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MONTGOMERY WOOLS PTY LTD (AS TRUSTEE FOR MONTGOMERY WOOLS PTY LTD SUPER FUND) v FC of T

Members:
JL Redfern SM

Tribunal:
Administrative Appeals Tribunal, Sydney

MEDIA NEUTRAL CITATION: [2012] AATA 61

Decision date: 6 February 2012

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J L Redfern (Senior Member):

Background

1. Montgomery Wools Pty Ltd (Montgomery Wools) is the trustee for the Montgomery Wools Pty Ltd Super Fund (the MWS Fund). The MWS Fund was established in 1993 and is a self managed superannuation fund for the purposes of the Superannuation Industry (Supervision) Act 1993 (the SIS Act). It was accepted as a "complying superannuation fund" by the Commissioner of Taxation (the Commissioner) for a number of years and as such enjoyed certain tax benefits available under the tax legislation.

2. The MWS Fund was audited for compliance with the regulatory provisions of the SIS Act and on 10 September 2008, the Commissioner issued a notice of non-compliance in respect of the year ended 30 June 2004. It is common ground that a fund remains non-complying unless and until the Commissioner sets aside the notice of non-compliance or issues a notice that the fund is complying.

3. As a result of the notice, the MWS Fund lost the benefit of concessional tax rates and was assessed for additional tax for each of the years ended 30 June 2004, 2005 and 2006.

4. Montgomery Wools applied for a review of the decision on 5 May 2009 but by review decision dated 6 July 2009, the Commissioner confirmed the original decision that a notice of non-compliance should be issued. Montgomery Wools then applied to this Tribunal for review of this decision and by consent order the Tribunal remitted the decision to the Commissioner for reconsideration.

5. On 13 September 2010 the Commissioner made a decision, on remittal, confirming the decision to issue the notice of non-compliance but varying the reasons.

6. Montgomery Wools disputes whether the reconsidered decision should be the subject of review by the Tribunal but, in any event, challenges both decisions and the issue of the notice of non-compliance by the Commissioner.

Issues

7. Montgomery Wools contends that the decision which is the subject of the review is the decision of 10 September 2008 and not the reconsidered decision of 13 September 2010. Montgomery Wools further contends that in reviewing the decision, the Tribunal should review the reasons to determine whether they are valid. If they are not valid, the Tribunal cannot substitute other reasons to support the decision to issue the notice. The decision and the reasons are inseparable and it is the role of the Tribunal to review the notice to determine whether the decision, as a whole, is correct.

8. Montgomery Wools further contends that, regardless of which decision the Tribunal reviews, neither is correct on the facts of this case. There have been no regulatory breaches by Montgomery Wools and as such there was no basis to issue a notice of non-compliance. In the alternative, the Commissioner should have exercised his discretion not to issue a notice of non-compliance. The Tribunal should therefore set aside the original decision, or the reconsidered decision, as the case may be.

9. The Commissioner contends that the reviewable decision before the Tribunal is the decision of the Commissioner to issue a notice of non-compliance or, alternatively, the decision to issue a notice for particular reasons. The reasons are those as set out in the reconsidered decision of 13 September 2010. The Tribunal is not confined to the role of reviewing the notice itself. The decision was correct and should be affirmed because Montgomery Wools contravened a number of regulatory provisions of the SIS Act and these breaches were significant. There is no reason why the discretion should be exercised in favour of the MWS Fund to make it complying.

10. The issues for determination are:

  • (a) What is the subject of review by the Tribunal and what is the role of the Tribunal in conducting the review?
  • (b) Did Montgomery Wools contravene any regulatory provisions of the SIS Act during the income year ended 30 June 2004?
  • (c) If the answer to (b) is yes, should the MWS Fund nevertheless be given a notice stating it was a "complying superannuation fund" in respect of the income year ended 30 June 2004?

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Legislative framework

11. The relevant legislation is the SIS Act, the Superannuation Industry (Supervision) Regulations 1994 (the SIS Regulations), the Income Tax Assessment Act 1936 (the ITAA) and the Income Tax Rates Act 1986 (the ITRA).

12. The object of the SIS Act is "to make provision for the prudent management of certain superannuation funds" and for their supervision by the relevant regulators: s 3(1) of the SIS Act. The regulator of self managed superannuation funds is the Commissioner of Taxation (the Commissioner).

13. Section 3(2) of the SIS Act provides:

"The basis for supervision is that those funds and trusts are subject to regulation under the Commonwealth's powers with respect to corporations or pensions (for example, because the trustee is a corporation). In return, the supervised funds and trusts may become eligible for concessional taxation treatment."

14. Section 40(1) of the SIS Act provides that the Commissioner may give a notice to a trustee of an entity stating "whether the entity is or is not a complying superannuation fund … in relation to a year of income specified in the notice". Section 40(2) provides that where the Commissioner gives a notice to a trustee stating the entity is not a complying superannuation fund, the notice must set out the reasons why the Commissioner has so stated.

15. Under s 42A(1) of the SIS Act, an entity which was a self managed superannuation fund during a year of income is a "complying superannuation fund" in relation to that year if the entity is a "resident regulated superannuation fund", which is not disputed in this case, and the entity passes the test set out in s 42A(5).

16. Section 42A(5) provides:

"An entity passes the test in this subsection in relation to a year of income or part of a year of income if:

  • (a) no trustee of the entity contravened any of the regulatory provisions in relation to the entity during the year of income or the part of the year of income; or
  • (b) if a trustee of the entity contravened one or more of the regulatory provisions in relation to the entity during the year of income or the part of the year of income, the Regulator, after considering:
    • (i) the taxation consequences that will arise if the entity were to be treated as a non-complying superannuation fund for the purposes of the Income Tax Assessment Act 1997 in relation to the year of income concerned; and
    • (ii) the seriousness of the contravention or contraventions; and
    • (iii) all other relevant circumstances;

    thinks that a notice should nevertheless be given stating that the entity is a complying superannuation fund in relation to the year of income concerned."

17. The "regulatory provisions" for the purposes of s 42A(5) include provisions under the SIS Act and the SIS Regulations, but only apply to contraventions which are an offence or a contravention of a civil penalty provision under the SIS Act: s 38A and s 39(1) of the SIS Act.

18. A fund is a "complying superannuation fund" for the purposes of the ITAA if the Commissioner has given notice the fund is complying and has not subsequently given a notice of non-compliance (s 45 of the SIS Act).

19. The ITRA provides concessional rates of tax for a trustee of a complying superannuation fund but the tax rate in respect of the taxable income of a non-complying fund was at the relevant time 47% (s 26(1) of the ITRA). If a superannuation fund is found to be non-complying but was complying in the previous year, the fund's assessable income for the year includes the fund's net income in respect of the previous years of income (s 288A the ITAA).

20. In summary, a self managed superannuation fund that has been issued with a notice of compliance will be a complying superannuation fund and will have the benefit of concessional tax rates unless and until the trustee is served with a notice that it is non-complying. Once served with such a notice, concessional rates will no longer apply to the self managed superannuation fund and tax will be assessed on net funds in the previous income years as well as on income in the current year of assessment.

21.

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It is common ground that there are significant tax consequences if a complying self managed superannuation fund becomes non-complying as a result of the issue of a notice of non-compliance by the Commissioner. In this case, amended assessments dated 8 November 2008 have been issued to Montgomery Wools for the years 2004 to 2006 as a result of the audit in the sum of $397,194.15.

22. The Commissioner contends that Montgomery Wools has contravened ss 62, 84 and 109(1A) of the SIS Act. The Commissioner previously relied on a breach of s 67 of the SIS Act in the original decision but no longer relies on this provision. These provisions are civil penalty provisions under s 193 of the SIS Act and are therefore "regulatory provisions" for the purposes of s 42A(5) of the SIS Act.

23. Section 62(1) requires a regulated superannuation fund to be maintained solely for one or more of the core purposes specified in s 62, namely for provision of benefits to members upon their retirement (or their dependants in the case of a member's death before retirement). Section 84 requires a trustee of a regulated superannuation fund to take "all reasonable steps" to ensure that the rules in relation to "in-house assets" are complied with by the fund. An in-house asset is a related party loan or investment. The in-house assets rule provides that if the market value ratio of the fund's in-house assets exceeds 5%, the trustee of the fund must not acquire an in-house asset. If the market value ratio does not exceed 5% but the acquisition would result in the market value of the fund's in-house assets exceeding 5%, the trustee must not acquire the in-house asset (s 83 of the SIS Act). Section 109 requires investment by a superannuation entity to be made and maintained on an arm's length basis.

24. Section 344(1) of the SIS Act provides that a person affected by a reviewable decision may request a review and the Regulator (in this case, the Commissioner) must reconsider the decision and confirm, revoke or vary the decision. Section 344(8) provides that an application for review may be made to this Tribunal in respect of decisions that have been either confirmed or varied.

Background facts

25. The MWS Fund was established on 31 May 1993. Mr Bruce and Mrs Beverley Montgomery are its sole members. The trustee of the MWS Fund is Montgomery Wools. Mr and Mrs Montgomery are the directors and shareholders of Montgomery Wools. Montgomery Wools is also trustee of the Montgomery Family Trust (MFT). The MFT is a discretionary trading trust and operates the family wool trading business. At all relevant times, the beneficiaries of the MFT were Mr Bruce and Mrs Beverley Montgomery.

26. Warwick Wools Pty Ltd (Warwick Wools) is the trustee of the Montgomery Property Trust (MPT). The MPT is a unit trust and was established by trust deed between Montgomery Wools, as trustee for the MWS Fund and Warwick Wools signed on 19 June 1997 (the MPT Trust Deed). Mr and Mrs Montgomery are the directors and shareholders of Warwick Wools.

27. Mr and Mrs Montgomery are also directors and shareholders of WWP Pty Ltd (formerly Warwick Wool Processors Pty Ltd) (WWP), which was incorporated in 1986.

