Montgomery Wools Pty Ltd as trustee for Montogmery Wools Pty Ltd Superannuation Fund [2012] AATA 61 (6 February 2012)
Last Updated: 6 February 2012
[2012] AATA 61
Division / TAXATION APPEALS DIVISIONFile Number(s) / 2009/3486
Re / MONTGOMERY WOOLS PTY LTD as trustee for MONTGOMERY WOOLS PTY LTD SUPER FUND
APPLICANT
And / COMMISSIONER OF TAXATION
RESPONDENT
DECISION
Tribunal / Ms J L Redfern, Senior MemberDate / 6 February 2012
Place / Sydney
The decision under review is affirmed.
...... [sgd]......
Ms J L Redfern, Senior Member
CATCHWORDS
SUPERANNUATION – superannuation funds – self managed superannuation fund – complying superannuation fund – subject of review – role of Tribunal – whether contravention of regulatory provisions – in-house assets rule – whether there was a loan – financial accommodation – sole purpose test – investments to be arm's length – required to deal – discretion to issue notice of non-compliance – tax consequences – seriousness of contraventions – other relevant considerations – whether removal of trustee is available – decision under review is affirmed
LEGISLATION
Administrative Appeals Act 1975 ss 42D, 43
Corporations Act 2001 ss 9, 1305
Income Tax Assessment Act 1936 s 288A
Income Tax Rates Act 1986 s 26
Superannuation Industry (Supervision) Act 1993 ss 3, 10, 17A, 38A, 39, 40, 42A, 45, 62, 71, 83, 84, 109, 133, 134, 193, 344
Superannuation Industry (Supervision) Regulations 1994
CASES
AAT Case 10,301 (1995) 31 ATR 1067
Brookton Co-operative Society Ltd v Commissioner of Taxation [1981] HCA 28; (1981) 147 CLR 441
Commissioner of Taxation v Radilo Enterprises Pty Ltd [1997] FCA 22; (1997) 72 FCR 300; 97 ATC 4151; [1997] FCA 22; 34 ATR 635
Corporate Initiatives Pty Ltd & Ors v Commissioner of Taxation [2005] FCAFC 62; (2005) 142 FCR 279
East Finchley Pty Ltd v Federal Commissioner of Taxation (1989) 20 ATR 1623
Pearson v Commissioner of Taxation (2006) 232 ALR 55; [2006] FCAFC 111
Raymor Contractors Pty Ltd v Federal Commissioner of Taxation (1991) 91 ATC 4259; 21 ATR 1410
Re JNVQ and Commissioner of Taxation (2009) 74 ATR 730; [2009] AATA 522
Re Triway Superannuation Fund and Commissioner of Taxation [2011] AATA 302
Re XPMX and Commissioner of Taxation (2008) 73 ATR 925; [2008] AATA 981
Shi v Migration Agents Registration Authority [2008] HCA 31; (2008) 235 CLR 286
Vivian (Deputy Commissioner of Taxation (Superannuation)) v Fitzgeralds& Anor (2007) 69 ATR 834; [2007] FCA 1602
SECONDARY MATERIALS
Explanatory Memorandum to the Superannuation Industry (Supervision) Legislation Amendment Bill 1995
Explanatory Memorandum to the Superannuation Legislation Amendment Bill (No. 4) 1999
PS LA 2006/19 Self managed superannuation funds – notice of non-compliance
REASONS FOR DECISION
Ms J L Redfern, Senior Member
6 February 2012
BACKGROUND
1. Montgomery Wools Pty Ltd (Montgomery Wools) is the trustee for the Montgomery Wools Pty Ltd Super Fund (the MWS Fund). The MWS Fund was established in 1993 and is a self managed superannuation fund for the purposes of the Superannuation Industry (Supervision) Act 1993 (the SIS Act). It was accepted as a “complying superannuation fund” by the Commissioner of Taxation (the Commissioner) for a number of years and as such enjoyed certain tax benefits available under the tax legislation.
