Administrative Appeals Tribunal
Purvis J (Presidential Member)
Index 1. Issue for determination 2. The Fund and breach of the in-house assets test 3. The relevant factual situation and explanation on behalf of the Fund 4. Statutory provisions 5. Non-exercise of discretion by delegate 6. Special circumstances 7. Decision *****
1. The issue for determination
In this matter, the Tribunal is called upon to review the exercise by a delegate of the respondent of the discretion conferred by s. 13(1)(b) of the Occupational Superannuation Standards Act 1987.
The applicant had not, in respect of the 1987 and 1988 financial years, complied with the ``in-house asset'' ratio test prescribed by s. 121C of the Income Tax Assessment Act 1936 (as it then was), being a prerequisite for exemption from income tax, of a fund pursuant to ss. 5(2) and 15A of the Occupational Superannuation Standards Act (hereinafter referred to as the OSS Act).
The decision under review is that of the delegate under date 8 October 1992, not to treat W & KF Pty Limited Employees Provident Fund (hereinafter referred to as the Fund), of which the applicant was at all relevant times trustee, as if it had satisfied the superannuation fund conditions in the OSS Act for the 1987 and 1988 years of income of the Fund.
2. The Fund and breach of the in-house assets test
At all relevant times and up until its termination as at 30 June 1988, the Fund was one affected by a reviewable decision within the meaning of the OSS Act. The Fund had been established in 1977 in order to provide superannuation benefits for employees of W & KF Pty Limited, which company acted as a service company to a firm of solicitors. The partners in the firm of solicitors were the trustees of the Fund.
The said partners on their own behalf and as trustees of the Fund retained a firm of Chartered Accountants to act for and advise them in relation to the affairs of the Fund. The investment policy and practice of the Fund was described by a trustee as:
``In the majority of cases, moneys from the Fund were invested by way of loans to the partners used by them in the conduct of the legal practice. On one or two occasions, the Fund invested on the basis of advancing moneys secured by mortgages usually to
ATC 308clients of the firm. There were also deposits in financial institutions. Each of these loans were duly repaid. In respect of the investment to the partners, this investment was carried out after consultation with the partners and the accountants and in relation to the investment to outside parties, this was carried out from time to time on the advice of the partner then having the conduct of the matter with the outside client. In the case of financial institution [sic] investments were made by decision of the parties.
- The details relating to the loans fall into three categories:
- A. Loans made to the partners. These were made repayable at call at interest rate indicated by the accountants as being then current commercial rates acceptable to the taxation office at the relevant time as a proper commercial rate for investment of Superannuation Funds.
- B. Loans to outside clients were made for fixed terms at the then prevailing rate of interest for loans of that type.
- C. Deposits in Financial institutions at the prevailing terms offered. e.g. Government Bonds.
- In relation to the loans to the partners made at call each of the partners had capacity to repay the loan at call.''
During the relevant years, the Fund held an investment in W & KF Pty Limited. The company's relationship to the Fund at all relevant times was that of employer-sponsor. In the annual return for the 1987 financial year, the company stated:
``IN-HOUSE ASSETS TEST
As at the 30th June, 1987 the level of in- house assets stood at $22137 or 30% of all investments. Furthermore, the level of in- house assets shown above exceeded the level of in-house assets as at 11th March, 1985 which amounted to $12083. Since the 30th June, 1987 the level of in-house assets has been reduced to that level as at 11th March, 1985 ie $12083 and that the level of in-house assets now only represents 16.3% of all investments.''
This statement was not consistent with the factual situation in that the loan was maintained to 30 June 1988 in the amount of $21,627 for assets and not fully repaid until August 1988 following the termination of the Fund. The annual return in respect of the 1987 financial year indicated, as abovementioned, that the Fund was in breach of the OSS Act standards. Such breach, however, was not disclosed in the annual return form for the 1988 financial year.
