Pabian Park Pty Ltd Superannuation Benefits Fund v Federal Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Administrative Appeals Tribunal (2010/2004)
Judgment date: 21 June 2012
Date published: 28 August 2012
Decision outcome: Unfavourable

Summary of decision:
Outlines the ATO 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 or revoked.

Overview of facts:
1. The Applicants are the trustees of the Pabian Park Pty Ltd Superannuation Benefits Fund (Fund), which is a self-managed superannuation fund (SMSF) under the Superannuation Industry (Supervision) Act 1993 (SIS Act). The Commissioner accepted that the fund was a "complying superannuation fund" for a number of years, which entitled it to concessional tax treatment. | 2. The Applicants are also directors of Pabian Park Pty Ltd (Pabian Park) to which the Fund made certain loans in 2007. The Commissioner found that the Fund had breached the SIS Act in 2008 because the loans were 'in-house assets' representing more than 5% of the market value of Fund assets. The Commissioner accepted an undertaking that the loans would be repaid by 30 September 2009. | 3. When the loans were not repaid by the agreed date, the Commissioner issued a notice of non-compliance under section 40(1) of the SIS Act for the 2006 income year. As a result, the Fund lost the benefit of concessional tax rates, and was assessed for additional tax for the 2006 and 2007 income years. There was no dispute that the Fund had breached a number of SIS Act provisions. | 4. The Applicants sought review of the decision to issue the notice. When the Commissioner confirmed his decision, the Applicants applied to the Tribunal for further review. After 'weighing up all the factors', the Tribunal set aside the decision of the Commissioner. | Issues decided by the court or tribunal | Exercise of discretion | Subsection 40(1) enables the Commissioner as the Regulator to give a notice to the trustee of an entity stating whether the entity is or is not a complying superannuation fund in relation to a year of income. Paragraph 42A(5)(b) provides that, in deciding whether a notice of compliance should be given to a superannuation fund where the trustee has contravened regulatory provisions, the Commissioner as the Regulator must consider - tax consequences arising from the fund being treated as non-complying, seriousness of the contraventions, and 'all other relevant circumstances'. | The Tribunal accepted that, as stated in PS LA 2006/19, the factors specified in paragraph 42A(5)(b) are 'equally relevant' in exercising the subsection 40(1) discretion to issue a notice of non-compliance. | The Tribunal's findings on each factor were as follows. | Tax consequences | As a result of the Fund becoming non-complying, the taxable income for the Fund increased from $56,361 to $309,827, with gross tax increasing from $8,454.15 to $145,618.69 [55]. The Tribunal found the adverse tax consequences were significant and that this would leave the Applicants with minimal savings in their Fund [56]. | Seriousness of contraventions | The Tribunal found that making unsecured loans to Pabian Park breached sections 62 and 84 of the SIS Act. The loans were not on commercial terms in breach of section 109, and were also in breach of the in-house assets rule [59]. The Tribunal found that the Applicants did not appreciate the significance of their regulatory breaches, did not comply with their undertaking and did not try to repay the loans at the earliest possible opportunity. These breaches were 'serious but they were not wilful' [63]. | Other relevant circumstances | The Tribunal also found that the tax consequences of the issue of the notice were likely to deplete most of the assets of the Fund, the age of the Applicants left little opportunity to rebuild retirement savings, the trustees did rectify the breach (though not in a timely manner) and there was no previous non-compliance [64-69]. | Conclusion | The Tribunal accepted (consistent with PS LA 2006/19) that the discretion is to be exercised taking into account the objects of the SIS Act [50], and noted that the case was 'finely balanced' [74]. Failure of the Applicants to appreciate the seriousness of the issue was a 'serious error of judgment', but it would be 'disproportionately harsh not to exercise the discretion in their favour' [75]. The Tribunal concluded that, 'weighing up all the factors', it would 'not be inconsistent with the objects of the SIS Act to exercise the discretion in favour of the Fund' [76].

Issues decided:
Exercise of discretion: Subsection 40(1) enables the Commissioner as the Regulator to give a notice to the trustee of an entity stating whether the entity is or is not a complying superannuation fund in relation to a year of income. Paragraph 42A(5)(b) provides that, in deciding whether a notice of compliance should be given to a superannuation fund where the trustee has contravened regulatory provisions, the Commissioner as the Regulator must consider - tax consequences arising from the fund being treated as non-complying, seriousness of the contraventions, and 'all other relevant circumstances'. The Tribunal accepted that, as stated in PS LA 2006/19, the factors specified in paragraph 42A(5)(b) are 'equally relevant' in exercising the subsection 40(1) discretion to issue a notice of non-compliance. The Tribunal's findings on each factor were as follows. | Tax consequences: As a result of the Fund becoming non-complying, the taxable income for the Fund increased from $56,361 to $309,827, with gross tax increasing from $8,454.15 to $145,618.69 [55]. The Tribunal found the adverse tax consequences were significant and that this would leave the Applicants with minimal savings in their Fund [56]. | Seriousness of contraventions: The Tribunal found that making unsecured loans to Pabian Park breached sections 62 and 84 of the SIS Act. The loans were not on commercial terms in breach of section 109, and were also in breach of the in-house assets rule [59]. The Tribunal found that the Applicants did not appreciate the significance of their regulatory breaches, did not comply with their undertaking and did not try to repay the loans at the earliest possible opportunity. These breaches were 'serious but they were not wilful' [63]. | Other relevant circumstances: The Tribunal also found that the tax consequences of the issue of the notice were likely to deplete most of the assets of the Fund, the age of the Applicants left little opportunity to rebuild retirement savings, the trustees did rectify the breach (though not in a timely manner) and there was no previous non-compliance [64-69]. | Conclusion: The Tribunal accepted (consistent with PS LA 2006/19) that the discretion is to be exercised taking into account the objects of the SIS Act [50], and noted that the case was 'finely balanced' [74]. Failure of the Applicants to appreciate the seriousness of the issue was a 'serious error of judgment', but it would be 'disproportionately harsh not to exercise the discretion in their favour' [75]. The Tribunal concluded that, 'weighing up all the factors', it would 'not be inconsistent with the objects of the SIS Act to exercise the discretion in favour of the Fund' [76].

ATO view of decision:
Although the Tribunal reached a conclusion different to the Commissioner on exercise of the discretion, it is acknowledged that the case was finely balanced and that it was open to the Tribunal to reach its decision on the facts as found. In doing so, the Tribunal also accepted and followed the general approach taken in PS LA 2006/19.

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 3 38A 39 40 41 42A 45 62 83 84 109 262A 344
Case references: Re JNVQ and Commissioner of Taxation [2009] AATA 522 2009 ATC 1-011 (2010) 74 ATR 730 Vivian (DCT (Superannuation)) v Fitzgeralds [2007] FCA 602 2007 ATC 5105 (2007) 69 ATR 834
Subject references: Complying superannuation fund Self managed superannuation fund Notice of non-compliance