28. On 22 July 1980 Montgomery Wools, as trustee for the MFT, acquired 10 Pearl Street, Altona North, Victoria (Pearl Street). On 30 June 1997 Pearl Street was transferred to Warwick Wools, as trustee for the MPT, for $450,000. On the same day, the MWS Fund acquired all of the units in the MPT (473,500 units). The acquisition was effected by a transfer of $473,500 from WWP to the MWS Fund, which was then paid to Warwick Wools, as trustee for the MPT. As such, the major asset of the MWS Fund when it was established was its investment in the units in the MPT, which in turn owned the Pearl Street property.

29. The MPT Trust Deed provides that the unitholders, that is, the MWS Fund is beneficially entitled to the investments and property of the MPT from time to time (clause 3.2.1). Clause 10.1.1 of the MPT Trust Deed provides as follows,

"Prior to the end of each Accounting Period the Trustee must determine the amount or proportion (if any) of the net income of the Trust Fund to be distributed to the

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Unitholders in respect of that Accounting Period."

30. Any income not distributed is to be added to the General Reserve established under clause 10.3 or such other reserve as the trustee decides to record in the accounts from time to time (cl 10.1.6).

31. The Pearl Street property was used as a wool store for the wool trading business and Montgomery Wools, as trustee for the MFT, paid rental to the MPT for the use of the property from 1998 to 2001. According to the financial statements for the MPT, rent from 2001 to 2003 was outstanding and was reclassified as a loan from Montgomery Wools, as trustee of the MFT, in the 2003 income year. The financial statements for the MPT and the MWS Fund from 1998 to 2003 show a distribution of the rental income, including the amount unpaid, from the MPT to the MWS Fund. The relevant income tax returns for the MPT and MWS Fund are consistent with these financial statements. The net income for rent for Pearl Street, which is recorded as having been distributed from the MPT to the MWS Fund, was $176,748.

32. On 28 June 2001 it was resolved at a directors' meeting of Warwick Wools that the net income for the MPT for the 2001 income year in the sum of $40,971 be distributed to the MWS Fund. There were no other formal resolutions in respect of the distribution of income, yet the financial statements for MPT record distributions made for each of the years 1998 to 2003.

33. On 24 October 2000 a mortgage over Pearl Street to the National Australia Bank was discharged and a mortgage in favour of the Commonwealth Bank of Australia (CBA) was granted. The mortgage secured loans from the CBA to the MFT. Advances were made by the CBA to the MFT from time to time and by 27 January 2004 the amount owing was in the vicinity of $1.6 million.

34. On 27 February 2004, Pearl Street was sold for $725,000. The proceeds were deposited into the CBA account of Montgomery Wools as trustee for the MFT and were used to repay debts owed by the MFT.

35. The payment of the proceeds of sale of Pearl Street was recorded in the financial statements of the MPT for the year ended 30 June 2004 as a loan to Montgomery Wools, as trustee of the MFT, in the sum of $828,080. There was a corresponding liability recorded in the financial statements for the MFT for the same period. This loan was reduced to $760,809 by the year ended 30 June 2006. No financial statements were provided for any of the entities after 30 June 2006 but it is common ground that after the sale of Pearl Street the most significant asset of the MPT was a loan to the MFT, which it could not repay. It is also common ground that interest was not being charged on the loan and that the MPT "derived no additional income during the years ended 30 June 2004 and 2009".

36. The sale of Pearl Street generated a profit of $192,999 for Warwick Wools, as trustee for the MPT, and this was recorded as such in the financial statements for the year ended 30 June 2004. It was also recorded that the MPT made a distribution to beneficiaries in this same amount. In the tax return for the MPT for 2004 it is recorded that there was a distribution of the profit to MWS Fund. There were also corresponding entries in the financial statements for the MWS Fund for the year ended 30 June 2004 recording the distribution of $192,999 to the MWS Fund from the MPT and the MWS Fund lodged a tax return for the same period declaring a capital gain of $128,666.

37. It is not in dispute that the financial statements and tax returns for the MPT and the MWS Fund for the year ended 30 June 2004 recorded that the MPT made a distribution to the MWS Fund during that financial year. What is in dispute is whether such a distribution was in fact made. The relevance of this is that if a distribution was made but unpaid, this arguably created a loan from the MWS Fund to the MPT, which the Commissioner contended contravened the in-house assets rules of the SIS Act.

38. It is relevant to note that according to the financial statements of the MWS Fund as at 30 June 1997, the value of net assets of the fund was $312,715, which included $473,500 for the value of the units in the MPT. By 30 June 2003 net assets were $577,646 and had increased to $753,368 by 30 June 2004. However, these

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assets comprised $473,500 for the value of the investment in the MPT, which had remained unchanged since the original investment, and $298,273 for a loan to MPT. This loan included the profits recorded as having been distributed from MPT in 2004 and previous years. As such, the financial statements for the MWS Fund showed a healthy growth in assets available to pay benefits to members as at 30 June 2004 but by 30 June 2004 the MPT no longer owned Pearl Street and its major asset was a loan to MFT of $828,080. The assets of the MFT had reduced from about $2.2 million as at 30 June 2003 to about $1.8 million as at 30 June 2004 but of significance is the fact that one of the major assets of the MFT as at 30 June 2004 (as recorded in the financial statements) were investments in related party investments. These assets included an investment in Carbowool (Aust) Pty Ltd ($416,000) and loans to Mr Bruce Montgomery ($219,017) and the Montgomery Investment Trust ($578,845).

39. In simple terms, the effect of the sale of Pearl Street was to replace the major asset of the MPT with a loan to the MFT. Montgomery Wools has carried on business since 1976 and the MFT has operated the family business from at least 2000. It continues to operate the business. According to Mr Montgomery, Montgomery Wools had been experiencing trading and cash flow difficulties since 2004 and if the family trust was liquidated, "there would be insufficient assets available" to discharge the loan owing to the MPT. I was not provided with any financial statements for any periods after 30 June 2006 but note that in the financial statements provided the assets of the MPT and the MWS Fund were not revalued to take into account the sale of Pearl Street or the parlous state of the MFT. It is common ground that the prospects of the MWS Fund having sufficient assets to provide Mr and Mrs Montgomery with any retirement benefits are poor unless and until the MFT repays its loan to the MPT.

The evidence

40. Mr Montgomery gave evidence that the MWS Fund was established to provide retirement benefits and he "believed the Fund to be always maintained for the sole purpose of providing superannuation benefits to its members being myself and my wife".

41. He also gave evidence that the MWS Fund invested in units in the MPT because it was a stable investment, the income yield on the units was likely to exceed 12% p.a. and investment would "help consolidate Montgomery Wools". He explained this in a further affidavit as meaning that "the investment would by supporting the 'Montgomery Wools group', maximise the income which could be paid to the Property Trust and which would be paid by the Fund and which could be used by the Fund to provide benefits to me and my wife on retirement".

42. Mr Montgomery was cross examined extensively on this issue and gave evidence during the hearing about his views on the MWS Fund and how it operated. In October 2000, Pearl Street was used as security for loans made to the CBA to Montgomery Wools, as trustee for the MFT. When questioned about this, Mr Montgomery's evidence was as follows,

"So at that point you decided that it was appropriate to use the trust fund's sole asset - sorry, the property trust's sole asset as security for your refinancing with the Commonwealth Bank?---Yes.

And you agree with me that in doing that, you were putting your super fund's sole asset potentially at risk. Just - --?--- I didn't believe so at the time, no, but I do agree that it was mortgaged.

Yes, and you agree, as an experienced businessman, you knew that if your trading trust couldn't repay those credit lines, that the Commonwealth Bank might come along and exercise its security?---Yes. Well, I - to be honest, I didn't think that at the time because I know it was a mortgage, but the company was in very sound state and - yes, but what you are saying is true. Yes.

And so you used your super fund's sole access - asset for the purposes of your business, didn't you?---Not directly, but indirectly.

Indirectly you did?---Yes."

43. Mr Montgomery's reasoning behind why it was appropriate for Pearl Street to be used as

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security for loans of the trading business of MFT was as follows,

"When I agreed for the mortgage to be taken on the Pearl Street property, I didn't see it as any hinder to the super fund in any way, shape or form. I saw it as a - as a possibility to enhance the income for the family group. I did not - I did not see it as a risk at the time for the super fund, and as it's turned out, we all know now, with hindsight, things are very easy, but at the time I didn't see it as a risk. The family company was in sound position and it was just going to add to our strength, but I did not at any stage feel that I was hurting the super fund. I felt I was just enhancing the income of the overall family group."

44. Mr Montgomery gave evidence that the wool trading industry experienced difficulties in Australia so by 2002 Montgomery Wools started exporting wool and looking for opportunities overseas. In about 2003, Montgomery Wools (as trustee for the MFT) invested in a joint venture with a Chinese company to operate a wool processing plant in China. The investment was made through a new company owned by Montgomery Wools, called Carbowool (Aust) Pty Ltd, which was valued at about $416,000 in the 2004 financial statements for the MFT. Additional investment of about $300,000 was made after 2004 when a call was made from the joint venture partner. It was necessary for Montgomery Wools to pay this call otherwise the investment in the joint venture would be forfeited.

45. Mr Montgomery said he had been trying to sell Carbowool to other Australian companies "ever since I virtually got into it" because he realised the Chinese partner was "very difficult". He was unable to sell but in 2009 the joint venture partner agreed to sell the joint venture company and the investment had been on the market since about mid 2009. In his affidavit of 13 April 2010, Mr Montgomery stated that he believed the sale may be "imminent" and Carbowool would receive approximately $2 million if the sale proceeded. The sale had not eventuated by the time of the hearing and Mr Montgomery gave evidence that he was travelling to China "every second week" to conduct the business and try and negotiate a sale. Montgomery Wools injected between $1 million and $1.4 million in cash into the joint venture from 2003 and part of the money invested had been borrowed from the CBA. This investment had caused cash flow problems for the MFT.

