CBNP Superannuation Fund and Commissioner of Taxation [2009] AATA 709 (13 August 2009)

Last Updated: 18 September 2009

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2009] AATA 709

ADMINISTRATIVE APPEALS TRIBUNAL )

) No 2008/5461

TAXATION APPEALS DIVISION		)
	Re		CBNP SUPERANNUATION FUND

Applicant

And

COMMISSIONER OF TAXATION

Respondent

ORAL DECISION

Tribunal

Senior Member R W Dunne

Date 13 August 2009

Place Adelaide

Decision

The Tribunal affirms the decision under review.

..............................................
R W DUNNE
(Senior Member)

CATCHWORDS

SUPERANNUATION – self-managed superannuation fund – trustees failure to comply with regulatory requirements in relation to in-house assets – loan to a related party – fund not a resident regulated superannuation fund at all times during the year of income – decision to issue notice of non-compliance – decision affirmed
Superannuation Industry (Supervision) Act 1993 ss 10(1), 17A(2), 19 and 42A(1), (5) and (6)
Income Tax Assessment Act 1936 ss 6E(1), (3) and (4), 6E(1B) and 288A

Income Tax Rates Act 1986 s 26

Re JNVQ and Commissioner of Taxation [2009] AATA 522

REASONS FOR ORAL DECISION

13 August 2009

Senior Member R W Dunne

INTRODUCTION

1. At the conclusion of the hearing of this matter, the Tribunal stated orally the terms of, and the reasons for, the decision. The Tribunal advised the parties that, if so requested pursuant to s 43(2A) of the Administrative Appeals Tribunal Act 1975 (“AAT Act”), a statement in writing of the reasons of the Tribunal for its decision would be given to the parties. The respondent has requested a statement of the reasons for the Tribunal’s decision.
2. The applicant in this matter is the CBNP Superannuation Fund (“Fund”) or, more particularly, the trustee of the Fund, CBNP. On 10 June 2004, a breach of certain rules imposed by the Superannuation Industry (Supervision) Act 1993 (“SIS Act”) with respect to “in-house assets” was reported to the respondent. Subsequently, the respondent determined that the Fund was not a resident superannuation fund at all times during the year ended 30 June 2004 and, on 27 August 2007, issued a notice stating that the Fund was not a complying superannuation fund for that year of income. Following the issue of an amended assessment, the applicant objected against the respondent’s decision to declare that the Fund was not a complying superannuation fund for the year ended 30 June 2004. The respondent reviewed and confirmed its decision to issue a notice of non-compliance and the Fund applied to this Tribunal for a review of the respondent’s objection decision.
3. At the hearing, the Fund was represented by its accountant and tax agent, Mr Robert Nicol. The respondent was represented by Ms Sandra Loveband (ATO Legal Services Branch). The Tribunal received into evidence the T documents lodged pursuant to s 37 of the AAT Act (Exhibit R1).

ISSUES

4. The following are the issues for the Tribunal’s consideration:
   • Was the Fund a resident regulated superannuation fund at all times during the year ended 30 June 2004?
   • Was the Fund a complying superannuation fund pursuant to s 42A(1) of the SIS Act in relation to the year ended 30 June 2004?
   • Is the respondent able to exercise the discretion in s 42A(5) of the SIS Act in relation to the Fund for the year ended 30 June 2004?

