CASE 23/96
Members:SA Forgie DP
AM Brennan M
ET Keane M
Tribunal:
Administrative Appeals Tribunal
SA Forgie (Deputy President), AM Brennan and ET Keane (Members)
Two funds were under consideration in these proceedings. In view of the confidentiality provisions of section 18 of the Occupational Superannuation Standards Act 1987 (``the OSS Act''), we will not use their real names. We will call them the ``B1 Pty Ltd Superannuation Fund'', or ``the B1 Fund'', and the ``Other Superannuation Fund'', or ``the Other Fund''.
2. On 18 December, 1992, the trustees of each of the funds lodged an Annual Return with the respondent, the Insurance and Superannuation Commissioner (``the Commissioner''). The returns related to the financial year ended 30 June, 1992. Each of them included a statement by the auditor that, in his opinion, the information provided to him by the trustees was consistent with that contained in the audited accounts and records in respect of which he had made an audit report. His audit report in respect of each fund included tests to determine whether the funds complied with the standards prescribed by the Occupational Superannuation Standards Regulations (``the Regulations''). In those reports, the auditor noted that regulation 16 of the Regulations had been breached. In relation to the B1 Fund, it was stated that the borrowing standard had been breached and, in relation to the Other Fund, the in-house asset standard had been breached.
3. The trustees sought an exercise of the Commissioner's discretion under section 13 of the OSS Act. With regard to the B1 Fund, the Commissioner decided on 29 October, 1993 that the trustees had breached the standards set out in regulation 16 in relation to borrowings. With regard to the Other Fund, he decided on the same day that they had breached sub- regulation 3(1) in relation to the sole purpose of a superannuation fund.
4. The trustees sought review of these decisions when they lodged applications for review on 22 December, 1993. At the hearing of the applications, Mr McPherson, Accountant, appeared on behalf of the trustees and Mr Fogarty, an advocate in the Commissioner's office, appeared on behalf of the Commissioner. The documents lodged pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 in respect of each application were admitted in evidence (``the B1 T documents'' and ``the Other T documents'') as well as a letter from Messrs Clayton Utz dated 18 April, 1994 and addressed to the Senior Government Lawyer attaching a copy of the trust deed for the Other Fund. Oral evidence was given by one of the trustees of the funds.
Background
5. A number of the facts which are relevant in reviewing the decisions were not in dispute between the parties. In light of that and on the basis of the written and oral evidence we have received, we are satisfied of those facts which we will now set out.
6. The trustees of the two funds are identical and they are husband and wife. Maintaining consistency with the names we have given to the funds, we will call them ``B1'' and ``B2''. The employer sponsor of each fund is also identical. We will call it ``B1 Pty Ltd as trustee of the B Family Trust'' or, more shortly, ``B Pty Ltd''.
7. The B1 Fund was established on 29 June, 1973. B1 and B2 were members of that fund together with another 12 people. The Other Fund was established later on 26 June, 1991. It had only two members - B1 and B2.
8. On 13 December, 1991, B1 and B2 withdrew from the Other Fund the sum of $52,962.95. It deposited the full amount in a bank account operated by the B1 Fund. On the same day, that full amount was withdrawn from the B1 Fund's bank account. Of that sum, $20,962.95 was paid to the Commissioner of Taxation to pay taxation payable by the B1 Fund. The remaining $32,000 was paid to B1 Pty Ltd as trustee of the B Family Trust.
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The issues
9. The issues in this case related to the year of income ending 30 June, 1992. In relation to the B1 Fund, the issue was whether the trustees had been in breach of the borrowings standard in paragraphs 16(1)(b) of the Regulations. In relation to the Other Fund, there were two issues. The first was whether its trustees were in breach of the sole purpose test under sub- section 3(1) of the OSS Act. The second was whether its trustees were in breach of the in- house standard in paragraph 16A(17)(a) of the Regulations.
10. If the breaches were established, the final issue was whether, because of special circumstances that existed in relation to the funds during the year ended 30 June, 1992, it would be reasonable for the funds to be treated as if they had satisfied the superannuation fund conditions.
The evidence
11. B1 gave evidence. He said that both funds had considerable assets. The assets of the B1 Fund were held in term deposits or bonds whereas the assets of the Other Fund were not held in term deposits or bonds. The assets of the B1 Fund were earning interest at a higher rate than the assets of the Other Fund. Both funds were grouped together for the payment of payroll tax and indemnity insurance. Although he acknowledged later during cross- examination that the two funds were separate, B1 considered them to be one. He did not have it in his mind that the members of the two funds were not precisely the same.
12. It was in the interests of good business, B1 said, to pay the tax owed by the B1 Fund from the Other Fund's assets. To do so avoided the need to realise any of the bonds or term deposits held by the B1 Fund and so avoided the penalties that would be consequent upon their premature realisation. Not only was realisation of the bonds and term deposits avoided but use would be made of the money that attracted the lower rate of interest.
13. B1's main concern was that he obtain the best interest rates for both of the funds and so for the members of both funds. He did not wish to advantage or disadvantage either fund. He said in cross-examination that it was his duty as trustee to get the best interest rates for the funds. B1 also said in cross-examination that it was in the interests of the Other Fund to get a higher, rather than a lower, rate of interest. The rate of interest paid by B1 Pty Ltd was a higher rate than that previously received by the Other Fund on the $32,000. That higher rate is a statutory rate of 16.5%. No loan agreement was executed between B1 Pty Ltd and the Other Fund.
14. In the statements attached to the Annual Returns lodged in relation to each fund, there appeared a sentence that the trustees of the B1 Fund were advised in December, 1991 that the loan to the B1 Family Trust (i.e. B1 Pty Ltd) was within the standards for in-house assets (B1 T documents, page 37 and Other T documents, page 35). B1 was asked as to the nature of the advice he had received and he replied that he would have sought the advice of his accountant.
15. When asked in cross-examination why the sum of $32,000 was transferred first to the B1 Fund and then to B1 Pty Ltd rather than directly to B1 Pty Ltd, B1 said that it was probably because the transaction only required one cheque. There was no particular reason. In response to a suggestion that the in-house asset test might have been a factor in the way in which the transaction was effected, B1 replied ``not at all; why write two cheques when one would do?''.
16. In cross-examination, B1 told Mr Fogarty that the Other Fund was established in addition to the B1 Fund when the rules relating to superannuation changed and it could be done.
The legislative framework
17. During the financial year ended 30 June, 1992, the OSS Act was in force. It has since been amended on several occasions and is now renamed the Superannuation Entities Taxation Act 1987. Should we consider the OSS Act as it was in force during the relevant financial year, at the date of the decision or at some other date? Mr Fogarty submitted that we should apply the OSS Act as it was in force during the financial year in which it is alleged the breaches occurred but did not elaborate upon his submission.
18. As we have said, a number of amendments have been made to the OSS Act since the financial year ending 30 June, 1992. Of particular concern were the amendments made by the Occupational Superannuation Standards Amendment Act 1993 which amended certain sections of the OSS Act and repealed, among others, sections 5, 7 and 12 of that Act. Section 16 of the amending Act
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provided for the application of the amendments. It stated that the ``compliance provisions'' of the OSS Act continue to apply (subject only to any changes noted in sub-section 16(2) as if they had not been amended or repealed. The ``compliance provisions'' of the OSS Act include sections 5, 7 and 12 with which we are particularly concerned in these proceedings.19. The change to which the compliance provisions are subject and which is of consequence for us is to section 12 of the OSS Act. Paragraph 16(2)(c) provides that a reference in that section to a year of income does not include a reference to the 1994-95 year of income or to a later year of income.
