CASE 7/2009

MJ Carstairs SM

Administrative Appeals Tribunal, Brisbane


Decision date: 14 July 2009

MJ Carstairs (Senior Member)

1. The applicants, (husband and wife) are the trustees of their self-managed superannuation fund ("the Fund"), which has breached certain rules imposed by the Superannuation Industry (Supervision) Act 1993 ("the Act") with respect to "in-house assets". An "in-house asset" includes a loan to, or an investment in, a "related party" of a fund[1] Section 71 of the Act. , "related parties" being widely defined in the Act.

2. In the 2004/2005 year of income, the Fund made loans to the husband's company. The company is a related party because the husband, a trustee of the Fund, is also sole director and general manager of the company.


3. The trustees now seek the exercise of discretion available in the Act, which would have the effect of reversing the respondent's decision to cancel the Fund's concessional taxation treatment, which followed from the Fund's breach of the rules. The trustees maintain that the particular circumstances surrounding the loan, combined with the declining fortunes of their business operations at the time, as well as other personal factors, were such as to warrant a favourable exercise of this discretion.

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4. Self-managed superannuation funds can have the advantage of concessional taxation, but to obtain this, a fund must comply with the rules which include, first and foremost, rules requiring that fund dealings be at arms-length, in particular avoiding any actions that might take special advantages.

5. On the matters raised by this case, the Act specifically provides that a fund with in-house assets with a value of more than 5% of total superannuation assets can be declared non-complying and lose concessional tax treatment as a result. Loss of complying status means a fund will be taxed at the highest marginal tax rate.

6. The rules ensure that the paramount consideration of superannuation investment is retirement income. In that regard, the "sole purpose test", set out at s 62 of the Act, provides that a fund must operate for the sole purpose of providing benefits for members at retirement. Prohibited arrangements include those that provide financial assistance to other parties. Additionally, funds must not themselves run a business as part of an investment strategy, because of the inherent risks that may present to retirement savings.

7. A fund, once accepted as a complying and able to take the benefit of concessional tax treatment, will continue to be so until the respondent gives notice that its status had changed. The respondent accepted that the Fund was complying until the company's auditors notified the breach. The respondent ultimately decided that the Fund had breached the Act, and issued the notice provided for in s 40 of the Act, namely that the Fund was no longer a complying superannuation fund.

8. The Act further provides that a contravention may be ignored where it is not a contravention of a civil penalty provision. Section 193 of the Act sets out the civil penalty provisions, referring, amongst other things, to breaches of s 62(1) - the sole purpose test - and of s 84(1) - which requires that the trustee take all reasonable steps to ensure that the market value ratio of the fund's in-house assets does not exceed 5%[2] Section 193(a) and s 193(d) of the Act. .

9. The applicants do not contest that the loans from the Fund to the company were greater than the statutory 5% and hence in breach of the Act. The contravention of the in-house asset rules was a contravention related to a civil penalty provision, which could not be ignored[3] Section 193(d) of the Act. .

10. The applicants' motivation for the loan was to see the company through a difficult period, when the company's usual banker refused further finance. Being able to access the loan enabled the company to continue trading. The trustees admitted that they were aware that they were contravening the Act[4] T10, p 44. but they had intended to repay promptly. As events transpired they were unable to do so.

11. On 2 August 2004, the Minutes of Meeting of the Fund's trustees recorded a request from the company for emergency working capital in order to "trade through current difficulties"[5] T9, p 41. . One aspect of the "difficulties"[6] Exhibit A3. was that it took some time to find alternative finance. This put the company under financial pressure: suppliers withdrew credit and cash flows were affected.

12. During this time, the trustee/company manager was suffering from ongoing chronic illness, which affected his ability to manage the company's operations. Added to this, the company's premises sustained damage in cyclones in 2004 and 2005, and those natural disasters were followed by a general downturn in trading in the region. Additionally, there were problems in other parts of the family businesses, including outstanding tax debts on which the Tax Office issued payment demands. As the applicants put it, placing the company into administration was one option; but borrowing from the Fund was another. That was the chosen option.

