BJ McMahon DP
Administrative Appeals Tribunal
BJ McMahon (Deputy President)
This is an application to review a decision of the respondent refusing to give a notice that he is satisfied that the applicant fund should be treated as if it had satisfied the superannuation fund conditions contained in the regulations in relation to the 3 years of income ending on 30 June 1988, 1989 and 1990. The decision was made pursuant to s 13 of the Occupational Superannuation Standards Act 1987. In the 3 years in question, the fund failed to comply with the standards set out in Regulation 16(1)(b) in that it borrowed and maintained a borrowing of money, otherwise than to secure temporary finance.
2. The structure of the legislation and regulations was examined in Case Z27,
92 ATC 255 and affirmed on appeal under the name of
Tefonu Pty Ltd v ISC 93 ATC 4727. It will therefore not be necessary to repeat the provisions of the statute and relevant regulation.
3. The Fund, which was established on 27 June 1979, has 2 members. Mr B, a registered tax agent, is the managing director of the trustee company and is a member of the fund. His wife is the other member.
4. In or about October 1987 they found a house at Port Macquarie which they considered to be a suitable investment for the fund. Negotiations thereupon commenced for its purchase. As set out in paragraph 22 of Case Z27, the regulations were gazetted on 22 December 1987 with retrospective effect from 1 July 1986.
5. As a tax agent, Mr B was notified in January 1988 of the existence of the regulations and of the restrictions on borrowing, in particular, contained in Regulation 16. By that time, the fund had paid a holding deposit of $500 to an estate agent to secure the house. Mr B gave evidence that by the time he learned of the borrowing restrictions, he had already paid a full deposit of 10 per cent and had exchanged
ATC 200contracts irrevocably. I am not satisfied that this in fact happened.
6. Mr B gave his evidence honestly and openly, and I do not suggest for one moment that he intended to mislead the respondent at any time. The events happened, however, 5 years ago and memories of exact dates become hazy. Documents produced at the hearing - particularly a notice to complete - showed that contracts were in fact exchanged on 11 February 1988 and that the full deposit of $9,150 was paid on that day. As Mr B has said throughout in his correspondence with the respondent that he learned of the existence of the regulations in January, it seems to me more probable than not that the contract was entered into with full knowledge of the problems in financing which the fund might encounter but in the hope that approval would be given. Mr B however continued to assert at the hearing that he did not know of the existence of the borrowing restriction at the time he entered into the contract and that he would not have entered into the contract had he had that knowledge.
7. When he did learn of the restriction, he said that he spoke to officers of the respondent and of the Australian Taxation Office by telephone. He could not recall their names or the dates of the conversations but there is no reason to doubt his evidence. The advice he received was that the fund should apply for the exercise of the respondent's discretion under s 13. Mr B assumed that there would be no difficulty in obtaining a favourable exercise of this discretion, although he had no grounds for believing this. He was not to apply for the exercise of this discretion for approximately 12 months, when the next statutory return was filed. In the meantime he carried on as if consent was a foregone conclusion.
8. An agreement with Westpac Savings Bank Limited was signed on 10 February 1988 by the applicant fund, setting out the terms upon which Westpac agreed to lend $40,000 to the fund to be secured by a mortgage on the house. Contracts were exchanged on the following day. There does not appear from the dates to have been any undue delay in the conveyancing, although a notice to complete was served on the fund. As a result of this, settlement of the purchase and of the loan took place on 24 March 1988. At that stage, the applicant had no indication from the respondent that he could expect a favourable exercise of discretion, although it was certainly by that time aware that by entering into the borrowing arrangement, it was in breach of the investment standard set out in Regulation 16.
9. Nothing further was done in relation to the observance of this standard for almost 12 months until the fund filed its return for 1988 in February 1989. That return acknowledged that the fund was a non-complying fund. Attached to the return, however, was an application in the following terms-
``[THE APPLICANT] SUPERANNUATION FUND FILE NUMBER: [FILE No] APPLICATION FOR COMPLIANCE STATUS IN RELATION TO INVESTMENTS
During this financial year the Fund bought a property in Port Macquarie and borrowed an amount of money to pay for it.
