WZWK and Commissioner of Taxation (Taxation)
[2023] AATA 872
•26 April 2023
WZWK and Commissioner of Taxation (Taxation) [2023] AATA 872 (26 April 2023)
Division:TAXATION & COMMERCIAL DIVISION
File Number(s): 2020/6546, 2021/4355, 2021/4356, 2021/7328
Re:WZWK
APPLICANT
AndCommissioner of Taxation
RESPONDENT
DECISION
Tribunal:Senior Member D K Grigg
Date:26 April 2023
Place:Brisbane
Pursuant to s 43 of the Administrative Appeals Act 1975 (Cth), the Tribunal affirms the decisions under review.
.......................[SGD].........................
Senior Member D K Grigg
CATCHWORDS
SUPERANNUATION – where member of self-managed superannuation fund received payments from fund; where member of fund was also director of the trustee of the fund; whether benefits appropriately paid; where fund subsequently wound up; statutory construction - meaning of non-commutable life pension and “market value”; consideration of “ordinary meaning” and relevance of context in statutory interpretation; whether conditions of release and cashing restrictions prescribed in Schedule 1 of the Superannuation Industry (Supervision) Regulations 1994 applied; whether market value of superannuation funds assets appropriately calculated; where member registered tax agent and chartered accountant; where ASIC disqualified applicant from continuing as a self-managed superannuation fund auditors; where Tax Practitioners Board terminated the Applicant’s tax agent registration; whether applicant should be disqualified from acting as a trustee of self-managed superannuation fund pursuant to section 126A of the Superannuation Industry (Supervision) Act 1993 (Cth); whether applicant was reckless; whether “intent” relevant to a finding of recklessness; whether administrative penalties should be remitted – decision under review affirmed
LEGISLATION
Acts Interpretation Act 1901 (Cth)
Administrative Appeals Tribunal Act 1975 (Cth)
Income Tax Assessment Act 1997 (Cth)
Superannuation Industry (Supervision) Act 1993 (Cth)
Superannuation Industry (Supervision) Regulations 1994 (Cth)
Taxation Administration Act 1953 (Cth)
CASES
Australian Securities and Investments Commission v Forex Capital Trading Pty Limited, in the matter of Forex Capital Trading Pty Limited [2021] FCA 570
Commissioner of Taxation v Coronica [2022] FCA 72; 114 ATR 305
Commissioner of Taxation v Douglas [2020] FCAFC 220
Federal Commissioner of Taxation v Consolidated Media Holdings Ltd [2012] HCA 55 (2012) 250 CLR 503
Forrest v Commissioner of Taxation [2010] FCAFC 6; 78 ATR 417
Gauci v Federal Commissioner of Taxation [1975] HCA 54; (1975) 135 CLR 81
Howard v Commissioner of Taxation [2012] FCAFC 149; 206 FCR 329
Re Kirkland, John Sloane; Ex Parte Official Trustee in Bankruptcy [1997] FCA 684
Stevens v Kabushiki Kaisha Sony Computer Entertainment and Others [2005] HCA 58; (2005) 224 CLR 193
Trautwein v Federal Commissioner of Taxation [1936] HCA 77; (1936) 56 CLR 63
SECONDARY MATERIALS
Law Administration Practice Statement PSLA 2006/17 Self-managed superannuation funds – disqualification of individuals to prohibit them from acting as trustee of a self-managed superannuation fund
Practice Statement Law Administration 2012/5, Administration of the false or misleading statement penalty - where there is a shortfall amount
REASONS FOR DECISION
Senior Member D K Grigg
26 April 2023
Contents
Decision
Catchwords
Legislation
Cases
Secondary Materials
Reasons For Decision
INTRODUCTION
BACKGROUND
ISSUES FOR THE TRIBUNAL
LEGISLATIVE BACKGROUND
Income Tax Assessment Act 1997 (Cth) (ITAA 1997)
Superannuation Industry (Supervision) Act 1993 (Cth) (SISA)
Object
Definition of Pension
Prescribed Standards
Complying superannuation fund for tax purposes
Special rules exist for regulated superannuation funds
Trustee Accounting and Reporting Obligations
Prohibition on providing assistance to Members
Administrative penalties in relation to self managed superannuation funds
Superannuation Industry (Supervision) Regulations 1994 (‘SISR’)
Defined benefit pension
When is a benefit a “pension”?
Payment Standards
Restrictions on Payments
SMSF Assets Must be Valued at Market Value
Taxation Administration Act 1953 (Cth)
Penalties
Onus of Proof
Evidence
CONSIDERATION
Areas of Agreement
What was the benefit paid to the Applicant?
Applicant’s Contentions
Respondent’s Contentions
Was the Condition of Release Met?
Were the payments received by the Applicant properly characterised as a “non-commutable life pension” within the meaning of r 6.01 of the Superannuation Industry (Supervision) Regulations 1994 (SISR)?
What is a “non-commutable life pension”?
Was a non-commutable life pension paid?
Were the payments from the Fund to the Applicant a “non-commutable life pension” or defined benefit?
Conclusion
administrative penalties and interest
Did the Applicant make false and misleading statements? Are the penalties appropriate?
Was the Applicant’s behaviour reckless?
Did the applicant fail to comply with the operating standards in breach of sections 31 and 34 of the SISA by allowing a benefit to be paid out of the fund?
Did the Applicant fail to comply with section 35B by failing to report the asset of the fund in accordance with the regulation?
Fund’s Investments/Assets (financial years 2014 to 2017)
Did the Applicant breach section 66 as trustee in acquiring an asset from a related party of the fund?
Fund A
Did the Applicant breach section 62 in failing to ensure the Fund was maintained for a core purpose?
disqualification
DISQUALIFYING UNDER SUBSECTION 126A(3) - FIT AND PROPER PERSON
Applicant’s Submissions
Consideration
Adverse Decisions
Interpretation of non-commutable pension
Fund Statement Errors
SISA Breaches
Conclusion
Decision
INTRODUCTION
This matter concerns whether income tax assessments issued by the Respondent were excessive. The answer to this lies in an assessment of whether payments made to the Applicant from their self-managed superannuation fund (SMSF) were permissible payments in light of the fact that the Applicant had not reached preservation/retirement age.
The second, albeit related, matter concerns whether the Applicant, who was also the trustee of the SMSF and an approved auditor of other SMSFs, should be disqualified from acting as a trustee of a SMSF pursuant to section 126A of the Superannuation Industry (Supervision) Act 1993 (Cth) (SISA).
BACKGROUND
Between 1988 and 2019 the Applicant was a registered tax agent.[1] The Applicant became a Chartered Accountant in 1989 and maintained that status until 2021.[2]
[1] T3
[2] Transcript, page 3, lines 9 to 16.
The Applicant worked as an accountant between 1983 and 2021 operating his own firm. The Applicant’s firm was later sold to Company A.[3] The Applicant was the sole shareholder and sole director of Company A. The Applicant was also the sole shareholder and director of “The Group” which was the overarching business name and trade mark for a group of businesses of which Company A was a part.[4]
[3] Transcript, page 3, lines 21 to 26.
[4] Transcript, page 3, lines 25 to 38.
In 2008 the Applicant commenced as a director and general manager of Company B. The Applicant was the managing director and shareholder of Company B from its incorporation to deregistration (i.e., between 17 January 2008 and 28 March 2011).[5]
[5] T17-T18
On 23 February 2010 the Applicant established a SMSF (Fund).[6]
[6] T3
The Applicant is the sole member of the Fund. Company C was the trustee of the Fund (Trustee).
Company B made superannuation contributions for the Applicant to the Fund.
Eight months after the establishment of the Fund, in October 2010, the Applicant’s employment with Company B ceased.[7] At the hearing the Applicant explained that Company B had suffered a fire on 15 August 2010 as a result of which the business was closed. As managing director of Company B the Applicant decided it was unviable to continue the business.[8]
[7] Transcript page 8, lines 39 to 40.
[8] Transcript page 8, lines 42 to 44 & page 9, lines 40 to 44; Affidavit of The Applicant [19]-[21]
In the Applicant’s income tax return (ITR) for the 2010 financial year the Applicant declared his assessable income as $32,124.[9]
[9] T4
On 1 October 2010, at 47 years of age, the Applicant commenced receiving payments from the Fund.[10]
[10] T20
In 2011 SMSF Strategies Pty Ltd, after payments were already being paid to the Applicant by the Fund, provided the Applicant with advice and a strategy regarding when a member of a SMSF can officially access their superannuation benefits.[11] SMSF Strategies advised:[12]
[11] T19
[12]T19 – page 383
The Applicant then applied to the Trustee of the Fund to commence a “Non-commutable Lifetime Pension” with the following conditions:[13]
13.1.condition of release “termination of gainful employment”;
13.2.minimum annual payment of $4,090;
13.3.maximum annual payment of $8,080;
13.4.100% tax free; and
13.5.it would commence on 1 October 2010.
[13] T19 – page 403
The Trustee resolved to commence the payment of a “Non-commutable Lifetime Pension” to the Applicant.[14] At this time the Applicant was 47 years of age. Based on the Applicant’s date of birth his “preservation age” is 58.[15] A person’s “preservation age” is one method used to determine when, and in what form (e.g. as a lump sum or annual payment) funds may be released from a superannuation fund.[16] A person’s retirement age can also be used and this is presently 67 years of age (if born after 1 January 1957).
[14] T19 – page 405
[15] Regulation 6.01(2), Superannuation Industry (Supervision) Regulations 1994 (Cth) (SISR); Schedule 1, SISR.
[16] Column 2 of Schedule 1 and subjection to regulation 6.01B of SISR.
On 3 July 2012 the Fund acquired one (1) unit in the Trust A and received income consisting of distributions from the Trust A and from returns on other investments.
Pursuant to the Fund’s Annual ITRs for the 2010, 2011, 2012, 2013, 2014, 2015 and 2016 financial years, Company B and the Applicant made the following superannuation contributions to the Fund:
| Year | Company B Super contributions for the Applicant | Applicant’s Personal Super contributions | Closing Account Balance |
| 2010[17] | $3,000 | $150,000 | $286,448 |
| 2011[18] | $17,000 | $392,547 | $520,421 |
| 2012[19] | N/A | N/A | $1,263,701 |
| 2013[20] | N/A | N/A | $2,470,824 |
| 2014[21] | N/A | N/A | $2,804,291 |
| 2015[22] | N/A | N/A | $5,005,304 |
| 2016[23] | N/A | N/A | $2,004,640 |
| TOTAL | $20,000 | $542,547 |
[17] T5, T7; T6
[18] T7
[19] T8
[20] T9
[21] T10
[22] T11
[23] T12
The Fund made the following benefit payments to the Applicant between 2011 and 2016:
| INCOME YEAR | BENEFIT PAID TO APPLICANT |
| 2011[24] | $4,275 |
| 2012[25] | $25,000 |
| 2013[26] | $100,000 |
| 2014[27] | $108,400 |
| 2015[28] | $213,569 |
| 2016[29] | $367,892 |
| Total | $819,136 |
[24] T7
[25] T8
[26] T9
[27] T10
[28] T11
[29] T12
In March 2011, Company B was voluntarily deregistered under section 601AA of the Corporations Act 2001.[30]
[30] T17
On 21 December 2015 the Respondent issued a Notice of Assessment that the Applicant’s assessed tax payable for the 2015 financial year was “$0.00” (2015 Assessment).[31]
[31] T9
For the 2016 financial year the Applicant’s income tax return provided that his taxable income was $20,426.[32]
[32] T14
On 22 May 2017 the Respondent issued a Notice of Assessment that the Applicant’s assessed tax payable for the 2016 financial year was “$0.00” (2016 Assessment).[33]
[33] T15
The Fund was wound up on 19 December 2018.[34]
[34] Affidavit of the Applicant [14].
In August 2019 the Respondent commenced an audit of the Applicant’s tax affairs for the 2015, 2016 and 2017 income years.[35] The Respondent requested the Applicant provide, amongst other things, documents which supported the basis for the payments made to him from the Fund.
