Xiu Xu and Commissioner of Taxation
[2013] AATA 855
[2013] AATA 855
Division Taxation Appeals Division File Number(s)
2013/2007
Re
Xiu Xu
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Mr Dean Letcher, QC, Senior Member Date 2 December 2013 Place Sydney The objection decision is affirmed.
...................[sgd]....................................................
Mr Dean Letcher, QC, Senior Member
CATCHWORDS
TAXATION AND REVENUE – income tax – withdrawal of superannuation funds – whether release conditions satisfied – inclusion of superannuation benefit in assessable income – penalty – decision affirmed
LEGISLATION
Income Tax Assessment Act 1997 ss 6-10, 304-10
Superannuation Industry (Supervision) Act 1993 ss 31, 65
Superannuation Industry (Supervision) Regulations 1994 regs 6.17, 6.18Taxation Administration Act 1953 Sch 1 ss 284-75, 284-90, 298-20
CASES
Dixon v Federal Commissioner of Taxation [2008] FCAFC 54; (2008) 167 FCR 287
Re JG & JA Williamson Holdings Pty Ltd and Federal Commissioner of Taxation [2007] AATA 1344; (2007) 66 ATR 868
Russell v Federal Commissioner of Taxation [2009] FCA 1224; (2009) 74 ATR 4666REASONS FOR DECISION
Mr Dean Letcher, QC, Senior Member
2 December 2013
The applicant is a trustee/member of the “Life Superannuation Fund” which is a self-managed superannuation fund (“SMSF”) under the Superannuation Industry (Supervision) Act 1993 (“SISA”). During the financial year ending 30 June 2010, the applicant withdrew from the fund over 90% of its assets, namely:
(a)22 January 2010 – $12,000;
(b)22 March 2010 – $5,500;
(c)24 March 2010 – $20,000;
(d)25 March 2010 – $25,000.
This total of $62,500 was not included in the applicant’s personal income tax return for financial year 2010 as assessable income. The respondent issued an amended assessment including that amount and imposed a penalty and interest charge. The applicant objected and the respondent disallowed the objection. From that decision the applicant seeks review by this Tribunal.
LEGAL BACKGROUND
The applicant asserts that the total of $62,500 was paid out to her account and used by her to assist the purchase of a home for herself at a time when she had nowhere else to live, no job and no ability to borrow further amounts. The applicant maintains that she was permitted to do so because she met the conditions of release for payment of “superannuation benefits” from her complying fund set out in regs 6.17 and 6.18 of the Superannuation Industry (Supervision) Regulations 1994 (“SISR”) and complied with s 31(1) of SISA .The respondent contends that the applicant did not meet those conditions and, in breach of SISA and SISR, withdrew those amounts as superannuation benefits, the result being that under s 304-10 and s 6-10 of the Income Tax Assessment Act 1997 (“ITAA 1997”) the total amount of $62,500 was to be included in her assessable income for the 2010 financial year.
The “Conditions of Release of Benefits” of Regulated Superannuation Funds are set out in a table as Part 1 of Schedule 1 to the SISR in the form of separate items with their own conditions and “cashing restrictions” (meaning how the amount may be paid out). The relevant items are:
Column 1
Item
Column 2
Conditions of release
Column 3
Cashing restrictions
101 Retirement Nil 105 Severe financial hardship For a person taken to be in severe financial hardship under paragraph 6.01(5)(a)—in each 12 month period (beginning on the date of first payment), a single lump sum not less than $1,000 (except if the amount of the person’s preserved benefits and restricted non‑preserved benefits is less than that amount) and not more than $10,000
For a person taken to be in severe financial hardship under paragraph 6.01(5)(b)—Nil.
107 Compassionate ground A single lump sum, not exceeding an amount determined, in writing, by the Regulator, being an amount that:
(a) taking account of the ground and of the person’s financial capacity, is reasonably required; and
(b) in the case of the ground mentioned in paragraph 6.19A (1)(b)—in each 12 month period (beginning on the date of first payment), does not exceed an amount equal to the sum of:
(i) 3 months’ repayments; and
(ii) 12 months’ interest on the outstanding balance of the loan
110 Attaining preservation age Any of the following:
(a) a transition to retirement income stream;
(b) a non‑commutable allocated annuity;
(c) a non‑commutable allocated pension;
(d) a non‑commutable annuity;
(e) a non‑commutable pension
The applicant did not disclose the amount withdrawn as part of her assessable income. The respondent says that was because she failed to take reasonable care to comply with a taxation law and the respondent applied a 25% administrative penalty to the shortfall under s 284-75(1) and Item 3 of the table in s 284-90(1) in Schedule 1 of the Taxation Administration Act 1953 (“TAA”). The respondent has declined to remit any portion of the penalty (s 298-20 Schedule 1 TAA).
