisions - sole purpose - late lodgement of returns - seriousness of contravention - decision under review affirmed

LEGISLATION

Superannuation Industry (Supervision) Act 1993 (CTH) ss 35D, 38A(ab), 39, 42A(5), 62, 65(1) 344(5), 344(8)

REASONS FOR DECISION

Mr Rob Reitano, Member

25 October 2021

1. On 15 November 2019 the Commissioner of Taxation (Commissioner) refused to issue a Notice of Compliance under s.40 of the Superannuation Industry (Supervision) Act 1993 (Act) to the Trustee of the Driscoll Superannuation Fund (Trustee) for the year ended 30 June 2009. The Trustee sought a review of that decision and following the Commissioner’s failure to make a decision the decision was confirmed by operation of the s.344(5) of the Act. It is that deemed decision which is the subject this review under s.344(8) of the Act.

   What happened?

2. On 23 January 2009 the Driscoll Superannuation Fund (Fund) was established in order to manage Peter Driscoll’s (Mr Driscoll) superannuation. The Fund was a self-managed superannuation fund. The Trustee was a corporation of which Mr Driscoll was one of the directors. Mr Driscoll was the only member of the Fund. The Trustee elected for the Commissioner to regulate it.

3. On 12 March 2009 $18,000 was deposited into the Fund’s bank account. On 8 May 2009 a further $2700.79 was deposited into the Fund’s bank account. Both amounts were from cheques drawn against Mr Driscoll’s MLC Masterkey Superannuation Account. If the Fund was compliant the rollover of the money from one fund to the other is treated differently for tax purposes than if the Fund was not compliant.

4. In March 2009 Mr Driscoll attended a course which was titled ‘Havingness Rundown’ which was conducted by the Church of Scientology. The Church of Scientology Flag Services Organization issued a statement in October 2012 which contained several entries relevant to the course which was in the total for an amount of $US4675 (about $AU6959.38 using the Commissioner’s suggested exchange rate). The course had nothing to do with self-managed superannuation funds or managing them or superannuation funds at all but appears on the evidence to have had something to do with making money.

5. Mr Driscoll claimed in his evidence that the purpose of doing the course was ‘My idea was to get out and make money and pump money into super’. That evidence is important because it carried with it the concession that the purpose was so that Mr Driscoll could make money rather than the Fund making money. The reason Mr Driscoll was focussed on ‘making money’ was because of the difficult financial circumstances that Mr Driscoll was in at the time, describing himself as being ‘on the bones of his arse’. The likelihood is that the course was undertaken by Mr Driscoll for personal purposes associated with him making money, so to deliver him an immediate benefit, and had not much at all to do with the Fund perhaps other than Mr Driscoll would have made contributions to it.

6. On about 19 March 2009 Mr Driscoll purchased a ‘Signature Collection’ of books which were described as a Limited Edition 18 volume set of ‘The Basics of Dianetics and Scientology’ which were authored by L Ron Hubbard (Books). The cost of the Books was $US7500 or something in the order of $AUS11,000. 

7. Mr Driscoll said that he regarded the Books as an investment by the Fund. He said he obtained advice from someone at the time who told him the Books would appreciate in value. He also said he received advice from accountants that they were a legitimate asset of the Fund. The Books were shown in the Fund’s accounts for 2009 as an ‘other investment’. In late 2012 Mr Driscoll had the Books valued and the valuer thought it important enough to note that Books remained in the slipcases and in their original packaging and were numbered ‘34 of 100 sets’. Although some years later Mr Driscoll tried to sell the Books, he was unable to do so. He has kept the Books ever since.

8. The issue about the Books is whether or not they were an investment for the Fund. I incline to the view that they probably were an investment given their description as being leather bound, a limited edition and the fact that they have been kept by Mr Driscoll in their original packaging (and not ever used for personal use by him). They may not have been a particularly good investment as things turned out, but I incline to the view that that was Mr Driscoll’s intention when he acquired them.

9. I should add before returning to the chronology, I accept that the Books were purchased by Mr Driscoll on his credit card in his name but that was the way things needed to be done because the Fund had no credit card. I also accept the Books were probably not kept separately form Mr Driscoll’s other assets, they having been kept in his bedroom, but I do not consider either of those things detract from their character as an investment.