[35] T11
Following the audit, the Respondent referred the Applicant to the Australian Securities and Investment Commission (ASIC) pursuant to section 128P of the Superannuation Industry (Supervision) Act 1993 (Cth) (SISA). Pursuant to section 128P of SISA:
Commissioner of Taxation may refer matters to ASIC
(1) If the Commissioner of Taxation is of the opinion that:
(a) an approved SMSF auditor is not a fit and proper person to be an approved SMSFauditor; or
(b) in relation to the conduct of an audit of a self managed superannuation fund--a person has contravened this Act or the regulations, or a person who conducted, or is conducting, the audit has failed to carry out or perform adequately and properly:
(i) the duties of an auditor under this Act or the regulations; or
(ii) any duties required by a law of the Commonwealth, a State or a Territory to be carried out or performed by an auditor; or
(iii) any functions that an auditor is entitled to perform in relation to this Act or the regulations or the Financial Sector (Collection of Data) Act 2001 ;
the Commissioner of Taxation may refer the details of the matter to ASIC.
In November 2019 the Australian Securities and Investment Commission (“ASIC”) disqualified the Applicant from continuing to be a SMSF auditor for the following reasons (ASIC Decision):[36]
for significant auditor independence breaches and deficiencies in auditing the acquisition of shares, borrowings, valuation of assets, compliance with in-house asset requirements and regarding a non-commutable life pension..
[36] ST1
The Applicant did not challenge the ASIC Decision.
In May 2020 the Tax Practitioners’ Board terminated the Applicant’s individual tax agent registration (TPB Decision). The Applicant did not challenge the TPB Decision.
The Disciplinary Panel of Chartered Accountants ANZ suspended the Applicant’s membership (CA ANZ Decision). The Applicant did not challenge the CA ANZ Decision.
Following the audit, on 2 April 2020, the Respondent issued a position paper with respect to the Applicant’s assessable income for the 2015 and 2016 financial years (Position Paper).[37] According to the Position Paper, the Fund claimed an exempt current pension income (ECPI) as follows (information was obtained from the Fund’s income tax returns):
[37] T13
The Position Paper provided that in the Respondent’s view the payments made to the Applicant from the Fund did not meet a condition of release of benefits such that the amount of the superannuation benefit the Applicant received from the Fund in the 2015 to 2016 years of income would be included in his assessable income under section 304-10 of the ITAA 1997 (conditions of release and relevant statutory provisions are outlined later in this decision).
The Respondent then issued a notice of amended assessment for the financial year ended 30 June 2015 pursuant to which the Respondent determined tax was payable on the amount received from the Fund.[38] The Applicant was now assessed as owing $226,787.29. (2015 Amended Assessment).
[38] T14
The Applicant lodged an objection the 2015 Amended Assessment.[39]
[39] T15-T16
The Applicant asserts that the payments made to him from the superannuation fund were “non-commutable life pension” payments. The Applicant contends that he met the “condition of release” on the basis that his employment with Company B had been terminated.
The objection to the 2015 Amended Assessment was not allowed.[40] The Respondent decided that the payments made by the Fund to the Applicant were not in accordance with the prescribed payment standards and, as a result, pursuant to subsection 304-10(1) of the ITAA 1997, the amount of the payments needed to be included in the Applicant’s assessable income.[41]
[40] T20
[41] T20
As per the 2015 Amended Assessment, the Respondent determined that the payments made to the Applicant from the Fund in the 2016 financial year did not meet a condition of release of benefits such that those amounts of the superannuation benefit he received from the Fund in the 2016 year of income would also be included in his assessable income under section 304-10 of the ITAA 1997.
As a result of its audit decision the Respondent then issued the following notices to the Applicant in February 2021 for the 2015 and 2016 financial year:-
36.1.A shortfall interest penalty of $99,040.40 was imposed pursuant to section 284-75 of Schedule 1 to the Taxation Administration Act 1953 (Cth) (TAA) on the 2015 Amended Assessment on the ground that the Applicant had made a false and misleading statement (“2015 Penalty Decision”);[42]
36.2.An amended assessment for the 2016 financial year (2016 Amended Assessment) with an amended taxable income of $388,318 and $186,622.44 tax payable;[43] and
36.3.A shortfall interest penalty of $80,621.45 was imposed pursuant to section 284-75 of Schedule 1 to the TAA on the 2016 Amended Assessment on the ground that the Applicant had made a false and misleading statement (“2016 Penalty Decision”).[44]
[42] T17
[43] T19
[44] T18
On 13 May 2021 the Applicant lodged an objection to the assessment notices on the grounds that the Respondent erred:[45]
37.1.in finding that the payment made by the Fund to the Applicant did not meet the relevant condition of release of benefit;
37.2.in finding that the relevant cashing restrictions had not been met; and
37.3.issuing the 2016 Amended Assessment and penalty notices.
[45] T20
On 10 June 2021 the Commissioner disallowed the Applicant’s objections (‘Decisions’).[46]
[46] T2; T21
On 17 June 2021, the Applicant filed an application for a review of the Decision by the Tribunal.[47] The Tribunal has jurisdiction to review the Decisions under the Act pursuant to section 25 of the Administrative Appeals Tribunal Act 1975 (Cth) and Part IVC of the TAA.
[47] Exhibit 1, T Documents, T1a, 1-10, Application for review of decision together with attachments dated 21 June 2021.
On 26 July 2021 the Commissioner disqualified the Applicant under section 126A of the SISA from being a trustee of a fund (“Disqualification Decision”). The Applicant requested a review of the Disqualification Decision. The Respondent confirmed the Disqualification Decision on 10 September 2021.
On 8 October 2021 the Applicant filed an application for review of the Disqualification Decision by the Tribunal. The Tribunal has jurisdiction to review the Disqualification Decision pursuant to section 344(4) of the SISA.[48]
[48] See also definition of “reviewable decision” in section 10, SISA.
ISSUES FOR THE TRIBUNAL
The parties agreed that the issues for determination by the Tribunal are whether:
42.1.the Applicant has discharged his onus of proof of establishing that the assessments, the subject of the reviewable objection decisions, are excessive, which involves a determination of whether:
42.1.1.the payments to the Applicant from the Fund was a “non-commutable life pension” as that term is used in Schedule 1 of the SISR?
42.1.2.the Applicant made false or misleading statements?
42.2.the Applicant failed to comply with the operating standards of a regulated superannuation fund in breach of sections 31 and 34 of the SISA by allowing a member’s benefit to be paid out of the Fund?
42.3.the Applicant failed to comply with section 35B of the SISA by failing to report the assets of the Fund at market value in accordance with regulation 8.02B of SISR and section 10 of the SISA?
42.4.the Applicant breached section 66 of the SISA in allowing Fund A to acquire assets from a related party, being the Fund?
42.5.the Applicant breached section 62 of SISA by failing as a trustee of the Fund to maintain the Fund for one of the core purposes?
42.6.If any breach of SISA or SISR are substantiated, are they of a nature or seriousness which justifies the Applicant’s disqualification pursuant to section 126A(1)(b) of SISA? and
42.7.the Applicant is a fit and proper person to be a responsible officer of a body corporate that is a trustee of a superannuation fund?
LEGISLATIVE BACKGROUND
Income Tax Assessment Act 1997 (Cth) (ITAA 1997)
The ITAA sets out when a superannuation benefit is to be included in a taxpayer’s assessable income. Section 304-10(1) provides that you must include in your assessable income the amount of a superannuation benefit if, relevantly:
(a) any of the following applies:
(i) you received the benefit from a * complying superannuation fund or from a * superannuation fund that was previously a complying superannuation fund;
(ii) the benefit is attributable to the assets of a complying superannuation fund or from a superannuation fund that was previously a complying superannuation fund; and
(b) any of the following applies:
(i) the fund was not (when you received the benefit) maintained as required by section 62 of the Superannuation Industry (Supervision) Act 1993 ;
(ii) you received the benefit otherwise than in accordance with payment standards prescribed undersubsection 31(1) of the Superannuation Industry (Supervision) Act 1993 .
(emphasis added)
A “superannuation benefit” is defined in section 307-5 as including a “superannuation fund payment” which is a payment to a recipient from a superannuation fund because of which the recipient is a fund member.
A meaning of “complying superannuation fund” is set out in section 45 of the SISA (see paragraph 55 below)
Superannuation Industry (Supervision) Act 1993 (Cth) (SISA)
Object
The object of the SISA is as stated in section 3:
The main object of this Act is to make provision for the prudent management of certain superannuation funds, approved depositfunds and pooled superannuation trusts and for their supervision by APRA, ASIC and the Commissioner of Taxation.
(emphasis added)
A "superannuation fund" is defined in section 10 of the SISA relevantly to mean:
(a) a fund that:
(i) is an indefinitely continuing fund; and
(ii) is a provident, benefit, superannuation or retirement fund;
A "self managed superannuation fund" has the meaning given by sections 17A and 17B of the SISA.
Section 17A(2) provides the following basic conditions for single member SMSFs:
(2) Subject to this section, a superannuation fund with only one member is a self managed superannuation fund if and only if:
(a) if the trustee of the fund is a body corporate:
(i) the member is the sole director of the body corporate; or
(ii) …..; or
(iii) …; and
(b) if the trustees of the fund are individuals:
(i) the member is one of only 2 trustees, of whom one is the member and the other is a relative of the member; or
(ii) the member is one of only 2 trustees, and the member is not an employee of the other trustee; and
(c) no trustee of the fund receives any remuneration from the fund or from any person for any duties or services performed by the trustee in relation to the fund;
(d) if the trustee of the fund is a body corporate--no director of the body corporate receives any remuneration from the fund or from any person (including the body corporate) for any duties or services performed by the director in relation to the fund.
Definition of Pension
A “pension”, is defined in section 10 of the SISA to mean:
except in the expression old‑age pension, includes a benefit provided by a fund, if the benefit is taken, under the regulations, to be a pension for the purposes of this Act.
(emphasis)
Prescribed Standards
Part 3 of SISA set out a system of prescribed standards applicable to the operation of regulated superannuation funds: s 30, SISA.
According to section 31(1) of SISA, the Superannuation Industry (Supervision) Regulations 1994 (Cth) (SISR) may prescribe standards applicable to the operation of “regulated superannuation funds”.
A regulated superannuation fund is defined in section 19 of the SISA as follows:[49]
[49] Section 10, SISA.
(1) A regulated superannuation fund is a superannuation fund in respect of which subsections (2) to (4) have been complied with.
Fund must have a trustee
(2) The superannuation fund must have a trustee.
Trustee must be a constitutional corporation or fund must be a pension fund
(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.
Election by trustee
(4)The trustee or trustees must have given to APRA, or such other body or person as is specified in the regulations, a written notice that is:
(a) in the approved form; and
(b) signed by the trustee or each trustee;
electing that this Act is to apply in relation to the fund.
The trustee of the fund must ensure that the prescribed standards are complied with at all times: section 34(1), SISA. Pursuant to section 34(2) of the SISA:
A person who intentionally or recklessly contravenes subsection (1) commits an offence punishable on conviction by a fine not exceeding 100 penalty units.
Complying superannuation fund for tax purposes
A “complying superannuation fund” is defined in section 45 of the SISA as follows:
(1)A fund is a complying superannuation fund for the purposes of the Income Tax Assessment Act in relation to a year of income (the current year of income ) if, and only if:
(a)the Regulator has given a notice to a trustee of the fund under section 40 stating that the fund is a complying superannuation fund in relation to the current year of income; or
(b)the Regulator has given a notice to a trustee of the fund under section 40 stating that the fund is a complying superannuation fund in relation to a previous year of income and has not given a notice to a trustee of the fund under that section stating that the fund was not a complying superannuation fund in relation to:
(i)the current year of income; or
(ii)a year of income that is:
(A)later than that previous year of income; and
(B)earlier than the current year of income.
Special rules exist for regulated superannuation funds
Core Purpose
Special rules exist for regulated superannuation funds including those set out in sections 62 and 66: section 61, SISA.
Section 62(1)(a) of the SISA sets out a “sole purpose test” for the maintenance of the SMSF. The trustee of a regulated superannuation fund must ensure that the fund is maintained solely for one or more of the following relevant 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;
(iii)the provision of benefits for each member of the fund on or after whichever is the earlier of:
(A)the member's retirement from any business, trade, profession, vocation, calling, occupation or employment in which the member was engaged; or
(B)the member's attainment of an age not less than the age prescribed for the purposes of subparagraph (ii)
(emphasis added)
Acquisition of certain assets prohibited
Pursuant to section 66(1) of the SISA a trustee of a regulated superannuation fund is prohibited from intentionally acquiring an asset from a related party of the fund.
Section 10 of the SISA defines "related", in relation to bodies corporate, as having the meaning given by section 20. Section 20 of the SISA provides:
The question whether bodies corporate are related to each other for the purposes of this Act is to be determined in the same way as that question would be determined under the Corporations Act 2001 .