46. On 15 August 2003, the CBA transferred the account of Montgomery Wools into credit recovery. The amount owing at this time was approximately $1.6 million. On 24 December 2003, Warwick Wools entered into a contract for the sale of Pearl Street and on 14 January 2004 Mr Montgomery sent a facsimile to CBA to the effect that the proceeds of the sale of Pearl Street should be applied to pay out two bill lines, one for the Montgomery Wools trading account and the other for the joint venture plant in China as part of the Carbowool investment. It was also proposed to pay out a personal bridging loan from the anticipated sale of property owned by Mr and Mrs Montgomery and to reduce the stock holdings of Montgomery Wools. The CBA responded to this letter by letter dated 22 January 2004 stating that it was "very satisfied with the modified repayment strategy".

47. On 27 January 2004 Mr Montgomery signed an authority to the CBA to apply the proceeds of Pearl Street against the indebtedness of Montgomery Wools, as trustee of the MFT. Mr Montgomery signed the authority as director of Warwick Wools.

48. Mr Montgomery agreed that he was the "controlling mind" of Montgomery Wools and Warwick Wools and that he made all decisions for both companies. As a practical matter, he and his wife did not have formal directors' meetings.

49. Mr Montgomery said he had no choice but to sell Pearl Street and pay the proceeds to the CBA. The CBA demanded to receive those proceeds and, notwithstanding the clear terms of his letter of 14 January 2004, Mr Montgomery denied he volunteered to apply the proceeds in this way. He had intended to pay the proceeds to the MWS Fund and originally proposed an orderly reduction of the CBA facility over time. This had been rejected by the CBA.

50. Mr Montgomery was cross examined about whether he had considered alternative

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choices, such as the sale of his residence at Werribee. Mr Montgomery said he had not considered this alternative as this would mean he and his wife would have nowhere to live. He was also cross-examined about the investments in the Chinese joint venture and why he did not ensure the loan to the MPT was repaid for the benefit of the MWS Fund before those investments were made. Mr Montgomery did not distinguish between the family business and the superannuation fund in respect of his retirement benefits, which is illustrated by the following evidence,

"And part of the reason, or the reason why you didn't do it is because you thought it was better to keep that money invested in your business?---Well, yes, and as I said last week which I know is probably not the right thing for me to say but it's the truth, I still regard the money in the business as part of our golden goose nest egg---

Sure?---And I do believe that it's going, even though - you're talking super fund, and you're talking property trust, and you're talking this, and you're talking that. And it really is all about retirement money, and I still believe we should, and hopefully will be, self-sufficient retirees. And that it should have gone back into the property trust, I know that now.

And your attitude which you attested to last time we were here, is that you regard as what's good for the business is likely to be good for you in the long term?---Yes.

But you accept that money that goes into the business is in no way ring fenced?---Sorry?

It's in no way ring fenced, is it - there's no - money that goes in the business is not in any way protected as it were for your retirement, is it?---Well, no, but as I say it's all been, and I've always worked all my life to provide for my family and my wife and myself. And it's still all there, it's not as though we've blown it, we've gone and spent up on it - it's there, it's in there, it's there for our retirement. I know it should be in the super fund but I do believe it's working well where it is."

And the following,

"MS STERN: Mr Montgomery, we have looked at the financial position, you have given very candid evidence as to the way in which you saw the use of, effectively, the assets of the superannuation fund. Do you accept that in not insisting on repayment to the property trust and in turn to the super fund, that you were in effect enabling the super fund to be maintained really for the benefit of your business?---Again it appear that way, yes. It can appear that way."

51. When Pearl Street was sold, the MPT made a profit of $192,999. The financial statements for the MPT and the MWS Fund for the year ended 30 June 2004 showed a distribution to the MWS Fund. Mr Montgomery was cross-examined about the financial statements and tax returns for the MPT and the MWS Fund for the year ended 30 June 2004 and agreed he had signed the financial statements and would never sign company accounts unless he read them and they were correct. In his affidavit of 13 April 2010, Mr Montgomery stated that Warwick Wools did not make any determinations to distribute income to the MWS Fund. He confirmed this in his oral evidence and said that this was because the MPT had no money to pay to the MWS Fund after the CBA used the proceeds to repay the MFT facilities. However, after Mr Montgomery was taken through the entries in the relevant financial statements he agreed this was not accurate.

52. Mr Montgomery said that he knew there was an obligation for the MPT to make a determination to distribute income of the MPT and this was a two stage process whereby income would be determined then distributed to the MWS Fund. Mr Montgomery also gave evidence that he knew there were tax consequences in the MPT earning income from the sale of Pearl Street and that if there was a distribution the income would be taxable in the MWS Fund, which had the benefit of tax concessions, rather than in the MPT. Mr Montgomery gave evidence that he relied on the advice of his tax agent and accountant in relation to the financial affairs of the Montgomery Wools group to arrange those affairs in a "tax efficient way" and agreed that when he signed the accounts he gave approval

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for those affairs to be arranged as advised by the accountants.

53. Notwithstanding this, Mr Montgomery maintained during cross-examination that there could not have been any distribution to the MWS Fund because there was no cash available to make a distribution. Mr Montgomery denied that there was distribution and loan back to the MPT for use by the MFT and said that these were merely "book entries". When he was later questioned about these matters by reference to the financial statements, Mr Montgomery's evidence was as follows,

"MS STERN: Mr Montgomery, you understood full well that the property trust owed a debt to the super fund?---Yes.

You understood full well that you as the trustee of the super fund could have asked for that debt to be repaid?---Yes.

And you understood that in 2004, when you saw these accounts?---Yes.

You equally understood that these accounts were saying that a distribution had been made to beneficiaries, at the top of the page?---Yes.

You knew that no money had changed hands?---Yes.

So you knew that the super funds could have required that money to be given to it. You knew also that this recorded a fairly hefty loan of $828,000 from the property trust to the family trust. Do you see that, the fourth entry from the bottom?---Which page are we, 605?

605, non current liabilities, and you see how it's got the brackets around it?---Yes.

Because that's a loan which was from the property trust to the family trust?---Yes.

You understood that on behalf of the property trust you could have required that loan to be repaid at any time?---Yes.

But you didn't do so, did you?---No, because I really didn't pay a lot of attention to it.

Well you knew there was a very large loan owing from the property trust to the family trust, didn't you?---I was aware of the fact that the family trust owed the property trust money, yes.

And the reason why you didn't demand repayment was because you thought it would be bad for the family trust if you did so?---Well, more or less."

54. Mr Montgomery gave evidence that the MFT had not repaid any part of the loan to the MPT and there were no arrangements for repayments or interest to be made. If Montgomery Wools was liquidated, and provided "it was done properly", there may be some assets to repay the loan, which would then be available to the MWS Fund. There have been no other available funds to repay the loan to MPT and the only other source of funds is the possible sale of the joint venture interest by Carbowool.

55. In his affidavit of 13 April 2010, Mr Montgomery stated he was prepared to cause Montgomery Wools to be replaced as trustee of the MWS Fund until the MPT makes a distribution to the MWS Fund but there was no evidence that any steps had been taken in this regard.

What is the subject of review and the role of the tribunal?

56. The Commissioner gave a written notice to Montgomery Wools that the MWS Fund was a non-complying superannuation fund on 10 September 2008. As required under s 40(2) of the SIS Act, the Commissioner gave Montgomery Wools written reasons. In those reasons the Commissioner relied on contraventions of ss 62, 67 and 109 of the SIS Act. Montgomery Wools requested a review of the decision under s 344(1) and the decision was affirmed on 6 July 2009. Montgomery Wools applied for review to this Tribunal and by consent, the decision was remitted to the Commissioner for reconsideration under s 42D (1) of the Administrative Appeals Tribunal Act 1975 (the AAT Act). On 13 September 2010, the Commissioner affirmed the decision but varied his reasons, relying on contraventions of ss 62, 84 and 109 of the SIS Act. Under s 42D(8) of the AAT Act, if a decision is affirmed, the review proceedings resume.

57. Montgomery Wools submitted that because of the terms of s 40 of the SIS Act, I am bound to review the notice of 10 September

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2008 and, more particularly, I am confined to consideration of the reasons set out in that notice and the contraventions alleged therein. The decision and reasons as required under s 40 are inseparable. The Tribunal has no power under s 43 of the AAT Act to provide new reasons so it must review those reasons to assess whether they are valid. In other words, my role is to review the notice of 10 September 2008 in its entirety and not only the decision. The review is therefore more like an appeal than merits review.

58. The relevance of this is that the Commissioner did not raise the alleged contravention of s 84 of the SIS Act in the first notice and no longer presses the breach of s 67 previously alleged.

59. I reject this argument. Section 344(8) of the SIS Act provides the legislative basis for the Tribunal to review decisions of the Commissioner in respect of the SIS Act. Section 10(1) of the SIS Act provides that a "reviewable decision" includes "a decision of the [Commissioner] to give a notice under s 40" of the SIS Act [emphasis added]. The definition does not refer to the reasons for the decision and I do not accept the contention that the decision to issue the notice of non-compliance and the reasons contained in the notice are inseparable.

60. My role is to stand in the shoes of the Commissioner and consider all relevant matters to make the correct or preferable decision about whether or not the MWS Fund should have been classified as a complying superannuation fund in respect of the 2004 income year. In so doing, I must form a view about whether there were contraventions of regulatory provisions in 2004 as this is a threshold issue. If there were contraventions of regulatory provisions, I then must consider whether discretion should be exercised to nevertheless give a notice stating the fund was complying. It is not in dispute that in considering whether this discretion should be exercised I should take into account supervening conduct and all relevant events from 2004 until the time of the hearing (
Re JNVQ and Federal Commissioner of Taxation 2009 ATC 1-011; (2009) 74 ATR 730; [2009] AATA 522 and
Shi v Migration Agents Registration Authority (2008) 235 CLR 286). Under section 43, I may affirm the decision under review, vary the decision or set aside the decision and make a new decision or remit the matter for reconsideration. I must provide reasons for my decision (s 43(2) of the AAT Act) and may come to a different conclusion or the same conclusion as the original decision maker, but for entirely different reasons.

