XPMX v Commissioner of Taxation

[2008] AATA 981

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• The impact of this case on ATO policy is discussed in Decision Impact Statement: XPMX and Commissioner of Taxation (Published 22 December 2008).

(Decision by: Senior Member R W Dunne)

XPMX
vCommissioner of Taxation

Tribunal:

Member:
Senior Member R W Dunne

Subject References:
SUPERANNUATION
self managed superannuation fund
trustees' failure to comply with regulatory requirements
various contraventions
audit of fund
opportunities provided to remedy contraventions
failure to remedy contraventions
decision to issue notice of non-compliance
decision set aside

Legislative References:
Superannuation Industry (Supervision) Act 1993 - s 3(1); s 17A(2); s 34(1); s 36(1); s 40(1); s 42(1); s 42(1A); s 42A(1); s 42A(5); s 111(1); s 112; s 113(1); s 120A(3); s 262A(1)
Superannuation Industry (Supervision) Regulations 1994 - Reg 4.09

Case References:
The Administration of the Territory of Papua New Guinea v Daera Guba - (1973) 130 CLR 353
Ousley v R - (1997) 192 CLR 69
Anderson v Commissioner of Taxes (Vic) - (1937) 57 CLR 233
Liquor Administration Board (NSW) v Wolfe - (1993) 32 NSWLR 328

Hearing date: 11 June 2008
Decision date: 5 November 2008

Adelaide

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Decision by:
Senior Member R W Dunne

1. The applicant in this case is a self managed superannuation fund ("Fund") and, pursuant to a confidentiality order made under s 35(2) of the Administrative Appeals Tribunal Act 1975 ("AAT Act"), is referred to in these reasons as "XPMX". The trustees of the Fund are Mr H and his daughter, Ms H. Ms H is the sole member of the Fund.

2. The Fund was established on 15 February 1998 and was accepted as a complying superannuation fund under the Superannuation Industry (Supervision) Act 1993 ("SIS Act"). However, over a period of years, the trustees of the Fund failed to comply with a number of regulatory requirements of the SIS Act. On 1 May 2007, the respondent decided to issue the trustees with a notice of non-compliance for contravening provisions of the SIS Act. Following a request by the trustees, the respondent reconsidered and confirmed its decision. The trustees have applied to this Tribunal for a review of the respondent's reconsidered decision.

3. At the hearing, Mr H represented himself and was assisted by his other daughter, Ms v The Tribunal received into evidence the T documents lodged pursuant to s 37 of the AAT Act (Exhibit R1), together with the following:

•

the applicant's statement of position (Exhibit A1);

•

a booklet entitled "Role and responsibilities of trustees" produced by the respondent (Exhibit R2);

•

a booklet entitled "DIY super - it's your money ... but not yet!" produced by the respondent (Exhibit R3);

•

ATO Practice Statement Law Administration (PS LA 2006/19) issued by the respondent on 30 November 2006 (Exhibit R4); and

•

the respondent's statement of facts, issues and contentions (Exhibit R5).

ISSUE

4. Put simply, the issue for the Tribunal is whether the notice of non-compliance issued by the respondent to the Fund should be revoked or withdrawn.

LEGISLATION

5. The SIS Act and the Superannuation Industry (Supervision) Regulations 1994 ("SIS Regs") provide for a system of prescribed standards applicable to the operation of regulated superannuation funds. The following are the provisions of the SIS Act that are presently relevant to the applicant.

" 34 Prescribed operating standards must be complied with

Standards must be complied with

(1)

Each trustee of a superannuation entity must ensure that the prescribed standards applicable to the operation of the entity are complied with at all times.

..."

Amongst other things, the prescribed standards require that the trustee of a regulated superannuation fund give to the Regulator (in this case, the respondent) a copy of the report of an approved auditor in relation to the fund. As it applied to the applicant, s 36(1) reads:

" 36 Trustee to give copy of audit report to APRA

Lodgment

(1)

Each trustee of a superannuation entity must, within the prescribed period after the year of income, ensure that APRA is given a copy of the report given to a trustee of the entity by an approved auditor under Part 13 in relation to the entity, and any RSE licensee of the entity, in respect of that year of income, certified to be a true copy of the report by:

(a)

if the trustee is a body corporate-a responsible officer of the body corporate; or

(b)

if the trustee is a member of a group of individual trustees-at least one of those trustees; or

(c)

in any other case-the trustee.

..."

