Triway Superannuation Fund and Commissioner of Taxation AATA 302
(Decision by: Mr Frank O'Loughlin, Senior Member)
Triway Superannuation Fund
and Commissioner of Taxation
Discretion to treat a non complying superannuation fund as a complying fund
Devenish v Jewel Food Stores Pty Ltd -  HCA 7; (1991) 172 CLR 32
McAusland v Deputy Federal Commissioner of Taxation; Antlers Pty Ltd - (1993) 47 FCR 369
Raelene Vivian, Suing in her Capacity as the Deputy Commissioner of Taxation (Superannuation) v Fitzgeralds -  FCA 1602; 2007 ATC 5105; 69 ATR 834
Re Ivovic and Director-General of Social Services - (1981) 3 ALN No 61
Secretary, Department of Social Security v (D A) Smith - (1991) 23 ALD 27
Decision date: 10 May 2011
Mr Frank O'Loughlin, Senior Member
REASONS FOR DECISION
1. The Triway Superannuation Fund (the Fund) is a self-managed superannuation fund (SMSF) that was created in April 2002. It had three members (a husband and wife and their son), who were also its trustees and are the applicants in this matter.
2. Between 28 May 2002 and 7 June 2002 superannuation balances totalling $41,002.91 were transferred by roll-over to the Fund. These amounts were substantially all of the then retirement savings balances of the three fund members.
3. The Fund was created and money was transferred to it upon advice given to its trustees by people introduced by the son.
4. The son had a drug addiction and took almost all of the money from the Fund and spent it or gave it away. Between 26 June 2002 and 25 July 2003 he took $40,260, $39,800 of it by 14 September 2002. The result of these actions is that these amounts have been lost. The Fund is now effectively a shell. The son also took money from the accounts of a business conducted with his mother and lost that as well. His mother (the wife) had contributed the money to the business.
5. On advice from a registered tax agent, the trustees concealed the true nature of the use and loss of this money for five years. While not entirely comfortable that it was the right thing to do, the husband and wife accepted this advice and followed it.
6. Following an audit that commenced in December 2008, the Commissioner decided that the Fund should be treated as a non-complying superannuation fund. On 15 October 2009 the Commissioner issued a notice under s 40 of the Superannuation Industry (Supervision) Act 1993 (Cth) (the SIS Act), that the Fund was a non-complying superannuation fund for the 2002 year of income because:
- the trustees had contravened ss 62, 65 and 126K of the SIS Act; and
- the Fund had not passed the test in s 42A(5) of the SIS Act.
7. The question for the Tribunal is whether the circumstances are sufficient to warrant exercising a discretion pursuant to s 42A(5)(b) of the SIS Act that would allow the Fund to be treated as a complying superannuation fund.
8. The issue for determination in this matter is whether, in all of the circumstances, the couple who have lost almost all of their retirement savings contributed to a superannuation fund are to be saddled with a further tax impost that will, necessarily, delay the accumulation of a replacement source of retirement income.
THE RELEVANT LEGISLATION
9. The relevant legislation is ss 42A and 65(1) of the SIS Act.
10. Section 42A(1) of the Act provides that an entity will be a complying superannuation fund in relation to a year of income if:
- the entity was a resident regulated superannuation fund at all times during the year of income when the entity was in existence; and
- the entity passes the test in ss (5) in relation to the year of income.
11. Section 42A(5) provides that an entity passes the requisite test:
... in relation to a year of income or part of a year of income if:
- no trustee of the entity contravened any of the regulatory provisions in relation to the entity during the year of income or the part of the year of income; or
- if a trustee of the entity contravened one or more of the regulatory provisions in relation to the entity during the year of income or the part of the year of income, the Regulator, after considering:
- the taxation consequences that would arise if the entity were to be treated as a non-complying superannuation fund for the purposes of the Income Tax Assessment Act 1997 in relation to the year of income concerned; and
- the seriousness of the contravention or contraventions; and
- all other relevant circumstances;
- thinks that a notice should nevertheless be given stating that the entity is a complying superannuation fund in relation to the year of income concerned.
12. Section 65(1) prohibits a trustee of a regulated superannuation fund from lending money of the fund to a member of the fund or from giving any other financial assistance using the resources of the fund to a member of the fund.
