Case K8
Judges: HP Stevens ChRE O'Neill M
CF Fairleigh QC
Court:
No. 1 Board of Review
R.E. O'Neill (Member): The Board has for review the Commissioner's refusal to exercise his discretion, pursuant to sec. 121C(4), to disregard the failure of the assets of a superannuation fund to include ``at all times'' during each of the years of income ended 30 June 1972 and 1973 public securities the cost of which, as required by sec. 121C(1), was not less than 30% of the cost of all the assets of the fund. The income of the fund is otherwise exempt pursuant to sec. 23F of the Act.
2. The fund was established on 22 June 1961 for the purpose of making provision for superannuation benefits for a man and his wife who were the two ``working principals'' of a private company which had been incorporated in March 1959. The company took over the business of electrical contractor which had theretofore since 1945 been carried on by the husband. On 4 March 1964 an associated company was formed. The husband-member is one of two trustees of the fund and he gave evidence in and presented the case to the Board.
3. An amount of $979 interest received on 2 July 1971 was brought into the accounts of the fund as income derived in the year ended 30 June 1971. That treatment of the amount had the result that the holding of bonds at 30 June 1971 was short of the requisite 30% by $282 (after adjusting the bond holding for an inadvertent omission of $60 from the accounts). When the return for the year ended 30 June 1971 was prepared in January 1972 the shortfall was noticed and to cover it $350 was subscribed for bonds in that month. That explanation was not notified to the Department until June 1972 when the Commissioner accepted that the 30% ratio had, but for that lapse, been maintained throughout the year ended 30 June 1971.
4. It was, however, apparent that the holding of public securities must have continued during the year ended 30 June 1972 to be short of the required ratio of public securities at least up to January 1972. Apparently it was on this circumstance that the Commissioner relied when he assessed to tax the income of the fund for the year ended 30 June 1972 by notice of assessment issued on 4 July 1973, as no other inquiry prior to assessing was made of the fund's trustees. The income of the fund for the year ended 30 June 1973 was also assessed to tax by notice issued on 2 July 1974.
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5. Receipt of the assessment issued on 4 July 1973 for the year ended 30 June 1972 led the trustee to make detailed study of what the law required. Upon ascertaining that exemption under sec. 23F of the fund's income was lost unless the holding of public securities was maintained at 30% of the total assets ``at all times during the year of income'' an appropriate system of accounting was promptly instituted and I accept the trustee's evidence that the ratio of public securities has at all times since July 1973 been maintained at more than 30% of total assets at any time to guard against any shortfall momentarily arising on any unexpected receipt of interest. But that action was, of course, too late to cure the lapses that had occurred during each of the years ended 30 June 1972 and 1973. In those circumstances the trustees seek to have the Board exercise in favour of the fund its discretion to disregard the failure to maintain the ratio in those two years.
6. As assessed by the Commissioner the taxable income of the fund for each relevant year comprised: -
Year ended Year ended
30 June 1972 30 June 1973
Mortgage interest ................ $2,128 $2,293
Mortgage interest receivable ..... 169 -
Bond interest .................... 655 726
Company loan interest ............ 140 140
Building society ................. 132 52
$3,224 $3,211
Less expenses .................... 142 4
Taxable income assessed .......... $3,082 $3,207
Amount of tax at 371/2% .......... $1,155.75 $1,202.62
7. The assets of the fund at cost at 30 June of each of the two years were: -
At 30 June At 30 June
1972 1973
Mortgage loans ................... $26,700 $28,700
Commonwealth bonds ............... 12,410 14,010
Loan to the company .............. 1,750 1,750
Building society ................. 100 633
Bank current account ............. 187 1,660
$41,147 $46,753
The only public securities held by the fund during each of the years ended 30 June 1972 and 1973 were Commonwealth bonds. The holding of $12,410 at 30 June 1972 was $66 in excess of 30% of the cost of the total assets, but the holding of $14,010 at 30 June 1973 was $15 short of the requisite 30%.
8. In June of each year contributions were made to the fund as follows: -
Husband Wife
1972
By companies $800 $491
By member $806 -
1973
By companies $800 $491
By member $806 -
In each of the two years the total contributions were $2,097, those for 1972 being made on 5 June 1972 and those for 1973 being made on 15 June 1973. The trustee of the fund looked on those contributions as being the occasion of the need to subscribe for bonds to bring the holding up to 30% of the cost of the total assets as increased thereby as well as by receipts of interest during the year.
9. In the course of considering the objections to the assessments a Departmental analysis of the assets of the fund from day to day showed that at 1 July 1971 the holding of Commonwealth bonds was $282 or.78% under 30% (see para. 3 and 4). The receipt of interest on mortgage loans and bonds during the next seven months gradually increased that deficiency in steps of approximately $50 a
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month to 2.02% which was the peak deficiency over the two years. As explained in para. 3 above $350 was subscribed for bonds on 20 January 1972 and that reduced the deficiency to 1.22% which crept up to 1.76% before the next subscriptions were made for $650 bonds on 5 June 1972 and for $850 on 16 June 1972, bringing the total of bonds held at 30 June 1972 to $12,410 representing a surplus of $66 over the requisite 30% at 30 June 1972.10. Although during the year ended 30 June 1973 the receipt of interest at approximately monthly intervals correspondingly increased the assets of the fund, the only subscription made for bonds was $1,600 on 15 June 1973 which lifted the holding of bonds of $174 above the required 30% of assets. However a receipt on 20 June 1973 of $633 for three months mortgage interest converted that surplus to a deficiency of $15.
11. The Board was given no particulars of what or when additional amounts were loaned out on mortgage during either of the years of income, but I think it may be reasonably inferred from the amount of mortgage interest included in the respective assessments (see para. 6) that, like subscriptions for bonds, additional loans were made only at the end of each year. Further, it would appear from what the trustee said that amounts of interest as received were accumulated in a ``holding account'' which, as comparison of the assets at the end of each year (see para. 7) suggests, was variously with a building society and a trading bank. But whatever the exact position may be in this regard it is quite clear that delay in subscribing for additional bonds was not for the purpose of putting more into loans on mortgage to earn more from rates of interest higher than those obtainable on bonds. This circumstance supports the claim that efforts to maintain the ratio of public securities were genuine and bona fide.
12. In determining whether it is satisfied in terms of sec. 121C(4) that the trustee made a genuine and bona fide attempt to ensure that the assets of the fund included, at all times during a year of income, the prescribed ratio of public securities, the Board is not confined to the objective facts of the nature and extent of the assets of the fund from day to day, but regard must be had to what was the intent of the trustee in investing the moneys of the fund. In this case the trustee at no time sought to advantage the fund by diverting moneys away from public securities into some other form of higher yielding investment. The moneys that became available for investment in a year came from the accumulation of mortgage and bond interest receipts and from the annual contributions to the fund. The fund was small and having regard to its scope as a fund for no more than the two working directors the trustees' attempts to keep the holding of public securities to the 30% ratio were genuine. The failure to do so was nothing but the result of a mistaken understanding of the efficiency needed to comply with the words of sec. 121C(1) strictly construed and which led to what I regard as an accidental failure to satisfy that provision. In the circumstances of this case it is my view that the failure to maintain the ratio at all times during the year has not in either year such a blameworthy character as to warrant denying to the fund the benefit of the discretion given to the Board by sec. 121C(4).
13. I would allow the objection to each assessment and reduce each assessment to nil.
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