20. It follows from section 16 of the Occupational Superannuation Standards Amendment Act 1993 that we must apply the repealed Sections 5, 7 and 12 of the OSS Act in this case.
21. In general terms, the OSS Act provides operating standards for certain superannuation funds, approved deposit funds and pooled superannuation trusts and for related purposes. In this case, Mr McPherson has submitted that the funds are superannuation funds. If each is to be a superannuation fund, each must be a fund that:
``...
- (a) is an indefinitely continuing fund; and
- (b) is maintained solely for one or more of the following purposes:
- (i) the provision of benefits for each member of the fund in the event of the retirement of the member from any business, trade, profession, vocation, calling, occupation or employment in which the member is engaged;
- (ii) the provision of benefits for each member of the fund in the event of the member attaining a particular age (being an age not less than the age prescribed by the regulations) without having retired from any business, trade, profession, vocation, calling, occupation or employment in which the member is engaged;
- (iii) the provision of benefits for dependants of each member of the fund in the event of the death of the member, being a death occurring before:
- (A) the member's retirement from any business, trade, profession, vocation, calling, occupation or employment in which the member is engaged; or
- (B) the member attains a particular age (being an age not less than the age prescribed for the purposes of subparagraph (ii)) without having retired from any business, trade, profession, vocation, calling, occupation or employment in which the member is engaged;
- whichever is earlier;
or for one or more of those purposes and for such ancillary purposes as the Commissioner approves in writing;''
(OSS Act, sub-section 3(1) .)
22. Section 12 of the OSS Act provides for the Commissioner to give notice whether he is or is not satisfied that a fund has satisfied the superannuation fund conditions for the year of income. Sub-section 12(1) provides that sub- section 12(3) applies where, as in this case, the trustee gives the Commissioner a return providing information relating to the fund and to the fund's satisfaction of the superannuation fund conditions, a trustee's certificate and a certificate from an approved auditor.
23. Sub-section 12(3) provides that:
``Where this subsection applies in relation to a fund in relation to a year of income, the Commissioner shall, subject to subsections (6) and (6A), give notice in writing to the trustees of the fund stating whether the Commissioner is satisfied that the fund satisfied the superannuation fund conditions in relation to the year of income, having regard to:
- (a) the return and certificates given under subsection (1); and
- (b) any other information available to the Commissioner.''
Sub-section 12(6A)
provides that the Commissioner may refuse to give notice under
sub-section 12(3)
if a levy payable on the return remains unpaid. That provision is not relevant in these proceedings.
Sub-section 12(6)
relates to the ameliorating provisions of
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24. Section 5 sets out what is meant by a reference to a fund's satisfying the superannuation conditions in relation to a year of income. Sub-section 5(2) provides that:
``A reference in this Act to a fund satisfying the superannuation fund conditions in relation to a year of income is a reference to the following conditions being satisfied in relation to the fund in relation to the year of income:''
and then goes on to specify certain conditions.
25. The first condition requires that the fund be a superannuation fund at all times during the year of income when the fund was in existence ( sub-paragraph 5(2)(a)(ii) ).
26. Paragraph 5(2)(b) provides that:
``at all times during the year of income when the fund was in existence and there were in force regulations for the purposes of subsection 7(1) prescribing standards applicable to the fund, the fund complied with those standards;''
27. Sub-section 7(1) of the OSS Act provides that the Regulations ``may prescribe standards applicable to the operation of the superannuation funds''. Two provisions of the Regulations are relevant in this case. The first is paragraph 16(1)(b) which provides that:
``subject to subregulation (3), the trustees of a superannuation fund shall not borrow, or maintain an existing borrowing of, money, whether by way of a secured or unsecured loan, otherwise than to secure temporary finance;''
28. The effect of paragraph 16(1)(b) is ameliorated by paragraph 16(3) but that does not apply in this case for it applies only to situations in which the trustees of public sector funds borrowed the money before 11 June, 1986 or the trustees of private sector funds did so before 1 July, 1990. In this case, the transactions with which we are concerned took place in December, 1991.
29. The second provision with which we are concerned is set out in regulation 16A and relates to in-house assets. Paragraph 16A(17)(a) applies to funds established after 11 March, 1985 and provides that ``the cost of the in-house assets of... [the fund] is not to exceed at any time during a year of income 10% of the cost of all the assets of the fund;''.
30. As the funds with which we are concerned are neither life assurance companies nor public sector funds, none of the qualifications to the definitions applies. The definition is that an
```in-house asset' , in relation to a superannuation fund, means an asset of the fund that is a loan to, or an investment in, an employer sponsor, or an associate of an employer sponsor, of the fund...''
( regulation 16A(1) )
31. The ``employer sponsor'' in relation to a superannuation fund is the employer who has contributed to the fund for the benefit of an employee (see sub-section 3(1) of the OSS Act). A person is an
``... associate of an employer sponsor of a superannuation fund other than a public sector fund if the person is an associate, within the meaning of subsection 26AAB(14) of the Tax Act, of the employer sponsor, the reference in that subsection to `taxpayer' being read as a reference to the employer sponsor''
( sub-regulation 16A(2) )
Consideration
B1 Fund: Prohibition against borrowing - OSS Regulations, paragraph 16(1)(b)
32. Mr McPherson submitted that the payment of the money from the Other Fund to the B1 Fund could be construed as a gift. We do not accept that submission. It is not supported by the evidence of B1 who did not suggest that the payment was a gift. It is not supported by the trust deed for the Other Fund. That trust deed does not authorise B1 and B2 to make a gift of the Other Funds assets. B1 said that he chose to transfer all of the funds to the B1 Fund rather than directly to B1 Pty Ltd and to the Commissioner of Taxation as it could be done in one cheque. On the basis of that evidence we find that B1 and B2 did not intend to give the sum of $52,962.95 to the B1 Fund.
The meaning of the word ``borrow''
33. That brings us to the superannuation fund condition in paragraph 16(1)(b) . The first question we have asked ourselves relates to the meaning of the word ``borrow'' used in sub- regulation 16(1)(b) . The word ``borrow'', when used as a verb as it is in the paragraph, is defined in the New Shorter Oxford Dictionary (in so far as it is relevant) as:
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``... Orig., take (a thing) on security given for its safe return. Now, get temporary use of (money or property to be returned later); take on loan. (Foll. by from, of a person etc.) OE. b Math. In subtraction, transfer (a unit of the next higher denomination) in the number being subtracted from, compensating for this at the next step L16. 2 vt. fig. Adopt, use without being the true owner or inventor; derive from another, import from an alien source....''
34. The Macquarie Dictionary defines it in similar terms as:
``1. to take or obtain (a thing) on the promise to return it or its equivalent; obtain the temporary use of. 2. to get from another or from a foreign source; appropriate or adopt; borrowed words....''
35. The two meanings which come through these definitions of ``borrow'' are that of a loan and that of an appropriation. An appropriation may, among other meanings, refer to taking for oneself or taking possession or to annexing or stealing (see New Shorter Oxford English Dictionary and the Macquarie Dictionary). Whether one or other, or even both, of the meanings is the appropriate meaning to adopt depends on the context in which it is used in paragraph 16(1)(b) and in regulation 16 generally.
