Administrative Appeals Tribunal
MB Hogan (Member)
This application arises from an assessment raised by the Commissioner against a superannuation fund (hereafter referred to as ``the Fund'') in respect of the year of income ended 30 June 1986. The Commissioner adopted the view that the Fund was at all times in the year of income in breach of the ``in-house asset'' provisions, embodied in s. 121C, as they applied in relation to the year ended 30 June 1986. In an objection lodged on behalf of the trustee, it has been claimed that the ``in-house asset'' provisions had no application in the circumstances of the Fund as the borrower of the investment funds of the Fund could not in the year of income be found to be ``an associate of an employer sponsor'' of the Fund and the definition of ``in-house asset'' did therefore not apply to the funds on loan. In the alternative, it was felt that the discretion under s. 121C(7) should be exercised by the Commissioner, as the terms of the loan-back of funds did not provide the trustee of the Fund with any mechanism to recall the loan (or any part of it) to comply with the new provisions and the trustee of the Fund did make a genuine and bona fide attempt to ensure that the Fund did not exceed at any time during the year of income the specified level of ``in-house assets''. A further or alternative ground claimed that any failure to comply with the specified levels of ``in-house assets'' was by reason of temporary delay in investment. The Commissioner's disallowance of this objection has led to the application which gave rise to the hearing before this Tribunal.
2. The hearing proceeded on the basis of a Statement of Agreed Facts which as far as they are relevant I quote hereunder:
``A. As regards the Fund:
(i) The Fund was created and operated under a Deed dated 27 April 1976 which was subsequently amended by a further Deed dated 27 February 1987.
(ii) The Fund was established to provide benefits to certain employees of Coy. A.
(iii) Coy. A contributed to the Fund only during the years ended 30 June 1976, 1977, 1978 and 1979.
(iv) Coy. A made the following contributions during those years:1976 $16,260.00 1977 $27,395.00 1978 $241,900.00 1979 $207,370.00
(v) No contributions have been made to the Fund other than those as shown in paragraph A(iv), and in particular there were no employee contributions.
(vi) The members of the Fund as at 30 June 1986 comprised only certain employees of Coy. A.
(vii) The cost of the Fund's assets as at 11 March 1985 was $763,345.00 of which 70% equals $534,342.00.
(viii) The loan by the Fund to Coy. B amounted to $639,608.86 as at 30 June 1986.
B. As regards Coy. A:
(i) Coy. A was a wholly owned subsidiary of Coy. B during the period 30 April 1986 to 30 June 1986.
(ii) Mr P was a director of Coy. A as at 30 June 1986.
(iii) Coy. A made certain contributions to the Fund for the benefit of its employees during the years ended 30 June 1976 to 30 June 1979.
C.As regards Coy. B:
(i) Mr P was a director and shareholder of Coy. B as at 30 June 1986.
(ii) Coy. B owned all the allotted shares of Coy. A during the period 30 April 1986 to 30 June 1986.
(iii) Coy. B had a loan liability to the Fund in the order of $639,608.86 as at 30 June 1986.
(iv) During the year ended 30 June 1986, Coy. B was an `associate' of Coy. A within the meaning of Section 121C of the Income Tax Assessment Act 1936.''
I find the facts set out above to be facts relevant to the application. Various documents in support of the agreed facts were tendered by agreement of the parties.
3. Evidence was given by the person I have described in B(ii) and C(i) above as Mr P (whom I will continue to describe as Mr P), by the trustee of the Fund (whom I will refer to as Mr H) and by a gentleman (whom I will refer to as Mr D) who was, in the years relevant to the application, the Chairman of the Board of the companies which I have referred to in the agreed facts above as Coy. A and Coy. B, which description I will continue to use in reference to those companies throughout these reasons.