6. The Regulator's power to give a notice of compliance (or a notice of non-compliance) in relation to a regulated superannuation fund is contained in s 40(1). Section 42(1) identifies when a fund, that is not a self managed superannuation fund, becomes a complying superannuation fund. Section 40(1) and s 42(1), along with s 42(1A), read:

" 40 Notices by the Regulator to trustee

Notice about complying fund status

(1)

The Regulator may give a written notice to a trustee of an entity stating:

(a)

whether the entity is or is not a complying superannuation fund; or

(b)

whether the entity is or is not a complying approved deposit fund; or

(c)

whether the entity is or is not a pooled superannuation trust;

as the case may be, in relation to a year of income specified in the notice.

...

42 Complying superannuation fund

When entity a complying superannuation fund

(1)

An entity is a complying superannuation fund in relation to a year of income for the purposes of this Division if:

(a)

either:

(i)

the entity was a resident regulated superannuation fund at all times during the year of income when the entity was in existence; or

(ii)

the entity was a resident regulated superannuation fund at all times during the year of income when the entity was in existence other than a time, before it became a resident regulated superannuation fund, when the entity was a resident approved deposit fund; and

(b)

either of the following conditions is satisfied:

(i)

no trustee of the entity contravened any of the regulatory provisions in relation to the entity in respect of the year of income;

(ii)

both:

(A)

a trustee of the entity contravened one or more of the regulatory provisions in relation to the entity in respect of the year of income on one or more occasions; and

(B)

the entity did not fail the culpability test set out in subsection (1A) in relation to any of those contraventions; and

(c)

the entity was not a self managed superannuation fund at any time during the year of income.

...

Entity fails culpability test

(1A) For the purposes of subparagraph (1)(b)(ii), an entity fails the culpability test in relation to a particular contravention of a regulatory provision if:

(a)

both:

(i)

all of the members of the entity were in any way directly or indirectly knowingly concerned in, or party to, the contravention; and

(ii)

the Regulator, after considering:

(A)

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

(B)

the seriousness of the contravention; and

(C)

all other relevant circumstances;

thinks that a notice should be given stating that the entity is not a complying superannuation fund in relation to the year of income concerned; or

(b)

all of the following conditions are satisfied:

(i)

one or more members of the entity were in any way directly or indirectly knowingly concerned in, or party to, the contravention;

(ii)

one or more members of the entity (the innocent members) were not in any way directly or indirectly knowingly concerned in, or party to, the contravention;

(iii)

none of the innocent members would suffer any substantial financial detriment 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;

(iv)

the Regulator, after considering:

(A)

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

(B)

the seriousness of the contravention; and

(C)

all other relevant circumstances;

thinks that a notice should be given stating that the entity is not a complying superannuation fund in relation to the year of income concerned.

..."

7. A self managed superannuation fund will be a complying superannuation fund if it satisfies the provisions of s 42A(1) and s 42A(5). These sections read:

" 42A Complying superannuation fund-fund that has been a self managed superannuation fund at any time during a year

Entity that was a self managed superannuation fund throughout a year of income

(1)

An entity that was a self managed superannuation fund at all times during a year of income is a complying superannuation fund in relation to that year of income for the purposes of this Division if:

(a)

either:

(i)

the entity was a resident regulated superannuation fund at all times during the year of income when the entity was in existence; or

(ii)

the entity was a resident regulated superannuation fund at all times during the year of income when the entity was in existence other than a time, before it became a resident regulated superannuation fund, when the entity was a resident approved deposit fund; and

(b)

the entity passes the test in subsection (5) in relation to the year of income.

...

Circumstances in which entity passes the test in this subsection

(5)

An entity passes the test in this subsection in relation to a year of income or part of a year of income if:

(a)

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

(b)

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:

(i)

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

(ii)

the seriousness of the contravention or contraventions; and

(iii)

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.

..."

8. In addition to the lodgement requirements contained in s 36(1), the SIS Act imposes obligations on the trustees of self managed superannuation funds to maintain proper accounting records and accounts and statements, to have an approved auditor review the operations of the fund and provide a report to the trustees, and to formulate and give effect to an investment strategy that has regard to all the circumstances of the fund. Section 111(1), s 112 and s 113(1) read:

" 111 Accounting records

(1)

Each trustee of a superannuation entity must ensure that:

(a)

such accounting records as correctly record and explain the transactions and financial position of the entity are kept; and

(aa)

if the entity is not a self managed superannuation fund-its accounts are so kept as to enable the preparation of reporting documents referred to in section 13 of the Financial Sector (Collection of Data) Act 2001; and

(b)

if the entity is a self managed superannuation fund-its accounting records are kept so as to enable the following to be prepared:

(i)

the accounts and statements of the entity mentioned in section 112;

(ii)

the returns of the entity mentioned in section 36A; and

(c)

its accounting records are kept so as to enable those accounts, statements and returns to be conveniently and properly audited in accordance with this Act.