There is no issue that the Fund, in respect of the relevant financial years, was in breach of the ``in-house asset rule'', which rule had the effect of freezing the amount which could be invested by a fund in assets relating to the sponsors or controllers of the Fund as the amount invested at 11 March 1985 or at 10 per cent of the cost of all assets of the Fund whichever was the greater.
3. The relevant factual situation and explanation on behalf of the Fund
A trustee of the Fund, a partner in the firm of solicitors, stated that the reason why the loan was not in fact reduced was that at no time was it brought to his attention that the Fund had failed to satisfy the in-house asset test:
``essential for it to maintain its tax exempt status. I have been made aware of a letter dated 24 November 1987 from... Chartered Accountants to... [the firm of solicitors] in which the accountants indicate that it was necessary for a loan made to the company to be reduced by the sum of $10,054. I say that that letter was not brought to my attention and I only became aware of its terms after the Fund had been dissolved and when a copy had been shown to me by my accountants in... 1991.''
The trustee continued by saying that if the letter had been received by his ``suburban office'', it would have been referred to him for action in accord with the method adopted by him in relation to dealing with statutory requirements of the Fund. From enquiries made by him of his partner and the bookkeeper to the firm of solicitors, he said that had he been made aware of the terms of the letter, there was no reason why he would not have requested the bookkeeper to make the necessary adjustment, and if it had been necessary to do so, arrange loan facilities for that purpose. The accountants, he said, had full access to the books and records; he relied on their advice and assumed that the relevant certificate attached to the return was correct.
The trustee further stated that having been aware the 1987 return contained an incorrect
ATC 309statement, the notation to the return, and the annexure, was made and signed by him in good faith, acting on the assumption that the action specified in the annexure had been taken. The return had been prepared by the accountants for the Fund, and the trustee was of the belief that prior to the preparation of the statement, the accountants had verified from the records of the Fund inspected by them that the statement prepared by them submitted to him was accurate.
Other relevant facts advanced on behalf of the Fund and with which no issue was raised by the respondent were:
- - The in-house loan was advanced to the Trust. The members and trustees of the Fund were directors of the company, trustees of the trust and partners in the law firm. The beneficiaries of the trust were the family trusts of the partners.
- - The assets of the trust were at all relevant times sufficient to satisfy repayment of the in-house loan to the Fund.
- - The interests of the beneficiaries in the Fund were during the relevant years fully protected by the trustees.
- - The investments generally carried no risk to the Fund and the in-house loan was a prudent investment.
- - The Fund had been carried on in a responsible fashion during its lifetime and in accordance with statutory requirements, except for the subject breaches of s. 121C of the Income Tax Act.
The trustee contended that the invariable practice of the partner principally responsible for the administration of the Fund was to discuss with the accountants before the end of each financial year what action they advised should be taken to ensure that the Fund complied with statutory requirements. The letter of 21 November 1987 from the accountants [which letter drew to the attention of the firm of solicitors the failure to satisfy the in-house assets test essential for it to maintain its tax exempt status during the relevant financial year and subsequent years, and suggested and requested that arrangements should be made for ``the necessary repayment to be made as soon as possible''] was not brought to the partner's attention, and he only became aware of the existence of the letter in 1991. Had the matter been brought to his attention, the problem, it was said, would have been rectified during the 1988 financial year; the means to do so were readily available. The annual return for the 1987 financial year did incorrectly state that the level of in-house assets of the Fund had been reduced during the 1988 financial year to the statutory level for in-house assets. However, the return was prepared by the accountants and signed by the abovementioned partner ``in good faith in reliance on the accuracy of `the accountant's statement'''.
In oral evidence before the Tribunal, the partner/trustee said that he believed the statement contained in the annexure to the return to have been correct - that the defect had been remedied - at the time he signed the return on 6 May 1988. He said that he only then became aware or the excess borrowing by members in the 1987 financial year, this either directly or by family trusts or other vehicles. The same persons tended to borrow each year, and the accountant would indicate to the trustees the level of borrowings. The partner said that he was made aware there had been a problem and that it was to be rectified by reducing the borrowing. He relied entirely on what he had been told.
