Edited version of your private ruling

Authorisation Number: 1012545708356

Ruling

Subject: superannuation contributions

Questions

1. Are the two payments from a trust to the superannuation fund contributions to the fund?

2. Are the withdrawals of these monies from the superannuation fund a superannuation benefit?

Answers

1. No.

2. No.

This ruling applies for the following periods:

2011-12 income year.

The scheme commences on:

1 July 2011

Relevant facts and circumstances

The Fund is a complying self-managed superannuation fund. The Fund has a corporate trustee.

The Fund has two members who are directors of the corporate trustee. Both members are under preservation age.

The Trust is a trust related to the members of the Fund.

In the first quarter of the 2011-12 income year, two amounts were deposited into the Fund. These amounts were received from a line of credit facility within the Trust.

The Trust is not an employer of the members or any other person.

The two relevant amounts were withdrawn from the Fund after approximately two months and four months respectively.

The delay in the repayment of the second amount was because a portion was inadvertently applied towards fund expenses. The Fund had to wait until it had derived sufficient income to make up the shortfall.

The members have not claimed a tax deduction for superannuation contributions in their income tax returns, nor have the relevant amounts been claimed as a deduction by any employer.

Your client has made the following statements:

1. The transfer of the relevant amounts into the Fund was made through an internet banking transaction. The intention for the transfer was for the amounts to be moved within the Trust from one line of credit to another line of credit with a higher interest rate. However, due to the similarity of name indicated on the internet banking transaction screen, the amounts were mistakenly transferred to the Fund.

2. The relevant amounts were never intended to be a contribution to the Fund, nor were the amounts ever intended to go into the Fund at all.

3. Since the relevant amounts were effectively borrowed funds, there would be no benefit obtained from contributing these amounts into the Fund.

4. The mistake was only discovered almost x months later, which resulted in the late withdrawal of the relevant amounts.

5. The additional delay in returning the second amount was due to insufficient funds in the Fund. Approximately 15% of the amount was used to pay fund expenses and hence the directors waited for additional income to be deposited into the Fund before sufficient funds were available to return the second amount.

6. This type of transaction has not occurred previously nor has it been repeated within the Fund.

Your client believes the withdrawal of the relevant amounts did not constitute a superannuation benefit as they were correcting a mistake of the original transaction.

The Fund's trust deed (the Deed) does not contain an express provision permitting the return of a mistaken contribution. A paragraph of the Deed states:

o The trustee may not accept contributions for a member:

o If the acceptance of such contributions would cause the fund to cease to be a complying superannuation fund;

o If the trustee has not received a tax file number for that member;

o From 1 July 2007, any contributions which are a rollover of an employment termination payments from employer of a member; or

o Any contribution otherwise not permitted by superannuation law.

If receiving the contribution on behalf of a member, the trustee becomes aware that any of the above factors apply, the trustee must refund (and debit the account of) the member with the appropriate amount within a reasonable time, and in such a way as not to contravene superannuation law.

Reasons for decision

Summary

On the basis of the information provided, the payments to the Fund of the two relevant amounts are not contributions to the Fund. Further, the withdrawals of these monies from the Fund do not constitute superannuation benefits.

Detailed reasoning

Restitution on the grounds of mistake

A payment made to a superannuation fund under a genuine mistake may be returned in certain circumstances where the principle of unjust enrichment is made out. This principle concerns whether it would be unjust for the recipient to retain the enrichment. ATO Interpretative Decision ATO ID 2010/104 contains a comprehensive overview of the law regarding restitution of mistaken contributions and may be used as guidance in this advice.

The leading case on this topic is David Securities Pty Ltd v Commonwealth Bank of Australia (David Securities),¹ where the High Court held that it is prima facie unjust for the recipient of a mistaken payment to retain the payment, whether that mistake is one of law or fact.² To satisfy the test of causation, the individual seeking restitution would need to establish that the payment would not have been made if they had been aware of the mistake at the time of the payment.

Unjust enrichment based on the grounds of mistake has also been considered in a superannuation context, in a Supreme Court of New South Wales case and in a Superannuation Complaints Tribunal case.

Personalised Transport Services Pty Ltd v AMP Superannuation Ltd and Anor (Personalised Transport)³ is an example of a case where a claim for restitution was made out. In this case, the company operated under the mistaken assumption that it was legally obliged to make superannuation guarantee contributions on behalf of its independent contractors. The company subsequently made a claim to recover a significant portion of the payments made to the superannuation fund. In allowing the claim, Justice Barrett agreed that the payments in question were made in the mistaken belief that the company would be liable for the superannuation guarantee charge if it did not.

Another superannuation case involving a claim for restitution is Superannuation Complaints Determination D06-07\129 (SCT case). The complainant in this case intended to pay his real estate agent $1,000 in rent. However, he instead paid $1,000 to his own superannuation fund by mistake. The complainant did not make the contribution in the mistaken belief that he was required to do so nor was there a legal obligation on the complainant to make the payment. The Tribunal ordered the repayment of the $1,000 and found that the payment was made under a mistake of fact, being the identity of the payee.

Application to the first amount

In the first quarter of the 2011-12 income year, the first amount was transferred from the Trust to the Fund. However, the directors have stated that the amounts were not provided for the purpose of benefitting members of the Fund. The intention was for the amounts to be transferred within the Trust from one line of credit to another line of credit. That is, an incorrect selection during the internet banking transaction resulted in the amounts being mistakenly transferred to the Fund.

A number of months later, the first amount was withdrawn from the Fund. The client indicates that the delay in rectifying the mistake was due to one of the directors, who usually manages the accounts of the Fund, only discovering the mistake after a trip away.