13. The trustees resolved to loan the related company an amount not exceeding $130,000 for a term up to 5 years, repayable at 10% interest. The loan agreement dated 4 August 2004[7] T9, p40 provided that any sums advanced would be aggregated and shown as one loan, as at 30 June 2005. According to one witness statement,[8] Exhibit A3 the original intention that the borrowed moneys would be repaid quickly but this proved impossible due to other priority payments, including the Tax Office demands.


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As it can be seen from the figures set out below, the amounts loaned within the 2004/2005 financial year totalled $211,000, and during that tax year the company repaid a total of $85,000[9] T9 p42 . The net amount of the loan stood at $126,000 in May 2005. The company paid the nominated 10% interest on 30 June 2005.

15. The following table records balances in the company's loan account:

• Date • Advance • Repayment • Balance of loan
12 August 2004 $30,000 $30,000
31 August 2004 $45,000 $75,000
3 September 2004 $10,000 (reversed on 7 September) $75,000
16 October 2004 $45,000 $120,000
7 January 2005 $75,000 $45,000
28 January 2005 $47,000 $92,000
22 February 2005 $10,000 $102,000
4 March 2005 $6,000 $108,000
5 May 2005 $18,000 $126,000
2 June 2008 $20,000 $106,000
3 June 2008 $20,000 $86,000
4 March 2009 $76,000 $10,000
9 March 2009 $5,000 $5,000
10 March 2009 $5,000 NIL

16. In about July 2004, the Fund's total assets had been in the order of some $123,000. The trustee's actions, at different points during the tax year resulted in the Fund lending almost all of its assets, above 95% - well beyond the allowed 5%.

17. On 23 July 2007, the Fund's auditor lodged a contravention report[10] T6. advising the respondent that, as at 12 August 2004, the Fund had contravened the in-house asset rules. After receiving this information, the respondent asked for further detail. But it was not until 9 May 2008 that the respondent notified the applicants that what was under consideration was a non-compliance notice under s 40(1) of the Act, a notice which then issued on 15 July 2008[11] T16. .

18. Before this, however, the applicants had made two offers ("enforceable undertakings") made pursuant to s 262A of the Act, proposing certain timeframes in which to repay the Fund[12] In the first offer, which the applicant made in February 2008, the proposal was to pay $20,000 out of an anticipated tax refund, a further $20,000 by 30 June 2008, followed by monthly payments of $3,600 until the loan was fully paid, that is, at 30 June 2010. Under the second offer made on 4 June 2008, the related company had by then repaid $40,000 and the proposed arrangement was to pay a further $10,000 by the end of June 2008, with the loan to be fully repaid by 30 November 2008. . The respondent declined each proposal. As appears from the respondent's reasons for refusing these offers, the respondent considered the timeframes were set too far into the future.

19. It bears comment here that the respondent's decisions (refusing those undertakings) were not under review. Those decisions are not "reviewable decisions" as identified at s 10 of the Act. Nevertheless, such offers are relevantly taken into account when considering the discretion.

The discretion

20. The reviewable decision, giving the notice that the Fund was no longer a complying superannuation fund, was made under s 40 of the Act: The discretion, set out at s 42A(5), allows the decision maker to consider the factors there listed, namely:

  • • the taxation consequences arising if the Fund is treated as non-complying;
  • • the seriousness of the contravention; and
  • • all other relevant circumstances;

in order to decide whether, despite the contravention, the Fund should be declared complying nevertheless, and so retain its concessional taxation status.

21. The respondent relied upon its Practice Statement on self-managed superannuation funds (PS LA 2006/19), as providing a useful internal Guide to determine whether to issue a notice to a fund. That Practice Statement

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indicates that a notice of non-compliance will not be given to a Fund if the Commissioner accepts an undertaking by the trustee to rectify a contravention. As we have seen, the respondent had declined those offers.

22. Guidelines of course are not binding upon this Tribunal, but the Tribunal will apply relevant guidelines that are consistent with the provisions of an enactment. I doubt that there was much utility in referring to the Guidelines in this instance. The requirements under consideration are plainly stated in the Act, and the Guide does no more that re-state what is already plain. Nevertheless, the Guide does correctly emphasise that the task involves weighing up all factors, and that it involves an exercise in which no single factor will be conclusive, and where matters of weight will be determined according to the circumstances of each case.