It was submitted on behalf of the applicant that this was not a case of a deliberate breach of a statutory requirement, the breach was inadvertent and the persons responsible for the management of the Fund believed at the time that it had been rectified. At no time during the 1987 or 1988 financial years were the assets of the superannuation fund at risk as a result of the breach. This was not, it was said, ``a typical occupational superannuation fund'' with employee members having no participation in the management of the Fund or the disposition of its assets. This was a closely held superannuation fund involving the partners of a small law firm. The breaches were not occasioned in the course of an attempt to avoid taxation or levies. The Fund otherwise had complied with prevailing statutory requirements.
4. Statutory provisions
As has already been indicated in these reasons, the decision under review is that of the delegate of the respondent which confirmed the decision of 8 October 1992 that the Fund had not complied with the superannuation fund conditions set out in the OSS Act in respect of the 1987 and 1988 years of income.
Superannuation fund conditions, for the purpose of s. 5 of the OSS Act, included the requirements of the former s. 121C and the former s. 23F of the Income Tax Assessment Act, which sections were repealed in 1987 but continued to apply for the purposes of the OSS Act and regulations made under it. S. 121C of the Tax Act applied for the relevant years of income. The section set out the statutory loan back rules which limited the level of investments that the trustee of a superannuation fund may invest in a sponsoring employer of the fund or an associate of such employer. Where a fund was established (as with the subject fund) on or before 11 March 1985, s. 121C(5) applied to the fund. That subsection provided that in order for a fund to satisfy the superannuation fund conditions, it was necessary for the cost of the in-house assets at all times during the year of income to not exceed the greater of the cost of the in-house assets at 11 March.1985 or 10 per cent of the cost of all assets of the fund.
In the present case, the cost of the in-house assets had increased beyond the 11 March 1985 balance, exceeded the 10 per cent threshold and hence the Fund failed to satisfy the said requirements of the s. 121C of the Income Tax Act.
However, s. 13(1) of the OSS Act conferred upon the respondent a discretion to treat funds as satisfying the superannuation fund conditions where, in relation to a fund in relation to a year of income:
(b) the trustees of the fund satisfy the Commissioner that, because of special circumstances that existed in relation to the fund during the year of income, it would be reasonable for the fund to be treated as if it had satisfied the superannuation fund conditions, and
It is in respect of the determination by the delegate of the respondent to not exercise this discretion in favour of the applicant that the present application has been made.
5. Non-exercise of discretion by the delegate
The delegate, in the reasons for declining to exercise the discretion and after setting forth the facts that established a failure to satisfy the requirements of the former s. 121C of the Income Tax Act, stated that:
``The interpretation of the term `special circumstances' by the Commission is set out in paragraph 7 of the document referred to as The Guidelines for the Exercise of Discretion. In that document the circumstances advanced to substantiate the exercise of discretion must be unusual, uncommon, exceptional or abnormal.
The fact that the trustees made a genuine attempt to reduce the loan from $22,127 to nil in August 1988 is not unusual, uncommon, exceptional or abnormal as this does not excuse the original breach.
In view of the above, the trustees have not advanced circumstances which would be sufficient to warrant the exercise of discretion under s. 13 of the OSS regulations [sic] for the breach of former s. 121C of the Tax Act. The breach of the provisions of former s. 121C of the Tax Act was apparently committed intentionally and with the knowledge that the breach was being committed. The degree and extent of the breach is significant.
I am not satisfied the circumstances exist which would justify an exception to the general rules prescribed by the legislation.''