...

112 Accounts and statements

(1)

Each trustee of a superannuation entity that is a self managed superannuation fund must, in respect of each year of income of the entity, ensure that the following accounts and statements are prepared in respect of the entity:

(a)

except where the regulations provide that this paragraph does not apply-a statement of financial position;

(b)

except where the regulations provide that this paragraph does not apply-an operating statement;

(ba)

except where the regulations provide that this paragraph does not apply-a statement of cash flows;

(c)

such accounts and statements as are specified in the regulations.

(2)

The regulations may make provision for or in relation to the preparation of accounts and statements covered by subsection (1). If the regulations make such provision, the accounts and statements covered by subsection (1) must be prepared in accordance with the regulations.

(3)

The accounts and statements prepared in accordance with subsection (1) must be signed as follows:

(a)

if there is a single corporate trustee-by at least 2 directors of the corporate trustee;

(b)

if there is a single individual trustee-by that trustee;

(c)

if there is a group of individual trustees-by at least 2 of those trustees.

(4)

Each trustee must ensure that the accounts and statements prepared in accordance with subsection (1) are retained for a period of 5 years after the end of the year of income to which they relate.

(5)

A person is guilty of an offence if the person contravenes this section.

Maximum penalty: 100 penalty units.

(6)

A person is guilty of an offence if the person contravenes this section. This is an offence of strict liability.

Maximum penalty: 50 penalty units.

113 Audit of accounts and statements

(1)

For each year of income, each trustee of a superannuation entity must ensure that an approved auditor is appointed to give the trustee, or the trustees, a report, in the approved form, of the operations of the entity, and the RSE licensee (if any) of the entity, for that year. The appointment must be made within whichever of the periods set out in the regulations that apply to the entity.

..."

9. The following are the provisions of the SIS Regs that are presently relevant to the applicant.

" 4.09 Operating standard - investment strategy

(1)

For the purposes of subsections 31 (1), 32 (1) and 33 (1) of the Act, the standard stated in subregulation (2) is applicable to the operation of superannuation entities.

(2)

The trustee of the entity must formulate and give effect to an investment strategy that has regard to all the circumstances of the entity, including in particular:

(a)

the risk involved in making, holding and realising, and the likely return from, the entity's investments, having regard to its objectives and expected cash flow requirements;

(b)

the composition of the entity's investments as a whole, including the extent to which they are diverse or involve exposure of the entity to risks from inadequate diversification;

(c)

the liquidity of the entity's investments, having regard to its expected cash flow requirements;

(d)

the ability of the entity to discharge its existing and prospective liabilities.

(3)

An investment strategy is taken to be in accordance with subregulation (2) even if it provides for a specified beneficiary or class of beneficiaries to give directions to the trustee where the directions:

(a)

relate to the strategy to be followed by the trustee in relation to the investment of a particular asset or assets of the entity; and

(b)

are given in the circumstances covered by regulation 4.02. "

BACKGROUND AND EVIDENCE

10. The Fund was established with an original contribution of $12,000. There have been no contributions to the Fund since then. For Ms H, who is a mother and has been working part-time for the last 14 years, the Fund represents part of her total superannuation savings. Mr H acknowledged that the trustees had not lodged regulatory returns for the Fund since its establishment. However, the trustees had attempted to lodge a regulatory return without approved auditor details. It was the respondent's contention that the trustees had not lodged income tax returns for the Fund, in the approved form, for the years ended 30 June 2001 and 2003. Income tax returns for the years ended 30 June 1998, 1999, 2000, 2002, 2004, 2005 and 2006 had been lodged with the respondent. Mr H contended that an income tax return for the Fund had been lodged for the year ended 30 June 2003. Mr H also acknowledged that the trustees had not appointed an approved auditor to audit the Fund's accounts and statements since its establishment. There was also evidence to suggest that, since the Fund's establishment, its records had not been kept in the correct manner, Fund accounts and statements had not been prepared and member contribution statements had not been lodged. The trustees had provided the respondent with the Fund's bank statements, information on some shares and some dividend statements. However, no further information or documentation had been provided.