36. The context of paragraph 16(1)(b) is that of a loan, secured or unsecured. There is nothing on the face of the paragraph itself which suggests that the delivery of property or money by a person to the trustees for the trustees' gratuitous use and then return (i.e. a bailment without reward) to the person is regulated. The paragraph speaks of loans, secured and unsecured. So too does paragraph 16(1)(a) , which prohibits the trustees from lending money from a superannuation fund to that fund's members. When regard is had to the definition of an ``in-house asset'' in sub- regulation 16A(1) , paragraph 16(1)(c) also refers to a loan but does so in addition to an investment.
37. The word ``loan'' was considered by one of us in
Re Gordon and Secretary, Department of Social Security (1992) 16 AAR 100 in the context of section 4C of the Social Security Act 1947. It was said in that case:
``The term `loan' is not defined in the Act but is defined in Chitty on Contracts (26th ed, 1989), par 3574:
`Definition of loan. A contract of loan of money is a contract whereby one person lends or agrees to lend a sum of money to another, in consideration of a promise express or implied to repay that sum on demand, or at a fixed or determinable future time, or conditionally upon an event which is bound to happen, with or without interest. In many circumstances, the question whether a particular transaction is, in law, a loan or not will be immaterial, since the transaction will take effect according to the intention of the parties, however the contract may be classified. But in some circumstances it is necessary to define the nature of a transaction because of particular statutory provisions which may apply to contracts of loan but not to other contracts. In these circumstances the question is, in the last resort, always a question of construction of the particular provision, and it would be unsafe to assume that a transaction which would be classified as a loan for the purposes of one statute will necessarily be so classified for the purposes of other statutory provisions. But subject to this caveat, the authorities on the meaning to be attached to the word ``loan'' in a particular statutory context are useful in showing the normal commercial definition of a contract of loan...'
At pars 3576-3577, it was said:
`Loans distinguished from other forms of debt... at common law not every form of indebtedness amounts to a loan. A person who buys goods on credit is not borrowing money from the seller. And a company which issues loan or debenture stock as a consideration for the acquisition of property is not borrowing money. Even where money passes from one party to the other, this does not necessarily make the transaction one of loan for there are many ways of raising cash besides borrowing money. The purchase of bills or book debts at a discount is not a lending of money, even where the seller gives a collateral security which has the effect of making
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him personally liable for the security which has the effect of making him personally liable for the amount raised. Nor does the ordinary hire-purchase transaction amount to a loan of money, although the economic effect of such a transaction may be the same as that of a loan, the legal effect is quite different.Borderline cases may however, arise, and it is difficult to state with any certainty whether or not certain types of instalment credit transaction, for example, cheque and voucher trading, revolving shop credit accounts, and credit cards, involve loans of money. Further, transactions of the kinds referred to in the preceding paragraph may sometimes amount to contracts of loan, for the real purpose of the parties may be to effect a loan, and other features of the transaction (such as the purchase of book debts or the making of hire-purchase agreement) may be merely a front, intended to hide the real nature of the transaction. But it must be stressed that what matters is the real legal nature of the transaction and not its economic nature, and the courts will not go behind the actual agreement made unless there is evidence the parties did not intend the relationship between them to be governed by the ostensible agreement which they have made. Thus, if a company wishes to acquire property in consideration of the issue of loan stock, a transaction in these terms will not amount to a borrowing of money as mentioned above. If, on the other hand, the parties make a contract which indicates that their intention is that the company should purchase the property at a stated sum, and that the company should then borrow that sum from the seller, and secure the loan by an issue of debenture on loan stock, there will undoubtedly be a loan to the company...'''
(pages 103-104)
38. Although this passage recognises that the meanings of ``loan'' may be diverse, none of them conveys any sense of simply taking for oneself i.e. none conveys any sense of appropriation or, indeed, of misappropriation. Each sense conveys an agreement to lend a sum of money and the other person agrees, expressly or impliedly, to repay it on certain terms and conditions.
39. We have considered at paragraphs 71-78 below the meanings of the word ``investment'' used in the definition of an ``in-house asset''. Although we have not found it necessary to reach a concluded view as to the meaning of the words we have concluded that the meaning is equally applicable to the word as it is used in paragraph 16(1)(c) referring as it does to the definition of an in-house asset. Whichever meaning is applicable or even if both are, their emphasis is upon the laying out of money by a person for a particular purpose. It is not upon the taking of another's property for one's own use. In view of that, we have concluded that the word ``borrow'' in the context of regulation 6, must refer to a loan rather than to an appropriation. A ``borrowing'', therefore, is a loan when viewed from the position of the person receiving the sum loaned (ie the debtor).
Was the initial transfer of the funds from the Other Fund to the B1 Fund a borrowing by the B1 Fund?
40. There is an initial question raised by both parties as to whether there could be a borrowing when B1 and B2 have transferred the money to themselves. Mr Fogarty submitted that it is a well established proposition that a legal entity cannot contract with itself and that a contract is only enforceable where the transferor and the transferee have separate legal personalities (see
De Taset v Shaw (1818) 1 B & ALD 664, 106 ER 224,
Ellis v Kerr (1910) 1 Ch 529,
Napier v Williams (1911) 1 Ch 361 and
Farrar v Farrars Ltd (1888) 40 Ch D 404.
41. In certain instances, exceptions to the general proposition established by these cases have been created by statute. One example is to be found in section 50 of the Property Law Act 1974 (Qld) and another in section 53 of the Trusts Act 1953 (Qld).
42. we have no disagreement with the general proposition, but have found that its application in relation to trustees is not necessarily as clear cut as might be hoped for.
43. Based on the general proposition, the authors of Principles of the Law of Trusts (H.A.J. Ford and W.A. Lee) have said in relation to its application to trustees:
``A trustee who is a trustee of two separate trusts may not dispose of trust property held in one trust so as to be held in the other trust
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unless the trust instrument for the first trust authorises the trustee to do so. [For an example where it is proper for a trustee to appropriate assets from one trust to another, see
Re Pilkington's Will Trusts (1964) AC 61 especially at 639 per Lord Radcliffe.] A power of sale or a power to vary investments would not suffice. The mischief involved in mixing the property of one trust with property in another trust administered by the trustee is that the trustee may have to make a decision in one trust that is injurious to beneficiaries under the other trust. A purported exchange of assets between the trusts would require authority in the trust instrument of each trust. Just as a trustee may not, without special authority, sell to herself or himself either as a taker beneficially or as agent for third persons [Lewin, p. 696;
ex parte Bennett (1805) 10 Ves. Jun. 382 at 399-400; 32 ER 893 at 899-900] so the trustee may not sell to herself or himself as a trustee. If a trustee purported to exchange assets between two trusts without specific authority under the trust instruments the interests of the beneficiaries under each `disposing' trust would persist in the asset `disposed of' since the trustee would not be a taker of the legal title for value in good faith and without notice. [
Glennon v F.C.T. (1972) 127 C.L.R. 503 at 512-513.]''(paragraph 138)
44. The authors later referred to legislative provisions, such as section 59 of the Trusts Act 1973 (Qld), under which
``Notwithstanding any rule of law or practice to the contrary, a trustee of any property in that capacity may sue, and be sued by, himself or herself in any other capacity whatsoever, including the trustee's personal capacity; but in every such case the trustee shall obtain the directions of the Court in which the proceedings are taken as to the manner in which differing interests are to be represented.''
