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[2014] FCA 1101
Federal Court of Australia
2014-10-15
Buchanan J
Original judgment source is linked above.
IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 681 of 2014
BETWEEN: ALISON LENDON, DEPUTY COMMISSIONER OF TAXATION (SUPERANNUATION)
JUDGE: BUCHANAN J DATE: 15 October 2014 PLACE: SYDNEY
Introduction 1 The Court has been asked, in this case, to make declarations, impose pecuniary penalties and assess costs arising from contraventions of the Superannuation Industry (Supervision) Act 1993 (Cth) ("the SIS Act"). 2 Many matters have been agreed between the parties. They have agreed the basic facts, the legal obligations, the nature and extent of the contraventions, the declarations which should be made, the pecuniary penalties which should be imposed and the costs which should be assessed. The parties have agreed that the pecuniary penalties and costs should be paid in quarterly instalments over a period of 24 months.
The approach to agreed penalties 3 The fact and extent of the agreement of the parties has avoided, I have no doubt, a considerable drain on the resources of the Court. No doubt the discussions have proceeded by reference, on each side, to principles and general regulatory objectives (in the case of the applicant) or personal interests (in the case of the second and third respondents) which do not reflect a commonality of purpose. For that reason alone, some examination of the proposed orders is appropriate and necessary. Moreover, it is accepted doctrine in this Court that the Court has an independent role in assessing whether penalties proposed (even jointly) by parties fall within an acceptable range, having regard to the particular circumstances of the case. 4 In NW Frozen Foods Pty Ltd v Australian Competition and Consumer Commission (1996) 71 FCR 285 ("NW Frozen Foods"), Burchett and Kiefel JJ pointed out (with the agreement of Carr J) that since at least the decision of Sheppard J in Trade Practices Commission v Allied Mills Industries Pty Ltd (No 4) (1981) 37 ALR 256 the practice in this Court has been to permit parties who have reached agreement about the circumstances of contravention of civil penalty provisions in federal statutes, to propose particular penalties which they had agreed should be imposed. Their Honours said: There is an important public policy involved. When corporations acknowledge contraventions, very lengthy and complex litigation is frequently avoided, freeing the courts to deal with other matters, and investigating officers of the Australian Competition and Consumer Commission to turn to other areas of the economy that await their attention. At the same time, a negotiated resolution in the instant case may be expected to include measures designed to promote, for the future, vigorous competition in the particular market concerned. These beneficial consequences would be jeopardised if corporations were to conclude that proper settlements were clouded by unpredictable risks. A proper figure is one within the permissible range in all the circumstances. The Court will not depart from an agreed figure merely because it might otherwise have been disposed to select some other figure, or except in a clear case. 5 Their Honours said that authorities in both Australia and New Zealand "provided unanimous support for the approach we have outlined". 6 In Minister for Industry, Tourism & Resources v Mobil Oil Australia Pty Ltd [2004] FCAFC 72 ("Mobil Oil") the Chief Justice of the Court directed a related question about this issue to a Full Court. The question, and its answer, were as follows: "Where the parties propose an agreed amount to be imposed as a penalty pursuant to s 13 of the Petroleum Retail Marketing Sites Act 1980 (Cth), is the Court bound by the decision in NW Frozen Foods Pty Ltd v Australian Competition and Consumer Commission (1996) 71 FCR 285 to consider whether the proposed amount is within the permissible range in all of the circumstances and, if so, impose a penalty of that amount? Answer: No, but the reasons in NW Frozen Foods Pty Ltd v Australian Competition and Consumer Commission (1996) 71 FCR 285 discloses no error of principle. 7 The circumstances in which this question was posed and answered are important to appreciate. 8 The case had been assigned to Gyles J. The parties (the Minister and Mobil) had agreed that Mobil had contravened the Petroleum Retail Marketing Sites Act 1980 (Cth). 9 The Full Court (Branson, Sackville and Gyles JJ) recorded: 3 The Minister and Mobil (together "the Parties") tendered at the hearing before Gyles J, a Statement of Agreed Facts ("Statement"). Mobil admitted in the Statement that it had contravened s 10(2) of the Sites Act. Specifically, Mobil admitted that during the period January 1998 to January 2000 ("the Relevant Period"), it operated retail sites exceeding the permitted number specified in the Petroleum Retail Marketing Sites Regulations 1981 ("Regulations"). The Parties agreed on the form of declaratory relief and the injunctions to be granted pursuant to s 12 of the Sites Act. His Honour expressed the view that the declaration and injunctions were appropriate and required no further consideration. 4 The Parties also put to Gyles J an agreed pecuniary penalty of $844,500 and submitted jointly that the Court should impose that penalty pursuant to s 13 of the Sites Act. … (A joint explanation for the amount of the penalty was then provided.) 