LEGISLATION

5. In broad terms, a superannuation fund is eligible for concessional tax treatment as a “complying superannuation fund” if the fund is a regulated superannuation fund and, if the fund is a self-managed superannuation fund, the fund is a complying superannuation fund under s 42A(1) of the SIS Act. The expression “self managed superannuation fund”, for a single member fund with a corporate trustee, is defined in s 17A(2)(a) of the SIS Act and reads:

“17A Definition of self managed superannuation fund
...
Basic conditions—single member funds
(2) Subject to this section, a superannuation fund with only one member is a self managed superannuation fund if and only if:
(a) if the trustee of the fund is a body corporate:
(i) the member is the sole director of the body corporate; or
(ii) the member is one of only 2 directors of the body corporate, and the member and the other director are relatives; or
(iii) the member is one of only 2 directors of the body corporate, and the member is not an employee of the other director; and”

Section 42A(1), along with s 42A(5) and s 42A(6), then read:

“42A Complying superannuation fund—fund that has been a self managed superannuation fund at any time during a year
Entity that was a self managed superannuation fund throughout a year of income
(1) An entity that was a self managed superannuation fund at all times during a year of income is a complying superannuation fund in relation to that year of income for the purposes of this Division if:
(a) either:
(i) the entity was a resident regulated superannuation fund at all times during the year of income when the entity was in existence; or
(ii) the entity was a resident regulated superannuation fund at all times during the year of income when the entity was in existence other than a time, before it became a resident regulated superannuation fund, when the entity was a resident approved deposit fund; and
(b) the entity passes the test in subsection (5) in relation to the year of income.
...
Circumstances in which entity passes the test in this subsection
(5) An entity passes the test in this subsection in relation to a year of income or part of a year of income if:
(a) the trustee did not contravene any of the regulatory provisions in relation to the entity during the year of income or the part of the year of income; or
(b) if the trustee 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 Part IX of the Income Tax Assessment Act 1936 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.
Determining whether contravention
(6) In determining for the purposes of this section whether any of the regulatory provisions were contravened in respect of the entity in respect of the pre-lodgment period or the rectification period, the regulatory provisions are taken to have applied in relation to the entity in respect of that period as if the entity were a resident regulated superannuation fund during that period.”

6. The expression “regulated superannuation fund” has the meaning given by s 19 of the SIS Act, which relevantly reads:

“19 Regulated superannuation fund
Definition
(1) A regulated superannuation fund is a superannuation fund in respect of which subsections (2) to (4) have been complied with.
Fund must have a trustee
(2) The superannuation fund must have a trustee.
Trustee must be a constitutional corporation or fund must be a pension fund
(3) Either of the following must apply:
(a) the trustee of the fund must be a constitutional corporation pursuant to a requirement contained in the governing rules;
(b) the governing rules must provide that the sole or primary purpose of the fund is the provision of old-age pensions.
Election by trustee
(4) The trustee or trustees must have given to APRA, or such other body or person as is specified in the regulations, a written notice that is:
(a) in the approved form; and
(b) signed by the trustee or each trustee;
electing that this Act is to apply in relation to the fund.”

7. In respect of the year ended 30 June 2004, the expression “resident regulated superannuation fund” in s 10(1) of the SIS Act is defined as “a resident superannuation fund within the meaning of s 6E(1) of the Income Tax Assessment Act 1936” (“ITAA 1936”). Section 6E relevantly reads:

“6E Resident superannuation funds and non-resident superannuation
funds

Resident superannuation fund at a particular time
(1) For the purposes of this Act, a fund is a resident superannuation fund at a particular time (the relevant time) if, and only if:
(a) the fund is a provident, benefit, superannuation or retirement fund at the relevant time; and
(b) either of the following conditions is satisfied:
(i) the fund was established in Australia;
(ii) any asset of the fund at the relevant time is situated in Australia; and
(c) at the relevant time:
(i) the central management and control of the fund is in Australia; or
(ii) the fund satisfies subsection (1A) or (1B); and
(d) [presently not applicable]
...
Resident superannuation fund in relation to a year of income
(3) For the purposes of this Act, a fund is a resident superannuation fund in relation to a year of income if, and only if:
(a) the fund is a provident, benefit, superannuation or retirement fund at all times during the year of income when the fund is in existence; and
(b) the fund is a resident superannuation fund at any time during the year of income when the fund is in existence.
Non-resident superannuation fund in relation to a year of income
(4) For the purposes of this Act, a fund is a non-resident superannuation fund in relation to a year of income if, and only if, the fund:
(a) is a provident, benefit, superannuation or retirement fund at all times during the year of income when the fund is in existence; and
(b) is not a resident superannuation fund in relation to the year of income.”