In confirming this decision, the delegate of the respondent stated that the guidelines for exercise of the special circumstances discretion indicated that ignorance of the requirements of a standard was not of itself to be considered a special circumstance justifying the treatment of a fund as a complying fund. Nor, it was said, a misunderstanding as to requirements or that a greater investment than the maximum investment exposure might appear to be or turn out to have been safe. The special circumstances discretion should not be used to override the specific requirements of the standards. After stating that it was not appropriate to dispense with compliance with the in-house assets standard, and that the breach in this particular instance was significant in amount and duration, the delegate continued by saying that it was not possible to be satisfied that the trustee had been prevented by events outside his control from acting, in November 1987, to rectify the breach. It was not accepted that the claimed frustration of prompt
ATC 311rectification should be considered to be an event for which the trustee was not responsible.
6. Special circumstances
The applicant contended that the discretion should have been exercised in its favour because:
- (a) The applicant, as the trustee of the Fund, relied on accounting advice in the management of that Fund.
- (b) The directors of the applicant were unaware of the requirement of the in-house asset rules and the breach was inadvertent and made in ignorance.
- (c) The applicant maintained the Fund as a genuine superannuation fund and the breach could have been rectified immediately had the applicant been aware or made aware of the requirements of the in-house asset rules.
It was further submitted on behalf of the applicant that the facts in this matter established that:
- (1) there had been an excess borrowing, it was of a relatively small amount, well within the capacity of the borrowers to repay, the interests of investors were not at risk, and the partner/trustee was aware in due course that the amount had to be reduced.
- (2) Responsibility for the administration of the Fund was with the accountants and the partner/trustee relied on and acted upon advice.
- (3) The partner/trustee believed that the Fund had acted in accordance with the statutory requirements.
- (4) The partner/trustee signed the return form in the belief that the borrowing had been reduced to the statutory level.
- (5) The Fund had not sought to avoid statutory obligations and there was no suggestion of a deliberate breach of the legislation.
Thus the ``special circumstances'' sought to be relied upon by the applicant may be summarised as follows:
- (a) Having regard to the purpose for which the borrowings had been made, even though there was not strict compliance, there was no risk to beneficiaries and the excess borrowing could have been rectified.
- (b) There had been substantial compliance with the purpose for which the legislative provision had been made.
- (c) The accountant made the error, and the error was inadvertently taken up by the trustee.
- (d) The accountant had made a false statement, and the trustee had signed in ignorance of the statement being false.
In support of the contention that the circumstances were special, the applicant relied inter alia on what was said by the President of the NSW Court of Appeal in
Warringah Shire Council v Sedevcic (1987) 10 NSWLR 335 and Burchett J in
Minister for Community Services and Health v Chee Keong Thoo (1988) 78 ALR 307 at 342. In Warringah Shire Council v Sedevcic (supra), the President had there, when making reference to a discretion to relax a statutory requirement, indicated that this may happen where a breach was ``purely technical'' or where it could be shown to have had a beneficial impact on a relevant public interest which the legislation sought to protect (page 339). The discretion is one to accommodate justice in particular circumstances and where an application of rules may produce an unjust result in a particular case (page 341). Whilst acknowledging that what is a special circumstance will depend upon a statutory context, and there has been a judicial resistance to adding a gloss to the ordinary meaning to be attached to the words ``special circumstances'', Burchett J in Minister for Community Services v Chee Keong Thoo (supra) at 324, did say:
``the core of the idea of `special circumstances' is that there is something unusual or different to take the matter out of the ordinary course, according to which the presumptions set out in the clause would he expected to apply. As a result, the ordinary course appears less appropriate or fair...''
The purpose of imposing the in-house assets requirement was ``apparently prudential'' to avoid the problem of members' funds being placed at risk by an employer, but this was not the situation in the present case. The breach, it was submitted, was inconsequential, there was nothing to be gained by non-compliance with the requirement. Strict enforcement of the legislation ``in the face of a technical breach'' would ``amount to the triumph of formalism over substance and could add nothing to the
ATC 312need to deter deliberate and dishonest breaches of the superannuation law''.
