Fitzmaurice and Commissioner of Taxation (Taxation)

Fitzmaurice and Commissioner of Taxation (Taxation) [2019] AATA 2217 (26 July 2019)
Division:GENERAL DIVISION
File Number(s): 2017/2533
Re:Louise Fitzmaurice
APPLICANT

AndCommissioner of Taxation
RESPONDENT

DECISION
Tribunal:Deputy President P Britten-Jones
Date:26 July 2019
Place:Adelaide

Pursuant to s 43 of the Administrative Appeals Tribunal Act 1975 (Cth), the Tribunal affirms the decision under review.
......................[sgnd]............................
Deputy President P Britten-Jones
CATCHWORDS
TAXATION — Superannuation — Self-managed Super Fund — Contravention of statutory imposed obligations by the responsible officer of the body corporate — Lending money to members — Breach of “sole purpose” test — Early release of benefits — Financial hardship — Late lodgement and failure to lodge annual returns — failure to maintain investments at “arm’s length” — Failing to keep up-to-date market valuation of the major asset of the fund — Failure to keep records — Superannuation Industry (Supervision) Act 1993 (Cth), ss 31, 35AE, 35B, 35C, 35D, 62, 65, 103, 104, 105, 109, and 126A — Decision affirmed.
LEGISLATION
Superannuation Industry (Supervision) Act 1993
Superannuation Industry (Supervision) Regulations 1994
CASES
Australian Prudential Regulation Authority v Derstepanian (2005) 60 ATR 518
Deputy Commissioner of Taxation (Superannuation) v Fitzgeralds (2007) 69 ATR 834
Hart and Commissioner of Taxation (2018) 107 ATR 966
SECONDARY MATERIALS
Self Managed Superannuation Funds Ruling (SMSFR 2008/2)
REASONS FOR DECISION
Deputy President P Britten-Jones