However, in order to assess this situation fully the timing of events is important:
My wife and I are trustees of the Fund. When the cash in the Fund totalled around $50,000 we decided it was time to consider some alternative investment avenues. We have always been great believers in real estate so the first step was to see if this was a viable proposition. We checked the Trust Deed and found that the Fund was allowed to hold property and also that it was allowed to borrow money. At that stage there seemed to be no other obstacles. - This happened in 1986/87 around the same time the Insurance and Superannuation Commission was established. In June 1987 we began to consolidate our funds into the building society and in January 1988 we paid a deposit on a house in Port Macquarie.
As you will recall the 1987 annual return for Superannuation Funds was the first of this kind and was due for lodgement as from March 1988 onwards. In January 1988 I obtained some copies of that form together with the various instructions available at that time and it was then that I found out Superannuation Funds should not borrow money after 11/6/86. This put us in a very difficult position as at that stage we had paid a 10% deposit and organised a loan of $40,000 with the bank. We would have lost a considerable amount of money by pulling out then. In desperation I made phone calls
ATC 201both to the Tax Office and to the Insurance and Superannuation Commission but the response from both was unclear. Both indicated that a letter of explanation would be required. So we went ahead in the hope that you would give this case favourable consideration.
To support our case we are prepared to give an undertaking that the loan will be fully repaid on or before 30/6/1995 which is the date set for compliance by all Superannuation Funds.
Signed: [Mr B]''
10. The last sentence of the penultimate paragraph indicates the reality of the position. The applicant knew that it was in breach. It nevertheless went ahead with the borrowing after becoming aware of the prohibition and acted in the hope that the respondent would give favourable consideration to its application.
11. In October 1989, the 1989 return was filed. It also disclosed that the fund was a non- complying fund and asked for a favourable exercise of the respondent's discretion. A copy of the above application for compliance was also attached to the 1989 return.
12. On 14 December 1989 the applicant received a printed document from the respondent in the following terms-
``INSURANCE AND SUPERANNUATION COMMISSION GPO Box 7059 Telephone 229 0311 Facsimile (02) 229 0345 TAX FILE NUMBER: [FILE No] YEAR OF INCOME: 1987/88 Dear Sir/Madam I wish to acknowledge receipt of the annual return and the prescribed fee in respect of the abovementioned fund and year of income. On the basis of information available to the Insurance and Superannuation Commission, in particular the information and certificates provided in the return, the Commissioner is satisfied that, in respect of the year of income shown above, the fund satisfied the relevant fund conditions set out in the Occupational Superannuation Standards Act 1987. The Commissioner of Taxation will be advised accordingly. Yours faithfully (Signed) G Colley Director Insurance and Superannuation Commission'' [The applicant endorsed on this: ``Received 14/12/89'']
13. The letter clearly refers to the year of income stated in its heading namely, the 1988 year. Nevertheless the applicant took it to be a response to the 1988 return (which had been filed 10 months previously) as well as an assurance that the deemed compliance would continue indefinitely. There was no basis in the terms of the letter for making this assumption. Mr B, a registered tax agent, was well able to read the letter and to understand that it referred only to one particular year of income. The assumption that he made of continuing deemed compliance was an assumption based on ignorance of the law and indeed upon a misreading of the clear words of the letter. He said in evidence that he now understands that returns are treated on a year by year basis.
14. Those officers of the respondent who had dealt with the requests attached to the 1988 and 1989 returns were apparently unaware of the December 1989 letter of compliance. In fact they did not get round to dealing with the requests until 4 August 1992. By that time, the 1990 return had been filed in November 1990.
