Coronica and Commissioner of Taxation

[2021] AATA 745

(Decision by: James K)

Coronica and Commissioner of Taxation

Tribunal:
Administrative Appeals Tribunal

Member:
James K

Legislative References:
Bills of Exchange Act 1909 (Cth) - The act
Corporations Act 2001 (Cth) - The act
Estate Duty Assessment Act 1914 (Cth) - The act
Gift Duty Assessment Act 1941 (Cth) - The act
Income Tax Assessment Act 1997 - The act
Instruments Act 1958 (Vic) - The act
Superannuation Industry (Supervision) Act 1993 (Cth) - The act
Taxation Administration Act 1953 (Cth) - The act

Case References:
Australian Prudential Regulation Authority v Derstepanian - (2005) 60 ATR 518
Australian Prudential Regulation Authority v Holloway - (2000) 104 FCR 521
Aussiegolfa Pty Ltd v Federal Commissioner of Taxation - (2018) 264 FCR 587
Cooper Brooks (Wollongong) Pty Ltd v Federal Commissioner of Taxation - (1981) 147 CLR 297
Davies v Australian Securities Commission - (1995) 59 FCR 221
Federal Commissioner of Taxation v Radilo Enterprises Pty Ltd - (1997) 72 FCR 300
Fitzmaurice and Federal Commissioner of Taxation, Re - (2019) 110 ATR 440
Hughes and Vale Pty Ltd v The State of New South Wales (No 2) - (1955) 93 CLR 127
JNVQ and Commissioner of Taxation, Re - [2009] AATA 522 (14 July 2009)
Montgomery Wools Pty Ltd as trustee for Montgomery Wools Pty Ltd Super Fund and Commissioner of Taxation, Re - [2012] AATA 61 (6 February 2012)
Normandy Finance Pty Ltd v Commissioner of Taxation - (2015) 333 ALR 339
Pabian Park Pty Ltd and Commissioner of Taxation, Re - [2012] AATA 375
Preuss and Australian Prudential Regulation Authority, Re - (2005) 60 ATR 113
Rich v Australian Securities and Investments Commission - (2004) 220 CLR 129
Shail Superannuation Fund and Commissioner of Taxation, Re - [2011] AATA 940
Thompson and Commissioner of Taxation, Re - [2014] AATA 339 (29 May 2014)
The Taxpayer and Commissioner of Taxation, Re - (2002) 51 ATR 1192
The Trustee for the R Ali Superannuation Fund and Commissioner of Taxation, Re - [2012] AATA 44 (30 January 2012)
Vivian (Deputy Commissioner of Taxation (Superannuation)) v Fitzgeralds - (2007) 51 ATR 834

Decision date: 1 April 2021

Melbourne

Decision by:
James K

REASONS FOR DECISION

Senior Member K James

1. This matter concerns two applications under section 344(8) of the Superannuation Industry (Supervision) Act 1993 (the Act) to set aside the Respondent's decision made on 5 September 2018 and affirmed internally on 23 November 2018:

(a)
give the Trustees of the G Coronica Superannuation Fund (the Fund) a Notice of non-compliance for the 2009 income year under section 40(1) of the Act (the Non-Compliance decision); [1] and
(b)
disqualify Mr Giuseppe Coronica, the First Applicant, from acting as a trustee of a superannuation Fund under sections 126A(1), (3) of the Act (the Disqualification decision). [2]

2. Counsel for the Commissioner submitted in closing submissions that there were 45 relevant contraventions of the Act. In the important 2009 financial year, it was put to the Tribunal there were contraventions of eight sections of the Act on seventeen separate occasions. The 45 alleged contraventions require consideration as to whether they justify the decisions made by the Commissioner in respect to the Fund's compliance, and to Mr Coronica's ongoing eligibility to act as a trustee of his or any other superannuation Fund.

3. The Applicants' Counsel submitted to the effect that the alleged breaches did not occur, and that the Commissioner had incorrectly applied the relevant law to the fact situation underlying the Commissioner's determinations.

LEGISLATIVE FRAMEWORK

4. There is a complex framework of sections of the Act relevant to this review.

5. A key concept of the Act was that a fund that elects to be a regulated fund and complies with the requirements of the Act it becomes eligible for concessional tax treatment contained in the Income Tax Assessment Act 1997.[3]

6. Part 5 of the Act has the object of providing for a system of notices about complying fund status and to provide for those notices to be used to determine complying fund status for tax purposes.[4]

7. In Division 2 of Part 5 of the Act, section 40(1)(a) provides that the Respondent may give written notice to a trustee stating that the fund is not a complying superannuation fund.

8. Subsection 42A(5)(a) of the Act provides that a fund will not be a complying fund if any of its trustees contravene any regulatory provisions of the Act during the year of income. Section 39 of the Act relevantly states that for the purposes of Division 2 'a contravention of a regulatory provision is to be ignored unless the contravention is;

(a)
an offence; or
(b)
a contravention of a civil penalty provision.

9. Relevant regulatory provisions that are either an offence or a civil penalty provisions include:

(a)
section 35A — Accounting records;
(b)
section 62 — Sole Purpose Test;
(c)
section 65 — Lending to members of regulated superannuation fund prohibited;
(d)
section 66 — Acquisitions of certain assets from members of regulated superannuation funds prohibited; and
(e)
Part 8 of the Act — In?house asset rules applying to regulated superannuation funds.

10. These provisions are described further in paragraphs below.

11. Section 42A(5)(b) of the Act provides:

(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 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.

12. Part 4 of the Act concerns accounts, statements and audits of superannuation entities. Relevantly section 35A(1) of the Act as in force during 2009 financial year provided that each trustee of a Self-Managed Superannuation Fund (SMSF) must ensure that:

(a)
accounting records that correctly record and explain the transactions and financial position of the entity are kept; and
(b)
...
(c)
... the accounting records of the entity are kept in a way that enables the following to be prepared:

(i)
the accounts and statements of the entity referred to in section 35B;
(ii)
the returns of the entity referred to in section 35D; and

(d)
the accounting records of the entity are kept in a way that enables those accounts, statements and returns to be conveniently and properly audited in accordance with this Act.

13. Part 7 of the Act sets out 'special rules which apply only to a regulated superannuation fund.'[5]

14. Section 62 of the Act, under the heading 'Sole Purpose Test', provides that each trustee of a regulated fund must ensure that the fund is maintained for one or more core purposes, or for one or more core purposes and for one or more ancillary purposes. These purposes essentially relate to the provision of retirement, death or incapacity benefits.

15. Section 65(1) of the Act provides that a trustee of a regulated fund must not:

(a)
lend money of the fund to:

(i)
a member of the Fund; or
(ii)
...

(b)
give any other financial assistance using the resources of the fund to:

(i)
a member of the fund...[6]

16. Section 66(1) of the Act prohibits a trustee from intentionally acquiring an asset from a member. Section 66(2) of the Act excludes certain acquisitions from the prohibition contained in subsection (1), being the acquisition of listed shares and business real property, if acquired at market value. Section 66(2A) excludes the acquisitions of certain 'in-house' assets that are acquired at market value where the acquisition would not breach the level of in-house assets permitted by Part 8 of the Act.

17. Part 8 of the Act provides rules which limit the proportion of 'in-house assets' that a regulated superannuation fund can hold. Section 70(1) provides, under the heading 'basic meaning', that an in-house asset of a superannuation fund 'is a loan to, or an investment in, a related party of the fund.' Section 10 of the Act defines 'related party' to include a member of a fund and a Part 8 associate of a fund. Section 70B states that for the purposes of Part 8 a company that is sufficiently influenced by or in which majority voting interests is held by an individual member of the fund is a Part 8 associate of that member.

18. Section 71(1)(f) of the Act proscribes that the basic meaning of an in-house in section 71 does not included an asset which the Regulator[7] by legislative instrument (or regulation) determines not to be an in-house asset. The relevant regulation in these matters is Division 13.3A of the Superannuation Industry (Supervision) Regulations 1994 (the Regulations). This Regulation permits the Part 8 Associate entity (a company or trust) to own real property used for business purposes and also allows business real property to be leased to members and employer sponsors. It provides that other assets may be owned by the Part 8 associated entity, provided certain conditions apply. One of the conditions contained in sub regulation 13.22C(f) of the Regulation is that the Part 8 associated entity does not hold an interest in or maintain a loan to another entity.[8]

19. Section 83(2) of the Act provides that, if the market value ratio of the fund's in-house assets exceeds 5%, the trustee must not acquire an in-house asset. If the ratio of in-house assets is below 5%, section 83(3) prohibits the trustee from acquiring further in-house assets if the acquisition would result in the fund's in-house assets exceeding 5%.

20. Section 82 provides if at 30 June of any year the market value ratio of a fund's in-house assets exceeds 5%, the trustees of the fund must prepare a written plan setting out the steps the trustees propose to take to ensure that one or more of the in-house assets is disposed of to ensure that at the end of that next year the 5% rule is complied with. They are also required to carry out that plan.

21. Section 85 of the Act is a prohibition of an avoidance scheme that would result, or be likely to result, in the artificial reduction in the market value ratio of the funds in-house assets.

22. In both section 66 and Part 8 of the Act, there is a requirement that to fit within the exclusions to those provisions related party transactions must take place at arm's length as defined in section 10 of the Act.

23. Part 15 of the Act sets out rules about the eligibility of trustees of superannuation entities. Section 126A(1) of the Act provides that a Regulator may disqualify an individual from being a trustee if:

(a)
the individual contravenes the Act; and
(b)
the nature and seriousness of the contravention or contraventions, or the number of contraventions, provides grounds for disqualifying the individual.

24. Section 126A(3) of the Act provides that the Regulator may disqualify an individual if satisfied that the individual is otherwise not a fit and proper to be a trustee.

ISSUES

25. The primary issue before the Tribunal in application number 2018/7160 is whether the notice issued under section 40(1)(a) of the Act, to give the trustees of the Fund a Notice of non-compliance for the 2008-2009 income year, on 5 September 2018 and affirmed internally on 23 November 2018, should be set aside. Such a notice is to be upheld where the Fund fails to demonstrate that it is a complying fund and where the discretion under section 42A(5)(b) of the Act ought not be exercised.

26. The primary issue before the Tribunal in application number 2018/7159 is whether to set aside the decision to disqualify Mr Coronica from acting as a trustee of a superannuation fund under sections 126A(1) and (3) of the Act.

27. Consistent with the submissions of the parties, these reasons follow a structure of what in fact happened, how the Act applied to those findings, and finally, what is the correct and preferable decision on those facts.

CONTENTIONS OF THE PARTIES

28. As mentioned above, in relation to the Non-Compliance decision, the Commissioner submitted there were 17 contraventions across eight sections of the Act in the 2009 financial year.

29. There are two pivotal factual matters to the 2009 contraventions. The first concerns the Fund's acquisition on or around 7 April 2009 from Mr Coronica of all the shares in a company G Coronica Nominees Pty Ltd (Nominees) for consideration of $100,000. These matters are considered below under the heading 'Acquisition of Nominees'. The Commissioner submitted the market value was a much higher figure and there were contraventions of section 66 and Part 8 of the Act, the in-house asset rules.

30. Mr Coronica's evidence was that he valued the shares at $100,000 and it was submitted that this was a valuation of 'market value'.[9] It was further submitted that if the market value was $100,000 then the acquisition by Nominees did not contravene the Act. It was also submitted that in the alternative Nominees was not an in-house asset as defined.[10]

31. To support this submission, the Tribunal was encouraged to accept the following assertions:

(a)
Mr Coronica was an experienced accountant and tax agent;[11]
(b)
Mr Coronica was an experienced valuer;[12]
(c)
Mr Coronica interpreted and applied an Australian Taxation Office (ATO) publication, particularly 'The ATO's View on the Meaning of "In-House Assets" – New Draft Determination',[13] suggesting it was possible to consider investments in related private companies;[14]
(d)
Having read Regulation 13.22C of the Regulations, and an article written by legal practitioners in 'CLEARDOCS', an online service, Mr Coronica believed and had good reason to believe, Nominees was not an in-house asset;[15]
(e)
His valuation consequentially was not influenced by the in-house asset rules
(f)
The valuation was in accordance with Accounting Standard AASB 1033;[16]
(g)
That the Fund had been audited in the relevant years by an approved auditor and was given 'an unqualified opinion that the Fund has complied with the requirements of the Act and the Regulations'; and[17]
(h)
The acquisition was to provide for his retirement benefits in accordance with the objects of the Act.[18]

32. The second group of factual matters, in relation to the Non-Compliance decision, concern the operation of the Fund, its accounting practices and, whether the trustees complied with the sections of the Act outlined above namely: section 35A (Accounting records), section 62 (the sole purpose test), and section 65 (prohibition against lending assets of the fund to members). These matters are considered below under the heading 'Issues Concerned with the Operation of the Fund'.[19]

33. At the centre of Mr Coronica's explanation of his compliance with the Act was his use of a 'suspense account' which was submitted to be:

(a)
a 'simplified record keeping for the Fund';[20]
(b)
maintained in accordance with the legislative intention of the Act;[21]
(c)
compliant with the Commissioner's published practice for recording member contributions;[22]
(d)
in conjunction with the Fund's other records, explained the transactions and financial position of the Fund;[23]
(e)
at any point in time, the asset position of the Fund could be distinguished from the asset position of Mr Coronica;[24] and
(f)
was approved in the unqualified opinion of an approved auditor.[25]

34. Submissions from the Respondent included;

(a)
Mr Coronica took a primary, if not exclusive, role of managing the fund's investment and accounts during the relevant period;[26]
(b)
As a tax agent with over 50 years' experience as a Certified Practising Accountant, Mr Coronica knew, or should have known that the acquisition by the fund of the shares in Nominees would contravene the Act;[27]
(c)
That Mr Coronica continued to maintain accounts in a manner that mixed fund assets with his own assets;[28]
(d)
That the accounting 'demonstrates unequivocally that Mr Coronica maintained the Fund for his own personal benefit;[29]
(e)
That the payment of fund assets to Mr Coronica at a time when he was already indebted to the fund established that the fund was being maintained for a purpose other than the provision of retirement benefits to members -namely as an ongoing source of finance for Mr Coronica;[30]
(f)
That inaccuracies and inconsistencies identified in his accounts 'disclose at the very least, a serious lack of competency on the part of Mr Coronica. The seriousness of the errors is magnified by the fact that Mr Coronica ... had more than 50 years' experience as a CPA';[31]
(g)
That in regard to his interpretation of a Regulation his explanation 'beggars' belief' for 'a tax agent of 50 years standing;[32]
(h)
That the purported suspense account was not a 'suspense account as that term is commonly understood';[33]
(i)
That "Mr Coronica's practice of undertaking a global reconciliation of fund assets paid to or received by him personally against payments purportedly made by him on behalf of the Fund did not comply with his obligations as a trustee and resulted in records for the fund which comprehensively failed to meet the requirements of section 35(1) and 35AE of the SIS Act"; [34]
(j)
Mr Coronica knowingly contravened subsection 65(1) of the Act by loaning fund assets to himself, or alternatively by providing himself with financial assistance using resources of the fund, and that the amounts were substantial;[35] and
(k)
That Mr Coronica used 'the assets of the Fund as an undifferentiated source of personal funding, in clear contravention of section 62(1) of the SIS Act'.[36]

BACKGROUND

35. Mr Coronica started his accounting practice as a sole trader in 1970 and became registered tax agent from that time. In 1974 he incorporated 'G Coronica & Associates Proprietary', (G Coronica Pty) an unlimited liability company carrying on the accountancy practice under the business name 'G Coronica & Associates'. On 16 May 1975,[37] G Coronica Pty settled a deed establishing the Fund for selected employees of that company in compliance with the then Occupational Superannuation Standards Act 1987. On 21 November 1994, G Coronica Pty and the trustees executed a replacement deed in compliance with the enactment of the Act in 1993.

36. At all material times, Mr Coronica has been the only member with an account balance. In accordance with the SMSF rules, Mr Coronica has also always been a trustee of the Fund. The other trustee at all material times was Mr Coronica's personal assistant who had a nil account balance in the Fund.

37. The evidence before the Tribunal is that up until 1 July 2008, Mr Coronica had been: the trustee making all the important investment decisions,[38] the sole beneficiary with an account balance, professional accountant, investment advisor and tax agent to the Fund, and, importantly, auditor signing off on the Fund's compliance with its deed and the Act.[39] The only change of importance in the 2009 financial year being that Mr Coronica was replaced as auditor by his 25-year-old daughter,[40] who at the time worked for a 'public company'[41] and whose address on the audit certificate was G Coronica Pty's Post Office Box.[42] The quality of her audit opinions is discussed at paragraphs 202–207 and 291–294 below.

38. As a witness Mr Coronica demonstrated that he was a professional that had a passion for his work and pride in what he had achieved. He displayed a confidence in his own professional experience, capability and competence.

39. When questioned about whether he sought advice from anyone else (about the Fund acquiring shares in Nominees from himself) he answered:

'No. basically, I'm a, you know, one-man band, basically. I try to take my own views, you know, and advice on matters. I do a lot of reading'.[43]

40. The Tribunal finds, as discussed below, his opinions and or conclusions on a number of provisions of the Act and Regulations, ATO rulings, ATO Interpretive Decisions (ATOID), ATO advice guidelines, Minutes of the ATO GAAR Panel, Australia Prudential Regulatory Authority (APRA) Circulars and an Accounting Standard (collectively, the Regulators' Guidance Documents), are not ones that an accountant and tax agent of his experience should reasonably be expected to form.[44] His misplaced opinion of his capability and competence together with a governance model where there was no opportunity for an independent review of his decisions, was the major contributor to the compliance difficulties the subject of these applications.

41. The Tribunal accepts Mr Coronica had experience in giving valuations as evidenced by his engagement, relevantly, in June 2010, by the administrators of Timbercorp Limited (KordaMentha) to perform an investigation into that company's financial reporting with attention to its reporting of asset valuations. The engagement letter and opinion were attachments to his witness statement.[45]

42. It is difficult to reconcile the professional acumen of the author of that report with Mr Coronica expressing his professional opinions as a witness. In his KordaMentha opinion, he expressed expertise on the duties of directors, responsible managers and auditors, and opined that they were in breach of their duties to follow professional accounting and auditing standards in that matter.

43. This is in contrast with his evidence that he had little regard to the Fund's Trust Deed and the provisions of the Act prescribing duties of trustees. He did not satisfactorily explain why the Fund, contrary to provisions of the deed and the Act, advanced funds to him and received extended credit from him. He could not explain why he banked in his own account significant amounts that were paid to the Fund, contrary to provision in the Fund deed and trustee covenants in the Act, and why records of decisions of the trustee were not recorded as required by the deed and the Act. He did not consider himself to be bound by the covenant in section 52(2) of the Act (which was supported in clause 12.4 of the Trust Deed) to keep assets of the Fund separate from his personal assets until his new independent Fund auditor pointed out that the SIS Regulations had been altered in the 2013 financial year to make intentional or reckless non-compliance with the requirement an offence.[46] As will be discussed in some detail below, the provisions of the deed and the Act in relation to proper accounting were also not adhered to.

44. In re-examination, Mr Coronica was asked to explain why the Fund's 30 June 2009 tax return did not disclose that, at year end, the Fund owed him $264,243.25 (interest free and unsecured) as recorded in the Fund's 'multi-column spread sheet'[47] which was in the nature of a trail balance. In this re-examination, he explained the interest free, undocumented, and at-call liability to him had been set off against the Fund's interest earning, fixed-term, secured loans to third parties.[48] The same offset appears in the Fund's audited financial statements.[49] This accounting treatment of assets and liabilities is at odds with the provisions of the deed and the Act. It also stands in contrast with his expert KordaMentha opinion of the duties of the Timbercorp directors, officers and auditors, to accurately record the value of assets in financial accounts. The Tribunal finds this very questionable offset destroys any suggestion that Mr Coronica was unaware that his management of the Fund, including his use of a member loan account in which its acquisition of Nominees was recorded, contravened the Act. The Tribunal finds that this offset from what was recorded in his multi-column worksheet (in the form of a trail balance) was an attempt to disguise the Fund's indebtedness to a member, from the Commissioner and/or the Fund's auditor.[50]

45. It is also noted that Mr Coronica conceded that he did not return the capital gain on the sale of Nominees in his personal 2009 tax return, as he should have.[51] While he brushed this aside with a comment that he had carried forward capital losses, as an experienced accountant and registered tax agent he should have known better. It is evidence of an attitude that accurate compliance in his own affairs had a low priority.

46. He also gave evidence that his use of a 'suspense account' to record advances to and from him and the Fund was an acceptable accounting practice sanctioned in documents issued by both APRA and the Commissioner in their roles as regulators of superannuation funds. In paragraphs 192–196 below the Tribunal finds these opinions to be without any merit.

47. Mr Coronica also gave evidence that he 'saw an ATO circular on the internet', entitled 'Private Company Dividends received by a superannuation fund', which 'suggested it was possible for a superannuation fund acquire [sic] the shares in a private company'.[52] The circular was an attachment to his witness statement. The sub-heading to the document is 'Supporting document requirements for private rulings'.

48. On the Tribunal's reading of the document an experienced and competent tax practitioner would understand that the document had the purpose of indicating to trustees, and their tax agents, that the ATO was extremely concerned about superannuation funds receiving dividends from private companies closely associated with SMSF members. Importantly, it telegraphed the hurdles the ATO placed before trustees if they acquired related private company shares. These include questions around the history of dividends, the relationship between members/trustees/directors, who the trustees acquired the shares from and significantly '[t]he value of the shares at the time of...sale, the basis of the valuation and who performed the valuation'. Having exhibited the document to his witness statement, Mr Coronica did not explain why such a document encouraged, rather than discouraged, him to sell his shares in Nominees to the Fund and perform the valuation himself, especially in the Fund's governance arrangement then in place.

49. There were many examples of Mr Coronica bending positions to be what he wanted them to be, not what they were. An example was his interpretation of his attendance at an ATO GAAR Panel meeting. In cross-examination his evidence was the ATO:

GAAR Panel knocked back the Commissioner's application under the anti-avoidance rule. If you look at the last sentence, it suggested that basically 75(a)(e) would be applied. In other words, the GAAR Panel didn't accept the Commissioner's submission that there was any Part 4A arrangement, and there wasn't any dividend stripping.[53]

50. And further: his exchange with Counsel continued

Mr Coronica, what it says at the end of that letter is:
The Panel concluded that primarily the breaches of the SIS Act should be investigated further. However, a determination under section 177E(a)(5) should be made, with arguments included in the ATO team's position to that effect, as an alternative
?--Yes, it's an alternative – has never been made. You know what's - - -
But Mr Coronica, the position hasn't been knocked back, has it? The GAAR Panel decided that it did fall within – it was appropriate to make a determination? --No. 177(5)(a), all the section say to treat the dividends going back the last four or five years just on the G. Coronica Nominees. And the ATO never did – to cancel that as a dividend, the Commissioner didn't do the determination, because that would not have been successful, because the company was still continuing and making money and paid tax. So if they would have cancelled the franking credit, which was a small amount anyway, they probably would not have been successful. And I asked the auditing, 'Why don't you go ahead and do a determination?' They said, you know, 'We don't have to follow the advice of the GAAR Panel'.[54]

51. Another example of Mr Coronica bending positions to be what he wanted it to be, was his evidence that the loan to him from the Fund of $248,842.25 as at 30 June 2008 did not need to be disclosed to the incoming auditor (his daughter) because it was 'immediately repaid'.[55] As discussed below, his indebtedness to the Fund was increased to around $400,000 before being extinguished late in the 2009 financial year.[56] Similarly, as discussed at paragraph 237 below, the credit loan from him at end of the 2009 financial year was not converted to a member contribution at the beginning of the next financial year, as was his evidence. It was repaid from funds generated by the sale of listed shares and income receipts.[57] A credit advanced from him at the end of the 2011 financial year was again not converted into a member contribution in the 2011–12 financial year, as his evidence and explanations inferred,[58] but offset against Fund's loan repayments that were banked in his personal account, early in that financial year.[59]

52. The Tribunal emphasises that the major root cause of the Fund's compliance problems especially in the 2009 and 2012 financial years was the sustained practice of Mr Coronica banking receipts of the Fund, for both principal and interest payments to the Fund, in his personal account in contravention to the covenant in section 52 of the Act and clause 12 of the Trust Deed as discussed above.

