VBN and Australian Prudential Regulation Authority and Anor
[2005] AATA 1089
•2 November 2005
CATCHWORDS – PRACTICE AND PROCEDURE – stay of operation of decision disqualifying person from being a trustee, investment manager or custodian of a superannuation entity – whether applicant may continue to act as a director of the trustee of his self-managed superannuation fund – whether public adequately protected if applicant permitted to continue to act – whether stay necessary to secure effectiveness of hearing and determination of the application for review – stay refused.
Administrative Appeals Tribunal Act 1975 ss. 35 and 41
Insurance Act 1973 s. 25A
Superannuation Industry (Supervision) Act 1993 ss. 3, 10, 17A, 52, 120, 120A, 121 and 344; Parts 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 19, 21 and 25
Kamha v Australian Prudential Regulation Authority [2005] FCA 480; (2005) 85 ALD 346
Re VBJ and Australian Prudential Regulation Authority [2005] AATA 642
Shi v Migration Institute of Australia Ltd (2003) 134 FCR 326
Yolbir v Administrative Appeals Tribunal (1994) 48 FCR 246
DECISION AND REASONS FOR DECISION [2005] AATA 1089
ADMINISTRATIVE APPEALS TRIBUNAL )
) V2005/686
GENERAL ADMINISTRATIVE DIVISION )
Re VBN
Applicant
AndAUSTRALIAN PRUDENTIAL REGULATION AUTHORITY
Respondent
AndVBT
Party Joined
DECISION
Tribunal: Deputy President S A Forgie
Date: 2 November 2005
Place: Melbourne
Decision:The Tribunal refuses to make an order staying the operation of the respondent’s reviewable decision dated 9 June 2005.
S A FORGIE
Deputy President
REASONS FOR DECISION
Using its powers under the Superannuation Industry (Supervision) Act 1993 (“SIS Act”),[1] the Australian Prudential Regulation Authority (“APRA”) has disqualified VBN[2] from being a trustee, investment manager or custodian of a superannuation entity. I have previously made an order under s. 41 of the Administrative Appeals Tribunal Act 1975 (“AAT Act”) staying the implementation of APRA’s decision to the extent that it not publish in the Commonwealth Government Gazette particulars of the notice given to VBN under s. 120(6) of the SIS Act and that it not make any public disclosure regarding its decision.[3] VBN now asks me to stay the operation of the decision to enable him to continue to act as a director of the trustee of his self-managed superannuation fund (“SMS Fund”). I have decided not to make an order staying the operation of APRA’s reviewable decision.
BACKGROUND
[1] SIS Act, ss. 120A(2) and (3)
[2] An order made under s. 35(2) of the Administrative Appeals Tribunal Act 1975 restricts the publication of VBN’s name and of any material tending to identify him.
[3] The hearing must be held in private: SIS Act, s. 344(11)
The issues to be resolved when the application for review of APRA’s decision is heard centre on four decisions or actions taken by the Trustee of a superannuation fund (“Fund”):
a decision taken by the trustee of a superannuation fund (“Trustee”) to alter the crediting rate policy applied to the Fund;
a decision to apply the amended policy to determine the Fund’s earnings for the previous financial year;
its conveying to the Fund’s members an offer made by the employer sponsor of the Fund without providing any information regarding the assessment of the offer; and
its management of the credit rate reserve.
APRA concluded that SPL had contravened the covenants in ss. 52(2)(b) and (c) of the SIS Act in respect of the crediting rate and employer issue and in s. 52(2)(g) in respect of the crediting rate reserve issue. Those covenants are set out below.[4]
[4] at […] below
LEGISLATIVE FRAMEWORK – SIS Act
The SIS Act provides for the “… supervision of certain entities engaged in the superannuation industry …”.[5] It does not apply to all entities engaged in the superannuation industry as the legislation depends on the Commonwealth’s powers with respect to corporations or pensions. Those funds that are supervised may be eligible to be taxed at concessional rates.[6] With these matters in mind, s. 3(1) provides that:
“The object of this Act is to make provision for the prudent management of certain superannuation funds, approved deposit funds and pooled superannuation trusts and for their supervision by APRA, ASIC[[7]] and the Commissioner of Taxation.”