15. Making no mention of the December 1989 letter, the respondent wrote to the applicant on 4 August 1992 seeking further details concerning the loan. These were furnished by the applicant on 17 August 1992 in a letter which also did not make any reference to the December 1989 letter. A few weeks later, however, on 1 September 1992 the applicant apparently thought better of it and wrote a letter to the respondent pointing out the existence of the compliance letter and amplifying the
ATC 202grounds of the application for deemed compliance.
16. The result of this correspondence was that on 25 August 1992 the respondent wrote 3 letters to the applicant in identical terms relating to the 3 years of income in question. The letter in relation to the 1988 year is in these terms-
``The Trustee [The applicant] Superannuation Fund Address] TAX FILE NUMBER: [FlLE No] YEAR OF INCOME: 1987/88 Dear Sir/Madam You have submitted an annual return and paid the prescribed fee in respect of the abovementioned fund and year of income. You have also requested the exercise of a discretion for the Commissioner to treat the fund as if it had satisfied the superannuation fund conditions under the Occupational Superannuation Standards Act 1987, even though it had not complied with Regulation 16(1)(b) of the Occupational Superannuation Standards Regulations. Having regard to the return and certificates provided by you and to other information available to me, for the reasons set out below, I am not satisfied that the fund satisfied the superannuation fund conditions in relation to the 1987/88 year of income. A statement of reasons is enclosed. If you disagree with this decision, you may request a reconsideration of it pursuant to the provisions of section 16 of the Occupational Superannuation Standards Act. Such a request, setting out your reasons, should be made to the Commissioner in writing within 21 days of receipt of this letter or such further period as the Commissioner allows. In the event that such a request is made and you are dissatisfied with the outcome of the Commissioner's reconsideration of the first decision, you may, under paragraph 17(1)(b) of the Occupational Superannuation Standards Act, make application to the Administrative Appeals Tribunal for a review of the confirmed or varied decision. The Commissioner of Taxation will be advised accordingly. Yours faithfully (Signed) GA Colley Director Insurance and Superannuation Commission 25 August 1992'' [The statement of reasons referred to in the letter is not here material]
17. These decisions were affirmed on internal review. The present application is brought to review these affirmations.
18. The applicant sought to establish special circumstances within the meaning of that term used in paragraph 13(1)(b) of the Act. The meaning of that phrase was considered in Case Z27. Although it must take on its meaning from the context in which it is found, it is clear from judicial authority that special circumstances can only be used to describe circumstances that have a particular quality of unusualness, sufficient to take the matter out of the ordinary course. Special circumstances alleged by the applicant were firstly that if it did not proceed with the borrowing it would have lost its deposit of $9,150. Secondly it alleges that it was ignorant of the requirements of the law at the time contracts were exchanged. Thirdly it alleges that its actions provided a benefit to the fund. Fourthly it pointed out that it was a small fund and that the concept of special circumstances should be so flexible as to take this into account. Fifthly it pointed out that the borrowing was to finance a solid investment and that there was no detrimental effect to the assets of the fund, and sixthly it alleged that the breach was an insignificant breach.
19. As to the first matter alleged, I have found on the balance of probability that there was no risk of loss of the deposit of $9,150. At the time the applicant became aware of the existence of the regulation, all that had been invested was a holding deposit of $500 which was probably refundable. However even if (as Mr B alleges) he did not become aware of the regulation until after contracts were exchanged, he was certainly aware of it, on any view of the evidence, before the borrowing was entered into. That being the case, there were other means available for financing the purchase of the house. Mr B himself could have borrowed to enable him to make a special contribution to the fund. The risk of loss of a deposit, even if it
ATC 203existed, in the present circumstances does not in my view constitute special circumstances.
20. Ignorance of the law (as was pointed out in paragraph 40 of Case Z27) is difficult to regard as a special circumstance, particularly where the trustee has had ample opportunities to seek advice. The managing director of the trustee in this case is a registered tax agent. The evidence of Mr B was that he consulted regularly with the fund's auditor. As a tax agent, he was given direct information concerning the change in prudential requirements for superannuation funds. Ignorance of the law in these circumstances is clearly not a special circumstance.