Section 10 of the SISA defines “related party" of a superannuation fund to mean any of the following:
(a) a member of the fund;
(b) a standard employer-sponsor of the fund;
(c) a Part 8 associate of an entity referred to in paragraph (a) or (b).
Section 70B of the SISA sets out what is a Part 8 associate:
Part 8 associates of individuals
For the purposes of this Part, each of the following is a Part 8 associateof an individual (the primary entity), whether or not the primary entity is in the capacity of trustee:
(a) a relative of the primary entity;
(b)if the primary entity is a member of a superannuation fund with no more than 6 members:
(i) each other member of the fund; and
(ii)if the fund is a single memberself managed superannuation fund whose trustee is a company--each director of that company; and
(iii)if the fund is a single memberselfmanaged superannuation fund whose trustees are individuals--those individuals;
(c) …
(d) …
(e)a trustee of a trust (in the capacity of trustee of that trust), where the primary entity controls the trust;
(f) a company that is sufficiently influenced by, or in which a majority voting interest is held by:
(i) the primary entity; or
(ii) another entity that is a Part 8 associate of the primary entity because of another paragraph of this section or because of another application of this paragraph; or
(iii) 2 or more entities covered by the preceding subparagraphs.
Trustee Accounting and Reporting Obligations
Part 4 of the SISA sets out various accounting and reporting obligations on trustees of superannuation funds to:
62.1.keep statements of financial position, operating statements and specified accounts (s 35B);
62.2.ensure that an approved SMSF auditor is appointed, and reports, each financial year (s 35C); and
62.3.to ensure the SMSF lodges ITRs (s 35D).
Prohibition on providing assistance to Members
Section 65 of the SISA provides:
(1) A trustee or an investment manager of a regulated superannuation fund must not:
…
(b) give any other financial assistance using the resources of the fund to:
(i) a member of the fund;
…
Note:Section 166 imposes an administrative penalty for a contravention of subsection (1) by a trustee in relation to a self managed superannuationfund.
Administrative penalties in relation to self managed superannuation funds
Section 166 of the SISA provides:
(1) If a person referred to in subsection (2) contravenes a provision of this Act specified in the table, the person is liable to an administrative penalty. The amount of the penalty is the amount specified in the table for the provision.
| Administrative penalties in relation to self managed superannuation funds | ||
| Item | Provision of this Act | Administrative penalty |
| 1 | Subsection 34(1) | 20 penalty units |
| 2 | Section 35B | 10 penalty units |
| 3 | Subsection 65(1) | 60 penalty units |
| 4 | Subsection 67(1) | 60 penalty units |
| 5 | Subsection 84(1) | 60 penalty units |
| 6 | Subsection 103(1) | 10 penalty units |
| 7 | Subsection 103(2) | 10 penalty units |
| 8 | Subsection 103(2A) | 10 penalty units |
| 9 | Subsection 104(1) | 10 penalty units |
| 10 | Subsection 104A(2) | 10 penalty units |
| 11 | Subsection 105(1) | 10 penalty units |
| 12 | Subsection 106(1) | 60 penalty units |
| 13 | Subsection 106A(1) | 20 penalty units |
| 14 | Subsection 124(1) | 5 penalty units |
| 15 | Subsection 160(4) | 5 penalty units |
| 16 | Subsection 254(1) | 5 penalty units |
| 17 | Subsection 347A(5) | 5 penalty units |
Note: See section 4AA of the Crimes Act 1914 for the current value of a penalty unit.
(2) For the purposes of subsection (1), the persons are:
(a) a trustee of a self managed superannuation fund; or
(b) a director of a body corporate that is a trustee of a self managed superannuationfund.
Note:Collection and recovery of administrative penalties imposed by this section is dealt with in Part 4-15 of Schedule 1 to the Taxation Administration Act 1953 .
(3) If a trustee of a self managed superannuation fund on whom a penalty is imposed by this section is an individual, a reference in Part 4-15 or Division 298 in Schedule 1 to the Taxation Administration Act 1953 to an entity is taken to be a reference to that individual in his or her personal capacity.
Disqualification
Pursuant to section 126A(1) and (3) of the SISA, the Respondent, as Regulator, may disqualify an individual as follows:
126A The Regulator may disqualify individuals
(1) The Regulator may disqualify an individual if satisfied that:
(a) the person has contravened this Act or the Financial Sector (Collection of Data) Act 2001 on one or more occasions; and
(b) the nature or seriousness of the contravention or contraventions, or the number of contraventions, provides grounds for disqualifying 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.
(emphasis added)
Superannuation Industry (Supervision) Regulations 1994 (‘SISR’)
Defined benefit pension
Regulation 1.03(2) of the SISR defines a “defined benefit pension” as follows:
defined benefit pension means a pension mentioned in section 10 of the Act, other than:
(a) a pension wholly determined by reference to policies of life assurance purchased or obtained by the trustee of a regulated superannuation fund, solely for the purposes of providing benefits to members of that fund; or
(b) an allocated pension; or
(c) a market linked pension; or
(d) an account‑based pension.
Regulation 1.03 of the SISR provides the following definitions:
"allocated pension " means a pension that is provided under rules of a superannuation fund that meet the standards of subregulation 1.06(4).
"market linked pension " means a pension paid under rules that meet the standards of subregulation 1.06(8).
account-based pension means a pension that is provided in accordance with the rules of a fund that:
(a)are described in paragraph 1.06(9A)(a); and
(b)meet the standards of subregulation 1.06(9A).
Therefore, unless a “pension” referred to in section falls within (a) to (d) of regulation 1.03(2) of the SISR, the section 10 pension is a “defined benefit pension”.
Regulation 9.04I establishes which SMSF must not provide a defined benefit pension:[50]
[50] There is an exception which is not relevant here.
9.04I Provision of defined benefit pensions
(1) Subject to subregulation (3), a regulated superannuation fund that has less than 50 members must not provide a defined benefit pension.
(2) Subregulation (1) has effect despite anything in the governing rules of the fund.
A defined benefit pension may only be paid by a regulated superannuation fund that has less than 50 members:
(a) to a person:
(i) who, on 11 May 2004, was a member of the fund; and
(ii) who, before 1 January 2006:
(A)retires (within the meaning of subregulation 6.01(7)) on or after attaining age 55; or
(B)attains age 65; and
(iii) who, after 11 May 2004 and before 1 January 2006, becomes entitled to be paid a defined benefit pension; and
(b) if the first pension payment is made within 12 months after the day when the person became entitled to the pension.
When is a benefit a “pension”?
Regulations 1.06(1) and (1B) relevantly prescribe when a benefit is considered to a be a pension:
(1) A benefit is taken to be a pension for the purposes of the Act if:
(a) it is provided under rules of a superannuation fund that:
(i) meet the standards of subregulation (9A) or 1.06A(2); and
(ii) do not permit the capital supporting the pension to be added to by way of contribution or rollover after the pension has commenced; and
(b) in the case of rules to which paragraph (9A)(a) applies and that meet the standards of subregulation (9A)—the rules also meet the standards of regulation 1.07D; and
(c)in the case of rules to which paragraph (9A)(b) applies and that meet the standards of subregulation (9A)—the rules also meet the standards of regulation 1.07B.
…
(1B) A benefit that commenced to be paid on or after 20 September 2007 is taken to be a pension for the purposes of the Act if:
(a) the benefit arises under rules of a superannuation fund that meet the standards of:
(i) subregulation 1.06(7) or (8); and
(ii) subregulation 1.06(9A); and
The Full Federal Court in Commissioner of Taxation v Douglas [2020] FCAFC 220 held:
[123] … SIS Regulations reg 1.06(1) directs attention to whether a “benefit” is provided under rules of a superannuation fund which meet certain standards.
Regulation 1.06(2) of the SISR then goes on to provide that rules of a superannuation fund will meet the standards of regulation 1.06 if certain conditions are met:
(2) Rules meet the standards of this subregulation if they ensure that:
(a)the pension is paid at least annually throughout the life of the primary beneficiary in accordance with paragraphs (b) and (c) ….; and
(b)the size of payments of benefit in a year is fixed, allowing for variation only:
(i) as specified in the governing rules; or
(ii)to allow commutation to pay a superannuation contributions surcharge; or
(iii)to allow an amount to be paid under a payment split and reasonable fees in respect of the payment split to be charged; and
…
(d)the pension does not have a residual capital value; and
(e)the pension cannot be commuted except in any of the following circumstances:
(i) the pension is not funded from the commutation of:
(A)an annuity that meets the standards of subregulation 1.05(2), (3), (9) or (10); or
(B)a pension that meets the standards of this subregulation or subregulation (3), (7) or (8); or
(C)a pension that meets the standards of subregulation 1.07(3A) of the RSA Regulations;
and the commutation is made within 6 months after the commencement day of the pension;
Regulation 1.06(7) is concerned with rules governing pensions linked to life expectancy. Regulation 1.06(8) relates to market-linked pensions.
Regulation 1.06(9A) provides:
(9A) Rules for the provision of a benefit (the pension) meet the standards of this subregulation if the rules ensure that payment of the pension is made at least annually, and also ensure that:
(a)for a pension in relation to which there is an account balance attributable to the beneficiary—the total of payments in any year (excluding payments by way of commutation but including payments under a payment split) is at least the amount calculated under clause 1 of Schedule 7; and
(b)for a pension that is not described in paragraph (a):
(i) both of the following apply:
(A) the rules do not provide for a residual capital value, commutation value or withdrawal benefit greater than 100% of the purchase price of the pension;
(B) the total of payments in any year (excluding payments by way of commutation but including payments under a payment split) is at least the amount calculated under clause 2 of Schedule 7; or
(ii) each of the following applies:
(A) the pension is payable throughout the life of the beneficiary (primary or reversionary), or for a fixed term of years that is no greater than the difference between the primary beneficiary’s age on the commencement day and age 100;
(B) there is no arrangement for an amount (or a percentage of the purchase price) prescribed by the rules to be returned to the recipient when the pension ends;
(C) the total of payments from the pension in the first year (excluding payments by way of commutation but including payments under a payment split) is at least the amount calculated under clause 2 of Schedule 7;
(D) the total of payments from the pension in a subsequent year cannot vary from the total of payments in the previous year unless the variation is as a result of an indexation arrangement or the transfer of the pension to another person;
(E) if the pension is commuted, the commutation amount cannot exceed the benefit that was payable immediately before the commutation; or
(iii) the standards of subregulation (2) are met; or
(iv) for rules in existence at the date of registration of the Superannuation Industry (Supervision) Amendment Regulations 2007 (No. 3), the standards of subregulation (2) would be met, except for the circumstances in which those rules allow for either or both of the following:
(A) the pension to be commuted;
(B) the variation or cessation of pension payments in respect of a child of the deceased; and
(c) the pension is transferable to another person only on the death of the beneficiary (primary or reversionary, as the case may be); and
(d) the capital value of the pension and the income from it cannot be used as a security for a borrowing.
Regulation 1.07(D) of the SISA refers to commutations of superannuation income streams. It provides:
Commutation of superannuation income stream
(1)For paragraphs 1.05(1)(d) and 1.06(1)(b), a benefit meets the standards of this regulation if, under the applicable contract or rules, the annuity or pension cannot be commuted, in whole or in part, except in the following circumstances:
(a) the commutation results from the death of the annuitant or pensioner or a reversionary annuitant or reversionary pensioner; or
(b) the sole purpose of the commutation is:
(i) to pay a superannuation contributions surcharge; o
(ii) to give effect to an entitlement of a non-member spouse under a payment split; or
(iii)to meet the rights of a client to return a financial product under Division 5 of Part 7.9 of the Corporations Act 2001 ; or
(c) for a commutation in part--the account balance of the annuity or pension, immediately after the commutation, is equal to or greater than the minimum payment amount calculated in accordance with Schedule 7, as reduced by the amount of payments (excluding amounts paid by way of commutation) to the annuitant or pensioner already made in the financial year in which the commutation occurs; or
(d) the annuity or pension has paid, in the financial year in which the commutation takes place, at least the minimum amount prescribed by subregulation (2).
Payment Standards
Part 6 of the SISR sets out payment standards.