2. The MWS Fund was audited for compliance with the regulatory provisions of the SIS Act and on 10 September 2008, the Commissioner issued a notice of non-compliance in respect of the year ended 30 June 2004. It is common ground that a fund remains non-complying unless and until the Commissioner sets aside the notice of non-compliance or issues a notice that the fund is complying.
3. As a result of the notice, the MWS Fund lost the benefit of concessional tax rates and was assessed for additional tax for each of the years ended 30 June 2004, 2005 and 2006.
4. Montgomery Wools applied for a review of the decision on 5 May 2009 but by review decision dated 6 July 2009, the Commissioner confirmed the original decision that a notice of non-compliance should be issued. Montgomery Wools then applied to this Tribunal for review of this decision and by consent order the Tribunal remitted the decision to the Commissioner for reconsideration.
5. On 13 September 2010 the Commissioner made a decision, on remittal, confirming the decision to issue the notice of non-compliance but varying the reasons.
6. Montgomery Wools disputes whether the reconsidered decision should be the subject of review by the Tribunal but, in any event, challenges both decisions and the issue of the notice of non-compliance by the Commissioner.
ISSUES
7. Montgomery Wools contends that the decision which is the subject of the review is the decision of 10 September 2008 and not the reconsidered decision of 13 September 2010. Montgomery Wools further contends that in reviewing the decision, the Tribunal should review the reasons to determine whether they are valid. If they are not valid, the Tribunal cannot substitute other reasons to support the decision to issue the notice. The decision and the reasons are inseparable and it is the role of the Tribunal to review the notice to determine whether the decision, as a whole, is correct.
8. Montgomery Wools further contends that, regardless of which decision the Tribunal reviews, neither is correct on the facts of this case. There have been no regulatory breaches by Montgomery Wools and as such there was no basis to issue a notice of non-compliance. In the alternative, the Commissioner should have exercised his discretion not to issue a notice of non-compliance. The Tribunal should therefore set aside the original decision, or the reconsidered decision, as the case may be.
9. The Commissioner contends that the reviewable decision before the Tribunal is the decision of the Commissioner to issue a notice of non-compliance or, alternatively, the decision to issue a notice for particular reasons. The reasons are those as set out in the reconsidered decision of 13 September 2010. The Tribunal is not confined to the role of reviewing the notice itself. The decision was correct and should be affirmed because Montgomery Wools contravened a number of regulatory provisions of the SIS Act and these breaches were significant. There is no reason why the discretion should be exercised in favour of the MWS Fund to make it complying.
10. The issues for determination are:
o (a) What is the subject of review by the Tribunal and what is the role of the Tribunal in conducting the review?
o (b) Did Montgomery Wools contravene any regulatory provisions of the SIS Act during the income year ended 30 June 2004?
o (c) If the answer to (b) is yes, should the MWS Fund nevertheless be given a notice stating it was a “complying superannuation fund” in respect of the income year ended 30 June 2004?
LEGISLATIVE FRAMEWORK
11. The relevant legislation is the SIS Act, the Superannuation Industry (Supervision) Regulations 1994 (the SIS Regulations), the Income Tax Assessment Act 1936 (the ITAA) and the Income Tax Rates Act 1986 (the ITRA).
12. The object of the SIS Act is “to make provision for the prudent management of certain superannuation funds” and for their supervision by the relevant regulators: s 3(1) of the SIS Act. The regulator of self managed superannuation funds is the Commissioner of Taxation (the Commissioner).
13. Section 3(2) of the SIS Act provides:
The basis for supervision is that those funds and trusts are subject to regulation under the Commonwealth’s powers with respect to corporations or pensions (for example, because the trustee is a corporation). In return, the supervised funds and trusts may become eligible for concessional taxation treatment.