61. The Commissioner submitted that it may be argued that the decision under review is "the decision and reasons". Even if this argument is correct, then the reconsidered decision of 13 September 2010 would be a variation (rather than an affirmation) and under s 42D(3) of the AAT Act the current application for review would be an application for a review of the decision as varied. On either view, it would be therefore be appropriate for me to consider the regulatory contraventions now alleged by the Commissioner.

62. However, I do not favour this construction as this still suggests that the focus of the review should be on the terms of the notice and the validity of the reasons, albeit the reconsidered decision and reasons. In my view, it is not the role of the Tribunal to review the notice but the decision to issue the notice. This is clear from the words of ss 10(1) and 344(8) of the SIS Act and is consistent with the merits based review jurisdiction of the Tribunal. I also note that neither party argued the case on this narrow basis.

Did Montgomery Wools contravene regulatory provisions of the SIS Act?

63. The Commissioner submitted that Montgomery Wools contravened s 62 (sole purpose test), s 84 (in-house assets rule) and s 109 (investments to be at arm's length), which are all regulatory provisions of the SIS Act, in the year ended 30 June 2004. Breach of the regulatory provisions will entitle the Commissioner to issue a notice of non-compliance to the superannuation fund. Montgomery Wools submitted that it has not breached those provisions. I do not agree with these submissions and my reasons follow.

In-house assets rule

Submissions of the parties

64. Section 83 provides that a trustee must not acquire in-house assets if the market value ratio of the fund's in-house assets exceeds 5%

ATC 4606

or if the acquisition would result in the market value of fund's in-house assets exceeding 5%. This rule is designed to limit the exposure of a superannuation fund to investment in related parties. Section 84 provides that each trustee of a regulated superannuation fund must take "all reasonable steps" to ensure there is compliance with the in-house asset rules. Section 84 is a civil penalty provision. Under section 71(1) of the SIS Act a loan to a related party of a superannuation fund is an in-house asset.

65. It is not disputed that MPT is a related party or that the market value of the loan recorded in the financial statements of the MWS Fund exceeds 5% of the total assets of the Fund. The value of the total assets of the MWS Fund as at 30 June 2004 was $771,967 and the value of the loan was $192,999, representing about 25% of the assets. What is in dispute is whether there was in fact a loan from the MWS Fund to the MPT.

66. The Commissioner submitted that all of the documentary evidence points to the conclusion that the MWS Fund made a loan to MPT. A loan includes the provision of credit or any other form of financial accommodation, whether or not enforceable or intended to be enforceable by legal proceedings (s 10(1) of the SIS Act). The Commissioner relies on the following:

  • (a) A loan was recorded in the 2004 financial statements for the MWS Fund of $298,273, which comprised $105,233 for a non-current liability in the 2003 year and $192,999 for the unpaid distribution made by MPT in the year ended 30 June 2004;
  • (b) The distribution is evidenced by the 2004 financial statements for the MWS Fund, the regulatory return for the MWS Fund for the 2004 year, the 2004 financial statements for the MPT and the tax returns for both the MWS Fund and the MPT for the year ended the 30 June 2004. The Trust Deed for the MPT did not require formal resolution;
  • (c) The financial statements were signed by Mr and Mrs Montgomery and fairly represented the financial position of both the MWS Fund and the MPT;
  • (d) The distribution was paid to the MWS Fund and loaned back to the MPT, or alternatively;
  • (e) There was a consensual arrangement between Montgomery Wools and Warwick Wools that after the MWS Fund became presently entitled to the income from the MPT any demand would be deferred;
  • (f) Even if there was no distribution and therefore no present entitlement, Montgomery Wools "provided financial accommodation" to Warwick Wools by not requiring a distribution and payment of income but instead enabling payment to be deferred so that the money could be used by MPT as a loan to Montgomery Wools as trustee of the MFT; and
  • (g) The distribution, or alternatively the "financial accommodation", is supported by the provisions of the Trust Deed for the MPT, which provide that: the MWS Fund was beneficially entitled to the investments and property in the MPT (clause 3.2.1); Warwick Wools is to determine the amount or portion of the net income to be distributed to unitholders in respect of the accounting period (clause 10.1.1); any income not distributed is to be added to the General Reserve (clause 10.1.6); the MWS Fund as the sole unitholder could have terminated the MPT by special resolution (clause 2.3.2) and could have given a direction that any asset of the MPT be transferred to it under clause 2.4.1(a).

67. Montgomery Wools submitted that:

  • (a) The financial statements for both the MWS Fund and the MPT were in error in recording the amount of $192,999 as a loan, as were the tax returns, and the evidence of Mr Montgomery (as set out in his affidavits, as opposed to his oral evidence) that there was no such distribution should be preferred;
  • (b) The MWS Fund had no right to require a distribution of the net income in the MPT and no distribution was in fact made or paid;
  • (c) Warwick Wools had intended that the proceeds of Pearl Street be distributed to be MWS Fund but the property was subject to a charge by the CBA for advances to Montgomery Wools, as trustee of the MFT.

    ATC 4607

    The CBA determined that on settlement of the sale the proceeds should be applied against the indebtedness of the MFT rather than be retained by the MPT. The Tribunal should accept the evidence of Mr Montgomery that Warwick Wools, as trustee of the MPT, had no choice in the matter;
  • (d) As a consequence, the MPT was unable to make a distribution to the MWS Fund in the year ended 30 June 2004;
  • (e) Even if the MWS Fund was presently entitled to any of the net income at the MPT, no loan was made by the MWS Fund to the MPT. This is because there was no "provision" of financial accommodation by the MWS Fund. Provision requires a positive action and failing to enforce the payment of the distribution cannot be characterised as providing something. Moreover, the term "financial accommodation" suggests the creation of some right or obligation and the failure to do something does not create a right or obligation;
  • (f) In any event, the MWS Fund could not enforce payment of a distribution by the MPT as there were no funds available to satisfy a distribution and, as such, there could be no financial accommodation.

Consideration

68. The key issue in dispute is whether there was a "loan" from the MWS Fund to the MPT in 2004.

69. The financial statements of both the MWS Fund and the MPT record a distribution of $192,999 and loan back to the MPT of the same amount by the MWS Fund for the year ended 30 June 2004. This is consistent with the tax returns for the MWS Fund and the MPT and the regulatory return for the MWS Fund for the 2004 year.

70. Section 1305 of the Corporations Act 2001 provides that a book kept by a corporation under a requirement of the Corporations Act is prima facie evidence of any matter stated in the book. The Corporations Act requires a corporation to prepare financial statements and under s 9 of the Corporations Act, "books" include financial reports. In the present case, the financial statements for Montgomery Wools and Warwick Wools for the year ended 30 June 2004 recorded a distribution from the MPT to the MWS Fund and a loan back. This is prima facie evidence of the distribution and loan, although it should be noted that this presumption can be rebutted by evidence to the contrary.

71. In his affidavit of 13 April 2010, Mr Montgomery states that there was no determination by Warwick Wools in relation to the income to be distributed for the year ended 30 June 2004 "nor any earlier or later year". It was submitted that this evidence, together with the fact that there was no evidence of a formal resolution by Warwick Wools making this determination, displaced the presumption that there was a distribution and loan back. Montgomery Wools relied on the High Court case of
Brookton Co-operative Society Ltd v Commissioner of Taxation (1981) 147 CLR 441 as authority that the financial statements of a company may incorrectly record transactions and it is therefore appropriate to "look beyond the accounts". Montgomery Wools also relied on
Pearson v Commissioner of Taxation 2006 ATC 4352; (2006) 232 ALR 55; [2006] FCAFC 111, where Edmunds J found, when considering an income distribution clause in similar terms to clause 10, that if there was no evidence of a determination by the trustee, the clause did not operate to effect an automatic distribution to unitholders.

72. I accept both these propositions but for the reasons outlined below, it is my view there is no evidence the transactions recorded in the financial statements were in error.

73. Having reviewed the documentary evidence, including the financial statements and tax returns of the MWS Fund, the MPT and the MFT for the relevant period, and having regard to the evidence of Mr Montgomery, I am not satisfied there is sufficient probative evidence to displace the presumption created by the transactions recorded in the accounts.

74. First, the Commissioner contended, and I accept, that there was no requirement for a formal resolution by Warwick Wools to effect a distribution of income to the MWS Fund. Clause 10.1.1 of the Trust Deed provides that the trustee must determine the amount or proportion (if any) of the net income to be distributed. While a resolution would evidence

ATC 4608

the determination, a determination could be made informally by Mr Montgomery as the person who made all decisions for Warwick Wools. This was conceded by Mr Montgomery when giving evidence. Under clause 10.1.6, any income not distributed will be added to the general reserve created under clause 10.3. There was no evidence of the creation of a general reserve or that any undistributed income was added to a general reserve. The undisputed evidence was that distributions were made from the MPT to the MWS Fund from 1998 until 2003. Other than in 2001, these distributions were made without formal resolution and to the extent they were unpaid, they were recorded in the financial statements of both the MWS Fund and the MPT as a loan.

75. Secondly, notwithstanding his written statement, Mr Montgomery recanted from this position in cross examination and when questioned by the Tribunal. Mr Montgomery was cross examined about the financial statements of the MPT and the entries which recorded a distribution to the MWS Fund. He was asked whether his written statement was inaccurate and replied "I'm not sure" then later "Well, yes". When he was asked about the process for approval of the accounts and conferring with his accountant, Mr Montgomery said that he would rely on the recommendations of his accountant in relation to transactions recorded in the financial statements, including distributions, and approve those recommendations around the time the accounts were prepared. While Mr Montgomery said he would not approve the accounts until after the end of the financial year, he would normally meet with the accountant "leading up to the end of the financial year" to discuss the financial affairs of Montgomery Wools and Warwick Wools and the trusts.