Regulation 6.01(2) of the SISR provides definitions of the following relevant terms “condition of release”, “cashing restriction” and “non‑commutable pension”:
condition of release means a condition of release specified in Column 2 of Schedule 1 and, subject to regulation 6.01B, a member of a fund is taken to have satisfied a condition of release if the event specified in that condition has occurred in relation to the member
cashing restriction, in relation to a condition of release, is a cashing restriction specified in column 3 of the item in Schedule 1 that mentions the condition of release.
non‑commutable pension means a pension provided under rules of a superannuation fund that:
(a)meet the standards of subregulation 1.06(2), (7) or (8); and
(b)ensure that, if the pension is commuted under subparagraph 1.06(2)(e)(i), (7)(g)(i) or (8)(d)(i), the resulting superannuation lump sum cannot be cashed unless:
(i) the purpose of the commutation is to cash an unrestricted non‑preserved benefit; or
(ii) before commutation, the pensionerhas satisfied a condition of release in respect of which the cashing restriction for preserved benefits and restricted non‑preserved benefits is ‘Nil’.
(emphasis added)
A benefit is taken to be a pension if it satisfies regulation 1.06(9A). But, if the pension is required under the standards to be a non-commutable pension, as here, it would need to satisfy standards in regulations 1.06(2), (7) or (8).
Restrictions on Payments
Regulation 6.17(1)-(2) sets out payment standards (restrictions) for regulated superannuation fund benefits relevantly as follows:
Restriction on payment
(1)For the purposes of subsections 31(1) and 32(1) of the Act, the standards set out in subregulations (2), (2A) and (2B) are applicable to the operation of regulated superannuation funds and approved deposit funds.
(2)A member's benefits in a fund:
(a)may be paid:
(i)by being cashed in accordance with Division 6.3; or
…
(b)must not be paid in that way except when, and to the extent that, the fund is required or permitted under this Part to pay them; and
(c)must be paid in that way when, and to the extent that, the fund is required under this Part to pay them.
Pursuant to regulation 6.18(1) a member's preserved benefits in a regulated superannuation fund may only be cashed on or after the satisfaction by the member of a condition of release. The same cashing restriction applies to restricted non-preserved benefits under regulation 6.19.
In summary, benefits can only be cashed to members of super funds when relevant conditions of release have been met and subject to meeting any relevant restrictions as set out in the SISR.
Schedule 1 of SISR sets out the conditions upon when superannuation fund benefits may be released. If a condition of release is met, the corresponding cashing restriction applies. For example, Item 108 of Schedule 1, which is relevant here, provides:
| Item | Condition of Release | Cashing Restriction |
| 108 | Termination of gainful employment with an employer who had, or any of whose associates had, at any time, contributed to the regulated superannuation fund in relation to the member | 1. Preserved benefits: Non-commutable life pension or non-commutable life annuity 2. Restricted non-preserved benefits: Nil |
(emphasis added)
Regulation 1.03 defines "gainfully employed " to mean “employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment”.
The applicable cashing restriction in Item 108 depends on whether the benefits are classified as preserved benefits or restricted non-preserved benefits as follows:
SMSF Assets Must be Valued at Market Value
When the trustee is preparing accounts and statements,[51] an asset must be valued at its “market value”: Regulation 8.02B of the SISR.
[51] Section 35B(2), SISA.
“Market value” is defined is defined in subsection 10(1) of the Act to mean:
"market value" , in relation to an asset, means the amount that a willing buyer of the asset could reasonably be expected to pay to acquire the asset from a willing seller if the following assumptions were made:
(a) that the buyer and the seller dealt with each other at arm's length in relation to the sale;
(b) that the sale occurred after proper marketing of the asset;
(c) that the buyer and the seller acted knowledgeably and prudentially in relation to the sale.
Taxation Administration Act 1953 (Cth)
Penalties
Section 284-75(1) of Schedule 1 of the TAA provides:
Liability to penalty
(1)You are liable to an administrative penalty if:
(a)you make a statement to the Commissioner or to an entity that is exercising powers or performing functions under a * taxation law (other than the * Excise Acts); and
(b)the statement is false or misleading in a material particular, whether because of things in it or omitted from it.
Onus of Proof
Pursuant to section 14ZZK(b) of the TAA, the Applicant bears the onus of proof, in proving the assessment is excessive or otherwise incorrect and what the assessment should have been.[52]
[52] Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614
In Trautwein v Federal Commissioner of Taxation [1936] HCA 77; (1936) 56 CLR 63 Latham CJ found as a general rule:
[2]. “…the taxpayer must…go further and show, not only negatively that the assessment is wrong, but also positively what correction should be made in order to make it right or more nearly right.”
In Gauci v Federal Commissioner of Taxation [1975] HCA 54; (1975) 135 CLR 81 Mason J explained:
[6]. “The Act does not place any onus on the Commissioner to show that the assessments were correctly made. Nor is there any statutory requirement that the assessments should be sustained or supported by evidence.”
Evidence
92. The Applicant gave evidence at the hearing and also provided evidence by way of affidavit dated 11 October 2022.[53]
CONSIDERATION
[53] Exhibit 5
Areas of Agreement
It is not in dispute that:
93.1.the Applicant received superannuation benefits from the Fund;
93.2.the Fund was a “complying superannuation fund”;[54]
93.3.the Fund was a regulated superannuation fund (s 19, SISA);
93.4.the Fund was unable to provide a defined benefit pension (Reg 9.04I);
93.5.the standards for the operation of the Fund are prescribed in the SISR;
93.6.the benefit paid by the Fund were “preserved benefits”;
93.7.in this matter the relevant standards are those set out in regulation 6.17(2) of the SISR
[54] Section 45, SISA; s 304-10(1), ITAA 1997.
If the benefit received by the Applicant was not paid in accordance with the SISR, the amount of the benefit received should have been included as part of the Applicant’s assessable income in the Applicant’s ITRs in accordance with section 304-10(1) of the ITAA 1997.
The issue is whether that benefit paid by the Fund to the Applicant was:
95.1.a defined benefit pension; and/or
95.2.received other than in accordance with the standards prescribed in the SISA.
What was the benefit paid to the Applicant?
Applicant’s Contentions
The Applicant contends:
96.1.the trustee of the Fund commenced paying him a pension satisfying the condition of release in item 108 of Schedule 1 of the SISR, because his employment with a contributor to the Fund had terminated his employment;
96.2.the benefits in the Fund were “preserved benefits” and therefore the trustee had to pay the benefits in the form of a non-commutable life pension or annuity as specified in the cashing restrictions;
96.3.the payments were made in accordance with the relevant cashing restriction for the condition of release, being the termination of gainful employment with an employer that made contributions to the Fund and therefore, are not assessable income and section 304-10(1) of ITAA97 is not enlivened;
96.4.the assessments are excessive.
The Applicant says he met a condition of release in Schedule 1 of the SISR because:
97.1.regulations 6.18(1) and 6.19(1) of the SISR relevantly provide that superannuation benefits may be accessed upon the satisfaction of a condition of release under schedule 1 of the SISR; and
97.2.rule 25.1 of the Trust Deed and Governing Rules for the Fund dated 2012 identifies that a benefit may be paid from the superannuation fund upon the satisfaction of a Condition of Release. Moreover, rule 25.2(g) of the Trust Deed and Governing Rules for the Fund authorises the access of superannuation benefits where the Member leaves the employment of an employer.[55]
[55] T4
The Applicant contends that the pension paid was a non-commutable life pension for the following reasons (citations omitted):[56]
[56] Applicant’s written submissions dated 19 October 2022.
27. As the SISR does not define non-commutable life pension, a Court may revert to extrinsic material to determine the ordinary meaning of the words used.
28. The Oxford Dictionary defines pension as:
pension
Subject: Social sciences, Economics
A specified sum paid regularly to a person who has reached a certain age or retired from employment. It is normally paid from the date of reaching the specified age or the retirement date.
29. Moreover, the Australian Macquarie Dictionary defines a pension as:
Pension
/ˈpɛnʃən/ (say 'penshuhn)
noun 1. a fixed periodical payment made in consideration of past services, injury or loss sustained, merit, poverty, etc.
2. an allowance or annuity.
3. a regular income paid out of a superannuation fund.
–verb (t)
4. to grant a pension to.
–phrase
5. pension off, to cause to retire on a pension.[Latin pensio payment; replacing Middle English pensioun, from Old French pensiun] – pensionable, adjective
30. In the premises, it is submitted that the term includes, adopting the ordinary definition of a pension, regular income paid out of a superannuation fund.
31. The Commissioner has issued the First and Second Decisions based on the Payments not being a pension (and was therefore assessable income). The controversial part of the First and Second Decisions are that a pension:
(a) needs to be paid for the life of the member; and
(b) involves regular payments of a pre-determined amount.
32. In this instance:
(a) The Commissioners’ contention that the Capital of [the Fund] was paid by way of a lump sum is factually, and legally, incorrect;
(b) The payments occurred during the life of [the Applicant] – there is no statutory requirement imposed on a superannuation fund to undertake some form of assessment of the life span of a member, or its members, and then spread any pension payments over that entire period; and
(c) Moreover, there is no statutory, or legal reason, to import the notion that every payment be for the same amount. Indeed, pensions paid by large industry and other funds will often pay different amounts until the corpus is depleted.
33. Therefore:
(a) The benefits have been treated as a pension;
(b) The benefits have not been commuted into a lump sum; and(c) The benefits have been paid during the life of the Applicant.
34. Alternatively, if the Tribunal were to consider that the word pension has to be defined in reference to r 1.06 of SISR, the word ‘non-commutable life’ ought to be interpreted as modifying the pensions which can be paid under the regulation.
35. The Applicant submits that the use of the words ‘non-commutable life’ modifies the word ‘pension’ because the context of words used is able to modify defined terms.
36. As such, any of the pensions in r 1.06 of SISA could be used, provided that the pension was not commuted and was for the life of the member.
37. Here, the rules of [the Fund] permitted the payment of an account-based pension, which is a pension calculated in accordance with r 1.06(9A)(a) of SISR which relevantly provides that:
for a pension in relation to which there is an account balance attributable to the beneficiary—the total of payments in any year (including under a payment split but excluding amounts rolled over) is at least the amount calculated under clause 1 of Schedule 7
38. Clause 1 of schedule 7 of SISR provides that the amount of payments is calculated by multiplying the account balance by the percentage factor in the table. For the Applicant, the relevant item in the table is item 1, as he is under the age of 65. Therefore, the relevant percentage factor is 4%.
39. Therefore, utilising that calculation method, the minimum pension is summarised in the following table:
Financial Year ended Account Balance Minimum pension 30 June 2015 $5,005,303.84 $200,212.15 30 June 2016 $2,004,640.30 $80,185.61 40. The Payments for the above-mentioned periods exceeded the minimum pension for each period.
…
53. Further, on the Commissioner’s proposed construction, an absurdity would occur. Namely, a person in a superannuation fund with less than 50 members who met the condition of release in item 108 of schedule 1 of SISR could never be paid a non-commutable life pension because it is a defined benefit pension.
54. This would surely result in the absurd conclusion that a person in a self-managed superannuation fund would not be able to be paid a non-commutable life pension whereas a person in a large superannuation fund would. How could that possibly be intended?
Respondent’s Contentions
The Respondent contends that the term “pension” and “non-commutable life pension” should take its reading in accordance with regulations 6.01(2) and 1.06(2) of the SISR.
Was the Condition of Release Met?
Company B had been making superannuation contributions to the Fund on the Applicant’s behalf.
The Applicant’s evidence was that he decided to close the Company B business because it would be too difficult to obtain contracts from previous customers and that even when the factory was rebuilt it was not viable.
There was nothing to corroborate the Applicant’s evidence concerning his employment, reasons for termination or the issue of the ongoing viability of Company B.
The Tribunal cannot be satisfied that the condition of release in item 108 of Schedule 1 has been met. The Applicant’s evidence is not independent or objective. Company B was owned and operated by the Applicant, It was the Applicant’s decision to terminate his own employment, In these circumstances more persuasive evidence is expected and required. There was no evidence regarding the financial viability of the business or why it could not have moved into new premises and continued performing its contractual obligations. There was no evidence that Company B was uninsured or that it had been abandoned by its customers. A copy of the employment agreement was not before the Tribunal. No documentation was before the Tribunal.
In the circumstances the Tribunal finds that the condition of release in Item 108 has not been met.
The Fund should not have made the payments to the Applicant. The payments were not made in accordance with relevant standards and were made in breach of sections 31 and 34 of the SISA.