10. On 8 May an amount of $2700.79 was deposited in the Fund’s bank account. Between 15 May and 27 May 2009 there was total of $2650 withdrawn from the account which Mr Driscoll initially said were for personal expenses then said they may have been reimbursements for expenses associated with the course. It perhaps does not matter a great deal because there are then a series of withdrawals and deposits from the Funds bank account until June 2009 that suggest that Mr Driscoll was using the account for personal purposes. Mr Driscoll conceded so much.

11. On 9 September 2011 the Commissioner wrote to the Trustee requiring that the annual returns for the years ending 30 June 2009 and 30 June 2010 be lodged by 21 October 2011. The letter also referred to the penalties that were available if the requirement in the letter was not complied with.

12. Mr Driscoll says it was about this time that he contacted the Commissioner and told him about his personal problems concerning the fact that his partner had taken his children to Spain and the various processes that were being taken by Mr Driscoll to have them returned to Australia. Mr Driscoll says that someone associated with the Commissioner, in all likelihood one of the Commissioners employees, told him that he should deal with his other problems and not be concerned about lodging the returns until after those personal more pressing matters were resolved. Mr Driscoll was unable to put a time or date or name to the conversation or conversations he had. Nor was he able to indicate much about the substance of what was said.

13. It is difficult to accept that in the face of a written notice threatening penalties that if such a conversation did occur that the Commissioner or his staff would not have put something in writing. In addition, Mr Driscoll’s recollection that the period was ‘extended’ until his other issues had passed is inconsistent with when the two returns were lodged: the 30 June 2009 return was first lodged on 19 December 2011 and the return for the period ending 30 June 2010 was not lodged until 16 January 2012. If the other issues concerning his children had ‘resolved’ to allow him to lodge the 2009 return by 19 December 2011 then there is no reason why those issues somehow meant that he could wait about another month before lodging the latter return.

14. I should add that I do not consider that Mr Driscoll was being untruthful about what occurred, but rather I think he is likely to have, somehow, misunderstood what was said to him. Given that these things happened so long ago and were amid what was undoubtedly a very emotional time for him it is not unrealistic to think that he mistook what he was being told.

15. On 6 December 2011 an Auditor Contravention Report was lodged which related to the year ending 30 June 2009.

16. On 19 December 2011 a further Auditor Contravention report was lodged in relation to the year ending 30 June 2010. Also, on 19 December 2011 the Commissioner received the annual return for the Fund for the year ending 30 June 2009. The annual return declared that the Fund had no assets.

17. On 16 January 2012 the annual return for the Fund for the year ending 30 June 2010 was lodged.

18. On 13 February 2012 the Commissioner wrote to the Trustee telling it that the annual return for the year ended 30 June 2009 could not be accepted because the Fund did not hold any assets during that year.

19. On 16 June 2012 Mr Driscoll wrote the Commissioner telling him that the Fund had been ‘effectively wound up on 30 June 2010.’

20. On 28 August 2012 the Commissioner told the Trustee that he would be conducting an audit of the Fund in respect of the reported contravention in the years ending 30 June 2009 and 30 June 2010.

21. On 23 November 2012 the Commissioner told Mr Driscoll that the audit was completed.

22. On 7 December 2012 the Commissioner told Mr Driscoll that he was commencing an audit in relation to Mr Driscoll’s income tax assessments.

23. On 11 February 2013 the Commissioner told Mr Driscoll about the outcome of the audit which involved increases in Mr Driscoll’s taxable income for the 2009 and 2010 years which were attributable to unexplained withdrawals from the Fund’s bank account. The increase in the 2010 years also attributed to the value of the Books. The Commissioner also advised that administrative penalties would be applied in respect of both years.

24. On 20 March 2013 Notices of Amended Assessments were issued by the Commissioner to Mr Driscoll for the 2009 and 2010 years. The income tax and Medicare levy for each year was increased by $43531.54 and $3797.44 and short fall interest charges were imposed for the amounts of $655.65 and $523.51 respectively.

25. On 17 May 2013 Mr Driscoll lodged objections to each of the Notices of Amended Assessment.

26. On 31 October 2013 the Commissioner told Mr Driscoll that his objection was allowed in part. The objection decision found that he amounts of $18,000 and $270.79 that had been withdrawn from the MLC Masterkey Superannuation Account did not satisfy the definition of roll-over superannuation benefits because the Fund was not a complying superannuation fund.