76. The Commissioner submitted that given the significant capital gain on the sale of Pearl Street, which was known by February 2004, it was likely that some time before the end of the financial year Mr Montgomery would have met with his accountant and the proposed financial transactions, including the distribution and loan, would have been discussed and approved. Mr Montgomery could not recall this, but nor did he deny it. On balance, I accept that it was likely such a discussion took place before 30 June 2004.

77. Mr Montgomery gave oral evidence that there could not have been a distribution to the MWS Fund in 2004 and this was based on his belief that a distribution could only be made if there was cash available to pay the distribution. He dismissed the distribution and loan back recorded in the financial statements as "book entries", although when taken through the entries, Mr Montgomery seemed to understand these entries recorded transactions. It is probable that at the time Mr Montgomery did not turn his mind to how these transactions operated and their legal effect (he said these transactions were "over my head") but nonetheless approved the transactions as advised and recorded by his accountant in the relevant financial statements. He had a general understanding of the nature of the transactions. This was his evidence. In 2004, Mr Montgomery knew the MPT had generated income by way of capital gain as a result of the sale of Pearl Street and that this income was taxable. He knew that the MWS Fund had the benefit of concessional tax rates and, importantly, he accepted that the MPT owed money to the MWS Fund. Mr Montgomery, as the controlling mind of Montgomery Wools and Warwick Wools, was able to approve these transactions.

78. It was submitted that admissions made by Mr Montgomery when giving his evidence should be discounted because he was confused and harassed. I accept that Mr Montgomery became confused, but do not accept that he was harassed or that his oral evidence should not be accepted where there is conflict with his written evidence. Mr Montgomery was clear that he had read and approved the financial statements for the MWS Fund and the MPT for 2004. He may not have understood all of the entries but gave evidence, which was repeated a number of times, that he relied on his accountant and approved transactions recorded in the financial statements, as recommended by his accountant, that were "tax effective". It is implicit that this would have included the distribution to the MWS Fund from the MPT in 2004. When asked about how he knew that no determination had been made, Mr Montgomery replied "Well, I would have been told that", suggesting Mr

ATC 4609

Montgomery included this in his affidavit because he had been told this was the case and not because this was his view.

79. The fact that there were no moneys available to distribute when Pearl Street was sold does not, of itself, displace the presumption and in this regard I note the analysis of Hill J in
East Finchley Pty Ltd v Federal Commissioner of Taxation 89 ATC 5280; (1989) 20 ATR 1623 at 1635 that there is no need for physical payment to "accomplish a transaction".

80. I am satisfied based on the evidence, that the distribution was unpaid (as opposed to not made) and, consistent with the observations of the Full Court (Spender, Heerey and Lander JJ) in
Corporate Initiatives Pty Ltd & Ors v Commissioner of Taxation 2005 ATC 4392; (2005) 142 FCR 279, the unpaid distribution was recorded in the financial statements of the MWS Fund as a loan. The Full Court found that where a beneficiary did not demand payment of unpaid distributions the beneficiary provided a benefit to the trustee. Relevantly the Full Court observed at 285,

"… it is difficult to see the practical difference between a formally recorded loan and what happened here. In effect Eldersmere was the recipient of a loan repayable on demand and, as stated above, could use the amount of the loan for trust purposes."

81. I therefore conclude that, based on the financial statements of the MWS Fund and the MPT, other documentary evidence (such as regulatory and tax returns) and the evidence of Mr Montgomery, there was a distribution of income to the MWS Fund in the amount of $192,999 and a loan back from the MWS Fund to MPT in the same amount for the year ended 30 June 2004.

82. Montgomery Wools submitted that even if it is established that the MWS Fund was presently entitled to income of the MPT in 2004 because there was a distribution, there was no "loan" within the meaning of s 10 of the SIS Act.

83. Section 10 provides that a "loan includes the provision of credit or any other form of financial accommodation, whether or not enforceable, or intended to be enforceable, by legal proceedings".

84. It was submitted by Montgomery Wools there must be some positive act, not merely a failure to demand payment, to satisfy the definition. It was also submitted that there must be an intention that the financial accommodation "ultimately be payable" (
Commissioner of Taxation v Radilo Enterprises Pty Ltd 97 ATC 4151; (1997) 72 FCR 300; 34 ATR 635). In this case there was little prospect the loan from MPT would "ultimately be payable" and it could be inferred that Mr Montgomery never believed it would be repaid.

85. On the other hand, the Commissioner submitted that s 10 should be given a broad interpretation consistent with the objectives of the legislation. In Radilo Enterprises, the Full Court considered the meaning of "the provision of credit or … financial accommodation" in the context of another legislative provision and found that the provision of credit or financial accommodation "implies a consensual transaction". In the case where Mr Montgomery was the controlling mind of both Montgomery Wools and Warwick Wools and was aware of the sale of Pearl Street, the distribution of income to the MWS Fund and the proposed payment to the CBA for the benefit of the MFT rather than to the MWS Fund, the Tribunal can infer there was a consensual arrangement. It would be artificial to suggest otherwise. In these circumstances, an agreement to delay payment of the distribution or the failure to make demand for payment of the distribution, could amount to financial accommodation. This is consistent with the Explanatory Memorandum to the Superannuation Legislation Amendment Bill (No. 4) 1999, which explains the reasons for the proposed amendments, which significantly amended the in-house assets provisions.

86. According to the Explanatory Memorandum, the SIS Act contains a number of rules governing investment activities by superannuation funds and "these rules are designed to limit the risks associated with superannuation fund investments and to ensure that superannuation savings are preserved until retirement and not accessed for current use".

ATC 4610

Under the heading "Problem Identification" it was noted that a 1997 survey found superannuation funds were "investing in unit trusts that were effectively controlled by the fund members or the employer" and superannuation savings were being transferred into related trusts that are not subject to the investment rules or other SIS regulation, which was leading to practices that undermined the effectiveness of the existing investment rules. The amendments to the in-house assets provisions were intended to limit these investments to ensure that "superannuation savings should be invested prudently, consistent with the SIS requirements, for the purpose of providing retirement income and not for providing current day benefits".

87. I agree with the submissions of the Commissioner. The facts of this case raise issues that are in line with the problem identified in the Explanatory Memorandum. Montgomery Wools has made an investment in a related unit trust and the unit trust has dealt with its assets in such a way as to transfer the value of retirement savings to a related family trust for its use. The mechanism through which this was affected was the sale of the assets of the MPT and the application of those proceeds to the CBA to ensure the liquidity and ongoing operations of the MFT. This was facilitated by the consensual arrangement between the trustees of the MWS Fund, the MPT and the MFT that the moneys would be so paid and that the MWS Fund would not call upon the distribution of income for 2004. In other words, the MWS Fund would provide financial accommodation to the MPT. The arrangement was consensual because it was approved by Mr Montgomery, who was the controlling mind of both trustees. It does not matter that Mr Montgomery did not specifically turn his mind to the legal effect of this or the specific nature of the transactions. He approved and intended to approve the sale and payment of the proceeds for the benefit of the MFT, knowing the MWS Fund was entitled to those proceeds.

88. There is no evidence Mr Montgomery did not intend that the financial accommodation would "ultimately be payable". Indeed there is evidence to the contrary. When questioned about this issue, Mr Montgomery said he did not consider there was a loss to the MWS Fund as the "money [was] still there".

89. It was also submitted by Montgomery Wools that the "loan back" to the MPT so that the proceeds could be loaned to the MFT and paid to the CBA was not consensual. Warwick Wools had no choice but to pay the proceeds to the CBA under the mortgage. The Commissioner submitted that Mr Montgomery in fact proposed this and had other alternatives, such as selling stock or the family home.

90. I accept that once Pearl Street was sold, the CBA was entitled to demand that the proceeds be paid to reduce the MFT debt, particularly given that the amount outstanding was substantial and the account had been in credit recovery for some time. The "die was cast" after Pearl Street was used as security for the MFT facilities in 2000. There is evidence that a property owned by Mr and Mrs Montgomery at Sanctuary Lakes, which was intended to be a future residence, did not secure trading debts, but could have been used to pay those debts as an alternative to the sale of Pearl Street. The Werribee property, which was also owned by Mr and Mrs Montgomery and was their residence at the time, was security for the MFT facilities. If the Werribee and Sanctuary Lakes properties were both sold, it is possible the CBA may have discharged the Pearl Street security but there was no evidence about this because Mr Montgomery did not propose this to the CBA. The fact is that Mr Montgomery could not easily sell the Werribee property and did not consider selling the Sanctuary Lakes property. Pearl Street was no longer being used to store wool and was vacant. It was not generating any income and, according to Mr Montgomery, it was therefore logical to sell this property.

91. This would be true if Pearl Street was owned by Montgomery Wools as trustee for the MFT. However, if Mr Montgomery had been properly discharging his duties as a director of Montgomery Wools, as trustee for the MWS Fund, and as director of Warwick Wools, as trustee for the MPT, he would have recognised it was not in the best interests of the MPT or the MWS Fund for Pearl Street to be sold as the proceeds would be applied to the MFT debt. Mr Montgomery had a conflict because he was also

ATC 4611

a director of Montgomery Wools, as trustee for the MFT, and it was in the best interests of the MFT to continue trading and have adequate funding. Mr Montgomery did not recognise these conflicts because he treated all entities as part of the Montgomery Wools group, with the common goal of growing the business. This is not a case about breach of directors' duties but this analysis is relevant to what happened when the MFT experienced financial difficulties in 2003 and 2004.

