"VX99C" & "VX99D" and Commissioner of Taxation
[2001] AATA 626
•3 July 2001
Administrative
Appeals
Tribunal
DECISION AND REASONS FOR DECISION [2001] AATA 626
ADMINISTRATIVE APPEALS TRIBUNAL )
) No V1999/1402 & 1403
GENERAL ADMINISTRATIVE DIVISION ) Re “VX99C” AND “VX99D” Applicants
And
COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal Mr B. H. Pascoe, Senior Member Date3 July 2001
PlaceMelbourne
Decision The Tribunal affirms the decisions under review. ...….(Sgd) B. H. Pascoe……..
Senior Member
CATCHWORDS
INCOME TAX – superannuation funds – whether complying superannuation funds – whether funds contravened the Act – whether scheme to acquire an asset from a member
Superannuation Industry (Supervision) Act 1993
REASONS FOR DECISION
3 July 2001 Mr B. H. Pascoe, Senior Member 1. These are applications to review decision which affirmed prior decisions of 13 August 1999 to give notice under section 40 of the Superannuation Industry (Supervision) Act 1993 (“the SIS Act”) that the L Superannuation Fund (No. 2) was not a complying superannuation fund for the year ended 30 June 1995 and the W Superannuation Fund was not a complying superannuation fund for the year ended 30 June 1996.
2. At the hearing, the applicants were represented by Mr J. de Wijn, Senior Counsel, assisted by Mr R. Moore of counsel and the respondent by Mrs J. Batrouney, Senior Counsel. Evidence was given by Mr and Mrs L and an accountant, Mr S.
3. The facts of this matter were not in dispute. In relation to the L Superannuation Fund (No. 2) the facts can be summarised as:
· The fund was established by deed dated 23 June 1995 with Mr and Mrs L as trustees
· The employer sponsor of the fund was G Pty Ltd and the two employee members were Mr and Mrs L
· The L Property Trust was established by deed dated 12 June 1995 with L Investments Pty Ltd as subscriber and trustee
· On 12 June 1995, L Investments Pty Ltd as trustee of the L Family Trust subscribed for 10 units at $1 each in the L Property Trust
· On 20 June 1995, the L Unit Trust acquired real estate owned by Mr and Mrs L for $100,000 and became indebted for that amount
· On 20 June 1995, the L Family Trust subscribed for 102,936 units in the L Unit Trust in consideration for assuming the debt of $100,000 to Mr and Mrs L and $2,936 cash
· On 29 June 1996, the L Superannuation Fund (No. 2) accepted a transfer of member benefits of Mr and Mrs L amounting to $130,751 from the L Superannuation Fund
· On 29 June 1995, the L Superannuation Fund (No. 2) subscribed for 102,941 units in the L Unit Trust in cash.
· On 29 June 1995 the L Unit Trust redeemed 102,946 units owned by L Family Trust for cash and the family trust paid out the debt to Mr and Mrs L.
· On 30 June 1995, the trustee lodged an election for the fund to be a regulated superannuation fund.
A similar pattern of events occurred in relation to the W Superannuation Fund. This fund was established on 27 June 1996 with the same trustees, employer and employees as the L Superannuation Fund (No. 2). On the same date the fund accepted a transfer of benefits of Mr and Mrs L from the L Superannuation Fund (No. 2) amounting to $134,571 and the employer contributed $150,000 for their benefit. On 26 June 1996 the W Unit Trust acquired real estate owned by Mr and Mrs L and a Mr B, a brother of Mrs L, for a debt of $220,000 and issued 230,387 units to the L Family Trust being 220,000 in consideration for assuming the debt of $220,000 and $10,387 cash. On 27 June, the W Superannuation Fund subscribed for 230,397 units in the W Unit Trust for cash and the units held by the L Family Trust were redeemed for cash with $220,000 being used to pay off the debt. An election to be a regulated superannuation fund was lodged on 28 June 1996.