The applicant is seeking a review of the respondent’s decision to disqualify the applicant as a responsible officer of a body corporate of a self-managed superannuation fund (SMSF) pursuant to s 126A(2) of the Superannuation Industry (Supervision) Act 1993 (the Act).
Section 126A(2) of the Act states that the Regulator may disqualify an individual who is, or was, a responsible officer of a trustee, investment manager or custodian (the body corporate) if satisfied that:
(a)the body corporate has contravened this Act or the Financial Sector (Collection of Data) Act 2001 on one or more occasions; and
(b)at the time of one or more of the contraventions, the individual was a responsible officer of the body corporate; and
(c)in respect of the contravention or contraventions that occurred while the individual was a responsible officer of the body corporate—the nature or seriousness of it or them, or the number of them, provides grounds for the disqualification of the individual.
A ‘responsible officer’, in relation to a body corporate, means:
(a)a director of the body; or
(b)a secretary of the body; or
(c)an executive officer of the body.
According to the respondent, the applicant, as the responsible officer of the body corporate has contravened the Act in the year ending 30 June 2013 in the following ways:
(a) Contravention 1 - lending money to a member, breaching the “sole purpose” test (s 65 and s 62 of the Act);
(b)Contravention 2 - early release of benefits where the member did not satisfy the statutory test for financial hardship (s 31 of the Act);
(c)Contravention 3 - late lodgement and failure to lodge annual returns (s 35D of the Act);
(d)Contravention 4 - failure to make and maintain investments at arm’s length (s 109 of the Act);
(e)Contravention 5 - failing to keep an up-to-date market valuation of the major asset of the fund (s 35B of the Act); and
(f)Contravention 6 - record keeping failures (ss 35AE, 35B, 35C and 103-105 of the Act).
Further, the respondent contends that the applicant is not a fit and proper person to be a trustee and should be disqualified under s 126A(3) which states:
The Regulator may disqualify an individual if satisfied that the individual is otherwise not a fit and proper person to be a trustee, investment manager or custodian, or a responsible officer of a body corporate that is a trustee, investment manager or custodian.
NON-CONTENTIOUS FACTS
The Alisar Superannuation Fund (the Superannuation Fund) was established on 26 May 2004. The trustee of the Fund is Alisar Pty Ltd (the body corporate). The applicant and her husband, Antony Bullock, are members of the Superannuation Fund.
The directors of the body corporate are the applicant, appointed 23 June 1997, and Mr Bullock, appointed 27 May 2004. The applicant is the sole shareholder.
The body corporate, in addition to acting as trustee for the Superannuation Fund, also acted as trustee for the Canada Trust. The Canada Trust is a discretionary trust and the beneficiaries are the applicant, Mr Bullock, and their two daughters.
The Superannuation Fund is a SMSF. The Superannuation Fund’s primary asset is a parcel of land located in Dundee Beach, Northern Territory (the Dundee property). In 2010, the applicant and her husband, Mr Bullock, caused to be erected two small dwellings on the Dundee property.
The Lease Agreement over the Dundee property
On 26 June 2013 the body corporate, as trustee for the Superannuation Fund, entered into a written lease agreement over the Dundee property (the Lease Agreement) with the body corporate, as trustee for the Canada Trust. The applicant executed the Lease Agreement in her capacity as director of both landlord and tenant. The applicant was not able to produce the Lease Agreement during the hearing but it was provided later to the Tribunal and the respondent. The Lease Agreement contains the following terms:
(a)the landlord is Alisar Pty Ltd as trustee for Alisar Superannuation Fund;
(b)the tenant is Alisar Pty Ltd as trustee for the Canada Trust;
(c)the landlord gives the tenant the right to occupy the premises at the Dundee property;
(d)the premises shall only be used for business operations including the installation of short term accommodation cabins for short term rentals;
(e)the tenant will operate a business of short term traveller accommodation. Any improvements relating to this business remain the property of the tenant;
(f)the tenant must obtain and maintain insurance policies required to cover all stock, furnishings and plant and equipment and public liability insurance and plate glass insurance;
(g)the rent was $5,160.00 per annum payable annually in advance adjusted for CPI on an annual basis; and
(h)the initial term is 5 years from 15 June 2013 to 14 June 2018 with an option to renew.
The financial statements for the Superannuation Fund year ending 30 June 2012 show amounts of $5,000.00 for rent paid to the Superannuation Fund in the years ending 30 June 2011 and 30 June 2012. In documents lodged with the Australian Taxation Office (ATO) for the year ending 30 June 2012 the Canada Trust described its main business activity as short term accommodation and declared rent expenses of $5,000.00. There is no written lease for this period prior to the Lease Agreement but I infer from the receipt of rent and the records of the ATO that a lease was in place with the Canada Trust from 2011 and that it was formalised later in June 2013.
The applicant’s records suggest that the last group who used the holiday shacks was in the June 2013 school holiday period from which time the business operation at the Dundee property was closed down. Mr Bullock said that the Lease Agreement with the Canada Trust ceased at about that time. The Dundee property was put on the market but efforts to sell were unsuccessful and it has not been sold. The Superannuation Fund did not receive any actual rent in advance upon entry in to the Lease Agreement – the accountants recorded the rent paid of $5,160.00 as a journal entry dated 30 June 2013 in the member loan account.
In documents lodged with the ATO the Canada Trust declared rent expenses of $5,160.00 in the year ending 30 June 2013 and $5,160.00 in the year ending 30 June 2014 but there is no record of receipt of actual rent by the Superannuation Fund in those years. The Superannuation Fund financial statements for the year ending 30 June 2013 record as revenue rent received of $5,160.00. The Superannuation Fund financial statements for the year ending 30 June 2014 record that no rent was received.
Superannuation Fund monies spent to repair storm damage to the Dundee property
On 24 January 2012, a storm caused significant damage to the Dundee property which is situated on the beachfront. Using monies from the Superannuation Fund, the applicant and her husband, Mr Bullock, engaged Arafura Concreting Pty Ltd to clear the property. This cost about $1,200.00.[1]
[1] Exhibit 3, p 4.
In around September 2012, the applicant and Mr Bullock commenced further works to the holiday shacks which involved the construction of a canopy between the two holiday shacks. Numerous businesses were engaged in the construction of the canopy. Mr Bullock did some of the work himself.
To finance the cost of the construction, the applicant transferred money out of the Superannuation Fund into a personal account held by the applicant and Mr Bullock (the Personal Account) and then from the Personal Account to the contractor. The ANZ bank account in the name of the body corporate records a series of withdrawals from 10 September to 27 September 2012 paid to the Personal Account and a single deposit from the Personal Account of $8,300.00 which is an amount slightly exceeding these withdrawals on 15 October 2012.
The general ledger for the body corporate records the withdrawals as a member loan effectively repaid by crediting the ledger with the payment of $8,300.00 on 15 October 2012. Mr Bullock gave evidence that the Canada Trust received an insurance pay out for the damage at the Dundee property which allowed the Superannuation Fund to be reimbursed (the $8,300.00) and further works to be carried out.
The applicant has been unable to produce any invoices or receipts as evidence of the payments to contractors but has provided the following estimates:[2]
·     Certified engineering plans: $1,500.00-$2,000.00;
·     Materials: $4,000.00; and
·     Labour: $4,000.00.
[2] Exhibit 3, p 4.
Superannuation Fund monies spent in the aftermath of the family home fire
On 6 November 2012, the family home of the applicant, Mr Bullock and their two daughters burnt down. In that fire, the applicant and Mr Bullock lost all of their material possessions as well as records that had been kept in relation to the Superannuation Fund’s activities, including the invoices and receipts relating to the works carried out at the Dundee property.
Emergency funds of $2,000.00 were provided by the insurer on 13 November 2012 followed by $9,750.00 for temporary accommodation on 14 November 2012.
In the aftermath of the fire, the applicant and Mr Bullock contacted their accountant in relation to accessing the Superannuation Fund as a short-term solution until the insurance company could fully reimburse them. According to the applicant and Mr Bullock, the advice from the accountant was that it was possible to access the Superannuation Fund under hardship provisions.