45. They said of this provision that:
``It falls short of treating the trust estate as a separate entity out of which any person could recover. The legislation does not expressly provide that a trustee may make a contract with herself or himself or dispose of any property to herself or himself or that certain conduct on the trustee's part will constitute a wrong against herself or himself. It would be possible for a court to interpret the provision as going to procedure only, so that where under a statute a trustee was empowered to enter a legal transaction with herself or himself which involved possible litigation the trustee's common law inability to be both plaintiff and defendant would not inhibit litigation. An example would occur where legislation had authorised a trustee to dispose of property to herself or himself and there were implied covenants attached to the disposition which later give rise to a justiciable issue. The legislation empowering a trustee to sue herself or himself in any capacity does not in terms say that a judgment may be ordered to be met out of a trust estate but it is arguable that it is implied.''
(paragraph 139)
46. A different point of view was expressed by Kennedy J of the Supreme Court of Western Australia in
Gulland v FC of T 83 ATC 4352 to which the authors referred. Despite its length, we will set out a passage from his judgment for it summarises many of the relevant cases. After setting out the general proposition, Kennedy J continued:
``The current trend of authority, however, does appear to suggest that it makes a difference to the validity of the contract if the contracting party concerned is acting in different capacities. Thus, the rule is stated in 9 Halsburys Law's of England (4th ed.) para. 204 as follows:
`There must be at least two parties to a contract, a promisor and a promisee... However, where a person has different capacities, he may have power to contract in his representative capacity with himself as an individual.'
A footnote provides, as examples of the latter situation, a trustee, executor, administrator or agent. No authority is cited for this view, which is somewhat tentatively put forward, and which is new to the 4th edition of Halsbury. It is the same view as that is put forward in Corbin on Contracts para. 55 footnote 2. It is to be observed that it is contrary to the view expressed in the Restatement of the Law of Contracts para. 15 and in 17 Corpus Juris Secundum, Contracts para. 26, and see also Williston on Contracts (2nd ed.) para. 18. It was, however, adopted by Kilner Brown J. in
Rowley Holmes and Co. v. Barber (1977) 1 All E.R. 801
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when delivering the judgment of the Employment Appeal Tribunal in which it was held that a personal representative could contract with himself in his individual capacity so as to become an employee.There are many cases concerning sales by trustees to themselves, which support the view that a trustee can contract with himself, notwithstanding that any contract so concluded would be voidable. They are not dealt with simply as instances of conveyances, independently of agreements. Even in these cases, however, there are dicta to be found which deny the possibility of such a contract. Thus, in
Williams v. Scott (1900) A.C. 499, Sir Ford North, speaking for the Privy Council, said at p. 503:`It is clear undisputed law that a trustee for the sale of property cannot himself be the purchaser of it - no person can at the same time fill the two opposite characters of vendor and purchaser.'
And see also,
Denton v. Donner (1856) 23 Beav. 285 and
Farrar v. Farrars Ltd. (1888) 40 Ch.D. 395 at p. 409.It is commonly asserted that the rule of equity that a trustee may not purchase part of the trust estate rests upon two reasons, first, that a man may not be both vendor and purchaser and, secondly, that there may not be a conflict of duty and interest - see, for example, 16 Halsbury's Laws of England (4th ed.) para. 1457. It is also frequently said to be based on the proposition that a person cannot be at the same time both plaintiff and defendant. But if the first reason be correct, then one may well wonder how it is that a purchase is possible, as it undoubtedly is, where express authority is contained in the trust instrument or where the trustee purchases with authority from the beneficiaries - see
Randall v. Errington (1805) 10 Ves. Jun. 423 and
Downes v. Grazebrook (1817) 3 Mer. 200. If the rule as expressed in
Holder v. Holder (1968) Ch. 353 at pp. 398, 402-403, where it was held that, in an action by beneficiaries to set aside a purchase without authority, the Court has a discretion as to setting it aside, then the position is still more clear. Even those holding the contrary view, that the court has no discretion in such a case, do not suggest that the contract is absolutely void - see Jacob's Law of Trusts in Australia (4th ed.) pp. 341, 343 and see also
Glennon v. F.C. of T. 72 ATC 4181 at pp. 4184-4185; (1972) 127 C.L.R. 503 at p. 511;
George A. Bond and Co. Ltd. v. Bond (1929) 30 S.R. (N.S.W.) 15; Finn, Fiduciary Obligations p. 185 and Hanbury and Maudsley, Modern Equity (11th ed.) p. 603.Furthermore, in
Lee v. Lee's Air Farming Ltd. (1961) A.C. 12, it appears that Lord Morris, speaking for the Privy Council, accepted the proposition that a person can contract with himself in another capacity, when he said, at p. 30:`There appears to be no greater difficulty in holding that a man acting in one capacity can give orders to himself in another capacity than there is in holding that a man acting in one capacity can make a contract with himself in another capacity.'
Although his remarks were clearly obiter, it does not appear that his Lordship was there restricting himself to the factual position in that case, where the contract was made between distinct parties, a company and an individual, with the company acting through that individual. His reference was to a man's making a contract with himself.
It is also of some interest to note that in
Re New Haw Estate Trusts (1912) 107 L.T. 191, it was indicated by Parker J. that a compromise by the Public Trustee, as trustee of one settlement, with himself, as trustee of another settlement, required the sanction of the Court. It was not suggested that the contract was a nullity.The second reason for the rule that a trustee cannot purchase trust property, relating to the existence of a conflict of interest and duty, must give way to a specific provision in the trust deed, such as cl. 17(3) of the present deed.
Finally, so far as the procedural reason is concerned, that a person cannot sue himself, this has been removed by sec. 57 of the Trustees Act 1962, to the extent that it permits a trustee of any property to sue and be sued by himself in any other capacity, although subject to the directions of the Court as to the manner in which the
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opposing interests are to be represented. Apart from this provision, where there are co-trustees, one of whom has entered into a contract with the trustees in his personal capacity, he could be sued as a defendant in both capacities by his co-trustees.In the light of the foregoing, I am prepared to accept, for the present purposes, that the contract of employment was a valid contract, notwithstanding the dual position of the appellant.''
(pages 4,365-4,367)
47. Clause 17(3) of the trust deed to which Kennedy J referred provided that the trustees could exercise their powers notwithstanding that they might have a direct personal interest in the manner or result of exercising those powers or discretions. Clause 17(4) permitted the trustees to sell property to the trust. Clause 17(2) authorised the trustees, with others or in their own right or as trustees of any other trust to accept, make or become a party to any of the applications or investments authorised by the deed.
48. His Honour's statement that the reasons for the general proposition based on the trustees' conflict of interest must give way to the specific provisions in the trust deed would seem to be consistent with the approach of the House of Lords in
Pilkington and Another v Inland Revenue Commissioner [1964] A.C. 612. Viscount Radcliffe looked to the terms of the trust deed and found that,
``... if it is part of the trusts and powers created by one settlement that the trustees of it should have power to raise money and make it available for a beneficiary upon new trusts approved by them, they are in substance given power to free the money from one trust and to subject it to another. So be it: but, unless they cannot require a settlement of it at all, the transaction they carry out is the same thing in effect as an appointment of new trusts.''
(page 638)
49. Similar regard to the powers of the trustee was given by Walsh J in
Glennon v FC of T; Carrigan v FC of T 72 ATC 4181; (1972) 127 C.L.R. 503. The appellants, Messrs Glennon and Carrigan, held shares in two family companies as trustees for certain children. The other shares in the family companies were beneficially held by Messrs Glennon and Carrigan and their wives. They decided to adjust the shareholdings by transferring some of the trust shares to themselves and some to their wives absolutely. Some consideration for the shares was shown in the books of account but it was less than the actual value of the shares.