92. Mr Montgomery made a proposal to the CBA, which I accept was made under pressure from the CBA, that the proceeds of Pearl Street be applied to the MFT debt. However, Warwick Wools did not have to sell Pearl Street at that stage and to do so was against the interests of the MPT and ultimately the MWS Fund. If Mr Montgomery had been dispassionate and independent, he may have forced a sale of other security and/or MFT assets to reduce the loan. For this reason, I accept the Commissioner's submission that Mr Montgomery, as the controlling mind of the trustees of both the MWS Fund and the MPT, had a choice and the choice that was made was to proceed with the sale of Pearl Street and have the proceeds applied to the debts of the MFT. Regardless of whether Mr Montgomery turned his mind to the legal effect of this, he knew that moneys were paid for the benefit of the MFT that the MWS Fund would have otherwise received. Mr Montgomery gave evidence that he had intended these proceeds to be distributed to the MWS Fund but also accepted that the MFT owed money to the MPT which in turn owed money to the MWS Fund. In my view, the arrangement was therefore consensual and voluntary.

93. In summary, I have decided there was a distribution to the MWS Fund and, as such, there was a present entitlement to the income. I have also decided there was a "loan" based on the financial statements and, in the alternative, by reason of the consensual arrangement argued by the Commissioner.

94. The Commissioner also submitted that even if it is not established that there was a determination under clause 10.1.1 and there was no present entitlement to the income, Montgomery Wools "provided financial accommodation" by not requiring the distribution and instead enabling the payment to be deferred so the money could be used by the MFT. Having already decided there was a present entitlement, I do not need to determine this question. However, if I am wrong and there was no distribution, I would have nonetheless found that there was a "loan" on the basis that the words "the provision of credit or any other form of financial accommodation, whether or not enforceable, or intended to be enforceable, by legal proceedings" should be given a broad interpretation to give effect to the 1999 amendments to the in-house assets rules.

95. Apart from the discussion in Radilo Enterprises, which refers to a consensual arrangement, there is no other guidance on the meaning of these words. I agree with the submission of Montgomery Wools that this implies some positive act or conduct. A positive act may include acquiescence in relation to an event or transaction or the failure to enforce or demand a right, provided the party makes an active decision to acquiesce or refrain from enforcing a right or making a demand. "Financial" means relating to money matters and the definition of "accommodation" is broad enough to cover a "readiness to aid others".

96. In this case, the MPT made a profit of $192,999 from the sale of an asset in February 2004. In January 2004 it was agreed by Mr Montgomery, on behalf of Warwick Wools, that the proceeds of sale would be paid to the CBA and therefore, would not be distributed to the MWS Fund. The MWS Fund did not have the right to call for a distribution or to direct where the proceeds should be paid but it did have the right to terminate the trust and give reasonable directions about the assets (clauses 2.3.2 and 2.4.1), which it chose not to do. Mr Montgomery did not merely 'stand by' but intended for the sale proceeds to be paid in this way. I accept he did not intend for the MWS Fund to be prejudiced because he believed what was good for the family business was good for the MWS Fund. However, in my view, Montgomery Wools, as trustee for the MWS Fund, intended the result and thereby provided financial accommodation to the MPT.

97.

ATC 4612

As noted by the Commissioner in his submissions, there is a degree of artificiality in this analysis because Mr Montgomery would not have turned his mind to the various legal obligations and rights of each entity in the Montgomery Wools group. The simpler argument is that Montgomery Wools provided financial accommodation to Warwick Wools by reason of the fact that Mr Montgomery, as the controlling mind of the trustees of the MWS Fund, the MPT and the MFT, made the decision about the sale and the distribution of the proceeds and approved all transactions to give effect to this proposal. This was not a mortgagee sale over which Mr Montgomery, and his companies, had no control as sought to be portrayed. There were alternatives available, albeit unpalatable for the family business and for him personally. In my view and in the circumstances of this case, Montgomery Wools provided financial accommodation to Warwick Wools, even if there was no distribution of income and therefore no present entitlement. If this was not the case, a trustee could overcome the in-house assets rules by deliberately failing to determine income and distribute assets.

98. I am therefore satisfied that Montgomery Wools breached s 84 of the SIS Act in the year ended 30 June 2004.

Sole purpose test

Submissions of the parties

99. Section 62(1) of the SIS Act, which is a civil penalty provision, provides that each trustee of a regulated superannuation fund must ensure that the fund is maintained solely for at least one of the "core purposes" or one or more "core purposes" and one or more "ancillary purposes".

100. A "core purpose" is to maintain the fund to provide benefits for each member of the fund on or after:

  • (a) the member's retirement from any business, trade, occupation or employment;
  • (b) the member's attainment of a prescribed age;
  • (c) the earlier of the member's retirement from any business, trade, occupation or employment or the attainment of a prescribed age, or
  • (d) the member's death, if the death occurred before they attained a prescribed age or retirement, where benefits are provided to the member's dependants or legal representative.

101. An "ancillary purpose" is to provide benefits for each member on or after:

  • (a) the termination of the member's employment with an employer who, at any time, had made contributions to the fund for that member;
  • (b) cessation of employment due to ill health;
  • (c) death of the member after retirement where benefits are paid to the member's dependants or legal representative;
  • (d) death of the member after attaining a prescribed age where the benefits are paid to the member's dependants or legal representative, or
  • (e) other ancillary benefits approved in writing by the Regulator.

102. In summary, a regulated superannuation fund must be maintained for the purpose of providing retirement benefits to members, or to the dependants or legal representative of members where the member dies. Whether a fund complies will depend on the facts of each case and will be assessed by the objective facts, not the subjective views of trustees or, in the case of the corporate trustees, the directors. As stated by Davies J in
Raymor Contractors Pty Ltd v Federal Commissioner of Taxation (1991) 91 ATC 4259; 21 ATR 1410;, at1412-3, when considering a superannuation fund established for the benefit the franchising business employees:

"… to ascertain whether a fund was being maintained and applied for the benefit of employees, it was proper to examine not merely the terms of the deed under which it was managed and controlled, but also the use made by the trustee of the trust funds and of the powers and discretions conferred on the trustee, the extent to which employees actually received benefits from the fund and the extent to which the funds went to the benefit of persons who were not employees."

103.

ATC 4613

Further guidance was provided by the Tribunal in AAT Case 10,301 (1995) 31 ATR 1067, as follows [at 24]:

"… it may be that there are isolated incidents which, viewed in the overall context of the way in which a superannuation fund is being maintained, are so incidental, remote or insignificant, that they cannot, having regard to the objects sought to be achieved by the Act, be regarded as constituting a breach of the sole purpose test. Such incidents will be rare. The legislature, by adopting the 'sole purpose' test, has expressly determined that a strict standard of compliance should be adhered to. Under the Act, the test requires more than the presence of a dominant or principal purpose in the maintenance of a superannuation fund - it requires an exclusivity of purpose commensurate with that purpose being the 'sole purpose'."

104. Montgomery Wools submitted that the directors believed the investment in the MPT would be stable and secure and that the investment would, by supporting the Montgomery Wools group, maximize the income which could be paid to the MPT (and thereby the MWS Fund) which in turn could be used to pay benefits to the members. This was said to be for the benefit of members and, as such, sufficient to satisfy the sole purpose test. The fact that the investments of the MPT were used for other purposes is irrelevant as s 62 applies to the superannuation fund and not its underlying investments. In any event, Montgomery Wools, and its directors, had no control over the proceeds of sale of Pearl Street when it was sold in 2004. The proceeds were applied by the CBA against the indebtedness of Montgomery Wools, as trustee for the MFT, under the 2000 CBA charge. Neither Warwick Wools nor Montgomery Wools had a choice.

105. The Commissioner submitted that the evidence before the Tribunal clearly established that the MWS Fund was maintained, in part, for the purpose of providing liquidity to the MFT, which was achieved by a proposal by Mr Montgomery, who was both a director of Montgomery Wools and Warwick Wools, that the proceeds of Pearl Street be used to repay the indebtedness of the MFT. This was not for the sole purpose of providing retirement benefits to the members of the MWS Fund but to facilitate the operations of the wool trading business of Montgomery Wools, as trustee for the MFT.

Consideration

106. The evidence of Mr Montgomery was that while the MWS Fund was established to provide retirement benefits to members, the investment in the MPT was also intended to support the Montgomery Wools group, which included the wool trading business of the MFT. It is clear Mr Montgomery considered that the viability and profitability of the business of MFT was of benefit to him and his wife, both now and in the future. The future benefit would be achieved through the profits that would flow through to the MPT and ultimately the MWS Fund. This is why, as the controlling mind of both trustees of the MPT and the MWS Fund, Mr Montgomery agreed to Pearl Street being used as security for the MFT facilities in 2000. This is also the reason why Mr Montgomery made the decision about the sale of Pearl Street and the proposal of 14 January 2004 to the CBA. His evidence was that there was no choice, but as outlined above, there were alternatives available at that time to force the sale of other securities or the sale of other assets and stock of the MFT.

107. In order to protect its investment in the MPT, the MWS Fund could have terminated the Trust Deed as sole unitholder and directed the transfer of Pearl Street or allowed the sale but demanded immediate repayment of the loan. It did not do so and Mr Montgomery did not consider this as an option. The only alternative option considered was to negotiate with the CBA to allow an orderly reduction of the debt, which was rejected.

108. The difficulty with this approach was that the liabilities and trading losses of the MFT have not been quarantined from retirement benefits and, as such, there has always been the potential for those benefits to be exposed to risk and loss. This is what happened in the case of the MWS Fund, where there have been no distributions to, or appreciation in, the MWS Fund since 2004. The only asset in the MWS Fund are units in the MPT and, according to the affidavit of Mr Montgomery of 13 April 2010, the only significant asset of the MPT is a loan

ATC 4614

to Montgomery Wools (as trustee for the MFT), which it is "unable to discharge". Even more concerning is that Mr Montgomery concedes that even if Montgomery Wools were to be liquidated there would be insufficient assets available to discharge the loan. The possible sale of the Carbowool joint venture may provide funds to Montgomery Wools but there was no clear evidence about the prospects of this, other than that the company was still for sale after two years.