53. Mr Coronica's constant assertion was that maintaining a running loan account (which he called a suspense account) between himself and the Fund was both normal and an acceptable practice. Trustees that have the discipline of ensuring that all receipts and payments of a fund are made through the fund's bank accounts should have source accounting records that comply with the Act and will not cause situations where members have loans over extended periods to or from the fund.

54. In a similar example, Mr Coronica sought to explain his decision to acquire Nominees after reading an article in a tax service 'CLEARDOCS' dealing with regulation 13.22C of the Regulations (the Article), which proscribed certain assets as being excluded from being in-house assets as provided in section 71(1)(j) of the Act.

55. The regulation enables an SMSF to jointly invest with employer sponsors and members provided that 'certain conditions'[60] are maintained. These conditions exclude an investment in a private company if the company is a party to a lease, or a lease arrangement, with a related party,[61] and the company has outstanding borrowings. Nominees did not hold any of these excluded assets or liabilities.

56. Regulation 13.22C goes on to state a further condition that:

(f)
the assets of the company...do not include:

(i)
an interest in another entity; or
(ii)
a loan to another entity, unless the loan is a deposit with an authorised deposit?taking institution within the meaning of the Banking Act 1959; or
(iii)
an asset over, or in relation to, which there is a charge; or
(iv)
an asset that was acquired from a related party of the superannuation fund after 11 August 1999, unless the asset was business real property acquired at market value; or
(v)
an asset that had been at any time (unless it was business real property acquired by the company, or a trustee of the unit trust, at market value) an asset of a related party of the superannuation fund since the later of:

(A)
the end of 11 August 1999; and
(B)
the day 3 years before the day on which the fund first acquired an interest in the company or unit trust.

57. In his amended witness statement Mr Coronica stated:

I recall reading an article about in-house assets on the internet. Exhibit GC-5B is a copy of that article. It stated 'Further, an asset will be deemed not to be an in-house asset (regulation 13.22C) if that asset had been at any time (unless it was business real property acquired by the company, or a trustee of the unit trust, at market value) an asset of a related party of the SMSF since the later of:

(a)
the end of 11 August 1999; and
(b)
the day 3 years before the day on which the fund first acquired an interest in the company or unit trust.

I thought about whether the shares in G Coronica Nominees would be an in-house asset of my fund. I formed the view that the shares will be deemed not be an in-house asset under that rule because the shares had been an asset of a related party of the fund (me) in the preceding 3 years.[62]

58. The Tribunal accepts that the Article is poorly expressed as to how regulation 13.22C of the Regulations operates. There is an obvious error in the extract of Article being the paraphrasing of the operation of the regulation to be that

'...an asset [shares in Nominees] will be deemed not to be an in-house asset (regulation 13.22C) if that asset [shares in Nominees rather than an asset held by Nominees] had been ... an asset of a related party of an SMSF since the day 3 years before the day on which the fund first acquired an interest in the company...'

59. Taken literally that has the meaning all shares acquired from a member in a related private company would fall within the exemption, as by definition, the shares must have been acquired by the member before they were sold to the fund. The day before they were sold will by definition be a day three years before the shares were acquired by the fund. That being the case the preceding clauses in the Regulation would be of no effect.[63]

60. In his cross-examination Mr Coronica repeated that he read and considered the Regulation as well as the article.[64] His interpretation was that he came within subparagraph (v) of Regulation 13.22C(2)(f)(ii). His answer to a question:

Why did you not believe it was an in-house asset?---Because basically I found the transaction was covered under regulation 33(a) on section 32(c), where it said basically if you buy an asset from a related party and that related party has got an asset within its structure which has been an asset of that party within a period of three years, then you – it's not an in-house asset.
Okay. And did you check the regulations when you formed that view?---Yes, I checked - - -.[65]

61. Shortly thereafter Mr Coronica added, after reading to the Tribunal regulation 13.22C(2)(v) of the Regulations:

The related party is me, the company is G. Coronica Nominees and the asset it refer is to the loan of 175. If I go back three years that was around that amount they're owing to the company and I (indistinct) 13.22C.[66]

This explanation is significantly different to the statement in his witness statement, which was based on his shareholding in Nominees, not the Nominees loan to him.

62. His answer to a separate question as to whether the assets of the company included a loan (per regulation 13.22C(2)(f)(ii) of the Regulations) was incomprehensible to the Tribunal.[67]

63. In answer to a question: '"The assets of a company do not include a loan to another entity", why didn't that cover the asset of the company which was a lone to you?', drew the response:

Because it – under 4 it got the word ["or"], in other words any of those one there that apply, that was – in the relation you see under 4 - - -
...
That's called ["or"]. So the way I read that is because of the ["or", basically the "or" gives alternative,] in other words, if I met this condition of (v) then that's not really a related party [asset because the loan was, of] G. Coronica Nominees for a period of three years, that's the way I've read that.[68]

64. In re-examination, Counsel for Mr Coronica stepped him through what he thought about the application of regulation 13.22C of the Regulations. His explanation as to how he read the regulation and why it clarified that Nominees was not an in-house asset was not only quite different to his witness statement but also unconvincing. Mr Coronica's evidence was that if the company satisfied any one of subparagraphs (i) to (v), its acquisition was exempted by the Regulations. He explained this in his re-examination:

So you think - did you think (v) applied in your favour?---That's right.
So did you think you needed to satisfy any of the other, (i) to - - -?---No, I would say that it only need to certify the one.
Why do you only need to satisfy the one?---Because it's basically in relation to asset gives alternatives and by giving - - -
Where does it give you - what indicates to you that it's alternatives?---By - by - after each one there's 'or'. In other words, it say any of those.
So you thought that if you - if you satisfied any of those ?---Yes.
- - - you would satisfy the provision?---That's - that's correct.
So did you think that you needed to satisfy all of them?---No.
You said you thought (v) was the one that was valid to you?---That's right, and - - -
So if we read the opening words of (f) and link it to (v) what does it say? (f)?
So the opening words of (f)?---'(f) The assets of the company do not include.'
And in terms of (v)?---'An asset that had been at any time; an asset of a related party'.
Since - okay?---Of the superannuation fund.
Yes?---'Since the later of the end of 11 August 1999 and the date three years before the day on which the fund first acquired and interest in the company or unit trust.'
So did the assets of the company include any assets that have been at any time an asset of a related party?---Well, the - - -
What were the assets of the company at the time?---The asset of the company was the shares and - and the related party loan, and then the - - -
Were any of those assets an asset of a related party of the fund at any time? Were the shares ever an asset of a related party?---Yes, it was. The - the shares were - belonged to me so I was a related party of the fund.
Do you mean the shares held by the company? Were they ever in your own name?---Yes, they were in my name. Therefore those - I was the related party, and the asset of that related party was - was that loan of one - an asset that there'd been at any time.
So paragraph (f), the opening words say, 'The assets of the company do not include an asset that had been at any time - - -'?---In other words, it doesn't include - it say that it doesn't include all the - - -
Okay, so that's the requirement. That - - -?---In my case it - it did include an asset that was an asset for more than three years.[69]

65. After a further series of questions with confusing responses on how regulation 13C(2)(f)(v) of the Regulations applied to the acquisition of Nominees, Mr Coronica was asked:

So, okay, so the shares of the company held - - -?---Yes.
- - - they had been with the company for more than three years? Is that what you're saying?---No, no. No, I mean that you - you buy the company shares and - and basically in the company there's an asset that, that asset has been in the - that loan of 175, that asset that's been an asset of the company for more than three year and that asset is an asset to a related party within that section. In other words, what it's saying is, if a company had an asset which the asset was a loan to - to a related party, that - that it's not treated within the in house asset, or that's the way I - I understood that.
Okay. So you say the loan - - -?---The loan was - the loan was an asset of the - of the company for more than three years.
So that satisfy paragraph (v), does it?---That - that's the way I understood it, and then there was the other - - -
And therefore that satisfies paragraph (f)?---Yes. Yes, and that would satisfy that, and then there was the other article there of Cleardocs, something similar.
Okay. Okay ,so let's just stop here?---That's the one that's - I read that.
So you've just told us you read this regulation and you thought it was satisfied on that basis that you've just explained?---That's right.[70]

66. This interpretation of regulation 13.22C of the Regulations was contrary to his explanation in his witness statement and difficult to follow and understand. A reading of the Regulation free of confusion from the CLEARDOCS article is that all of the conditions in subparagraph (f) of regulation 13.22C(2) need to be satisfied for the exemption in the Regulation from being an in-house asset to apply. The shares are not an in-house asset of the Fund if, when the shares are acquired, the assets of the company do not include assets listed from (i) to (v). Mr Coronica's interpretation in the first instance misses the significance of the word 'not' before 'include'. Nominees did not satisfy subclause (ii) due to its loan to Mr Coronica being a loan to another entity.

67. Subparagraph (v) of regulation 13.22C(2)(f) of the Regulations requires Nominees to not have acquired an asset, other than business property, that has been owned by a related party of the Fund in the previous three years (not including any period of ownership prior to 11 August 1999). The clause does not apply to the loan to Mr Coronica as it was never an asset acquired from a related party (Mr Coronica).

68. Mr Coronica's reasoning that regulation 13.22C(2)(f)(v) of the Regulations applied because at the relevant time Nominees had held a Division 7A loan to him, for more than 3 years, is factually incorrect.[71] The loan agreement is dated 1 July 2008. As the Fund acquired the shares on 7 April 2009, the asset, even on Mr Coronica's reading of the Regulation, had not been held for more than three years.[72] In summary, the Tribunal rejects the submission made that Mr Coronica made a reasonable mistake 'about the application of the exceptions to the in-house asset rules'.[73] He was held out to be an experienced accountant with over 50 years' experience. His interpretation of the Regulation to the facts and circumstances of the acquisition of Nominees were confused and demonstrated a lack of thoroughness, if not competence, for an accountant with his experience.

69. Mr Coronica also had great difficulty in advancing a reason as to why the Fund would want to acquire Nominees. At the time of purchase, it was a passive investment company in the nature of a cash box (see paragraphs 88–91 below). The Fund held interests in Futuris, a listed company, which fell within the exclusion to the in-house asset rules and section 66 of the Act. It held other interests in suspended listed entities. Mr Coronica's evidence was that those investments were not a priority to him. Other than those securities, the remaining cash had recently been lent to him on 'Division 7A' terms.

70. Before making any discount the loan to Mr Coronica made up 82.5% of the net assets of the company. If the loan is valued at the range adopted by Mr Coronica, the percentage of value to net assets is in the range 62.5% to 71.5%.

71. It was not explained why a passive investment company or 'cash box' entity was a more attractive investment opportunity to investing the cash in the Fund. Mr Coronica conceded that the 'franking credits' were 'also' an attraction.[74]

72. The Tribunal finds that when valuing Nominees, Mr Coronica was conscious of the requirement that the value had to comply with the 5% ratio of the in-house asset rules. At or around the valuation time, Mr Coronica was aware that the bond market was trading at significant discounts. From the charts attached to his witness statement, in April 2009 the bond market was at or around its depth. The Tribunal accepts that Mr Coronica in performing that valuation was influenced by his understanding of accounting standard AASB 1033 and a view that he could rely on the bond market to form a value of his recent borrowing from Nominees. Both views were mistaken.

73. The Tribunal finds that for an experienced tax agent and accountant Mr Coronica's professional opinions and competence were not at a level that would be expected from a professional with his experience. The incestuous governance arrangements were a dangerous mix with that level of challenged competence.

Did the Acquisition of Nominees Contravene the Act?

74. With regard to the acquisition of the shares in Nominees, the Commissioner alleged the shares had a market value much higher than the consideration (as valued by Mr Coronica) and that if the 'market value' was substituted as proscribed by the Act, the acquisition contravened sections 66 and section 83 of the Act.

75. Section 66(1) of the Act, which, as referred to above, prohibits a trustee intentionally acquiring an asset from a related party of the Fund subject to the exceptions contained in later subsections. The second related contravention relates to the in-house asset rules in Part 8 of the Act and specifically section 83 restricting the acquisition of in-house assets if the ratio of in-house assets to total assets exceeds 5%.

Was the Acquisition of Nominees at Arm's-length?

76. Central to the operation of both provisions, is a factual question as to what was the 'market value', as defined, of Nominees. Section 10 of the Act defines 'market value', in relation to an asset, as 'the amount a willing buyer of the asset could reasonably be expected to pay to acquire the asset from a willing seller if the following assumptions were made':

(a)
That the buyer and sell dealt with each other at arm's length in relation to the sale;
(b)
That the sale occurred after proper marketing of the asset; and
(c)
That the buyer and the seller acted knowledgeably and prudentially in relation to the sale.

77. The Tribunal notes that this definition of 'market value' is an objective measure of what a 'willing buyer' (the trustees of the Fund) could 'reasonably' be expected to pay a 'willing seller' (Mr Coronica, the only member of the Fund with an account balance). The objective nature of the value is reinforced by the three added objective assumptions that must be applied in reaching the assessment of value.

78. The Tribunal notes that the definition does not countenance a value a buyer with a tax profile different to the actual concessionally taxed taxpayer, the trustee of a related SMSF, would pay when acquiring that asset (with any associated liability). How assets of another type or class are valued is also of limited relevance to the definition.

79. The definition also requires an examination of whether the vendor would sell at that price to an arm's length purchaser not holding the assets for their sole benefit.

80. Mr Coronica defended the valuation primarily on the basis that the market value of the net assets of Nominees should be discounted on two bases. One was a tax adjustment, the other related to the value of Nominees Division 7A loan to Mr Coronica.

The Tax Adjustment

81. Mr Coronica's evidence was:

Then I had to adjust for tax:

(a)
firstly, I looked at the financial statements of the company for the 2009 year. At 7 April 2009, the G C Nominees had retained profits of $410,169.02 (before it paid the $35,000 dividend in 2009) (see Fund T Document 48 at page 314 and Supplementary T Document 2 at pages 6 and 8);
(b)
secondly, the historical cost of the company's investments as at 30 June 2008 of $204,000 (see Fund T Document 48 at page 313). Those investments, on my analysis above, were only worth $42,000 in April 2009. The company had an unrealised loss of $162,000 on those investments. If those losses were realised, they would reduce the company's retained profits to $248,169.02;
(c)
thirdly, a buyer who bought GC Nominees would have to inherit those retained profits. If the company paid out franked dividends from those retained profits, they would get 30% franking credit on those dividends. However, I assumed that the purchaser would not be a low income earner and would be on a marginal tax rate of 45%. This meant the purchaser would be subject to 15% ' top-up' tax on the dividend. That is, the purchaser would be subject to a tax detriment equal to 15% of the company's retained profits. This equals $37,225.35.

Subtracting the tax detriment away from the asset values above, I obtained net values for the company of $74,996.07 and $109,996.07. I adopted a $100,000 value from that range.
This valuation takes into account the franking credit balance in the company. Otherwise, if it assumed the retained profits were paid out as unfranked dividends, the purchaser's top-up tax would be 45%. I have assumed that the retained profits would be paid out as franked dividends, using up the company's franking credit balance, so the purchaser is paying 15% top up tax.[75]

82. Complying superannuation funds do not pay tax at the maximum rate (the top up tax), as the valuation adjustment assumes. To the contrary, complying funds get a refund (credit) of tax as their tax rate is less than the franking credit attached to the dividend paid by the company. In accordance with the definition of 'market value', 'reasonable' willing buyers would not seek discounts for a non-existent future tax liability, especially when there are in fact valuable credits. To reinforce this, the definition requires an objective assessment of proper marketing of the asset, and the buyer and seller acting knowledgeably and prudently in relation to the sale.

83. Similarly, a well-informed 'reasonable' vendor, would never agree to giving a discount to a purchaser they knew would receive a future benefit, not a future impost allowed for in the discount. To the contrary a well-informed vendor would have sought some arbitrage for the benefit of refundable franking credits being acquired.

84. In addition, if the purchaser was a maximum-rate taxpayer and being subject to incurring the top up tax (the basis of the discount), that tax cost might be deferred indefinitely. The discount assumes the company will immediately dividend the pre-acquisition profits or be immediately liquidated. There would also have been significant unrealised capital losses that well-informed buyers and sellers would have discussed before agreeing to the assumption that the company would be immediately liquidated. As discussed above, in submissions, and in his evidence, Mr Coronica presents himself as an experienced accounting and tax practitioner.

85. The Tribunal finds that on the evidence as an experienced accountant and registered tax agent, Mr Coronica understood the tax discount was one he would only have agreed to if he was enjoying the upside. It was not one a reasonable willing seller would have agreed with a reasonable willing buyer, especially on the further assumptions that the asset was properly marketed, and the purchaser and vendor acted knowledgably and prudently.

86. The Tribunal finds this tax adjustment does not comply with the 'market value' definition as set out above.

The Loan Adjustment

87. The second discount disputed by the Commissioner related to the value of the assets of Nominees at the time of transfer.

88. The assets of Nominees consisted of Convertible Unsecured Notes in Futuris Corporation Ltd (now renamed Elders Ltd). No sale took place on 7 April 2009 and the last sale being on 30 March 2009 at the sale price of $27.50 per share. The Commissioner accepted that as being a reasonable valuation of their market value.

89. Nominees also held Perpetual Unsecured Notes issued by Willmott Forests Limited, Unsecured Notes in Timbercorp Limited and subordinated Notes in Gunns Limited. These were valued at a 'conservative valuation of $20,000'.[76] All three being suspended listed companies. The Respondent accepted these valuations as an appropriate market valuation.

90. As at 7 April 2009, Nominees had cash at bank of $221.42. This again was accepted by the Respondent.

91. The remaining asset of Nominees was an unsecured loan (on Division 7A terms) receivable, owed by Mr Coronica. In his witness statement, Mr Coronica described the asset and his valuation as follows.

G Coronica Nominees had a loan receivable from me of $175,000 in April 2009. It was an unsecured loan. I made reference to Australian Accounting Standard AASB 1033 concerning 'Presentation and Disclosure of Financial Instruments'. Where an asset is not exchange traded, one of the valuation techniques referred to in the standard is the discounted cash flow valuation technique. The standard states at paragraph 5.6.6 that 'In applying discounted cash flow analysis, an entity uses a discount rate equal to the prevailing market rate of interest for financial instruments having substantially the same terms and characteristics, including the creditworthiness of the debtor'. It also states at paragraph 5.6. 7 that 'When it is difficult to determine net fair value for a financial instrument or for a class of financial assets or financial liabilities, it may be useful to disclose a range of amounts within which the net fair value of the financial instrument or class is reasonably believed to lie.' Exhibit GC-6 is that accounting standard. In relation to the unsecured loan to me, there is no frequently traded market for it. I considered that if the G C Nominees sold the loan to a third party, what would the third party pay for it? They wouldn't pay a purchase price equal to the entire principal outstanding, being $175,000. This is because the debtor was me. How could they be sure I would pay them back? The loan is unsecured. There needed to be discount which considered 'the creditworthiness of the debtor'. 2009 was the middle of the Global Financial Crisis. I've referred to the Unsecured Notes issued by Futuris Corporation Ltd above. Those notes had a face value of $100. They were trading at $27.50, a 72.5% discount. The other issuers I've referred to above are worth nothing. At that time, I recall even the unsecured loan instruments issued by APRA regulated banks such as CBA PEARLS and NAB Income Securities were trading at 50% discounts. Exhibit GC-7 are the ASX traded prices for a number of corporate bonds, each with a face value of $100. They show that around April 2009, Bendigo Bank bonds were trading at $47.20 (a 52.8% discount), Multiplex bonds were trading at $17.20 (a 82.8% discount), National Bank bonds were trading at $56 (a 44% discount) and Westpac bonds were trading at $60.50 (a 39.5% discount). In terms of my own credit-worthiness, I used a range of discounts – 40% (placing me at a better credit rating than Bendigo Bank, CBA and NAB) and 60% (placing me at a better credit rating than Multiplex and Futuris but worse than CBA and NAB). Using these discounts, I generated a value for the loan of between $70,000 and $105,000.[77]
(citations omitted.)

92. In cross-examination, in re-examination, and in answering questions from the Tribunal, Mr Coronica confirmed that he was solvent in April 2009. This was evidenced by the transfer of a personally held listed company share portfolio for $1,197,718 to the Fund in the period shortly after date of acquisition of Nominees. He also sold real estate assets which in the next few years realised $1,160,000 net. As a consequence of the transfer of the listed shares, at 30 June 2009, the Fund owed Mr Coronica $264,243.25 (see paragraphs 166 and 215 below), an amount well in excess of his Division 7A loan balance of $175,000.00 he owed Nominees.

93. Mr Coronica's consistent evidence was that the valuation method described in the extract above from his witness statement should be accepted as complying with the Act. His repeated view was that as an experienced accountant well versed in the knowledge of accounting standards his methodology should be accepted. The companies referred to in his evidence were also solvent at the time and their bonds traded at a discount.

94. As outlined above he relied on Accounting Standard AASB 1033 titled 'Presentation and Disclosure of Financial Instruments' (the Standard) as justifying the discount that applied to the above companies' bonds also applied to his Division 7 loan. The Standard was exhibited to his witness statement.

95. In his cross-examination and his re-examination, Mr Coronica steadfastly held the view that paragraphs 5.6.6 and 5.6.7 and the Standard discussing the concept of 'net fair value' more generally justified his valuation.[78] Apart from acknowledging that he was at the time aware that there was a definition of 'market value' in the Act, he stoically held the view that his valuation experience and knowledge arrived at the correct value.

96. AASB 1033 begins with a statement that

this Standard applies to each and every entity which is required to prepare financial reports in accordance with Part 2M.3 of the Corporations Law and which;

(a)
is a reporting entity; or
(b)
holds those financial reports out to be, or form part of a general-purpose financial report.

Nominees was neither.

97. As the title to the Standard indicates, it is a reporting standard that the reporting entity should adopt in its annual accounts. Nominees, of which Mr Coronica was the sole director, did not prepare its 2009 accounts (or any year's accounts) in accordance with the two paragraphs of the standard he said justified his valuation.

98. Paragraph 1.3 (b) of the Standard provides that the Standard does not apply to 'interests in associates.' Paragraph 7.1 defines associates to mean an investee 'over which the investor has significant influence'. The apparent rationale being that related parties should be able to assess value on a factual basis.

99. Clause 3.1 of the Standard states

The purpose of this Standard is to prescribe certain financial report presentation requirements for financial instruments and to require disclosure in the financial report of information concerning financial instruments.