50. Walsh J said at pages ATC 4185-4186; CLR 512-513:
``As to the equitable ownership of the rights conferred by the shares, it is plain that no disposition was made by the children who were the beneficiaries of the trusts. In the absence of any disposition by them, the only way in which their equitable rights could be divested from them would be by an act of the trustee performed by virtue of his authority and powers as such trustee. Each trustee had a power of sale and he had a power to vary any of the investments for the time being representing the trust fund. There is no doubt that if the trustee had sold and transferred the shares to a third person who was a bona fide purchaser, that would have been effective to transfer the equitable, as well as the legal, ownership of the shares, assuming that the transaction complied with any relevant requirements of the articles of association. But, in my opinion, it is impossible to hold that the transfers by the trustees to themselves were effective to transfer to them the beneficial interest of the children. As I have said, there was not in reality any intention or any attempt to exercise the power of sale vested in the trustees. What was the real intention of the trustees might well be immaterial in appropriate circumstances in deciding whether a transfer to a third party was, because of the existence of the power of sale, effective to transfer the full proprietary rights in the shares. But as the transfers were to the trustees themselves it is impossible, in my opinion, to hold that the power of sale gives any efficacy to the transactions or to hold that the trustees acquired the equitable interest but were merely at risk that the transactions might subsequently be set aside at the suit of a beneficiary.''
51. It follows from these authorities that, as the trustees of the Other Fund, B1 and B2 could only enter a contractual arrangement with themselves as trustees of the B1 Fund if the trust deed establishing the Other Fund authorised them to do so.
ATC 289
52. The trust deed establishing the Other Fund makes provision for such things as the membership of the trust fund, the appointment of trustees, the trustees' powers, the exercise of the trustees' powers, payment and portability of benefits and investments which may be made. With regard to investments, clause 5.1 opens with the words:
``Moneys belonging to the Fund and not required immediately for the payment of Benefits or other amounts authorised by the Deed and Rules may be invested by the Trustees in or upon any investments of any kind (not limited to investments authorised by law for the investment of trust funds) as the Trustees in their absolute discretion shall think fit and without limiting the generality of the foregoing either directly or indirectly provided.''
53. There then followed a list of specific limitations and investments relating to the investments that could be made with the moneys of the Other Fund. Of particular note is clause 5.1(iii) which provides that ``... all investments other than prescribed investments as defined in the Regulations [the OSS Regulations] shall be made on an arms length basis''. That refers to the 17 sub-paragraphs which follow. Those sub-paragraphs set out the types of investments which may be made e.g. investments in fixed term deposit, shares, stock, land, units in a fixed or flexible unit trust and life assurance. They refer also to the way in which the trustees may set aside amounts to meet debts, may pay calls on shares and may vary the terms of any document or security. Sub-paragraph 5.1(iii)(o) authorises the trustees
``to invest in or lend moneys to the Trustees of any superannuation fund or funds established or managed by any company in Australia or elsewhere.''
54. There is no provision in the trust deed, either express or implied, which gives B1 and B2, as trustees of the Other Fund, the power to enter into contractual arrangements with themselves. That is so whether they are attempting to enter contractual arrangements with themselves in their own right or as trustees of the B1 Fund. That is so regardless of the breadth of the opening words of clause 5.1. Sub-paragraph 5.1(iii)(o) of the trust deed does not authorise them for, apart from any other limitations it has, it refers only to investments in, or loans to, superannuation funds established or managed by a company. The B1 Fund is not managed by a company but by B1 and B2 themselves.
55. It follows that as a borrowing is a loan (see paragraph 39 above) and as a loan is a contract (see paragraph 37 above), B1 and B2 as trustees of the B1 Fund could not be said to have borrowed from themselves as the trustees of the Other Fund when they transferred the sum of $52,962.95 from the account of the Other Fund to the account of the B1 Fund. Therefore, while the money sat in the account of the B1 Fund, the trustees continued to hold the beneficial interest for the beneficiaries of the Other Fund. There had been no borrowing by the B1 Fund. At this stage, B1 and B2 were not in breach of the standard set out in paragraph 16(1)(b) in relation to the sum of $52,962.95 placed in the B1 Fund's bank account.
Did the trustees of the B1 Fund borrow to pay their taxation liability?
56. Can it be said that the trustees of the B1 Fund borrowed the sum of $20,962.95 when they paid that sum to the Commissioner of Taxation for their liability in relation to that fund? When B1 and B2 paid that sum to the Commissioner they paid, in the main, moneys which B1 and B2 held beneficially for the beneficiaries of the Other Fund. We say ``in the main'' for the rule in Clayton's Case (1816) 1 Merc. 572, 35 E.R. 781 is ``first in, first out'' where a trustee has mixed in a bank account moneys deriving from several funds of which he or she is trustee. Looking at the page of the passbook for the B1 Fund (B1 T documents, page 30, Other T documents, page 26), it appears that the account held $953.39 when the sum of $52,962.95 was deposited. That would mean that, when withdrawals were made from the account, the sum of $953.39 already in the account would be drawn first as it was first in and so first out.
57. While the rule in Clayton's Case may be relevant in tracing the moneys, it does not take us a great deal further for the great percentage of the money paid to the Commissioner of Taxation was held on behalf of the beneficiaries of the Other Fund even if not quite all.
58. In some circumstances, money paid by X to Y to extinguish a debt owed by Z to Y may lead to a finding that there is a contract of loan between X and Z. X has lent the money to Z even though it has, at Z's request, been paid not
ATC 290
to Z himself but directly to another to extinguish Z's debts. That cannot be the situation here for we have already found that B1 and B2, as trustees for the Other Fund, cannot enter a contract with themselves as trustees of the B1 Fund. Therefore, there cannot have been a borrowing by B1 and B2 as trustees of the B1 Fund when they paid the money they held for the beneficiaries of the Other Fund to the Commissioner of Taxation. The trustees of the B1 Fund were not in breach of the superannuation standard in paragraph 16(1)(b) .59. Our finding is not to say that B1 and B2 are not in breach of standards other than superannuation standards. It would seem to us that they may be in breach of their fiduciary duties as trustees of the Other Fund. They have used funds held for the beneficiaries of the Other Fund for the benefit of the beneficiaries of the B1 Fund. That is so even though we find that the trustees later paid the sum of $20,962.95 from the assets they held on behalf of the B1 Fund to themselves as trustees of the Other Fund.
Other Fund: the sole purpose - OSS Act, sub-section 3(1) and 5(1)
60. Mr Fogarty submitted that the Other Fund has breached the sole purpose test under sub- section 3(1) of the OSS Act. While the definition of a ``superannuation fund'' set out in that sub-section does incorporate as a sole purpose test, we doubt whether a superannuation fund may, strictly speaking, be said to be in breach of such a test.
61. The definition of a ``superannuation fund'' does not set out any standards which any fund must meet. It is simply a definitional provision which identifies some of the funds which are subject to the OSS Act. It is more appropriate to speak of a breach in relation to sub-section 5(2) for that specifies as a superannuation fund condition that the fund is a superannuation fund. As Mr Fogarty submits, the question whether a fund is a superannuation fund is answered by reference to the definition of the term in sub-section 3(1) . That definition of a superannuation fund requires us to look at the purposes for which the fund is maintained as well as whether the fund is an indefinitely continuing fund.