13. Section 42A(5) is a relieving discretion. There are two principles that need to be observed:
- first, discretions that are remedial or beneficial in nature ought be given a construction that allows the fullest relief which is open on a fair reading of their terms;1 and
- second, in exercising a discretion it is necessary to have regard to whether its exercise in a particular instance will achieve or frustrate the ends, objects or purposes of the SIS Act.2
14. In determining whether an exercise of a discretion would frustrate the objects of an act, it is necessary to understand the objects and underlying policy of the relevant act.
15. The legislative scheme in which s 42A(5)(b) of the SIS Act sits is one that:
- taxes taxable income on a concessional basis if a fund complies with a range of conditions, which includes conditions concerning the use to which superannuation funds may be put;
- taxes taxable income at a higher rate if those conditions are not met;
- imposes tax on the trustees of the Fund rather than the Fund itself; and
- allows trustees to recoup tax liabilities from the assets of the Fund.
16. Some activities are prohibited if a superannuation fund is to continue to enjoy the concessional taxation imposts. They include trustees using superannuation monies for their own purposes.
17. The apparent scheme of this system of taxation is to provide comparatively concessional taxation on the earnings of a superannuation fund, provided the Fund is managed in a prudential way that facilitates accumulation of a source of retirement income. The objects of the SIS Act include:3
- to encourage and provide for prudent management of regulated superannuation funds;
- to encourage members of the community to provide for their retirement by taxing funds managed appropriately on a concessional basis; and
- to ensure that superannuation assets are available to support fund members in their retirement (or other times when access to those assets is otherwise permitted) rather than being used for unauthorised purposes'
18. It is against this backdrop that the issue of whether the relieving discretion in s 42A(5)(b) should be exercised in the applicants' circumstances needs to be considered.
19. The following facts are taken substantially from the Commissioner's statement of facts and contentions and were not disputed.
- The Fund operated a Bendigo Bank Classic Passbook account (the Triway Account). The signatories on the Triway Account were the trustees who were also the members of the Fund. Only one signature was required to operate the account.
- The trustees' tax agent (the Agent) arranged for the rollover of the members' existing superannuation balances into the Triway Account as follows:
|Member||Date of Rollove||Amount|
|The Son||28 May 2002||$7,061.55|
|The Husband||7 June 2002||$13,056.65|
|The Wife||28 May 2002||$20,884,71|
- By a letter dated 1 May 2002 to the husband's employer, the Agent requested payment of future superannuation contributions to the Fund.
- By a letter dated 10 November 2004, the Agent consented to an appointment as auditor of the Fund.
- Between 2002 and 2007, the Fund's income tax and regulatory returns reported the Fund's total assets as follows:
|Financial Year||Amount||Tax Return Label|
- By notice dated 17 February 2005, the Commissioner confirmed that the Fund was a complying superannuation fund pursuant to s 40 of the SIS Act for the 2002 financial year.
- By letter dated 3 December 2008, the Commissioner notified the Fund of its decision to commence an audit into the Fund's tax affairs (the Audit).
- In the course of the audit, the Commissioner identified the following withdrawals of money (the Withdrawn Money) from the Triway Account:
|26 June 2002||$9,600||Withdrawal by cheque|
|27 June 2002||$14,000||Transfer|
|3 July 2002||$7,000||Withdrawal by cheque|
|12 July 2002||$1,000||Cash withdrawal|
|19 July 2002||$1,000||Cash withdrawal|
|9 August 2002||$6,500||Withdrawal by cheque|
|14 September 2002||$700||Transfer|
|25 July 2003||$460||Cash withdrawal|
- For each of the 2002 to 2007 financial years:
- the audit reports prepared by the Agent and signed by two of the trustees (the husband and wife) indicated that the trustees had complied with all relevant SIS Act requirements and that no Auditor Contravention Reports had been lodged;
- the trustees submitted a statement to the Agent, acknowledging it was a true and fair representation of the Fund's financial affairs for the year (the Trustees' Statements); and
- on behalf of the trustees, the husband and wife signed a memorandum of resolutions of the trustees of the Fund adopting the audit report, income tax return and trustees' statement.
- Attached to each of the Trustees Statements was a handwritten document identifying, amongst other matters, loans to a named individual (the Alleged Borrower).
