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ADMINISTRATIVE APPEALS TRIBUNAL - GENERAL ADMINISTRATIVE DIVISION

Case [2000] AATA 238

B J McMahon, Deputy President

16, 27 March 2000 - Sydney

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B J McMahon, Deputy President.    The present respondent is the Commissioner of Taxation. Through a succession of legislative amendments, he continues to be responsible for administration of the preserved portions of the Occupational Superannuation Standards Act 1987 (Cth). For present purposes, it is not necessary to trace the way in which this Act has changed its name and in which administration responsibilities have devolved upon various bodies. No issue has been raised by either party relating to the formal preservation of rights, obligations and responsibilities. It is therefore sufficient to say that the decision under review is the decision of a delegate of the Insurance and Superannuation Commissioner made on 21 December 1994 as varied by the decision of another delegate of the same Commissioner on 6 April 1998. Once again, although an explanation was given at the hearing, it is not necessary, for present purposes, to set out the tangle of reasons which led to such a delayed reconsideration.

  2  The decision was that the then Commissioner was not satisfied that the applicant (the Fund) satisfied or should be treated as if it had satisfied the applicable "superannuation fund conditions" in relation to the 1992-93 year of income.

  3  These conditions included the requirement to observe investment standards relating to in-house assets laid down in reg 16A of the Occupational Superannuation Standards Regulations 1987. An in-house asset was defined to include (relevantly) a loan to or an investment in an employer sponsor of the fund.

  4  If that investment standard is not met, then s 13 (as it stood at the relevant time) provided that the Commissioner could give notice in writing to the trustees of the Fund stating that the Commissioner was satisfied that the Fund should be treated as if it had satisfied the superannuation fund conditions in relation to the year of income but only if the trustees of the Fund first satisfied the Commissioner that "because of special circumstances that existed in relation to the Fund during the year of income, it would be reasonable for the fund to be treated as if it had satisfied the superannuation fund conditions".

  5  Two questions arise for determination in the present application. The first is whether the fund in fact breached the prudential requirements of reg 16A. In the event that this question is answered positively, then the second question arising for determination is whether there were special circumstances of a kind contemplated by s 13.

  6  The Fund's managers (the company) operated a jewellery repair business for a number of stores in the Prouds chain. When that organisation was sold, the new proprietors decided that the chain would no longer provide this kind of service and, accordingly, the arrangements with the company were terminated. The only directors and shareholders of that company were a married couple (the trustees). Its activities provided their principal means of livelihood. It was therefore necessary for the company to find some other source of income.

  7  The trustees decided to acquire a concrete cartage business. This consisted of a truck, which was worth less than $20,000 and a franchise contract with Pioneer Concrete. For this business they agreed to pay $160,000.

  8  There was no written contract with the vendor, nor was there any written franchise agreement with Pioneer Concrete. At the time, the couple did not seek any legal or accounting advice as to the way in which the purchase should be structured. It seems from all available evidence, however, that on completion of the purchase, registration of the truck was transferred into the name of the company.

  9  To finance the purchase, the trustees approached their bank. Notwithstanding submissions that they made, the full extent which the bank was prepared to make available was $100,000. This was accordingly lent to the company. Repayment was secured by a mortgage over their house. They had $10,000 of their own. The shortfall of $50,000 coincided with an amount that was then currently available in the fund.

  10  There were pressures of time and opportunity to be addressed. It was necessary to start up a new source of income because of the loss of their primary business. There was also another buyer in the offing for the concrete cartage business. Accordingly a decision was made to take the balance of $50,000 from the Fund. There was no written agreement witnessing the way in which this financial arrangement with the Fund was to be structured from a legal point of view. The purchase deal was completed on 27 August 1988.

  11  The Fund had been established on 18 June 1981. At all relevant times, the company was the only sponsoring employer and the trustees were the only members. For some years after its establishment, transactions between members, the Fund and associated entities were not prohibited, if permitted under the trust deed. The husband did not consider the implications of arranging for the Fund to advance the $50,000 until some 12 months after the event when he consulted Mr Gallie, his accountant.

  12  Mr Gallie then consulted a local solicitor and instructed him to prepare a joint venture agreement between the company, on the one hand, and the Fund, on the other hand, to acquire and operate the concrete cartage business. At that meeting, the solicitor informed Mr Gallie that the proposal could not be carried out as there was a conflict of interest between the parties:

   

in that [the trustees] were directors and shareholders of the company … and they were the trustees and the members of the superannuation fund. In trying to prepare a document of this nature he advised it would be almost unreadable as the reader would have extreme difficulty knowing which of the positions the [trustees] were occupying in the recital.

  13  Mr Gallie gave evidence that he conveyed this advice to the trustees and informed them that as a joint venture was not possible, the most commercial way of recording what had happened would be to call the funds advanced by the Superannuation Fund a loan, which would have to be interest bearing in accordance with the guidelines of the ATO at that time. It is clear from the documentary evidence that was put before me that, in fact, this is what then happened.

  14  In recent times, the applicant has attempted to show that the money in fact was not a loan but represented a contribution to a joint venture. I find as a fact that this was not the case. Such an approach is entirely inconsistent with all the documentary evidence, including evidence seen in earlier correspondence between Mr Gallie and the Commissioner and in the contemporary books of account of the company and the Fund.