4. Mr P agreed that, at all relevant times during the years ended 30 June 1985 and 1986, he had been a director of, a shareholder in, and held a controlling interest in, each of Coy. A and Coy. B. Despite his position of dominance as a controlling shareholder Mr P held firmly to the view that, in administrative practice as it applied within his group of companies, he was in a position to influence the outcome of decisions taken at meetings of directors, only ``as one of three directors''. He had earlier described to the Tribunal the manner in which the administrative control of the group of companies which had extensive and diverse business interests, was exercised. The directors of the group were very much a hands-on group of directors. Formal meetings as a board of directors were rare; there was a weekly meeting, attended by all available directors, of what Mr P described as a ``finance committee'' which dealt with ``a lot of day to day matters''. People other than directors would often participate as the decision-makers at these finance committee meetings. In cross-examination, he was to say that Mr D, another director and Mr P himself ``certainly'' controlled the group, including Coy. A and Coy. B, but he was insistent that his ``controlling interest in the capital'' did not mean that he, unilaterally, controlled the decisions by which the group of companies was administered. If he used his ``superior voting power'' - ``you would not have a stable board and you would destroy the board through that''. He volunteered that ``once, twice... in 10 years... I have overruled the board''. That open invitation was not pursued in cross-examination.
5. Mr P gave evidence that Mr H was the trustee of the Fund who presented a request to the finance committee to take action which would permit the Fund to comply with the change in income tax laws. He stated he believed the meeting to have been in ``the last quarter of the income year 1985/86'' but, on reflection, admitted that that dating was ``a matter of construction'' on his part. He said minutes were taken at the finance committee meeting but stated that there was no reference in the minutes to the request ``because there was no resolution passed''. It emerged in later evidence from Mr D that it was the practice to record in the formal minutes of each finance committee meeting only those matters where follow-up action was required by the finance committee; positive decisions only were recorded in the formal minutes produced, with no majority or minority views leading to the
ATC 180decisions being recorded. Mr P also stated that Mr H retired as trustee of the Fund in June 1986 and that there was a hiatus period when there was no trustee appointed between the date of Mr H's retirement as a trustee (6 June 1986) and 25 August 1986 when Mr P himself assumed the role of trustee. Mr P was replaced as trustee in March 1987 by a company of which Mr P was a director.
6. It became apparent under cross-examination that Mr P had, during the periods relevant to this application, been under the mistaken impression that what the legislation which inserted s. 121C into the Act required, was simply a reduction in the proportion of the cost of ``in-house assets'' in the Fund to 70% of the costs of all the assets of the Fund by 30 June 1986; he saw the operation of the 70% limitation as being first operative as at 30 June 1986. He admitted quite clearly he was unaware during year ended 30 June 1986 that what was required was limitation of the cost of ``in-house assets'' throughout that year of income to 70% of the cost of all the assets of the Fund as at 11 March 1985. But he was insistent that his misunderstanding had not influenced in any way his thinking as a director of Coy. B when agreeing to support the decision not to act upon the request of the trustee of the Fund to adjust the situation between Coy. B and the Fund in such a manner as to allow the Fund to comply by 30 June 1986 with a limitation of the cost of ``in-house assets'' in the Fund to 70% of the cost of all the assets of the Fund. His view was that, having regard to the interests of the company, it would have been ``a very uncommercial thing to do'', involving either a reduction in working capital of Coy. B or the borrowing of further money to the extent of $100,000 with the incurrence of stamp duties and the difficulties of arranging security. He recorded as a ``second factor'' which influenced him personally, the view that the change in the tax legislation ``did not respect transactions that happened in the 1970s, and to me that is very loosely termed a matter of retrospectivity and that would reduce the importance to me of acceding to the request''. The use of the term ``retrospectivity'' is puzzling as, on the face of the legislation which no doubt reflected some statement by the Treasurer which preceded it, the operation of the legislation appears somewhat prospective, setting a figure by way of ratio based on an 11 March 1985 date and allowing a period until 1 July 1985 to achieve that ratio in order to conform with the new requirements.