62. The Commissioner has not questioned that the B1 Fund comes within the definition. Although it was not questioned, we find that we are satisfied that it is such a fund. Turning to the Other Fund, we find that it is an indefinitely continuing fund. Clause 1 of the trust deed dated 26 June, 1991 establishes it as such (Exhibit 3).
63. Mr Fogarty has submitted that the Other Fund does not meet the requirements of paragraph (b) of the definition of a ``superannuation fund''. He argued that the transfer of the money from the Other Fund to the B1 Fund is not consistent with a finding that the fund was ``maintained solely for one or more of'' the purposes specified in that paragraph. He has relied on Scott's case, to which we have already referred, and
Raymor Contractors Pty Ltd v FC of T 91 ATC 4259 as authority for the principle that a superannuation fund established for the benefit of employees must be a bona fide fund whose sole purpose is devoted to the provision of benefits for employees reaching a prescribed age.
64. Mr Fogarty also relied on [Case 43/95,
95 ATC 347 at 382] V94/447 and the Insurance and Superannuation Commissioner (Decision No 10301, 19 July, 1995, unreported) where it was said that
``... 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'.''
65. Finally, Mr Fogarty drew our attention to Case X60,
90 ATC 438. That case, he submitted, stated that an incidental but not purposeful benefiting of someone other than the employees and their beneficiaries by the trustee in the conduct of the investment programme will not ordinarily of itself contravene the sole purpose test.
66. We have exercised care in looking at previous authorities for some have been
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concerned with the sole purpose for which a fund was established and some with the sole purpose for which it was established and maintained. We are concerned with the purpose for which it was maintained. The reason for care is illustrated in the following passage from the judgment of Davies J in the case of Raymor Contractors Pty Ltd v FC of T when he said:``In
Mahoney & Anor v F.C. of T. (1965) 13 A.T.D. 519, (1965) 39 A.L.J.R. 62, (1967) 41 A.L.J.R. 232,
Compton & Ors v. F.C. of T. (1965-1966) 116 C.L.R. 233,
Scott v. F.C. of T. (No. 2) (1966) 40 A.L.J.R. 265,
Rollason & Anor v. F.C. of T. (1966) 40 A.L.J.R. 291 and
Driclad Pty Ltd v F.C. of T. (1966-1968) 121 C.L.R. 45, it was pointed out that, to determine whether a fund was established for the benefit of the employees, regard should be had primarily to the terms of the trust deed, for it was from those terms that the purpose of the trust was to be ascertained. However, in those cases, it was also pointed out that, 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. In Mahoney's case, Compton's case (per Taylor J. and Kitto J.) and Scott's case, it was held that a fund was in fact being applied for the benefit of the employer company or others rather than for the benefit of employees.''(page 4,261)
67. Mr Hogan in Case X60 considered the case of
Driclad Pty Ltd v FC of T (1966) 14 ATD 302; (1966-1968) 121 C.L.R. 45 and concluded that
``From all of which I deduce that, for there to be a derogation of the rights of employees as contemplated by Taylor J., there has to be found, either in requirements placed on the trustees by the deed in the conduct of their investment program, or established by consideration of the facts of the manner in which the trustees' investment program has been conducted, a clearly defined purpose (my emphasis) of benefiting some party or parties other than the employees or their dependants. It seems to me to emerge that an incidental, but not purposeful (my emphasis) benefiting of someone other than the employees and their beneficiaries by the trustee in the conduct of their investment program cannot be seen, of itself, as a contravention of the sole purpose test seen to arise under sec. 23(j)(i) in the decision in Compton (supra) and later enshrined in the statute by sec. 23F(2)(a)....''
(page 446)
68. We have had regard first to the terms of the trust deed of the Other Fund. It provides for the membership of the fund and for the provision of benefits for each member of the fund in the event of his or her retirement and for the member's dependants upon his or her death. It makes provision for no other payments. We are satisfied on the basis of the trust deed that the Other Fund was established solely for a purpose set out in the definition of a superannuation fund. That, however, is not the question we must ask ourselves. The relevant question is whether the trustees ``maintained'' the Other Fund solely for these purposes during the relevant year of income.
69. The word ``maintain'' means, among other things, ``to keep in existence a continuance... to keep in due condition, operation or force...'' (Macquarie Dictionary and see also the New Shorter Oxford English Dictionary). We have already found that the money that B1 and B2 had on trust for the beneficiaries of the Other Fund was paid to pay their tax liability as trustees of the B1 Fund. This was not a purpose set out in the definition of ``superannuation fund''. Those purposes are concerned with benefits for members of the particular fund and not for members of another fund. That is so even where the members benefited are also members of the fund whose assets are used. In view of that, we must conclude that the Other Fund was operated during the year of income for purposes other than for the provision of benefits for members or dependants of members as described in the definition of ``superannuation fund''. Unlike Case X60, we cannot say that the benefiting of the members of the B1 Fund occurred only incidentally. It occurred directly and they were the only people benefited. The payment of the tax liability of the B1 Fund was a major transaction and a significant payment from the funds of the Other Fund. It cannot be said to be
ATC 292
an incidental, remote or insignificant transaction in the affairs of the Other Fund. That it occurred is contrary to the exclusivity of purpose required in the sole purpose test. The Other Fund was not maintained solely for the purposes set out in the definition during the year of income. Therefore, the Other Fund was in breach of the superannuation fund condition set out in sub-section 5(2) of the OSS Act.Other Fund: in-house asset - OSS Regulations, regulation 16A
Regarding the sum of $52,962.95 paid to the account held by the trustees on behalf of the B1 Fund
70. Mr Fogarty submitted that the trustees of the Other Fund made an investment in the B1 Fund in the total amount of $52,962.95 and did so in breach of regulation 16A . Whether that is so depends upon the answer to two questions. The first is whether the B1 Fund is an associate of the employer sponsor. If it is, the second question is whether the Other Fund has made an investment in the B1 Fund. In view of our answer to the second question, we have not answered the first.
71. Was the transfer of the sum of $52,962.95 an investment? The word ``investment'' is defined in the New Shorter Oxford English Dictionary as:
``1 The act of putting on clothes or vestments; clothing; robes, vestments. Now rare or obs. L16. 2a An outer covering of any kind; an envelope; a coating. M17. b Refractory material used to embed or surround an object and allowed to harden, to allow soldering (in Dentistry), or to form a mould for investment casting. L19. 3 The action of investing or fact of being invested with a position, rank, right, or attribute; endowment. M17. 4 Mil. The surrounding or blockading of a place by a hostile force. E19. 115 The investing of money (now also time or effort); an instance of this. E17. 6 An amount of money invested. Also, anything in which money etc. is or may be invested. M19.''
72. The Macquarie Dictionary defines it, in so far as it is relevant, as:
``1. the investing of money or capital in order to secure profitable returns, esp. interest or income. 2 a particular instance or mode of investing. 3 a thing invested in. 4. that which is invested....''
73. Black's Law Dictionary defines it as:
``An expenditure to acquire property or other assets in order to produce revenue; the asset so acquired. The placing of capital or laying out of money in a way intended to secure income or profit from its employment.
Securities & Exchange Commission v Wickham, D.C. Minn., 12 F.Supp. 245, 247. To purchase securities of a more or less permanent nature, or to place money or property in business ventures or real estate, or otherwise lay it out, so that it may produce a revenue or income. revenue or gain (or both) in the future....''