8. Section 6E(1B) of the ITAA 1936 modifies the central management and control test in s 6E(1)(c)(i). It reads:

“(1B) A fund satisfies this subsection at the relevant time if the trustee of the fund is a company and at the relevant time:
(a) a director or directors of the company are temporarily absent from Australia; and
(b) the central management and control of the fund would be in Australia if that director or those directors were in Australia; and
(c) the continuous period for which the director or each of those directors has, at that time, been outside Australia does not exceed:
(i) 2 years; or
(ii) such longer period as is applicable to the circumstances in accordance with the regulations.”

9. In respect of the year ended 30 June 2004, the assessable income of a non-complying superannuation fund, that was a complying superannuation fund in relation to the immediately preceding year of income, includes the fund’s “net present income” in respect of previous years of income. Section 288A(1) of the ITAA 1936 relevantly reads:

“288A Liability to taxation of non-complying fund that was previously
a complying fund

(1) If a superannuation fund that is a non-complying superannuation fund in relation to the year of income (the current year of income) was a complying superannuation fund in relation to the immediately preceding year of income, the fund's assessable income of the current year of income includes the fund's net previous income in respect of previous years of income.
(2) The fund's net previous income in respect of previous years of income is taken to be the amount worked out using the formula:
Asset values less Undeducted contributions
where:
Asset values means the sum of the market values of the fund's assets immediately before the start of the current year of income.
Undeducted contributions means the amount in the fund immediately before the start of the current year of income that represented the total undeducted contributions (as defined in section 27A) made by current members of the fund.”

10. In respect of the year ended 30 June 2004, s 26 of the Income Tax Rates 1986 (“Rates Act”) sets out the rate of tax payable by trustees of superannuation funds. Section 26(2) of the Rates Act reads:

“26 Rates of tax payable by trustees of superannuation funds

(1) ...
(2) The rate of tax payable by a trustee of a non-complying superannuation fund in respect of the taxable income of the fund is 47%.”

BACKGROUND

11. The factual background to this case is not in dispute and may be summarised as follows. The Fund was established on 29 June 1994. It is understood that the trustee of the fund at its establishment was CBNP. The sole shareholder, sole director and sole member of the fund was Ms M. Ms M was living in Australia at the time of the establishment of the Fund. She has not lodged an Australian income tax return since the year ended 30 June 2000. In her last income tax return she indicated that she was a resident of Australia for the year ended 30 June 2000. Her last recorded contribution to the Fund was also for the year ended 30 June 2000. To satisfy the requirements of the Corporations Act 2001, Ms M’s brother (Mr M) was also appointed a director of CBNP in January 2006. Ms M ceased to be a resident of Australia for income tax purposes from 1 July 2000 and became a resident of New Zealand. Since 1 July 2000, all decisions in relation to the management and control of the Fund have been made by Ms M in New Zealand.
12. In the letter reporting the breach of the “in-house asset” rules, Mr Nicol advised the respondent that the Fund had loaned Ms M the sum of $118,439.80. The loan took place in 2002. An audit of the Fund was conducted and by letter and Position Paper dated 21 June 2004 (Exhibit R1, T4 at pages 14-21) the respondent advised CBNP that it proposed to issue a notice of non-compliance for the year ended 30 June 2004 under s 40(1) of the SIS Act as the Fund was not then an Australian resident superannuation fund. In the Position Paper, the respondent expressed the view that the requirements of s 6E(1) of the ITAA 1936 were not satisfied because the central management and control of the Fund (ie Ms M) was not in Australia and as Ms M did not satisfy the two year absence rule referred to in s 6E(1)(c)(ii) and s 6E(1B) of the ITAA 1936. The respondent determined that the Fund did not meet the conditions of s 42A(1) of the SIS Act and was considered to be non-complying for the year ended 30 June 2004.
13. In the absence of a response to the respondent’s Position Paper, the respondent issued the notice of non-compliance to CBNP. An amended assessment issued on 3 September 2007 disclosing a taxable income of the Fund for the year ended 30 June 2004 of $302,313. By notice dated 5 June 2008, the applicant (through Mr Nicol) objected against the amended assessment and the decision to declare the Fund a non-complying fund under s 42A(1) of the SIS Act. By letter dated 8 August 2008, the respondent confirmed its decision to issue CBNP with the notice of non-compliance.