7. It emerged in cross-examination of Mr P that there had in fact been partial repayment of the loan from the Fund to Coy. B is the amount of $104,000 by 30 June 1988. This emerged from a letter dated 13 January 1988 to the trustee of the Fund from the auditors of the Fund. This was dealt with at a meeting of the directors of the corporate trustee on 30 May 1988 - Mr P as a director being present at the meeting. It was decided by the two directors present to write to Coy. B requesting partial repayment of the loan to reduce the loan to a figure which represented 70% of the cost of all the assets of the Fund at 11 March 1985. The request for partial repayment was to acknowledge that repayment of the loan could not be demanded but pointed to the prospect of benefit for the members of the Fund. The letter was despatched on the same day to the chairman of Coy. B (Mr D) and was dealt with at the finance committee meeting on 14 June 1988. The rather cryptic minute noted the ``recommendation'' to repay the sum of $104,000 in the letter of 30 May 1988 and resolved that it was ``necessary to reduce the loan to Coy. B by an amount of $104,000 as from 30 June 1988''; Mr P is noted as one of those participating in the meeting. The amount was reported by the auditors of the Fund to the Commissioner of Taxation as having been received by the Fund on 30 June 1988. Mr P's first reaction in cross-examination was that his recollection was that the amount was not paid. When confronted with the auditor's letter, he stated he did not recall the payment being made but was not shocked by the fact of repayment. The minute to which I have referred was not available during cross-examination, being supplied on request at a later sitting, but Mr P had made the point that he did not think he did approve it, commenting -
``like all boards, you sit down and you discuss issues and you make your views known and we do not record minority or majority decisions.''
He agreed, however, that, as a director of the corporate trustee, he believed the approach to Coy. B was ``absolutely necessary'' following the letter from the auditors, but that, as a director of Coy. B, he did not think the
ATC 181approach made by the corporate trustee should be accepted. He had commented earlier that -
``if two directors felt the payment should be made, then that is the way the company is run.''
8. Mr H was the trustee of the Fund for the relevant period up to his retirement on 6 June 1986. He stated that he was kept up to date with changes in taxation requirements by the auditors and his recollection was that he was made aware ``late in 1985'' of a change ``relevant to March 1985... about the percentage of the loans made... from the superannuation fund to the parent companies'' introducing a reduced ratio of 70% and ``by June 1986 the fund had to comply with that 70% regulation''. He was not advised of a specific figure of reduction. He stated that ``late in 1985 early 1986'', he brought the situation to the attention of ``the Board''. He was to explain in cross-examination that the matter was first mentioned in November 1985 at a finance committee meeting. The reaction had been that the group was in the middle of financial restructuring and Coy. B was unable to pay anything back out of funds and another decision would be required as to how the Board ``could arrange their borrowings to comply with the regulations''. The later meeting with the Board was held in February 1986. The reply was that the Board would look at restructuring. He was positive that there were no minutes kept of the Board meeting and appeared to think it was unlikely that any minutes were produced of the finance committee meeting. Mr H gave notice of his intention to retire as trustee on 8 May 1986 effective from 6 June 1986.
9. The evidence of Mr D was to the effect that, in 1982, he had been setting up an importing and wholesaling business. He was also doing part-time consulting work with a major accounting firm. At this time he had become acquainted with Mr P through mutual interests and was invited by Mr P to undertake consulting work in Mr P's group of companies and later was invited to join the board of his companies. He joined the board in January 1983 and was appointed chairman of the board in February 1984, remaining in that position until November 1987. When he took up his appointment as a director, he had made it plain to Mr P that he ``was not prepared to be overruled by him as a shareholder if we had a consensus of the board''. Mr D was responsible for introducing the third director who, along with Mr P, constituted the board for the period relevant to this application. The board ``operated on a very independent basis of a majority of directors agreeing to a proposition, then it was carried''. In dealing with the approach by the trustee of the Fund, Mr D took the view that, as a director, he bore ``absolutely no responsibility to that fund'' and that it would be ``an act of charity... to make a repayment earlier than we were obliged to'' and recommended to his fellow directors that they did not comply with the trustee's request. He recalled the approach well because it was one of the few instances where his fiduciary responsibility to the shareholders was directly under consideration. He believed the decision taken may not have been documented because the practice was to record only positive decisions entailing an agreement to do something in the future.
