Re Montgomery Wools Pty Ltd as trustee for Montgomery Wools Pty Ltd Super Fund and Federal Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Administrative Appeals Tribunal (2009/3486)
Judgment date: 6 February 2012
Date published: 17 August 2012

Summary of decision:
Outlines the ATO's response to this case which concerned whether a notice of non-compliance issued to the trustee of a self managed superannuation fund should be confirmed, revoked or varied.

Overview of facts:
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 (SIS Act). Mr and Mrs Montgomery are directors of Montgomery Wools. | 2. Montgomery Wools is also trustee of the Montgomery Wools Family Trust (MFT). The MFT is a discretionary trust and operates the family wool trading business. At all relevant times, the beneficiaries of the MFT were Mr and Mrs Montgomery. | 3. Warwick Wools Pty Ltd (Warwick Wools) is the trustee of the Montgomery Property Trust (MPT). The MPT is a unit trust. Mr and Mrs Montgomery are directors of Warwick Wools. | 4. In 1997, the MWS Fund acquired 100% of the units in the MPT. In the same year, the MPT purchased a property from the MFT and then leased the property back to the MFT. The property was mortgaged to the Commonwealth Bank of Australia (CBA) as security over MFT loans from CBA. From 2001 onwards, no rent was actually paid by the MFT. Instead, the unpaid rent was recorded as a loan from the MPT to the MFT. Although no rent was actually paid to the MPT, the MPT recorded distributions of net income to the MWS Fund in its income tax returns and financial statements. | 5. The MPT asset (the property) was sold in 2004. The proceeds from the sale were deposited into the CBA account of Montgomery Wools as trustee for the MFT and were used to repay debts owed by the MFT. The payment of the proceeds of sale of the property was recorded in the financial statements of the MPT as a loan to Montgomery Wools as trustee of the MFT. There was a corresponding liability recorded in the financial statements for the MFT. After the sale of the property, the most significant asset of the MPT was a loan to the MFT, which it could not repay. Interest was not being charged on the loan and the MPT derived no additional income during the years from 2004 until 2009. | 6. The profit made on the sale of the property by the MPT was recorded as fully distributed to the MWS Fund in income tax returns and financial statements. The profit recorded as having been distributed to the MWS Fund was also included in the amount recorded in the financial statements of the MWS Fund as a loan back to the MPT. | 7. The MWS Fund was audited by the Commissioner, and as a result, on 10 September 2008, the Commissioner issued a notice of non-compliance for the year ended 30 June 2004. | 8. Montgomery Wools applied for a review of the decision on 5 May 2009. By letter dated 6 July 2009, the Commissioner confirmed the original decision that a notice of non-compliance should be issued. | 9. Montgomery Wools applied to the Tribunal for review of the Commissioner's decision. By consent, the Tribunal remitted the decision back to the Commissioner for reconsideration. | 10. 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. The Commissioner contended that Montgomery Wools contravened section 62 (sole purpose test), section 84 (in-house assets rule) and section 109(1A) (investments to be at arm's length) of the SIS Act. | Issues decided by the court or tribunal | The decision under review was affirmed. | Role of Tribunal | The Tribunal decided that its role in reviewing the decision to issue a notice of non-compliance is to stand in the shoes of the Commissioner and consider all relevant matters to make the correct or preferable decision about whether or not the notice of non-compliance should have been issued. In doing so, the Tribunal must form a view about whether there were contraventions of the regulatory provisions. If there were contraventions, the Tribunal must then consider whether the discretion should be exercised to nevertheless give a notice that the fund was complying. [Paragraph 60] | In-house asset rule - related party loan | A key issue considered by the Tribunal was whether there had been a loan made from the MWS Fund to the MPT in the 2004 year. The Tribunal was satisfied based on the evidence that there was an unpaid distribution of the profit