74. Mr Fogarty referred to the case of
Inland Revenue Commissioners v Rolls-Royce Ltd [1944] 2 All ER 340. In that case, Macnaghten J considered royalties which had been received by Rolls-Royce Ltd from the licences it had granted to manufacture certain products of which it was the registered proprietor. His Honour considered whether those monies could be said to be ``income derived from investments'' for the purposes of the Finance Act 1939. He said that
``The word `investment', though it primarily means the act of investing, is in common use as meaning that which is thereby acquired; and the primary meaning of the transitive verb `to invest' is to lay out money in the acquisition of some species of property; consequently, letters patent, which are undoubtedly a species of property, may properly be described as an investment.
...
Some light on the true interpretation of the word `investment' in the Finance (No. 2) Act, 1939, Sched. VII, para. 6(1), may, I think, be obtained from consideration of the provisions of subpara. (2). The income which is to be included in the profits under subpara. (1) is, it will be observed, income received from investments in the case of a building society, of a banking business assurance business, and a business concerned, wholly or mainly, in dealing in or holding of investments. In all of those cases the investments would be investments acquired by the laying out of money. A banking business has nothing but money for investment; so, too, in the case of a building society which receives money from its shareholders and depositors: and an
ATC 293
assurance business which receives premiums on the policies of insurance which it issues and has to create a fund for the purpose of meeting its obligations under the policies. It is the money which such businesses receive that is laid out in the purchase of investments. Businesses consisting wholly or mainly in dealing in or holding investments would, as a general rule, be businesses where money, and nothing but money, is laid out in acquiring the investments.The conclusion at which I arrive, not without some doubt, is that the word `investments' in para. 6(1), ought to be construed as investments acquired by the laying out of money.''
(pages 341-342)
75. Macnaghten J went on to find that Rolls- Royce Ltd had not laid out any money for the acquisition of the patents even though the patents were property. It acquired them because its researchers had made the inventions and it had paid the prescribed fees for the patents. That did not amount to a laying out of money and so the patents were not investments.
76. The word ``invest'' was considered by Lockhart J in
Melville v Mutual Life and Citizens Assurance Co Ltd (1980) 31 ALR 649.
Sub-section 39(2)
of the Life Insurance Act 1945 provided that the assets of a statutory fund shall not, without the sanction of the court, be invested in any share or interest in any company carrying on life insurance. It purchased shares in APA Holdings Ltd. APA Holdings Ltd held 98.5% of the shares in APA Life Assurance Ltd which, together with the respondent, was registered under the Life Insurance Act 1945. Lockhart J noted that life insurance companies were able to carry on business other than that of life insurance business. He also noted that the purpose of
sub-section 39(2)
was to maintain competition in the life insurance business.
77. Lockhart J said:
```Invest' is not defined in the Act. It is defined by the Shorter Oxford English Dictionary, so far as relevant, as meaning: `to employ (money) in the purchase of anything from which interest or profit is expected... to make an investment... colloq. to lay out money'.
In Wharton's Law Lexicon the relevant meaning given is: `to lay out money'. See also
Commissioner of Taxes v AMP Society (1903) 22 NZLR 445, per Stout CJ at 450; and
Re Will of Sherriff [1971] 2 NSWLR 438, per Helsham J at 442.No doubt Parliament chose to use the word `invested' in s 39(1) because the section is dealing with the use of the assets of a statutory fund of a company carrying on life insurance business; and it is assumed that the company will use it prudently for the purpose of obtaining a return by way of income or some other pecuniary gain for the benefit of policy holders. It is in this sense that the word is used in s 39(1) and (2). It is not used in a broad commercial sense, whatever that may be;...
It is impermissible to characterize the investment made by the respondent by reference to the purpose or object of the investment. The respondent may have acquired the shares in APA Holdings to derive benefit from the principal asset of APA Holdings, namely its shares in APA Life; but, if it did so, it is not to the point. The respondent invested the assets of the statutory fund in the purchase of shares in APA Holdings; the respondent did not acquire any share or interest in the APA Group. That is an impossibility. `Interest', in the context of s 39(2), necessarily involves a proprietary interest of some kind. All the respondent did, so far as relevant, was to buy shares in APA Holdings.
It is impermissible to determine the investment of the respondent by having regard to economic equivalence or the end result, except as a matter of contractual right.
It is not the purpose or object of the investment, or the economic results sought to be obtained by expending the statutory fund, that is determinative of whether the respondent invested such fund in a share or interest in a company or undertaking carrying on life insurance business; it is the legal rights enforceable by the respondent that it acquired in return for the expenditure.''
(pages 653-654)
78. Given the structure of the legislation, the purpose of regulation 16A is to limit the amount of a fund's money placed in bodies under the same control. That purpose would tend to suggest that we should give the word ``investment'' its broader, rather than narrower,
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meaning. We do not need to decide that finally. In relation to the placement of the sum of $52,962.95 in the bank account of the B1 Fund, we find that it is not an investment in either sense. The money, we are satisfied on the basis of B1's evidence, was simply placed there as a transitory thing pending its distribution to its ultimate source. This is supported by the bank account which shows that it was deposited and withdrawn in full on the same day (B1 T documents, page 30, Other T documents, page 26). A beneficial interest in the money, as we have already found, did not pass to the beneficiaries of the B1 Fund. On the evidence we have, we find that B1 and B2 have neither acquired property in the B1 Fund on behalf of the beneficiaries in the Other Fund nor secured any income or profit on behalf of those beneficiaries. There is, therefore, no investment in the B1 Fund by the Other Fund in the narrower sense of the word ``investment''.79. Nor is there any investment in the broader sense. There was no placement of the money in the B1 Fund as a business venture so that it might produce revenue or capital gain in the future. The B1 Fund was not, on the evidence we have, a business venture. We are satisfied on the evidence of B1 that the money was simply transferred to the bank account of the Other Fund in the first instance as a matter of convenience to reduce, in some way that is not clear but of no consequence, the number of cheques that had to be drawn.
80. In view of our findings, we are satisfied that, even if the B1 Fund is an associate of the employer sponsor, the trustees of the Other Fund were not in breach of regulation 16B in relation to the payment by B1 and B2 of the sum of $52,962.95 to the bank account they held as trustees of the B1 Fund.
Regarding the sum of $20,962.95 paid to the Commissioner of Taxation
81. We had considered whether payment of the tax debt could, in some way, be regarded as an investment on behalf of the Other Fund. The investment, if at all, would be the acquisition of the rights of the Commissioner of Taxation to recover the amount of the debt. This would only occur if B1 and B2 were surrogated to the rights of the Commissioner of Taxation.
82. Payment of a debt by a third person does not mean that the third person is automatically put in the place of the creditor so that he or she may exercise the creditor's rights against the debtor. The exchange, or subrogation, of the third party for the creditor, occurs commonly in the area of insurance contracts and contracts of guarantee. Once insurance companies and guarantors have compensated another, they are generally at liberty to step into the shoes of the person compensated in respect of his or her legal and equitable rights and to take action to enforce them.
83. We have not pursued this aspect further in relation to this case for we have concluded that, even if subrogation were applicable, it would not amount to an ``investment in'' the B1 Fund. A debt is a chose in action and so property. Subrogation to the rights of the creditor is the acquisition of property but it is not the acquisition of property in, or of, the debtor. It is the acquisition of property from the creditor and enables the person subrogated to exercise his or her rights to recover the debt from the debtor. Any ``acquisition'' of the Commissioner's debt does not amount to an investment in the B1 Fund.