Monies were then taken from the Superannuation Fund to purchase clothes, look after an array of animals, and to secure accommodation. Monies were also used to purchase two vehicles. One vehicle was a second-hand car for the applicant’s daughter. The second vehicle was a hunting buggy that replaced the written off vehicle that Mr Bullock used in his employment.
The “Ledger Entries Report for the year ending 30 June 2013” indicates that $9,948.57, $9,920.09 and $2,304.89 were withdrawn from the Superannuation Fund on 11 December 2012, 11 December 2012 and 24 December 2012 respectively.[3] The description for these withdrawals is “INT Transfer”. These international transfers were payments for the replacement hunting buggy. Mr Bullock purchased the replacement buggy overseas as he was able to get a better price.
[3] Exhibit 1, p 246.
That same document shows that on 21 January 2013 there were two transfers of $2,000.00 and $2,900.00 from the Superannuation Fund.[4] These transactions were for the purchase of the second-hand car for the daughter who was working in a rural location to which there was no public transport.
[4] Ibid.
There was a delay in receiving insurance payments for the fire until sometime in February 2013 at which time the Superannuation Fund was reimbursed for the expenses paid by it.
Concerns raised from 2015
On 23 January 2015, the Superannuation Fund’s accountant emailed the applicant and other director of the body corporate querying “unknown transfers” which “look personal”. The accountant also asked questions about the status of “Dundee Beach” and referred to “a lease agreement in place whereby the Fund rents the land to The Canada Trust which operates short term tourist accommodation”. The accountant could not see any rental payments for the 2012-13 or 2013-14 income years.
On 27 January 2015, in two emails, Mr Bullock responded to the Superannuation Fund’s accountant acknowledging that there had been transfers from the Superannuation Fund account to “our savings account and business cheque account” but that they were “acutely aware that [their] superfund is not to be accessed”. He also advised that the Dundee Beach lease was closed down in 2013 and that the Dundee property was put on the market. Mr Bullock advised that the last group to rent the Dundee property was in the June 2013 school holidays. It was also stated that the withdrawals from the Superannuation Fund appeared to be payments for a permanent engineered shed built on the Dundee property.
On 26 November 2015, the Superannuation Fund auditor lodged with the ATO an auditor contravention report (ACR) for the income year 2012-2013. The auditor reported the following contraventions in the ACR:
(a)the body corporate failed to collect rent from a related entity. Accountants recorded rent received as a journal entry against member loan account. The body corporate failed to make and maintain investments at arm’s length;
(b)combined debit loan account balance (including rent paid and cash withdrawals) outstanding at 30 June 2014 is $2,068.00. Directors of the body corporate advised they will repay $100.00 per fortnight;
(c)the body corporate failed to keep records of permanent works carried out on the Dundee Beach property. The directors of the body corporate allege a series of unsubstantiated withdrawals and contributions relate to the works. They have not supplied any invoices or minutes, only photographs which they allege show the building work;
(d)the directors of the body corporate caused $38,678.00 cash to be withdrawn from the Fund in the course of 19 transactions between 10 September 2012 and 24 January 2013. The directors of the body corporate maintain this was used for an expansion of a shed. The accountants have not recorded the withdrawals as site improvements but posted all unsubstantiated transactions to a member loan account; and
(e)no evidence of market value of real property held in the Fund. The directors of the body corporate state that they obtained a ‘current’ market value as at October 2015 but have not produced a copy.[5]
[5] Exhibit 1, pp 196-201.
On 24 February 2016, the directors of the body corporate of the Superannuation Fund were advised that the Fund had been selected for audit in respect of the Fund’s compliance with tax and superannuation laws.
On 2 August 2016, a position paper was issued to the applicant advising that the respondent was considering disqualifying her as a responsible officer of the body corporate and amending her 2013 tax return to include $1,034.00 and that she had until 16 August 2018 to respond.
On 2 September 2016, the respondent advised the applicant that she had been disqualified under s 126A(2) of the Act.
On 28 August 2017, the applicant lodged an application for review and extension of time with this Tribunal. The extension of time was granted.
As at today, the Superannuation Fund’s 2015, 2016, 2017 and 2018 annual returns have not been lodged.
General obligations of a trustee
An SMSF is perceived to have certain benefits in that the members have greater control, flexibility and choice in the operation of the fund. However, associated with these benefits are the responsibilities of managing a superannuation fund which demands a certain level of expertise or knowledge in many technical areas. When managing an SMSF, trustees need to apply a high level of governance to meet the requirements of both income tax and superannuation rules.
An SMSF is subject to prudential supervision under the Act. The Commissioner of Taxation is the principal Regulator of SMSFs.
The applicant, as a member and director of the body corporate has full responsibility for the Superannuation Fund’s management, investment and general administration functions. The Act contains covenants that codify some of the duties imposed on a trustee under general trust law. These deemed covenants are referred to in s 52B(1) of the Act and include:
(a)to act honestly in all matters concerning the fund;
(b)to exercise, in relation to all matters affecting the fund, the same degree of care, skill and diligence as an ordinary prudent person would exercise in dealing with property of another for whom a person felt morally bound to provide; and
(c)to perform the trustee’s duties and exercise the trustee’s powers in the best interests of the beneficiaries.
ISSUES
The question that the Tribunal needs to answer is whether the applicant should be disqualified under s 126A(2) of the Act based on the contraventions of the Act whilst she was a responsible officer of a body corporate.
It is not in dispute that the applicant, as director of Alisar Pty Ltd, was a responsible officer of the body corporate at the relevant time.
Contravention 1 – Lending to member of regulated super fund and breach of sole purpose test
The respondent contends that the applicant lent money to members of a regulated super fund contravening s 65 of the Act.
Section 65 of the Act prohibits the lending of fund money, or the giving of financial assistance using fund resources, to a member or a relative of a member of the fund. It provides that:
(1)A trustee or an investment manager of a regulated superannuation fund must not:
(a)      lend money of the fund to:
(i)       a member of the fund; or
(ii)       a relative of a member of the fund; or
(b)give any other financial assistance using the resources of the fund to:
(i)       a member of the fund; or
(ii)       a relative of a member of the fund.
The term ‘loan’ is defined under section 10(1) of the Act as including “the provision of credit or any other form of financial accommodation, whether or not enforceable, or intended to be enforceable, by legal proceedings”.
Section 65 provides for a strict prohibition on lending to a member. The contravention remains even if the loan is repaid shortly after the advance of any funds. Section 166 of the Act imposes an administrative penalty for a contravention of s 65(1) by a trustee in relation to a SMSF. Section 65(1) is a civil penalty provision and there are civil and criminal consequences of contravening, or of being involved in a contravention of, that subsection.
The respondent contends that, in the period between 10 September 2012 and 30 June 2013, the applicant made a series of withdrawals from the Superannuation Fund which constitute loans and which were followed by subsequent repayments. The applicant’s accountant recorded these expenses as a “member loan” and not as expenses for construction or maintenance.
When this was put to the applicant at the hearing, she gave the following evidence:
(a)She did not know that the accountant was recording these expenses as a loan. She did not know that it was not permissible for the Superannuation Fund to make a loan.
(b)The transactions following the fire were all emergency-related. The accountant advised that she could access the Superannuation Fund and that they should keep receipts from whatever expenditure there was.
(c)They needed to purchase a car for their daughter because she was working rurally and there was no public transport to get to work.
(d)She was not aware that after the repayments were made, there was still a small shortfall between the money that should have been paid into the Superannuation Fund and what was actually paid into the Superannuation Fund.

