OPUS CAPITAL LIMITED And AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION - [2010] AATA 723

Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2010] AATA 723
ADMINISTRATIVE APPEALS TRIBUNAL )
) No 2010/3743

GENERAL ADMINISTRATIVE DIVISION )

Re OPUS CAPITAL LIMITED

Applicant

And

AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION

Respondent

DECISION

Tribunal Deputy President P E Hack SC; Senior Member Bernard J McCabe;
Dr K S Levy RFD, Senior Member
Date20 September 2010
PlaceBrisbane

Decision
The decision of the respondent made on 26 August 2010 to cancel the applicant’s Australian financial services license is set aside.

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Deputy President
CATCHWORDS
SECURITIES & INVESTMENTS – Australian financial services licence – condition requiring licensee to hold net tangible assets (NTA) of not less than 0.5% of assets – cancellation of licence by the Australian Securities and Investment Commission – satisfied that deferred tax assets (DTA) ought be included within NTA for purposes of satisfying licence condition – NTA requirement satisfied – proper to recognise DTA as an asset for purposes of calculating value of total assets – “intangible asset” – DTA was “without physical substance” – “monetary assets” – interpretation of “received” – DTA was a monetary asset – DTA not an intangible asset required to be excluded from calculation of NTA – NTA not excluded assets – satisfied that NTA exceeded requisite level – decision under review set aside
PRACTICE & PROCEDURE – confidentiality order varied – no longer any justification for wide-ranging confidentiality order – restricted to several extracts of affidavit evidence and s 37 documents – Tribunal’s objectives of “providing mechanism of review that is fair, just, economical, informal and quick” met
Administrative Appeals Tribunal 1975 (Cth), s 35(2)(b)
Corporations Act 2001 (Cth), ss 296, 334, 911A, 913B, 914A, 915C(1)(a)
REASONS FOR DECISION