4. The evidence of Mr and Mrs L and Mr S was that, in May 1995, Mr L discussed with Mr S the possibility of an investment property owned by himself and his wife being transferred to the superannuation fund. Mr S had discussions with a legal adviser who prepared the documents for the transactions outlined above. While Mr L could not recall signing the particular documents he said that his usual practice was to sign documents on the advice of Mr S as his accountant. A similar discussion and set of documents was prepared and signed in May/June 1996 to transfer a second investment property to a superannuation fund.
5. The original notice that the funds were not complying superannuation funds and the reviewable decision affirming such notice were made in the name of the Australian Prudential Regulation Authority (“APRA”). Subsequently delegated authority for such matters was transferred to the Commissioner of Taxation who is now the respondent in relation to these application. The decisions that the funds were not complying superannuation funds in the years ended 30 June 1995 and 1996 were on the grounds that each of the funds had contravened section 66(3) of the SIS Act.
6. Although the relevant years in dispute in this matter are the years ended 30 June 1995 and 1996, it is appropriate to consider the terms of the legislation as they were as at the date of the original decision, 13 August 1999. In part, the applicant argued that there was a fundamental error in the decision as a result of amending legislation and it is necessary to consider such amendments and their effect. The relevant provisions of the SIS Act are:
“19(1) A regulated superannuation fund is a superannuation fund in respect of which subsections (2) to (4) have been complied with.
19(2) The superannuation fund must have a trustee.
19(3) Either of the following must apply:
(a)the trustee of the fund must be a constitutional corporation pursuant to a requirement contained in the governing rules;
(b)the governing rules must provide that the sole or primary purpose of the fund is the provision of old-age pensions.
19(4) The trustee or trustees must have given to APRA a written notice in the approved form signed by the trustee or each trustee:
(a)in the case of a corporate trustee — under its common or official seal; or
(b)in the case of an individual — by him or her;
electing that this Act is to apply in relation to the fund.
19(5) An election made as mentioned in subsection (4) is irrevocable.
19(6) The trustee or trustees have the power to make an election as mentioned in subsection (4) despite anything in the governing rules of the fund.
…
40(1) APRA may give a written notice to the trustee of an entity stating:
(a)whether the entity is or is not a complying superannuation fund; or
(b)whether the entity is or is not a complying approved deposit fund; or
(c)whether the entity is or is not a pooled superannuation trust;
as the case may be, in relation to a year of income specified in the notice.
40(2) If APRA gives a notice to the trustee of an entity stating that:
(a)the entity is or is not a complying superannuation fund; or
(b)the entity is not a complying approved deposit fund; or
(c)the entity is not a pooled superannuation trust;
as the case may be, in relation to a year of income, the notice must set out the reasons why APRA so stated.
40(3) When APRA give a notice under this section, APRA must give particulars of the notice to Commissioner of Taxation.
…
42(1) An entity is a complying superannuation fund in relation to a year of income for the purposes of this Division if:
(a)either:
(i) the entity was a resident regulated superannuation fund at all times during the year of income when the entity was in existence; or
(i) the entity was a resident regulated superannuation fund at all times during the year of income when the entity was in existence other than a time, before it became a resident regulated superannuation fund, when the entity was a resident approved deposit fund; and
(b)either of the following conditions is satisfied:
(i) the trustee did not contravene this Act or the regulations in relation to the entity in respect of the year of income;
(ii) both:
(A)the trustee contravened this Act or the regulations in relation to the entity in respect of the year of income on one or more occasions; and
(B)the entity did not fail the culpability test set out in subsection (1A) in relation to any of those contraventions.