- Further, as a result of the Audit, the Respondent became aware that one of the trustees, the son, had been a bankrupt since 4 April 2006 but had not removed himself as a trustee for the Fund.
- By a letter dated 13 December 2008 from the Agent to the Respondent, the Agent made voluntary disclosures on behalf of the Fund of an understatement of interest in respect of the purported loan from the Fund to the Alleged Borrower, and in respect of interest on funds held in the Fund account. The letter had attached to it, amongst other things, worksheets showing the calculation of interest on the purported loan to the alleged borrower.
- On 11 May 2009 and 1 June 2009 the trustees attended audit interviews with the Respondent (the Audit interviews). During the course of the Audit Interviews the trustees advised that, amongst other matters:
- the Withdrawn Money had been withdrawn by the son to pay for personal expenses;
- the husband and wife had consented to the establishment of a fictitious loan account in the name of the Alleged Borrower, to cover up the withdrawal of funds by the son;
- no loan was ever made to the Alleged Borrower;
- the husband and wife had participated in the preparation of a letter requesting the release of $7,651.24 (the Son's Funds) on financial hardship grounds, which was subsequently signed by the son;
- the husband and wife had recorded in a minute of a trustees meeting dated 14 August 2005 that the trustees had agreed to pay the Son's Funds pursuant to the request; and
- the son had, however, never made an application for release of money on financial hardship grounds and, notwithstanding the recording of payment of the Son's Funds in the Fund's financial records, no money were ever paid to the son pursuant to any such request.
- On 15 October 2009 the Respondent issued a notice under s 40 of the Act that the Fund was a non-complying superannuation fund for the 2002 year of income on the grounds that:
- the trustees of the Fund had contravened ss 62, 65 and 126K of the SIS Act; and
- the Fund had not passed the test in s 42A(5) of the SIS Act (the Non-Compliance Notice).
- On 9 March 2010 the Respondent issued to the Fund a notice of assessment for the year ended 30 June 2002, and notices of amended assessment for the years ended 30 June 2003, 2004, 2005, 2006 and 2007.
20. The husband and wife's evidence was that the Agent had suggested the steps which they took to conceal the true use of the Withdrawn Money and that they were uncomfortable with it but acted on it nevertheless. They now accept that it was a serious mistake. There was no evidence from the Agent and a finding concerning an allegation of this nature cannot be made on the evidence adduced. The Tribunal merely observes that the husband and wife appeared sincere in their evidence.
21. As noted above, in addition to taking the Withdrawn Money from the Fund, the son took money from a bank account of a business conducted in partnership with his mother (the wife) and dissipated that money as well.
22. The husband and wife have lost their then retirement savings balances and now need to begin the process of saving for their retirement again.
23. The son accepts that he is responsible for the misappropriations from the Fund and that he should be responsible for any tax impost as a consequence.
24. It is unlikely that the husband and wife will recover money from the son in the near future, if at all.
APPLICATION OF THE RULES TO THESE FACTS
25. It is only natural to have sympathy for the trustees in this matter. Addiction to illicit drugs is a scourge of modern society. And it is not just those addicted who suffer. The families of those addicted often suffer in many ways, including seeing the destruction of loved ones' lives and at times by the misappropriation and theft of money and assets by the addicts to finance their habits. In the present matter the husband and wife have seen and experienced both of these phenomena and have had their then retirement savings extinguished. The assessments which have been made by the Commissioner only add to the financial hardships that have been forced on them by their son's actions, because their accumulations of retirement savings will be delayed if the Fund is not accepted as a complying superannuation fund and the assessments stand. In that sense, exercising the discretion in this matter would not frustrate the purposes of the SIS Act, rather it would further them.
26. However, the SIS Act plays an important role in the wider system of encouraging the community to provide for their own retirement and ease the strain on public welfare resources.
27. In the present matter, the breaches of the standards required of superannuation funds to be concessionally taxed, are particularly serious.
28. While tragic, the present circumstances are not those in which a discretion ought be exercised consistently with the principles governing exercise of discretionary powers. To do so would frustrate the wider objects of the SIS Act by relieving those responsible for superannuation funds of tax imposts where all of the assets of a superannuation fund are deployed inappropriately and lost as a consequence. Exercising a discretion in these circumstances is not consistent with the objects of the SIS Act.
29. The Commissioner's decision must be affirmed.