Mr Bullock gave oral evidence with respect to the storm damage and the subsequent withdrawals from the Superannuation Fund that:
(a)The withdrawals in that period relate to the building of the permanent structure on the property and include the damage to the property from the storm on 24 January 2012.
(b)Money was transferred out of the Superannuation Fund into either our personal account or the business account. There could have been cash payments too.
(c)He did not know why the accountant identified the transactions as loans as they were done for the direct purpose of building an asset.
(d)Although the withdrawals were for the cost of building the canopy, they were repaid in October because the insurer paid out a cash settlement close to $19,000.00 or $20,000.00 which was used to pay for other builders to do work and to put money back into the Superannuation Fund.
(e)The insurance was paid to the Canada Trust and there was then a transfer from the Canada Trust to the Superannuation Fund so as to cover the building expenses.
In emails to their accountant in December 2017 the applicant and Mr Bullock explained that the withdrawals from the Superannuation Fund went to:
(a)“The maintenance of our property owned by the Superfund, namely … Dundee beach after a large storm damaged the property…”
(b)“In 2012 we spent approximately $9000 on… Dundee beach building a permanent structure on the property which is not part of the removable accommodation.”
(c)“funds were withdrawn from the superfund for… Dundee beach between 10^th - 27^th September 2012 of $7700 and $8300 was refunded back into the superfund on 15^th October 2012 – some 19 days later.”
Consideration of Contravention 1
There are two distinct periods during which withdrawals were made from the Superannuation Fund. The first is in September 2012 when a series of 10 payments were made to the Personal Account held by the applicant and Mr Bullock (the September 2012 withdrawals). These payments were related to the storm damage to the Dundee property. The second series of payments relate to the period following the house fire on 6 November 2012 and concluding on 24 January 2013 (the Post House Fire withdrawals).
The September 2012 Withdrawals
With respect to the September 2012 withdrawals the applicant contends that they were not loans but were bona fide expenses incurred by the Superannuation Fund with respect to an asset of that fund. There are numerous reasons as to why the applicant has failed to satisfy me with respect to this contention. Those reasons are as follows.
Firstly, the cabins which were damaged in the storm were owned and insured by the Canada Trust and were not an asset of the Superannuation Fund. The Lease Agreement records the permitted use of the premises at the Dundee property as business operations including installation of short-term accommodation cabins for short-term rentals and it provides that any improvements relating to the business remain the property of the tenant who has an obligation to insure them. Further, it is not in dispute that it was the Canada Trust (and not the Superannuation Fund) that received the insurance payout with respect to the damage caused by the storm, part of which was used to reimburse the Superannuation Fund in the sum of $8,300.00 with respect to the September 2012 withdrawals. The terms of the Lease Agreement together with the fact that insurance for the damaged cabins was paid to the Canada Trust suggest that the cabins were not an asset of the Superannuation Fund.
Secondly, the withdrawals were paid to the Personal Account of the applicant and Mr Bullock and were recorded as member loans in the ledger accounts of the Superannuation Fund.
Thirdly, an amount of $8,300.00 approximating the withdrawals was paid to the Superannuation Fund on 15 October 2012 which suggests a repayment from the insurance proceeds of the advances made in September 2012 to the Personal Account.
Fourthly, the withdrawals were made in September 2012 but the alleged works, as evidenced by the dated photographs, were carried out in or around April and June 2012.
Fifthly, there is no documentary evidence of payments to contractors who may have carried out the work. Even acknowledging the loss of records in the November 2012 fire, there is no satisfactory explanation for why the personal bank records (most of which have been provided) do not provide some evidence of payments to contractors.
Even if the withdrawals were made for the purpose of paying expenses incurred in repairing the storm damage and constructing the canopy, those expenses were covered by the insurance policy held by the Canada Trust. The Superannuation Fund’s funds should not have been used to pay these expenses. Instead of waiting for the insurance payout, the applicant decided to make use of the Superannuation Fund’s funds to pay expenses for the benefit of the Canada Trust. This is an improper use of the Superannuation Fund’s funds either by way of a loan or a payment out in breach of the sole purpose test.
The evidence before the Tribunal shows that loans were made by the body corporate to the applicant in breach of s 65(1) of the Act in September 2012. Specifically, as noted above, there were a series of withdrawals from 10 September to 27 September 2012 paid to the Personal Account of the applicant and Mr Bullock, both of whom are members of the Superannuation Fund. These withdrawals were recorded in the general ledger of the Superannuation Fund as member loans. I am satisfied that they were loans made in advance of the expected payout from the insurer. Upon receipt of the insurance payout, the loans were repaid. It is apparent that the period of the loan was very short. The first withdrawal was made on 10 September 2012 and the repayment occurred on 15 October 2012.
I acknowledge that the applicant did not consider that there were any loans made to her and that there was no loan documentation. Nevertheless, the loans were recorded in the general ledger and there is no doubt that monies from the Superannuation Fund were paid out to the personal bank account and that there was a corresponding payment into the Superannuation Fund which had the effect of repaying the September 2012 loans. The making of a loan under the Act does not require a subjective intention of the applicant to do so. The definition of loan is broad enough to cover the situation. Further, the payments to the Personal Account would come within the prohibition in s 65(1)(b) to “give any other financial assistance using the resources of the fund”. The conduct of the applicant, as the responsible officer of the body corporate, is a breach of both ss 65(1)(a) and (b) of the Act.