27. On 22 November 2013 the Commissioner issued Notices of Amended Assessment for the 2009 and 2010 years.

28. On 15 January 2014 The Commissioner was given a second annual return for the Fund for the 2009 year.

29. On 7 December 2015 Mr Driscoll filed an application for review with the Tribunal which sought a review of the objections decision for which Mr Driscoll needed an extension of time.

30. On 4 April 2016 the Tribunal refused to extend the time for dealing with Mr Driscoll’s application of for review.

31. On 15 November 2019 the Commissioner told Mr Driscoll that the Commissioner would not issue a Notice of Compliance for the Fund for the 2009 year.

32. On 3 December 2019 the Commissioner was asked by Mr Driscoll to review the decision not to issue the Notice of Compliance for the 2009 year.

33. On 18 February 2020 the Commissioner told Mr Driscoll that as a decision had not been made within 60 days the decision not to issue the Notice of Compliance was affirmed.

34. On 21 February 2020 Mr Driscoll filed an application seeking a review of the Commissioner’s decision.

    What is the issue?

35. The deceptively simple issue is whether the Commissioner’s decision refusing to issue a Notice of Compliance for the Fund in respect of the 2009 year was the correct decision.

    What are the rules for issuing Notices of Compliance?

36. A Notice of Compliance is issued to trustee of a superannuation fund that is a superannuation fund which conforms in a year of income with s.42A(5) of the Act.

37. Section 42A(5) 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 the 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.

    It is not necessary to set out the other parts of s.42A as they are not relevant to the issue with which this decision is concerned.

38. The discretion in s.42(A)(5) is not at large although, because the decision maker is entitled to take into account ‘all other relevant circumstances’, it is undoubtedly wide. In addition to all other relevant circumstances the section directs particular attention to the tax consequences if the fund were to be treated as non-compliant and the seriousness of the contraventions.

    What contraventions are relevant to s.45A(5)?

39. A contravention for the purpose of s.42A(5) must be ignored unless it is an offence, a civil penalty provision or one of the particular provisions mentioned in s.38A(ab); see s.39. There are several such provisions in play here, but it is only necessary to set out their substance for present purposes.

40. Section 35D of the Act requires a trustee of a superannuation fund that was a self-managed superannuation fund during any part of a year of income to give to the Commissioner within the reporting period, or any longer period the Commissioner permits, a return. The reporting period is defined as that prescribed by the Regulations or that which is laid down by legislative instrument by the Commissioner. The form of the annual return is prescribed. A contravention of the section is an offence.

41. Section 62 of the Act provides that superannuation funds must be maintained for ‘one or more’ ‘core purposes’ or ‘ancillary purposes’. ‘Core purposes’ are to provide retirement benefits to fund members upon attaining prescribed ages or to provide such benefits to legal representatives or dependants where a member dies before retirement or reaching a prescribed age: s.62(1)(a). ‘Ancillary benefits’ concern the provision of benefits where a member’s employment is terminated by their employer or someone associated with their employer, and that employer has contributed to the fund, or where a member has become ill such that they must cease work, or where a member has died before reaching a retirement or a prescribed age or for purposes that are approved by the regulator in writing; s.62(1)(b).

42. Section 65(1) of the Act proscribes regulated superannuation funds from lending fund monies or giving financial assistance from the fund to fund members or their relatives.

43. Section 193 of the Act provides that s.62(1) and s.65(1) are both civil penalty provisions so they are regulatory provisions that must be complied with. A maximum penalty of 2400 penalty units (which is presently $532,800) is provided for in the event of a contravention.

    Were there relevant contraventions?

44. The first issue concerns Mr Driscoll’s failure to give the Commissioner the 2009 return for the Fund within the prescribed time such that there was a contravention of s.35D of the Act. I have indicated earlier that I consider it unlikely that Mr Driscoll was given an extension by the Commissioner for giving the Commissioner the 2009 return which was due on 28 February 2010. As such the contravention is established. I will return to the circumstances of the contravention and its consequences shortly as they are relevant to the exercise of the discretion.

45. There was a formal issue about whether the 2009 annual return was provided on 19 December 2011 when Mr Driscoll gave it to the Commissioner, which was later rejected because it was not in the correct form, or whether it was lodged on 15 January 2014 when Mr Driscoll ‘rectified’ the issues associated with the first return and lodged the return again. It is not necessary to resolve the issue: the return was lodged either 46 months late or 21 months late, on either view it was significantly late.

