Deputy Commissioner of Taxation v Lyons - [2014] FCA 1353 - FCA 2014 case summary — Zoe

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Deputy Commissioner of Taxation v Lyons

[2014] FCA 1353

Federal Court of Australia|2014-12-12|Before: Bennett J

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Source facts

Court

Federal Court of Australia

Decision date

2014-12-12

Before

Bennett J

Source

Original judgment source is linked above.

Judgment (42 paragraphs)

[1]

Mr Lyons, as a trustee of the Lyons Family Superannuation Fund (Fund) caused the Fund: (a) On 3 July 2008 to lend to Paul Ellis, a relative of Mr Lyons, the sum of $35,000 from the Fund without authorisation of the governing rules of the Fund; (b) On 7 July 2008 to lend to Paul Ellis, a relative of Mr Lyons, the sum of $50,000 from the Fund without authorisation of the governing rules of the Fund; (c) On 7 July 2008 to lend to Paul Ellis, a relative of Mr Lyons, the sum of $15,000 from the Fund without authorisation of the governing rules of the Fund; (d) On 21 July 2008 to lend to Paul Ellis, a relative of Mr Lyons, the sum of $20,000 from the Fund without authorisation of the governing rules of the Fund; (e) On 10 October 2008 to lend to Paul Ellis, a relative of Mr Lyons, the sum of $20,000 from the Fund without authorisation of the governing rules of the Fund; and (f) On 25 May 2009 to lend to Paul Ellis, a relative of Mr Lyons, the sum of $50,000 from the Fund without authorisation of the governing rules of the Fund.
By way of the conduct set out above in (1), Mr Lyons contravened: (g) Section 62 of the Superannuation Industry (Supervision) Act 1993 (Cth) (Act) by failing to ensure that the Fund was maintained solely for one or more of the purposes prescribed in s 62(1) of the Act, instead maintaining the Fund for the purpose or significant purpose of making back-to-back loans to provide working capital for Mr Lyons' retail business. (h) Section 65 of the Act by lending money using the assets of the Fund to a relative of Mr Lyons, who was a member of the Fund. (i) Section 84 of the Act by failing to take all reasonable steps to ensure that the provisions of Division 2 and Division 3 of the Act were complied with in respect of the Fund, instead making loans to a relative of a member which caused the market value ratio of the Fund's in-house assets to exceed 5% and failing to prepare a plan setting out steps to ensure the disposal of in-house assets in excess of the 5% limit. (j) Section 109 of the Act by making investments in his capacity as trustee of the Fund in circumstances where Mr Lyons and the other parties to those transactions failed to deal with each other at arm's length in respect of each transaction, or the terms and conditions of those transactions were more favourable to the third party than those which it is reasonable to expect would have applied if the trustee was dealing with that third party at arm's length in the same circumstances.

[6]

REASONS FOR JUDGMENT 1 The Respondent, Mr Lyons, who is the trustee of the Lyons Family Superannuation Fund (Fund) has admitted multiple contraventions of ss 62, 65, 84 and 109 of the Superannuation Industry (Supervision) Act 1993 (Cth) (Act). The only issue left to be determined is that of penalty. 2 The parties jointly submit to the Court that it would be appropriate for the Court to make orders: for a declaration in the form set out in Annexure A of these reasons; that Mr Lyons pay a monetary penalty of $32,500 under s 196 of the Act; that Mr Lyons pay $5,000 towards the Deputy Commissioner's costs. 3 As a preliminary matter, the Deputy Commissioner draws to the Court's attention the decision of the High Court in Barbaro v The Queen; Zirilli v The Queen [2014] HCA 2 (Barbaro). The majority (French CJ, Hayne, Kiefel and Bell JJ) there held that criminal prosecutors should not make submissions to a sentencing judge as to the 'available range' of sentences. Their Honours held that such a submission was no more than a statement of opinion which could not properly be taken into account by a sentencing judge. 4 In accordance with long-established practice in civil penalty matters, the Deputy Commissioner has made submissions to the Court about penalty amounts which it considers would have appropriate deterrent value. This is in accordance with the decision of Middleton J in ACCC v Energy Australia Pty Ltd [2014] FCA 336 who decided (although as his Honour recognised, without the benefit of a contradictor) that the High Court in Barbaro did not implicitly or otherwise intend to exclude the making of submissions (jointly or otherwise) by the parties as to appropriate orders to make as to penalty in civil penalty cases (at [150]). His Honour referred (at [151]) to the contrary conclusion reached by Logan J in ACCC v Flight Centre (No 3) [2014] FCA 292, but decided that he need not follow the approach taken in that case. I agree with the approach taken by Middleton J, and with the detailed reasons given by his Honour for taking that approach.