Section 62 of the Act provides that:
(1)Each trustee of a regulated superannuation fund must ensure that the fund is maintained solely:
(a) for one or more of the following purposes (the core purposes):
(i)the provision of benefits for each member of the fund on or after the member's retirement from any business, trade, profession, vocation, calling, occupation or employment in which the member was engaged (whether the member's retirement occurred before, or occurred after, the member joined the fund);
(ii)the provision of benefits for each member of the fund on or after the member's attainment of an age not less than the age specified in the regulations...
The respondent contends that the body corporate, of which the applicant was a responsible officer at the relevant time, breached s 62 of the Act because the Superannuation Fund was maintained for a purpose other than the provision of benefits to members. I accept this contention and find that the Superannuation Fund was being maintained as a source of finance for its member (for the reasons set out above) or alternatively for the Canada Trust. I consider that, in breach of s 62 of the Act, the Canada Trust received a benefit as a result of the Superannuation Fund’s funds being used to pay expenses associated with the storm damage prior to the receipt of the insurance proceeds.
Post House Fire Withdrawals
With respect to the Post House Fire withdrawals, the applicant denies that these amounted to loans and that she consequently breached s 65 of the Act. The applicant contends that the payments were an early release from the Superannuation Fund allowable because they were experiencing severe hardship as a result of the fire. I will deal with that further below.
It is not in dispute that monies from the Superannuation Fund were paid out after the fire in the period ending 24 January 2013. These payments are recorded as member loans in the general ledger of the Superannuation Fund. On 1 February and 18 February 2013 insurance funds became available and were paid into the Superannuation Fund. The insurance funds were approximately the same amount as the earlier payments out from the Superannuation Fund. I find that these payments constitute a loan or other financial assistance in breach of s 65(1) of the Act.
I acknowledge that the applicant did not consider that there were any loans made to her and that there was no loan documentation. Nevertheless, the loans were recorded in the general ledger. Further, there is no doubt that monies from the Superannuation Fund were paid out to purchase replacement items and cover expenses arising from the fire and that there was a corresponding payment into the Superannuation Fund when the insurance funds became available which were allocated to repaying the earlier withdrawals from the Superannuation Fund. Again, the definition of loan is broad enough to cover this situation. As I said above, the making of a loan under the Act does not require a subjective intention of the applicant to do so. Further, the payments out from the Superannuation Fund would come within the prohibition in s 65(1)(b) to “give any other financial assistance using the resources of the fund”. The conduct of the applicant is a breach of both ss 65(1)(a) and (b) of the Act.
The respondent contends that the body corporate, of which the applicant was a responsible officer at the relevant time, breached s 62 of the Act because the Superannuation Fund was maintained for a purpose other than the provision of benefits to members. I accept this contention and find that the Superannuation Fund was being maintained as a source of finance for its member (for the reasons set out above). I find that, in breach of s 62 of the Act, the applicant received a benefit as a result of the Superannuation Fund being used to pay expenses associated with the house fire prior to the receipt of the insurance proceeds.
Contravention 2 – Early release of superannuation benefits
A member can gain early access to their superannuation benefits where they are experiencing severe financial hardship.
The term ‘severe financial hardship’ is relevantly defined in R 6.01(5) of the Superannuation Industry (Supervision) Regulations 1994 (the Regulations) as:
For the purposes of Schedule 1, a person is taken to be in severe financial hardship if:
(a) the trustee of a superannuation entity is satisfied:
(i)based on written evidence provided by at least one Commonwealth department or agency responsible for administering a class of Commonwealth income support payments, that:
(A)the person has received Commonwealth income support payments for a continuous period of 26 weeks; and
(B)the person was in receipt of payments of that kind on the date of the written evidence; and
(ii)that the person is unable to meet reasonable and immediate family expenses; or
Schedule 1 of the Regulations at Item 105 restricts the amount that can be released from the Superannuation Fund in any 12 month period to not more than $10,000.00. On 11 November 2012 the amounts of $9,948.57 and $9,920.09 were withdrawn from the Superannuation Fund thereby exceeding the statutory limit. It follows that the later withdrawals of $2,000.00 and $2,900.00 on 21 January 2013 for the daughter’s second-hand car were also beyond that limit.
Mr Bullock gave evidence that:
(a)After the fire, he and the applicant contacted their accountant and asked whether they could access their superfund. The accountant told them there were provisions to do so.
(b)Neither he, nor the applicant, was receiving Centrelink income support payments after the fire.
(c)The advice was given by the accountant in a telephone conversation shortly after the fire. There was nothing in writing.
In emails to their accountant in December 2017 the applicant and Mr Bullock explained:
(a)“On 6 November 2012 we lost our home to a house fire due to arson and most of our contents were destroyed. We were required to find alternative accommodation for about five months while our home was rebuilt. We contacted Sam to see if we could access our super funds and were advised we could if it was for “financial hardship”. We proceeded on that basis.”
(b)“Between 11^th November 2012 and 24^th January we withdrew, on advice from Sam under “severe financial hardships” due to our house fire some $28,468, which we repaid $31,569 back into super fund by 18^th February 2013. I understand this was not required but we did so to preserve our superfund.”