23 September 2010 Deputy President P E Hack SC; Senior Member Bernard J McCabe; Dr K S Levy RFD, Senior Member

Introduction

On 20 September 2010, we made the decision earlier appearing and indicated that we would subsequently publish our reasons for the decision. These are those reasons.
Opus Capital Limited (Opus) was, until service on it of the decision which is the subject matter of these proceedings, the holder of an Australian financial services licence issued pursuant to Chapter 7 of the Corporations Act 2001 (Cth). With the authority of that licence it operated as the “responsible entity” of 12 managed investment schemes.
On 26 August 2010 a delegate of the respondent, the Australian Securities and Investments Commission, determined to cancel the financial services licence issued to Opus. The delegate decided that Opus had breached, and continued to breach, a condition of its licence, that which required it to have net tangible assets of a particular level.
In these proceedings, Opus contends that it does, and did, comply with that condition because one or both of what were described in the proceedings as “deferred tax assets” and “sale and performance fees”[1] were assets that ought to be included within net tangible assets for the purposes of satisfying the licence condition. The Commission contends that neither ought to be included because they are each an “intangible asset” and thus expressly excluded from the calculation of net tangible assets. As is apparent from our decision we have not accepted the Commission’s argument. We are satisfied that deferred tax assets ought to be included. We have not found it necessary to reach a concluded view about the position of sales and performance fees because it was common ground that the net tangible assets requirement was satisfied if deferred tax assets were included in the calculation.
[1] The latter are also described in the material as “performance fee asset” and “future performance fees”.
Background
There is no dispute about the factual background. Opus operates as the responsible entity of 12 managed investment schemes pursuant to Australian financial services licence 246714 effective 21 July 2009. According to Mr Dean Palmer, a director and the chief executive officer of Opus, it “specialises in property syndicates with a focus on providing an income stream and capital growth through property investments”. Of the 12 schemes, nine are fixed term schemes, two are fixed term funds with constitutions that enable them to be open-ended and one, that which is now called the Opus Income and Capital Fund No 21, is open, that is, there is no specified end date for investment.
The assets of the various funds are held by a custodian. Opus, as the responsible entity, is required to manage any debt facilities, to manage the properties, including collecting rent, ensuring that buildings are tenanted and maintained, to account to investors and to generally manage each investor’s investment.
The licence granted to Opus is subject to various conditions. Condition 8, described as “Base Level Financial Requirements” requires Opus to satisfy basic measures of financial worth, that is, to pay its debts as and when they fall due, to be balance sheet solvent and to hold a level of cash assets. But additionally, Opus is required by condition 9 to hold a predetermined level of net tangible assets. Where, as in the case of Opus, It reads:
“The licensee must hold a least $5 million net tangible assets (‘NTA’),        unless for each registered scheme operated by the licensee at least one of the following is satisfied:
(a)all the scheme property and other assets of the scheme(s) not         held by members are held by a custodian appointed by the licensee that has $5 million NTA or is an eligible custodian; or
(b)all the scheme property and other assets of the scheme(s) not held by members are special custody assets or the Tier $500,000 class assets held by the licensee or a custodian appointed by the licensee (or a sub-custodian appointed by that custodian), where the person holding the scheme property or other assets is:
(i)the licensee and the licensee has $500,000 NTA; or
(ii)the custodian or sub-custodian and the custodian has $500,000 NTA or is an eligible custodian; or
(c)the only scheme property and other assets of the scheme(s) that are not held under paragraph (a) or (b) of this condition are special custody assets, each which is held by:
(i)the licensee; or
(ii)an eligible custodian; or
(iii)a custodian that has the same level of NTA as the licensee is required to have under the remainder of this condition; or
(iv) the members of the scheme.
Where paragraph (a), (b) or (c) is satisfied, the licensee must hold NTA of 0.5% of the value of;
(d)assets (including mortgages held by members of a mortgage            scheme and managed as part of the scheme); plus
(e)any other scheme property not counted in calculating the value of assets;
of the registered scheme(s) operated by the licensee with a minimum NTA requirement of $50,000 and a maximum NTA requirement of $5 million.”
It is common ground that one or other of paragraphs (a), (b) or (c) is satisfied and thus it is the calculation in paragraphs (d) and (e) that must be considered.
Other features of the licence need be noticed. First, the ”value of assets”, for the purpose of condition 9 of the licence, means,
“the value of assets and other scheme property ... determined as follows:
(a)in the case of assets that would be recognised in preparing a balance sheet for members under Chapter 2M of the Act – their value as if at that time such a balance sheet was being prepared; and
(b)in the case of any other scheme property and/or IDPS property – its market value. For the purpose of this calculation mortgages held by members of a registered scheme and managed as part of the scheme must be treated as assets of the scheme.”
The following definitions from the licence, relevantly excerpted, are also relevant:
“net tangible assets or NTA means adjusted assets minus adjusted liabilities.”
“adjusted assets means the value of total assets as they would appear on a balance sheet at the time of calculation made up for lodgement as part of a financial report under Chapter 2M of the Act if the licensee were a reporting entity:
(a)minus the value of excluded assets that would be included in the calculation; and
(b) ... “
“adjusted liabilities means the amount of total liabilities as they would appear on a balance sheet at the time of calculation made up for lodgement as part of a financial report under Chapter 2M of the Act if the licensee were a reporting entity:
(a)minus the amount of any liability under any subordinated debt approved by ASIC; and
(b)minus the amount of any liability that is the subject of an enforceable right of set-off, if the corresponding receivable is excluded from adjusted assets; and
(c) ... “
“excluded assets means:
(a)intangible assets (i.e. non-monetary assets without physical substance); and
(b)... “
The expression “intangible assets” is not otherwise defined in the licence.
The proceedings have their genesis in what is colloquially known as “the global financial crisis”. Prior to mid-2008 Opus had invested its own monies in three funds managed by it – Opus Income & Capital Growth Fund No 21, Opus Capital Growth Fund No 1 and Opus Development Fund No 2. It did so by acquiring units in the unit trusts that were the vehicle for investment by the Funds. It brought the value of the units into account in its balance sheet. When property values in the underlying schemes were adversely affected by the global financial crisis the value of Opus’ investments, and thus its net assets, fell. In April 2009, Opus reported to the Commission that it was in breach of Condition 9 of its licence because its net tangible assets had fallen below the level required by that condition. Additionally, the reduction in value caused an operating loss in the 2009 and 2010 financial years.
After the initial report to the Commission there was a continuing dialogue between Opus and the Commission regarding the breach of Condition 9 and its consequences. It is not necessary to record the detail of that contact. It will suffice to note that on 24 May 2010 Mr Palmer advised the Commission that Opus was of the view that the breach was rectified as a consequence of an alteration in the accounting treatment of deferred tax losses. On 19 July 2010, a hearing was held before the Commission’s delegate where Opus was given the opportunity to, in effect, show cause why its licence ought not to be cancelled because of the breach of Condition 9 of the licence. By that stage Opus was contending that the sales and performance fees ought to also be regarded as an asset to be included in the calculation of net tangible assets.
The Commission did not accept either of the contentions by Opus, hence the cancellation decision made on 26 August 2010 which was served on Opus on 30 August 2010. By virtue of s 915F of the Corporations Act2001 (Cth) the decision took effect on 31 August 2010 when written notice of the cancellation was given to Opus.
It is common ground that the total value of assets of the schemes managed by Opus i.e. the figure from which the 0.5% net tangible asset figure is calculated, is in the order of $510m and thus, to satisfy Condition 9, Opus must have net tangible assets of $2.55m. Opus contends that its net tangible assets as at 30 June 2010 total $9,753,466 calculated as follows:
Assets
Cash & receivables   $1,952,029
Loans to trusts   $     38,009
Deferred tax asset   $2,307,220
Sale & performance fees   $6,623,417
Other assets   $   374,668
Liabilities
Loan facility  <$2,000,000>
Trade & other payables  <$   642,583>
Provision for doubtful debts  <$   361,285>
Net assets$8,291,475
Adjustments[2]
Less: loans to trusts <$   38,009>
Add: subordinated debt   $1,500,000
[2]    Required by the financial services licence.
Net tangible assets   $9,753,466
Mr Sullivan SC, who led Mr Chesterman of counsel for the Commission, put in issue the reliability of the calculation of the figure for sale and performance fees however we did not understand the Commission’s case to challenge the accuracy of the other figures which were sworn to by Mr Palmer. We deal below with the Commission’s criticism of the calculation of sales and performance fees however, as is apparent from the balance sheet, Opus’ net tangible assets fall below $2.55m if both deferred tax assets and sale & performance fees are excluded from the calculation of net tangible assets. If either is included (and the figure for sales and performance fees is accurate), the figure of $2.55m is exceeded.
Legislative framework
There is no controversy about the legislative framework and it may be shortly stated. A person who carries on a financial services business (and there is no doubt that Opus does so) must hold an Australian financial services licence covering the provision of the financial services[3]. The Commission may grant a financial services licence if satisfied of specified matters[4] and may impose conditions on the licence[5]. A licensee must comply with the obligations specified in s 912A(1) of the Corporations Act, including, materially, the obligation in paragraph (b) of that sub‑section to “comply with the conditions on the licence”. The Commission may suspend or cancel a financial services licence where, amongst other things, “the licensee has not complied with their obligations under section 912A”[6].
[3]    Corporations Act, s 911A.
[4]    Corporations Act, s 913B.
[5]    Corporations Act, s 914A.
[6]    Corporations Act, s 915C(1)(a).
It is worth noting the objectives of Chapter 7 of the Corporations Act, within which the provisions for the granting and cancellation of financial services licences are contained. They are:
“760A Object of Chapter
The main object of this Chapter is to promote:
(a)confident and informed decision making by consumers of financial products and services while facilitating efficiency, flexibility and innovation in the provision of those products and services; and
(b)fairness, honesty and professionalism by those who provide financial services; and
(c)fair, orderly and transparent markets for financial products; and
(d)the reduction of systemic risk and the provision of fair and effective services by clearing and settlement facilities.”
Next, reference ought to be made to the Commission’s policy statement about the financial requirements of licensing, Regulatory Guide 166 (RG 166). RG 166.11 explains that the Commission is not a prudential regulator and that the Guide is not intended to ensure that licensees will meet their financial commitments. The financial requirements are imposed, as RG 166.12 explains,
“to help ensure that:
(a)you have sufficient financial resources to conduct your financial services business in compliance with the Corporations Act (including carrying out supervisory arrangements);
(b)there is a financial buffer that decreases the risk of a disorderly or non-compliant wind-up if the business fails; and
(c)there are incentives for your owners to comply through risk of financial loss.”
The underlying principles concerning the NTA calculation are described in RG 166.69 in these terms:
“We will not require the NTA calculation to address market or credit risks to assets, or the risk of contingent liabilities crystallising. NTA is a measure of general financial standing. It includes non-current assets and is not specifically a measure of capacity to meet financial obligations.”
Finally, we ought to make reference to the Standards made by the Australian Accounting Standards Board. The Board may, by legislative instrument, make accounting standards for the purposes of the Corporations Act[7]and, except in the case of some reports by small proprietary companies, the financial report of a company for a financial year must comply with the accounting standards[8]. Moreover, as we have noted, Opus’ licence requires the starting point of the calculation of adjusted assets and adjusted liabilities to be the value of assets and liabilities “as they would appear on a balance sheet … made up for lodgement as part of a financial report under Chapter 2M of the [Corporations] Act”.
[7] Corporations Act, s 334.
[8] Corporations Act, s 296.
Extensive reference was made in the evidence and the submissions to accounting standards, in particular AASB 138, Intangible Assets. We propose to consider the detail of AASB 138, and the other relevant standards, when considering the calculation of net tangible assets.
Opus’ net tangible assets
The licence defines net tangible assets to mean adjusted assets minus adjusted liabilities. The calculation of adjusted assets required two steps – the determination of the value of total assets as they would appear on a balance sheet made up for lodgement as part of a financial report under Chapter 2M of the Corporations Act, and the identification, and deduction from total assets, of “excluded assets”. The definition in the licence means that, relevantly, “intangible assets (i.e. non-monetary assets without physical substance)” must be excluded from the calculation of adjusted assets and, thus, net tangible assets.
There were two elements of the Commission’s argument so far as the deferred tax assets were concerned. First, it submitted that the deferred tax assets fell within the definition of an intangible asset and could not be taken into account in calculating net tangible assets[9]. But, additionally, the Commission submitted that “some doubt exists whether sufficient profit will be earned by [Opus] so as to utilise the [deferred tax assets]” with the result, it was submitted, that it could not be recognised as an asset[10].
[9] Exhibit 12, paragraphs 42-52.
[10] Exhibit 12, paragraph 56.
Despite the Commission posing the issues in this way it seems to us that logically the first question is whether the deferred tax assets are assets that would be included within a balance sheet, that is, whether they satisfy the first part of the definition of adjusted assets.
Income taxes are the subject matter of AASB 112. That Standard describes deferred tax assets in these terms:
“5Deferred tax assets are the amounts of income tax recoverable in future periods as a result of:
(a)deductible temporary differences (based on the difference between accounting profit and taxable income and is recognised by the company as advance tax payment based on accounting income but is not known to the ATO.);
(b)the carry forward of unused tax losses; and
(c)the carry forward of unused tax credits.”
The deferred tax assets in issue in these proceedings are carry forward tax losses arising from the writing down by Opus of the value of its investments in units in three funds. The Commission does not dispute that the losses answer the description of deferred tax assets. Its first argument puts in issue only whether they ought to be recognised (in an accounting sense).
The Australian Accounting Standards Board has published a document called the “Framework for the Preparation and Presentation of Financial Statements”. One of the stated objectives of the Framework is to,
“assist preparers of financial statements in applying Australian Accounting Standards and in dealing with topics that have yet to form the subject of an Australian Accounting Standard”.
The Framework deals with, inter alia, “the definition, recognition and measurement of the elements from which financial statements are constructed”. The Framework provides that an item that meets the definition of an element i.e. relevantly, an asset or liability,
“should be recognised if:
(a)it is probable that any future economic benefit associated with the item will flow to or from the entity; and
(b)the item has a cost or value that can be measured with reliability.”