42(1AA) An entity is also a complying superannuation fund in relation to the 1994-95 year of income or a later year of income if:
(a)the entity:
(i) is a superannuation fund that came into existence during the year of income; or
(ii) was a resident approved deposit fund that became a superannuation fund during the year of income; and
(b)the entity complied with subsections 19(2) to (4):
(i) within 60 days after the day on which it came into existence or became a superannuation fund, as the case may be; or
(ii) within such further period, if any, as APRA (whether before or after the end of the period of 60 days) allows; and
(c)either of the following conditions is satisfied:
(i) the trustee did not contravene this Act or the regulations in relation to the entity in respect of the whole of the period (the pre-lodgment period) that began when the entity came into existence or became a superannuation fund, as the case may be, and ended when the entity complied with subsections 19(2) to (4);
(ii) the trustee contravened this Act or the regulations in relation to the entity in respect of the pre-lodgement period on one or more occasions but the trustee satisfied APRA that, because of special circumstances that existed in relation to the fund during the pre-lodgment period, it would be reasonable for the fund to be treated as if it had satisfied this Act and the regulations; and
(d)the entity was a resident regulated superannuation fund at all times during the part of the year of income occurring after the end of the pre-lodgement period; and
(e)either of the conditions stated in paragraph (1)(b) is satisfied in relation to the entity in respect of the part of the year of income occurring after the end of the pre-lodgement period.
42(1AB) In determining for the purpose of paragraph (1AA)(c) whether this Act or the regulations were contravened in respect of the entity in respect of the pre-lodgment period, this Act and the regulations are taken to have applied in relation to the entity in respect of that period as if the entity were a resident regulated superannuation fund during that period.
42(1AC) …
42(1A) For the purposes of subparagraph (1)(b)(ii), an entity fails the culpability test in relation to a particular contravention of this Act or the regulations if:
(a)both:
(i) all of the members of the entity were in any way directly or indirectly knowingly concerned in, or party to, the contravention; and
(ii) APRA, after considering:
(A)the taxation consequences that would arise if the entity were to be treated as a non-complying superannuation fund for the purposes of Part IX of the Income Tax Assessment Act 1936 in relation to the year of income concerned; and
(B)the seriousness of the contravention; and
(C)all other relevant circumstances;
thinks that a notice should be given stating that the entity is not a complying superannuation fund in relation to the year of income concerned; or
(b)all of the following conditions are satisfied:
(i) one or more members of the entity were in any way directly or indirectly knowingly concerned in, or party to, the contravention;
(ii) one or more members of the entity (the ‘innocent members’) were not in any way directly or indirectly knowingly concerned in, or party to, the contravention;
(iii) none of the innocent members would suffer any substantial financial detriment if the entity were to be treated as a non-complying superannuation fund for the purposes of Part IX of the Income Tax Assessment Act 1936 in relation to the year of income concerned;
(iv) APRA, after considering:
(A)the taxation consequences that would arise if the entity were to be treated as a non-complying superannuation fund for the purposes of Part IX of the Income Tax Assessment Act 1936 in relation to the year of income concerned; and
(B)the seriousness of the contravention; and
(C)all other relevant circumstances;
thinks that a notice should be given stating that the entity is not a complying superannuation fund in relation to the year of income concerned.
42(1B) For the purposes of subsection (1A), if there is a question whether a person was in any way directly or indirectly knowingly concerned in, or party to, a particular contravention, that question may be decided on the balance of probabilities.
42(2) …
…
66(1) Subject to subsection (2), the trustee or an investment manager of a regulated superannuation fund must not intentionally acquire an asset from:
(a)a member of the fund; or
(b)a relative of a member of the fund.
66(2) Subsection (1) does not prohibit a trustee or investment manager acquiring an asset from a member of the fund or a relative of such a member if:
(a)the asset is exempt business real property of the member or relative, or a listed security; and
(b)the asset is acquired at market value; and
(c)if the asset is business real property — after the acquisition of the business real property, that property, together with any other business real property previously acquired from a member of the fund or a relative of such a member since this Act received the Royal Assent, would represent no more than the acceptable percentage of the total value of the assets of the fund.