The applicant gave evidence that:
(a)“We were unable to afford the rental accommodation on a single income plus all our other bills such as loans, rates, etc. We were required to buy clothing for 4 members of the family and my husband lost his capacity to earn an income as he worked from home. This caused significant financial hardships.
(b)Under such severe financial hardship, we had no choice but to access our superfund for a short period of time.
(c)As soon as our insurance provider reimbursed for the loss of contents I deposited funds plus interest back into the super fund. This is recorded in the document supplied by the Australian taxation office.”
Consideration of Contravention 2
No evidence has been provided which indicates that either the applicant or Mr Bullock were in receipt of any Commonwealth income support payments, and certainly not for a continuous period of 26 weeks. The requirements to release funds due to severe financial hardship have not been met.
By making payments out of the Superannuation Fund whilst not in severe financial hardship, the body corporate has breached s 34 of the Act which provides that a trustee of a regulated superannuation fund must ensure the prescribed standards regarding the payment of benefits are complied with at all times.
Contravention 3 – Trustee to lodge annual returns
Under s 35D(1) of the Act, each trustee of a superannuation entity that was an SMSF at any time during that income year must, within the reporting period, or within such longer period as the Commissioner of Taxation allows, ensure that the Commissioner of Taxation is given a taxation return.
Consideration of Contravention 3
The applicant has lodged the Superannuation Fund’s annual returns for income years 2011, 2012, 2013 and 2014. The annual returns for 2011 and 2012 were late by a small margin. The annual returns for 2013 and 2014 were 1 year and 9 months and 1 year and 4 months late respectively.
The annual returns for income years 2015, 2016, 2017 and 2018 have not been lodged as at the date of the hearing despite email correspondence between the respondent and the applicant’s accountant, Ms Taylor, dated 2 May 2018 which states “The investigation does not affect the preparation of financial (sic) and lodgement of outstanding returns should occur as normal”.[6]
[6] Exhibit 6
The applicant gave evidence that:
(a)Up until the morning of the hearing, she was not aware that the respondent advised her accountant that annual returns should be lodged as per usual. She has had no conversations with her accountant about the lodgement of outstanding annual returns and therefore was not aware of this requirement.
(b)When the problems surrounding the Superannuation Fund arose in 2015, she was under the impression that “things were on hold” and that the Superannuation Fund could not be accessed.
(c)The reason for the late lodgement of the 2013 and 2014 years is poor health on her behalf. She stated that:
From early 2014 right up until when things were resolved mid last year I was going through a stressful period with past employer and … I was suffering from mental health problems. In 2015, I took 6 months off work because of my mental health.
By failing to lodge SMSF annual returns for the Superannuation Fund by the legislated due date, the body corporate has contravened s 35D of the Act.
Contravention 4 – Investments to be made and maintained on an arm’s length basis
Under s 109 of the Act, investments of a superannuation entity are to be made and maintained on an arm’s length (commercial) basis.
The expression ‘on an arm’s length basis’ is not defined in the Act. Weinberg J said the following in Australian Prudential Regulation Authority v Derstepanian:[7]
The term “at arm’s length” is not defined in the SIS Act. Nonetheless, it plainly implies a dealing that is carried out on commercial terms. As counsel for the respondent submitted, a useful test to apply is whether a prudent person, acting with due regard to his or her own commercial interests, would have made such an investment.
[7] (2005) 60 ATR 518, 524.
The respondent contends that the transactions between the Superannuation Fund and the Canada Trust were not done on an arm’s length basis. First, there is a conflict of interest in that the body corporate of the Superannuation Fund is also the trustee of The Canada Trust. Second, the applicant, as the responsible officer of the body corporate, did not enforce the Superannuation Fund’s rights under the Lease Agreement.
Consideration of Contravention 4
The applicant gave the following evidence in relation to the business dealings between the Superannuation Fund and the Canada Trust:
(a)She remembers seeing a lease document and having discussions with the accountant about the terms of the agreement namely that payments were to be made from the Canada Trust to the Superannuation Fund for rental of the cabins.
(b)She is not certain where the lease document is currently located. She believes that the accountant would have a copy but did not think it would be relevant for this hearing.
(c)She remembers sending the accountant an email advising that she and Mr Bullock intended to cease the Lease Agreement because they wanted to sell the property. There was no notice of termination served on the Canada Trust.
(d)It was the decision of both her and Mr Bullock to stop paying rent. This decision was made without first seeking legal advice. She assumed if there were any possible issues with terminating the lease that the accountant would flag them.
(e)In hindsight, she can see that ceasing the payments from the Canada Trust to the Superannuation Fund was advantageous for the Canada Trust but not for the Superannuation Fund.
(f)She is aware of the term ‘conflict of interest’ but did not think it was relevant to this situation. The concept of there being a conflict of interest was never raised by the accountant.
The respondent also drew the Tribunal’s attention to the Superannuation Fund’s member loan general ledger for the year ending 30 June 2013.[8] In that ledger, there is a debit entry of $5,160.00 on 30 June 2013 with the description ‘Rent paid’. This entry is a journal entry indicating that the Superannuation Fund did not receive rental income from the Canada Trust for that financial year but instead the member became indebted to the Superannuation Fund for that amount. Nevertheless, the Canada Trust has declared that amount in its expenses for the year ending 30 June 2013.[9]
[8] Exhibit 1, p 247.
[9] Exhibit 1, p 135.