Regarding the sum of $32,000 paid to B1 Pty Ltd as trustee of the B Family Trust
84. Mr McPherson submitted that the sum of $32,000 was paid from the funds of the B1 Fund and not of the Other Fund. If that were so, then the B1 Fund would not be in breach of regulation 16A as the sum was less than the cost of the assets of that fund. On the basis of B1's evidence, however, we have found that the B1 Fund was simply intended as a point of transition for the money. It was not intended to become part of the assets of the B1 Fund and we have already found that B1 and B2 continued to hold it for the beneficiaries of the Other Fund.
85. We find on the basis of the evidence of B1 that interest was to be paid on the sum of $32,000 and it was to be paid at the rate of 16.5% per annum. On the basis of B1's evidence, we find that the interest was payable from B1 Pty Ltd to the Other Fund. There is no written contract of loan but the payment of the interest and the subsequent repayment of the sum to B1 and B2 as trustees of the Other Fund support our finding that there was an unwritten contract of loan between B1 and B2 as trustees of the Other Fund and the separate legal entity B1 Pty Ltd as trustee of the B Family Trust.
86. During the year ended 30 June, 1992, we find that the cost of the assets of the Other Fund totalled $131,302 as declared in its annual
ATC 295
return (Other T documents, page 29). The sum of $32,000 represents 24% of that cost. As the loan to B1 Pty Ltd represents over 10% of the cost of the Other Fund's assets, the Other Fund has not satisfied the superannuation standard in regulation 16A .Other Fund: special circumstances - OSS Act, section 13
87. Are there special circumstances that would mean that it is reasonable to treat the Other Fund as having satisfied the superannuation conditions? This is relevant in the context of sub-section 13(1) which provides that
``Where, in relation to a fund in relation to a year of income of the fund:
- (a) the trustees of the fund have not given the Commissioner the return and certificates referred to in subsection 12(1), or the trustees of the fund have given the Commissioner the return and certificates referred to in that subsection but the Commissioner is not satisfied that the fund satisfied the superannuation fund conditions; and
- (b) the trustees of the fund satisfy 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; and
- (c) if the trustees have not lodged a return for the year of income under subsection 12(1) - the trustees satisfy the Commissioner that the failure of the trustees to lodge the return, and any failure of the fund to satisfy the superannuation fund conditions, were not part of a levy avoidance scheme;
the Commissioner shall give notice in writing to the trustees of the fund stating that the Commissioner is satisfied that the fund should be treated as if it had satisfied the superannuation fund conditions in relation to the year of income.''
88. Mr McPherson submitted that we should have regard to the fact that there are two funds and not simply one. The OSS Act and Regulations are concerned with the regulation of a fund with regard to bodies other than other superannuation funds. The fact that there are two funds in this case establishes that there are special circumstances. The only difference between the two funds was that the B1 Fund had beneficiaries in addition to B1 and B2. It was the fund with the additional beneficiaries that benefited from the transactions and not the fund of which B1 and B2 were the sole beneficiaries. The trustees had no intention to breach the superannuation standards and rectified the situation as soon as they realised the breach had occurred. The breach could be regarded as of a fairly technical nature. The detriment was small and there was no benefit to the employer sponsor.
89. What is meant by ``special circumstances'' in the context of
sub-section 13(1)
of the OSS Act was considered by Beazley J who said in
Tefonu Pty Ltd v ISC (1993) 18 AAR 236:
``Senior counsel for the applicant accepted that the Tribunal had correctly identified the test to be applied in determining whether circumstances were special: see
Re Beadle and Director-General of Social Security (1984) 6 ALD 1; and
Minister for Community Services and Health & Anor v Chee Keong Thoo (1988) 78 ALR 307 at 324 where Burchett J said:`Bearing in mind the care shown by the draftman of cl 8 to avoid laying down any binding rules, it is particularly important that the broad discretions, created to give a lively flexibility to the administration of the scheme, should not by the gradual deposition of judicial decisions become fossilised into rigidity. Those discretions are intended to be applied to a great variety of situations. In such a context, the core of the idea of ``special circumstances'' is that there is something unusual or different to take the matter out of the ordinary course, according to which the presumptions set out in the clause would be expected to apply. As a result, the ordinary course appears less appropriate or fair; cf
Crabtree v Hinchcliffe (Inspector of Taxes) [1972] AC 707 at 731 per Lord Reid;
Jess v Scott (1986) 12 FCR 187 at 195; 70 ALR 185;
R v Secretary of State for Home Department; Ex parte Mehta [1975] 1 WLR 1087;
Re X and Adoption of Children Ordinance 1965 (1984) 12 FCR 533;
Cortez Investments Ltd v Olphert & Collins [1984] 2 NZLR 434 at
ATC 296
437, 439, 441...'''(pages ATC 4736-4737; CLR 247-248)
90. When regard is had to the events in this case solely from the view of the beneficiaries of the Other Fund, they are events which we would hope are out of the ordinary. Monies held on their behalf have been used without regard to their interests at all. As B1 said, he regarded the two funds as one. He paid no regard to the beneficial interests of the members of the Other Fund when he paid the tax liability he and B2 owed as trustees of the B1 Fund. That is so even though B1 and B2 were the sole beneficiaries of the Other Fund. In his evidence, B1 showed no understanding of the duties of a person who is holding property of another as trustee. He showed no understanding of the particular duties of a trustee of a superannuation fund. We find that his sole concern, and his measure of his success as a trustee, was to gain the highest interest rate for money for which he had responsibility. He viewed the money of the two funds globally and did not differentiate between them. In doing so, he might have been in breach of trust in improperly using the funds of the Other Fund but that is not a matter for us to decide.
91. Unfortunately, we cannot have regard to whether there are special circumstances from the view of the beneficiaries. The test is whether there are special circumstances in relation to the fund during the year of income. There is, in our view, nothing revealed in the evidence of B1 or in the documentary material that takes the breach out of the ordinary. Simple ignorance or disregard of the standards is not sufficient to do so. Maximising the income of a fund is not sufficient to do so for, while that is a laudable objective, it must be done so in the framework of the trustees' statutory obligations under the OSS Act and Regulations. In saying that, we realise that ascertaining and understanding those obligations may be difficult for B1 and B2 as well as for many people generally. If, however, they choose to be the trustees of superannuation funds, they must be expected either to ascertain those obligations or to seek professional advice before they deal with the assets of those funds.
92. In our view, no special circumstances have been established in relation to the fund during the year of income that would make it reasonable to treat the Other Fund as if it had satisfied the superannuation fund conditions in relation to the year of income ending 30 June, 1992. For these reasons, we
- 1. set aside the decisions of the respondent dated 29 October, 1993;
- 2. substitute a decision, that
- (1) during the year of income ending 30 June, 1992, the Other Fund was in breach of the superannuation fund conditions set out in sub-section 5(2) of the Occupational Superannuation Standards Act 1987 and regulation 16A of the Occupational Superannution Standards Regulations;
- (2) the discretion in section 13 of the Occupational Superannuation Standards Act 1987 to treat the Other Fund as satisfying the superannuation fund conditions should not be exercised; and
- (3) during the year of income ending 30 June, 1992, the B1 Fund was not in breach of the superannuation fund conditions.
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