The respondent submitted that s. 13(1)(b) of the OSS Act imposed upon a trustee of a fund an obligation to satisfy the respondent as to the existence of special circumstances. The decision of the delegate was made on the facts as presented to him and after having regard to the material contained in the ISC guidelines (guidelines for the exercise of the ``special circumstances'' discretion in s. 13(1)). Although the guidelines do not have statutory force and do not bind a primary decision-maker, they do, it was submitted, reflect policy settled at a departmental level (see
Re Becker and Minister for Immigration and Ethnic Affairs (1977) 1 ALD 158). The Tribunal, standing in the shoes of the decision-maker, should give effect to the departmental policy as far as possible.
The policy set forth in the guidelines was settled after consideration had been given to the relevant matters appropriate to govern the exercise of the discretion. Paragraph 5 of the guidelines provides that ``the following are some factors which an examiner is bound to take into account in arriving at a decision''. The factors are:
``(i) the particular standard breached;
(ii) the degree of breach of the standards;
(iii) the effects of the breach on the long- term retirement interests of the members;
(iv) whether the trustee knew of the breach and took steps to rectify the breach;
(v) claims made that the breach will be rectified;
(vi) claims made that incorrect Departmental or professional advice was given;
(vii) whether the trustees took any action to remedy breaches after they became aware of incorrect advice being provided;
(viii) practical difficulties faced by trustees in seeking to comply;
(ix) impossibility of complying with standards;
(x) ignorance or misunderstanding of the nature of the standards.
This list is not a closed list of factors. The trustees may raise other factors which may or must be taken into account, depending on the particular factor.''
Paragraph 9 details ``claims which would, generally speaking, on their own not constitute `special circumstances''', such claims not to be automatically rejected, but be considered in each particular case. The matters here considered are:
- (a) claims relating to retrospectivity of legislation
- (b) claims relating to ignorance of the law
- (c) claims that incorrect advice was received from professional advisers
- (d) financial hardship
- (e) claims made that the breach will be rectified if the discretion is exercised favourably
- (f) claims made that due to the complexity of the superannuation legislation, it has not been possible to implement it
- (g) claims that to comply with a standard will impose hardship, inconvenience to the fund members, eg industrial action, high costs of auditing a very small fund.
Paragraph 10 deals with types of circumstances which may constitute ``special circumstances'' depending on the facts of each case, and they fall under the following headings:
- (a) incorrect advice by ISC
- (b) misunderstood press announcements
- (c) delayed advice by ISC
- (d) insignificant breach
- (e) impossibility of compliance
- (f) where the ISC's aims in relation to the protection of revenue and the members' rights would not be served by treating the fund as non-complying
- (g) where the fund is to be wound up.
The guidelines are to be considered in the context of any relevant judicial or Tribunal pronouncements. In Case Z27,
92 ATC 255;
(1992) 27 ALD 343, the Tribunal was called upon to consider the factors relevant to the exercise of a discretion where ``special circumstances'' were said to exist. On appeal from the Tribunal to the Federal Court (
Tefonu Pty Limited v ISC 93 ATC 4727) the reasons for decision of the Tribunal were not distinguished or made the subject of adverse comment. In the Tribunal's decision, it, as here relevant, stated
ATC 313[at 92 ATC pp 258, 263, 264; 27 ALD pp 346-347, 352, 353-354]:
``8. The language of sub-section 13(1) points to a number of factors that must be taken into account by this Tribunal. Firstly, paragraph (b) expressly imposes on the trustees of the fund an obligation to satisfy the Commissioner of certain matters. Section 43 of the AAT Act requires this Tribunal to place itself in the position of the administrator and to make its own decision. Therefore, on this application the trustees of the fund have an obligation to satisfy this Tribunal of the matters referred to in paragraph (b): compare
McDonald v Director-General of Social Security (1984) 1 FCR 354 at 357.
9. The second consideration arising from an examination of the language of s 13 is the requirement to show that the special circumstances existed `in relation to the fund during the year of income'. Thus, in the present circumstances, the fact that the trustee of the fund at the time when the alleged breaches occurred has since gone into provisional liquidation, the fact that since the relevant years the group to which the fund was affiliated, has now become insolvent and the fact that some special circumstances were alleged to have occurred before the relevant years, are all ineligible to be taken into account.