It is strictly unnecessary for the Tribunal to consider the other issues concerning the payment of the benefits. However, the parties spent a considerable time on the issue of what is a non-commutable life pension. As a result, the Tribunal will consider this issue.
The issue is which cashing restriction should have applied to the benefit payments and whether a pension was payable.
Were the payments received by the Applicant properly characterised as a “non-commutable life pension” within the meaning of r 6.01 of the Superannuation Industry (Supervision) Regulations 1994 (SISR)?
What is a “non-commutable life pension”?
Irrespective of what is provided for in the Trust Deed, or the Fund’s rules, it is still subject to, and required to be compliant with, the SISA and SISR. The Trust Deed acknowledges this in rule 25.2 which commences with “subject to the Superannuation Laws”.
The Schedule item 108 provides that in order for a non-commutable life pension to be paid the benefits must be “preserved benefits”.
As the Applicant had not reached preservation age, the benefits paid are “preserved benefits”. Therefore, the relevant cashing restriction is that the benefit paid must have been a non-commutable life pension. It cannot have been paid as a lump sum.
Despite the requirement that the benefit paid must have been a non-commutable life pension, the Fund’s detailed operating statement for the year ending 2014 identifies that the pension paid to the Applicant was an unrestricted non‑preserved tax‑free benefit.[57] If, pursuant to item 108 of the Schedule, the pension paid is a restricted non‑preserved benefit there would have been nil cashing restriction. That is, all of the benefit could have been paid out at once.
[57] T10 – page 300.
The Fund’s Member Statement for the period ended 30 June 2014, executed by the Applicant on 29 April 2015, referred to the total amounts paid to the Applicant as “unrestricted non-preserved” benefits and indicated that no preserved benefit had to be paid to the Applicant.
For the 2015 financial year, the pension paid to the Applicant was again referred to in the financial statements as an “unrestricted non-preserved” benefit. The Fund’s Member Statement for the period ended 30 June 2015, executed by the Applicant on 9 May 2016, also referred to the amounts paid as “unrestricted non-preserved” benefits and indicated that no preserved benefit had to be paid to the Applicant. The payment of unrestricted non-preserved benefit was not permitted under the SISR.
The Fund’s financial statements were prepared by Company A, a company controlled by the Applicant.
The Applicant was asked during cross-examination if he accepted that the entirety of the Fund should not have been characterised as unrestricted non-preserved at the time the financial statements were prepared. The Applicant neither admitted nor denied the suggestion and said:[58]
---As I have said earlier, I would need to go back into the Act and have a look at all the definitions. It’s been a while since I’ve looked.
Ms Chen: If you accept that the preserved benefit had the requirement for a preserved benefit to be converted into an unrestricted non-preserved benefit had not been satisfied that that would be an inaccurate member statement?
Applicant: As I said before, you know, I would not - I can’t answer that question on the basis that I - you know, that that didn’t occur.
[58] Transcript page 20, lines 11 to 19.
Earlier in the hearing the Applicant accepted that he applied for a non‑commutable lifetime pension because, under the cashing restriction for termination of employment, if it was a preserved benefit it had to be taken as a non‑commutable lifetime pension.[59]
[59] Transcript page 14, lines 38 to 40 & page 15, lines 1 to 26.
All of the funds paid were “preserved benefits”, despite how they were categorised in the financial statements. The financial statements were incorrect. Contrary to the financial statements, the superannuation member’s fund summary was obliged to identify the amounts that were preserved benefits. No explanation for the error in the operating statement was provided by the Applicant.
Was a non-commutable life pension paid?
The parties contend for a different interpretation of the “life pension”.
The Applicant contended that:
119.1.“pension” is defined in accordance with its ordinary meaning.
119.2.the pension does not fall within regulation 1.06(2) and, as a result, the definition of pension within the regulation is irrelevant.
Alternatively, the Applicant says if regulation 1.06 applies that the pension falls under regulations 1.06(1) and then 1.06(9A) of the SISR.
The Applicant says he was paid over a period of time during his life and that the payments do not have to be of the same amount each time to qualify.
The Respondent contends that:
122.1.the meaning of “non-commutable life pension” must not be defined without a proper consideration of the context.[60] In this regard the Respondent refers to the definition of “pension” in regulation 1.06, and says that based on that definition, the meaning of “non-commutable life pension” must be a pension:
122.1.1.that cannot be commuted to a lump sum;
122.1.2.paid “for the life” of the member (not simply “during” the life of the member as contended by the Applicant);
122.1.3.must involve regular payments; and
122.2.regulation 1.06(9A) is not applicable because it is the most flexible and broadest pension and that more stringent requirements are required for a non-commutable life pension.
[60] Referring to Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 at 381 per McHugh, Gummow, Kirby and Hayne JJ.
The ordinary meaning of a word must be taken to mean its ordinary meaning within the context of the legislative scheme in which it is found. This is set out in section 15AB of the Acts Interpretation Act 1901 (Cth) (“AIA”) which provides relevantly that:
(1) Subject to subsection (3), in the interpretation of a provision of an Act, if any material not forming part of the Act is capable of assisting in the ascertainment of the meaning of the provision, consideration may be given to that material:
(a) to confirm that the meaning of the provision is the ordinary meaning conveyed by the text of the provision taking into account its context in the Act and the purpose or object underlying the Act
(emphasis added)
In Stevens v Kabushiki Kaisha Sony Computer Entertainment and Others (2005) 224 CLR 193 at 230 McHugh J said at [124]:
In determining issues of statutory construction, the text of the relevant statutory provision must be evaluated not only by reference to its literal meaning but also by reference to the purpose and context of the provision……For purposes of statutory construction, context includes the state of the law when the statute was enacted, its known or supposed defects at that time and the history of the relevant branch of the law, including the legislative history of the statute itself. It also includes in appropriate cases “extrinsic materials” such as reports of statutory bodies or commissions and parliamentary speeches – indeed any material that may throw light on the meaning that the enacting legislature intended to give to the provision. That is the process required by the modern approach of the common law to statutory construction. In many jurisdictions, the common law principles have been incorporated, extended or modified by statute. Section 15AA of the Acts Interpretation Act 1901 (Cth) requires a court construing federal legislation to have regard to its purpose. Section 15AB of that Act authorises the use of various forms of extrinsic material to determine the meaning of that legislation.
See also the High Court decision in Federal Commissioner of Taxation v Consolidated Media Holdings Ltd [2012] HCA 55; (2012) 250 CLR 503, at 519 where the Court noted:
[39] This Court has stated on many occasions that the task of statutory
construction must begin with a consideration of the [statutory] text. So
must the task of statutory construction end. The statutory text must be
considered in its context. That context includes legislative history and
extrinsic materials. Understanding context has utility if, and in so far as, it
assists in fixing the meaning of the statutory text. Legislative history and
extrinsic materials cannot displace the meaning of the statutory text. Nor
is their examination an end in itself.
The preferable interpretation is one “that would best achieve the purpose or object of the Act (whether or not that purpose or object is expressly stated in the Act)”: section 15AA of the AIA. The main object and purpose of the SISA is set out in section 3(1):
The main object of this Act is to make provision for the prudent management of certain superannuation funds, approved depositfunds and pooled superannuation trusts and for their supervision by APRA, ASIC and the Commissioner of Taxation.
The Explanatory Memorandum noted the operating standards were:[61]
…designed to limit the risks associated with superannuation fund investments and to ensure superannuation savings are preserved until retirement and not accessed for current use.
[61] Explanatory Memorandum, Superannuation Legislation Amendment Bill (No 4) 1999, 3:
Regulation Impact Statement p.4 [check]
The main object of the SISA is prudent management of superannuation funds to provide financial means to retirees. The system established under the SISA provides for this by limiting when and how superannuation funds can be withdrawn.
The context of the word “pension” is within legislation which provides specified definitions. “Pension” has an expressly defined meaning for the purpose of the SISA and SISR.
Section 10 provides that a pension is only a pension for the purpose of the SISA if it meets the relevant SISR requirements.
The term “non-commutable life pension” is not defined in the SISA or SISR.
However, "non-commutable pension” is defined in regulation 6.01(2) to mean a pension provided under rules of a superannuation fund that:
(a)meet the standards of subregulation 1.06(2), (7) or (8); and
(b)ensure that, if the pension is commuted under subparagraph 1.06(2)(e)(i), (7)(g)(i) or (8)(d)(i), the resulting superannuation lump sum cannot be cashed unless:
(i)the purpose of the commutation is to cash an unrestricted non-preserved benefit; or
(ii)before commutation, the pensioner has satisfied a condition of release in respect of which the cashing restriction for preserved benefits and restricted non-preserved benefits is 'Nil'.
(emphasis added)
The payments made to the Applicant did not meet the standards in regulations 1.06(7) or (8), therefore regulation 1.06(2) applies.
Regulation 1.06(2) is the standard here because regulation 1.06(7) relates to life expectancy, and regulation 1.06(8) relates to market allocation, both of which are not relevant to the Applicant’s circumstances.[62]
[62] They are also not payable for life.
Regulation 1.06(1) provides a wider definition of “pension”, in that it only needs to satisfy regulation 1.06(9A). However, regulation 1.06(1)(b) requires a regulation 1.06(9A) benefit to also satisfy regulation 1.07D which refers to a 1.06(1)(b) benefit as an “income stream”. “Income stream” benefits are generally non-commutable but regulation 1.07D provides for some limited exceptions. A definition of a “non-commutable income stream” is provided for in regulation 6.01 and requires fixed monthly payments.
The benefit paid to the Applicant does meet the definition of an income stream. “Income streams” are not payable under Item 1.08 and are only payable under Items 1.09 (temporary incapacity), 1.09A (re acquiring a superannuation interest), 110 and 208 (when attaining preservation age).
Regulation 1.06(9A) is not applicable.
Even if regulation 1.06(9A) applied and regulation 1.06(2) provides that for a pension in regulation 1.06 to comply with the rules, the pension must be paid annually and must be paid throughout the life of the primary beneficiary.
The Oxford English Dictionary defines “throughout” as:
During the whole of (a period of time, event, situation, etc.); through the course of (a book or document); from the beginning to the end of.
During the whole of a period of time, event, situation, etc.; at every moment or point; all through.
The Macquarie Dictionary Online defines “throughout” as:
preposition 1. in or to every part of; everywhere in.
2. from the beginning to the end of.adverb 3. in every part.
4. at every moment or point.
The Applicant submitted that the difficulty with the Respondent’s interpretation is that it would lead to SMSFs being unable to pay non-commutable life pensions even where a member meets the condition of release. According to the Applicant, if the intention of the legislation was to define a non-commutable life pension parliament would have inserted the word “life” into the definition.
The words “throughout the life of” must have some meaning. If the word life was to have no meaning it need not have been inserted into Item 108 of Schedule 1. However, the word “life” merely describes the type of non-commutable pension the pension must be. The three non-commutable pensions are a life pension (1.06(2), a life expectancy pension (regulation 1.06(7) and a market linked pension at (1.06(8).
The Respondent submits that life pension surely has to be paid for the life of the recipient otherwise it is a misnomer. The Tribunal agrees.
The ITAA 97 refers to a pension covered by regulation 1.06(2) as a “lifetime pension” in section 294-130.
Under rule 1.06(2) the size of payments of benefit is fixed allowing for only minor variations.[63]
[63] There is a formula provided in regulation 1.06(2)(c).
The Respondent contends that the Applicant essentially received a lump-sum payment and did not receive a life pension as it was not paid throughout his life. After the 6 payments to the Applicant (see para 17 above), the Fund was depleted of all resources and wound up. The Applicant says the reason the Fund’s assets were depleted was because the assets of the Fund were devalued.[64]
[64] T20
No explanation was provided for the amounts distributed, why they were not in fixed amounts, or why the Fund was not ensuring it could pay the pension for the life of the Applicant. It all seems to have come to an end abruptly when the Applicant declared the assets of the Fund to be worthless.
The Tribunal accepts the Respondent’s submission that to pay out the entirety of a fund in the way that has occurred here goes against the objectives and intention of the SISA. Further, the SISA/SISR only allow for commutable pensions in very limited circumstances. For example, when a cashing restriction is nil.