66(3) A person must not enter into, commence to carry out, or carry out a scheme if the person entered into, commenced to carry out, or carried out the scheme or any part of the scheme with the intention that:
(a)the scheme would result, or be likely to result, in the acquisition of an asset by the trustee or an investment manager of a regulated superannuation fund, where the asset is acquired from a person who has a connection (either direct or indirect through one or more interposed companies, partnerships or trusts) with:
(i) a member of the fund; or
(ii) a relative of a member of the fund; and
(b)that acquisition would avoid the application of subsection (1) to the fund.
66(4) …
…
66(8) …”
For the purpose of considering these applications it needs to be noted that subsections (1AA) and (1AB) were inserted by Act No. 172 of 1997 effective 1 July 1996.
7. It was submitted for the applicants that the funds had not contravened section 66(3) of the SIS Act. It was said that the funds simply acquired units in a unit trust and such units did not give any entitlement to the assets of the unit trust. While the relevant land had been acquired from Mr and Mrs L by the unit trust, the funds did not acquire any property from them. It was further argued that the funds were not regulated funds at the time the units in the unit trust were acquired in that the trustees did not make the election under section 19(4) until after the date of acquisition. It was said that, if there was a scheme to acquire a prohibited asset, it was not by a then regulated fund as required by section 66(3). Mr de Wijn submitted that section 42(1AA) did not apply in relation to either fund as that subsection was effective from 1 July 1996 and could not have applied in relation to the years ended 30 June 1995 and 1996.
8. It was submitted for the respondent that the steps undertaken by the various parties were part of a scheme that was intended to have the result that the relevant parcels of real estate would be acquired by the superannuation funds in breach of section 66 of the Act. It was argued that, notwithstanding the date of effect of the introduction of subsections 42(1AA) and (1AB), then provisions specifically state that they apply to the 1994-1995 and later years of income. Alternatively, it was submitted that the funds did not comply with section 42(1)(b) of the SIS Act.
9. It is appropriate to deal firstly with the applicants’ contention that sections 42(1AA) and (1AB) did not apply to the 1994-1995 or the 1995-1996 years as the Act which introduced these subsections was stated to be effective from 1 July 1996. It is relevant to note that Temporary Modification Declaration No. 21 (No. GN49 of 13 December 1995) modified paragraph 42(1)(a) to read:
“(a)one of the following conditions is satisfied:
(i)…
(ii)…
(iii)if the year of income is the 1994-1995 year of income:
(A) the entity:
(I)came into existence during the year of income: or
(II)…
(B) the entity complied with subsections 19(2) to (4) before 1 July 1995; and
(C) the entity was a resident regulated superannuation fund at all times during the part of the year of income occurring after the entity complied with subsections 19(2) to (4) when the entity was in existence;
(iv)…
(v)if the year of income is the 1995-96 year of income:
(A) the entity:
(I)came into existence during the year of income; or
(II)…
(B) the entity complied with subsections 19(2) to (4) within 60 days after the entity came into existence …
(C) the entity was a resident regulated superannuation fund at all times during the part of the year of income occurring after the entity complied with subsections 19(2) to (4) when the entity was in existence.”
The clear intended effect of this Temporary Modification was to deem a fund which came into existence during an income year commencing with the 1994-95 year as having been a complying fund in relation to that year subject to having satisfied subsection 42(1)(b). The Temporary Modification had no effect after 30 June 1996, clearly as a result of the insertion of subsection 42(1AA). It is noted that, under subsection 42(1AA), a contravention of the Act between the time when the entity came into existence and the date of compliance with subsections 19(2) to (4) resulted in the fund not being a complying superannuation fund. The amendment by Temporary Modification No. 21 is not as clear although it can be read as meaning that, if a fund came into existence during the year of income ended 30 June 1995 and complied with subsections 19(2) to (4) prior to 1 July 1995, it was a complying fund in respect of the year unless there was any contravention during the year, whether prior to complying with subsections 19(2) to (4) or not.