10. The third consideration arising from an examination of this section, is that the trustees must not only show special circumstances to the satisfaction of the Commissioner, they must go on to show that as a result of the existence of those special circumstances during the relevant years, it would be reasonable for the fund to be treated as if it had satisfied the relevant conditions. It is necessary therefore to show both special circumstances and reasonableness.
11. The fourth legal consideration to be taken into account is, of course, the meaning of special circumstances in the context of s 13.
Re Beadle and Director-General of Social Security at first instance, (1984) 6 ALD 1, a Tribunal presided over by Toohey J (then a Presidential Member of this Tribunal) observed at page 3-
`An expression such as ``special circumstances'' is by its very nature incapable of precise or exhaustive definition. The qualifying adjective looks to circumstances that are unusual, uncommon or exceptional. Whether circumstances answer any of these descriptions must depend upon the context in which they occur. For it is the context which allows one to say that the circumstances in one case are markedly different from the usual run of cases. This is not to say that the circumstances must be unique but they must have a particular quality of unusualness that permits them to be described as special.'
35.... Even if we assume that the applicant had no actual knowledge of the existence of the proposal or of the regulation until..., we find that it had an obligation to inform itself which it failed to carry out.
40. In our view, the trustee has not shown any relevant special circumstance, except possibly ignorance of the government's proposal. Taken in isolation, ignorance is difficult to regard as a special circumstance, particularly where the trustee has had ample opportunities to seek advice....''
7. Submissions and decision
The bases upon which the applicant submits the existence of special circumstances have been earlier set forth in these reasons. The respondent submits that the trustee should have been aware of the breach of the legislation, that it has not been shown that the accountant was in error as the accountant had assumed, further to its letter, that the trustee had remedied the situation, that a lack of awareness of the regulations and the legislation is no excuse, and that nothing occurred in the year of income which established the existence of special circumstances.
The Tribunal, having considered the guidelines and the matters deemed relevant to the exercise of its discretion in this matter, is satisfied that:
- 1. the events occurring after the relevant year of income, namely the termination of the Fund, and the repayment of the moneys,
ATC 314are not relevant in a consideration of special circumstances;
- 2. reliance upon the exercise by a professional of due care and diligence or the non-provision or advice is not such as to raise a special circumstance;
- 3. ignorance by trustees of the requirement of legislation governing the operation of a fund and hence inadvertence as to a breach of such legislation is not such as to raise a special circumstance;
- 4. capacity to rectify a breach, and the interests of beneficiaries or investors not being at risk, is not such as to raise special circumstances;
- 5. substantial compliance with a legislative breach is not in aid of establishing a special circumstance;
- 6. as to the guidelines and the factors to be taken into account, there are not any facts in evidence warranting further consideration in the context of paragraph 5; the claims of the applicant are similar to the matters referred to in paragraph 9, that is, ignorance, reliance on a professional adviser and complexity of the legislation, and there are no facts establishing the kind of circumstance referred to in paragraph 10.
In the view of the Tribunal, there are not special circumstances occurring during the subject years which show that it would be reasonable for the Fund to be treated as if it had satisfied the relevant conditions. The matters relied upon by the applicant in support of its contention as to the existence of special circumstances are not of such a particular quality of unusualness that permits them to be so described. There was resting upon the partner/trustee an obligation to inform himself as to the true factual situation at or prior to the time he signed the return. Reliance upon the accountants, even be it that they had done all they could by reason of the letter to inform the trustees of the situation, does not constitute a special circumstance. No one of the matters relied upon by the applicant could alone or in association with any other or others be said to be unusual, uncommon, exceptional or abnormal.
The Tribunal is not satisfied that the applicant has discharged the onus of establishing or showing special circumstances within the meaning of s. 13(l)(b) of the OSS Act. Accordingly, the decision under review is affirmed.
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