10. I would record here that I accept the evidence of Mr P, supported as it is by that of Mr D, as to the manner in which proceedings at meetings of the finance committee were conducted and recorded in the minutes; in particular, I accept from the evidence that there was an underlying protocol that the will of the majority of the directors would be acted upon. Insofar as it may conflict with the evidence of Mr P and Mr D, I accept the evidence of Mr H as settling the factual manner in which the request put before them by Mr H as trustee of the Fund was dealt with; in particular, I accept that there were two stages of processing the request, the first in November 1985 and the second in February 1986. In selecting Mr H's view of the facts, I have taken into account the fact that the request originated from him and was presented by him to the finance committee and later to the directors, whereas the evidence of Mr D is that it was a matter of little more than oddity interest to him and Mr P had already made up his mind on principle to refuse the request. I would record that it is my finding from the evidence that neither Mr D nor Mr H had a correct understanding at any time during the year of income relevant to this application, of the effect of the changes necessary to comply with s. 121C. It is plain that each of them believed that the Fund had only to comply with the requirements in relation to ``in-house
ATC 182assets'' by 30 June 1986 in order to satisfy the requirements of the legislation. In particular, it is plain from the evidence and his demeanour at the hearing that it was not until he read in the witness box a copy of the auditor's letter of 13 January 1988 to the trustee of the Fund that Mr P apprehended that the upper level limit on the cost of ``in-house assets'' was established by a 70% ratio applied to all the assets of the Fund as at 11 March 1985. It appears from his evidence that Mr D was conscious of the fact that the 70% ratio was applicable ``relevant to March 1985'' but believed that the upper level limit established by that ratio needed only to be attained by 30 June 1986. There is no evidence from the third director involved but I would believe that Mr P, who has extensive experience in taxation matters, would be regarded as the resident taxation guru on the board.
11. The primary ground of objection in this application is that the definition of ``in-house asset'' does not apply to the loan by the Fund to Coy. B, because there was no ``employer sponsor'' in relation to the Fund in the relevant year of income. It will be noted from A(iv) and (v) of the Statement of Agreed Facts that Coy. A made contributions to the Fund in each of the years ended 30 June 1976 to 1979 (both inclusive) and that apart from those contributions, no contributions have been made to the Fund, and, in particular, there have been no employee contributions at any time. The question raised is whether, such being the facts in relation to the year of income, the subject of this application, it can be said that Coy. A is an employer of an employee who contributes to the fund in respect of that employee and thus an employer who, for the purposes of s. 121C, shall be taken to be an employer sponsor. It is important to note that subsection (2) of s. 121C which I have paraphrased above does not specifically require the employer sponsor to contribute in the year of income. It is a notable omission. In several instances in the section, notably subsections (4), (5), (8) and (9), there are specific references to the year of income but I note that these are all subsections having to do with the denial of exemption in relation to the facts of particular years of income (4) and (5) or the non-application of the section in relation to particular years of income (8) or the calculation of asset ratios in relation to a particular year of income because of receipt in that year of a particular type of income (9). On the whole, I am of the view that having regard to the fact of the insertion of the words ``the year of income'' in particular subsections of s. 121C to deal with matters specific to those years of income, the omission of those words in other subsections indicates that those subsections are to be interpreted, having regard to a broader range of facts and circumstances than those applicable in the specific year of income, the subject of the application. In my view it is not appropriate to say that, because an employer of an employee did not contribute to the fund in respect of that employee (or indeed, as in this case, any of its employees) in the year of income, there can be no employer sponsor in respect of that year.