Together, those certain superannuation funds, approved deposit funds and pooled superannuation trusts are known as superannuation entities.[8]
[5] SIS Act, long title
[6] SIS Act, ss. 3(2) and (3)
[7] Australian Securities and Investments Commission
[8] SIS Act, s. 10(1)
The SIS Act provides for such matters as the approval of trustees,[9] the prescription of operating standards for superannuation entities,[10] and trustees’ lodgement of annual returns.[11] It provides for APRA’s supervision of those superannuation entities to which the legislation applies by providing that it may give a written notice to the trustee of a superannuation entity stating, in effect, whether that entity has, or has not, complied with its obligations under the SIS Act.[12] The entity’s obligations are set out[13] as well as those of its trustees, custodians and investment managers[14] and its actuaries and auditors.[15] The SIS Act goes on to, among other matters, regulate and prohibit certain sorts of conduct[16] and to give APRA power to monitor and investigate entities.[17]
[9] SIS Act, Part 2
[10] SIS Act, Part 3
[11] SIS Act, Part 4
[12] SIS Act, Part 5
[13] SIS Act, Parts 6-14
[14] SIS Act, Part 15
[15] SIS Act, Part 16
[16] e.g. SIS Act, Parts 19 and 21
[17] SIS Act, Part 25
Covenants that must be included in a superannuation entity’s governing rules
One way in which the SIS Act prescribes the obligations of a superannuation entity is to provide that:
“If the governing rules of a superannuation entity do not contain covenants to the effect of the covenants set out in subsection (2), those governing rules are taken to contain covenants to that effect.”[18]
Of relevance in this case, are:
“… the following covenants by each trustee of the entity:
…
(b)to exercise, in relation to all matters affecting the entity, the same degree of care, skill and diligence as an ordinary prudent person would exercise in dealing with property of another for whom the person felt morally bound to provide;
(c)to ensure that the trustee’s duties and powers are performed and exercised in the best interests of the beneficiaries;
(g)if there are any reserves of the entity – to formulate and to give effect to a strategy for their prudential management, consistent with the entity’s investment strategy and its capacity to discharge its liabilities (whether actual or contingent) as and when they fall due”.[19]
[18] SIS Act, s. 52(1)
[19] SIS Act, s, 52(2)
Disqualification and its implications
A person must not intentionally be, or act as, a trustee[20] or as a responsible officer[21] of a superannuation entity if the person is, and knows, that he or she is a disqualified person. A responsible person in relation to a body corporate is a director, secretary or executive officer of the body.[22]
[20] SIS Act, s. 121(1)
[21] SIS Act, s. 121(2)
[22] SIS Act, s. 10(1)
A person becomes a disqualified person by operation of s. 120(1) in certain circumstances. In addition, APRA may disqualify an individual if it is satisfied that the individual has contravened the SIS Act, whether before or after s. 120A(1) commenced on 18 January 2001[23] and if “… the nature or seriousness of the contravention or contraventions, provides grounds for disqualifying the individual.”[24] It may also disqualify an individual in two other circumstances set out in ss. 120A(2) and (3):
“(2) The Regulator[[25]] may disqualify an individual who is, or was (including before the commencement of this section), 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 (whether before or after the commencement of this section); 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.
(3) 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.”
[23] Inserted by the Financial Sector Legislation Amendment Act (No.1) 2000, s. 3, Schedule 3, item 14
[24] SIS Act, s. 120A(1)(b)
[25] For the purposes of this case, the Regulator is APRA: SIS Act, s. 10(1)
A disqualification takes effect on the day on which it is made.[26] APRA’s decision to disqualify a person is a reviewable decision.[27] APRA may revoke a disqualification either on the application by the person it has disqualified or on its own initiative.[28] A revocation takes place on the day on which it is made.[29]
[26] SIS Act, s. 120A(4)
[27] SIS Act, s. 10(1)
[28] SIS Act, s. 120A(5)
[29] SIS Act, s. 120A(5)
Section 121(3) provides that, if a trustee of a superannuation entity is or becomes a disqualified person, the trustee must immediately tell the Regulator in writing.