CONSIDERATION

Was the Fund a resident regulated superannuation fund at all times during the year ended 30 June 2004?

14. During the course of the hearing, Mr Nicol agreed that the Fund was not a resident regulated superannuation fund at all times during the year ended 30 June 2004. On the evidence before it, the Tribunal is satisfied that, for the year ended 30 June 2004, the Fund was a regulated superannuation fund (vide s 19 of the SIS Act), but that it did not satisfy the central management and control test in s 6E(1)(c)(i) of the ITAA 1936. In relation to s 6E(1)(c)(ii), s 6E(1A) was not applicable as the trustee of the Fund was not an individual. Although s 6E(1B) modifies the central management and control test, after 1 July 2000 Ms M was not “temporarily absent from Australia” and the continuous period for which she was outside Australia has exceeded two years.
15. In these circumstances, it follows that the Fund was not a resident regulated superannuation fund at all times during the year ended 30 June 2004.

Was the Fund a complying superannuation fund pursuant to s 42A(1) of the SIS Act for the year ended 30 June 2004?

16. Again, on the evidence before it, the Tribunal is satisfied that the Fund was a self managed superannuation fund for the year ended 30 June 2004. However, as the Fund was not a resident regulated superannuation fund, it was not a complying superannuation fund pursuant to s 42A(1) of the SIS Act for the year ended 30 June 2004.

Is the respondent able to exercise the discretion in s 42A(5) of the SIS Act in relation to the Fund for the year ended 30 June 2004?

17. In the applicant’s Statement of Facts, Issues and Contentions, Mr Nicol sought to have the respondent (and, on review, the Tribunal) exercise the discretion in s 42A(5) of the SIS Act “to apply penalties against the Trustee of the [Fund] by being allowed to treat the [Fund] as a resident regulated fund for the year ended 30 June 2004 instead of treating the Fund as a non-resident fund thereby imposing taxes of forty seven percent on the net value of the fund.” It was submitted that, by being allowed to exercise the discretion, the Tribunal could reduce any penalties to an appropriate amount to take account of the trustee’s contravention of the SIS Act, but still preserve most of Ms M’s retirement benefits. Mr Nicol argued that s 42A(6) should be construed to deem the fund to be a resident regulated superannuation fund during the period when Ms M was rectifying the contravention by repaying the loan she borrowed from the Fund. If this deeming occurred, the Tribunal could exercise the discretion set out in s 42A(5)(b) of the SIS Act. The Tribunal is unable to accept the argument put by Mr Nicol. Section 42A(6) is not a deeming provision. Like the test in s 42A(5), it applies for the purpose of determining whether any of the regulatory provisions in the SIS Act have been contravened in respect of a self-managed superannuation fund that is seeking to be treated as a complying superannuation fund under s 42A(1). The exercise of the discretion in s 42A(5) would only be available to the Fund if it satisfied s 42A(1), which it does not.
18. A recent example of the exercise of the discretion to treat a fund as a complying superannuation fund where a notice of non-compliance has been issued under s 40(1) of the SIS Act appears in Re JNVQ and Commissioner of Taxation [2009] AATA 522. In that case, a breach of the “in-house asset” rules had occurred and Senior Member M J Carstairs said (at paragraphs 7-8):