10. While it must be accepted that the new subsections 42(1AA) and 42(1AB) produce some confusion in being stated to be effective from 1 July 1996 whilst specifically referring to the 1994-95 year of income, it is difficult to accept the applicants’ submission that it does not apply to that year of income. It must be read as having a meaning and the applicants’ argument, if accepted, would result in the amendment having no effect on the 1994-95 year although that is what the subsections say. The words of subsections 42(1AA) are clear that it applies “in relation to the 1994-95 year of income or a later year of income" and it must be accepted that the legislators intended it to apply retrospectively to the years of income with which these applications are concerned. Even if I am wrong in this view, I am, nevertheless, satisfied that the effect of Temporary Modification No. 21 has the same effect of disqualifying a fund from being a complying superannuation fund if there was a contravention of the Act after the fund came into existence but prior to compliance with subsections 19(2) to (4).
11. The second issue is whether the transactions involving the two funds resulted in a contravention of section 66 of the SIS Act and, more particularly, whether pursuant to subsection 66(2), it was a scheme entered into or carried out with the intention that it would result in the acquisition of an asset by the trustee from a person who has a connection with a member or relative of a member of the fund. It must be said that, from the evidence of Mr and Mrs L and Mr S, the purpose and intent of the various transactions which were entered into over a very short space of time were to use superannuation fund moneys to acquire real estate formerly owned by Mr and Mrs L. It can be assumed that the legal advisers were aware of the difficulties created by subsections 66(1) in such a transaction. It is clear that the documentation and order of transactions were designed to have the real estate acquired by a unit trust prior to the establishment of a new superannuation fund and to have such new superannuation fund subscribe for units in the unit trust with funds transferred from pre-existing superannuation funds. It can be assumed that the arrangements were done in such a way so that the asset acquired by the fund would be a different asset to that formerly owned by Mr and Mrs L. I am satisfied that the series of transactions were designed and planned in advance and clearly constitute a scheme. I am satisfied, also, that the scheme was entered into and carried out with the intention that the beneficial ownership of the relevant land be transferred from Mr and Mrs L, as members of the fund, to the superannuation funds in a manner which would avoid the application of subsection 66(1).
12. Whilst it was argued that the assets acquired by the funds were not the same assets as formerly owned by Mr and Mrs L on the grounds that they are different assets and the subscription for new units does not constitute the acquisition of the units from another person, I am satisfied that the scheme was one to which subsection 66(3) refers. As the sole unit holder of the unit trust, the superannuation fund, at any time, may resolve to wind up the unit trust and to have distributed to it the asset of the trust in specie. It has the full equitable interest in the land and the capacity to call for it to be transferred. Under subsection 66(5), a “scheme” means any arrangement “whether or not enforceable, or intended to be enforceable, by legal proceedings”. It is clear that the intention and the practical result was to have the superannuation funds acquire assets from Mr and Mrs L in a manner which hoped to avoid the application of subsection 66(1).
13. It follows that I find that the transactions in question constituted a scheme to which subsection 66(3) of the SIS Act applied. As a result the trustee contravened the Act and did not satisfy subsection 42(1)(b) and/or subsections 42(1AA)(c)(i) so that the relevant funds were not complying superannuation funds. It follows that the decisions under review should be affirmed.
I certify that the thirteen (13) preceding paragraphs are a true copy of the reasons for the decision herein of
Mr B. H. Pascoe, Senior Member
Signed: .....................................................................................
Member Support TeamDate/s of Hearing 28 March 2001
Date of Decision 3 July 2001
Counsel for the Applicant Mr J. de Wijn, SC and Mr R. Moore
Solicitor for the Applicant Harwood Andrews Lawyers
Counsel for the Respondent Mrs J. Batrouney, SC
Solicitor for the Respondent Australian Taxation Office Legal Practice
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