Self managed superannuation fund
What is meant by a “self managed superannuation fund” is defined in s. 17A of the SIS Act. It must meet the conditions set out in that section. Among the conditions that must be met by a self managed superannuation fund, which has only one member and whose trustee is a body corporate, is that the member is a director of the body corporate.[30] If a self managed superannuation fund does not meet a condition, it does not cease to be such an entity immediately but continues for a limited time according to s. 17A(4). Subject to s. 17A(5), which is not relevant in this matter:
“… if a superannuation fund that is a self managed superannuation fund would, apart from this subsection, cease to be a self managed superannuation fund, it does not cease until the earlier of the following times:
(a)the time an approved trustee of the fund is appointed;
(b)6 months after it would so cease to be a self managed superannuation fund.”
[30] SIS Act, s. 17A(2)(a)
LEGISLATIVE FRAMEWORK – Administrative Appeals Tribunal Act 1975
In general terms, s. 41(1) of the AAT Act provides that:
“Subject to this section, the making of an application to the Tribunal for a review of a decision does not affect the operation of the decision or prevent the taking of action to implement the decision.”
Section 41(2) then goes on to provide that:
“The Tribunal may, on request being made, as prescribed, by a party to a proceeding before the Tribunal (in this section referred to as the relevant proceeding), if the Tribunal or presidential member is of the opinion that it is desirable to do so after taking into account the interests of any persons who may be affected by the review, make such order or orders staying or otherwise affecting the operation or implementation of the decision to which the relevant proceeding relates or a part of that decision as the Tribunal considers appropriate for the purpose of securing the effectiveness of the hearing and determination of the application for review.”
In the context of the SIS Act, the decision referred to in s. 41 of the AAT Act is the decision confirmed or varied by APRA under s. 344(4) of the SIS Act or taken to have been confirmed under that section by virtue of s. 344(5).
SUBMISSIONS and EVIDENCE
On behalf of VBN, Mr Santamaria QC with Mr Pound submitted that, in view of the limited nature of the order sought, there was no reason to distinguish between the operation and implementation of APRA’s decision. That is to say, the Tribunal has previously stayed the implementation of APRA’s decision and the same grounds justify its also staying its operation so that VBN is permitted to continue to be a director of the trustee of the SMS Fund. APRA’s power to disqualify a person from being a trustee, investment manager or custodian of a superannuation entity is a power that is to be used to protect the public and those engaged in the superannuation industry from behaviour that Parliament has specified to be inappropriate. Mr Santamaria QC relied on the judgment of Gyles J in Kamha v Australian Prudential Regulation Authority[31] considering a similar power to disqualify a person given by s. 25A of the Insurance Act 1973 and my own decision in Re VBJ and Australian Prudential Regulation Authority.[32] The public would be adequately protected if VBN were permitted to act as a director of the trustee of the SMS Fund. The only people who could be affected by his doing so would be VBN himself and his wife. VBN is the only member beneficiary of the SMS Fund as he is the only member with an account balance greater than zero.
[31] [2005] FCA 480; (2005) 85 ALD 346
[32] [2005] AATA 642 at [60]
If no stay is granted in terms that permit him to resume his position as a director of the trustee, the SMS Fund will cease on 28 December 2005. That will come about when the six month period of grace effectively established by s. 17A(4)(b) of the SIS Act comes to an end. Before that time, Mr Santamaria QC submitted, VBN will have to take certain action in relation to the SMS Fund. That action could be one of two and these were set out in VBN’s affidavit sworn on 12 August 2005:
“wind up the assets of the SMSF and transfer my account balance into a public offer superannuation fund (New Fund); or
appoint a new independent trustee to administer the SMSF, whereupon it would cease to be a self-managed superannuation fund and become what is know as a ‘small fund’.”