This discrepancy was put to the applicant in cross-examination. The applicant stated the following in response:
(a)She was unaware that this discrepancy existed. She was not sure whether she overlooked making the payment for the financial year ending 30 June 2013.
(b)She was the person who generally transferred money in and out of the Superannuation Fund. In other years, she made an annual payment from the Canada Trust to the Superannuation Fund.
The financial statements for the Superannuation Fund show amounts of $5,000.00 for rent paid to the Superannuation Fund in the years ending 30 June 2011 and 30 June 2012. In documents lodged with the ATO for the year ending 30 June 2012 the Canada Trust declared rent expenses of $5,000.00.
In documents lodged with the ATO, the Canada Trust declared rent expenses of $5,160.00 in the year ending 30 June 2013 and $5,160.00 in the year ending 30 June 2014 but there is no record of receipt of actual rent by the Superannuation Fund in those years. The Superannuation Fund financial statements for the year ending 30 June 2013 record as revenue rent received of $5,160.00. The Superannuation Fund financial statements for the year ending 30 June 2014 record that no rent was received.
There are some inconsistencies in these financial documents which have not been explained. However, it is apparent from all of the written and oral evidence that the Superannuation Fund received a payment for rent of $5,000.00 from the Canada Trust in 2011 and 2012 but not in 2013 or following. In particular, the amount due of $5,160.00 upon entry into the Lease Agreement on 26 June 2013 was not paid by the Canada Trust to the Superannuation Fund. Instead there was a journal entry recording a member loan of $5,160.00. Further, despite there being a written Lease Agreement for a 5 year term ending on 14 June 2018 there was no rent received by the Superannuation Fund pursuant to that lease.
There is no satisfactory evidence as to why the Canada Trust was not pursued for payments of rent under the Lease Agreement. Mr Bullock gave evidence that the business operation at the Dundee property ceased in about June 2013 but that seems odd given that the Lease Agreement was executed by the applicant and witnessed by Mr Bullock on 26 June 2013.
At the very least, the failure by the Canada Trust to make a payment of rent to the Superannuation Fund in 2013 was a benefit to the Canada Trust with a corresponding detriment to the Superannuation Fund. I find that the Lease Agreement with the Canada Trust was an investment that was not entered into at arm’s length. Further, the failure to enforce payment of the 2013 rent shows that the investment was not maintained on an arm’s length basis in breach of s 109 of the Act.
Further, or in the alternative, the above circumstances give rise to a breach of s 65(1)(b) of the Act because the member loan of $5,160.00 recorded in the general ledger and dated 30 June 2013 was not immediately enforced. I agree with the Commissioner’s view as expressed in the Self Managed Superannuation Funds Ruling 2008/1 at paragraph 12(vii) that a trustee of an SMSF contravenes s 65(1)(b) by delaying recovery action for a debt owed by a member.
Contravention 5 – Assets must be valued at market value
Section 31(1) of the Act states that the regulations may prescribe standards applicable to the operation of regulated funds and to trustees of those funds.
Section 34(1) of the Act requires each trustee of a superannuation entity to comply with the prescribed operating standards at all time.
Regulation 8.02B of the Regulations states that, for s 35B(2) of the Act, for the 2012-2013 income year and any later year of income, when preparing accounts and statements required by s 35B(1) of the Act, an asset must be valued at its market value.
The respondent contends that the body corporate has contravened s 35B of the Act by not ensuring that the Superannuation Fund had on its record a current market valuation of the Dundee property for the 2012-13 and 2013-14 income years.
Consideration of Contravention 5
Mr Bullock’s evidence was that neither he, nor the applicant, had ever gone to the expense of getting a licensed valuer to appraise the Dundee property. Any estimations of what the Dundee property was worth came from real estate agents. Mr Bullock added that most real estate agents base their valuations on Land Title searches and the sales of similar properties in that area.
Although the Superannuation Fund auditor has stated in the ACR that the body corporate obtained a ‘current’ market value as at October 2015, the oral evidence given by Mr Bullock suggests that this is not correct. Furthermore, no evidence of such a valuation has been provided to the Tribunal.
There was no current market valuation for the Dundee property in the 2013 and 2014 financial years. The body corporate’s failure to have the Dundee property valued at its market value is in breach of s 35B of the Act.
Contravention 6 – Record Keeping Obligations
Sections 35AE, 35B and 35C of the Act set out the requirements for a trustee of a SMSF to keep accounting records, accounts and statements for each income year (record keeping obligations), and appoint an approved auditor to provide a report for each income year.
Trustees of a SMSF are required to keep the abovementioned records for a period of five years after the end of the year of income to which they relate.[10]
[10] Superannuation Industry (Supervision) Act 1993, ss 35AE(2)(a) and 35B(4).
Sections 103, 104 and 105 of the Act set out the requirements for a trustee to keep minutes and records of all meetings of the trustees at which matters affecting the entity were considered, records of any changes of trustees of the entity, and member or beneficiary reports.
Trustees of a SMSF are required to keep the abovementioned records for a period of at least 10 years.[11]
[11] Ibid, ss 103(1), 104(1)(c) and 105(1)(a).
The respondent contends that the body corporate has breached its obligations to keep accurate records by:
(a)failing to keep records of the permanent works carried out on the Dundee property;
(b)failing to keep records of the transactions that occurred after the fire. The applicant and her husband are now in a position where they cannot recall the purpose of specific transactions; and
(c)failing to keep records of the Lease Agreement between the Superannuation Fund and the Canada Trust and failing to keep records of the rent payments made by the Canada Trust after the commencement of the lease.
The respondent also contends that a trustee acting prudently should maintain electronic copies of such records. Moreover, once the records were destroyed, the body corporate should have taken steps to reconstruct the missing records (for example by seeking copies of invoices from suppliers or notating bank statements to record what transactions were for).
Consideration of Contravention 6
Mr Bullock gave the following evidence at the hearing:
(a)The works at the Dundee property were done by several different businesses and the receipts and invoices would have been lost in the house fire.
(b)He attempted to get second copies of the invoices but encountered several problems. Glenn Pascoe, from Arafura Concreting Pty Ltd, had died in a car accident with his wife. Halikos Roofing Pty Ltd stated that, if they still had the invoice, it would be in their archives.
(c)He attempted to contact Prestige Property Maintenance but never received a reply. Darwin Steel Supplies Pty Ltd said that it would be very difficult to retrieve an invoice from that far back and that they would need the exact details of when the transaction took place.
(d)He could not remember the name of the engineer that he hired to draw up the plans for the canopy. “It was a rural engineering company run by an individual” and “was advertised on side of highway”. He did not get the engineer’s ABN. He does not have the plans anymore which would normally have the engineer’s name on them.
(e)He did not keep electronic copies of the receipts because “[he] is not the best when it comes to computers”. Normally, the applicant would give him a bundle of receipts in a clear plastic folder which he would take to the accountants. When the accountants were finished with the receipts, he would collect them.
The body corporate has failed to comply with the record keeping obligations required by the Act in that:
(a)The body corporate has not supplied any invoices in relation to the attainment of materials and labour at the Dundee property. The body corporate has not kept any minutes of meetings where the construction of the canopy was discussed. The only evidence provided by the body corporate is a series of photographs which it contends shows that the construction occurred.
(b)The body corporate has not provided any documentation in relation to the ‘emergency’ purchases that were made after the fire. No invoices or receipts have been provided for the purchase of the second-hand vehicle or the hunting buggy.
The Act requires strict compliance with the record keeping obligations. The explanations for not complying are relevant to, and will be considered with, the issue as to whether the applicant should be disqualified.