100. Clause 3.1.3 states this Standard does not prescribe the basis on which financial assets and liabilities are recognised and measured.

101. The Standard deals with disclosure, and the two paragraphs referred to in Mr Coronica's witness statement are under the heading 'Disclosure'. Preceding those two paragraphs, the Standard states that the required disclosure should provide information that assists users of assessing seven risks which include 'credit risk', being the risk that 'one party to the financial instrument will fail to discharge an obligation and cause the other party to incur financial loss'.[79] Also included is 'Liquidity risk', being the risk that 'an entity will encounter difficulty in realising assets or otherwise raising funds to meet financial commitments associated with financial instruments'.[80]

102. Clause 5.1.4 of the Standard further provides that 'specific information about an individual instrument may be material when the instrument represents, for example, a significant element in an entities capital structure'.

103. At clause 5.7, the Standard states that where an asset is recognised at more than its 'net fair value', the following information must be disclosed:

(a)
the carrying amount and the net fair value of either the individual assets or appropriate groupings of those individual assets
(b)
the reasons for not reducing the carrying amount, including the nature of the evidence that provides the basis for management's belief that the carrying amount will be recovered.

104. In summary, AASB 1033 provides that, in the presentation of accounts, the 'fair value method' can be used with appropriate disclosure. It has no relevance where there are loans to associates nor when the risks are understood. It does not support the valuation espoused by Mr Coronica. If an assumption is made that there was voluntary compliance, the Standard contemplates that where the facts, circumstances and risks are known, the instrument can be valued according to those known factors.[81] That is not what Mr Coronica did.

105. Mr Coronica, as trustee of the Fund, advanced loans to private individuals (Mr and Mrs Davis and Mrs Rigoli) during the 2008–09 financial year at or around the time of the acquisition of Nominees. The explanation offered as to why those loans were made when he was of the opinion loans should be discounted, was that those loans were on first mortgage security. Given Mr Coronica's resources and especially that his loan from the company could have been fully repaid if the Fund's indebtedness to him was paid, the risk associated with the company's loan should be regarded to be minimal.

106. If Mr Coronica sold the shares with his discounts on the loans to an arm's length purchaser, he knew he would have had to repay the face value. As such he knew the purchaser would make a gain of the discount. He would have personally incurred a loss of the difference. A well informed (and very solvent) vendor/debtor would never have agreed to that price.

107. The market value of Nominees at the time of acquisition is held to be the value of the net assets as determined in his valuation before he applied the two discounts discussed above.

108. An alternative way of reaching the conclusion that the discounted valuation was not an objective assessment of market value as defined, is to consider what return Mr Coronica would have received if he liquidated Nominees rather than sold to an arm's-length purchaser with his discounts. The Commissioner, in the Non-Compliance decision, included this reasoning.[82] Mr Coronica, in his evidence during cross-examination and re-examination, relied on the experience he had in making valuations of private companies for estate, death and gift duty purposes.[83]

109. Counsel for the Applicants, in exchanges with the Tribunal, stated that the alternative of no sale was not open because there was a sale. A liquidation, while not a sale, would be a disposal. In cases concerned with gift duty, where there was a transfer between parties not at an arm's length, the legislation provided for the Commissioner to deem a gift of the difference between arm's-length value and the consideration given.[84] That legislation (and the relevant legislation for estate duty and probate duty) specifically authorised a minimum valuation of private investment companies on a deemed liquidation basis.[85]

110. The specific inclusion of the 'knowledgeable and prudent' vendors and purchasers in the Act contemplates alternative options. A liquidation of Nominees, before or after tax, would have given a much better return to Mr Coronica personally, than his discounted sale to a notional, arm's length purchaser on a different tax profile to the actual purchaser. As noted above, Mr Coronica gave evidence that he was an experienced valuer of private companies for estate, probate and gift duty purposes.

111. In summary, the Tribunal finds that the two discounts to net assets applied by Mr Coronica do not reflect the market value as defined in section 10 of the Act. The market value should be no less than the value of net assets before the discounts were made. The market value of Nominees at 7 April 2009 is held to be $211,446.42. It was not in dispute that the relevant value of the Fund at 30 June 2009 was $2,249,256.21.[86] That results in Nominees constituting 9.4% of the Fund's assets at the date of acquisition. The Tribunal notes that to get that ratio below 5% both discounts would need to apply.

112. The Tribunal finds that Mr Coronica's motivation was for the Fund to benefit in the future from the pre-acquisition franking credits. The loss he personally made on the discount would be recouped in his Fund. It was also an opportunity to neutralise his future tax liability when he liquidated Nominees while providing a tax benefit to the Fund.

113. The discounts that securities were trading at in the economic circumstances prevailing in April 2009 was seen as an opportunity to acquire Nominees within the in-house asset rules. For these benefits to arise his timing of picking the bottom of the bond market was important.

114. He did not have the luxury of applying for a ruling from the ATO, as the ATO circular discussed in paragraphs 47–48 above was intended to encourage. On his evidence he expected that to take a long time.[87] He did not obtain an independent valuation as the Commissioners circular advised nor did he prepare a written document explaining his valuation. Timing was of the essence and Mr Coronica backed himself in to have expert valuation skills that could be substantiated on challenge.

PROHIBITION ON ACQUISITION OF ASSETS FROM MEMBERS AND IN-HOUSE ASSETS RULES

Section 66 of the Act

115. As noted above, section 66(1) of the Act prohibits the acquisition of an asset from a related party.

116. The purpose of section 66 of the Act is to 'limit the scope of non-arm's length transactions with related parties that result in early access to superannuation savings for non-retirement purposes'.[88] The limiting (5% rule) of the in-house asset rules exception to the general prohibition in section 66 had an additional purpose of limiting 'the risk to superannuation savings from investment in an employer sponsor or associate'.[89] The market value requirement has the purpose 'of limiting non-arm's length transactions that result in early access to superannuation savings for non-retirement purposes'.[90]

117. Subsection 66(2) goes on to provide that there are limited exclusions, such as listed securities and business real property.

118. Subsection 66(2A) creates a further exception for acquisitions of in-house assets that would not be a breach of the in-house rules. Section 66(2A) relevantly provides:

Subsection (1) does not prohibit the acquisition of an asset by a trustee or investment manager of a superannuation fund from a related party of the fund if:

(a)
the acquisition of the asset constitutes an investment that:

(i)
is an in?house asset of the fund within the meaning of subsection 71(1); or...
...
(iv)
is referred to in paragraph 71(1)(b), (ba), (c), (d), (e), (f), (h) or (j); and

(b)
the asset is acquired at market value; and
(c)
the acquisition of the asset would not result in the level of in?house assets of the superannuation fund exceeding the level permitted by Part 8.

119. Importantly, an acquisition of a non-listed (private company) share will contravene section 66(1) of the Act unless exempted by section 66 (2A). Section 66(2A)(a)(i) exception is dependent on the asset acquired satisfying: (a) the definition in section 71 of the Act of an in-house asset; (b) being acquired at market value; and (c) being within the 5% rule in section 75. section 66(2A)(a)(iv) exemption is dependent on the share being exempted relevantly by section 71(1)(f). That subsection applies to an asset (here the share in Nominees) which the Regulator, by legislative instrument not to be an in-house asset of any fund. The relevant Regulation being 13.22C (discussed above). As discussed above, Nominees did not come within this regulation. Nominees was in any event not acquired at market value which is an additional precondition for exclusion in subsection 66(2A).

120. Section 83(2) of the Act provides that if the market value ratio of the fund's in-house assets exceeds 5%, a trustee of the fund must not acquire an in-house asset. Section 83(3) provides that if the market value ratio of the fund's in-house assets does not exceed 5%, a trustee of the fund must not acquire an asset if the acquisition would result in the market value ratio of the fund's in-house assets exceeding 5%.

121. The Applicants' Amended Statement of Facts, Issues and Contentions submitted that the shares in Nominees held by the Fund are not in-house assets:[91]

In the present case, Mr Coronica is the relevant member of the Fund. Section 70B defines who are the 'Part 8 associates' of an individual. They relevantly include a company that is 'sufficiently influenced by', or in whom a majority voting interest is held by, the individual. Section 70E(1)(a) relevantly provides that a company is 'sufficiently influenced by' an individual if the company, or a majority of its directors, is accustomed or under an obligation to (whether formal or informal), or might reasonably be expected, to act in accordance with the directions, instructions or wishes of the individual. In the present case, GC Nominees is wholly owned by the Fund. However, the Fund can't be a director of GC Nominees because it is not an individual (see section 201B(1) of the Corporations Act 2001 (Cth)). Instead, Mr Coronica sits on the board of GC Nominees in his capacity as trustee of the Fund. As such, GC Nominees is wholly owned by the Fund and sufficiently influenced by the Fund alone. In particular, GC Nominees is not sufficiently influenced by Mr Coronica in his capacity as a member of the Fund. This means GC Nominees is not a related party of the Fund and the Fund's investment in GC Nominees is not an in-house asset. This outcome is consistent with the legislative purpose of the in-house asset rules. The rules are intended to restrict investments in related parties. They are not intended to prevent funds from wholly owning and controlling investee entities.[92]

122. The Respondent submitted that the shares in Nominees were in-house assets as 'at the date of acquisition of the company shares, Mr Coronica controlled (as sole director), and held a controlling interest in (as sole shareholder), the company, and accordingly, the Company was a Part 8 associate of Mr Coronica'.[93] This poses the question of whether the in-house status of an acquired asset is determined immediately before acquisition, that is, when Mr Coronica was a sole shareholder (the Respondent's submission), or immediately after acquisition when the shareholder was the Fund (the Applicants' submission).

123. As outlined above, the in-house rules had an 'additional purpose' to section 66 of limiting 'future risk'. Consistent with this purpose, the Tribunal believes the better view is that the in-house assets in section 75 should be those assets that going forward are investments held by the fund. The purpose of the provisions is to limit the risk attached to the acquisition going forward.

124. However, the Tribunal rejects the submission that Nominees after acquisition was not a sufficiently influenced by Mr Coronica and thereby not a related party of the Fund.

125. Mr Coronica continued as a director after the acquisition by the Fund. The Tribunal was not provided with any minutes prepared by the trustee for the acquisition of Nominees. The only minute being one of Nominees agreeing to register the transfer. No evidence was produced that the trustees had appointed Mr Coronica as a director.

126. Mr Coronica, after acquisition, does not sit on the board in his capacity as trustee of the Fund. At best he sits on the board as a nominee of the shareholder trustees. He brings his personal attributes to the role and remains personally responsible to the company for his acts as a director.[94]

127. As Nominees was not 'acquired at market value'[95]and the acquisition of Nominees resulted in the level of in-house assets of the superannuation fund exceeding the level permitted by Part 8 of the Act,[96] its acquisition was not excluded by section 66(2A) and contravened section 66(1). The contravention of both section 66 and the in-house rules in Part 8, discussed below, flows from the different policy objectives of the two provisions.

In-house asset rules Sections 83(2) and (3) of the Act

128. The Commissioner made two submissions concerning contraventions of the in-house asset rules.

129. The first concerns whether at the time of acquisition of Nominees there were pre-existing in-house assets and a consequential contravention of section 83(2) of the Act. As discussed above, during his cross-examination, Mr Coronica produced a handwritten 'multi-column worksheet' in the nature of a trial balance for the Fund. Mr Coronica conceded in his evidence that this worksheet revealed that at 30 June 2008 the Fund held an asset being an 'advance' to him of $248,842.[97]

130. On 1 July 2009, he banked in his personal account proceeds from the sale of the Fund's livestock of around $2,857.[98] On the 13 July 2008, he deposited in his personal account repayments made to the Fund by an arm's length borrower in the amount of $150,000.[99] On 30 September 2009 and 23 December 2009, he banked further proceeds from the sale of the fund's livestock of respectively $14,287 and $5,715.[100] Mr Coronica's evidence was that these advances remained substantially in place until sometime between 7 April 2009 and 30 June 2009.[101] The advance was 'extinguished' in part by the transfer of Nominees on 7 April 2009 and finally with the transfer of listed shares that happened 'in the latter part of the 2009 financial year'.[102]

131. The Tribunal notes that the above advances and their 'extinguishment' were not recorded by the Fund trustees in the Fund's accounts until the accounts were prepared many months into the succeeding financial year (see paragraph 164 below). The Tribunal also notes that interest was not paid by Mr Coronica on these advances nor were they secured.

132. In its ordinary meaning, a loan is a payment to or for someone on the condition that it be repaid.[103] In Normandy Finance Pty Ltd v Commissioner of Taxation,[104] Edmonds J stated 'a loan is a payment of money to which there is attached an obligation of repayment upon demand or at a fixed date'.[105] The definition of 'loan' in section 10 of the Act is extended to include 'the provision of credit or any other form of financial accommodation, whether or not enforceable, or intended to be enforceable, by legal proceedings'.

133. The Tribunal finds that the amounts paid to Mr Coronica and the funds payable to the Fund but banked in his personal account were loans as defined in the Act. Section 71(1) of the Act provides that for the purposes of subdivision C of Part 8 of the Act (the in-house asset rules) 'an in-house asset of a superannuation fund is an asset of the fund that is a loan to...a related party of the fund'.

134. The Commissioner was not aware of the opening advance or loan until it was disclosed in a document produced during Mr Coronica's cross-examination. The Tribunal was not made aware of the circumstances of how the opening advance eventuated. It and the further advance raise a number of issues.

135. Firstly, the opening advance is in contravention to section 65(1) of the Act, which prohibits the lending of money or the giving of financial assistance using the resources of the Fund to a member.[106] Clause 23.3 of the Fund's deed is to the same effect. The grandfathering concession in sections 65(2) and (4) of the Act for loans pre-dating the enactment of the Act in 1993 have no application to the facts of this case. The original deed replaced by the current deed did not permit loans to members in the circumstances that existed in 2008 and 2009.[107]

136. Secondly, the making of the further advance of $150,000 [and the personal banking of the proceeds of the sale of the fund's livestock] is also in contravention of the in-house asset rules. The banking of these amounts in his personal account provided him with a further 'loan' as defined. This further provision of financial accommodation is, in addition to the contravention of section 65(1) of the Act identified below at paragraph 208–214, a contravention of section 83(2). Between 1 July 2008 and 7 April 2009 there is evidence of there being some offsets (discussed further in paragraph 163–173 below).

137. Thirdly, the acquisition of Nominees on 7 April 2009, irrespective of its market value is, for the reasons discussed at paragraph 111 above, in contravention 83(2).

138. At the time of making the Non-Compliance decision, the Commissioner, having not been made aware of the above advances, determined that the acquisition of Nominees was a contravention of section 83(3) of the Act. On the facts as then understood, and the Tribunal's finding above, that the market value was $212,446.42, the Tribunal accepts that that determination was, on the then understanding of the facts, correct.

139. Given the existence of the opening loan of $248,842, the provision of the further advance of $150,000 and the personal banking of the proceeds of sale of the Fund's livestock, there were at least three contraventions of section 83(2) of the Act. The Tribunal finds the correct decision is that the subsequent acquisition of Nominees contravened section 83(2) on at least three occasions, not section 83(3).

IN-HOUSE ASSET RULES – PROHIBITION OF AVOIDANCE SCHEME

140. In his Non-Compliance decision, and before the Tribunal, the Commissioner has contended there was a contravention of section 85 of the Act.

141. In Australian Prudential Regulation Authority v Holloway (Holloway), [108] Mansfield J summarised the effect of section 85 of the Act as:

prohibit[ing] persons from entering into, commencing or carrying out a scheme (as defined) with the intention that the scheme would result, or be likely to result, in an artificial reduction in the market value ratio of the in-house assets of a regulated superannuation fund, and that that artificial reduction would avoid the application of any provision of Pt 8 of the Act to the fund.

As discussed above, the Tribunal finds that Mr Coronica formed the view that he could value the shareholding at a value that would not be a contravention of Part 8 of the Act.

142. The Tribunal has found that his valuation was not at market value (as defined) and the acquisition contravened Part 8 of the Act. Mr Coronica's actions did not alter the market value of Nominees artificially or otherwise. He undertook a valuation based on incorrect premises. This was partly due to the undesirable governance arrangements discussed above. If he had properly understood the Commissioner's circular, he would have been wise to obtain an independent valuation and/or sought clearance from the ATO. But the fact that he relied on his misconception of the value, did not alter the market value of Nominees.

143. In Holloway, Mansfield J draws out the issue further, concluding in that case:

The reduction was artificial in the sense that it created a false or misleading impression as to the true nature of the investment, and so of the market value ratio of All Sweat SBF's in-house assets: cf Marra Developments at 59 per Mason J; Fame Decorator Agencies per Gleeson CJ at 62-63. I also find that the carrying out of the part of the scheme constituted by the All Sweat transactions by the conduct of Holloway & Co and Mr Holloway in processing the All Sweat transaction was intended to result in that artificial reduction avoiding the application of a provision of Pt 8 of the Act.[109]

144. Here the true nature of the investment was the acquisition of shares in a related party. The incorrect valuation did not alter the transaction. The acquisition, without the help of section 85 of the Act, contravened Part 8 (and section 66(1)). In these circumstances, section 85 has no application in the 2009 financial year. For the same reasons it has no application to any of the 2009–10, 2010–11, 2011–12, and 2012–13 financial years.

145. The Tribunal finds that section 85 of the Act is not activated as Mr Coronica's actions did not alter the market value of an in-house asset, or artificially cause an asset to not be included in the in-house asset test. That does not alter the finding that his valuation resulted in the above contraventions of the Act.

IN-HOUSE ASSET RULES - SELF-CORRECTING CONTRAVENTIONS — SECTION 82 OF THE ACT

146. Section 82 of the Act sets out a compulsory self-correcting mechanism: 'if the market value of the fund's in-house assets as at the end of the year...exceeds 5%, the trustee of the fund or, if the trustee of the fund has a group of individual trustees, the trustees, must prepare a written plan'.

147. The section goes on to provide that the trustees must specify: the amount of the excess,[110] the steps that will be taken to dispose of sufficient excess assets during the following year,[111] and the value of assets so disposed.[112] The plan must be prepared before the end of the following year,[113] and the trustees 'must ensure that the steps in the plan are carried out'.[114]

148. The Tribunal above held that Nominees was an in-house asset on acquisition. Section 82 of the Act requires an assessment as to whether the asset remains an in-house asset at the end of the financial year. At paragraphs 124 to 126 above, the Tribunal has set out the reasons as to why Nominees was an in-house asset immediately after acquisition. Those conditions were in place at 30 June 2009. The Tribunal rejects the Applicants' submission that Nominees was not a related entity because it was no longer a Part 8 Associate of him.[115]

149. Mr Coronica, in his capacity as trustee of the Fund, did not comply with the requirements of section 82 to value Nominees as at 30 June 2009 at its market value (as defined) and in, the 2010 financial year, contravened section 84 of the Act. The Tribunal finds the market value of the in-house assets exceeded the 5% test in section 82(3) of the Act at the end of the 2009 financial year.

ISSUES CONCERNED WITH THE OPERATION OF THE FUND

150. The Respondent's submissions to the Tribunal, and the ATO's reasons for both decisions, rely on additional contraventions relating to how the Fund had been administered in the 2009 financial year.

Accounting Related issues

151. It was submitted that there were contraventions of: the accounting record keeping requirements, by the operation of the 'suspense account'; and the covenants prescribed in section 52 of the Act to keep the money and other assets separate from 'those that are held by the trustee personally'. It was also submitted that the regulations regarding contributions and mandated by section 34 of the Act were not complied with.

152. Section 35A(1) of the Act provides:

Each trustee of a registrable superannuation entity must ensure that:

(a)
accounting records that correctly record and explain the transactions and financial position of the RSE licensee for the entity and the entity are kept; and
(b)
the accounting records of the RSE licensee and the entity are kept in a way that enables:

(i)
the preparation of reporting documents referred to in section 13 of the Financial Sector (Collection of Data) Act 2001; and
(ii)
the preparation of any other documents required to be audited under the RSE licensee law; and

(c)
the accounting records of the RSE licensee and the entity are kept in a way that enables those reporting documents and other documents to be conveniently and properly audited in accordance with the RSE licensee law. this paragraph needs to come in.

153. The term 'accounting records' is not defined in the Act but has a well-established meaning. The term includes general books of account such as journals, ledgers, working papers and other explanatory documents. It also includes

'the records which must be kept by an accounting entity as the sources of information upon which its transactions are based (e.g. invoices, receipts, orders for the payment of money, bills of exchange, cheques, promissory notes, vouchers, and other documents) which enable any person to determine with reasonable accuracy the financial position of the entity at any time'.[116]

154. Section 35A of the Act is supported by Clause 29 of the Trust Deed which, in standard terms, provides:

29.1. The Trustee shall establish and maintain accounting records in such form as shalI:
29.1.1. correctly record and explain the transactions and financial position of the Fund;
29.1.2. enable to the annual accounting statements to be prepared in accordance with clause 30;
29.1.3. enable the annual returns of the Fund to be prepared and lodged in accordance with the Act;
29.1.4. enable those accounting records to be conveniently and properly audited in accordance with this Deed and the Act.
29.2. The Trustee shall retain the accounting records for at least five years after the end of the Financial Year to which the accounting records relate.

155. Other relevant provisions of the deed include the following:

(a)
'all matters affecting the Fund arising at a meeting of Trustee shall be determined by resolution';[117]
(b)
'the trustee shall keep or cause to keep proper minutes of meetings of the trustee...and retain those minutes for at least 10 years';[118]
(c)
'the trustee covenanted to keep money and other assets of the Fund separate from any money and assets ...that are held by the trustee personally';[119]
(d)
'the trustee shall not borrow money... except in a manner which is approved by the Act';[120]
(e)
'the trustee shall not allow any money of the Fund to be lent, or any financial assistance using the financial resources of the Fund to be given, to a member...except in a manner and circumstances permitted by the Act';[121]
(f)
'the trustee must not intentionally acquire or allow to be acquired on behalf of the Fund an asset of a member...except in the manner and circumstances permitted by the Act';[122]
(g)
'in the absence of any agreement to the contrary a member shall not have any obligation to make a contribution to the Fund and may remain a member of the Fund notwithstanding that a contribution is not made';[123] and
(h)
'any contribution can be in the form of cash or the transfer of an asset to the Fund in compliance with the Act'.[124]

156. These deed requirements support relevant provisions of the Act, and are relevant to the Commissioner's decision and submissions in this case, namely: sections 35A (Accounting) 62 (sole purpose), 65 (lending to members), 66 (acquiring assets from members), 69–71E, 73–75, and 80–85 (the in-house asset rules in Part 8). Importantly these requirements always apply to the trustees, and not just on the last day of the financial year.

157. As noted above, there is a connection between the accounting record-keeping requirements and the requirement in the Act, and the standard deed, to have an annual audit. The auditor in 'Part A: Financial Report' is required to include an opinion on the special purpose financial report which contains the Statement of Financial Position and an Operating Statement.