made on the sale of the property from the MPT to the MWS Fund and a loan back of that amount from the MWS Fund to the MPT [Paragraph 81]. | In the alternative, the Tribunal was satisfied that the unpaid trust distribution formed part of the provision of financial accommodation (which was a loan within the extended meaning set out in subsection 10(1) of the SIS Act) from the MWS Fund to the MPT. Specifically, the Tribunal found that there was a consensual arrangement between the trustees of the MWS Fund, the MPT and the MFT that the MWS Fund would not call for payment of the profits it was distributed, and that those profits would instead be applied for the benefit of the MFT. That consensual arrangement amounted to the provision of financial accommodation by the MWS Fund to the MPT. "Montgomery Wools has made an investment in a related unit trust and the unit trust has dealt with its assets in such a way as to transfer the value of retirement savings to a related family trust for its use." [Paragraphs 83 - 87]. | Even if there had not been a distribution, the Tribunal would have found that the MWS Fund had provided financial accommodation to the MPT, by reason of the fact that: • the MWS Fund actively chose not to take steps to prevent the proceeds of sale being paid to CBA [the Tribunal finding that the positive act required for there to be a consensual arrangement necessary for the provision of financial accommodation can include an active decision to acquiesce or refrain from enforcing a right or making a demand]; or • Mr Montgomery, as the controlling mind of the trustees of the MWS Fund, the MPT and the MFT, made the decision about the sale and distribution of the proceeds and approved all transactions to give effect to this proposal. [Paragraphs 95 - 97]. | • the MWS Fund actively chose not to take steps to prevent the proceeds of sale being paid to CBA [the Tribunal finding that the positive act required for there to be a consensual arrangement necessary for the provision of financial accommodation can include an active decision to acquiesce or refrain from enforcing a right or making a demand]; or • Mr Montgomery, as the controlling mind of the trustees of the MWS Fund, the MPT and the MFT, made the decision about the sale and distribution of the proceeds and approved all transactions to give effect to this proposal. | [Paragraphs 95 - 97]. | The Tribunal was therefore satisfied that Montgomery Wools, having made a loan to the MPT in its capacity as trustee of the MWS Fund, breached section 84 of the SIS Act in the year ended 30 June 2004 [Paragraph 98]. | Sole purpose test | The Tribunal decided that, properly characterised, the sole purpose of the MWS Fund was not to provide retirement benefits to its members. One of its purposes was to provide support to the family business. The Tribunal found that Montgomery Wools breached section 62 of the SIS Act in 2004 and has continued to do so by failing to call up the loan from the MPT and/or failing to consider terminating the Trust Deed to take control of the assets of the MPT. [Paragraphs 109 and 111] | Arm's length investments | The Tribunal found that, even if 'required to deal' should be given a broad meaning, Montgomery Wools was not required to deal with the units held in the MPT as trustee for the MWS Fund as a result of the events that took place in 2004. Therefore, Montgomery Wools did not breach subsection 109(1A) of the SIS Act in 2004 [Paragraphs 114-116]. | Notice of compliance | The Tribunal was satisfied that the contraventions of the Montgomery Wools were serious and that the impact on the MWS Fund was significant. There has been no attempt to rectify the contraventions. It was the Tribunal's view that it would be inconsistent with the objects of the SIS Act to issue the MWS Fund with a notice of compliance. The Tribunal was therefore not prepared to exercise the discretion under subsection 42A(5) of the SIS Act in favour of the MWS Fund. [Paragraph 146]

Issues decided:
The decision under review was affirmed. | Role of Tribunal: The Tribunal decided that its role in reviewing the decision to issue a notice of non-compliance is to stand in the shoes of the Commissioner and consider all relevant matters to make the correct or preferable decision about whether or not the notice of non-compliance should have been issued. In doing so, the Tribunal must form a view about whether there were contraventions of the regulatory provisions. If there were contraventions, the Tribunal must then consider whether the discretion should be exercised to nevertheless give a notice that the fund was complying. [Paragraph 60] | In-house asset rule - related party loan: A key issue considered by the Tribunal was whether there had been a loan made from the MWS Fund to the MPT in the 2004 year. The Tribunal was satisfied based on the evidence that there was an unpaid distribution of the profit made on the sale of the property from the MPT to the MWS Fund and a loan back of that amount from the MWS Fund to the MPT [Paragraph 81]. In the alternative, the Tribunal was satisfied that the unpaid trust distribution formed part of the provision of financial accommodation (which was a loan within the extended meaning set out in subsection 10(1) of the SIS Act) from the MWS Fund to the MPT. Specifically, the Tribunal found that there was a consensual arrangement between the trustees of the MWS Fund, the MPT and the MFT that the MWS Fund would not call for payment of the profits it was distributed, and that those profits would instead be applied for the benefit of the MFT. That consensual arrangement amounted to the provision of financial accommodation by the MWS Fund to the MPT. "Montgomery Wools has made an investment in a related unit trust and the unit trust has dealt with its assets in such a way as to transfer the value of retirement savings to a related family trust for its use." [Paragraphs 83 - 87]. Even if there had not been a distribution, the Tribunal would have found that the MWS Fund had provided financial accommodation to the MPT, by reason of the fact that: • the MWS Fund actively chose not to take steps to prevent the proceeds of sale being paid to CBA [the Tribunal finding that the positive act required for there to be a consensual arrangement necessary for the provision of financial accommodation can include an active decision to acquiesce or refrain from enforcing a right or making a demand]; or • Mr Montgomery, as the controlling mind of the trustees of the MWS Fund, the MPT and the MFT, made the decision about the sale and distribution of the proceeds and approved all transactions to give effect to this proposal. [Paragraphs 95 - 97]. • the MWS Fund actively chose not to take steps to prevent the proceeds of sale being paid to CBA [the Tribunal finding that the positive act required for there to be a consensual arrangement necessary for the provision of financial accommodation can include an active decision to acquiesce or refrain from enforcing a right or making a demand]; or • Mr Montgomery, as the controlling mind of the trustees of the MWS Fund, the MPT and the MFT, made the decision about the sale and distribution of the proceeds and approved all transactions to give effect to this proposal. [Paragraphs 95 - 97]. The Tribunal was therefore satisfied that Montgomery Wools, having made a loan to the MPT in its capacity as trustee of the MWS Fund, breached section 84 of the SIS Act in the year ended 30 June 2004 [Paragraph 98]. | Sole purpose test: The Tribunal decided that, properly characterised, the sole purpose of the MWS Fund was not to provide retirement benefits to its members. One of its purposes was to provide support to the family business. The Tribunal found that Montgomery Wools breached section 62 of the SIS Act in 2004 and has continued to do so by failing to call up the loan from the MPT and/or failing to consider terminating the Trust Deed to take control of the assets of the MPT. [Paragraphs 109 and 111] | Arm's length investments: The Tribunal found that, even if 'required to deal' should be given a broad meaning, Montgomery Wools was not required to deal with the units held in the MPT as trustee for the MWS Fund as a result of the events that took place in 2004. Therefore, Montgomery Wools did not breach subsection 109(1A) of the SIS Act in 2004 [Paragraphs 114-116]. | Notice of compliance: The Tribunal was satisfied that the contraventions of the Montgomery Wools were serious and that the impact on the MWS Fund was significant. There has been no attempt to rectify the contraventions. It was the Tribunal's view that it would be inconsistent with the objects of the SIS Act to issue the MWS Fund with a notice of compliance. The Tribunal was therefore not prepared to exercise the discretion under subsection 42A(5) of the SIS Act in favour of the MWS Fund. [Paragraph 146]