At the hearing, Mr Santamaria QC made available SMS Fund’s financial statements for the years ended 30 June 2003 and 2004. VBN stated in his affidavit evidence that he believed that either option had severe financial consequences for him but that the expense and difficulty of appointing a new independent trustee and converting the SMS Fund to a small fund would be greater than those involved in winding it up.
VBN said that the current costs of maintaining the SMS Fund comprise a fee equating to approximately 0.6% per annum of the current fund balance for fund administration and audit and brokerage fees averaging 2% on buying and selling shares on the Australian Stock Exchange (“ASX”).[33] As VBN had used a fund of $300,000 with annual contributions of $5,000 to illustrate his evidence, Mr Santamaria QC selected a hypothetical fund with a value of $292,065 with annual contributions of $30,000. Using VBN’s fees, he calculated that the total fee would be $2,352 comprising brokerage fees of $600 and fees for administration and audit of $1,752.
[33] Affidavit sworn on 12 August 2005 at [12]
Winding it up, VBN said, would involve realising securities that were purchased with a view to being held on a long term basis. It would mean that the SMS Fund would be denied the investment outcomes that were likely to be achieved if the securities were held for the long term as planned. VBN had enquired of other funds into which the sum currently held to his benefit might be rolled over before 28 December 2005. He set out in detail the costs including brokerage, capital gains tax, tax and regulatory charges, contribution fee to the New Fund, administration costs, membership charges, recovery fees and investment management fees. On his “best calculation, a rollover of … [his] account balance, including the cost of liquidation of the securities, but excluding capital gains tax, would sacrifice a sum equivalent to over 4 times the current annual maintenance cost for the SMSF.”[34] VBN had difficulty in assessing the impact of capital gains tax being debited upon the short term liquidation of the securities as opposed to its being debited at a much later time. He expected that its deduction in the short term would have an additional negative effect on the growth in his account balance.
[34] Affidavit sworn 12 August 2005 at [20]
As to the ongoing management costs associated with the New Fund, VBN calculated that they would be in excess of 4% of the account balance on the assumption that he would make further contributions at the rate of 10% of the current balance for the next few years. That represented a substantial reduction in the level of benefit available to him on his retirement compared with the level that he could expect if the SMS Fund continued to operate as it had prior to 1 June 2005.
If a new independent trustee were to be appointed to the SMS Fund, it must be an approved trustee. One such approved trustee is Perpetual Trustees Australia Ltd (“Perpetual”). VBN exhibited to his affidavit of 12 August 2005 a copy of Perpetual’s Schedule of Fees and Costs in its Product Disclosure Statement as an example of the fees and costs charged by Perpetual and other approved trustees. Taking into account an establishment fee, a contribution fee, management costs and annual fees, VBN estimated that the total annual fees and costs for a fund with a value of $300,000 and with contributions each year of $5,000 would be at least $8,800. They would increase if VBN were to increase his contributions.
VBN was of the opinion that any prospective new trustee would want to liquidate the securities and so, in all likelihood, the SMS Fund would still have to be wound up. That would mean that there would be additional fees to be paid were an approved trustee to be appointed to the SMS Fund. Therefore, he concluded that the appointment of a new independent trustee would be a more onerous burden than winding up the SMS Fund in the first place.