Heerey J discussed the importance of the funds only being released early in exceptional circumstances in Re Kirkland, John Sloane; Ex Parte Official Trustee in Bankruptcy [1997] FCA 684:
Regulation 6.17(2)(a)(i) of those regulations provides that a member's benefit in a regulated superannuation fund (which the Fund is) may only be paid by being cashed in accordance with Division 6.3. Regulation 6.18(1) in Division 6.3 provides that a member's preserved benefits in a regulated superannuation fund may be cashed on or after the satisfaction by the member of a condition of release specified in sch 1. Part 1 of sch 1 (which is applicable to regulated superannuation funds) states that cashing restrictions on a preserved benefit are nil. The conditions of release are as follows:
(a)On retirement. By reg 6.01(7), the retirement of a person, for the purposes of sch 1, is taken to have occurred, in the case of a person who has attained age 55 if gainful employment has terminated and the trustee is reasonably satisfied that that person has no intention of subsequently becoming gainfully employed, either on a full-time or a part-time basis.
(b)The member has died.
(c)The member has become permanently incapacitated.
(d)The member has permanently departed from Australia.
(e)The member has suffered severe financial hardship.
(f)The member has attained age 65.
(g)Termination of employment with a particular employer has occurred and the benefit is paid as a non-commutable pension for life or an annuity for life.
(h)Termination of employment with an employer has occurred and the benefit is paid as a non-commutable pension for life or an annuity for life.
(i)The member is suffering from temporary incapacity.
(j)A condition has occurred for which there is an approval under s 62(1)(b)(v) of the Superannuation Industry (Supervision) Act.
…
Because superannuation funds in Australia enjoy substantial tax benefits there is a complex statutory regime which restricts the access members may have to benefits. Speaking very generally, the object of superannuation is to make provision for death, disablement or retirement at normal retiring age, or earlier if there are exceptional circumstances. It would conflict with that objective if members of funds could treat their entitlements as though they were funds on deposit, available at call.
The practical effect of the interpretation adopted by the Applicant is inconsistent with the object, purpose and context of the regulations and the Act. It would mean a fund member, whose employment had been terminated, could draw down their entire superannuation fund at once regardless of whether they had met preservation age, and regardless of whether they met any special permitted circumstances such as severe financial hardship, compassionate grounds, or the COVID 19 exception. During the early days of the COVID 19 pandemic, superannuation funds were permitted to be accessed “early” in the 2019–20 financial year. Eligible individuals adversely financially affected by COVID-19 were able to apply to access up to $10,000 of their superannuation early, between 20 April 2020 and 30 June 2020. One of the eligibility criteria for this early release was that the applicant was unemployed. Pursuant to the Applicant’s interpretation of the legislation such an extraordinary measure during the early stages of the pandemic would not have been required.
Were the payments from the Fund to the Applicant a “non-commutable life pension” or defined benefit?
The Fund does not satisfy the requirements of regulations 6.01(2) and 1.06(2) of the SISR - it was not paid throughout the life of the Applicant, having only been paid for six years, and the payments were not for a fixed amount.
Further, regulation 1.06(2) is a defined benefit pension which cannot be paid by the Fund.
A non-commutable pension is a type of defined benefit pension, such as a life or fixed term pension. This is because a defined benefit pension (see para 66 above) is any pension other than (relevantly here) an allocated pension, a market linked pension; or an account‑based pension. The pension paid here is not an allocated pension, a market linked pension; or an account‑based pension.
As a result, the Tribunal finds that the benefit paid by the Fund to the Applicant was a defined benefit pension. Pursuant to regulation 9.04I a defined benefit pension was not permitted to be paid to the Applicant.
Counsel for the Applicant submitted that the pension was intended to be paid for life. There was no evidence before the Tribunal of the Applicant’s/Fund’s intention at the time of establishing the Fund, or at the time of determining to pay the pension to the Applicant. Counsel for the Applicant accepted that this evidence was not before the Tribunal.[65]
[65] Transcript page 53, lines 6 to 12.
The Tribunal finds that the Fund had breached regulation 6.17 of the SISR. Regulation 6.17 is a prescribed operating standard pursuant to section 31(1) of the SISA. That is, the Applicant received a benefit from the Fund which was not in accordance with the prescribed standards. The Amended Assessments are correct. The amounts paid to the Applicant from the Fund should have been included as assessable income of the Applicant pursuant to 304-10(1) of the ITAA 1997 as it was a superannuation benefit received otherwise than in accordance with the prescribed payment standards.
The Fund breached operating standards pursuant to section 31(1) of the SISA.
The amount of:
158.1.$213,569 paid to the Applicant from the Fund in the 2015 financial year; and
158.2.$367,892 paid to the Applicant by the Fund in the 2016 financial year;
ought to have been included in the Applicant’s assessable income under s 304-10(1) of the ITAA 1997, as they were superannuation benefits received otherwise than in accordance with the prescribed payment standards.
The Tribunal funds that the assessments under review were not excessive.
Conclusion
The Applicant has not discharged its onus that the Respondent’s 2015 Amended Assessment and 2016 Amended Assessment were excessive.
ADMINISTRATIVE PENALTIES AND INTEREST
Did the Applicant make false and misleading statements? Are the penalties appropriate?
The statements of income in the Applicant’s ITRs were incorrect in that they did not include the benefit received from the Fund resulting in a shortfall amount.
Was the Applicant’s behaviour reckless?
Practice law statement PS LA 2012/5, Administration of the false or misleading statement penalty - where there is a shortfall amount, provides guidance on the administration of penalty, under subsection 284-75(1) of Schedule 1 to the Taxation Administration Act 1953, for making a false or misleading statement that results in a shortfall amount, including:
162.1.when an entity will become liable to the penalty, in the situation where the statement results in a shortfall amount, and
162.2.how the penalty is assessed, including factors to consider when making a remission decision.
There are different levels of conducts referred to in the practice statement. There is “failure to take reasonable care”, then “recklessness” and then “intentional disregard”. Different penalty units apply, with intentional disregard attracting the highest penalty.
PS LA 2012/5 sets out that the following factors are relevant when assessing reasonable care:
·whether reasonable attempts were made to keep records and to set up processes and systems, including the training of staff
·if the error was an inadvertent mistake - for example an isolated transposition mistake or a data entry error which was not the result of systematic issues
·for mistakes in interpreting the law or the facts and law, if reasonable enquiries were made, including whether
·the entity conducted a level of enquiry commensurate with the risk of the decision and their resources, or
·the entity just assumed the statement was correct.
·whether the entity was aware, or should have been aware, of the correct treatment of the law or of the facts, noting
·an entity should not rely on advice they have received where a reasonable person would be expected to know the advice is not worthy of such reliance, and
·an entity is not obliged or entitled to blithely accept assurance by their professional advisor.
·whether any factors prevented the entity from seeking advice, understanding the requirements of the tax law or reporting correctly
·whether it was a new, unusual or extraordinary transaction, as these transactions should have higher levels of care associated with them (the care and investigation expected is also relative to the size of the transaction), and
·whether the entity's level of knowledge, understanding of the tax system or personal circumstances impacted their compliance, considering
·whether a registered tax agent or BAS agent was used, and the agent's knowledge and understanding
·the entity's level of sophistication relating to tax matters
·the level of knowledge, education, experience and skills of relevant persons involved with the entity, and
·the personal circumstances of relevant persons involved, including age, health and background.
Despite the client list being worth $140,000, the Applicant had valued the worth of Company H in 2014 a “negative asset” on the basis that it:
“owed considerable money to its financiers and had - and back then it had only just started business or – well it just started business under - sorry, let me rephrase that. It had just gone through a change of advisers which then means that you’ve got to actually work out whether those clients will stay with the business or go. Some might follow Mr Reed, and they did. Some might go elsewhere, and they did. And some stayed”.[79]
[79] Transcript page 20, lines 43-47 & page 21, lines 1 to 5.
Even with the potential risk of not being able to retain the client base, this should only result in a discounting of the value. How can it have been worth a negative value? Again, there is no corroborating evidence to support the Applicant’s valuation.
At the hearing the Tribunal queried the Applicant regarding how Company H was deregistered if it owed considerable money. The Tribunal queried the identity of the financier? It was then the Applicant revealed that the entity Company H owed money to the Applicant personally. The Applicant said he forgave the money owed. The Applicant said he had provided the capital for the business.[80] There was no loan agreement or any other documentation regarding any investment or loan by the Applicant to this company. There was no corroborating material of any kind. Further, no explanation was given for the amount of the debt nor why the Applicant did not insist on payment.
[80] Transcript page 27, lines 39 to 47 and page 28, lines 1 to 5.
In these circumstances the Tribunal is not satisfied that the Trustee valued the Fund’s investment in the Trust A and Company H, at “market value”[81] as required by regulation 8.02B of the SISR.
[81] Defined in section 10, SISA – see paragraph 47 above.
The Applicant is also not satisfied with the Applicant’s valuation of the other investments made by the Fund. There is simply a paucity of evidence to corroborate the Applicant’s statement.
DID THE APPLICANT BREACH SECTION 66 AS TRUSTEE IN ACQUIRING AN ASSET FROM A RELATED PARTY OF THE FUND?
Yes. This was conceded by the Applicant.
Fund A
Fund A was established on 13 August 1992. The Applicant was the sole member of Fund A.
It was not in dispute that the trustees of Fund A and the Fund are related parties. The Applicant was the responsible officer of the Trustee and the sole director and shareholder of Company O, the corporate trustee of the Fund A.
The Fund purchased some shares owned by the Fund in Company L and Company N. The Applicant acknowledged this constituted an acquisition of assets from a related entity and that this constituted a breach of section 66 of the SIS Act.[82]
DID THE APPLICANT BREACH SECTION 62 IN FAILING TO ENSURE THE FUND WAS MAINTAINED FOR A CORE PURPOSE?
[82] Transcript page 21, line 41.
The sole purpose test is an objective test.[83]
[83] Aussiegolfa Pty Ltd v Federal Commissioner of Taxation [2018] FCAFC 122; 264 FCR 587
The Applicant’s evidence is that he did not establish that fund to obtain early access to the retirement benefits. The Applicant submits he could not have known that Company B business was going to be destroyed by fire at the time he established the Fund. The Applicant submits that the circumstances were beyond his control.
The Respondent submits the Fund was not established for a core purpose but rather to facilitate early access to superannuation benefits.
Section 62 is concerned with the purpose for which the fund is “maintained”, not just the intention behind its establishment.
The Applicant’s employment with Company B commenced shortly after establishing the Fund. The Fund was established by the Applicant even though he already had another SMSF. Company B was not an “arms length” employer because the Applicant was its sole director and shareholder. Benefits of over $800,000 were distributed to the Applicant in only 6 years, even though he had not reached preservation age. This was a relevant factor considered in Commissioner of Taxation v Coronica [2022] FCA 72; 114 ATR 305 (“Coronica”). There is no independent source of information which establishes that when the Fund was wound up suddenly its assets had no value.
In 2016 the financial statements reported a more than $3,000,000 decrease in the valuation of the Funds’ investments. Despite this the Fund paid its largest distribution of an “unrestricted non-preserved” benefit to the Applicant of $367,891.89.
The Tribunal agrees with the Respondent that this is not what is expected of a superannuation fund being maintained for the purposes of retirement. If the Fund was maintained for retirement purposes, one would have expected that the amount of benefit paid each year would reflect the reduced asset value. The definition of “superannuation fund” (see paragraph 47 above) specifically provides that the fund is to be an indefinitely continuing fund.
As referred to earlier, the Applicant said the reason for this drop in asset value was largely due to a loss in value of the Fund’s investment in Company E. The Applicant said Company E had applied for listing on the ASX but this was later refused by the ASX with the result that the value of the shares plummeted. The Applicant also stated that the pension that was paid was based on the calculation of the assets from 30 June 2015, prior to the decrease in value.[84] The Applicant acknowledged in his affidavit that he does not have “any documentation that evidences my provision of capital to [Company E] or the ongoing bonus shares” (see paragraph 186 above).[85]
[84] Transcript page 19, lines 24 to 35
[85] Affidavit of The Applicant [40.3]
The Applicant began receiving pension payments from the Fund in 2010 when he was only 47 years of age (11 years from his preservation age).
As at 2018 the Funds resources were depleted and it was wound up.
Despite Company B only contributing $20,000 in superannuation funds to the Fund on the Applicant’s behalf. The Fund was able to distribute over $819,000 to the Applicant.
It was put to the Applicant that he only set up the Fund to allow himself early access to those super funds. The Applicant refuted this. The Applicant did not explain why he needed another superannuation fund at the time he set up the Fund.[86]
[86] Transcript page 10, lines 20 to 23.