SHOULD THE APPLICANT BE DISQUALIFIED?
In summary, the Tribunal has found that the body corporate contravened ss 65(1), 62, 34, 109, 35AE, 35B and 35C of the Act, and that, at all relevant times, the applicant was the responsible officer of the body corporate (s 126A(2)(b) of the Act).
The Tribunal must now consider, in accordance with s 126A(2) of the Act, whether the nature, seriousness or number of the contraventions provides grounds for the disqualification of the Applicant.
Those contraventions must be seen in the context of the events in 2012 which saw the Dundee property significantly damaged by a freak storm and the applicant’s home destroyed by fire. The applicant claims that these events provide a sufficient explanation for the contraventions and that there had been no previous issues with respect to the Superannuation Fund. I am not satisfied by this explanation. I consider that these events exposed a fundamental misunderstanding by the applicant of her obligations as a trustee.
There is no doubt that the natural disasters were very unfortunate and had a significant detrimental impact upon the applicant and her family. However, it is of concern that the applicant in response to the disasters saw fit to utilize the money in the Superannuation Fund for her and her family’s convenience. This suggests that the applicant has no understanding of the purpose for which the Superannuation Fund was maintained. The applicant treated the Superannuation Fund as a resource that could be accessed so as to overcome the short term monetary difficulties that arose from the storm and the fire. This was in fact unnecessary given that there were insurance policies in place to cover the expenses associated with the storm and the fire. To the credit of the applicant, these insurance monies were paid into the Superannuation Fund as soon as they became available and not long after the withdrawals from the Superannuation Fund had been made. I also note that, excluding the member loan of $5,160.00, the monies in the Superannuation Fund were not depleted as a result of the applicant’s conduct.
The Tribunal notes a number of the contraventions relating to record keeping can be explained by the fire when records were destroyed. However, that does not excuse the failure to keep the required records since the fire. In particular, the record of purchases made using the Superannuation Fund, copies of which the accountant advised should be kept. Further, the annual returns for the Superannuation Fund for 2015, 2016, 2017 and 2018 have not been lodged.
The applicant seeks to downplay the gravity of the prohibited early release of funds on the basis that the accountant told them that they could access the Superannuation Fund because they were suffering from severe financial hardship. Mr Bullock said in cross examination that he asked his accountant if they could access the Superannuation Fund and that the accountant said “there were provisions to do so” and that “you can access the funds for emergency reasons.” I consider that it was very imprudent of the applicant and Mr Bullock to act on such vague advice and without anything in writing. The applicant did not seek any further advice or clarification prior to accessing the funds for specific purchases such as the second-hand car for the daughter. This car was not purchased to replace a car damaged in the fire but was rather purchased as a matter of convenience for the daughter more than 2 months after the fire. I am not satisfied that, as at the date of this purchase, that the applicant was “unable to meet reasonable and immediate family living expenses.”[12] In any event, the amount withdrawn on the basis of severe financial hardship well exceeded the $10,000.00 annual limit set by the Act.
[12] Superannuation Industry (Supervision) Regulations 1994 (Cth), r 6.01(5)(a)(ii).
The applicant also lays blame on her accountant with respect to the contraventions relating to the member loans, the failure to obtain a market valuation and the non-arm’s length dealings with the Canada Trust. The applicant and Mr Bullock assert that at all material times they relied on advice from their accountant and that they expected that they would be advised of any statutory obligations with respect to the maintenance of the Superannuation Fund. This general assertion was not supported by specific reliable evidence as to what the terms of the retainer were with respect to their accountants. No documentary evidence of this nature has been provided. In any event, the primary responsibility in respect of the maintenance of a superannuation fund in accordance with the terms of the deed, and as required by the Act, falls upon the applicant.[13] It is of concern that the applicant has not accepted full responsibility and is still trying to lay blame on her advisers.
[13] Deputy Commissioner of Taxation (Superannuation) v Fitzgeralds (2007) 69 ATR 834, 838 [21].
A further concern is the failure of the applicant to recognize the obvious conflict of interest arising from the lease with the Canada Trust. The dealings between the Superannuation Fund and the Canada Trust were not at arm’s length. The failure of the Canada Trust to pay rent in accordance with the 2013 lease had a real and significant negative financial impact on the Superannuation Fund.
I consider the nature of the contraventions to be serious even though many of them had no adverse financial impact upon the Superannuation Fund. As well as the number and nature of these contraventions, I am concerned that there is a risk of future non-compliance by the applicant. The applicant did not appear to understand her role and her duties as a responsible officer of the body corporate. She considered that her shortcomings in this regard could be resolved by obtaining advice from advisors. That was not a successful strategy in the past and is unlikely to be successful in the future even if there is a change of accountants. A trustee must have an understanding of the legal obligations involved with maintenance of a superannuation fund. The fact that the applicant accepted that she did not know that it was impermissible for the Superannuation Fund to make a loan is one example of her lack of understanding of trustee duties.
I am not satisfied that the applicant had a proper understanding of the role of a trustee and the duties owed by a trustee and a director of a trustee company. Although there was no suggestion of dishonesty or intention to defraud on the part of the applicant, there was, in my opinion, in the attitude of the applicant towards the alleged contraventions, an element of incompetence and a lack of contrition and acceptance of responsibility.
I am not satisfied that the applicant has a sufficient understanding, or sufficient skill and diligence to be a trustee of a SMSF. Indeed, she has shown a lack of competence in the management of the Fund.
On balance, I find that the nature, seriousness and number of the contraventions provide grounds for the applicant’s disqualification, and that the correct or preferable decision is that the applicant be disqualified under s 126A(2) of the Act from acting as a responsible officer of a body corporate of a SMSF.
Fit and Proper Person
The respondent also contends that the applicant is not a fit and proper person to be a responsible officer of a body corporate that is a trustee and that she should be disqualified under s 126A(3) of the Act.
In the decision of Hart and Commissioner of Taxation, Senior Member Fice said:[14]
a trustee of a self managed superannuation fund who fails to adequately and properly carry out his duties and functions as a trustee due to his lack of skill, competence and knowledge of the relevant legislation, could not be a fit and proper person to be a trustee of such fund.
[14] (2018) 107 ATR 966, 998 [174].
For the reasons outlined above in paragraphs 104–115, I find that the applicant is not a fit and proper person to be a responsible officer of a body corporate. This provides a further ground for disqualification pursuant to s 126A(3) of the Act.
DECISION OF THE TRIBUNAL
The decision of the Commissioner of Taxation is affirmed. The applicant is disqualified from acting as a responsible officer of a body corporate of a SMSF.

120. I certify that the preceding 119 (one hundred and nineteen) paragraphs are a true copy of the reasons for the decision herein of Deputy President P Britten-Jones.

........................[sgnd]...........................
Associate
Dated: 26 July 2019

Dates of hearing: 20 February 2019

Representative for the Applicant Mr Anthony Bullock

Representative for the Respondent Ms K Clark instructed by the Commissioner of Taxation

[2019] AATA 2217

26 July 2019

Key Legal Topics

Areas of Law

Tax Law

Administrative Law

Legal Concepts

Statutory Construction

Judicial Review

Procedural Fairness

Standing

Dates of hearing:	20 February 2019
Representative for the Applicant	Mr Anthony Bullock
Representative for the Respondent	Ms K Clark instructed by the Commissioner of Taxation