Recognition of a deferred tax asset is explicitly dealt with in AASB 112, at clause 34, in these terms:
“A deferred tax asset shall be recognised for the carryforward of unused tax losses and unused tax credits to the extent that it is probable that future taxable profit will be available against which the unused tax losses and unused tax credits can be utilised.”
The Commission submits that it is not probable that there will be future taxable profits. It submits that, having regard to the recent past performance of Opus (and the funds that it manages), there is reason to doubt the view taken by Mr Palmer (and adopted by the other directors of Opus) that Opus will return to profitability. That view was adopted in the financial forecasts attached as Appendix 1 to the Opus submission to the Commission in July 2010 and forms the factual basis on which the detailed calculation of deferred tax assets has been undertaken.
We cannot accept the Commission’s submission. First, we do not regard the evidence as warranting the conclusion that the Commission asserts that “some doubt exists whether sufficient profit will be earned by [Opus] …” There is no evidence to the contrary of that given by Mr Palmer. He has very considerable experience in the area. He has expressed a view about the likelihood of future profit, and, by inference, the other directors hold a similar view given that it was propounded in a document forwarded to the Commission on behalf of Opus. We have no reason to doubt that Mr Palmer’s opinion is his genuinely and reasonably held opinion. It is not inherently incredible or unreliable and, in the absence of some other evidence, it would be perverse of us not to act on it.
But in any event the requisite judgment about recognition for the purposes of a company’s accounts is that of the company’s officers. The point is illustrated in AASB 138 where, under the heading “Recognition and Measurement” the following appears,
“22An entity shall assess the probability of expected future economic benefits using reasonable and supportable assumptions that represent management’s best estimate of the set of economic conditions that will exist over the useful life of the asset.”
The calculations that have been put forward answer that description. It is not for the Commission (or the Tribunal in its stead) to impose a contrary view a fortiori one not supported by any evidence.
We are then satisfied that it is proper to recognise deferred tax assets as an asset for the purposes of calculating the value of total assets. The next question is whether the deferred tax assets answer the description of an intangible asset.
The description of intangible asset in the licence “i.e. non-monetary assets without physical substance”, is similar in content to the definition of intangible asset in AASB 138. It defines the term as,
“an identifiable non-monetary asset without physical substance.”
Given the way in which the Commission put its arguments it is relevant to note some other matters from AASB 138. It defines “asset” as,
“a resource:
(a)controlled by an entity as a result of past events; and
(b)from which future economic benefits are expected to flow to the entity.”
Finally we note the definition of “monetary assets” as:
“money held and assets to be received in fixed or determinable amounts of money.”
It is open to doubt the extent to which definitions in AASB 138 (and some other standards) can govern the meaning to be given to a term in Opus’ licence however we propose to accept, as the Commission submitted, that the standards perform that task. On that approach, the starting point is the question whether a deferred tax asset is an asset. In our view it is. It is a resource because it represents a reduction in a future outgoing, the income tax that would otherwise be payable in the future. It is controlled by Opus. Given that the evidence satisfies us that it is probable that there will be future taxable profits, there is a resource from which future economic benefits (the reduction in income tax otherwise payable) can be expected to flow to Opus.
The Commission’s argument stressed, correctly as it seemed to us, that the deferred tax asset was “without physical substance”. And it submitted that an asset was a non-monetary asset if it did not satisfy the definition of monetary asset. Again it seems to us to be right to say that monetary and non-monetary are the only alternatives. The Commission submitted that the deferred tax asset was not money held, nor was it an asset to be received in a fixed or determinable amount of money. We do not agree.
We accept that the reference to “money held” is a reference to currency however we think the Commission’s argument reads “received” too narrowly. There will be no physical receipt of money: the Commissioner of Taxation will not ever be paying the amount of the deferred tax asset to Opus. But where a judgment has been made that it is probable that there will be future taxable profits, on which income tax would otherwise be payable, the amount required to be paid will be reduced by the amount of the deferred tax asset. The deferred tax asset will reduce the liability that would otherwise exist to pay income tax. The amount to be received in this way is determinable; the amount of the losses has been determined and the value of the asset is calculated by applying the company tax rate to the amount of those losses.