10 The Full Court said: 7 In NW Frozen Foods the ACCC sought an order for a pecuniary penalty under s 76(1) of the Trade Practices Act 1976 (Cth) ("TP Act") in respect of a contravention of Part IV of that Act. The joint submission in the present case contended that the principles stated in NW Frozen Foods apply equally to proceedings under the Sites Act seeking an order that an alleged contravenor pay a pecuniary penalty. 8 Gyles J did not think it appropriate to accede to the joint submission on penalty without further examination of the approach taken in NW Frozen Foods. His Honour delivered a judgment in which he noted that several Judges of the Court sitting at first instance had expressed reservations about that approach. He considered that these public reservations raised matters of principle which required the issue of agreed civil penalties to be revisited by a Full Court, particularly as Commonwealth regulators were becoming parties to agreements concerning civil penalties with increasing frequency. His Honour suggested that it is "inherently unlikely" that an agreed penalty will be so far outside the range as to entitle a single Judge to depart from it. In practice, therefore, the agreed penalty would be imposed and there would be no aggrieved party wishing to appeal to a Full Court. 9 Gyles J indicated to the Parties' representatives that he was satisfied that the penalty was within the range. Nonetheless he thought it appropriate to refer the "threshold issue" to a Full Court. Although this course was opposed by the Parties, his Honour recommended to the then Acting Chief Justice that the Question be referred to a Full Court. The Chief Justice subsequently made the direction under s 20(1A) of the Federal Court Act. 11 In the course of its judgment the Full Court explained, and amplified, the reasoning in NW Frozen Foods. At [51] the Full Court said: 51 The following propositions emerge from the reasoning in NW Frozen Foods: (i) It is the responsibility of the Court to determine the appropriate penalty to be imposed under s 76 of the TP Act in respect of a contravention of the TP Act. (ii) Determining the quantum of a penalty is not an exact science. Within a permissible range, the courts have acknowledged that a particular figure cannot necessarily be said to be more appropriate than another. (iii) There is a public interest in promoting settlement of litigation, particularly where it is likely to be lengthy. Accordingly, when the regulator and contravenor have reached agreement, they may present to the Court a statement of facts and opinions as to the effect of those facts, together with joint submissions as to the appropriate penalty to be imposed. (iv) The view of the regulator, as a specialist body, is a relevant, but not determinative consideration on the question of penalty. In particular, the views of the regulator on matters within its expertise (such as the ACCC's views as to the deterrent effect of a proposed penalty in a given market) will usually be given greater weight than its views on more "subjective" matters. (v) In determining whether the proposed penalty is appropriate, the Court examines all the circumstances of the case. Where the parties have put forward an agreed statement of facts, the Court may act on that statement if it is appropriate to do so. (vi) Where the parties have jointly proposed a penalty, it will not be useful to investigate whether the Court would have arrived at that precise figure in the absence of agreement. The question is whether that figure is, in the Court's view, appropriate in the circumstances of the case. In answering that question, the Court will not reject the agreed figure simply because it would have been disposed to select some other figure. It will be appropriate if within the permissible range. 12 Five further points were then made. The second and fifth were: 54 Secondly, the sixth proposition drawn from the reasoning in NW Frozen Foods does not mean, in our opinion, that the Court must commence its reasoning with the proposed penalty and limit itself to considering whether that penalty is within the permissible range. A Court may wish to take that approach. However, it is open to a Court, consistently with the reasoning in NW Frozen Foods, first to address the appropriate range of penalties independently of the parties' proposed figure and then, having made that judgment, determine whether the prepared penalty falls within the range. … 58 Fifthly, there is nothing in NW Frozen Foods that is inconsistent with any of the following propositions: (i) The Court, if it considers that the evidence or information before it is inadequate to form a view as to whether the proposed penalty is appropriate, may request the parties to provide additional evidence or information or verify the information provided. If they do not provide the information or verification requested, the Court may well not be satisfied that the proposed penalty is within the range. (ii) If the absence of a contradictor inhibits the Court in the performance of its duties under s 76 of the TP Act, s 13 of the Sites Act, or similar legislation, it may seek the assistance of an amicus curiae or of an individual or body prepared to act as an intervenor under FCR, O 6 r 17. (iii) If the Court is disposed not to impose the penalty proposed by the parties, it may be appropriate, depending on the circumstances, for each of them to be given the opportunity to withdraw consent to the proposed orders and for the matter to proceed as a contested hearing. 13 Then the Court dealt with some criticisms and reservations expressed by academic commentators and individual judges of the Court. One criticism, which was addressed at length, had been offered by Weinberg J in Australian Competition and Consumer Commission v Colgate-Palmolive Pty Ltd [2002] FCA 619. The criticisms were not accepted. 