I note that VBN relied on a Schedule of Fees and Costs for “Perpetual’s DIY Super Approved Trustee Service”. Ms Joanne Baker had obtained a document that appeared similar but was different in some respects from the document that VBN had obtained. On page 2 of the document obtained by VBN, there is a reference to a:
“Supplementary Product Disclosure Statement (PDS) No. 1 – dated 30 June 2005”[35]
whereas the document provided by APRA referred to a:
“Supplementary Product Disclosure Statement (PDS) No. 1 – dated 30 June 2005 (Perpetual Private Clients)”[36]
[35] Affidavit sworn 12 August 2005 at TL-11 at 2
[36] Affidavit of Ms Joanne Ethel Baker at Annexure JEB1 at 2
The table put forward by Mr Santamaria QC calculated the one-off costs of winding up a fund with a balance of $292,065 was $13,564. That comprised brokerage of $5,841, Capital Gains Tax of $4,802 and tax and regulatory charges of $2,921. Assuming that annual contributions of $30,000 were made into the fund, the annual fees would be $11,728. It comprised contribution fees, administration costs, membership charges, expense recovery fees and an investment management fee.
Mr Almond QC questioned the precise calculations that had been made on behalf of VBN. He observed that the fees had been calculated on the basis of a private client and that was an inappropriate basis. On the basis of his calculations, the costs would be more in the order of $8,000 or $9,000.
VBN offered to give undertakings:
“… that, until the review and or appeal(s) of the Decision have been finally determined, or further order from the Tribunal, not to accept a position as a trustee, investment manager or custodian of a superannuation entity, or a responsible officer of a trustee, investment manager or custodian of a superannuation entity.”[37]
[37] Affidavit of VBN sworn 14 June 2005 at [30]
Section 41(2): the matters to which the Tribunal must have regard in exercising its power
In a related matter of Re VBJ and Australian Prudential Regulation Authority,[38] I set out a number of authorities to which I must have regard in exercising my discretion under s. 41(2) of the AAT Act.[39] During submissions, Mr Santamaria QC drew my attention to two further authorities. Referring to the judgment of the Full Court of the Federal Court in Yolbir v Administrative Appeals Tribunal,[40] Tamberlin J said of s. 41(2) that:
[38] [2005] AATA 642
[39] [2005] AATA 642 at [37]-[39]
[40] (1994) 48 FCR 246 at 249
“The subsection is framed in broad general terms, and by reference to a specific purpose. It should be given a liberal interpretation: see Yolbir …”[41]
[41] Shi v Migration Institute of Australia Ltd (2003) 134 FCR 326 at 332
This is consistent with my analysis of the earlier cases and I repeat my conclusion that I reached in Re VBJ and Australian Prudential Regulation Authority regarding the principles set out in those cases:
“40. What are those principles in the context of a decision disqualifying a person from being a trustee, investment manager or custodian of a superannuation entity made in the wider context of the SIS Act? They must always be directed to a consideration of:
what is desirable;
for the purpose of securing the effectiveness of the hearing and the determination of the application for review; and
after taking into account the interests of any persons who may be affected by the review.”
For the reasons I gave in Re VBJ and Australian Prudential Regulation Authority, I also conclude that I must take into account the interests of all persons who may by affected by the decision under review. A person’s personal commercial interests or interests affecting his reputation are factors that must be taken into account in making the decision but are only some of the factors that must be taken into account. Another factor is the protection of the public. It is clear from the scheme of the SIS Act that Parliament intends to protect the public through regulating certain superannuation entities. Other factors that may be relevant in the context of this application include:
“the prospects of success of VBJ’s application for review of APRA’s decision;
the consequences for APRA in carrying out its functions under the SIS Act and for those whose interests are affected by the review of the decision if the stay were, or were not, granted;
the consequences for VBJ if the stay were, or were not, granted;
any conditions, such as undertakings, that could ameliorate any consequences of either granting or refusing a stay; and
whether review is sought of APRA’s reviewable decision or of its decision after its own review.”[42]
[42] Re VBJ and Australian Prudential Regulation Authority [2005] AATA 642 at [47]
None of the factors is given supremacy over the others. What does have supremacy is the matter to which each factor must be addressed. That matter is the order that the Tribunal may make. As a body established by statute its powers are limited by statute. It does not have implicit powers other than those necessary for the exercise of its explicit powers. The express power that the Tribunal has been given is the power to make an order that is “… appropriate for the purpose of securing the effectiveness of the hearing and determination of the application for review.”[43] The circumstances that may lead the Tribunal to make an order to achieve that effectiveness are myriad.