The applicant has also asserted on occasions that the withdrawal was a loan by the fund to her and not withdrawal of a “superannuation benefit”. The respondent contends that there was no agreement for repayment, that supposed loan agreements were not genuine and the withdrawal cannot be characterised as a loan. In any event, s 65(1) of SISA provides that:
A trustee or an investment manager of a regulated superannuation fund must not:
(a) lend money of the fund to:
(i)a member of the fund…
(b) give any other financial assistance using the resources of the fund to:
(i)a member of the fund…
Both the applicant and respondent agree that the applicant was at all times a trustee and member of the relevant regulated superannuation fund. Whether the withdrawal had the character of a loan or “other financial assistance” it was still contrary to SISA.
FACTUAL BACKGROUND
The applicant was born in China and came to Australia as a student. She obtained an Advanced Diploma in Accountancy at TAFE, and then worked as a bookkeeper in the field of accountancy but without any specialisation in superannuation or tax. She formed the SMSF in 2002 with her son as the only other member. She says that in January 2009 she lent RMB 360,000 (approximately $A60,000) to a friend in China which was to be repaid with interest in January 2010. The friend’s business was not successful and was unable to repay the loan. In the meantime, the applicant entered a contract to purchase a house for $300,000 on 23 December 2009. She says that she paid a deposit of $30,000 and was required to pay the balance of $270,000 on the settlement date, later extended to late March 2010. In the expectation of completing the purchase of the house, she agreed to vacate her rented residential home unit, and then in January her employer gave her notice that she was to be retrenched. The applicant was not cross-examined as to the accuracy of her story. On her version of events, she was soon to be without a roof over her head, having given up her rented unit but unable to complete the house purchase, and because she would be unemployed, she would have no prospect of being able to borrow more money to make up the gap left by the unpaid loan.
The Superannuation Industry (Supervision) Regulations 1994 made under SISA specify in Schedule 1 the only conditions under which funds may be released from a SMSF. If none of those conditions are met, then under s 304-10 of ITAA 1997 the funds accessed are included in the recipient’s assessable income for that financial year. That is what occurred in this case. The applicant objected to the assessment but on 26 March 2013 the respondent issued a decision disallowing the objection. On 6 May 2013 the applicant sought review of the decision from this Tribunal.
In addition to having $62,500 added to her assessable income for the year, the applicant was issued with an administrative penalty of 25% of the shortfall. Under s 284-75(1) of Schedule 1 of TAA, such a penalty may be applied subject to a discretion to remit the penalty in whole or part. The applicant seeks the remission of the whole.
DISCUSSION AND FINDINGS
The essence of a loan is that there is an agreement before money is paid that it will be repaid, usually at a particular time and usually with an agreed rate of interest. The applicant has alleged a loan existed between the SMSF and herself only after her fund was audited and found to be non-compliant. She told the auditor that the funds were withdrawn because of hardship and did not mention a loan. In December 2011 the applicant produced two “loan agreements” both dated 10 January 2010, containing different terms but neither was executed. I find that neither document is a genuine loan agreement, that the applicant at the time of the withdrawals had not agreed on the terms of any loan, and that at the time she believed that she could persuade others that she was entitled to obtain her superannuation benefits.
The applicant contends that she has brought herself within each of the four relevant conditions by which funds were permitted to be released. The facts of this case concerning the relevant Schedule 1 conditions are:
(a)Retirement (item 101): The condition requires prior retirement from gainful employment and, if the recipient is under 60, that the recipient has an intention never to again be gainfully employed. At the time of receiving the payments, the applicant was still in employment which ended on 14 April 2010 – after the payments made in January and March. Further she was only 55 years old, did not state an intention to never again be employed and in fact has been employed from October 2010 to the present time. She has at times stated that her intention was to borrow the funds from the SMSF as a loan which would be quite inconsistent with taking the amounts as a retirement benefit.