It was put to the Applicant that “given the significant decrease in market value and a large pension amount being paid, that the superannuation fund was not being maintained for the purposes of retirement?”. The Applicant said:[87]
---Incorrect. The pension that was paid was based on the calculation of the assets from 30 June 2015, and the decrease in market value had been in June of 2016, as the primary - the main - the biggest part of that decrease in value because one of the investments, [Company E], had applied for listing on the ASX, and the ASIC had no objections to the prospectus; however, the ASX decided not to proceed with listing [Company E], and in accordance with that, the shares - several of the companies got placed into administration, liquidation, et cetera, over the succeeded few months, and the shares were worth very little at that point in time.
[87] Transcript page 19, lines 26 to 35.
The Respondent submitted that an inference could be drawn that the purpose of the Fund was not for a core purpose, because at the time the Fund was established by the Applicant, he already had a superannuation fund. Further, having established the Fund, Company B only contributed $20,000 yet in excess of $800,000 was able to be withdrawn in a very short time span before the Fund was wound up.
The Applicant says the Fund was not wound up because the assets had been depleted by the benefit payments made to himself. Rather, the Applicant says benefit payments had to cease because the assets and investments held by the Fund lost their value. The Applicant submits that the assets reduction in value did not arise due to some action or inaction on their part.
The hurdle for the Applicant is that there is not one piece of corroborating evidence to support any of his contentions regarding the assets’ values. This was acknowledged at the hearing. No explanation was proffered by the Applicant to explain why no corroborating evidence was before the Tribunal on this issue.
Another troubling issue which gives rise to an inference that the Fund was not established or maintained for a core purpose is that the Applicant was receiving the benefits before it went to SMSF Strategies Pty Ltd for general advice on when payments could be made (see paragraph 12 above).
In the circumstances the Tribunal is not satisfied that the Fund was established for a core purpose. All that can be said of the investments made is that they all appeared to have failed. The Applicant was the director and shareholder of the Trustee.[88] In his affidavit the Applicant confirmed that as director of the Trustee, he “had the conduct of the investment activities of the Fund and made decisions as to which investments the Fund would make”.[89]
[88] T16
[89] Affidavit of The Applicant [46]
The Applicant has obtained early access to retirement funds of which he was not otherwise entitled.
DISQUALIFICATION
If any breaches of the Act are substantiated, are they of the nature and seriousness which justify the applicant’s disqualification? Is the Applicant a fit and proper person (s 126A, SISA)
Law Administration Practice Statement PSLA 2006/17 Self-managed superannuation funds – disqualification of individuals to prohibit them from acting as trustee of a self-managed superannuation fund, is an internal ATO document that instructs staff of the circumstances which can be considered in disqualifying an individual and thereby prohibiting them from acting as a trustee of a self-managed super fund.
PSLA 2006/17 provides the following guidance:
6. General considerations
When considering disqualification in relation to contraventions of the relevant legislation, you should:
·look at the acts of the individual
·consider all the facts of the case
·consider whether there is a future compliance risk.
The nature, number and seriousness of contraventions are a question of fact and degree, and it is not possible to apply prescriptive rules to the decision to disqualify.
Each case has to be considered individually. Some examples of relevant considerations when determining the seriousness of a contravention are:
·the behaviour of the trustee in relation to the contravention
·the extent to which the fund's assets were affected by the contravention
·the extent to which the fund's assets were exposed to financial risk and whether there was any loss to the value of the fund
·the number and extent of contraventions over a period of time.
·the nature of the contravention in the overall scheme of the legislation. For example, a contravention involving an artificial arrangement intended to undermine the regulatory provisions or the tax concessions offered to SMSFs is likely to be serious.
7. Assessing the future compliance risk
Disqualification is designed to protect the investing public against the risk that people with a history of non-compliance will re-offend.[18] A key factor in making the decision to disqualify an individual is whether, by not taking such action, there will be a future compliance risk.
An individual will be considered to have a future compliance risk if it is reasonable to draw that conclusion from their compliance history. This includes considering matters in relation to their SMSF, own personal tax affairs, or that of any other entity in which they have been in a position of responsibility.
Consideration should be given to all four of the following aspects of compliance, both before and after a contravention:
·registration - whether the trustee is registered for all relevant roles
·lodgment - whether the individual has lodged all returns in the correct format on time without prompting from the Commissioner
·reporting - whether the individual has demonstrated a willingness to report correctly
·payment of debt - whether the individual paid debts voluntarily by their due dates. Further, if the individual has an outstanding debt, whether they have entered into a payment arrangement and fulfilled their payment obligations under the arrangement.
It is imperative to remember that sometimes mistakes are made. What is important is that the individual demonstrates a willingness to comply with their obligations.
DISQUALIFYING UNDER SUBSECTION 126A(3) - FIT AND PROPER PERSON
8. What do I take into account when assessing an individual as 'fit and proper'?
You need to look at two things when deciding whether an individual is a fit and proper person. The fitness of the person - which is determined with reference to the skills required for them to satisfy the obligations as trustee, including their qualifications, experience and competence.
Factors to consider include whether the person:
·possesses a reasonable level of skills, knowledge, expertise, experience, diligence and soundness of judgment to undertake and fulfil particular duties and responsibilities of being an SMSF trustee
·answers questions by the ATO in a manner that is reasonable in the circumstances.
Deciding whether an individual is a proper person to be a trustee entails looking at their general behaviour and conduct in the discharge of their duties, and also their reputation and character in relation to the conduct of any relevant business activities.
Some considerations are whether they have:
·demonstrated a willingness to comply with regulatory or other professional requirements
·carried out their role with proper independence
·been reprimanded or otherwise sanctioned by a professional or regulatory body
·managed their personal debts
·demonstrated a high level of integrity
·been substantially involved in the management of entities which have been wound up or failed.
Both fitness and propriety need to be considered in light of the reasonable risks of the individual potentially:
·misappropriating fund monies
·dealing with fund assets in an illegal way
·failing to keep proper records
·knowingly providing inaccurate or misleading information to the ATO, and
·repeatedly and or deliberately failing to provide information to the ATO in compliance with their reporting obligations.
Generally, situations where a trustee may be found not to be a 'fit and proper' person include, but are not limited to, where the trustee:
·allows a contravention by another trustee to occur
·fails to take reasonable steps to prevent a contravention
·fails to notify the Regulator as soon as is reasonably practicable to do so after becoming aware of a contravention by another trustee
·performs their duties in a manner which allows other trustees to contravene the SISA or the FS Act.
In making the decision to disqualify an individual for not being 'fit and proper' the Commissioner will take into account the following indicators:
·any contraventions of the SISA
·the circumstances surrounding the contravention
·considerations other than the individual's compliance with the SISA which go to establishing the character and repute of the person
·non-compliance with other taxation laws
·whether the individual has been subject to sanctions under any other relevant laws. (Relevant laws in this instance would generally include those laws dealing with financial responsibilities, honesty and business transactions)
·the association the individual has with other trustees of the SMSF and the impact this relationship has on their ability to perform their duties as a trustee, and
·all the circumstances of the case including the reasonably assessed honesty, competence, diligence, knowledge, ability, soundness of judgment, reputation and character of the individual.
Where there is sufficient evidence to identify contraventions which justify a disqualification under subsections 126A(1) or (2), and evidence that provides grounds to disqualify under subsection 126A(3), the individual can be disqualified under both limbs.
(emphasis added)
The Respondent made the Disqualification Decision on the basis that the Applicant, as responsible officer of the body corporates of the Fund and Fund A contravened the SISA on the following grounds:-[90]
230.1.Failing to comply with the prescribed operating standards of a regulated SMSF (the Fund);[91]
230.2.Providing financial assistance to a member of an SMSF (the Fund);[92]
230.3.Failing to prepare accurate accounts and statements as required by the SISA (the Fund);[93]
230.4.Failure to operate a Fund for the sole purpose of benefiting the members in their retirement (the Fund);[94] and
230.5.Acquiring assets from a related party (Fund A).[95]
[90] T-Docs 3: T2, p.17, the Commissioner reconsidered his position in relation to the Applicant's
compliance with in-house asset provisions and this ground was no longer pressed.
[91] Section 34, SISA.
[92] Section 65, SISA
[93] Section 35B, SISA
[94] Section 62, SISA.
[95] Section 66, SISA.
The relevant principles were recently addressed by Davies J in Coronica (on appeal from the Tribunal):
2The SIS Act makes provision for “the prudent management” of regulated superannuation funds and for their supervision by regulators (s 3(1)). A regulated superannuation fund is a superannuation fund that meets the requirements of s 19(2)-(4), namely: it must have a trustee; either the trustee must be a “constitutional corporation” or the fund must be a pension fund; and the trustee must elect for the fund to become a regulated superannuation fund. In return for a trustee electing for the fund be to be subject to regulation and supervision under the SIS Act, the fund may become eligible for concessional taxation treatment under the Income Tax Assessment Act 1997 (Cth) (ITAA 1997): SIS Act s 3(2). To qualify, the fund must be a complying superannuation fund for the purposes of the ITAA 1997 in relation to a year of income (see SIS Act, s 45).
3The Commissioner is one of the regulators under the SIS Act and, by ss 5(2)(c) and 6(1) is given the general administration of the provisions of the SIS Act as they relate to regulated self‑managed superannuation funds, including a fund’s complying status for tax purposes. The requirements for a self-managed superannuation fund to be a complying superannuation fund are set out in s 42A and include the trustee’s compliance with the operating standards prescribed by the SIS Act for self-managed superannuation funds. Section 42A(5) requires either that the trustee has not contravened any regulatory provisions during the year of income or, if contraventions during the income year have occurred, the Commissioner nevertheless thinks that a notice should be given to the trustee stating that the self‑managed superannuation fund is a complying superannuation fund. In making that decision, the Commissioner must give consideration to the taxation consequences for the self‑managed superannuation fund if it were to be treated as a non‑complying superannuation fund, the seriousness of the contraventions and all other relevant circumstances: s 42A(5)(b)(i)-(iii). Where a fund does not meet the requirements of s 42A in a year of income, the Commissioner, by s 40(1), may revoke the complying status of the fund and, if revoked, the notice of compliance is taken never to have been given.
4By s 34 of the SIS Act, it is a requirement for a trustee of a superannuation fund to ensure that the prescribed operating standards applicable to the fund are complied with at all times. A contravention of s 34 renders the trustee liable for administrative and criminal penalties: ss 34, 166. Contravention also renders the trustee liable to disqualification from acting as a trustee: ss 120, 126A. These sanctions are directed at ensuring compliance by trustees with their fiduciary and regulatory obligations: Senate Select Committee on Superannuation, Parliament of Australia, Safeguarding Super (Report, June 1992) 42-4; Supplementary Explanatory Memorandum, Superannuation Industry (Supervision) Consequential Amendments Bill 1993 (Cth) 1.
(emphasis added)
In Coronica Davies J had to consider, among other things, whether the Tribunal had:
232.1.addressed the correct statutory questions posed by ss 126A(1) and (3) of the SISA; and
232.2.asked itself the right question in exercising its discretion under ss 126A(1) and (3) of the SISA.
Davies J explained that whether breaches of the SISA are serious enough to ground disqualification and/or whether a person is otherwise not a fit and proper person to be a trustee, “the formation of the state of satisfaction of those matters [is] a precondition to the exercise of the statutory power to disqualify a person from acting as trustee of a superannuation fund”. That is, it is “mandatory” for the decision maker “to consider whether to form the required states of satisfaction as a statutory condition for the exercise of discretion”.[96] In Coronica Davies J found:
[19]…the Tribunal did not separately and independently consider for itself whether it was satisfied that Mr Coronica was not a fit and proper person to act as trustee. Rather, the Tribunal proceeded straight into a consideration of whether in the exercise of its discretion it should disqualify Mr Coronica…
[96] At [15].
In Australian Securities and Investments Commission v Forex Capital Trading Pty Limited, in the matter of Forex Capital Trading Pty Limited [2021] FCA 570, Middleton J, said in the context of a disqualification order, that it “protect[s] the public and further[s] the objectives of personal and general deterrence”.[97]
[97] Citing Rich v Australian Securities and Investments Commission (2004) 220 CLR 129 at [48]-[49] (McHugh J) citing Australian Securities and Investments Commission v Adler [2002] NSWSC 483; 42 ACSR 80 ('ASIC v Adler') at 97-99 (Santow J). See also ASIC v Adler & 4 Ors [2002] NSWSC 483, at [56].