109. Properly characterised, the sole purpose of the MWS Fund was not to provide retirement benefits to members. One of its purposes was to provide support to the family business and while it was intended that any surplus from the MFT be transferred to the MPT then the MWS Fund, this was not guaranteed. While this is not a case where fund assets have been used as in
Re JNVQ and Commissioner of Taxation 2009 ATC 1-011; (2009) 74 ATR 730; [2009] AATA 522, Montgomery Wools has acquiesced (and arguably participated for the reasons outlined below) in the decisions made by the MPT. These decisions have had the affect of providing support and accommodation to the MFT to the detriment of the MWS Fund.

110. As referred to above, the MWS Fund did not have the power under the Trust Deed to direct the investments of the MPT but it did have the power to terminate and give reasonable directions in relation to the assets. As such, the breach of s 62 arguably occurred as early as October 2000 when Montgomery Wools, as trustee of the MWS Fund, acquiesced in the MPT providing such security. Montgomery Wools also acquiesced to the sale of Pearl Street and the sale proceeds being applied to the MFT debt in 2004. It has failed to demand payment of the loan from the MPT or to insist on interest being paid. Importantly, it has failed to terminate the Trust Deed to take control of the MPT investment. Mr Montgomery was, and is, the controlling mind of both trustees at all relevant times and the MWS Fund owned all of the units in the MPT. In these circumstances it could be said that Montgomery Wools, as trustee of the MWS Fund, was an active participant in the decision making and agreed to the various transactions, including the sale of Pearl Street and the proposal to the CBA. These transactions were for the benefit of the MFT and were intended to be so.

111. Having regard to the documentary evidence and Mr Montgomery's own evidence about the his view of the MWS Fund, I find that Montgomery Wools breached s 62 of the SIS Act in 2004 and has continued to do so by failing to call up the loan from the MPT and/or failing to consider terminating the Trust Deed to take control of the MPT investment. In failing to take action for the benefit of the MWS Fund, Montgomery Wools has preferred the interests of the MFT and acquiesced in MFT retaining the benefit of the proceeds of sale of Pearl Street.

Investments to be arm's length

Submissions of the parties

112. Section 109(1A) of the SIS Act provides that where a trustee of a regulated superannuation fund deals with a party who is not at arm's length in respect of an investment, that dealing must be undertaken in the same manner as it would if the other party was at arm's length.

113. It is not disputed that the various Montgomery Wools entities are related but rather whether Montgomery Wools was "required to deal" in respect of the investment in the MPT. The Commissioner submitted that Montgomery Wools, as trustee for the MWS Fund, permitted the sale of Pearl Street and allowed the proceeds to be lent on an unsecured basis to a related third party with no agreed interest or repayment schedule. The failure of Montgomery Wools as sole unitholder in the MFT to demand repayment and terminate the MPT by special resolution breached s 109(1A). Montgomery Wools submitted that there is no suggestion that the original investment, although related, was not at arm's length. Once the investment has been made, s109(1A) only applies if the trustee has been "required to deal" with the investment. There was no "requirement to deal" in this case and permitting the sale and loan to the MFT was not "dealing". In any event, neither Montgomery Wools nor Warwick Wools made this happen as the proceeds were "taken" by the CBA under the mortgage.

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Consideration

114. I accept that the original investment in the MPT was at arm's length, or at least there was no evidence or argument to the contrary.

115. Section 109(1A) applies where there is an investment and the trustee is "required to deal in respect of the investment with another party that is not at arm's length". The investment in units in the MPT is not at arm's length. There is no definition or guidance on what "required to deal" means in the context of a related party investment. The Explanatory Memorandum to the Superannuation Industry (Supervision) Legislation Amendment Bill 1995, states that the amendment, which inserted s 109(1A), "introduces a requirement that investments must at all time be maintained as if they were arms-length". However, the wording of the subsection, which only applies if the trustee is "required to deal", appears to be curiously narrow. The Commissioner did not address this submission, although Montgomery Wools submitted that as a matter of statutory construction and on the facts of this case, s 109(1A) simply did not apply.

116. Even if I was of the view that "required to deal" should be given a broad meaning to simply cover dealings with the related party investment by the trustee, Montgomery Wools was not required to deal with the units by reason of the events that took place in 2004. There was no sale of or dealing in the units, but rather the underlying investment owned by the MPT. It is not clear that this provision is intended to apply in these circumstances and in this regard I note that that this was one of the reasons why the in-house assets rules were amended in 1999.

117. I therefore find that Montgomery Wools did not breach s 109(1A) of the SIS Act in 2004.

How should the discretion under Section 42A(5) of the SIS Act be exercised?

118. Section 42A(5) gives the Commissioner discretion to issue a notice of compliance if a trustee of the superannuation fund has contravened one or more of the regulatory provisions of the SIS Act or SIS Regulations. The discretion requires the decision-maker to consider the tax consequences arising from the fund being treated as non-complying, the seriousness of the contraventions and all other relevant circumstances.

119. As stated by Senior Member O'Loughlin in
Re Triway Superannuation Fund and Commissioner of Taxation [2011] AATA 302 [at 13], s 42A(5) is a relieving discretion and two principles need to be observed:

  • "(a) first, discretions that are remedial or beneficial in nature ought be given a construction that allows the fullest relief which is open on a fair reading of their terms; and
  • (b) second, in exercising a discretion it is necessary to have regard to whether its exercise in a particular instance will achieve or frustrate the ends, objects or purposes of the SIS Act."

120. The Commissioner has issued Practice Statement Law Administration (PS LA 2006/19) outlining the factors that will be considered in deciding whether a notice of non-compliance should be given to a superannuation fund where the trustee has contravened one or more of the regulatory provisions.

121. While guidelines are not binding on the Tribunal, provided the guidelines are consistent with the provisions of the relevant legislation, they may provide useful insight for a decision-maker about the relevant regulatory issues, having regard to the experience of, and policy developed by, the regulator administering or enforcing the legislation.

122. PS LA 2006/19 draws substantially on the factors set out in the legislation, emphasises the discretion is an exercise in weighing up all relevant factors, but also identifies matters the decision-maker should consider when assessing those factors.

123. The Commissioner contends that when exercising the discretion, the objects of the SIS Act should be taken into account. The Commissioner relies on the following comments of Logan J in
Vivian (Deputy Commissioner of Taxation (Superannuation)) v Fitzgeralds & Anor 2007 ATC 5105; (2007) 69 ATR 834; [2007] FCA 1602, which are instructive:

  • "[25] Our parliament has deliberately constructed a scheme whereby, in return for submission to a regulatory regime found in

    ATC 4616

    the SISA, particular taxation benefits are given to the trustee of a superannuation fund and its members. The public policy that seems to underlie that particular concession is to encourage prudent provision by Australians for their retirement. In so doing, the burden on other Australian taxpayers in the provision of social security benefits for the aged is thereby lessened. I can, I believe, responsibly take judicial notice that a contemporary phenomenon is a recognition that Australia has, in terms of its demographics, a need for such provision to be encouraged.
  • [26] Part of the scheme found in the legislation is to enable what one might term small funds or, at least, funds which have fewer than 5 members to be self-managed. That is a particular benefit conferred by the parliament on those who would wish to make provision for their retirement. It enables self-management as opposed to becoming a member of a fund the management of which may be remote from membership. It is a privilege. It is a privilege that should not be abused…"

124. There are three factors that must be considered under s 42A(5) of the SIS Act and PS LA 2006/19 provides guidelines to the decision-maker on each of these factors. In my view, PS LA 2006/19 is consistent with the objects of the SIS Act as further explained by Logan J.

125. Montgomery Wools contends that the previous decisions of the Tribunal have given too much weight to the objects of the SIS Act and have not focussed enough on the beneficial nature of the provisions and the importance of preserving superannuation entitlements. The Tribunal was referred to a number of decisions, all of which, save for the decision of
Re XPMX and Commissioner of Taxation (2008) 73 ATR 925; [2008] AATA 981, have found that where there are contraventions of the SIS Act, the seriousness of these contraventions have invariably weighed heavily against the favourable exercise of the discretion. The approach taken by the Tribunal has rendered s 42A(5) "meaningless". The Tribunal should be open to considering alternative remedies where a superannuation fund has contravened the regulatory provisions of the SIS Act (rather than merely making the fund non-complying) because the tax consequences will necessarily affect the fund as a retirement vehicle (as recognised in JNVQ [at 27]).

126. I accept that in each of the cases referred to, the Tribunal has refused to exercise the discretion under s 42A(5) and in a number of those cases the hardship or difficult circumstances of the members of the fund have been referred to with sympathy. This does not mean the discretion in s 42A(5) has not been properly considered or that it does not have an effective and meaningful role. It is clear from the cases that the Tribunal has taken into account a number of factors in reaching its decisions. While it is true s 42A(5) provides a relieving discretion, the provision also has the capacity to change the status of a non-complying superannuation fund for the future. It is not just about past rights, obligations and entitlements. In my view this is a significant matter and is an issue recognised in PS LA 2006/19. Importantly, the guideline provides sufficient scope for the decision-maker to consider alternative remedies before the issue of the notice. Interestingly, few applicants in cases before the Tribunal have taken action, or offered to take action, to appropriately remedy the contravention identified. In my view it is this failure, rather than the alleged failure of the PS LA 2006/19 or the approach by the Tribunal, that has resulted in so few successful matters. This is referred to in more detail below.

Tax consequences

127. PS LA 2006/19 recognises that the decision to change the status of a self managed superannuation fund from a complying fund to a non-complying fund will have a significant financial impact on the fund. Whether it would be reasonable to treat a non-complying fund as complying is said to depend on:

"… the particular circumstances of the case, the seriousness of the contravention, and the trustee's attitude to complying with the regulatory provisions."