11. According to Mr H, it was too costly to appoint an approved auditor to audit the Fund's accounts and statements. The regulatory requirements were too onerous for small, single member self managed superannuation funds. For a single member self managed superannuation fund with limited transactions, the process of attending to the taxation obligations of the fund and its member was no more complex than attending to the member's personal income tax obligations. As the member was deemed to be capable of attending to personal taxation obligations by self assessment, the same concession should be extended to small, single member self managed superannuation funds. The regulatory requirements were appropriate if there was more than one member in a fund, or where the amount of the benefits in the fund was significant. Ms H's self managed fund had increased in value, whereas her other industry superannuation fund had reduced in value. In 2004, when he became aware of the type of regulatory return that was required for self managed superannuation funds, Mr H started to lodge them with the respondent. However, he attempted to lodge a single return covering several financial years. The return again lacked approved auditor details.

CONSIDERATION

12. The object of the SIS Act, as stated in s 3(1), is to make provision for the prudent management of certain superannuation funds, approved deposit funds and pooled superannuation trusts and for their supervision by different Regulators, including the respondent. For a superannuation fund (including a self managed superannuation fund) to be eligible for concessional income tax treatment, the fund must be a complying superannuation fund. A fund is a complying fund if it has received notice from the respondent under the SIS Act stating that it is a complying superannuation fund. A fund continues to be a complying superannuation fund until it is notified that its status has changed. To obtain a complying fund notice, a self managed superannuation fund must be a "regulated superannuation fund" and it must comply with the regulatory requirements or, if it has contravened the regulatory requirements, it must not fail the "compliance test" set out in s 42A(5). The respondent has issued a Practice Statement Law Administration (PS LA 2006/19) dealing with self managed superannuation funds and notices of non-compliance. Where there has been a contravention of one or more of the regulatory requirements, PS LA 2006/19 sets out the factors that the respondent will consider when deciding whether a notice of non-compliance should be given to (or to the trustees of) such a fund.

Should the notice of non-compliance issued by the respondent to the Fund be revoked or withdrawn ?

13. On the evidence, the Fund has contravened the following regulatory provisions of the SIS Act:

(a)

Section 36(1). The Fund has failed to lodge a regulatory return, in the approved form, for the year ended 30 June 1998. It also appears the Fund has failed to lodge regulatory returns, in the approved form, since its establishment in February 1998.

(b)

Section 34(1) and Regulation 4.09. The trustees of the Fund have not formulated and given effect to an investment strategy that has regard to all the circumstances of the Fund.

(c)

Section 111(1). The trustees of the Fund have failed to keep accounting records that correctly record and explain the transactions and financial position of the Fund, so as to enable its accounts, statements and returns to be properly prepared and audited.

(d)

Section 112. The trustees of the Fund have failed to ensure that certain accounts and statements (including a statement of financial position and an operating statement) have been prepared in respect of the Fund.

(e)

Section 113(1). The trustees of the Fund have failed to ensure that an appropriate auditor is appointed to give to the trustees a report, in the approved form, of the operations of the Fund.

14. From the reasons for decision (Exhibit R1, T40, pages 140-147), the respondent relied on s 42(1) of the SIS Act as a basis for issuing the notice of non-compliance. In doing this, the respondent concluded that the Fund had failed the culpability test in s 42(1A), in that all the members of the Fund were directly or indirectly knowingly concerned in, or party to, the contraventions set out in paragraph 13 above, and after considering:

(a)

the taxation consequences if the Fund were to be treated as a non-complying superannuation fund;

(b)

the seriousness of the contraventions; and

(c)

other relevant circumstances.

15. Mr H's contention was that the Fund should not be treated as a non-complying superannuation fund. A small, single member self managed superannuation fund with few transactions should not be required to comply with the regulatory requirements of the SIS Act. Such a fund should be accepted as a complying superannuation fund without having to comply with the onerous and costly obligations imposed under the SIS Act.

16. I note from the T documents that the respondent issued three Position Papers to Mr H and Ms H in relation to the Fund. In the two Position Papers dated 30 March 2006 (Exhibit R1, T29 and T30), the respondent proposed that Mr H and Ms H be disqualified from being trustees of the Fund under s 120A(3) because they were not fit and proper persons. In doing so, the respondent found that, from its establishment on 15 February 1998, the Fund was a regulated self managed superannuation fund. I am satisfied that this finding was correct and that the Fund was a self managed superannuation fund within the meaning of s 17A(2) of the SIS Act. The respondent subsequently decided not to disqualify Mr H and Ms H from being trustees of the Fund.

17. In the Position Paper dated 22 March 2007 (Exhibit R1, T38, pages 130-136), the respondent proposed that the Fund be given a notice of non-compliance because of the seriousness of the contraventions of the SIS Act in the year ended 30 June 1998. The contraventions identified in the Position Paper were those referred to in the reasons for decision to issue the notice of non-compliance (on 1 May 2007) and again were based on s 42(1) and s 42(1A) of the SIS Act. Interestingly, when Mr H requested that the decision to issue the notice of non-compliance be reconsidered, the respondent applied the provisions contained in s 42A(1) and s 42A(5) of the SIS Act. I note that s 42A(1) and s 42A(5) apply to self managed superannuation funds, whereas s 42(1) and s 42(1A) apply where the entity was not a self managed superannuation fund at any time during the year of income.