21. The fact that there was a benefit to the fund by the investment, that the fund was a small one, and that there was no detrimental effect to the assets of the fund caused by anything resembling a speculative investment do not, it seems to me, take the matter out of the ordinary course. These facts do nothing to distinguish the present circumstances from those of a host of other funds in other contexts.
22. The breach of borrowing $40,000 cannot be regarded as insignificant. After the loan transaction, this represented 40 per cent approximately of the fund's gross assets. Furthermore, the breach continued throughout the whole of the 3 year period, although regular payments were made to reduce the amount of the loan. The time taken to rectify the breach adds to its significance.
23. In my view, there is nothing unusual in the facts to justify the application of any rule other than the normal rule, except for one matter. The compliance letter of December 1989 cannot be ignored. In her statement of reasons, the decision maker said that: ``It is apparent that the first notice was issued in error and thus should be considered to be a nullity''. I do not consider that to be the case at all. There is no evidence that the document is anything other than what it appears to be upon its face.
24. There is no evidence of forgery, or any other circumstance that would detract from the validity of the notice. The respondent acknowledged that the applicant relied upon the notice (although mistakenly) in relation to the subsequent year and accordingly gave a notice of deemed compliance in respect of the 1991 year.
25. The document (Exhibit G) was, on it face, prompted by the 1988 return. That return included an application for compliance status (as it was called). Ten months after the return was lodged, Exhibit G was sent to the applicant. It must be read in its own terms. Although it does not follow the wording of the concluding paragraph of s 13 by stating that the fund ``should be treated as if it had satisfied the superannuation fund conditions'', nevertheless it does give an unqualified expression of satisfaction on the part of the Commissioner, which is a compliance open to him when application is made under that section.
26. On the hearing before me, counsel for the respondent did not seek to argue that Exhibit G was a nullity. He did however submit that it was revoked by the terms of the letter of 25 August 1992 quoted above. Power to revoke a notice of satisfaction is found in sub-section 12(5) which is in the following terms-
- (a) the Commissioner has, under this section, given a notice to the trustees of a fund stating that the Commissioner is satisfied that the fund satisfied the superannuation fund conditions in relation to a year of income of the fund; and
- (b) the Commissioner, after considering information that was not previously considered by the Commissioner, ceases to be satisfied that the fund so satisfied the superannuation fund conditions;
the Commissioner shall, subject to subsection (6), give notice in writing to the trustees of the fund revoking the notice referred to in paragraph (a) and stating that the Commissioner is not satisfied that the fund satisfied the superannuation fund conditions in relation to the year of income.''
27. That sub-section empowers the Commissioner to carry out 2 functions namely, to revoke the notice and to state that he is not satisfied. A proper exercise of the power conferred by the sub-section involves an exercise of both functions. The letter of 25 August 1992 expresses the respondent's failure to be satisfied in the third paragraph. It does not, however, expressly revoke the earlier notice. In fact it makes no reference to it whatever. In view of the terms of the sub-
ATC 204section, I cannot accept that an expression of failure to be satisfied is an implied revocation of an earlier notice of satisfaction. What is required is an explicit revocation of a specified earlier notice, and its replacement with another inconsistent notice. In my view, the notice constituted by Exhibit G has never been revoked. Accordingly, the applicant is entitled to have the fund treated as satisfying the requirements of Regulation 16 in the 1988 year. No notice of compliance was ever given in respect of subsequent years and the question of revocation of notices in relation to those years therefore does not arise.
28. The decision of the Tribunal will therefore be that the decisions under review relating to the 1989 and 1990 years are affirmed. The decision under review relating to the 1988 year is set aside and the matter is remitted to the respondent with a direction that the fund should be treated as if it had satisfied the superannuation fund conditions in relation to the 1988 year of income and that all necessary notifications to other authorities should be given as a result of this finding.