23. The applicant's submitted that the respondent gave too much weight to one aspect of the consideration, namely the "seriousness of the contravention" without having due regard to matters peculiar to their particular circumstances. My job, of course, is not to examine the grounds upon which previous decision-makers decided the matter, but to consider the matter afresh.

24. There was some reference in the course of the hearing to the point of time at which matters relevant to the discretion ought to considered. The respondent submitted that the discretion was only to be exercised by reference to facts that pertained as at August 2004 when the contravention occurred. I do not agree, and would follow the approach taken by the Tribunal's President Downes J, in his dissenting judgment in
Shi v Migration Agents Registration Authority (2007) 158 FCR 525 (as later upheld by the High Court) where the President said (at par 42):

"The appropriate basis to commence consideration of the issues is the prima facie position that administrative decisions should be made on the latest material. The question becomes whether there is anything in the legislation which requires a different conclusion."

25. As I read the provision set out in s 42A, the language does not suggest or require a more limited approach, by reference to the date of contravention. Subsequent events can be taken into account. The discussion of the discretion in the Practice Statement also accords with that approach.

26. Accordingly I now turn to the matters that must be weighed up when considering whether the Fund might be treated as complying despite the contravention of the Act.

Taxation consequences

27. As to this first matter for consideration in 42A(5)(b)(i) of the Act, I recognise that adverse taxation consequences will follow for the Fund as a result of being declared non-compliant. It seems it will follow necessarily, as the applicants submit, that imposing a greater tax burden will affect the Fund as a retirement vehicle.

28. I recognise also, that this is in addition to other burdens sustained across the families business entities in what was clearly a difficult period, for reasons that included ones beyond immediate control. I also take into account the applicants' submission that they are essentially hard-working, small business operators, seeking to ensure that in their retirement they will be able to provide for themselves. These are worthy aims. But their further argument, when reduced to basics, is that all the entities in which they are involved are in reality themselves, a husband-and-wife team, whether operating as the Fund, in partnership, or through company structures. Such an approach, in my view, has led them to ignore certain of the fundamental principles that underpin this supervisory legislation.

29. The resultant taxation consequences, will be adverse to the Fund, but this factor cannot be taken on its own, as a stand-alone factor, but must be weighed with the other matters set out in section 42A(5)(b). It will be a matter of weighing this with the other factors. In that context, I turn to the question of the seriousness of the contravention: s 42A(5)(b)(ii) of the Act.

Seriousness of the contravention

30. Mr D King, who assisted the applicants at the hearing, submitted on their behalf that the impugned investment (the loan) is an allowable kind of investment under the Act, albeit provided it does not exceed 5%. He made that submission in support of this being an

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investment strategy, not a dissipation of Fund assets. That said, it seems to me that one measure of the "seriousness" of a contravention is the extent that the loaned amount departed from the statutory figure of 5%. In that regard, I was satisfied that the proportion here was a relevant indicator of the seriousness of the contravention.

31. I doubt that the applicants even now appreciate its seriousness. Certainly, their argument (that all of these entities through which they operate -- partnerships, companies and the Fund -- really are themselves as individuals), indicates a less than full appreciation of their role as trustees of the Fund, or, of the sole purpose test set out in section 62 of the Act.

32. I also consider that this was a serious contravention because the applicants failed to take the steps to ensure that the loan was repaid. The loan was outstanding until 2009, when the company paid back the balance of $86,000. This was more than four years after the initial breach of the Act. Their accountants notified the Tax Office in 2007, so at the very least, for a period of some two years, the trustees made no attempt, in any real sense, to rectify the situation. The Act required those steps be taken.

33. Even if I were to accept at face value the financial difficulties faced across-the-board in their business operations, the evidence was that in subsequent years opportunities were not taken to pay down the loan. Instead, they pursued other investments. In that regard, I note in particular that two investment properties were sold in 2006, and those proceeds were directed elsewhere[13] Exhibit A2, p2; Exhibit A3, para 18. .

34. Taken on its own, the seriousness of the contravention here militates against any exercise of the discretion. However, no factor is taken alone and I must consider the particular mitigating circumstances upon which the applicants rely, which are part of "all other relevant circumstances"[14] Section 42A(5)(b)(iii). .