158. Relevantly, in the Part B: Compliance report, the auditor has the responsibility to:

provide reasonable assurance that the trustee of the fund has complied, in all material respects, with the relevant requirements of the following provisions (to the extent applicable) of the SISA and the SISR.
Sections: 17A, 35A, 35B, 35C(2), 52(2 )(d), 52(2)(e), 62, 65, 66, 67, 67A, 67B, 69-71E, 73-75, 80-85, 103, 104A, 109, 126K.
Regulations: 1.06(9A), 4.09, 4.09A, 5.03, 5.08, 6.17, 7.04, 8.02B, 13.12, 13.13, 13.14, 13.18AA.[125]

159. Section 35A of the Act also requires the trustees to keep, for at least 5 years, such accounting records to enable the auditor to, among other responsibilities, attest that the trustee has complied with the above stipulated sections throughout the year.

160. Throughout their audit, and at these proceedings, the Commissioner has challenged Mr Coronica's accounting practices. Mr Coronica's consistent response, including at the hearing, is that he is an experienced accountant of good professional standing and that he has kept proper accounts and adopted proper accounting practises. As noted above, he also relied on the fact that the Fund obtained unqualified audit reports for each of the relevant years. He was the only witness called to give evidence.

161. In his amended witness statement Mr Coronica described his accounting in the following terms:

From that time, I maintained a ' suspense account' in respect of my dealings with the fund. It simplified record keeping for the fund.
This is how my 'suspense' account works.
During the course of an income year, when I transfer assets into the fund or when I pay expenses incurred by the fund from my personal funds, I record such amounts as an acquisition' in the suspense account. That is, such amounts are assets ' acquired' by the fund from me.
When I transfer assets into the fund or pay expenses for the fund, I need to be paid for it. Why would I do it for nothing?
Then, how does the fund pay me for those assets and expense payments?
Firstly, the fund pays me using its cash from its bank account.
Secondly, the fund pays me by directing third parties who owe the fund money to pay me instead.
I record these payments by the fund to me as 'repayments' in the suspense account.
This is in accordance with the ATO's published practice. Exhibit GC-5 is a printout of the ATO website on SMSFs acquiring assets from related parties. It states 'if the asset is acquired at less than market value (including no cost, such as an in specie distribution), the difference between the market value and the amount actually paid should be recorded as a contribution'. This is exactly how my suspense account works. It also shows that the ATO recognises that an acquisition and a contribution are not the same thing.
On a regular or yearly basis, I work out the balance of the suspense account. If I have given the fund more value than it has paid to me, the balance is my contribution to the fund for the year.
I usually treat the contribution as a concessional contribution up to the relevant cap. The balance is a non-concessional contribution. I don't treat any of the balance as anything else.[126]

162. Submissions were made that the 'suspense account used by the Fund to record Mr Coronica's contributions is maintained in accordance with the legislative intention of the Act and the Commissioner's published practice'.[127] The submission then referred to taxation determination TD 2013/22, ATOID 2012/16, APRA SMSF regulator's Bulletin 2018/1 and ATOID 2015/21 (the Regulators' Guidance Documents, previously referred to above in paragraph 40).

163. The evidence before the Tribunal in the 2009 year reveals quite a different story. Mr Coronica's evidence was that the 'suspense account' was a line in his 'handwritten multi-column worksheet' with the description G Coronica'[128] and which he described in his examination-in-chief as 'my loan account'.[129]

164. The worksheet was not prepared on a regular basis or in chronological order. The evidence was that it was prepared many months after the end of the financial year.[130] In the 2008 and 2009 financial years (and in other years),[131] Mr Coronica was advanced significant amounts before assets were transferred to the Fund. Those advancements were not in the nature of 'repayments' nor were they recorded as such. Mr Coronica did not make a concessional or non-concessional member contribution in the 2008 and 2009 financial years. G Coronica Pty, the incorporated practice entity, made deductible contributions.[132] The employer contributions being recorded as credit accounting entries in the G Coronica line in the worksheet.

165. For the 2009 financial year, the following entries appeared in the G Coronica line on 'handwritten work worksheet':

Debit entries $  Credit entries  $
Opening balance 1/7/08 248,842.50
Cash paid 532,305.00 Cash deposit 16,400.00
GC Nom's dividend 35,000.00 Investment in GC Nomin's P/L 100,000.00
Adjustment * 232,727.72 GC Shares transferred to S/Fund 18,288.50
GC Shares transferred to S/Fund 1,178,430.00
Closing balance 30/6/09 264,243.28    
     
  1,313,118.50 1,313,118.50

166.In response to a request made during his cross-examination, Mr Coronica produced the following typed version of his 'suspense/offset account':

G CORONICA PTY SUPERANNUATION FUND
2008-2009 YEAR
G CORONICA SUSPENSE OFFSET ACCOUNT
Opening Balance 1st July 2008 ($248,842.50)
Acquisitions or payments on behalf of Fund
Cash deposited to bank account 16,400.00
PAYG Tax paid on behalf of Fund 15,000.00
G Coronica Nominees acquisition 100,000.00
Carmela Rigoli Loan Increase 18,968.75
Davis Loan increase 24,738.03
Shares on an ASX
WCTPA Pref Shares 9,883.50
David Jones 118,300.00
Caltex 263,150.00
Caltex 82,960.00
Ansell Ltd 70,160.00
CBA 19,500.00
Telstra 122,040.00
Suncorp Group 140,700.00
Coca Cola Amatil 361,620.00
Suncorp Pref Shares 4,365.00
Bendigo Bank Pref Shares 4,040.00
$1.196.718.50
1,371,825.28
1,122,982.78
Payments or acquisitions
Cash Payments 532,305.00
Livestock sold and finalized 41,434.50
Randazzo Loan Repayment 150,000.00
Contribution to Fund 100,000.00
Dividend G Coronica nominees 35,000.00
858,739.50
Balance at 30th June 2009 CR 264,243.25

167. Neither the original handwritten worksheet nor this typed document recorded the adjustments in their chronological order. The $232,727.72 adjustment entry in the G Coronica line in the work sheet is made up of the following entries in the adjustment column:

$ $
Debit items: Credit items:
Livestock sold & finalised 41,434.50 PAYG tax on behalf of S/Fund 15,000.00
Randazzo loan repayment 150,000.00 Carmela Rigoli loan Increase 18,968.75
Superfund contribution 100,000.00 Davis Loan increase 24,738.03
Total 291,434.50 Total 58,706.78
Sundry balance 232,727.72

168. The three credit items are amounts paid out of Mr Coronica's personal account. The livestock and Randazzo debits are amounts paid to the Fund but banked personally by Mr Coronica. That is, Mr Coronica banked $132,727.72 more than he paid out on behalf of the fund. The $100,000 contribution was recorded in the 2009 fund tax return as an employer contribution.[133]

169. An ATO summary of G Coronica Proprietary's income tax returns records a superannuation expense of $103,000.[134] The ATO summary of the employer company's balance sheet records total liabilities of $14,968 as at 30 June 2009.[135] In the practice company financial accounts the post balance date contribution is claimed as an expense. Mr Coronica's funding of the employer company's contribution by a series of post balance date accounting entries did not create a liability owing to him in the company's accounts. The most probable explanation being that there was an offset against a pre-existing loan to Mr Coronica.

170. The debit to the G Coronica line in the worksheet for this employer contribution was not a payment by the employer company. The contribution was recorded as having been made (by way of an entry in a worksheet) by Mr Coronica personally.

171. Tribunal places the adjustments in the following chronological order on the evidence or the disclosed assumptions based on the evidence:

Date Ref

para

Details Debit entry Credit entry Balance
         
01/07/08 Op balance 1/7/08 248,842.50   248,842.50 Debit
01/07/08 173 Sale of 6 Livestock 2,857.55   251,700.05 Debit
         
13/07/08 Randazzo loan banked by GC 150,000.00   401,700.05 Debit
       
30/09/08 173 Sale of 30 Livestock 14,287.76   415,987.81 Debit
       
23/12/08 173 Sale of 12 Livestock 5,715.11   421,702.92 Debit
         
< 31/03/09 175 PAYG tax paid by GC for S/Fund   15,000.00 406,702.92 Debit
         
< 7/04/09 177 Cash deposit from GC to S/Fund bank   16,400.00 390,702.92 Debit
         
< 7/04/09 180 C. Rigoli loan Increase paid by GC   18,968.75 371,334.17 Debit
         
07/04/09 29 Acquis of GC Nomin's P/L   100,000.00 271,334.17 Debit
         
26/05/09 173 Sale of 20 Livestock 9,525.17   280,859.34 Debit
         
  Shares on an ASX:      
) 172 WCTPA Pref Shares   9,883.50  
) David Jones   118,300.00  
Latter ) Caltex   263,150.00  
part ) AMP   82,960.00  
of ) Ansell Ltd   70,160.00  
financial ) CBA   19,500.00  
year ) Telstra   122,040.00  
) Suncorp Group   140,700.00  
) Cocoa Cola Amatil   361,620.00  
) Suncorp Pref Shares   4,365.00  
) Bendigo Bank Pref Shares 4,040.00 915,859.16 Credit
)      
) 177 Cash paid to GC 532,305.00   383,554.16 Credit
       
< 30/06/09 180 Davis Loan increase 24,738.03 408,292.19 Credit
       
15/06/09 173 Sale of 19 Livestock 9,048.91   399,243.28 Credit
       
30/06/09 184 GC Nom's P/L divid paid to GC 35,000.00   364,243.28 Credit
30/06/09 GC Contribution to S/Fund 100,000.00   264,243.28 Credit
note: "<" indicates prior to date.

172. As discussed above, at 1 July 2008 Mr Coronica 'owed' the Fund $248,842. His evidence was that at 30 June 2008 the difference was $348,842 before he allocated $100,000 as an employer contribution by the practice company.[136] The first acquisition (transfer) referred to in Mr Coronica's witness statement was the acquisition of Nominees on 7 April 2009. In response to a written request made by the Tribunal after the conclusion of the hearing, Mr Coronica confirmed that the transfer of listed shares for $1,178,430 occurred in the latter part of the 2009 financial year.[137] On 13 July 2008, Mr Coronica banked the Randazzo loan repayment of $150,000 in his personal account.[138] It was not a payment for any acquisition as stated in his explanation in his witness statement. This did not happen by way of a recorded 'direction' (again as stated in his witness statement), Mr Coronica simply banked it in his personal account at a time he was already indebted to the Fund. What he did with the advance before it was 'repaid' was not in evidence. The only record of the advance was in Mr Coronica's personal bank statements. There is not a record as to why the trustees permitted this to occur. The trustees should have recorded their reasons so the appropriate accounting entries could be made.

173. On or about 1 July 2008, 30 September 2008, 23 December 2008, 26 May 2009 and 15 June 2009, the proceeds from the sale of the Fund's livestock were also banked in Mr Coronica's personal account, and again, there is no record of a direction. The first three sales occurred before assets were acquired by the Fund from Mr Coronica.[139]

174. The Tribunal finds that the trustees in the 2009 financial year did not create and keep records as to why they allowed the receipt of the Randazzo repayment and livestock sales proceeds to be paid to Mr Coronica. There was no source accounting record for these transactions. The subsequent entry of 'Adjustment' (which was made up in part with these advances) in the 'multi-column worksheet', whilst an accounting record, is not a source document and does not describe in any way the nature of these transactions. No evidence was given that the personal banking was a mistake. Mr Coronica's evidence was that they were paid to him by direction for the acquisitions the Fund made from him.[140] The above chronological analysis reveals that the funds were withdrawn at least nine months before the first major acquisition was made to partially pay down Mr Coronica's borrowing.

175. The first three quarterly tax instalments of the Fund, amounting to $15,000 paid from Mr Coronica's personal account, are presumed to be paid before 7 April 2009. Again, there is not any record evidencing an agreement or understanding relating to the transaction other than the 'adjustment' entry in the worksheet prepared months after year end. In SMSFR 2010/1, the Commissioner accepts that 'a monetary payment that is made by a related party of a SMSF to a third party to extinguish a liability a SMSF has with a third party does not contravene section 66(1)' of the Act.

176. In TR 2010/1, issued on the same day as SMSFR 2010/1, the Commissioner refers to a practice involving:

'making journal entries after the expense is paid that, in the case of an employer or Fund member, re-classifies the expense payment as a superannuation contribution and, in the accounts of the superannuation provider, recognising the making of the contribution and payment of expense'.[141]

Neither accounting entry was made in this case. Chronologically, these payments were not contributions but repayments of Mr Coronica's borrowing.

177. Evidence was not given as to when or why $16,400 was deposited by Mr Coronica in the Fund's bank account and whether, at that time it was deposited, his account with the Fund was in debit or credit. In the table in paragraph 171 above, it is assumed to have occurred before the advance was extinguished. In the absence of any evidence (and submissions from the Commissioner) it is also assumed that the cash withdrawals were made after the shares were transferred.

178. Similarly, the worksheet does not reveal when the additional amounts were advanced by Mr Coronica from his personal account to Mrs Rigoli or Mr and Mrs Davis, and importantly, when the Fund resolved to make or assume the advance made out of Mr Coronica's personal account as a Fund asset. The worksheet and evidence are that the interest on the original Davis loan was accrued and returned as income in the accounts and tax return. Interest was not recorded or accrued on the further advance.

179. This is to be contrasted to the accounting and tax treatment of the interest on Mrs Rigoli's loan where all but a small amount of interest (presumably on the original loan) was being accrued, but not recorded in the accounts or returned in the Fund's tax return. No explanation was provided as to why there was this accounting and tax difference.

180. The fact that interest was not accrued on the additional advance to Mr and Mrs Davis carries an implication that it was advanced late in that financial year and that assumption is made in the above table. The unexplained non recording of the accrual of the interest on Mrs Rigoli's loan makes it difficult to determine when the additional advance was made. Given that these transactions were not made from the Fund's bank account, a minute or record should have been made at the time the advance was assumed by the trustees. In the Tribunal's above estimate of the chronological order, it is assumed to have been made before 7 April 2009 but may well have been paid after.

181. Mr Coronica's evidence and submissions were that in his personal banking statements he had records of the receipts/payments. His personal records are not a record of the Fund. They are not a document or record of the Fund evidencing how the Fund acquired the asset (the additional loans). There is not a record of the trustees directing Mr Coronica to make these payments. Mr Coronica's personal bank statements are not a record of when, how and why the Fund made, or assumed both advances became fund assets, in such an unusual way. The Fund's accounting records do not record when the Fund entered these transactions.

182. The Tribunal finds that the trustees did not comply with clause 9 of the deed, dealing with 'Proceedings of Trustee', specifically clause 9.3 which required 'all matters affecting the Fund arising at a meeting of the Trustee shall be determined by resolution', and clause 9.9.1 which provides 'the Trustee shall keep or cause to be kept proper minutes of meetings of the trustee which shall be entered in a book maintained for that purpose'.[142] The keeping of proper minutes or the recording of directions may have prevented further non-compliance with the covenant in clause 12.4 of the deed 'to keep the money and other assets of the Fund separate from any money and assets...that are held by the trustee personally', and the requirement in clause 29.1.1 to 'establish and maintain accounting records in such form as shall...correctly record and explain the transactions and financial position of the Fund'.

183. If the receipts of the Fund had been routinely banked in the Fund's bank account and acquisitions made from the Fund's account, then the requirements of the Act and the Fund's deed would most likely have been adhered to. The assets would have been acquired out of the Fund's reserves. The need to have the G Coronica line in the worksheet is a direct consequence of that governance failure. Mr Coronica's explanation that the loan account was a necessary consequence of his practice of transferring assets to the Fund is rejected. In the 2009 financial year and in the 2012 financial year (discussed below at paragraph 257), the transfers into the Fund come after Mr Coronica has built up a sizable loan as a consequence of personally banking, and enjoying the benefit of, receipts that should have been banked into the Fund's account.

184. The dividend declared, and apparently paid by Nominees to Mr Coronica's personal account at year end, again occurred without the Fund creating and/or holding any source accounting document such as a written direction.

185. The Tribunal notes that the 'suspense account' was not closed out with a non-concessional contribution as outlined in Mr Coronica's witness statement re-produced in paragraph 161 above.

186. Finally, the recording of the employer's contribution in Mr Coronica's personal 'suspense account', contrary to Mr Coronica's explanation of his accounting without there being any apparent memorandum or like source document is puzzling. The Tribunal notes that the ATO audit and position papers did not raise any issue regarding this matter. It does highlight how complex superannuation can be even to specialist regulators.

187. It was submitted on behalf of the Commissioner that:

the records of the Fund produced at the hearing for the 2009 income year, in tandem with Mr Coronica's explanation of those records, demonstrates that the fund did not maintain any true "suspense" account in the usual sense of an account to which items were posted pending their clarification. Instead, there was an annual global offsetting exercise carried out by Mr Coronica at the end of each financial year, which revealed either Mr Coronica's net debt to the fund, or vice versa.[143]

188. The Oxford dictionary defines a suspense account as 'an account in the books of an organization in which items are entered temporarily before allocation to the correct final account'.[144]

189. The Act's accounting and auditing requirements are more than requiring a set of financial statements prepared from a double entry trial balance.[145] The Act and the Fund's deed require that records are kept that show, at all times, the unique statutory and supporting deed requirements of a complying superannuation fund are met for each individual transaction or acquisition of the Fund.

190. Taking as an example the 2008 Randazzo loan repayment discussed at paragraph 172, a bookkeeper having evidence that the loan has been repaid credits the Randazzo loan, and could be expected to temporarily post the debit to a suspense account, until being instructed where the repayment was paid and/or where it was banked. Having ascertained they were banked by Mr Coronica, an inquiry would need to be made as to whether the debit entry should be recorded as an asset (loan) or as withdrawal (a distribution to a member). If the decision was that it was advanced to pay for future acquisitions, and not a withdrawal, the credit would go to a loan (asset) account, and no longer sit in suspense. An enquiry would then be made as to why the Act and the deed's requirements had not been adhered to.

191. The Tribunal finds that in the 2009 financial year the trustees contravened section 35A(1)(a) of the Act in that they did not keep the source accounting records that explained all of the transactions entered into by the trustees on behalf of the Fund.

Regulators' Guidance Documents

192. Submissions were made on behalf of the Applicants that the use of the 'suspense account' to record contributions were in accordance with APRA's and the Commissioner's published practice.[146] These submissions included a reference to paragraphs 44 and 46 of ATOID 2015/21, as follows:

The Commissioner adopts the same view as APRA that suspense accounts are not reserves. The Commissioner states (at paragraph 44):
We understand the suspense accounts used to hold contributions pending their allocation under Division 7.2 of the SISR to an accumulation interest of a member are commonly referred to as 'reserves'. Consistent with APRA's views in SPG 222, we do not consider that these accounts are reserves for the purposes of the SISA and SISR.
Importantly, the Commissioner again approves the use of such suspense accounts used to record contributions. The Commissioner states (at paragraph 46):
SMSF trustees are able to accept contributions to these accounts pending allocation to the relevant member in accordance with Division 7.2 of the SISR.'[147]

193. This paragraph and the other guidance documents, read as a whole, do not support Mr Coronica's accounting methods. In each document the Fund has received an amount as a contribution. The Regulators' reference to 'suspense' is in the context that a recorded contribution was not, on receipt, allocated to a member. The 'suspense accounts' relate to transactions that begin with recording of the receipt of a contribution referred to in the earlier Regulators' Documents as an 'unallocated contributions account'.[148] Mr Coronica's 'suspense account' relates to a transaction that ends, in some years, with a member contribution. As stated above, in the 2008, 2009, 2010 and 2011 financial years, Mr Coronica did not make a member contribution. Contributions were made in those years by the employer, G Coronica Pty. The item in suspense in the above paragraph discussing the Randazzo transaction is a debit, the credit having been made to the loan. The item in suspense in the regulator's guidance are the credits for recorded contributions (debits). They do not sanction Mr Coronica's accounting.

194. The Regulators' Guidance documents are in accordance with regulation 7.08 (in force during the relevant period to 30 June 2013). That regulation stated that if a trustee 'receives a contribution in a month it must allocated':

(a)
no later than 28 days after the end of the month; or
(b)
if it was not reasonably practicable to allocate the contribution to the member of the fund, not later than 28 days after the end of the month — within such longer period as is reasonable in the circumstances.

195. The Commissioner's Rulings TR 2010/1 and SMSFR 2010/1 issued together on 25 February 2010 referred to above at paragraph 176 are in accordance with this regulation. Section 34 of the Act proscribes that each trustee of a superannuation fund must ensure that the prescribed standards applicable to the operation of the fund are always complied with. The amount owing to Mr Coronica at 30 June 2009 was never allocated to a contribution from him. $100,000 was allocated to an employer contribution when the worksheet was prepared many months after year end. The evidence was that the Fund's only records were the work sheet. The balance owing to Mr Coronica at 30 June 2009 was not recorded as a contribution in accordance with the regulation by 28 July 2009. It was not converted into a contribution at any time. It was repaid.[149]

196. All the evidence was that the G Coronica line in the worksheet was recording what Mr Coronica owed or was owed by the Fund. Some entries were journal entries which also required accounting entries between other controlled entities (Nominees and the practice company). The line on the multi-column worksheet is more properly described as a member's loan account out of which member contributions, if made, were first recorded at the time accounts were prepared well after the end of the financial year. As referenced in paragraph 163. Mr Coronica on different occasions referred to the account as a suspense or offset or loan account.

197. The Tribunal notes, as set out above at paragraph 155(g), the deed provided a member (Mr Coronica) could not be required to make a contribution. The 'G Coronica' line in the worksheet is not in any form a 'contribution' account as discussed in the Regulators' Guidelines.

198. The Tribunal accepts the submission of the Commissioner that trustees have a responsibility to, at all times, ensure that they comply with the requirements of the Act. At a minimum that requires accounting records and accounts being recorded on a chronological basis. Trustees that bank all their receipts and make all their payments out of their accounts will have a chronological record. Mr Coronica's worksheet and subsequently prepared 'suspense account' does not satisfy this basic requirement of being an appropriate accounting record.

199. In summary, for the above reasons, the Tribunal agrees with the Commissioner's submission that Mr Coronica's 'suspense account' was not a true 'suspense account':

in the usual sense of an account which items posted pending their clarification. Instead there was an annual global offsetting exercise carried out by Mr Coronica at the end of each financial year, which revealed either Mr Coronica's net debt to the fund or vice versa.[150]

200. For the above reasons the Tribunal also rejects the Applicants' submission that the

suspense account used by the Fund to record Mr Coronica's contributions was maintained in accordance with the legislative intention of [the Act] and the [Regulator's] published practice.[151]

201. The Tribunal finds that in the 2009 financial year the trustees contravened section 35A(1) of the Act in that they did not prepare and keep accounts that properly explained the transactions and financial position of the fund and keep accounting records to enable those accounts to be conveniently and properly audited.

202. Finally, the Tribunal rejects the Applicants' submission that it should rely on the clean audit opinion of the auditor. The worksheet revealed that Mr Coronica, at the beginning of the year, had a significant loan from the Fund. It revealed at the end of the financial year, Mr Coronica was owed by the Fund a significant amount. As discussed above in the financial statements this closing, interest-free liability was not recorded and the holding value of income earning 'other assets' was understated. This conscious and deliberate act was done to hide the fact that Mr Coronica had provided a substantial loan to the Fund that was not converted into a member contribution in the 2010 financial year.

203. The Funds bank records revealed that Fund receipts were not being banked in the Fund's bank accounts.

204. The Statement of Financial position did not correctly record the financial position of the Fund as required by section 35A(1)(a) of the Act.

205. A review of the Fund's bank statements, and worksheet would have revealed that Mr Coronica was banking fund receipts in his personal account at a time when he owed the fund a considerable sum. Part B of the auditor's report states they have tested that 'the Fund is not providing financial assistance to members'.