46. The second issue is a little more problematic. It concerns how the Fund assets were used. The Commissioner referred to the financial records that disclosed that between 27 February 2009 and 30 June 2009 $22024.74 was deposited into the Fund’s bank account for which most of the money came from Mr Driscoll’s MLKC MasterKey Superannuation Account. In the same period, approximately the same amount was withdrawn from the Fund’s bank account of which $US7500 related to the purchase of the Books. I will deal with the issue concerning the various withdrawals form the Fund’s bank account in turn.

47. I have indicated that I accept that the Books were an investment on behalf of the Fund. The Fund was entitled to make investments. I have also indicated earlier that I consider the amount expended by the Fund so far as attendance at the course, the Havingness Rundown, is concerned, the expenditure was to confer on Mr Driscoll a personal benefit rather than one that had anything to do with the Fund. I have also referred to the series of transaction in June 2009 which showed that he was probably using the bank account as a personal bank account at those times. There was an issue about some audit and accounting fees that were paid as well but it is not necessary to resolve that issue for present purposes.

48. Having regard to my findings concerning the course and the personal deposits and withdrawals from the Fund’s bank account the Fund was not maintained for the sole purpose of providing retirement or death benefits and has provided financial assistance to its member. This is because the Fund’s assets in its bank account were given to the member for personal use and because the costs associated with the course were paid for by the Fund to give a benefit, the benefit of doing the course, to its member.

    Should the discretion be exercised?

49. I should first have regard to the two specific criteria found in s.42A(5): the tax consequences and the seriousness of the contraventions.

50. First, the Commissioner correctly pointed out that the contraventions, all of them, would have no tax consequences at all for the Fund given the loss it reported for the 2009 year.  This factor it seems to me is neither here nor there so far as the exercise of discretion is concerned.

51. Second, the Commissioner suggested that the contraventions were serious. I do not consider given what Mr Driscoll said about his reasons for not giving the return to the Commissioner, namely his personal circumstances so far as his marriage and children were concerned and what he believed he had been told by the Commissioner’s staff, that the late lodgement contravention is at a high level of seriousness. The consequences for late lodgement did not create any prejudice to anyone. So far as offences under the Act are concerned it seems being late with giving a return is at the low end of seriousness especially given the maximum penalty for such an offence which is 25 penalty units (which is presently $5,550) compared to the other offences to which I will refer to shortly. 

52. The other contraventions are different. Although I have found that the purchase of the Books was likely to have been an investment by the Fund, the use of the other Fund monies to undertake a course for personal gain and using the Fund’s bank account on many occasions for personal benefit is a serious matter. This is because of the objects of the Act which is to make provision for the prudent management of superannuation funds. Using superannuation funds for personal matters and to confer benefits extraneous to their objective, namely providing retirement and death benefits, is antithetical to that object.

1. I also take the view that in exercising the discretion to issue a Notice of Compliance or not regard should generally be had to the need to deter, specifically and generally, people from using superannuation monies for personal purposes. In particular, in this case the use of the Fund’s bank account very much as a personal bank account in May and June 2009 is particularly egregious because it completely ignored the very purpose of the Fund.

2. There are other matters that are relevant. The early use of the Funds’ assets once available to pay for the course suggests that not a great deal of regard was had to the fact that the money was intended for the particular purpose for which superannuation exists and not for the purpose of conferring benefits on members outside the purposes. A significant part of the Fund’s assets were used to confer such benefits. I do not think the matters that affected Mr Driscoll’s late lodging of the return are relevant here not simply because of their timing but also because if Mr Driscoll was able to undertake the course and was able to transact on the Fund’s bank account he should have been able to properly consider the consequences of doing those things.

3. The fact that the legislature has imposed a maximum penalty of 2400 penalty units or $532,800 for contraventions of s.62(1) and 65(1) suggest that the legislature considered contraventions of those sections to generally be considered a serious matter. There is no sufficient explanation offered in this case that would lead me to consider that the general position about treating such matters as serious should be altered.

4. For these reasons I do not consider that the discretion to issue a Notice of Compliance in respect of the Fund for the 2009 year should be exercised.

   DECISION

5. The decision under review is affirmed.

I certify that the preceding 57 (fifty -seven) paragraphs are a true copy of the reasons for the decision herein of Mr Rob Reitano, Member

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Associate

Dated: 25 October 2021

Date(s) of hearing:	10 August 2021
Applicant:	In person
Advocate for the Respondent:	Vijay Nellailingam