14 In Australian Securities and Investments Commission v Ingleby (2013) 275 FLR 171, the Victorian Court of Appeal criticised both NW Frozen Foods and Mobil Oil. Weinberg JA (with whom the other members of the Court of Appeal agreed on this point) said (at [28]-[29]) that in his view both NW Frozen Foods and Mobil Oil represented "bad law" and were "wrongly decided". Those conclusions were a step in a process of reasoning which explained why the Court of Appeal proposed to take a different course in the case before it. The conclusions were strongly expressed and explicitly endorsed. 15 Nevertheless, apart from any view of my own (which I need not express here) each of those Full Court judgments in this Court is binding on me. The judgment in Mobil Oil, in particular, resolved for single judges of this Court the criticisms earlier made of NW Frozen Foods. I therefore propose to apply the approach stated in those authorities.
The agreed facts 16 The first respondent is the corporate trustee ("the trustee") of the Graham Family Superannuation Fund ("the Fund") which was established on 18 October 2006, the first respondent having been incorporated on 9 October 2006. The second and third respondents (who are husband and wife) were the directors of the trustee. 17 On 31 July 2007 the Fund was capitalised in the amount of $216,047.43 by rollover from an existing superannuation account of the third respondent. On 10 August 2007 further capital of $273,113.15 was provided by rollover of an existing superannuation account of the second respondent. 18 On 20 July 2007, the trustee contracted to purchase a residential property for $285,408.92. Settlement took place on 20 August 2007. However, arrangements were made to take possession from the date of contract and, from that date, the property was leased to a son of the second and third respondents, fully furnished, until 4 February 2013. 19 $48,500 was expended on furniture before the lease commenced. A further $2,897.10 was expended on outgoings (including repairs, rates and insurance) over the lease period. Those expenses are accepted as properly incurred. However, rent was not paid as required by the lease, and by 30 June 2012 the arrears were $60,762. 20 On 11 July 2008 the trustee purchased a caravan for $24,500. A further $4,570.46 was expended in relation to the caravan for storage, registration, maintenance and insurance. No income was derived by the Fund. 21 The second and third respondents conducted a livestock business in Victoria. Between September 2007 and September 2009 the trustee expended $56,226.50 on the purchase of stud cattle. A further $6,736 was expended on insurance, registration fees, veterinary costs and other expenses. No income was derived by the Fund. 22 In July and August 2009 the trustee purchased two motor vehicles which were garaged with the two adult sons of the second and third respondents. A further $4,462.95 was expended by the trustee on insurance, registration, repairs and maintenance. The Fund derived no income from the motor vehicles. 23 There are some other facts agreed which relate to some non-contravening expenditure by the trustee, to an accidental withdrawal (subsequently repaid) and to two withdrawals ($4,000 and $10,000) which were unexplained and treated as contravening loans, the specific details of which I have not recorded, because the general practice is, in my view, clear enough. 24 By 30 June 2012, on a proper view of the Fund's affairs, the loan account of the Fund (including both contravening and some non-contravening loans) stood at $260,064. 25 It is agreed that Income Tax and Regulatory Returns were not filed within applicable time limits. The return to 30 June 2008 was not filed until March 2011. The returns for 2009, 2010 and 2011 were not filed as at 30 June 2012. In respect of the 2008 return, the auditor of the Fund filed an Auditor Contravention Report ("ACR") referring to loans made to members of the Fund of $55,454. The second and third respondents were advised why that ACR was filed, but from March 2011 the trustee nonetheless expended further funds which were subsequently treated in the accounts as loans to them. 26 In September 2012 the auditor of the Fund filed further ACRs in respect of the 2009, 2010 and 2011 income years. Loans to members had, by this time, reached $253,865. 27 The agreed facts record: 49. The ATO commenced an audit into the Fund initially in respect of the 2007 and 2008 income years. By ATO letter to the Trustee dated 9 July 2012 the audit was extended to include the 2009 to 2012 income years. Despite the Grahams being aware of the ACRs and the ATO's audit, they continued to lease the property to their son until February 2013. In attempting to defend some of their conduct the Grahams claimed in correspondence to the ATO dated 13 August 2012 that the motor vehicles referred to in paragraph 12 were purchased on the basis that the family members who used them would have to pay a daily hire charge, although no documentation was ever drawn up which created such obligations. It is not established that the motor vehicles were registered in the name of the Trustee and it is agreed that the motor vehicles did not produce income for the Fund. 50. On 22 February 2013 the Commissioner of Taxation disqualified the Grahams from acting as a trustee, investment manager or custodian of a superannuation entity under s126A(2) of the Superannuation Industry (Supervision) Act 1993 (the Act). 