206. While the auditor was not a witness to defend her audit, the Tribunal finds that the conclusions reached indicate that the worksheet or trail balance and bank statements cannot have been sighted by the auditor, which is inexplicable in the circumstances of this fund.

207. The unqualified Part A and Part B statements in the Audit report are not accepted as being appropriately made and the Tribunal rejects the submission that reliance should be placed upon them.

Prohibition on Lending to members Section 65

208. As discussed above, the loan to Mr Coronica at 1 July 2008 quickly grew from $248,842 to something in the order of $400,000 and was not fully repaid until late in the 2009 financial year. On the evidence, this loan: was undocumented, other than in a spreadsheet prepared in the next financial year; did not accrue any interest; and was not secured. Clause 23(3) of the Fund deed provided that the 'Trustee shall not allow any money of the Fund to be lent, or any financial assistance using the resources of the Fund to be given to a Member or a relative of a member except in circumstances permitted by the Act'.

209. In his cross-examination, Mr Coronica admitted he was aware that section 65 of the Act prohibited loans to members. He admitted that at 30 June 2008 he owed $248,842 to the Fund.[152] The policy objective of section 65 'is to prevent the use of superannuation savings as a means of providing current day financial support to members'.[153] This interest free loan quickly grew up to $400,000, and extended over nine months. It provided Mr Coronica a financial benefit and supports a finding that the Fund was not complying with section 65 of the Act. It was not in evidence as to why and to what use Mr Coronica had put the Fund's advanced to him, other than the loan was not substantially repaid from Mr Coronica's personal accounts. It was 'repaid by the sale of Nominees on 7 April 2009 and the sale of listed shares in the latter part of the 2009 financial year'.

210. In Re Fitzmaurice and Federal Commissioner of Taxation,[154] the Tribunal emphasised the importance of complying with section 65 of the Act, stating at [42]:

[s]ection 65 provides for a strict prohibition on lending to a member. The contravention remains even if the loan is repaid shortly after the advance of any funds.

211. The Tribunal also observed that a trustee should not utilise the fund's assets as a source of liquidity for members even as a short-term measure, adding:

Even if the withdrawals were made for the purpose of paying expenses incurred in repairing the storm damage and constructing the canopy, those expenses were covered by the insurance policy held by the [related entity]. The Superannuation Fund's funds should not have been used to pay these expenses. Instead of waiting for the insurance payout, the applicant decided to make use of the Superannuation Fund's funds to pay expenses for the benefit of the [related entity]. This is an improper use of the Superannuation Fund's funds either by way of a loan or a payment out in breach of the sole purpose test.[155]

212. In these matters, the funds were advanced to a member, for a significant period. No explanation was provided as to what use the member put those funds. The explanation that was provided was that the advance was 'immediately cleared by acquisition of assets',[156] and further 'if the breach was remedied, there is no issue at the time'.[157] The evidence was, as discussed above, that the advances were not immediately cleared but were in place for in excess of nine months.

213. This Tribunal, differently constituted, stated in Re Thompson and Commissioner of Taxation [2014] 339 at 43: '...superannuation does not create some form of account for a taxpayer, from which they are free to withdraw and deposit money'.

214. The Tribunal notes that the contravention of section 65 whilst included in the Respondent's submissions and supplementary submissions was in final submissions not pressed, without concession as to its application (due to the late provision of the original 1975 Trust Fund deed) and submissions from the Applicants that that deed came within the grandfathering provisions in section 65. As discussed above at paragraph 135, the 1975 deed did not authorise lending in the circumstances that applied in 2009 and were contrary to the provisions of the 1993 replacement deed and the Act (enacted in 1993). The grandfathering provisions in section 65 did not apply to the loans made in 2008 and 2009.

The 30 June 2009 indebtedness

215. At 30 June 2009 Mr Coronica was owed $264,243, being in substance the balance of the 'unpaid' consideration for the acquisition of listed securities. Discussed below that amount was not converted into a member contribution in the following year.[158] The credit was interest free.[159] Listed securities are not usually sold on extended credit. The transaction was not conducted on arm's length terms and supports the Respondent's submission that the fund was one of Mr Coronica's controlled entities that gave and received credit.

Livestock Trading

216. The Fund's trading in 'livestock' is another example of Mr Coronica not separating his personal financial affairs from those of the Fund. Mr Coronica acquired a 500-acre farming property on King Island, Tasmania in or around 1985. After operating the farm, himself through hiring a local farm manager or contractor, in about 2000 he rented the farm to Mr and Mrs Davis, local King Island dairy farmers.[160] In 2001, he purchased another property on King Island jointly with Mr and Mrs Davis. Mr and Mrs Davis used this property as part of their farming operations.[161] They did not pay any rent.[162] However, in Mr Coronica's witness statement, he added Mr and Mrs Davis:

had to spend money on improving the land for ten years. The deal was that I would own half of the improvements they paid for. Improvements such as fencing, fertiliser and dams.[163]

217. In the course of the hearing Mr Coronica acknowledged he obtained, for GST compliance purposes, an ABN for a 'partnership' in name of 'Giuseppe Coronica and John F & Geraldine Davis'.[164] That was necessary because 'they' had an arrangement to jointly own livestock kept on the jointly owned land. His evidence was 'just like a particular venture just for those cattle, so it was day on day [Mr Davis] was looking after them'.[165]

218. The Tribunal accepts Mr Coronica's explanation that the true relationship was more in the nature of a joint venture and consistent with the Commissioner's practice that joint owners and/or joint venturers are not required to file a partnership tax return.[166] The joint venture involved the joint purchase of 200 cattle at $270 each.[167] The Tribunal notes the partners are described as Giuseppe Coronica and not both trustees of the Fund. The multi-column worksheet records opening livestock of $21,448 and $41,434 proceeds from the sale of the livestock which was directly banked into Mr Coronica's personal bank account.[168] This profit is recorded in the accounts as profit and in the tax return as income.

219. There are several issues a prudent trustee should have considered. Other than the worksheet and financial accounts, the evidence is that there was no source accounting record of the Fund's trustees' joint ownership of the cattle.

220. At the hearing, Mr Coronica's explanation of the 'multi-column worksheet' included an explanation that the Fund accounted for the sale of its opening livestock during the 2009 financial year.[169] After the conclusion of the hearing the Tribunal wrote to the parties with a series of questions which included:

3. Exhibit A2 lists an opening balance of 'Livestock' and an entry for its sale during the year. There are references to this livestock in the transcript.
It is not apparent from the evidence when this livestock was sold, or whether the proceeds of sale were returned on a net of cost basis and/or what any such costs were. Can the parties advise:
a. When this livestock was sold?
b. Were the proceeds returned net of any costs? And
c. If so, what would those costs be for?

221. The Applicants' reply to the Tribunal was:[170]

a) The livestock was sold on 1 July 2008 (6 head), 30 September 2008 (30 head),23 December 2008 (12 head),26 May 2009 (20 head) and 15 June 2009 (19 head).
b) Proceeds were returned net only of agents selling costs and commission on sale.
c) Net proceeds after allowing for cost of livestock were shared with Mr. Davis.[171]

222. In respect of the banking of the proceeds in Mr Coronica's personal account, there was a breach of the covenant to keep the money and other assets of the Fund separate from any money and assets of the trustee personally. The provision of the financial benefit (the free full agistment arrangement) received by the Fund is further evidence of decisions being made without consideration that the Fund was a separate tax entity to Mr Coronica.

SOLE PURPOSE TEST — SECTION 62

223. Section 62 of the Act requires that trustees of superannuation funds ensure that the fund is maintained solely for at least one of the 'core purposes'. A fund may also be maintained for an 'ancillary purpose' in conjunction with a 'core purpose'.

224. Core purposes are the provision of benefits for members on retirement or reaching the prescribed retirement age. It also deals with the situation if the member dies or is incapacitated before reaching either of those two requirements.

225. The sole purpose test was considered in Aussiegolfa Pty Ltd v Federal Commissioner of Taxation (Aussiegolfa), [172] where the Full Federal Court confirmed that the sole purpose test is an objective test. The subjective motivation of a controlling director is not to be confused with the purpose of the entity they may control.[173] The Court also held that arrangements that are on arm's length terms should typically not contravene the sole purpose test.[174] Justice Stewart also stated that the word 'benefit' in the sole purpose test refers to a financial benefit rather than a general 'current day benefit'.[175]

226. The Tribunal makes the following findings on respect of the evidence discussed above in respect to the Fund's operation in the 2009 financial year. Mr Coronica:

(a)
mixed his personal affairs with the Fund's affairs contrary to the trustee's covenant in section 52(2)(f) of the Act;
(b)
benefited in early access to the fund savings by transferring assets contrary to section 66 and Part 8 of the Act;
(c)
didn't keep proper accounts and records contrary to section 35A;
(d)
entered a non-arm's length acquisition of Nominees for the purpose of the Fund obtaining tax benefits from the payment of franked dividends out of pre-acquisition dividends;
(e)
was not able to advance any creditable reason why the acquisition of Nominees, a passive investment and/or cash box entity, (at any value) and who's major asset was a loan to him, was in the interests of the Fund other than to access the pre-acquisition accumulated franking credits. He was not able to advance any reason as to why he (subjectively) believed the acquisition was in the best interest of the Fund other than the availability to access franking credits;
(f)
received an interest free loan from the fund of a significant sum for around nine months contrary to section 65;
(g)
extended credit to the fund on a non-arm's length basis; and
(h)
traded livestock in the fund on a non-arm's length basis.

227. Each of the above severally and collectively support a finding that the fund was not being conducted for the Sole Purpose of providing superannuation benefits.

Findings for 2009 Financial year.

228. In summary, for the 2009 financial year the Tribunal finds the trustees contravened sections 35A, 62(1), 65, 66(1) and 84(1) of the Act. There were more than one contravention of section 35A and the in-house asset rules. The contravention of the Sole Purpose Test was on multiple grounds. Contravention of each of those sections is either an offence or contravention of a civil penalty provision. An incorrect valuation as at the 30 June 2009 of Nominees, caused a further section 84 contravention (non-compliance with section 82 of the Act) in the 2010 financial year.

229. Pursuant to section 39(1) of the Act, for the purposes on the Non-Compliance decision, the contraventions should not be ignored in determining the complying status of the Fund. The Fund therefore fails the first limb of section 42A(5)(a) for the relevant 2008–09 financial year.

The 2010 to 2014 financial years

230. Section 42A(5)(b) of the Act contains what has been described as a relieving discretion allowing one or more contraventions to be ignored where the Commissioner, and the Tribunal on review, determine that a notice of compliance should be given, after considering:

(a)
the taxation concessions 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;
(b)
the serious of the contravention or contraventions; and
(c)
all other relevant circumstances.

231. For the purposes of the Non-Compliance decision, a consideration of contraventions of the Act in subsequent years is only relevant to a consideration of the matters provided in sections 42A(5)(b), (c) of the Act.[176]

232. Pursuant to section 126A of the Act, for the purposes of the Disqualification decision, subsection (1)(a) looks to 'one or more' contraventions and subsection(1)(b) requires the Regulator to be satisfied that 'the nature or seriousness of the contravention or contraventions, or the number of contraventions, provides grounds for disqualifying the individual'.

233. Whether there were further contraventions in the above period audited by the Commissioner is therefore directly relevant to the Disqualification decision and depending on the facts and circumstances a factor indirectly relevant to the Non-Compliance decision.

2010 Financial year

234. Very little evidence was put before the Tribunal as to any specific transaction that occurred in this Financial year. There is however evidence of what did not happen.

235. As mentioned above, as at 30 June 2009 the Fund was in contravention of the 5% in-house asset market value ratio in section 82(2) of the Act and in not having prepared and implemented a plan to dispose of assets so as to come within the in-house asset rules by the end of that year in contravention of subsections 82(4) and (5). For the reasons stated above, there was not a contravention of section 85.

236. As stated above at paragraphs 165 and 171, during the hearing it was revealed that at 30 June 2009/1 July 2009, the Fund owed Mr Coronica $264,243.25. This credit was not held or recorded as a prepaid contribution but repaid at some stage during the financial year. This credit was not treated as a prepaid member contribution contrary to Mr Coronica's claim in his evidence that the amount owing was treated as a contribution in accordance with 'the regulators guidance documents'.[177] Mr Coronica did not make a member contribution in the 2010 year. The practice company claimed a deduction for an employer contribution. How and when that contribution was made was not in evidence.

237. The financial accounts for the Fund reveal the Fund repaid Mr Coronica the $264,243.25 out of net revenues and proceeds from the sale of shares. They do not reveal when the repayments took place.

238. There is nothing in the financial accounts to indicate that the Fund acquired any assets from Mr Coronica. Evidence was not put before the Tribunal of Mr Coronica banking fund receipts in his personal account. Mr Coronica was not examined on this year's transactions. The ATO auditors did not reconcile the 'suspense account' for this year. There is accordingly no evidence before Tribunal to suggest all of the Fund's receipts were not banked in the Fund's bank account and Fund expenses were not paid from the Fund's account. Absent that evidence the Tribunal is not satisfied there was a contravention of section 35A of the Act.

239. The creation of the indebtedness has been dealt with in the discussion of 2009 year and as there was also no evidence that funds were paid directly to Mr Coronica and mixed with his assets, the Tribunal is not satisfied there was a contravention of the section 62 Sole Purpose Test.

2011 Financial Year

240. Limited evidence was put of transactions that occurred in this period but it is clear, and the Tribunal finds, that the Fund continued to contravene section 82 of the Act in not having prepared and implemented a plan to have disposed of assets so as to comply with the in-house asset rules.

241. As at the year's end, the Fund's accounts record that it owed Mr Coronica $70,702.46.

242. The multi-column worksheet for the 2011 financial year was not put in evidence, nor was Mr Coronica examined on his 'suspense account' for that year. The Statement of Financial position reveals a 'sundry creditor' of $70,702. The tax return for the Fund also discloses an 'other liability' of that amount. Evidence was not given as to how this occurred, but a balance sheet comparison suggests Mr Coronica either transferred, or funded on a net basis, the increase of $407,000 in mortgage loans held at year end by the Fund.[178]

243. In correspondence to and from the ATO and Mr Coronica during the Commissioner's audit, it was disclosed, and accepted, that the liability was to him. Significantly, in one email, Mr Coronica describes the $70,702.46 in the 2012 year as 'loan repayment to member'. Evidence was not put before the Tribunal of Mr Coronica banking fund receipts in his personal account. Mr Coronica was not examined on this year's transactions. The ATO auditors did not reconcile the 'suspense account' for this year.

244. In cross-examination, in the context of discussing the opening position of the Fund as at 1 July 2011, and with some confusion, Mr Coronica agreed with the Commissioner's Counsel that the $70,702.46 credit was a loan to him. All the above evidence was that it was a loan from him. In his re-examination, Mr Coronica's Counsel sought to explain the confusion of the accounting entries by reference to the Regulators' Documents referred to in paragraphs 40 and 162 above dealing with 'unallocated' contributions'.

245. In exchanges with the Tribunal, in the context of whether the Applicants' Counsel's questions were appropriate in re-examination, Counsel explained that Mr Coronica would confirm that at 30 June 2011 the $70,702,46 was a liability. Counsel for the Applicants' then suggested:

MR MENG: ... Then the question is, why is the suspense account balance listed as a liability because in our case, that is not a liability, it's an account in suspense, the transactions are in suspense. And I ask Mr Coronica, you know, why couldn't he list- there are three categories in a balance sheet, its either got to be an asset, a liability or members equity.
I asked Mr Coronica, why can't it fit into the other two? And why can't you just leave it out all together? The point of this is, it goes into liability because---
...
MR MENG: So it's listed as a liability but we would say it's a transaction in suspense not a liability. And the question is, why can't - if it's a transaction---
...
MR MENG: We would say that recognises a liability for accounting purposes and that arises by reason – the application of accounting rules which are different to superannuation rules. Accounting rules are ridged, and they say, something has to be an asset, a liability or members equity. There can't be something in suspense, where as in superannuation, well we say, there can be something in suspense.[179]

246. Mr Coronica's evidence in answer to questions from his Counsel was:

So, Mr Coronica has just seen the liabilities, of sundry other---Sundry other, that's what the fund owed me.
So is that the balance of your suspense account?---Yes, that's the balance of the suspense account. As you see, the fund purchased from me a lot of shares and other investments at the end of the day, the offset account owed me $70,702.42 which was the opening balance for the next year.
Why is the balance of the suspense account listed as a liability?---Because basically the fund got more assets that the 70,000 it's in the (indistinct) cash or it got in assets. So if you didn't get the $70,702.46 the investment would be less by that amount. As simple as that.
Can it be listed instead as equity or contribution?---No, no it's not listed as equity or contribution.
Why not?---Because basically for that particular year they only- there was- there was a contribution of 50,000, there was no non-concessional or contribution (indistinct), that is a non-concession or contribution but I did not.
Could it have been listed in the assets section of the balance sheet?---No, It can't be listed in the assets section. In other words, the funds or assets or assets from me and at the end of the day I will be $70,702,46.
Could the suspense account balance have been omitted from the balance sheet?---No it can't, otherwise you would not have balanced the books.[180]

247. Mr Coronica's evidence does not explain why he thought the balance of the 'suspense account' was an amount owing by him which is what his evidence was in cross-examination. The exchange with his Counsel explains the reasoning underlying the submissions Mr Coronica's accounting complied with the Regulators' guidance.

248. The accounting method adopted by the Fund was not in accordance with any of those Regulators' Documents. As stated above, in the explanations within each of the Regulators' Documents there is a debit arising from the receipt of a contribution and the credit is made to an 'unallocated contribution account'[181] or 'suspense accounts used to record contributions...pending allocation to members'.[182] The suspense is in members equity waiting to be allocated to a particular member. The guidance documents are in accordance with accounting theory. The APRA Guidelines refers to 'accounting constructs such as 'suspense accounts' used to record contributions...pending their allocation to the accounts of specific members'.[183]

249. In the 2011 financial year, Mr Coronica did not make a member contribution.

250. The Tribunal notes the much smaller interest free credit from Mr Coronica, compared to the credit in 2008–09, was recorded as a 'liability' and not offset against income producing assets.

251. The material before the Tribunal does not indicate as to when the fund became indebted to Mr Coronica for the $70,702.41. In these circumstances the Tribunal does not have any evidence before it justifying a finding of a contravention of the accounting requirements in section 35A of the Act.

252. The Tribunal finds that the non-arm's length supply of credit supports a finding of a contravention of the Sole Purpose Test in section 62 of the Act.

2012 Financial Year

253. The 2011–12 financial year accounting was the subject of some considerable evidence. The ATO auditors sought access to Mr Coronica's multi-column worksheet and from it constructed a 'suspense account'.[184] As the worksheet was not recorded in chronological order the ATO 'suspense account' was in a similar form to the 2009 version produced during the hearing and discussed at paragraph 165 above.

254. In his witness statement,[185] Mr Coronica attested a detailed version of the 'Suspense Account' for the 2011–12 financial year prepared by him and contained in the material submitted under section 37 of the Administrative Appeals Tribunal Act 1975 (the T Documents) was the correct 'suspense account'.[186] That document broke down the activity of the six-month periods from 1 July 2011 to 31 December 2011 and 1 January 2012 to 30 June 2012. Not everything was listed in complete chronological order, however it was an improvement on the 2009 financial year summaries. The cross-examination of Mr Coronica revealed further light on the actual chronological order of transactions.

255. Mr Coronica conceded in cross-examination that his version of the 'suspense account' recorded acquisitions (on 1 July 2011) by the Fund of his King Island farming properties, which were contemplated at some stage but did not eventuate.[187]

256. The multi-column worksheet and the G Coronica line does not record the contemplated sale of the properties to the Fund. It does record a subsequent acquisition of the vendor financed loans secured on the sale of those properties.[188]

257. The evidence before the Tribunal is that between July and December 2011, Mr Coronica withdrew $78,100 from the Fund's bank account and banked it in his personal account. He also banked in his personal account $437,684 in principal and interest payments made to the Fund, which, after netting his opening loan of $70,702, revealed he owed the Fund $445,082 at 31 December 2011.[189]

258. On 30 April 2012, Mr Coronica settled the sale of his original 100% owned property on King Island to his tenants Mr and Mrs Davis. On the same day, he and Mr and Mrs Davis sold their respective 50% interest as tenants-in-common in the jointly owned property to Mr and Mrs Davis's daughter and son-in law (the Millwood couple). After reorganising existing loans, Mr Coronica advanced on the sale both properties 90% of the consideration on vendor terms, taking registered security over both properties. The additional advances to the Davises and loan to the Millwoods became assets of the Fund. There is no evidence of the Fund advancing anything to the purchaser/borrowers. Mr Coronica's evidence is that the loan agreements were transferred to the Fund.[190]

259. The Commissioner submitted that the acquisitions of the loans were further contraventions by the trustees of sections 62 and 66 and the in-house asset rules in Part 8 of the Act. It was also submitted that, before the Fund acquired these loans, the Fund had advanced significant amounts to Mr Coronica in contravention of section 65 of the Act

260. The withdrawal of $78,100 from the Fund and personal banking of Fund receipts was, similar to the 2009 transactions, not the subject of any recorded document such as a minute, direction or memorandum. There was not a document or record made at the time evidencing the acquisition by the Fund of the loans. The lack of clarity as to what happened is again a consequence of the governance failures in the administration of the Fund.

261. In the Applicants' Statement of Facts, Issues and Contentions it was submitted that 'Mr Coronica intended that the loan receivables to be assets acquired by the Fund and executed a declaration of trust over the registered mortgages for that purpose'. The relevant paragraph in Mr Coronica's witness statement does not included the word intention. However, having considered his evidence, the Tribunal accepts that is what his thought process was. Mrs Price, as a trustee of the Fund, was agreeable to the Fund acquiring the benefit of the mortgage security. See paragraph 265 below.

262. The acquisitions were evidenced by Mr Coronica's entries in his multi-column worksheet. The worksheet records the acquisition from Mr Coronica for the face value of the principal sum on the loan agreements. As noted above the worksheet was prepared late in the next financial year.

263. Importantly, the Fund did not advance any of its monies to the purchasers. In his evidence Mr Coronica agreed he gave instructions to a lawyer to prepare the loan agreement in his name as lender. Having taken instructions from the vendor/lender, the agreement (strangely in the circumstances) has a clause obliging the lender to 'not assign its rights under this Agreement or the securities without the consent of the borrower'.