“7. A fund, once accepted as a [sic] complying and able to take the benefit of concessional tax treatment, will continue to be so until the respondent gives notice that its status had changed. The respondent accepted that the Fund was complying until the company’s auditors notified the breach. The respondent ultimately decided that the Fund had breached the Act, and issued the notice provided for in s 40 of the Act, namely that the Fund was no longer a complying superannuation fund.
8. The Act further provides that a contravention may be ignored where it is not a contravention of a civil penalty provision. Section 193 of the Act sets out the civil penalty provisions, referring, amongst other things, to breaches of s 62(1) – the sole purpose test – and of s 84(1) – which requires that the trustee take all reasonable steps to ensure that the market value ratio of the fund’s in-house assets does not exceed 5%.”

In Re JNVQ, the exercise of the discretion was available because, prior to the issue of the notice under s 40(1), the fund there (unlike the present Fund) was a resident regulated superannuation fund at all times during the relevant year of income. In the case of the Fund, a breach of the in-house asset rules also occurred, but the notice of non-compliance issued because the Fund was not a resident regulated superannuation fund and was unable to satisfy the requirements of s 42A(1) of the SIS Act. If s 42A(1) had been satisfied and the issue of the notice under s 40(1) was concerned only with the breach of the in-house asset rules, it may have been argued that the discretion should be exercised favourably.

19. The Tribunal has reviewed the making of the amended assessment of the Fund for the year ended 30 June 2004. The Tribunal is satisfied that the amended assessment was properly made within the relevant amendment period and at the rate of tax imposed under s 26(2) of the Rates Act, having regard to the provisions of s 288A of the ITAA 1936. As the year of non-compliance commenced in the year ended 30 June 2004, the calculations for the previous year assets of the Fund were based on the year ended 30 June 2003, and the reported asset values were as follows:
    • Listed shares and equities $1,697
    • Unlisted shares and equities 60,000
    • Cash, debt securities & term deposits 2,985
    • Loans 209,086

Total $273,768
The undeducted contributions were $0
The net previous income is therefore:
Fund’s total assets as at 30 June 2004 $273,768
Less Undeducted contributions 0
Net previous income $273,768
The reported taxable income of the Fund for the year ended 30 June 2004 was $28,545.
Therefore, the assessable income for the year ended 30 June 2004 is:
Taxable income as per return $28,545
Plus s288A Net previous income 273,768
Amended taxable income $302,313

The notice of amended assessment (Exhibit R1, T19, page 66) correctly reflects the amount of the amended taxable income of $302,313.

20. It is most unfortunate that Ms M will suffer a significant reduction in her self-managed superannuation fund benefits. The Tribunal sympathises with her and the position in which she finds herself, but has no greater power than the respondent under the SIS Act to assist her. The Tribunal understands that, before Mr Nicol’s involvement, Ms M was given advice by her previous accountant to borrow the money from the Fund with the intention of doing whatever was necessary to remedy the breach within the Fund as soon as possible. If this account of the facts and the previous advice is correct, the advice was clearly wrong. Given the resultant application of the non-compliance provisions of the SIS Act with an obvious injustice to Ms M, there may be grounds for an application to be made for an act of grace or ex-gratia payment to provide some compensation to her.
21. For the reasons outlined above, the respondent’s decision to issue the notice of non-compliance to the Fund under s 40(1) of the SIS Act was correct. It follows that the amended assessment to give effect to the notice of non-compliance is also correct.

DECISION

22. The Tribunal affirms the decision under review.
    

I certify that the 22 preceding paragraphs are a true copy of the reasons for the decision herein of Senior Member R W Dunne

Signed: .....................................................................................

Associate

Date of Hearing 13 August 2009

Date of Decision 13 August 2009

Advocate for the Applicant Mr R Nicol

RM Nicol & Associates

Advocate for the Respondent Ms S Loveband

ATO Legal Services Branch