14. Section 40(1) of the SIS Act provides that the Commissioner may give a notice to a trustee of an entity stating “whether the entity is or is not a complying superannuation fund ... in relation to a year of income specified in the notice”. Section 40(2) provides that where the Commissioner gives a notice to a trustee stating the entity is not a complying superannuation fund, the notice must set out the reasons why the Commissioner has so stated.
15. Under s 42A(1) of the SIS Act, an entity which was a self managed superannuation fund during a year of income is a “complying superannuation fund” in relation to that year if the entity is a “resident regulated superannuation fund”, which is not disputed in this case, and the entity passes the test set out in s 42A(5).
16. Section 42A(5) provides:
An entity passes the test in this subsection in relation to a year of income or part of a year of income if:
(a) no trustee of the entity contravened any of the regulatory provisions in relation to the entity during the year of income or the part of the year of income; or
(b) if a trustee of the entity contravened one or more of the regulatory provisions in relation to the entity during the year of income or the part of the year of income, the Regulator, after considering:
(i) the taxation consequences that will 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.
17. The “regulatory provisions” for the purposes of s 42A(5) include provisions under the SIS Act and the SIS Regulations, but only apply to contraventions which are an offence or a contravention of a civil penalty provision under the SIS Act: s 38A and s 39(1) of the SIS Act.
18. A fund is a “complying superannuation fund” for the purposes of the ITAA if the Commissioner has given notice the fund is complying and has not subsequently given a notice of non-compliance (s 45 of the SIS Act).
19. The ITRA provides concessional rates of tax for a trustee of a complying superannuation fund but the tax rate in respect of the taxable income of a non-complying fund was at the relevant time 47% (s 26(1) of the ITRA). If a superannuation fund is found to be non-complying but was complying in the previous year, the fund’s assessable income for the year includes the fund’s net income in respect of the previous years of income (s 288A the ITAA).
20. In summary, a self managed superannuation fund that has been issued with a notice of compliance will be a complying superannuation fund and will have the benefit of concessional tax rates unless and until the trustee is served with a notice that it is non-complying. Once served with such a notice, concessional rates will no longer apply to the self managed superannuation fund and tax will be assessed on net funds in the previous income years as well as on income in the current year of assessment.
21. It is common ground that there are significant tax consequences if a complying self managed superannuation fund becomes non-complying as a result of the issue of a notice of non-compliance by the Commissioner. In this case, amended assessments dated 8 November 2008 have been issued to Montgomery Wools for the years 2004 to 2006 as a result of the audit in the sum of $397,194.15.
22. The Commissioner contends that Montgomery Wools has contravened ss 62, 84 and 109(1A) of the SIS Act. The Commissioner previously relied on a breach of s 67 of the SIS Act in the original decision but no longer relies on this provision. These provisions are civil penalty provisions under s 193 of the SIS Act and are therefore “regulatory provisions” for the purposes of s 42A(5) of the SIS Act.
23. Section 62(1) requires a regulated superannuation fund to be maintained solely for one or more of the core purposes specified in s 62, namely for provision of benefits to members upon their retirement (or their dependants in the case of a member’s death before retirement). Section 84 requires a trustee of a regulated superannuation fund to take “all reasonable steps” to ensure that the rules in relation to “in-house assets” are complied with by the fund. An in-house asset is a related party loan or investment. The in-house assets rule provides that if the market value ratio of the fund’s in-house assets exceeds 5%, the trustee of the fund must not acquire an in-house asset. If the market value ratio does not exceed 5% but the acquisition would result in the market value of the fund’s in-house assets exceeding 5%, the trustee must not acquire the in-house asset (s 83 of the SIS Act). Section 109 requires investment by a superannuation entity to be made and maintained on an arm’s length basis.
24. Section 344(1) of the SIS Act provides that a person affected by a reviewable decision may request a review and the Regulator (in this case, the Commissioner) must reconsider the decision and confirm, revoke or vary the decision. Section 344(8) provides that an application for review may be made to this Tribunal in respect of decisions that have been either confirmed or varied.