264. Mr Coronica's evidence in cross-examination was:

And you told him to prepare them in your name, as lender, is that right?---That's correct.
That's because you were making the loans, you actually were the owner of the property?---That's correct.
And you were essentially providing vendor financing to enable the purchasers to purchase those properties, weren't you?---Well, that's basically, as I said, in Tasmania (indistinct) vendors loan. I was providing financing.
That's right, and that was coming from you personally, wasn't it?---That's correct, out of my own - - - All right. And as I understand it, you then essentially - sorry, I'll take that back. If I can just show you the declarations of trust. Let's go to tab 26?---Which - all right, tab 26. Which one are we looking at, T or - - -
The big folder, Mr Coronica?---T26, all right, let's have a look. All right, I found it, trust deeds.
And there's the trust deed - the other trust deed is at T27?---Yes.
You entered in - so you declared these trusts on 30 April 2012; that's correct, isn't it?---That's correct. That's when we had some sort of settlement.
And that's the date on which the Fund acquired in the interest in the mortgage loans, isn't it?---That's correct.
So it didn't have an interest in those mortgage loans on 1 July 2011, did it?---No, it acquired the loans from me.
And who prepared these documents?---These documents - I've prepared these documents.
All right. And did Ms Price have any involvement in considering whether acquiring these loans was a suitable investment for the Fund?---Yes. Well, you know, this - as I said to you before, discussed a lot of these things with Mrs Price from time to time. She was a co-trustee, and the reason was because you needed two trustees, as simple as that, so - - -
Yes. And is there any resolution recording the decision of the Fund to acquire these assets?---I don't - I don't recall.
You don't recall?---No.
Have you looked for any resolution? Do you normally keep - make a resolution in relation to these matters?---In relation to most acquisitions, shares and others, no. The only minutes that's basically is required by the Act is in relation to an implementation of an investment strategy every three years.[191]

265. The trust deed is dated 30 April 2012 (the 2012 Deed) between Mr Coronica (described as 'trustee') and Mr Coronica and the other trustee, Mrs Price, as 'trustees for G Coronica Pty Superannuation Fund', described as 'beneficiary'. This deed was drafted by Mr Coronica.[192]

266. The 2012 Deed provides that the Trustee holds the 'property on trust as bare trustee for the beneficiary absolutely on the terms of this deed'. The 2012 Deed further provides that;

In this deed, unless the contrary intention appears:
Property means the mortgage of $525,000 over the property at ... King Island in Tasmania, represented by Mortgage number ... registered on Volume ... registered in the name of the Trustee and such other property as from time to time hereafter the Trustee acknowledges in writing is held on trust for the Beneficiary.

267. The document is executed as a deed. There is no recital of the loan having been assigned or transferred to the Fund (and any consideration for that transfer). The Fund's governance arrangements are now further complicated with Mr Coronica assuming the role of unqualified drafter of legal documents.

268. The Commissioner's submissions were that the rights under the loan agreements were not assigned to the Fund and that:

the Fund's interest as beneficial owner of the debts is evidenced by the declarations of trust over the loan securities. The Fund thereby invested in related trusts within the meaning of subsection 10(1) of the [Act].[193]

269. The submissions for Mr Coronica were that the 2012 Deed dealt only with the security and not the principal loan monies. That being the case, there is no document evidencing the transfer/acquisition of the loan. The offsetting in the worksheet implies that consideration was given by the Fund in respect of its acquisition of both loans. The Tribunal finds that there is no evidence of the existence of any source accounting record of the acquisition of these assets.

270. The agreement of the trustees to acquire the loan for value can, in the circumstances, only be oral. The bare 2012 Deed is taken by the Tribunal as evidence that the trustees at the time of the execution understood that Mr Coronica's vendor loans were previously acquired Fund assets.

271. Mr Coronica must have been aware that at that time he was indebted to the Fund for a significant amount and that debt needed to be discharged. The Tribunal accepts that Mr Coronica held the intention that after settlement the loans would become a Fund asset acquired for their face value.

272. The Tribunal's decision proceeds on the basis there was an undocumented agreement between Mr Coronica and Mrs Price to transfer the loans from Mr Coronica to the Fund before the execution of the bare 2012 Deed. That oral contract was in breach of a clause in the agreement which created rights in the borrowers should that breach have been discovered. As was the 2012 Deed. The death or incapacity of Mr Coronica would have been inconvenient as would have a dispute with the borrowers. The Tribunal notes that the loans were repaid ahead of time. If the Tribunal's finding on the facts is incorrect there is a myriad of alternatives that would need to be considered. None of the alternatives would be any more favourable to Mr Coronica or the Fund.

273. The Tribunal notes that if Mr Coronica had repaid the Fund the amounts of the Fund's receipts he had previously banked in his personal account, and had also drawn on his personal accounts to make the member contribution recorded when he prepared his multi-column worksheet in or about May 2013,[194] the Fund would have been in a position to enter loan agreements before settlement with the respective purchasers, which would not have contravened section 66 of the Act or the in-house asset rules.

274. As the Commissioner's Counsel pointed out during submissions, evidence was not given as to whether that was possible, and if so at what cost or inconvenience that would have put Mr Coronica.

275. In respect of the Millwoods' loan it would have also posed the question of in whose interests the loan was being made and subsequently acquired by the Fund. In his witness statement and in his evidence, Mr Coronica stated that he gave vendor finance because the Millwoods could not get bank finance. His evidence before the Tribunal was:

Now, in relation to the Millwood loan, you said in your statement the Milwoods couldn't - the bank wouldn't loan them money?---Yes.
And wasn't prepared to - why did you consider that it was a suitable investment for the fund, given that the bank was not prepared to lend them any money?---Well, because basically we owned the land with the Davis originally, we paid for it, 143,000, so the land was done up and I was pretty familiar with what values on King Island and in order to - buy selling it to Millwood, buy selling like on a mortgage loan we were able to get a slightly higher price, to sell it for a cash loan, it would've been a lower price. That's how basically things work in the country.
But your purpose was to assist the Milwoods because they - - -?---No, the - - -
- - - couldn't get a bank loan?---No, the purpose was to invest the money on behalf of the fund. That was my purpose and at a rate of interest of 70 - sorry, seven per cent, which is not too bad.
But you did have a purpose of assisting them because if you hadn't loaned them the money or the fund hadn't loaned them the money, then they wouldn't have been able to purchase the land, would they? Because they couldn't get a bank loan?---Yes, well that's fair comment. So then the primary purpose was an investment of the fund.[195]

276. The Millwood loan was for $585,000 on a purchase price of $650,000, that is, geared at a 90% loan to value ratio. It is unsurprising that the Millwoods could not get bank finance on those terms. Mr Coronica's evidence that the finance offer was to extract a better price for himself as vendor, demonstrates that decisions were being made to use the resources of the Fund in his wider interests.

Does the acquisition of the loans contravene section 66 of the Act (the in-house asset rules)?

277. The Definition of an in-house asset includes a loan to a related party. The definition of related party includes a Part 8 associate which in turn includes a partner of the 'primary entity', which in this case is Mr Coronica, a member of the fund. As discussed above at paragraph 217, Mr Coronica obtained an ABN for a 'partnership' of himself and Mr and Mrs Davis. A Tax File Number was not sought or obtained. As stated earlier the Tribunal accepts that the association with the Davis' is in the nature of a jointly owned property and/or a joint venture. It is not a general law or tax partnership and the association with Mr and Mrs Davis the loan to them is not with a 'related party of the fund' within the 'basic meaning of in-house assts' in section 71 of the Act. The loans are held not to be in-house assets.

278. Section 66 of the Act applies where trustees 'intentionally acquire an asset from a related party of the Fund'. It was submitted to the Tribunal that Mr Coronica 'intended for this loan receivable to be an asset acquired by the Fund'.[196] In Mr Coronica's repeated descriptions as to how his 'suspense account' worked, credit entries were described as payments to him in consideration of his transfers of assets to the Fund.[197] If it did not occur to Mr Coronica that he was receiving consideration for the Fund's acquisition on 30 April 2012 at settlement, it should have when he credited the G Coronica line in his multi-column worksheet.

279. The previously discussed exclusions from the prohibition of funds acquiring assets from members in section 66 of the Act are restricted to listed shares, business real property and certain in-house assets. Those exclusions do not apply to these loans.

280. In addition to the stated exclusions, section 66 of the Act contains definitions in subsection (5), which provides 'in this section..."acquire an asset" does not include accept "money"'. Submissions were made for Mr Coronica that the loan agreements were within the meaning of the word 'money' and effectively excluded from the application of section 66.

281. Reliance was placed on a paragraph in an APRA Superannuation Circular No.II.D.3. The paragraph is under heading 'The General Proposition Section 66' and reads:

The wide scope of the section prohibits a Fund from accepting in specie contributions (non-cash assets) from related parties. However, the acceptance of monetary contributions is specifically allowed for in the definition of 'acquire an asset' in section 66(5) of SIS Act. The term 'Money' is taken to include negotiable instruments such as cheques. Bills of exchange or promissory notes.

282. The Applicants' submission was that 'the secured loans are analogous to promissory notes'. For these reasons, it was submitted the secured loans fall within the meaning of the 'money'.[198]

283. The Tribunal rejects this submission on these grounds:

(a)
Taken as a whole, the above APRA paragraph is not advocating that the word money should be extended any further than the terms used.
(b)
The APRA guidelines refer to 'monetary contributions'. The loans were acquired for consideration at their face value. The acquisition of the loans was not recorded as a contribution. While there is some overlap between a promissory note and a loan, there is a big gap between a promissory note and cheques and bills of exchange. A true promissory note is at the outer edge of the concession. While the Davis and Millwoods' loans are not written with complex terms, the agreements are a considerable departure from the definition of a promissory note in the Bills of Exchange Act 1909 which reads:
A promissory note is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay, on demand or at a fixed or determinable future time, a sum certain in money, to or to the order of a specified person, or to bearer.
The loan agreement here has mutual rights and obligations and, as pointed out above, the agreement contained a clause restricting the lender to 'not assign its rights under this agreement or the securities without the consent of the borrower'. The agreement is also for a fixed term of five years with a fixed rate of interest.
(c)
The APRA circular in the relevant paragraph uses the term 'Non-cash asset' when introducing the inclusion of negotiable instruments in the concept of money. In this context the words cash and money are taken to be the same.

284. In cross-examination, Mr Coronica stated in response to a question to explain why he thought the loans were money:

And, then if we go back to 1993, in the Act it said it's cash or other moneys, which means it encompassed not just cash, it encompassed other money, and subsequently the Act was changed. They left the cash out, and just had moneys. And, you know, you've got-as far as- there's cash, cash equivalents; there's money, and money equivalent. So that's the way I interpreted the law at that time. There was no specific definition in the (indistinct) of money, so money was, you Know a generic term, and basically, I was of the view that it included money.[199]

285. The terms 'cash and cash equivalents' have an accepted meaning in Australian Accounting Standards. AASB 107 on Cash Flow Statements defines cash as 'cash on hand and demand deposits'. Cash equivalents are defined as 'short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of a change in value'. None of those qualities or attributes were present in these secured fixed term loans.

286. The word 'accept' before money was not the subject of submissions before the Tribunal. If the Tribunal had have held that the loans were 'money' the issue would then become whether the money was 'accepted' (in the policy context as a contribution). On the facts, as found by the Tribunal the loan was acquired by the Fund, for consideration, being a discharge of a pre-existing loan to a member. The transaction in this case was not a contribution.

287. As discussed at paragraph 114 above, the policy underlining the section 66 of the Act was to prevent the early access to superannuation savings. The Tribunal finds the acquisition of the Davis and Millwoods' loans by the trustees contravened section 66 of the Act.

288. The banking transactions described in paragraph 257 above, were a contravention of section 65(1) of the Act and clause 23.3 of the Fund deed.

289. Mr Coronica's banking of those fund receipts in his personal bank account is not in accordance with his explanation of his suspense account. The Fund did not have any outstanding obligations for the purchase of assets when the advances were made. Mr Coronica's drawings from the Fund as an undifferentiated source of personal funding is in contravention of section 62 of the Act. Explanations were not given as to what use Mr Coronica put those advances or why they were personally banked and or, not immediately corrected.

290. This finding is also supported by the evidence that the opening liability to Mr Coronica of $70,702.49 was not fully discharged till 5 October 2014 when a loan repayment to the Fund was banked by Mr Coronica in his personal account.

291. In the audit finalisation letter dated 14 May 2012 for the 2011–12 year (the Audit Finalisation letter), the auditor made comment on the following matters:

Record Keeping Procedures
I am satisfied with the record keeping procedures of the Superannuation Fund to date.
Financial Statements
I note that the Sundry Debtor carried forward balances have been treated as pension payments.
I note that the trustees have acknowledged my recommendation to reflect assets at market valuation.'

292. As discussed above, records were not kept in a complete chorological order. More concerning is the comment regarding the 2011 'sundry creditor'. The creditor was not treated as a pension payment. No pension payments were made. It was not even converted into a contribution which could become a future pension.

293. While the auditor was not called as a witness to explain her audit there is little to suggest she examined the workpapers at an appropriate level.

294. The comments in the Audit Finalisation Letter together with the unqualified Part A and Part B statements in the audit report are again not accepted as being appropriately made and the Tribunal rejects the submission that reliance should be placed on them.

2013 Financial year

295. The evidence for the 2013 financial year was restricted to the T Documents and accepted into evidence. The multi-column worksheet was examined by the ATO auditors. It discloses that Mr Coronica transferred $317,000 worth of listed shares to the Fund. The Fund satisfied this liability with a credit to cash of $241,000, and Mr Coronica banking a Fund receipt of $8,000. The balance of $68,000 was made up of: a member contribution of $8,000; accounting entries of Mr Coronica funding the practice company's employer contribution of $25,000; and the Fund adjusting for Mr Coronica receiving the dividend declared by Nominees to its shareholder (the Fund). That dividend was not paid in cash but journalised as part of Mr Coronica's obligation to make repayments on his Division 7A loan from Nominees. Mr Coronica was not examined on this year's accounting.

296. It is not possible from the material before the Tribunal to determine the chronological order of these events other than the journal entries making up the $68,000 taking place on 30 June 2013. Mr Coronica was not examined on this year's accounts. The Tribunal is therefore unable to make a finding as to whether and to what extent financial accommodation was given by the Fund to Mr Coronica. The absence of evidence of the chronological order also means a finding cannot be made as to whether the payments were made to Mr Coronica in contravention of the conditions of release in Section 34(1) of the Act and regulation 6.17 of the Regulations. The 30 June 2013 journal entries are consistent with Mr Coronica's description of his 'suspense account' and an indication that he extended the Fund credit of at least those amounts for an undisclosed period. The non-arm's length terms of the credit being further evidence that the Sole Purpose Test was contravened.

297. The continuing practice of not keeping a chronological record of transactions supports a finding that section 35AE of the Act relating to keeping proper accounting records was contravened.

298. Submissions were made that regulation 4.09A(2) of the Regulations which came into operation from 7 August 2012 was contravened. This regulation is to the effect that the covenant in the standard deed[200] and in section 52(2)(g) of the Act to keep money and other assets of the Fund separate from those held personally by a trustee. The regulation becomes a prescribed operating standard. Section 34(1) of the Act provides that trustees must ensure that prescribed standards are complied with. Section 166 imposes an administrative penalty for a contravention of the subsection in relation to an SMSF.

299. Section 34(2) of the Act provides that a person who intentionally or recklessly contravenes section 34(1) is guilty of an offence. There was no evidence of an intentional disregard of this provision. While the contravention above is disappointing for a person of Mr Coronica's professional experience and qualifications, the Tribunal does not find the degree of carelessness to amount to recklessness in all of the relevant circumstances.

300. The 2013 financial year also saw the introduction of regulation 8.02B of the Regulations which requires trustees of SMSFs, when preparing accounts and statements required by the Act, to value an asset at its market value. The Fund's Statement of Financial position for that year revalued the listed shares to market value. The holding in Nominees was recorded at the historical cost value of $100,000, being the then market value as determined by Mr Coronica as discussed above. As at 30 June 2013, the payment of dividends out of pre-acquisition profits had diminished the net asset position to $84,321. Submissions were made that a finding of a contravention should be recorded.

301. Absent a value being placed on franking credits, the market value is $84,321, that is $15,679 below the carrying book value. An 18.6% difference. This matter was not the subject of evidence during any of the five days of hearing. In the audit papers included in the documents filed by the parties, and in the Respondent's SFIC the proposition was advanced that market value should take into account 'its available franking credits.[201] Submissions were not made as to how future franking credits should be valued. A value of 15% on the $84,321 retained earnings would be $12,648. A 30% value would be $25,296. In these circumstances and considering the materiality of the issue no finding is made that regulation 8.02B was contravened.

302. In this year, the assets transferred to the Fund by Mr Coronica consisted solely of listed shares which are excluded from the operation of section 66 of the Act. The ATO auditors did not enquire as to the chronological order of transactions. There was no evidence before the Tribunal as to whether the Fund advanced funds to Mr Coronica before he transferred the shares, or whether he banked Fund receipts in his personal accounts. Absent that evidence, no findings are made as to whether there was a contravention of the Sole Purpose Test in section 66.

2014 Financial Year

303. In this year, the Fund acquired listed shares from Mr Coronica to the value of $108,600. The date(s) of acquisition are not in the evidence before the Tribunal. The multi-column worksheet (which was examined by the ATO auditors) records the payment from Mr Coronica to the Fund's account of $38,650 and the payment or $195,000 from the Fund's account to Mr Coronica. These are total amounts, which were not chronologically recorded.

304. On 19 June 2014, Mr Coronica entered into a loan agreement with Mrs Rigoli to lend her $270,000 for her to acquire from her sister a half share in a property left to the sisters in their father's estate. On or before that date (the transfer is dated 27 May 2014), Mr Coronica drew from his personal account and advanced that amount to Mrs Rigoli to facilitate that transaction. Importantly, the funds provided did not emanate from the Fund.

305. On 20 August 2014, after the Executorship of the estate was completed, the mortgage was registered and on that date, Mr Coronica, as bare trustee and Mr Coronica and Mrs Price as trustees of the Fund, executed a bare trust deed on the same form as the deeds executed in the 2012 year (discussed above at paragraphs 265 to 271).

306. The financial accounts record that as at 30 June 2014 the Fund had acquired the Loan made to Mrs Rigoli, and a member contribution from Mr Coronica of $150,000. The multi-column worksheet records an entry for an employer contribution from the practice company of $35,000 and a 'repayment' of $35,000, being the dividend declared by Nominees and presumably directed by the Fund to be paid to Mr Coronica. All of these entries were on the evidence recorded many months after the year end. The evidence is that no memoranda, formal directions or minutes were at any time made and kept in respect to any of these accounting entries. The requirements of the deed and the Act to keep proper accounting source records were again contravened.

307. The facts and circumstances bear a close similarity to the 2012 loans discussed above at paragraphs 265 to 272. The only material difference being that the loan agreement did not contain a clause requiring consent of the borrower to a transfer on the loan by the lender. The Tribunal finds that the loan was nevertheless not 'money' and excluded from the operation of section 66 of the Act. For the reasons stated above, the Tribunal finds there was a further contravention of section 66.

308. The continued contravention of the accounting requirements, the access to superannuation saving through the unauthorised acquisition of assets from members, the mixing of personal assets with fund assets supports a finding that the Sole Purpose Test was also contravened.

309. The Tribunal notes that with more appropriate governance and care these contraventions should have been avoided. On this occasion, at or before the advancement of the loan to Mrs Rigoli, Mr Coronica had the cash in his account to make his member contribution and to fund the practice company making its employer contribution. If the loan was made by the Fund, there would not have been a need to 'assign' Nominees' dividend by way of repayment. The net cash transfers to Mr Coronica could have been reduced to the $106,800 purchase price of the listed shares. The Fund, from its revenues and the contributions from the employer and Mr Coronica, would have had the capacity to make the loan directly to Mrs Rigoli and not need to acquire it from a member in contravention of section 66 of the Act.

310. Similarly, if care was taken to transact matters in the appropriate chronological order there would not have been a contravention of section 34(1) of the Act and regulation 4.09A of the Regulations, to permit fund assets to be mixed with personal assets.

Other observations

311. The Tribunal notes that after intervention of the new auditor Mr Coronica ceased operating his 'suspense account' at or around the end of the 2014 financial year. He did so before the ATO commenced its audit.

312. The Tribunal also notes:

(a)
Mr Coronica evidence is that his 'suspense account started when the non-concessional contribution limits were increased in the 2007 budget'.[202]
(b)
Mr Coronica believed it has always been possible for funds to lend money to members., and for members to extent credit to the fund.[203]
(c)
Mr Coronica had been auditing the Fund since the Fund's inception up until the start of the 2009 financial year.
(d)
The 'voluntary' correction was only in respect to the acquisition of Nominees and the consequential franking credit benefits. The correction was made after the Commissioner audit had concluded. The consequences and impacts of the other contraventions on the Fund, and the benefits enjoyed by the practice company and Mr Coronica remained in place.

NON-COMPLIANCE DECISION

313. The trustee's contraventions in the 2009 financial year of the regulatory provisions summarised in paragraph 228, causes the Fund to fail the automatic complying fund test in section 42A(5)(a) of the Act. In the 2009 financial year the Trustees contravened seven separate section or subsections. Some on multiple occasions. Section 42A(5)(b) is a relieving discretion allowing one or more contraventions of the regulatory provisions to be ignored where the Commissioner, and the Tribunal on review, decides that a notice should be given determining that a fund is complying, 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;
(b)
the seriousness of the contravention or contraventions; and
(c)
all other relevant circumstances.

314. Being a relieving discretion there are four principles that need to be observed:

(a)
the legislative scheme is that regulated funds that operate the fund in compliance with the requirements of the Act are eligible to the concessional tax treatment contained in the Income Tax Assessment Act 1997. The operating requirements relevantly include operating standards, governing rules, lending rules, in-house asset rules, accounting requirements and auditing standards;[204]
(b)
the legislative scheme taxes the taxable income at the higher maximum marginal rate if those conditions are not met and brings forward tax at that higher rate on unrealised gains;
(c)
discretions that are remedial or beneficial in nature ought to be given a construction that allows the fullest relief which is open on a fair reading of their terms; and
(d)
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 Act.

315. These four principles have their origins in an often-cited extract of Logan J in Vivian (Deputy Commissioner of Taxation (Superannuation)) v Fitzgeralds (2007) 51 ATR 834 (Fitzgeralds case):

Our parliament has deliberately constructed a scheme whereby, in return for submission to a regulatory regime found in the SISA, particular taxation benefits are given to the trustee of a superannuation fund and its members. The public policy that seems to underlie that particular concession is to encourage prudent provision by Australians for their retirement. In so doing, the burden on other Australian taxpayers in the provision of social security benefits for the aged is thereby lessened. I can, I believe, responsibly take judicial notice that a contemporary phenomenon is a recognition that Australia has, in terms of its demographics, a need for such provision to be encouraged.
Part of the scheme found in the legislation is to enable what one might term small funds or, at least funds which have fewer than five members to be self-managed. That is a particular benefit conferred by Parliament on those who would wish to make provision for their retirement, it enables self-management as opposed to becoming a member of a fund the management of which may be remote from membership. It is a privilege. It is a privilege that that should not be abused.[205]

316. As noted above in Aussiegolfa,[206] the primary policy objective of the superannuation investment rules (as outlined in the Explanatory Memorandum accompanying the Superannuation Legislation Amendment Bill (No 4) 1999 amendments to the Act):[207]

is to ensure that the investment practices of superannuation funds are consistent with the governments retirement incomes policy. That is, superannuation savings should be invested prudently, consistently with the SIS requirements, for the purpose of providing retirement income and not providing current day benefits.