Applicant’s Submissions
The Applicant submitted that if the Tribunal determined the Payments were not a non-commutable life pension in accordance with SISR, the contravention was not of a nature or seriousness which justifies disqualification for the following reasons: [98]
[98] Applicant’s written submissions dated 19 October 2022 [112]-[124]
235.1.the Applicant had a genuine belief that the Payments met the definition of a non-commutable life pension;
235.2.the fact that the Applicant’s interpretation turned out to be incorrect, ought not be a factor that weighs in favour of disqualification;
235.3.the Applicant met a condition of release;
235.4.the reasons for the reduction in the value of the Fund related to external factors, and not as a result of the payments to the Applicant;
235.5.as the Applicant is now retired, he will not have any cause to be paid a pension in accordance with the condition of released contained within item 108 of schedule 1 of SISR, as he is not employed which means that his employment cannot be terminated and therefore does not represent a future compliance risk;
235.6.should the Tribunal determine that the units in Trust A were not correctly valued, such a contravention would represent a mere accounting error;
235.7.the Applicant has engaged external advisors to administer and audit the Fund A;
235.8.the acquisition of assets from a Related Party contravention is not of a nature or seriousness that would justify disqualification because the relevant assets were acquired from another superannuation fund of which the Applicant was a member and the assets remained in the superannuation system and are available for the Applicants retirement and
235.9.should the Tribunal find that the Applicant, as a result of the payments, was not maintaining the Fund for a core purpose, such a contravention is not of a nature or seriousness which would justify disqualification.
Consideration
The Applicant accepted the following propositions during cross-examination that:
236.1.as director of the Trustee, he checked all of the financial statements prepared by staff of Company A for the Fund;[99]
236.2.as trustee and as a chartered accountant he was aware he had an obligation to comply with the operating standards of the regulated superannuation fund;[100]
236.3.when the Fund paid a pension, the Trustee has to report assets held by the Fund at market value;[101]
236.4.he had an obligation to not allow the Fund to acquire assets of a related party, except in limited circumstances;[102]
236.5.he had an obligation to ensure that the Fund was maintained solely for at least one of the core purposes;[103]
236.6.for some pensions minimum amounts need to be paid and it was his obligation to ensure those minimum amounts were paid;[104] and
236.7.for each year the minimum amount of pension the Fund was required to pay was 2% of the closing account balance of the Fund from the previous year;[105]
[99] Transcript page 5, line 18.
[100] Transcript page 5, lines 39 to 41.
[101] Transcript page 5, lines 46 to 47 & page 6, lines 1 to 2.
[102] Transcript page 6, lines 4 to 7.
[103] Transcript page 6, lines 8 to 10.
[104] Transcript page 10, lines 43 to 44.
[105] Transcript page 12, lines 16 to 19 & lines 34 to 38.
At the hearing the Applicant maintained that he had not acted in breach of any obligations under SISA and SISR. This is despite the TPB’s finding that he had acted in breach and the cancellation of his SMSF auditor registration by ASIC.[106]
[106] Transcript page 6, lines 16 to 25.
Adverse Decisions
The Applicant has been disqualified and terminated by ASIC and the TPB. The Applicant has lost his membership with a professional organisation.
An extract from ASIC’s media release in regards to the ASIC Decision states:[107]
ASIC disqualified…[the Applicant] – for significant auditor independence breaches and deficiencies in auditing the acquisition of shares, borrowings, valuation of assets, compliance with in-house asset requirements and regarding a non-commutable life pension.”
[107] ST-Docs: ST1.
The findings of the CA ANZ disciplinary hearing was that the Applicant:
240.1.had been subject of adverse or unfavourable findings by ASIC in relation to his professional or business conduct and competence;
240.2.failed to comply with a reasonable and lawful direction related to a matter concerning the good order and management of CA ANZ; and
The Applicant’s membership of CA ANZ was suspended for a period of three years.[108]
[108] ST-Docs: ST2.
The Applicant says he disputes the outcomes of the ASIC Decision TPB Decision and CPA Decision and he did not appeal those decisions because there was no utility in doing so and he had stopped practising anyway.[109] It is too late to reargue those matters. No appeals were lodged in relation to those matters. Those decisions therefore stand. This is not the forum to argue the correctness or otherwise of those decisions. The Applicant had an opportunity to appeals those decision and elected not to. They now weigh heavily against the Applicant.
[109] Transcript page 64, lines 20 to 27.
ASIC, in making the ASIC Decision to ban the Applicant, had taken into account that a number of the Applicant’s clients had also claimed the payment of a non-commutable life pension prior to their preservation age.
The Respondent submits, and the Tribunal agrees, it is evident from the ASIC decision, Chartered Accountants Australia and New Zealand suspension of his membership and the decision of the Tax Practitioners Board to cancel his registration, that the Applicant is not fit and proper.
The Respondent submits and the Tribunal also agrees that:
…the seriousness of this contravention is due to the fact that the Applicant took a personal benefit from his role as corporate officer of the trustee and this contravention attracts a civil penalty.[110]
[110] See section 193, SISA.
The Applicant said he read the legislation and believed his interpretation was correct.[111]
[111] Transcript page 23, lines 20 to 26.
At the hearing in relation to the ASIC Decision, the Applicant sought to distinguish whether he had advised clients or merely audited them. The Applicant is very experienced and knows that, as auditor, he should have checked that the conduct engaged in the audited clients was permitted. The pathway existed for him to seek a private ruling from the ATO.
Interpretation of non-commutable pension
The Applicant refused to accept that his construction of a non‑commutable life pension, meant he was able to draw down the entirety of the Fund prior to his preservation age. The Applicant said:[112]
I drew pension payments out of the fund, however it was the collapse of the investments that actually meant that the entirety of the fund disappeared, or effectively disappeared, not anything to do with the actual payments of the pensions.
Well, the pension amounts paid were significantly - were more than the minimum payments, on your contention? The pension payments, as I said before, you know, I would have to relook at the Act in relation to minimum pension payments. The fact that, as you said before, there’s over $800,000 worth of payments over the years, but there was over $5 million worth of assets. So, 800,000 over all those years on $5 million worth of assets, is not a depletion of the balance of the fund.
[112] Transcript page 24, lines 28 to 39.
Fund Statement Errors
The Applicant was very experienced in financial matters, he had status as a chartered accountant, he was registered as a tax practitioner and SMSF auditor. He was also director and shareholder of the Trustee of the Fund. It was therefore not plausible that the Applicant was unable to recall, during cross-examination, whether the payments made should have been preserved benefits or unrestricted non‑preserved benefits. The Applicant indicated he would have to refresh his memory.
Do you recall how the benefits were identified in the [the Fund]?‑‑‑No, we’re going back so long in memory I don’t, you know, and as I said, I’ve been retired for a couple of years now, I don’t recall all the parts of the Act either.
You applied for a non‑commutable lifetime pension?‑‑‑Yes.
That was because, under the cashing restriction for termination of employment, if it was a preserved benefit it had to be taken as a non‑commutable lifetime pension, is that correct?‑‑‑From memory, yes, but I haven’t got the Act in front of me so I’m not sure.
…
And so earlier I took you to an application where you applied for a non‑commutable lifetime pension?‑‑‑Yes.
And you applied for that on the entirety of the account balance because all of those amounts were preserved benefits at that time?‑‑‑Yes, as I said, I can’t recall, so, yes. But that’s what my application says so, yes, that’d be correct.
And that would’ve been what you would have done; if the amounts were preserved benefits you would’ve applied for a non‑commutable life pension?‑‑‑Correct.
…
You’ll see there that’s [the Fund’s] financial statement for the year ending 2014?‑‑‑Correct.
It’s prepared there by [Company H]?‑‑‑Yes.
If you then turn to page 18?‑‑‑Yes.
That identifies that your liability for accrued benefits is $2.8 million there for 2014?‑‑‑Correct.
And if you turn over the page to page 19, it identifies there that the pension paid was an unrestricted non‑preserved tax‑free benefit?‑‑‑Yes.
You accept that that’s incorrect?‑‑‑I’m trying to recall the Act that once the pension starts whether it continues to be preserved and continues to be restricted, and I don’t recall.
Do you recall that if a cashing restriction is nil that a pension then becomes an unrestricted non‑preserved benefit?‑‑‑As I said, it’s been a long time since I looked at the Act and actually gone through it because of the complexities of the Act.
The Trustee of the Fund had declared the Fund’s accounting and reporting statements to be true and correct.
In other areas the Applicant had very good recall.
You would accept that the drawing down of a superannuation fund whilst a person is below their preservation age, not having suffered some sort of terminal illness or incapacity, is against the objects and purpose of the Superannuation Act? I’m not sure what you mean by drawing down, however if you’re talking about the payment of a pension, the Act says that it can be done.
SISA Breaches
A breach of section 66 of the SISA is now conceded. The Tribunal has also found the Applicant has also acted in breach of:
252.1.section 34 of the SISA in failed to ensure prescribed operating standards were complied with;
252.2.section 65 of the SISA in making the payments to the Applicant when not permitted to do so; and
252.3.section 62 of the SISA in failing to ensure the Fund was maintained for a core purpose.
Conclusion
The Tribunal finds that the Applicant’s breaches take on an enhanced significance because of the Applicant’s circumstances, and support a finding that the Applicant is not a fit and proper person to be a trustee of a superannuation fund.
The Applicant was a responsible officer of the Fund’s Trustee, a chartered accountant, SMSF auditor and registered accountant. Despite that experience, education and standing, the Applicant was engaged in numerous breaches of the SISA. Those breaches related to the fundamental operations of a SMSF. Some of those breaches attract civil and criminal penalties. This is not trivial misconduct. The Fund has had to be wound up, having had all of the money available distributed to the Applicant. This conduct is the antithesis of that required by the objects of the SISA.
The Applicant is sole director of the trustee of the the Fund and therefore there remains a continuing risk of breach. The Applicant’s conduct does affect the public because of his former role as SMSF auditor, and the importance of the superannuation system to the Australian community in general. There are reasons superannuation is not paid out early, and they are all to ensure adequate provision for individuals’ retirement which reduces the burden on the Australian taxpayer in having to pay the age pension. The Tribunal is also concerned to see the doggedness with which the Applicant has maintained his interpretation of the law and his conduct in that regard. This raises serious question regarding his suitability to continue acting as a trustee. There was no acceptance by the Applicant that there were steps he could have taken to mitigate any chance of breach. There was no contrition or acceptance of responsibility acknowledged by the Applicant.[113] The Applicant, in his position, ought to have known the correct steps to be taken. The fact that he took none of them, and appears to lack a decent understanding of them, leads to a finding that the Applicant is not a fit and proper person.
[113] See Fitzmaurice v Commission of Taxation [2019] AATA 2217 where this was a relevant factor taken into account by the Tribunal.
In decision of Hart and Commissioner of Taxation (2018) 107 ATR 966, 998 [174], Senior Member Fice said:
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.
When it came to the section 66 breach, the Applicant sought to put some of the blame on the auditor. The Applicant told the Tribunal:[114]
…it was an oversight. It wasn’t picked up by the auditor, and I missed it, and it was a transfer from one super fund to another, and, yes, I must admit I didn’t give it the due thought and process I should have at that time. And we have conceded that, you know, we breached that.
[114] Transcript page 22, lines 8 to 12.
The Respondent referred the Tribunal to another Tribunal decision of Driscoll v Commissioner of Taxation [2021] AATA 3892 at [42] and [55], where the Tribunal determined that, based on the significant maximum penalty that may be imposed, it suggests the legislature considered contraventions of this section to generally be a serious matter.
The Tribunal finds the conduct of the Applicant demonstrates they are not a fit and proper person.
DECISION
The Applicant has failed to discharge his onus of proof that the assessments were excessive. The Decisions are affirmed.
The Tribunal affirms the 2015 Penalty Decision and 2016 Penalty Decision.
The Tribunal finds that conditions for disqualification have been met and that the Applicant should be disqualified. The Disqualification Decision is affirmed.
| I certify that the preceding 262 (two hundred and sixty-two) paragraphs are a true copy of the reasons for the decision herein of Senior Member D K Grigg. |
...........................[SGD]............................
Associate
Dated: 24 April 2023
Date of hearing: | 20 October 2022 |
Counsel for the Applicant: | Mr M de Waard |
Solicitor for the Applicant: | Cornwalls |
| Counsel for the Respondent: Respondent: | Ms F Chen Australian Taxation Office |
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