51. The Fund was not declared non-complying. The Commissioner could have declared the Fund to be non-complying which would have resulted in the issuing of an assessment of 45% of the net assets of the Fund for the relevant year. 52. The Fund was wound up on 29 September 2013. 28 The following further agreed matters are also recorded: ADDITIONAL FACTS RELEVANT TO SPECIFIC CONTRAVENTIONS 53. Superannuation funds are regulated to ensure that retirement benefits are available when persons meet qualification criteria. Taxation concessions apply in respect of certain contributions to and the income derived by such funds. 54. Section 62 of the Act requires that the trustee maintain the Fund solely for core or ancillary purposes. The purchase and immediate lease of the property to the Grahams' son breached the core or ancillary purpose test as soon as the Fund was capitalised. The expenditures treated as loans to members and the failure to collect rent further breached the core or ancillary purpose test. 55. Section 84 of the Act requires that the market value ratio of the Fund's in house assets not exceed 5%. By 30 June 2008, or the first year of any substantial investment activity, the Fund's market value ratio of in house assets was 69.59%. By 30 June 2012 it was 90.13%. The Grahams also failed to prepare and implement written plans to reduce the excess of the market value ratio of in house assets that exceeded 5%.
The parties' submissions 29 The parties each filed submissions shortly after the agreed facts were filed. The applicant submitted: 4. The contraventions were serious, numerous, varied as to their particulars and sustained over many years. … and: 18. The contraventions are very serious and fall into two broad categories: 18.1. The making of 80 contravening loans to members over four year period for a wide variety of private purposes, namely the purchase of a caravan, motor vehicles, stud cattle for hobby purposes and other unspecified private purposes. 18.2. The lease of the fund's principal asset, being residential premises, to the son of the Second and Third Respondent and the failure to collect rent from July 2007 to February 2013. The Second Respondent played the dominant role in the management of the Fund, whereas the Third Respondent relied on the judgment of the Second Respondent. Accordingly the parties submit that it is appropriate for a higher penalty to be imposed on the Second Respondent. 30 As a result of the investigations conducted by the Commissioner of Taxation, the second and third respondents were, on 9 May 2013, disqualified from being trustees or responsible officers of corporate trustees of a superannuation entity. The Commissioner did not issue a notice of non-compliance to the Fund. That was because the Fund was repaid by the second and third respondents from other assets. The result is that the second and third respondents retained the benefit of their interests in the Fund undiminished by a penalty assessment for non-compliance. 31 The second and third respondents sought to excuse their conduct as, in large part, unintentional or the result of reliance on others. The applicant accepts that the third respondent relied on the judgement of the second respondent. The second respondent claimed to have relied on information obtained from an unidentified financial adviser and an unidentified quantity surveyor "each of whom provided informal guidance regarding the regulatory restrictions applicable to the acquisition and use of property by a regulated superannuation fund". The second respondent claims that "he believed he understood the relevant regulatory requirements and restrictions and believed he was making decisions in accordance with the requirements and restrictions". 32 I am unable to give much credence to these protestations. The second respondent is an educated man. He was at one time a school principal. The expenditure which he, with the support of the third respondent, caused the trustee to make on a residential property, fully furnished, provided effectively rent free to their son, on a caravan, stud cattle, motor vehicles placed in the possession of their sons and for the provision of lump sums in cash, cannot have been understood as consistent with the basic arm's length conduct of a fund held in trust for the specific purpose of providing retirement benefits, without (at least) a careless disregard for the regulatory requirements. The basic terms of those regulatory requirements are not difficult to obtain or to understand, given the level of education of the second and third respondents. 33 I have taken into account affidavit material from the second and third respondents dealing with their poor health at the time, and that they each suffered from psychological or physical afflictions "which adversely affected their capacity to properly understand their responsibilities". I have taken into account their explanation that the son to whom the property was leased was unco-operative, and their relationship with him has now fractured. Those matters were not tested, but are not disputed by the applicant for present purposes. Nevertheless, I agree with the submission of the applicant that the contraventions were serious. 34 I acknowledge the following statement by the second and third respondents: (h) The Second and Third Respondents acknowledge that they failed to carry out their responsibilities in relation to the Fund to the required standard, and deeply regret and apologise for those failures. They accept that as directors of the corporate trustee of the Fund, they had primary responsibility in respect of the maintenance of the Fund in accordance with the terms of its trust deed and as required by the Act.