317. That Explanatory Memorandum noted the existing rules are 'designed to limit the risks associated with superannuation fund investments and to ensure superannuation savings are preserved until retirement and not accessed for current use'.[208] The Explanatory Memorandum continues with a description of the existing rules being the in-house asset rules, the prohibitions against borrowing to, and lending and acquiring assets from members, and the general requirement to make investments at arms-length. In the references to these provisions there is further reference to a policy of limiting risk and to preventing the use of superannuation savings as a means of providing current day financial support to members.[209]

318. The Applicants' submissions on the exercise of the discretion in section 42A(5)(b) of the Act were that the taxation consequences were extreme, taxing more than 25% of the 2016 total member funds. The Applicants also submitted that the asserted contraventions stemmed from a single transaction — the acquisition of Nominees. That setting aside the decision was consistent with the purpose of the Act by providing retirement income. That Mr Coronica made an honest and reasonable mistake. That all the alleged contraventions had been rectified. That Mr Coronica is willing to provide appropriate undertakings to the Commissioner and finally that there should be no future compliance risk as going forward the Fund would invest exclusively in listed shares and Mr Coronica would be the sole member.

319. The Commissioner's submissions were that, consistent with the Commissioner's position stated in PSLA 2006/19, the financial impact of the issue of a non-compliance notice will always be serious, and the decision should not be made lightly. That it is relevant to consider the quantum of funds that will remain available for members' retirement and the extent to which a reduction in Fund assets will impact on persons who are not involved in the relevant contraventions.[210]

320. That the consequences of issuing a non-compliance notice are not determinative and must be weighed against the other matters in section 42A(5)(b) of the Act. The submission discussed authorities relevant to the issue of seriousness and other relevant circumstances. It was submitted that a contravention may be serious in character notwithstanding that it had no adverse financial impact on the superannuation fund.[211]

321. It was also submitted that Mr Coronica sought to minimise and deflect responsibility for the contraventions in a variety of ways. That it was incorrect to characterise the contraventions as arising from a single event. That the seriousness of the errors is magnified by the fact that Mr Coronica had more than 50 years' experience as a Certified Practising Accountant.

322. In the Tribunal's view, the taxation consequences are significant. Increased income tax assessments are a consequence of any non-compliance decision. They are also the consequence of Mr Coronica operating the Fund in the 2009 financial year, and over the following period of the Commissioner's audit, whereby he obtained current day financial support from the concessionally taxed superannuation savings. What is required is a balancing of the reversal of the concessionally taxed benefit, against the seriousness of the contraventions and other relevant matters. The Tribunal notes the Commissioner's submission that that while on face value the amended assessment of around 25% of the Fund's balance, there is still around 75% available for retirement purposes.

323. The contraventions here are numerous. The trustee's actions or inactions:

(a)
involve multiple contraventions in the 2009 financial year and the contraventions extend over a period of time, including in the 2008 year through to the 2013–14 year;
(b)
go well beyond the acquisition of Nominees;
(c)
were implemented by an experienced accountant, registered tax agent and registered company auditor, who ought to have known that the arrangements constituted contraventions of the Act;
(d)
were in breach of the provisions of the deed;
(e)
were in breach the trustee's covenants to keep the money and other assets of the Fund separate from those held by the trustee personally;
(f)
involved Mr Coronica being advanced, interest-free and unsecured, significant current day financial benefits for periods in the order of 9 to 12 months in at least two years;
(g)
involved Mr Coronica providing interest-free credit to the Fund for periods in the order of six months or more in at least more than one year;
(h)
involved the intentional acquisition of a related company for the dominant purpose of receiving franked dividends out of pre-acquisition profits and to provide personal income tax benefits and a contravention of the Sole Purpose test;
(i)
involved the lodgement of the 2009 Income Tax Return (and preparation of the Statement of Financial position) with misleading disclosure of the true asset and liability position of the Fund;
(j)
Involved Mr Coronica's reliance on his undocumented valuation of his private investment company that, while not wilful, was grossly negligent if not incompetent; and
(k)
the contravention in (h) above was not corrected within amnesty periods made public by the Commissioner and only corrected well after the Commissioner's audit activities had concluded.

324. The Tribunal finds that the number and nature of the contraventions of the standards required of trustees of superannuation funds to be concessionally taxed are very serious. The seriousness is amplified by the standing of Mr Coronica as an experienced accountant, registered tax practitioner and registered company auditor.

325. In Fitzgeralds case, Logan J added to his above cited statement:

I should add that it seems to me to be part of the scheme on the legislation, in its provision for self-management, that those who take advantage of the utilisation of a self-managed fund do, indeed, self-manage that fund in accordance with the terms of the deed and the legislation, rather than have a much wider and more detailed policing of that. In other words, the parliament is entrusting those who manage a self-managed fund with a duty of adhering to the terms of the deed and the terms of the legislation. That is not an unusual duty. Any trustee - and the trustee of a superannuation fund is but a particular exemplar of a trustee - is obliged to discharge his or her duty according to the terms of a governing trust deed.[212]

326. The Tribunal accepts that:

the exercise of the discretion in s 42A as one to be undertaken in a manner that is consistent with objects of the Act as these set out at s 3. Any exercise of discretion must have regard to considerations of unfairness in a particular case, but must be applied in a manner consistent with the objects of the relevant Act. It is important to have regard to whether, by exercising the discretion in a particular case, the decision-maker will be achieving or frustrating those objects.[213]

327. The policy of the Act is that where the contraventions are found to be serious, the concessional tax benefits enjoyed by the fund are at risk. To exercise the discretion in this case would be relieving those responsible for managing the SMSF of tax consequences of managing the Fund contrary to the control measures stipulated in the legislation. Exercising a discretion in these circumstances is not consistent with the objects of the Act.

328. The concept of fairness goes beyond just being about the party seeking the exercise of the discretion. An object of the Act is that complying and non-complying trustees are respectively treated fairly. On the current facts as found, it could be said that exercising the discretion to a trustee that is trained and qualified in the relevant field is not fair on all the trustees who understand the privilege offered by the legislation and who self-manage their fund in accordance with the deed and the legislation 'rather than have a much wider and more detailed policing of that'.[214] The covenants of a trustee to keep the fund's money and assets separate from the trustees personal affairs has been proscribed since 1993. It is not all that hard to bank your fund's receipts in the fund's account and to meet fund payments out of that account or accounts. That does not restrict a member from contributing 'in specie' within the proscribed rules.

TRIBUNAL'S DECISION ON THE NON-COMPLIANCE DECISION (2018/7160)

329. In the circumstances of this case discussed above, and weighing up all the factors, it is the Tribunals view that it would be inconsistent with the objects of the Act to issue a notice of compliance. The section 40 notice was properly issued, and the discretion afforded by section 42A(5)(b) of the Act is not to be exercised. The non-compliance decision under review is affirmed.

CONCLUSION ON THE DISQUALIFICATION DECISION

330. Where the trustees contravene provisions of the Act which are described as an offence, or a civil penalty provision or contravenes certain offence provisions of the Taxation Administration Act 1953 (TAA Act) (see section 38A(ab) of the TAA Act), there are a range of actions that the Regulator can take. Personal action against the offending trustee in respect of the above contraventions involves taking proceedings in the Federal Court. The Act also empowers the Regulator to take administrative action to treat the Fund as non-complying (as per the decision above). The Act also empowers the Regulator to take the administrative action of disqualifying an individual from being a trustee or from being a responsible officer of a corporate trustee. The most appropriate action will depend on all the circumstances.

331. The Commissioner here decided to disqualify Mr Coronica pursuant to the powers contained in Part 15, Division 3, subdivision A of the Act, and more specifically section 126A, on the grounds that the Commissioner was satisfied that, as a trustee of the Fund, Mr Coronica contravened the Act on one or more occasions and the nature and seriousness, or number, of the contraventions provided grounds for disqualifying him.[215]

332. The Commissioner also relied on the grounds that he was not satisfied Mr Coronica was a fit and proper person to be a trustee of a superannuation fund.[216] The Tribunal has considered the following in determining the appropriateness of this decision.[217]

333. The consequence of the making and upholding of the Non-Compliance decision is in the nature of imposing a monetary penalty on Mr Coronica for his actions as trustee in contravening the Act.[218] The consequential, amended assessments to the Fund significantly impact his entitlements from the Fund on his retirement. He is the only member with an account balance. His entitlements are reduced as a result of the additional tax not only on the transactions held to contravene the Act, but also tax income that was generated by the Fund in compliance with the Act. The amended assessments also have a component of taxing unrealised gains that would otherwise been deferred and taxed in the concessional tax environment.

334. The reference in section 42A(5)(b)(i) of the Act, that the Regulator and the Tribunal should consider these increased tax consequences together with a consideration of the seriousness of the contraventions and any other relevant circumstances, reinforces this position. In exercising the discretion, consideration must be given to whether the additional tax is appropriate in the circumstances of the contraventions. Expressed colloquially, does the penalty fit the crime?

335. Disqualification decisions can be both 'punitive' and 'protective'. As the High Court pointed out in Rich v Australian Securities and Investments Commission[219] (a decision concerned with issues arising in proceedings before the Australian Securities and Investments Commission (ASIC) on disqualifying a company director): 'account must be taken in sentencing a criminal offender of the need to protect society, defer both the offender and others, to extract retribution and promote reform'.[220]

336. This was elaborated on in the separate decision of McHugh J, who added in the context of whether disqualifying decisions were purely protective:

In exercising their discretion, however, courts which administer the legislation do not concern themselves solely with the issue of whether the defendant now is or in the future will be a fit and proper person to manage corporations. They take into account a wide variety of factors in addition to determining whether any and, if so, what period of disqualification should be imposed. They consider more than the present and future fitness of the defendant to manage corporations. They take into account factors such as the size of any losses suffered by the corporation, its creditors and consumers, legislative objectives of personal and general deterrence, contrition on the part of the defendant, the gravity of the misconduct, the defendant's previous good character, prejudice to the defendant's business interests, personal hardship and the willingness of the defendant to render assistance to statutory authorities and administrators. No doubt some — maybe all — of these matters are relevant in determining whether the defendant ought to be disqualified or the period of disqualification that is required in order to protect the public. But in practice courts do not use these matters merely as evidentiary indicators of the time when the defendant will, if ever, be fit to manage corporations. Rather, they become part of a synthesis from which the judges make a value judgment concerning whether to order disqualification and, if so, the period of disqualification that should be imposed. It is not the practice of judges to say: ''On the evidence, I find that after (say) five years, the defendant will be sufficiently reformed to make it safe for him or her to manage corporations.'' This suggests that the disqualification provisions are not purely protective in nature.[221]

337. Justice McHugh later added:

A good example of the approach of judges in this particular area of the law is found in the judgment of Bryson J in Re One.Tel Ltd (In liq); Australian Securities and Investments Commission v Rich. His Honour's reasons show that the jurisdiction cannot be characterised as purely protective. They reflect an approach that can be found in many other cases concerning the disqualification from office of company officers. Among the matters Bryson J thought were relevant were the second defendant's age and stage of career at which disqualification would fall, the office held, the extent of the second defendant's responsibilities in terms of the value of assets, the complexity of the activities and the number of people within the range of adverse effects of the second defendant's breaches of duty. His Honour warned that the guidance to be obtained from other decisions with respect to the reasons for ordering disqualification and the period of disqualification is limited. Each decision is closely related to its own facts, which tend to be highly complex. Further, the circumstances of each defendant are special to that person. Bryson J also said that there is ''not much to be gained from considering or attempting to classify periods of disqualification which have been imposed in other cases''. That is because breaches of the Corporations Act, the circumstances of the breaches and the outcomes of the breaches, including the number of persons and the value of the interests affected, may take many forms. In addition, the personal circumstances of persons in breach vary greatly.[222]
(citations omitted.)

338. In the context of determining the appropriate penalty for contraventions of the 'civil penalty' provisions of the Act, in Australian Prudential Regulation Authority v Derstepanian,[223] Weinberg J observed:

It is of course proper to have regard to the principles that govern pecuniary penalties under other statutes. In Trade Practices Commission v CSR Ltd [1991] ATPR 41-076, French J identified a number of factors that were relevant when considering appropriate penalties for infringements of Pt IV of the Trade Practices Act 1974 (Cth). His Honour distilled these factors from earlier decided cases. They include: the nature and extent of the contravening conduct; the amount of loss or damage caused, if any; the circumstances in which the conduct took place; the size of the contravening company; the deliberateness of the contravention, and the period over which it extended; whether the contravention arose out of the conduct of senior management; the company's corporate culture; and whether the company had co-operated with the authorities in relation to the contravention. To these factors may be added the respondent's past record, the respondent's financial position, and the deterrent effect of any civil penalty imposed.
Both the applicant and the respondents submitted that the agreed penalty of $100,000 for the first respondent was ''within the permissible range''. They pointed out that although the maximum penalty for the 2 contraventions, viewed separately, was $440,000, in practical terms the 2 offences ought to be viewed as essentially involving a single course of conduct. Both offences arose out of the precisely the same facts and circumstances. In essence, ss 62(1) and 109(1) are simply different ways of characterising the same misbehaviour. It is a well-recognised principle of sentencing that a person not be punished twice for what is, in substance, the same conduct, even if that conduct can be viewed as giving rise to 2 separate offences. Accordingly, it was submitted, that as a practical matter, the maximum penalty for these 2 contraventions should be regarded as $220,000. I accept that submission.[224]

339. The authorities on the application of section 126A of the Act raised before the Tribunal do not deal with the section's application in conjunction with other additional penalty provisions. The history of cases before the Tribunal concern its application in cases where the funds have been dissipated and a non-compliance decision would be of little practical effect.

340. The Tribunal notes that for funds regulated by ASIC disqualifications are made by the Court on application by ASIC. The Commissioners responsibility to consider disqualification reflects the dual role of being responsible for the administration of the tax system and the regulator of SMSFs. Reference has already been made to the judicial observations of the consequential responsibility placed on self-managed trustees.

341. The Tribunal notes that in the authorities referred to, in either the application of non-compliance decisions, or in the civil penalty cases referred to the Court, there is no mention of a section 126(A) disqualifying decision having also been made.

342. Section 126A(1) of the Act provides:

The Regulator may disqualify an individual if satisfied that:

(a)
the person has contravened this Act or the Financial Sector (Collection of Data) Act 2001 on one or more occasions; and
(b)
the nature or seriousness of the contravention or contraventions, or the number of contraventions, provides grounds for disqualifying the individual.

343. The contraventions of the Act that underpin the non-compliance decision above have, in their circumstances, been held to be serious and, considering their financial consequences, justify being upheld. Those financial consequences meet the sentencing objectives discussed above. The penalty satisfies 'the need to protect society, deter the offender and others, to extract retribution and promote reform.'[225] In the Tribunal's opinion, the noncompliance decision is an appropriate 'penalty' for the 'offence/offender'.

344. Notwithstanding the adequacy of the financial penalty, an upholding of the disqualification is still supportable if the financial penalty could not satisfy one of the purposes of disqualification, namely protecting society against future contraventions.

345. The Tribunal agrees with the statements in the Commissioner's Law Administration Practice Statement PS LA 2006/17 that:

[a] key factor in making the decision to disqualifying an individual is whether, by not taking such action, there will be a future compliance risk... Disqualification under section 126A is primarily aimed at protecting the integrity of the superannuation system. It should be applied where the Commissioner is concerned that allowing the individual to remain in the position of trustee would present a future compliance risk.[226]

346. The PS LA also states that there are options other than disqualification which include: issuing the fund with a notice of non-compliance; and accepting undertakings from the trustee.

347. The Commissioner's submissions on section 126A of the Act focus on the seriousness of the contraventions in the 2009 and subsequent years. As to the issue of future compliance risk it was submitted that Mr Coronica's evidence demonstrated a failure to comprehend the character of the obligations of a trustee. The inaccuracies in his workings and evidence demonstrated a lack of competence and the seriousness of the errors was 'magnified by the fact that Mr Coronica not only has more than 50 years' experience as a CPA but also continues to provide advice to clients in relation to superannuation matters'.[227]

348. The Tribunal does not take issue with these submissions. They are consistent with the Tribunal's findings that the contraventions were serious in the above Non-compliance decision.

349. Submissions on behalf of Mr Coronica were that the contraventions were the result of honest and reasonable mistakes, that he has demonstrated the willingness to comply with his obligations in accordance with Part 7 of the PS LA 2006/17, is willing to provide appropriate undertakings, and there is no future risk to the investing public and, because of the Fund's current investment strategy, no future compliance risk.

350. The Tribunal does not agree that the contraventions were reasonable or in the alternative reasonably arguable as that concept applies in income tax legislation. The issue remains as to the Tribunal's assessment of a future compliance risk.

351. The Commissioner contended in the alternative that Mr Coronica is not a fit and proper person to be a trustee in accordance with section 126A(3) of the Act. That subsection provides 'the regulator may disqualify an individual if satisfied that the individual is otherwise not a fit and proper person to be trustee'.

352. In Davies v Australian Securities Commission (1995) 59 FCR 221, Hill J observed, in the context of a similar section, that 'no principle of interpretation could be better established than that a provision must be interpreted by reference to the context in which it appears'.[228] He also commented on the meaning of the expression 'fit and proper person', noting that what is necessary to constitute a person as fit and proper to occupy a particular office or pursue a particular vocation will vary having regard to the office or vocation under consideration.[229]

353. The office under consideration here is trustee of an SMSF. Underpinning the SMSF rules are requirements that Regulated SMSF's with fewer than five members, all members must be are either trustees or directors of a corporate trustee. The Act does not prescribe any minimum qualifications or experience to be a trustee. The Act presumes that members or trustees will educate themselves or put in place governance arrangements where the necessary expertise can be obtained. As stated above by Logan J, the privilege of being a trustee should not be abused.

354. Section 126A(3) of the Act enables the Commissioner to consider factors in addition to those mentioned in section 126A(1). In discussing the phrase 'fit and proper person' in the context of licences to use motor vehicles for the purposes of interstate trade, Dixon CJ, McTiernan and Webb JJ said in Hughes and Vale Pty Ltd v The State of New South Wales (No 2) (1955) 93 CLR127 at 156–57:

But their very purpose is to give the widest scope for judgment and indeed for rejection. "Fit" (or "idoneus") with respect to an office is said to involve three things, honesty knowledge and ability: "honesty to execute it truly, without malice affection or partiality; knowledge to know what he ought duly to do; and ability as well in estate as in body, that he may intend and execute his office, when need is, diligently, and not for impotency or poverty neglect it" — [Lord] Coke. When the question was whether a man was a fit and proper person to hold a licence for the sale of liquor it was considered that it ought not to be confined to an inquiry into his character and that it would be unwise to attempt any definition of the matters which may legitimately be inquired into; each case must depend upon its own circumstances: R v Hyde Justices (1912) 1 KB 645, at p 664.

355. The widest scope of judgement includes: whether the trustees 'discharge[d] his or her duty according to the terms of a governing trust deed',[230] and invested prudently and consistently with the Act's requirements (for the purpose of providing retirement income and not providing current day benefits);[231] and that it is a privilege that should not be abused.[232] These matters have been considered in the application of the non-compliance decision and section 126A(1) of the Act. Any additional factors should still be subject to the policy objectives discussed above in PL SA 2006/17.

356. The closest authority in the material provided to the Tribunal is case Re The Taxpayer and Commissioner of Taxation.[233] In that case, the applicant had been convicted on 32 counts of paying secret commissions and was sentenced to a term of imprisonment suspended on condition of good behaviour for three years. The applicant was therefore automatically disqualified from being a trustee of a superannuation entity.[234] That applicant applied to the Commissioner under section 126B of the Act to waive the disqualification and permit him to continue as a trustee of his SMSF. The Tribunal held:[235]

Disqualification is not a sanction. It is not intended to be an additional punishment. The applicant has already been sentenced by a court for his crime. Disqualification is a prophylactic. It is designed to protect the investing public against the risk that people with a track record of misconduct will offend again. The use of the words "highly likely" in the sub-section confirms that Parliament intended to place a premium on investor protection. It is not an easy standard to satisfy. The fact the applicant might incidentally suffer hardship as a result of the disqualification is therefore irrelevant.
I think the tribunal's decision in Re VX96A and Insurance and Superannuation Commissioner (1996) 23 AAR 427 illustrates the correct approach. The tribunal explained (at 435) that it:
"... must be satisfied on the totality of the evidence before it that the applicant is highly unlikely to pose any risk in the exercise, as an officer of a company which is to be a trustee, of his judgment, wisdom and provident care in the management of the superannuation entities under his control. In the latter context, in the circumstances of this case, it is not so much the significance of the sums involved in the offences committed by the applicant but rather the issue of whether, given the fact that the offences were committed, people entrusting superannuation funds can be assured that it is highly unlikely that in the discretions exercised, the wisdom adopted, the judgment applied and the provident care extended in the management of the funds, the applicant's actions would be highly unlikely to pose any risk."

357. In dismissing the application, the Tribunal concluded:

I am less concerned by the applicant's lack of genuine remorse than I am by his limited insight into the errors he made. While he is unlikely to make the same mistake... there is a real risk that his poor judgment will manifest itself in relation to other choices that he might be required to make. In any event, I am unable to be satisfied it is highly unlikely (as opposed to merely unlikely) that he will contravene the law or cause the fund of which he is a trustee to contravene the law.[236]

358. While the Act does not expressly state the highly unlikely standard applies to an application to waive a section126A disqualifying determination, the decision in Re The Taxpayer and Commissioner of Taxation [2002] AATA 1233 provides a useful guidance.

359. The Commissioner's submissions in respect of sections 126A(1) and (3) of the Act raise the same facts and circumstances as supporting those alternative decisions. Those facts and circumstances were also advanced to support the non-compliance decision. They have been held to be serious breaches for which there has been a monetary impost in the nature of a penalty.

360. The Tribunal notes that apart from the contraventions discussed above Mr Coronica is rightly proud that his fund has performed well, even after the reversal of the concessional tax privileges the Fund has delivered savings for his retirement consistent with the objects of savings through a regulated fund.

361. Mr Coronica's attempted rectification, despite being begrudgingly and belated, and in part occurring after the disqualification, does demonstrate a newfound willingness to comply with the requirements of the Act. The contraventions of the Act founded on keeping the trustee's personal affairs and the Fund's affairs separate ceased in 2014, after intervention of the Fund's auditor.

362. As a witness, Mr Coronica appeared to be a very proud man. That pride interfered with a proper understanding as to the boundaries of his competence and the benefits of a good governance model. This and his sole practitioner history contributed to him not understanding when the boundaries of his competence were challenged. There may also have been a factor that he did not appropriately prioritise complying with his personal affairs.

363. The deterrent effect of the non-compliance assessment has clearly focussed him on prioritising compliance. He genuinely expresses a desire to going forward 'tick all the boxes'. This is evidenced by his willingness to enter 'appropriate undertakings'. The Tribunal is of the view he wants to, and will, do the correct thing if appropriate governance arrangements are in place.

364. A past misjudgement of competence should not automatically result in what is in effect a lifetime ban. Section 126A of the Act requires an assessment as to whether that previous misjudgement is recognised, and action taken that it will not reoccur. The proposed enforceable undertakings are an acknowledgement that corrective actions are necessary.

365. The Tribunal is of the opinion that with appropriate enforceable undertakings which include a commitment to adopting appropriate governance arrangements Mr Coronica is highly likely to comply going forward.

TRIBUNAL'S DECISION ON THE DISQUALIFICATION DECISION (2018/7159)

366. The Tribunal finds that due to the size of the monetary penalty, as a consequence of the Non-compliance Decision, the attempted rectification of the breaches, his commitment to keep his personal affairs and the Fund's compliance separate since 2014, the willingness to provide appropriate undertakings and the assessment of a highly unlikely future compliance risk, the exercise of the discretion in section 126A(1) of the Act is appropriate. The Tribunal also exercises the discretion in respect of section 126A(3).