ATO view of decision:
Role of Tribunal | The ATO agrees that the role of the Tribunal is to review the decision to issue the notice of non-compliance rather than the notice itself. | In-house asset rule - related party loan | The ATO agrees that MWS Fund had made a loan to a related party and that there was a breach of the in-house asset rules in the circumstances of this case. | With respect to the unpaid present entitlement issue, the ATO view, consistent with the decision of the Tribunal, (set out in SMSFR 2009/3 in respect of the SIS Act) is that a beneficiary that makes no demand for payment of funds representing its unpaid present entitlement, in circumstances where it knows those funds are being used otherwise than for its benefit, is financially accommodating the relevant trust. Financial accommodation falls within the extended definition of a loan for the purposes of the SIS Act. | The ATO view is also consistent with the decision of the Tribunal that the consensual arrangement required for there to be the provision of financial accommodation can be implied through deliberate acquiescence - see for example the discussion in TR 2010/3 Income tax : Division 7A loans : trust entitlements , in particular at paragraphs 60-63. | Sole purpose test | The ATO view that there was a breach of the sole purpose test in the circumstances of this case is in accordance with the Tribunal's decision. | Arm's length investments | The view of the Tribunal that there was no breach of subsection 109(1A) of the SIS Act because the trustee was not required to deal with the investment in the units during the events that took place in 2004 is not in accordance with the ATO submissions. The ATO view was that Montgomery Wools as trustee of the MWS Fund in permitting the sale of the MPT asset (the property) and permitting the proceeds of the sale to be lent on an unsecured basis to a third party with no agreed interest or capital repayments was a breach of subsection 109(1A) of the SIS Act. Clarification of this issue by way of appeal was not pursued in this case as the findings were otherwise favourable to the Commissioner. However, should a similar issue arise in the future, the ATO may seek to further clarify the application of subsection 109(1A) of the SIS Act. | Notice of compliance | The ATO view that the SIS Act rules are designed to ensure the prudent management of superannuation fund investments and to ensure that superannuation savings are preserved until retirement and not accessed for current use accords with the Tribunal's decision in relation to the issue of a notice of non-compliance. The ATO's approach to the exercise of the discretion to not issue a notice of non-compliance as set out in PS LA 2006/19 is in accordance with the Tribunal's decision.

Administrative treatment:
Implications for ATO Precedential documents (Public Rulings & Determinations etc) | None | Implications for Law Administration Practice Statements | None

Legislative references: Superannuation Industry (Supervision) Act 1993 (Cth) 10(1) 40 42A(5) 62 84 109(1A) 344(8)
Case references: AAT Case 10,301 (1995) 31 ATR 1067 95 ATC 374 Brookton Co-operative Society Ltd v Commissioner of Taxation (1981) 147 CLR 441 11 ATR 880 81 ATC 4346 Commissioner of Taxation v Radilo Enterprises Pty Ltd (1997) 72 FCR 300 97 ATC 4151 34 ATR 635 Corporate Initiatives Pty Ltd & Ors v Commissioner of Taxation [2005] FCAFC 62 142 FCR 279 2005 ATC 4392 59 ATR 351 East Finchley Pty Ltd v Federal Commissioner of Taxation (1989) 20 ATR 1623 20 ATR 1623 Pearson v Commissioner of Taxation [2006] FCAFC 111 232 ALR 55 2006 ATC 4352 64 ATR 109 Raymor Contractors Pty Ltd v Federal Commissioner of Taxation (1991) 91 ATC 4259 21 ATR 1410 Re JNVQ and Commissioner of Taxation [2009] AATA 522 74 ATR 730 2009 ATC 1-011 Re Triway Superannuation Fund and Commissioner of Taxation [2011] AATA 302 Re XPMX and Commissioner of Taxation [2008] AATA 981 73 ATR 925 Shi v Migration Agents Registration Authority [2008] HCA 31 235 CLR 286 Vivian (Deputy Commissioner of Taxation (Superannuation)) v Fitzgeralds & Anor [2007] FCA 1602 (2007) 69 ATR 834 2007 ATC 5105
Subject references: Complying superannuation fund Self managed superannuation fund Notice of non-compliance