18. In my view, had s 42(1) and s 42(1A) applied to the Fund, the respondent's decision to issue a notice of non-compliance under s 40(1) would be sustainable. However, the notice was expressed to be based upon the failure of the Fund to satisfy the condition contained in s 42(1), namely that the trustees contravened regulatory provisions in the SIS Act and failed the culpability test in s 42(1A). In the circumstances, as the Fund was at all times during the year ended 30 June 1998 a self managed superannuation fund, the notice of non-compliance is on its face invalid and ineffective. Having made this finding, it is necessary for me to consider the possible application of the maxim falsa demonstratio non nocet, that is, an imperfect or inaccurate description will not vitiate an instrument. This doctrine was applied in The Administration of the Territory of Papua New Guinea v Daera Guba (1973) 130 CLR 353, where an error in the description of land in an instrument of transfer was held not to affect the validity of the transfer (see Gibbs J at 448-449). Similarly, the doctrine was applied where there was an obvious error in warrants which derived their force from statute, and where the process of issuing a warrant was described as a step in an administration process : Ousley v R (1997) 192 CLR 69 at 87.

19. In the present case, it seems clear that the respondent intended that the Fund be made non-complying. However, that intention was based upon what the respondent perceived as serious contraventions of the SIS Act and the failure by the trustees of the culpability test. Had the culpability test not been relevant to the issue of the notice, the respondent may not have viewed the contraventions as serious, may have viewed more favourably the contention put by Mr H in regard to small, single member self managed superannuation funds, and may have refrained from issuing the notice of non-compliance. Given what did take place and the incorrect basis upon which the notice of non-compliance was issued, I am of the view that the falsa demonstratio maxim does not apply in the present case. The possible application of the maxim may also be countered by the principle that a taxpayer should not be subjected to the detriment of a taxation provision unless the provision is clear and unambiguous (Anderson v Commissioner of Taxes (Vic) (1937) 57 CLR 233 at 243). If there is any ambiguity, the matter should be resolved in favour of the taxpayer (Liquor Administration Board (NSW) v Wolfe (1993) 32 NSWLR 328 at 329).

20. In PS LA 2006/19 the respondent outlines the process that is followed in deciding whether to give a self managed superannuation fund a notice of non-compliance. Paragraphs 14-16 of the Practice Statement read:

" 14. The decision will be made on a case by case basis, taking into account the individual circumstances of the case. The final decision will be the result of a process of weighing up the factors set out in paragraph 13 of this practice statement. No one factor by itself will be conclusive and the weight given to each factor will vary depending on the circumstances of the case.

15. To ensure that a fair and reasonable outcome is achieved in each case, the decision will be made in accordance with the statements and principles set out in the taxpayers' charter, compliance model, and the good decision-making model. In particular, the taxpayers' charter requires that taxpayers be treated fairly and reasonably, so a decision to give a fund a notice of non-compliance will need to be fair and reasonable in the circumstances. This is further underlined by the good decision-making model, which requires that the decision be legal, ethical, overt, sensible, timely and in accordance with the principles of natural justice.

16. A notice of non-compliance will not be given to an SMSF if the Commissioner has accepted an undertaking (including an informal arrangement) by the trustee to rectify a contravention, provided the trustee is genuinely attempting to satisfy the terms of the undertaking. " (emphasis added)

Then, in paragraph 11 of PS LA 2006/19 the respondent outlines the range of options available under the SIS Act to deal with a contravention by the trustee of a self managed superannuation fund. One of those options is to accept an enforceable undertaking from the trustee to rectify the contravention (s 262A).

21. Although it is my finding that the notice of non-compliance issued by the respondent to the trustees of the Fund is invalid and ineffective, it is nevertheless my view that it should be withdrawn. As to the ongoing status of the Fund, I have already found that the respondent's decision to issue the notice would have been sustainable, had the decision been correctly based on s 42A(1) and s 42A(5) of the SIS Act. To avoid the possible issue of a further notice of non-compliance, the trustees must ensure that the Fund becomes a complying fund. In my view, this can be achieved by the trustees undertaking to transfer and roll-over the Fund into a nominated independent fund which is a complying superannuation fund, and immediately thereafter giving effect to that undertaking.