Support for the proposition that “received” is not to be read narrowly comes from the discussion of “control” in AASB 138 which, at clause 13, speaks of an entity controlling an asset “if the entity has the power to obtain the future economic benefits flowing from the underlying resource…” [emphasis added].
The argument for the Commission sought to place some reliance upon clause 3 of AASB 138 which deals with examples where another Standard prescribes the accounting for a specific type of intangible asset. Deferred tax assets, and AASB 112 Income Taxes is given as an example however so too are financial assets as defined in AASB 132. Financial assets include money. It seems unlikely that the Standard would require money to be regarded as an intangible asset.
AASB 138 lists examples of assets of intangible resources – scientific or technical knowledge, design and implementation of new processes or systems, licences, intellectual property, market knowledge and trademarks are listed. Such assets plainly fall within the definition of intangible assets and within a reasonable perception of the width of such a term. They lack precise value. Deferred tax assets in contrast have a precise and determinable value once the judgment has been made that there is a probability of future taxable profits. A deferred tax asset is, in our opinion, a monetary asset and, thus, not an intangible asset required to be excluded from the calculation of net tangible assets.
We would add that we are comforted in reaching that conclusion by the opinion of Mr David Holland, who was called to give evidence on behalf of the applicant. Mr Holland is an experienced chartered accountant who previously lectured in accounting at Monash University. He said a reporting entity could legitimately recognise a deferred tax asset as an asset on its balance sheet if the recognition criteria are met. Mr Holland’s opinion was that a deferred tax asset was not an intangible asset although he recognised that other minds might reasonably come to a different conclusion. In such a case, he said, the entity ought to include a note in the accounts to the effect that deferred tax assets were utilised in order to calculate net tangible assets in order to permit the reader to reach an independent judgment. We prefer the approach of the well-credentialed and experienced Mr Holland to that of Mr Douglas Niven, the chartered accountant relied on by the Commission. Mr Niven would not regard a deferred tax asset as an amount receivable in fixed or determinable sums of money because it is contingent upon the entity having future taxable income against which the asset can be utilised. That contingency, in our view, determines whether the asset is recognised. Once recognised, that is, once it is determined that it is probable that there will be future taxable profits that can be set off against the losses carried forward, we accept Mr Holland’s view that it can legitimately be regarded as a monetary asset.
It follows that we were satisfied that Opus’ net tangible assets exceeded the required level once it was determined that deferred tax assets were not excluded assets. In light of that conclusion, and given the urgency of the matter, we have not found it necessary to consider the position of the sales and performance fees.
Confidentiality
A confidentiality order was made pursuant to s 35(2)(b) of the Administrative Appeals Tribunal Act 1975 on 3 September 2010 by the Tribunal as then constituted. The reasons for that decision were subsequently provided to the parties. There is no longer any justification for a wide-ranging confidentiality order. The parties agree: the applicant wrote to the Tribunal with the respondent’s consent on 21 September 2010 to ask that the confidentiality order be varied so that it applies only to several extracts of the affidavit evidence of Mr Palmer and certain extracts within the s 37 documents.
We were satisfied the order should be varied as the parties have requested. The order made will permit the reasons for the direction given on 3 September 2010 to be released. The evidence referred to in the extracts is commercially sensitive. If a party to the proceedings before the Tribunal were to be forced to disclose evidence of that nature to the wider public, the utility of those proceedings might be compromised. We are satisfied an order under s 35(2)(b) is appropriate in the circumstances notwithstanding the Tribunal’s commitment to transparency. In the event, we are satisfied that the Tribunal’s objective of providing a transparent public review process “that is fair, just, economical, informal and quick” has been best served by bringing on a hearing, making a decision and delivering ourselves of reasons within less than a month after the reviewable decision was made.

I certify that the preceding 40 paragraphs are a true copy of the reasons for the decision herein of Deputy President P E Hack SC, Senior Member Bernard J McCabe & Dr K S Levy RFD, Senior Member
Signed:         ........................................................................
  Associate
Dates of Hearing  15 & 16 September 2010
Date of Decision  20 September 2010
Date of reasons for decision     23 September 2010
Counsel for the applicant          Mr DA Savage SC & Ms JK Chapple
Solicitors for the Applicant        McMahon Clarke
Counsel for the Respondent     Mr TP Sullivan SC & Mr DEF Chesterman

Solicitors for the Respondent Australian Securities & Investments Commission

GENERAL ADMINISTRATIVE DIVISION		)
Re		OPUS CAPITAL LIMITED

23 September 2010	Deputy President P E Hack SC; Senior Member Bernard J McCabe; Dr K S Levy RFD, Senior Member
Introduction