All other relevant circumstances

35. I can readily accept the applicant's evidence that the health issues affecting the husband, and those affecting other immediate family members, compounded the problems existing in the company's operations in the relevant tax year, and later. So too, the cyclones that battered North Queensland in 2004 and 2005. I accept that these events served to impede whatever good intentions existed for early repayment of the loans.

36. However, as I interpret the evidence before me, those factors operated only up to a certain point, and not throughout. The trustees' respective witness statements amply demonstrated that over the rather lengthy period during which the loan was not repaid, husband and wife nevertheless were able to fund other investments. For instance, they invested in the purchase of a commercial site and undertook a strata project in 2007. Yet, no serious attempt was made to rectify the breach. It might be argued that this was undertaken by another business entity. I would only observe, in that regard, that for other purposes the applicants rely on a lack of real distinction between the businesses, the Fund and themselves.

37. While I am prepared to accept that unforseen calamities and health issues must be taken into account as considerations when taking account of "all relevant circumstances" it should be observed that "all relevant circumstances" are not simply those circumstances that might lead to a favourable exercise of the discretion.

38. Other relevant circumstances which I take into account include that the trustees are experienced business people, who were operating their various endeavours, including with respect to the Fund, with the assistance of professional advice from a leading accounting firm. This was not a case where there was any suggestion of inadequate of wrong professional advice. Nor is it one where action was taken in ignorance of the standards. It seems that the professional advice provided suggested that the company might be placed in administration. Instead the trustees chose the option of using the Fund as a line of credit to prop the company up, in an attempt to trade through its difficulties.

39. It is true that in 2008 the trustees offered the undertakings. That would ordinarily be viewed favourably in considering an exercise of the discretion. However, the year of contravention was the 2004/2005 tax year, and from 2005 until 2008, no repayment were made, and no arrangement put in place, as

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required by s 82(5) of the Act, to prepare a plan "before the end of the next following year of income" in order to rectify the situation the trustees had allowed to develop. In that regard, the undertakings cannot be viewed favourably, coming as they did, much too late in the day.

40. It was submitted on behalf of the applicant that the Fund was now in a better position having lent the money to the company than had the money been invested in marketable securities which may have been more severely affected in the economic downturn[15] Exhibit A1, para 2.3. . I would not take that into account as a relevant circumstance. To do so would be to fly in the face of the plain requirements of the Act.

Weighing up the factors

41. As a general proposition, I would approach the exercise of the discretion in s 42A as one to be undertaken in a manner that is consistent with objects of the Act as these set out at s 3. Any exercise of discretion must have regard to considerations of unfairness in a particular case, but must be applied in a manner consistent with the objects of the relevant Act. It is important to have regard to whether, by exercising the discretion in a particular case, the decision-maker will be achieving or frustrating those objects.

42. The applicant's main submission about the exercise of the discretion was that the respondent gave too much weight to one factor without due regard to the other matters that are required to be addressed under s 42A(5).

43. Weighing up the factors as I must, I was satisfied that it was the correct decision to issue the notice of non-compliance. I was satisfied that the seriousness of the contravention here, and the length of time taken to redress it, weigh most heavily against treating the Fund as complying despite the contravention of the Act. Accordingly I am satisfied that the decision to issue the notice of non-compliance was the preferable decision.


44. The Tribunal affirms the decision under review.


[1] Section 71 of the Act.
[2] Section 193(a) and s 193(d) of the Act.
[3] Section 193(d) of the Act.
[4] T10, p 44.
[5] T9, p 41.
[6] Exhibit A3.
[7] T9, p40
[8] Exhibit A3
[9] T9 p42
[10] T6.
[11] T16.
[12] In the first offer, which the applicant made in February 2008, the proposal was to pay $20,000 out of an anticipated tax refund, a further $20,000 by 30 June 2008, followed by monthly payments of $3,600 until the loan was fully paid, that is, at 30 June 2010. Under the second offer made on 4 June 2008, the related company had by then repaid $40,000 and the proposed arrangement was to pay a further $10,000 by the end of June 2008, with the loan to be fully repaid by 30 November 2008.
[13] Exhibit A2, p2; Exhibit A3, para 18.
[14] Section 42A(5)(b)(iii).
[15] Exhibit A1, para 2.3.

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