367. There remains the question of what the form should be of the 'appropriate' undertakings offered'. Reference is made in submissions that:

(a)
Mr Coronica will not act as trustee of any other fund than his own in which he will become and remain the sole member.
(b)
The Fund will continue to invest only in listed shares and cash. Given Mr Coronica's misconceived understanding as to what constitutes money/cash this will need clarifying.

As mentioned in the Non-compliance Decision, there are governance arrangements that need strengthening.

368. The Tribunal proposes undertakings requiring the Fund adopt governance arrangements that are most common for SMSF's for superannuants outside of the accounting/tax agent profession. That begins with the appointment an independent accountant and tax agent. This entity or entities should be firm(s) that are bound by the accounting profession's ethical standard on independence. For the avoidance of doubt, that firm should also be independent from Mr Coronica's daughter.

369. The Tribunal would also prefer that the Fund engaged or retained a suitably experienced firm of lawyers, to undertake any legal work, who, together with a licenced investment advisor, could sign off that all new investments complied with the Act and the undertakings. Whether these proposed undertakings are additional or in substitution to those offered is something the Tribunal proposes to hear submissions.

370. The Disqualification Decision is dependent on a suitable and appropriate form of undertaking and a directions hearing will be held to progress that issue.

DECISION

371. The Tribunal:

(a)
Affirms the decision under review made under section 40(1) of the Superannuation Industry (Supervision) Act 1993, in relation to application 2018/7160; and
(b)
Reserves its decision in relation to application 2018/7159 and refers that matter to be listed for a further directions hearing.

I certify that the preceding 371 (three-hundred and seventy-one) paragraphs are a true copy of the reasons for the decision herein of Senior Member K James

Associate

Dated: 1 April 2021

Dates of hearing: 16-17 September, 8 October, 21-22 November 2019
Date final submissions received: 22 April 2020
Counsel for the Applicant: Mr Matthew Meng
Solicitors for the Applicant: Mr Terry O'Connor
Counsel for the Respondent: Ms Meredith Schilling
Solicitors for the Respondent: Mr Jack Clarke, Australian Taxation Office

[1]
Application number 2018/7160. Initial decision dated 5 September 2018.

[2]
Application number 2018/7159. Initial decision made 5 September 2018.

[3]
Vivian (Deputy Commissioner of Taxation (Superannuation)) v Fitzgeralds (2007) 51 ATR 834 at 839. Explanatory Memorandum to the Superannuation Industry (Supervision) Bill 1993 paragraph 4, section 5.

[4]
The Act section 37.

[5]
The Act section 61.

[6]
As discussed later at paragraph 135, the section contains grandfathering rules where the deed that applied to the period before the enactment of the Act permitted loans. The Fund's deed Adopted in 1993 in clause 23.3 contained a covenant in similar terms to the section.

[7]
The definition in section 10 of the Act defines 'Regulator' for these purposes to be the Commissioner of Taxation.

[8]
APRA Superannuation Circular NO.II.D.6 November 2000 [63]-[67].

[9]
Applicants' Amended Statement of Facts, Issues and Contentions dated 22 July 2019, 15 [69] ( ASFIC ).

[10]
Applicants' Outline of Submissions, 9 September 2019, [59]-[69].

[11]
ASFIC 1 [3].

[12]
Ibid 2 [4].

[13]
Applicants' Witnesses Statement dated 30 March 2019, exhibit GC-5B.

[14]
ASFIC 10 [53]; ibid 10 [68].

[15]
ASFIC [53]-[54].]

[16]
See, eg, Amended Witness statement of Mr Coronica, [75]; ASFIC [25]; Applicants Outline of Submissions, 9 September 2019, [27].

[17]
ASFIC 3 [11].

[18]
ASFIC 84-85; Applicants' Outline of Submissions dated 9 September 2019, 69,74, 75.

[19]
Explanatory Memorandum, Superannuation Industry (Supervision) Bill 1993.

[20]
Applicants' Witness Statement dated 30 March 2019, 6 [41].

[21]
ASFIC 16 [76].

[22]
Applicants' Outline of Submissions dated 9 September 2019, 33 [150].

[23]
Ibid 37 [173].

[24]
Ibid 35 [161].

[25]
Ibid 3 [10].

[26]
Respondent's Amended SFIC, 29 May 2019, [73.1].

[27]
Ibid [73.2].

[28]
Ibid [73.4].

[29]
Respondent's Supplementary Submissions, 3 October 2019, [36].

[30]
Ibid [21].

[31]
Ibid [37(d)].

[32]
Ibid [62(b)].

[33]
Ibid [3(a)].

[34]
Ibid [3(b)].

[35]
Ibid [16(b)]-[(c)].

[36]
Ibid [17].

[37]
T72 of the documents filed in matter 2019/7159 pursuant to s 37 of the Administrative Appeals Tribunal Act 1975, 638 ( T documents 2019 / 7159 ).

[38]
Transcript of Proceedings on 16 September 2019, page 48 line 5.

[39]
Applicants' Witness Statement dated 30 March 2019, 4 [25].

[40]
Ibid [26]. See also Transcript of Proceedings on 16 September 2019, 51 line 33.

[41]
Transcript of Proceedings on 16 September 2019, 51 line 35.

[42]
T18, T Documents 2018/7159, 181. See also Exhibit Gc-2A, exhibited to the Applicants' Amended Witness Statement dated 24 July 2019.

[43]
Transcript of Proceedings on 16 September 2019, 63 line 15.

[44]
Paragraph 190 below

[45]
Exhibit GC-1B, exhibited to the Applicants' Amended Witness Statement dated 24 July 2019.

[46]
Transcript of Proceedings on 17 September 2019, 153 lines 40-45; see also, 228 line 22-23.

[47]
Mr Coronica's description of his accounting in his response to the ATO's reasons for decision dated 5 September 2016. ST11, Supplementary T documents, page 88.

[48]
Transcript of Proceeding on 8 October 2019, 280 line 35 to 284, line 25.

[49]
T84, T documents 2019/7159, 791.

[50]
Commissioner only became aware of the offset at the hearing: Transcript of proceedings on 16 September 2019.

[51]
Transcript of Proceedings on 16 September 2019, 67 line 7.

[52]
Applicants' Witness Statement dated 30 March 2019, 10 [67].

[53]
Transcript of Proceedings on 16 September 2019, 79 lines 30-35.

[54]
Ibid 79-80 lines 33-47 and 1-9.

[55]
Transcript of Proceedings on 16 September 2019, 57.

[56]
See paragraph 171 below.7

[57]
See paragraph 237 below.

[58]
Applicants' Witnesses Statement dated 30 March 2019, 7 [52]-[53].

[59]
See paragraph 257 below.

[60]
APRA Superannuation Circular No. II.D.6 In-house Assets (November 2000) 14 [63].

[61]
Regulation 13.22C(2)(d) of the Regulations. Regulation 13.22D also includes tracing provisions.

[62]
Amended Witness Statement of Mr Coronica, dated 24 July 2019, 11 [70]-[71].

[63]
The Tribunal notes that APRA issued Superannuation Circular No. II.D 6 IN-HOUSE ASSETS in November 2000. At paragraphs 63-67 there is a clear discussion of the regulation. Mr Coronica in other evidence stated he had regard to the APRA circulars in forming his opinions.

[64]
Transcript of Proceedings on 16 September 2019, 63 lines 1-16; see also Transcript of Proceedings on 17 September 2019, 188 lines 21-24, 193 lines 34-39 and 43-44.

[65]
Transcript of Proceedings on 16 September 2019, 60 5-12.

[66]
Transcript of Proceedings on 16 September 2019, 61 lines 27-29.

[67]
Ibid 62 line 30.

[68]
Ibid 61 lines 31-40.

[69]
Transcript of Proceedings on 17 September 2019, 190-1 lines 36-47 and 1-44.

[70]
Ibid 193 lines 20-44.

[71]
Ibid 195 line 33.

[72]
APRA, In-House Assets, Superannuation Circular No II.D.6, November 2000, 14 [64].

[73]
Applicants' Outline of Submissions dated 9 September 2019, 26 [120].

[74]
Transcript of Proceedings on 17 September 2019, 187 line 10. See also, Transcript of Proceedings on 16 September 2019, 79 line 30, 77 lines 45-46, 78 lines 1-2.

[75]
Amended Witness statement of Mr Coronica, 22 July 2019, 13 [78]-[80]

[76]
Ibid 11 [74].

[77]
Ibid 11-12 [75].

[78]
Transcript of Proceedings on 16 September 2019, 66-67, 82. See also, Transcript of Proceedings on 17 September 2019, 198-201.

[79]
The Standard clause 5.1.2(b).

[80]
Ibid clause 5.1.2(c).

[81]
Ibid clause 5.1.1.

[82]
T2, T documents 2019/7160, 13, 16, 29, 32.

[83]
Transcript of Proceedings dated 16 September 2019 page 65, lines 20-30; Transcript of Proceedings dated 17 September 2019 page 209, line 45.

[84]
D G Hill, Stamp, death, estate and gift duties (New South Wales, Commonwealth and Australian Capital Territory) (1970) 547.

[85]
Ibid 614: discussing section 18 of Gift Duty Assessment Act 1941 (Cth) and section 16A of the Estate Duty Assessment Act 1914.

[86]
Applicants' Outline of Submissions, 9 September 2019, 16 [74].

[87]
Transcript of Proceedings on 16 September 2019, 63 line 20, 72 lines 5-8.

[88]
Explanatory Memorandum, Superannuation Legislation Amendment Bill (No 4) 1999, 4; Appendix 2 to SMSFR2010/1 at page 17.

[89]
Explanatory Memorandum, Superannuation Legislation Amendment Bill (No 4) 1999, 4.

[90]
Ibid.

[91]
Applicants' amended SFIC, [63].

[92]
Submissions to the same effect were made in the Applicants' Outline of Submissions, 9 September 2019, [59]-[69].

[93]
Respondent's SFIC 60.1

[94]
Corporations Act 2001 section 201B.

[95]
The Act section 66(2A0(b).

[96]
The Act section 66(2A)(c).

[97]
The loan at 30 June 2008 was reduced by an entry in his worksheet of an employer contribution made by the practice company of $100,000.

[98]
See paragraphs 171 and 172 below.

[99]
Transcript of Proceedings on 17 September 2019, page 137 line 25. See paragraph 172 below.

[100]
See paragraph 173 below.

[101]
See below paragraph 131 above.

[102]
Some dividends paid as late as 15 June 2009 and returned by Mr Coronica in his 2009 tax return. Applicants solicitor reply dated 30 March 2020 to the Tribunal questions.

[103]
Dr CL Pannam, The Law of Money Lenders in Australia and New Zealand (1965) 6, quoted in Normandy Finance Pty Ltd v Commissioner of Taxation (2015) 333 ALR 339, 359 [70], citing Federal Commissioner of Taxation v Radilo Enterprises Pty Ltd (1997) 72 FCR 300, 313.

[104]
(2015) 333 ALR 339, 359-360 [67]-[72].

[105]
Ibid 360 [72].

[106]
Re Fitzmaurice and Federal Commissioner of Taxation (2019) 110 ATR 440, 446 [41], 449 [56] and 449-50 [61].

[107]
The Trust Deed clause 23.3: T3, T documents 2019/7159, 75.

[108]
(2000) 104 FCR 521, 534-5 [35].

[109]
Ibid 562 [159].

[110]
The Act section 82(3).

[111]
Ibid section 82(4)(a).

[112]
Ibid section 82(4)(b).

[113]
Ibid section 82(5).

[114]
Ibid section 82(6).

[115]
See earlier finding above at paragraph 126.

[116]
The CCH Macquarie Dictionary of Business (CCH Australia, 1993). See also definitions in Peter E Nygh and Peter Butt, Butterworths Australian Legal Dictionary (LexisNexis, 1997); P Butt, et al (eds) Encyclopaedic Australian Legal Dictionary (LexisNexis, online, 2016); David Willis, Accounting and Bookkeeping Principles (Mcgraw-Hill, 2010) ch 2.

[117]
The Trust Deed clause 9.3.

[118]
Ibid clause 9.9.

[119]
Ibid clause 12.4.

[120]
Ibid clause 23.2.

[121]
Ibid clause 23.3.

[122]
Ibid clause 23.4.

[123]
Ibid clause 47.1.

[124]
Ibid clause 47.2.

[125]
T35, T documents 2019/7159, 253.

[126]
Amended Witness Statement of Mr Coronica, 24 July 2019, 6-7 [43]-[53].

[127]
Applicants' Outline of Submissions, 9 September 2019, 31.

[128]
Transcript of Proceedings dated 16 September 2019, page 105 at line 5, pages 106-7 at lines 40-7 and line 1-5, and page 108 at lines 25-40.

[129]
Transcript of Proceedings 16 September 2019; Transcript of Proceedings 17 September 2019, 119 line 16. In a 'Request for review of the ATO'S Decision' dated 5 September 2018, forwarded to the Commissioner under the letterhead of G Coronica and Associates, Mr Coronica defends his accounting stating:
'We humbly disagree with the Commissioners reasons relating to a suspense account in use prior to 7 August 2012.
A suspense or clearing account or a members loan account is a normal accounting[g] any organisation.'ST11, Supplementary T Documents, page 87. See also reference to 'loan repayment to Member' at ST11, page 97 discussed at paragraph 241 below.

[130]
Transcript of Proceedings on 17 September 2019, 154 lines 42-44, 156 line 5. See also, Transcript of Proceedings on 8 October 2019, 261 lines 3-4.

[131]
The loan was $348.842 before being reduced by $100,000 on 30 June 2008 by accounting entries effecting an employer contribution to the fund on 30 June 2008 by G Coronica Pty. Transcript of Proceedings 17 September 2019, page 117 line 40. See also T67, T Documents 2019/7159, 22; T68, 22; T82, 20.

[132]
T81, T Documents 2019/7159, 707; T67, 488.

[133]
Ibid T15, 169. See also, paragraph 164 above.

[134]
Ibid T67 488.

[135]
Ibid.

[136]
Transcript of Proceedings on 17 September 2019, 117 line 35. T67, T document 2018/7159, paragraph 41(b).

[137]
The dividends paid on these shares were returned by Mr Coronica personally: Letter to the Tribunal dated 30 March 2020.

[138]
See paragraph 130 above.

[139]
As advised in a letter to the Tribunal from the Applicants dated 30 March 2020.

[140]
Applicant's Witness Statement dated 30 March 2019, 6 [42]-[49].

[141]
ATO, Taxation Ruling 2010/1 (2010), 33 [172]-[173].

[142]
Transcript of the Proceedings on 17 September 2019, 167 lines 35-7.

[143]
Respondent's Supplementary Submissions, 3 October 2019, [27].

[144]
The CCH Macquarie Dictionary of Business (CCH Australia, 1993) defines:
'Suspense Account a temporary account not included in financial statements, for recording transactions when, due to lack of full details or other uncertainty, the account to which they should be posted cannot be identified. As soon as the correct allocation for each entry in the suspense account has been established, it must be posted to its correct account.'
See also Collins English Dictionary (online, 2021) <"https://www.collinsdictionary.com/dictionary/english/suspense-account">; Michael Agnes, Webster's New World College Dictionary (4th ed, 2005); Gordon Shillinglaw et al, Accounting A Management Approach (R D Irwin, 6th ed, 1979) 173.

[145]
ST11, Supplementary T Documents. See also, Transcript of Proceedings 16 September 2019, 56 line 40.

[146]
See previous paragraph 162.

[147]
Applicants' Outline of Submissions, 9 September 2019, 32 [148]-[149].

[148]
See paragraph 195 below.

[149]
See paragraphs 236-237 below.

[150]
Respondent's Supplementary Submissions, 3 October 2019, [27].

[151]
Applicants' Outline of Submissions, 9 September 2019, 31 [143].

[152]
Transcript 17 September 2019, 166 line 45.

[153]
\Explanatory memorandum Superannuation Legislation Amendment Bill (No 4) 1999, 'Problem Identification'.

[154]
(2019) 110 ATR 440, 447 [42].

[155]
Ibid 448 [54].

[156]
Transcript of Proceedings dated 17 September 2019, 156 line 15.

[157]
Ibid 156 lines 15-40.

[158]
See paragraphs 236-237.

[159]
T15 and T18, T documents 2018/7160: 2009 and 2010 Income tax returns for the Fund do not include any interest deductions. See also, T93 page 827: Fund's Receipts and Payments Statement for 2009 year; and page 829: 2010 member benefit statement. Neither statement records any payment of or receipt of interest.

[160]
Amended Witness Statement of Mr Coronica, 24 July 2019, 14-15 [87].

[161]
Ibid 15 [88].

[162]
Ibid 103.

[163]
Ibid.

[164]
Transcript of Proceedings on 17 September 2019, 180.

[165]
Ibid 181 line 20.

[166]
Transcript of Proceedings on 16 September 2019, 94 line 8. See also GSTR 2004/2.

[167]
Transcript of Proceedings on 17 September 2019, 181.

[168]
Ibid 135.

[169]
Transcript of Proceedings on 17 September 2019, page 135.

[170]
The Respondent advised by letter dated 14 April 2020, that the questions raised 'factual matters which are not within the [Respondent's] knowledge' and it 'respectfully objects to the Tribunal's eliciting evidence on factual matters in circumstances where the hearing of the proceeding has concluded and the [Respondent] has no opportunity to adequately test that evidence'.

[171]
Applicants' Letter to Tribunal dated 30 March 2020.

[172]
(2018) 264 FCR 587.

[173]
Ibid [231(c)] (Steward J). See also, Dominique Hogan-Doran SC, Current thinking on the Sole Purpose Test (Law Council of Australia, Superannuation Lawyers Conference 2019) 14.

[174]
Ibid [231(f)]. See also, ibid [177] (Moshinsky J).

[175]
Ibid [241] (Steward J).

[176]
Re The Trustee for the R Ali Superannuation Fund and Commissioner of Taxation [2012] AATA 44 (30 January 2012) [68]; Re Montgomery Wools Pty Ltd as trustee for Montgomery Wools Pty Ltd Super Fund and Commissioner of Taxation [2012] AATA 61 (6 February 2012) [133].

[177]
Applicant's Witness Statement dated 30 March 2019, 7 [51]-[52].

[178]
This was confirmed in re-examination: Transcript of Proceedings on 8 October 2019, 280 line 1.

[179]
Transcript of Proceedings on 8 October 2019, 265.

[180]
Ibid 279-280.

[181]
ATOID 2012/16.

[182]
ATOID 2015/21.

[183]
APRA Prudential Practice Guide SPG222- Management of Reserves. See also TR 2010/1.

[184]
T67, T document 2019/7159, 502, table 21.

[185]
Applicant's Witness Statement dated 20 March 2019, 7 [52].

[186]
T68, T document 2019/7159, 547-551. See also T69, T document 2019/7160.

[187]
Transcript of Proceedings on 17 September 2019, 178-179.

[188]
T61, T documents 2019/7160.

[189]
Amended Witness Statement of Mr Coronica, 24 July 2019, [54]. See also, T69, T documents 2019/7160, 551; Transcript of Proceedings on 17 September 2019, 177-179.

[190]
Transcript of Proceedings on 17 September 2019, 167-168.

[191]
Transcript of Proceedings on 17 September 2019, 166-167.

[192]
Ibid 167 lines 20-21.

[193]
Respondent's Submissions, 9 September 2019, 17.

[194]
Transcript of Proceedings on 8 October 2019, 261 line 40.

[195]
Transcript of Proceedings on 17 September 2019, 183 lines 7-30.

[196]
Applicants' Amended SFIC, 22 July 2019, [36].

[197]
Witness Statement of Mr Coronica, 22 July 2019, [49]-[50], [84]. See also, Transcript of Proceedings on 17 September 2019, 119 lines 12-26.

[198]
Applicants' Outline of Submissions, 9 September 2019, 30 [140].

[199]
Transcript of Proceedings on 17 September 2019, 168 line 20.

[200]
The Deed clause 12.4.

[201]
Respondent's SFIC dated 15 April 2019, 6 [22].

[202]
ASFIC paragraph 42.

[203]
Transcript of proceedings on 16 September 2019, 56-57.

[204]
Explanatory Memorandum, Superannuation Industry (Supervision) Bill 1993, [3]-[5]. See also Vivian (Deputy Commissioner of Taxation (Superannuation)) v Fitzgeralds (2007) 51 ATR 834, 839 [30] (Logan J) ( Fitzgeralds case ).

[205]
Fitzgeralds case (2007) 51 ATR 834, 838-9 [25]-[26].

[206]
(2018) 264 FCR 587 640 [194].

[207]
Explanatory Memorandum, Superannuation Legislation Amendment Bill (No 4) 1999, 5.

[208]
Ibid 4.

[209]
Ibid 5. See footnote 84.

[210]
Re Pabian Park Pty Ltd and Commissioner of Taxation [2012] AATA 375, [54]; Re Shail Superannuation Fund and Commissioner of Taxation [2011] AATA 940, [69].

[211]
Fitzmaurice and Federal Commissioner of Taxation, Re (2019) 110 ATR 440, [112]; The Trustee for the R Ali Superannuation Fund and Commissioner of Taxation, Re [2012] AATA 44, [70] citing JNVQ and Commissioner of Taxation, Re [2009] AATA 522; ZDDD and Commissioner of Taxation, Re [2011] AATA 3 (10 January 2011).

[212]
(2007) 51 ATR 834, 839 [30].

[213]
Senior Member Carstairs in Re JNVQ and Commissioner of Taxation [2009] AATA 522 (14 July 2009) [41].

[214]
Fitzgeralds case (2007) 51 ATR 834, 839 [30].

[215]
T4, T documents 2019/7159, 24: relying on section 126A(1) of the Act.

[216]
Ibid: relying on section 126A(3) of the Act.

[217]
Treating the fit and proper reasoning as being a different decision to the section 126A(1) finding.

[218]
Rich v Australian Securities and Investments Commission (2004) 220 CLR 129, 143 [26].

[219]
(2004) 220 CLR 129.

[220]
Ibid 145 [32].

[221]
Ibid 149 [43].

[222]
Ibid 155-6 [53].

[223]
(2005) 60 ATR 518.

[224]
Ibid 526 [30]-[31].

[225]
Rich v Australian Securities and Investments Commission (2004) 220 CLR 129, 145 [32].

[226]
PL SA 2006/17, part 7.

[227]
Respondent's Supplementary Submissions, 3 October 2019, [37(d)].

[228]
Davies v Australian Services Commission (1995) 59 FCR 221, 231. See also, Cooper Brooks (Wollongong) Pty Ltd v Federal Commissioner of Taxation (1981) 147 CLR 297.

[229]
Preuss and Australian Prudential Regulation Authority, Re (2005) 60 ATR 1137, 1158 [94].

[230]
Fitzgeralds case (2007) 69 ATR 834, 839 [30].

[231]
Explanatory Memorandum, Superannuation Legislation Amendment Bill (No 4) 1999, 5.

[232]
Fitzgeralds case (2007) 69 ATR 834, 839 [26].

[233]
(2002) 51 ATR 1192.

[234]
See section 120(1)(a)(i) of the Act.

[235]
Re The Taxpayer and Commissioner of Taxation (2002) 51 ATR 1192, 1195 [12]-[13].

[236]
Ibid 1196 [21].

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