  15  Interest was charged at the particularly high rate that was then prevalent and, in accordance with expectations of the Commissioner in the case of loan transactions. The interest was not actually paid. It was debited to the company and credited to the Fund. The company claimed a tax deduction in its income tax returns for amounts of interest debited against it. The company also claimed depreciation on the value of the truck, which was an asset of the business.

  16  In my view, there can be no doubt as to what happened from a legal point of view. The company acquired the business and the Fund advanced a sum of money to the company for this purpose. The Fund continued to accept the benefit of accrued interest. This is shown not only in its own accounts but also in the annual return lodged with the Insurance and Superannuation Commissioner and his successors.

  17  The return for the year ended 30 June 1993 was lodged in June 1994. In that return, the trustees of the Fund disclosed a breach of the investment standard relating to in-house assets and requested the exercise of the Commissioner's discretion under s 13. In my view, this still remains the only issue to be determined.

  18  As at 30 June 1993, the total assets of the Fund were $96,241 and the cost of the in-house assets of the Fund was $96,196. These in-house assets consisted of the original loan to the company of $50,000 and accumulated interest which, by then, amounted to $46,196. The cost of the in-house assets of the Fund, therefore, represented 99.95% of the cost of all assets of the Fund. The Regulations set the relevant permitted percentage limit at 10%. This breach of the Regulations continued between September 1988, when the loan was first made, and June 1994, when the business was sold the loan was re-paid.

  19  The meaning of "special circumstances" as applied under s 13 has been considered on a number of occasions. The decisions relating to the use of that phrase in other legislation were cited in AAT Case 8042 (1992) 23 ATR 1227; Case Z27 92 ATC 255 at 258-259. This approach was not criticised in the appeal against that decision reported as Tefonu v Insurance and Superannuation Commissioner (1993) 30 ALD 455. It has since been applied in a number of subsequent tribunal decisions, notably AAT Case 9689 (1994) 29 ATR 1086; Case 47/94 (1994) 94 ATC 417.

  20  The Trustees must therefore satisfy the Commissioner (and therefore this tribunal) that there were special circumstances:

 •  Existing in relation to the Fund

 •  During the year of income

 •  Of such a nature that it would be reasonable for the Fund to be treated as if it had satisfied the superannuation fund conditions

  21  To do this, the trustees must satisfy the tribunal that there are such special circumstances which are unusual, uncommon, or exceptional and are circumstances which have a "particular quality of unusualness that permits them to be described as special" or, as Burchett J put it in Minister for Community Services and Health v Chee Keong Thoo (1988) 78 ALR 307 at 324 that there is "something unusual or different to take the matter out of the ordinary course".

  22  The circumstances alleged by the applicant to be special were expressed in general terms. As I understand the case made for the applicant, the circumstances alleged as being special were as follows:

 •  The Trustees operated the Fund within the powers given to them by the trust deed. As to this submission, one would expect that Trustees act in accordance with their statutory and fiduciary duties. The fact that they did so does not amount to special circumstances.

 •  The delay between the 1994 decision and the 1998 reconsideration arising, as it did, from misunderstandings on both sides, should be taken into account. Clearly this misunderstanding did not exist in relation to the Fund during the relevant year and, in my view, does not amount to a special circumstance.

 •  Different prudential requirements were introduced by subsequent legislation which would have a different legal effect on the circumstances of this case had it existed at the relevant time. Once again, I cannot accept this as a special circumstance as it did not exist in relation to the Fund during the relevant year.

 •  The loan was repaid in full with interest by 30 June 1994 and the Fund did not suffer any loss as a result of the investment. It has been held that not only does this not amount to a special circumstance, it is an exacerbation of the breach of standards. It demonstrates that the breach (which, by its nature, was gross) continued not only during the whole of the year of income but for a further year after that.

 •  Additional income tax will be imposed on the Fund if it is found to be a non-complying Fund in relation to the relevant year. I do not regard this as a special circumstance. This is a consequence of actions taken or decisions made by trustees of the Fund.

 •  No further outside finance was available to the company although efforts were made to find it. In my view, these are circumstances relating to the employer and are not circumstances existing in relation to the Fund.

 •  The loan was made to assist the employer restructure its earning capacity which was devastated by an adverse decision of the firm for which it contracted its services and which required the employer to seek investment elsewhere. Once again, this is a circumstance existing in relation to the employer. It illustrates, however, that the transaction under consideration was the very type of transaction sought to be limited by the superannuation conditions. The purpose of superannuation is to give some degree of security to employees so as to ensure the provision of genuine retirement income. The in-house investment limits are intended to ensure that the fates of the company and of the Fund member are not inextricably linked. If the company sinks, the retirement income source for the Fund member should survive. In the present case, it was imperilled throughout the whole of the financial year. As it happened, the business in which the loan was invested was finally sold at a considerable loss.

 •  Accepting the loan was "in essence the ownership of the business and not an advance of money to a member". There is no substance in this. The evidence clearly is that the joint venture arrangement (if it was ever contemplated) was abandoned in favour of a loan arrangement which was documented and implemented for a number of years. The fact that "appropriate benchmark interest rates" was charged is, to my mind, irrelevant.

 •  It was submitted that "it would seem quite unjust to still penalise this excluded mum and dad superannuation fund over such a technicality which happened more than 12 years ago". In my view, the breach was not a technicality. It was a substantial breach deliberately and methodically maintained for a number of years. It had the effect of achieving exactly what the Regulations had sought to deflect. There is nothing special in this consideration which would take it out of the ordinary course.

  23  Accordingly, in my view, the decision under review should be affirmed.