The facts in the SCT case are similar to the circumstances surrounding the Fund because there was a mistake of fact regarding the identity of the payee which resulted in the enrichment of the respective amounts. The Trust originally intended the first amount to be moved within the Trust from one line of credit to another line of credit which bore a higher interest rate. Due to a similarity in the account names however, the amounts were mistakenly transferred to the Fund.

Applying the decision in the SCT case, the transaction which resulted in the mistaken deposit of the first amount is invalid and the parties can be returned to the status quo that existed before the transaction occurred.

Whilst acknowledging that Australian Prudential Regulation Authority (APRA) is not the regulatory body in the case under consideration (because the Fund is a self managed superannuation fund) we note there is persuasive guidance on the issue of mistake provided by APRA. For instance, APRA Circular II.B.1 entitled 'Payments to Standard Employer-Sponsors' states that a trustee may return contributions to an employer if the contributions were paid as a result of 'clerical error, computer malfunction or other mistake'. While there is no similar pronouncement from APRA with respect to member contributions, the argument may be made that the same exception should apply to member contributions.

Application to the second amount

The circumstances involving the transfer of the second amount into the Fund are identical to that of the first amount. That is, the facts show that an erroneous selection in an internet banking transaction resulted in the inadvertent deposit of the second amount into the Fund.

Once the principle of unjust enrichment has been established, there is a prima facie entitlement to recover the money, subject to any defences available. Change of position has become firmly established as a defence to a claim for restitution based on unjust enrichment.⁴ This defence is established if a defendant, acting in good faith, irreversibly changes their position in reliance on the receipt of a benefit.⁵

By way of example, suppose A mistakenly pays B $30,000. B has no reason to doubt their entitlement to the $30,000 and spends $25,000 of it. When A realises the mistake and brings a claim for restitution, B may object by establishing that they have changed their position by spending the money, that the change cannot be reversed, that they believed in good faith that they had title to the money and that they acted in reliance on its receipt.

In this case, a portion of the second amount deposited into the Fund was used to pay Fund expenses (approximately 15%). As a result, insufficient monies were available to facilitate the withdrawal of the mistaken deposit.

Here, the application of a portion of the second amount does not constitute a fundamental change to the position of the Fund. As such, it cannot be said that the change which has occurred is significant or irreversible. This is supported by the period of time lapsed between the date of the mistaken transaction and its subsequent removal as well as the subsequent replenishment of the full amount.

The law surrounding restitution in situations where a portion of the payment has been dealt with is not entirely clear in Australia. However, the recent decision in Citigroup Pty Ltd v. National Australia Bank Ltd (Citigroup v NAB)⁶ may be relied upon for guidance in respect of the issue of defences to claims for restitution. Here, the initial plaintiffs were joint account holders with both Citigroup and NAB. Citigroup received signed instructions to transfer US$500,000 to NAB. Several days later, NAB also received signed instructions to transfer the funds to overseas third party accounts. In accordance with those signed instructions, both Citigroup and NAB made the respective transfers. It was shortly after revealed that the signed instructions received by both Citigroup and NAB were in fact fraudulent.

The Supreme Court of New South Wales deemed Citigroup as liable to bear the whole loss and determined that NAB had met the change of position defence. In determining its decision, the Court concluded that NAB had acted in good faith and in reliance on the receipt of funds. The Court confirmed the causal connection that NAB's payment to the overseas account would not have been possible, but for the receipt from Citigroup. The judgement also quoted from David Securities when stating that the change of position defence is relevant to the enrichment of the defendant 'precisely because its central element is that the defendant has acted to his or her detriment on the faith of the receipt'.

In a similar vein, it was held in Port of Brisbane Corporation v ANZ Securities Ltd⁷ that to establish the defence of change of position, the defendant must have acted to its detriment in relance on its having received the money.

Thus, what becomes clear from Australian case law is that a defence to restitution requires that the recipient has changed its position because of the fact that the payment was made.

Applying this causal connection test, the facts in this case may be distinguished from Citigroup v NAB because the payment of the fund expenses would presumably have occurred regardless of the mistaken deposit of the second amount as failure to do so would have potentially attracted penalties. In other words, the change of position to the Fund did not come about in reliance on the mistaken deposit.

On the facts of this case, the circumstances surrounding the original transfer of the second amount arose out of the same transposition error that occurred with the first amount, which supports the position that both amounts should be accorded the same treatment. Furthermore, even if there was a payee mounting a defence of 'change of position' in respect of the second amount, it cannot be said that the subsequent paying out of expenses did not occur 'but for' the fact that the mistaken payment was made.

As such both amounts will not be contributions to the Fund. As such, the withdrawals from the Fund of these monies do not constitute superannuation benefits.

¹ (1992) 175 CLR 353; (1992) 66 ALJR 768; (1992) 109 ALR 57; (1992) 24 ATR 125; (1992) 92 ATC 4658.

² (1992) 175 CLR 353 at 376-377.

³ [2006] NSWSC 5.

⁴ Australia and New Zealand Banking Group Ltd v Westpac Banking Corporation (1988) 164 CLR 662; (1988) 62 ALJR 292; (1988) 78 ALR 157.

⁵ David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353; (1992) 66 ALJR 768; (1992) 109 ALR 57; (1992) 24 ATR 125; (1992) 92 ATC 4658.

⁶ [2012] NSWCA 381; (2012) 82 NSWLR 391; (2012) 294 ALR 779; [2013] ALMD 4123.

⁷ [2003] 2 Qd R 661.