The principles 35 The applicant's written submissions set out carefully, and very helpfully, the regulatory framework, the penalties available to be imposed for the admitted conduct, the principles about how to deal with multiple contraventions, including the significance of a course of conduct and the application of the "totality" principle, and the factors which courts frequently take into account when fixing a penalty, including the central purpose of deterrence. It is not necessary for me to discuss those matters in detail. The accuracy of the applicant's submissions about those matters is not in dispute in the present case and I have found them to be of considerable assistance. 36 There were many separate acts of contravention, breaching four provisions (ss 62, 65, 84 and 109 of the SIS Act) over a period of more than four years. The applicant (accepting the explanation of the authorities given by Foster J in Clean Energy Regulator v MT Solar Pty Ltd [2013] FCA 205 (at [73]-[89]) did not seek the imposition of separate penalties for breaches of each provision. The applicant submitted: 30. … On the facts of this matter the proper way to approach the matter is as follows: 30.1. A separate and single penalty should be assessed for each of the contraventions relating to the lease of the residential premises to the son of the Second and Third Respondents (sections 62, 84 and 109). 30.2. A single penalty should be imposed on a 'course of conduct' basis for the making of the eighty loans. Although there were multiple separate contraventions for each of these loans (sections 62, 65, 84 and 109), the circumstances of the present case are such that it is appropriate to impose one penalty for each such course of conduct. 37 I accept that this approach is appropriate on the facts of the present case. 38 A statutory maximum penalty of $220,000 applies to each contravention (2,000 penalty units of $110 each). Although, as the applicant submitted, the offences are serious ones they fall well short of a worst possible case. The second and third respondents have shown remorse, they have made early admissions, they have co-operated with the Commissioner. They have remedied their conduct. A penalty should not be imposed which is "crushing". At the same time, the penalty should serve as a deterrent and mark the Court's acceptance of the need to enforce the regulatory scheme.
Penalties 39 There is no reason to think that the penalties agreed with the applicant do not sufficiently serve each of the relevant purposes. The parties have agreed that the second respondent should pay a total penalty of $30,000 ($21,000 and $9,000), that the third respondent should pay a total penalty of $10,000 ($7,000 and $3,000) and that each should be responsible for half of the agreed costs of $10,000. I accept those proposed penalties as within the proper range of penalties appropriate to the circumstances of the present case and as ones which do not require adjustment under the totality principle. I propose to order that they be paid in the amounts, and at the times, agreed by the parties.
Costs 40 The applicant has agreed to accept $10,000 in satisfaction of its costs. There is no need to further explore that question.
A further matter 41 Finally, the applicant drew attention to the decision of the High Court in Barbaro v The Queen; Zirilli v The Queen [2014] HCA 2 ("Barbaro"). On the present state of authority in this Court I think it appropriate to follow the view expressed by Middleton J in Australian Competition and Consumer Commission v EnergyAustralia Pty Ltd [2014] FCA 336, that Barbaro does not prevent an agreed approach, such as was reached in the present case, or its endorsement by the Court.
Orders 42 There will be declarations, penalties and orders for costs in the form jointly submitted by the parties. I certify that the preceding forty-two (42) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Buchanan.
Deputy Commissioner of Taxation (Superannuation)
Graham Family Superannuation Pty Limited
[2014] HCA 2
(2013) 275 FLR 171
(1996) 71 FCR 285
(1981) 37 ALR 256