[43] AAT Act, s. 41(2)
Decision
I do not consider that the circumstances that have been made out in this case are a sufficient basis on which it is appropriate for me to make an order. Certainly, VBN is suffering the consequences of not being able to be a trustee, investment manager or custodian of a superannuation entity. As matters stand, that includes his not being able to be a director of the trustee of his own self managed superannuation fund. I have some sympathy for the proposition that, while the public should be protected, there is no need to protect VBN from his own actions. That proposition, though, ignores the fact that Parliament has decided to protect a person from his own actions as well to protect his wife, even though her account balance is zero, and the public generally from those actions. The only concession that Parliament has made in relation to his own actions is that it has effectively given him six months to put the affairs of his self managed fund in order.[44]
[44] SIS Act, s. 17A(4)(b)
The ramifications of my not making a stay order under s. 41(2) to permit VBN to remain a director will be that VBN will have to make other arrangements in relation to its management. That will necessarily mean that he will incur greater costs in the management of his funds than is currently the case. The increase will be as much $11,000 although it is more likely to be in the order of $7,000. Neither figure is inconsequential but neither is so great that it would compromise the investment that VBN has made to date through the SMS Fund.
At one level, it is unfair to VBN that he should incur additional costs before APRA’s decision has been reviewed. He has a case that is not without merit. At another level, Parliament has decided that APRA’s decision should, subject to any order made under s. 41(2) of the AAT Act, have full effect. A balance must be achieved between the two levels. The consequences to VBN of not granting a stay are not so great that the effectiveness of the review of APRA’s decision would be compromised. Having regard to that and to all of the circumstances, I have decided that Parliament’s intention to protect the public outweighs VBN’s personal position in relation to his SMS Fund or otherwise.
For the reasons I have given, I refuse to make an order staying the operation of the respondent’s reviewable decision dated 9 June 2005.
I certify that the thirty-two preceding paragraphs are a true copy of the reasons for the decision herein of
Deputy President S A Forgie,
Signed: ...............................................................
Nathaniel Wills Associate
Date of Stay Hearing 2 September 2005
Date of Decision 2 November 2005
Counsel for the Applicant Mr J. Santamaria QC and Mr A. Pound
Solicitor for the Applicant Corrs Chambers Westgarth
Counsel for the Respondent Mr P. Almond QC and Mr C. Archibald
Solicitor for the Respondent Australian Prudential Regulation Authority
LEGEND
VBN =Trevor Duncan Lloyd
VBO =Keat Seng Chew
VBP =Jason William Brown
VBQ =Craig Robert Dainton
VBR =Howard Wayne Coleman
VBV =Melvyn Keith Ward
VBW =Andrew Richard Penn
ND1 =Jane Lovell Perry
C1 =Mark Philip Delaney
C2 =Ross Andrew Wilson
C3 =Stephen Douglas Spiller
C4 =Neil Roderick Whiteside
C5 =Frank Allan Catlin
MS1 =Andrea Piaia
MS2 =Laurence Dalton
MS3 =Kate Maartensz
MS4 =Kim Webber
Plan Actuary A = Kristain Fok
Plan Actuary B = John Smith
Plan Actuary C = Paul Shallue
Actuary D = Paul Francis (Employer’s consultant actuary from Towers Perrin)
Actuary E = Steven John Schubert (a second Employer’s consultant actuary from Towers Perrin)
CEO =Les Owen
Plan Executive = Cyril Twomey
Accumulation Category = AXA Select
Actuarial Firm = NSP Buck Pty Ltd
EC1 =Michael Baker
Employer Plan
Superannuation Committee = AXA’s Superannuation Plan Steering Committee
Employer’s Plan
Representative = Richard Veale
FS = Mallesons Stephen Jaques
FSS = Christopher Martin Beeny
PD1 = Colin Royce Grenfell
TS = Bruce Akiva Goldman
TSF = Deacons Lawyers
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