128. Montgomery Wools submitted that the tax consequences are so significant that in the circumstances of this case, they should be afforded greater weight than the seriousness of the contraventions which related to a single

ATC 4617

transaction, were unintentional and were driven by the particular financial difficulties experienced by the family business in 2003 and 2004. Mr and Mrs Montgomery have already suffered a loss because of the likely loss to the MWS Fund and to cause the fund to be non-complying would impose a "very heavy penalty which will make it even harder for Mr Montgomery to retire than what is presently the case".

129. When a superannuation fund is found to be non-complying, not only does it lose its concessional rates but under s 288A of the ITAA the trustee will be liable to pay tax on the assessable income in respect of the year it became non-complying and will be liable to pay tax on the net previous income in respect of the previous years of income, which will be calculated by reference to the market value of the assets in the immediately preceding year, less undeducted contributions.

130. To understand the tax consequences, I requested the Commissioner to provide details of how the amended assessments were made. The gross tax was $409,302.32 for the year ending 30 June 2004 (a difference of $389,641 from the amount originally assessed), based on the value of the assets of the MWS Fund as at 30 June 2003 of $771,967 and there were no undeducted contributions. It is unclear how the value of the assets was derived when the assets recorded in the financial statements for 30 June 2003 was $580,925. It is possible that this calculation is an error which is a matter the parties may no doubt wish to investigate. This is not a matter for the Tribunal. In any event, whatever the basis for the estimated value, it appears that the greater the appreciation in the value of the superannuation fund, the more serious the tax consequences. Neither party was able to explain the rationale for the formula but both agreed the tax consequences were very significant for the MWS Fund. However, for the reasons already outlined in relation to the prospects of recovery of loans, this may have little practical impact on the retirement benefits of Mr and Mrs Montgomery. The assets of the MWS Fund are the units and a loan to the MPT. The assets in the MPT comprise loans to the MFT, which Mr Montgomery has said are unlikely to be recovered unless the Carbowool investment is sold.

131. I accept the tax consequences are significant and the MWS Fund may be unable to pay the tax debt, which may lead to liquidation of the Fund but I am not persuaded that the tax consequences of treating the MWS Fund as non-complying outweigh other factors, including the seriousness of the contravention and the failure of Montgomery Wools to remediate and to ensure there is future compliance.

132. Montgomery Wools also submitted there was no utility in issuing the notice of non-compliance because there was evidence the tax liability will not and cannot be paid. The Commissioner submitted this is not a relevant consideration. I agree. The scheme is designed to provide concessional tax treatment to superannuants provided they follow the regulatory rules. The scheme is not about revenue and to issue a notice that the Fund is complying simply because any tax resulting from a notice of non-compliance being issued would not be recoverable would be inimical to the objects of the SIS Act.

Seriousness of the contraventions

133. Under PS LA 2006/19, the following factors should be considered when assessing the seriousness of the contravention:

  • • The behaviour of the trustee in relation to the contravention;
  • • The extent to which the contravention affects the fund's assets;
  • • The extent to which those assets are exposed to financial risk and whether there is any loss in the value of the fund;
  • • The number and duration of the contraventions over time; and
  • • The nature of the contraventions in the overall scheme of the legislation.

134. Montgomery Wools submitted that I should take into account that when the MWS Fund was set up there was no prohibition on acquiring the units in the MPT and rent was paid and/or distributed to the MWS Fund until 2003. The sale of the property was, in effect, forced by the CBA which had unreasonably withdrawn financial support for the MFT. This meant that the only other alternative to the sale of Pearl Street was to significantly liquidate the stock and assets of the MFT, which would stifle

ATC 4618

trading profits and growth for the family business, and sell the family home. This would have had dire consequences for Mr and Mrs Montgomery. The contraventions were inadvertent and it was relevant that they were based on a single transaction.

135. I accept these submissions but note that the contraventions were serious because they had the effect of exposing the MWS Fund to significant risk and loss. I also note that the MWS Fund failed to take action to demand payment or recover the loans or interest and that this has been the position since 2004. It is unclear whether these funds will ever be recovered and the benefit to the MFT of having the CBA loan repaid from the proceeds of sale of Pearl Street has remained with the MFT.

136. Mr Montgomery, as a director of Montgomery Wools and Warwick Wools, had a conflict of duty in exercising his various decision making roles but did not recognise this. While Mr Montgomery gave evidence that he read financial statements of the trusts before he signed them and was careful, he did not fully appreciate the nature and effect of the various transactions and invariably approved recommendations made by his accountant that were tax effective without independent consideration of whether those transactions were appropriate. This raises concerns about future compliance by the MWS Fund.

137. In my view, the nature and extent of the contraventions are serious and militate against issuing a notice of compliance.

All other relevant circumstances

138. PS LA 2006/19 identifies the following matters as relevant circumstances to consider when deciding whether to exercise the discretion to treat a non-complying fund as complying:

  • • Whether the trustee has rectified the contravention, entered into an enforceable undertaking or taken action to prevent the contravention recurring;
  • • The trustee's level of skill and knowledge;
  • • The compliance history of the fund before and after the contraventions; and
  • • The events which lead to the contravention and whether these influenced the trustee's decision, including serious illness.

139. I accept that Mr Montgomery, while an experienced business man, had limited skill and knowledge about the SIS Act and the investment rules for self managed superannuation funds. He retained an accountant to advise him on these matters but, on his own admission, clearly did not pay enough attention. He now professes to have a better understanding of these matters and has offered to cause the trustees of the MWS Fund to be replaced until the MPT has repaid to the loan. However, it should be noted that this offer does not completely rectify the breach as until the MFT loan is repaid, the value of the units in the MPT, being the only significant asset of the MWS Fund, is still seriously compromised. It should also be noted that Mr Montgomery has taken no steps in this regard, even though the Commissioner identified the regulatory breaches and issued a notice of non-compliance in September 2008.

140. Montgomery Wools has given no undertakings nor sought to offer an enforceable undertaking that would rectify, or substantially rectify, the contravention. Moreover, there has been no offer to undertake compliance measures to ensure compliance in the future. In my view, this is significant given the nature of the relief in s 42A(5) is to give a notice stating the fund is complying, even though it has not complied with the regulatory provisions of the SIS Act.

141. If Montgomery Wools had given such undertakings or taken remedial action in a timely manner after the contraventions were identified, the Commissioner (and indeed the Tribunal) may have been more favourably disposed to exercise the discretion because this would have ameliorated the negative impact of serious breaches. Where there have been serious contraventions of the regulatory provisions of the SIS Act and those contraventions have resulted in loss, applicants for review cannot expect the discretion to be exercised in their favour where no attempt has been made to rectify the breach or ensure compliance for the future, regardless of the prejudicial effect of the tax consequences.

142.

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Montgomery Wools contended an alternative and more preferable solution would have been for the Commissioner (and therefore the Tribunal) to remove it as trustee under s 133 of the SIS Act and appoint an independent acting trustee under s 134 of the SIS Act. The acting trustee could take remedial action and the appointment would expire once the MPT had repaid all outstanding contributions. This would be an "equitable" result.

143. The Commissioner rejected this contention for a number of reasons. First, there is a fundamental flaw. Under s 17A of the SIS Act a superannuation fund will only qualify to be a "self managed superannuation fund" if each director of the trustee company is a member of the fund. As such, an independent trustee could not be appointed. Secondly, there is insufficient evidence for the Tribunal to be satisfied that the conditions of s 133 have been satisfied, namely that Montgomery Wools has engaged in conduct that "may result in the financial position of the entity or of any other superannuation entity becoming unsatisfactory". There is no evidence about the current financial position of the MWS Fund.

144. I do not accept the contention of Montgomery Wools. I agree that s 17A appears to preclude this as a remedy. However, even if s 133 could be established and was available, I do not consider this to be a preferable alternative to the issuing of the notice of non-compliance in this case. In particular, it does not resolve concerns about future compliance. If an independent trustee needs to be appointed to make good breaches, it is difficult to understand how there can be any level of satisfaction that the MWS Fund will comply in the future. Mr and Mrs Montgomery, as common directors of Montgomery Wools and Warwick Wools, could take action (and could always have taken action) to restore the position of the MWS Fund by injecting money into the MFT and/or MPT or selling assets of the MFT to repay the MPT loan. They did not and have not done so.

Conclusion on exercise of discretion

145. I agree with the observations of Senior Member Carstairs in
Re JNVQ and Commissioner of Taxation 2009 ATC 1-011; (2009) 74 ATR 730; [2009] AATA 522 at [41], that in exercising the discretion in s 42A(5):

"… 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."

146. I am satisfied the contraventions of the Montgomery Wools are serious and the impact on the MWS Fund has been significant. As in
Re JNVQ and Commissioner of Taxation (2009) 74 ATR 730; [2009] AATA 522, there has been no attempt to rectify the contraventions in the five years following the sale of Pearl Street or to ensure compliance in the future. In the circumstances of this case and weighing up all the factors, it is my view that it would be inconsistent with the objects of the SIS Act to issue a notice of compliance. I am therefore not prepared to exercise the discretion in favour of the MWS Fund under s 42A(5) of the SIS Act.

Findings and conclusions

147. It is not the role of the Tribunal to review the notice of non-compliance but the decision to issue the notice.

148. I find that Montgomery Wools contravened a number of regulatory provisions of the SIS Act in 2004 and as such, the MWS Fund did not pass the test set out in s 42A(5) for compliance. The notice of non-compliance cannot be set aside on the basis the MWS Fund did pass the test. The contraventions were serious and have not been rectified.

149. Having regard to the circumstances of the case and the guidelines set out in PS LA 2006/19, I am not satisfied that a notice of compliance should be issued under s 42A(5) of the SIS Act.

150. Accordingly, I affirm the decision of the Commissioner.


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