12. But that, of course, is not the end of the matter. The question in this application is whether an employer who has not contributed to the Fund in respect of any employee for a period of some seven years (including the year of income the subject of this application), but who has been the sole contributor to the Fund in the four earlier years, can in the year of application be appropriately encompassed in the description of ``an employer... who contributes to the fund...'' and thus ``be taken, for the purpose of the section, to be an employer sponsor in that year''. As I have indicated above, I am of the opinion that it is open to me as the Tribunal to have regard to the broader range of facts and circumstances in relation to Coy. A and the Fund than those arising in the year of income. Taking this view, it seems to me that the words ``who contributes to the fund in respect of the employee or dependants of the employee'' are to be taken as merely descriptive of the employer for the purpose of identifying him for purposes of the subsection. In the circumstances where Coy. A is the employer and is the only person who has ever made a contribution to the Fund, it seems not unreasonable to regard Coy. A in a broadly descriptive way as ``the employer... who contributes...'' to the Fund in respect of the employees of the company. I therefore find that Coy. A should be taken as ``an employer sponsor'' of the Fund for purposes of this application. It was not argued that Coy. B was not ``an associate'' of Coy. A in terms of s. 26AAB. Accordingly, I would find that the loan from the Fund to Coy. B is an ``in-house
ATC 183asset'' for purposes of s. 121C in the year ended 30 June 1986.
13. I turn now to consider the claim in the objection that ``the Commissioner should as required by s. 121C(7) disregard the failure of the assets of the fund to comply with the maximum levels of in-house assets'', the basis for that claim being:
- (i) that the loan from the Fund to Coy. B was made on 3 December 1980 for a term of 10 years and there was no right in the trustee of the Fund to seek repayment of the loan or any part of it before that period had expired;
- (ii) that the trustee ``did make a genuine and bona fide attempt to ensure that the in-house assets of the fund did not exceed, at any time, during the year of income, the specific levels''; and
- (iii) that the failure to comply with the specified levels was by reason of a temporary delay in investment and that, in all the circumstances, it would be reasonable for the Commissioner to disregard that failure.
In approaching the submission, I would emphasis that I accept the evidence of Mr P, backed as it is by the evidence of Mr D, as to the manner in which the business affairs of the group of companies were administered. I accept in particular Mr P's description of the manner in which decisions were reached in the matter of the loan between the Fund and Coy. B. I accept also the evidence of Mr H as to the manner in which he acted in carrying out his duties as trustee of the Fund.
14. As I understand subsection (7) of s. 121C, I am required by the subsection in applying myself (as the Tribunal) to the question of the exercise of the discretion contained in the subsection, to focus on the conduct of the trustee in seeking to comply with the requirements of s. 121C in relation to the attainment of the specified levels of in-house investments. As I have already noted, I accept that the trustee made a genuine approach to the administration of the company to have the level of in-house investment reduced (though the evidence is that no definite amount of reduction was suggested) and I accept that, for perfectly valid reasons, the administration refused to act in the manner sought by the trustee. If that were all, I might well be prepared to exercise the discretion. But the approach made by the trustee, genuine though it be, was not ``a genuine and bona fide attempt to ensure that the in-house assets of (the) fund did not exceed, at any time during that year of income...'' the specified levels (my emphasis). Simply there was no approach until November 1985, some five months into the year of income; no attempt was made by the trustee to procure compliance with the in-house asset rules in the first five months of the year of income. In the circumstances as they emerged at the hearing, I do not believe it would be reasonable to disregard that failure. Nor do I believe that the failure was in any way occasioned ``by reason of a temporary delay in investment''. There is simply no evidence of any delay in investment during the year of income. There are indications in the evidence that the requirements of s. 121C may not have been fully understood by the administration of the companies in the group and it may be that the trustee did not fully apprehend the duty laid on him by s. 121C(7) but the legislation does nothing to alleviate difficulties caused by misapprehension of the effects of the legislation.
15. In the result, the decision of the Tribunal will be that the Commissioner's decision on the objection should be affirmed.
16. For the sake of completeness, I believe I should make some comment of two separate sets of figures which were handed to me showing calculations of the value of all the assets of the Fund as at 11 March 1985, which calculations took into account refunds of income tax paid and the interest thereon received some years after that date. I would merely record that it is my view that neither set of figures gives the correct value; in this regard see generally Cain's case (
National Trustees Executors and Agency Co of Australia Ltd v. FC of T (1954) 91 CLR 540). All the figures prove is that, on the view of the value of all assets of the Fund at 11 March 1985, most favourable to this Fund, the specified levels of in-house assets have clearly been breached.