(b)Severe financial hardship (item 105): This condition requires that the recipient be not employed at the time of receipt and “unable to meet reasonable and immediate family living expenses” and either:
(a)evidence of receipt of Commonwealth income support payments for a continuous period of 26 weeks ; or
(b)evidence of receipt of Commonwealth income support payments for a cumulative period of 39 weeks.
The evidence from the applicant’s own records and evidence was that she was employed at the time of receipt of each of the payments, that after her employment ended she received Centrelink benefits for no more than 22 weeks and she proffered no evidence of inability to meet reasonable and immediate expenses. Her view that she was unable to meet expenses could be persuasive only if it were to be accepted that inability to settle the purchase of her house and possible forfeiture of the deposit of $30,000 satisfied the test set out in the Item. Clearly this was not so.
(c)Compassionate grounds (item 107): The condition specifies a very restrictive test. The ground the applicant seeks to rely upon requires the prior existence of a mortgage on the residence of the recipient, an application to the regulator to allow the release of a single amount and its written consent to release that amount to prevent foreclosure on the mortgage. The applicant applied to Centrelink in January but was told correctly that as she was not the owner of the property and there was no mortgage in existence the condition could not apply. At the time of withdrawing the funds, the applicant had not settled the purchase, there was no mortgage so no risk of any foreclosure, the regulator never consented and the withdrawal was made in four instalments rather than a single sum. This condition was not met.
(d)Attaining preservation age (item 110): The applicant was aged over 55 years at the time of each withdrawal and she maintains that this was sufficient compliance. However, the condition requires that when one reaches the preservation age (as the applicant had) the amount withdrawn must be directed to income streams, pensions or annuities. The fact was and the applicant agreed that this was not so. The applicant took the funds in several substantial payments either as superannuation benefit or as a loan but not as an income stream, pension or annuity.
ADMINISTRATIVE PENALTY
The administrative penalty of 25% of the shortfall amount was imposed on the basis that there was a failure to take reasonable care by the taxpayer to comply with a taxation law. The applicant studied accountancy in Australia and obtained an Advanced Diploma of Accountancy. She has worked in that field for many years. Leaving aside the applicant’s story of a loan (which I do not accept) the most exculpatory version of events she gave was that someone, unnamed, had told her that she could legally access the benefits. In fact, in voluminous correspondence, in her evidence and in repeated addresses to the Tribunal the applicant insistently and continually asserted that she had complied with each of the four conditions of release. Any reading of those conditions would lead to a conclusion that the applicant did not comply.
The applicant, having obtained her own self-managed superannuation fund, with her accountancy background, with a fluent command of English and with experience working in businesses, was at least the equal of the ordinary prudent person in knowing of the requirements of the superannuation system. If a taxpayer is uncertain about a tax matter, reasonable care requires that they enquire from someone with more specialised knowledge (Russell v Federal Commissioner of Taxation [2009] FCA 1224; (2009) 74 ATR 466 at [196], Re JG & JA Williamson Holdings Pty Ltd and Federal Commissioner of Taxation [2007] AATA 1344; (2007) 66 ATR 868 at [10]). I find that the applicant did not exercise reasonable care in relation to her income tax return.
REMISSION OF PENALTY
I find that there are no compassionate, special or particularly unusual features of this matter which would justify the exercise of the discretion to remit in favour of the applicant. I believe she knew the many benefits of the superannuation system and also the restrictions which applied and the sanctions adopted to discourage breaches. While recognising that the applicant was in a difficult and unfortunate financial position at the time it should, and on the evidence, it would have been clear to her that she was obliged to declare as income the amounts received from the superannuation fund. The relevant question when exercising the discretion to remit is whether “the outcome is harsh, having regard to the particular circumstances of the Taxpayer” (Dixon v Federal Commissioner of Taxation [2008] FCAFC 54; (2008) 167 FCR 287). Given the applicant’s qualifications, experience and clear failure to comply with the conditions of release of the fund, I do not find that the outcome is harsh in all the circumstances of the applicant. The applicant did not make a voluntary disclosure of the falsity of her return and has never conceded that the statement of assessable income was wrong.
DECISION
The objection decision is affirmed.
I certify that the preceding 16 (sixteen) paragraphs are a true copy of the reasons for the decision herein of Mr Dean Letcher, QC, Senior Member ...............[sgd]......................................................
Associate
Dated 2 December 2013
Date of hearing 8 November 2013 Date final submissions received 15 November 2013 Applicant In person Counsel for the Respondent Mr D Barlin Solicitors for the Respondent Ms A Ryan, Australian Taxation Office
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