[8]

Contravention of s 65 of the Act 6 On 3 July 2008, Mr Lyons in his capacity as trustee of the Fund commenced lending money to his brother-in-law, Paul Ellis. Paul Ellis immediately transferred the loan funds to the Lyons' retail business account to provide working capital to support Mr and Mrs Lyons' retail business. Mr and Mrs Lyons were advised by a Mr Steve Skeen, Financial Planner, that they could liberate monies from the Fund by entering into those arrangements. This advice was wrong. 7 It is possible to liberate monies from a fund in the case of severe financial hardship. However, for this condition to be met, a trustee must be satisfied that Mr Lyons was in receipt of Commonwealth income support for a continuous period of 26 weeks and that he was unable to meet reasonable and immediate family living expenses. Even if so satisfied, there is a cashing restriction of up to $10,000 for any 12 month period (reg 6.01(5) and Sch 1 of the regulations to the Act). None of these conditions of release were capable of being satisfied. Mr Lyons did not seek another expert's advice. 8 A "Debtors Factoring Agreement" was entered into between Paul Ellis and the trustees which had the effect of disguising the true purpose of the loans. Mr Skeen prepared the "Debtors Factoring Agreement" and advised generally on the process of withdrawal. 9 The following table sets out the loans that were made back-to-back to Paul Ellis to support the business. Mr Lyons admits that each loan was a contravention of s 65 of the Act, a civil penalty provision, because Paul Ellis was a relative of Mr Lyons (the spouse of Mr Lyons's sister) for the purposes of the Act. Date of Loan Loan Amount Repayment Balance 03/07/2008 $35,000.00 Nil $35,000.00 07/07/2008 $50,000.00 Nil $85,000.00 07/07/2008 $15,000.00 Nil $ 100,000.00 21/07/2008 $20,000.00 Nil $120,000.00 10/10/2008 $20,000.00 Nil $140,000.00 25/05/2009 $50,000.00 Nil $190,000.00 TOTAL $190,000.00 Nil $190,000.00

[12]

Consequences of the contraventions and other facts relevant to penalty 13 The Fund's auditor in respect of the 2009 financial year lodged with the Australian Taxation Office (ATO) an Auditor Contravention Report in respect of the loans made to Paul Ellis. 14 The ATO commenced an audit on 5 May 2011 (Audit). Mr Lyons complied fully with the requirements of the auditors, including by making himself available on three occasions for interview, as well as providing to the ATO all relevant documentation that had been sought during the course of the Audit. 15 The result of the Audit was to issue a notice of non-compliance in respect of the 2009 income year on the basis of illegal early access to superannuation benefits. This had the effect of making the Fund non-complying and therefore cancelling the concessional tax treatment of the Fund. 16 However, because the Fund had negligible assets immediately prior to the start of the 2009 income year (the Fund received the first substantial roll-over amount only on 1 July 2008), the trustees of the Fund were only assessed on assets of $2,480. The trustees were not assessed by reference to the assets acquired during the 2009 income year, being the roll-over amounts which had enjoyed concessional tax treatment. Had the roll-over amounts of $193,459.44 been paid into the Fund by 30 June 2008, the trustees would have been assessed for additional tax of $82,138.95: $182,531, being the taxed component of the roll-over amounts, x 45%. By reason of the Fund being declared non-complying, the illegal early access payments (the loans) were treated as exempt income in the hands of the members of the Fund (see Division 305 of the Income Tax Assessment Act 1997(Cth)). 17 For the avoidance of doubt, the Deputy Commissioner does not suggest, and Mr Lyons does not admit, that the roll-over consequences identified in [16] above, formed part of a scheme to obtain a taxation benefit. That concessional taxation treatment was merely an unintentional consequence of the timing. 18 Mr Lyons does not rely upon a Defence in these proceedings that alleges, by reason of his and Mrs Lyons' reliance on advice, that he should escape civil penalty for breaches of his statutory or fiduciary duties in respect of the contraventions outlined. Mr Lyons accepts that, as a trustee of a regulated superannuation fund, he should have ensured compliance with his statutory obligations and that he bears principal responsibility for the material non-compliance. Mr Lyons says, and the Deputy Commissioner accepts, however, that those matters are relevant to the quantum of penalty to be imposed.

[14]

THE REGULATORY FRAMEWORK ESTABLISHED BY THE ACT 21 The Act provides for the supervision of superannuation funds by either the Australian Prudential Regulation Authority or the Commissioner of Taxation. The Act makes the Commissioner the regulator of small superannuation funds, including self-managed funds. 22 The principal obligation to comply with the Act is placed on trustees of regulated funds. Where the trustee is a corporation, the obligation lies with the responsible officers of the trustee. The obligations are diverse and are aimed at managing funds in a way that ensures that retirement benefits are available for members of those funds when conditions of release are satisfied. The sanctions under the Act for non-compliance fall into four broad categories: Administrative sanctions such as disqualifying trustees (s 126A) and making funds non-complying (s 40) with effect that the funds lose their concessional taxation status. Court imposed civil sanctions for contravening civil penalty provisions (s 196). Court imposed criminal sanctions for offences defined to be civil penalty provisions contravened with dishonest or fraudulent intent (s 202). Administrative penalties introduced from 1 July 2014 (these do not apply on the facts of this case). 23 On 13 March 2012, the Commissioner issued a notice of non-compliance for the income year ended 2009. 24 Sections 62 (sole purpose test), 65 (prohibition on lending to members of regulated superannuation funds), 84 (compliance with in-house asset rules) and 109 (investments to be made and maintained at arm's length) are all civil penalty provisions. 25 By s 62, trustees of a regulated superannuation fund must ensure that the fund is maintained solely for one or more of the Act's core purposes or ancillary purposes. In general these are, respectively, retirement benefits or benefits consequent upon termination of a member's employment. 26 Section 65 is a specific prohibition on a trustee of a regulated superannuation fund from lending money or giving financial assistance using the resources of the fund to a member or a relative of a member. Mr Ellis is included in the definition of 'relative' for the purposes of s 65. 27 Sections 81 to 84 regulate the proportion of in-house assets that a fund may acquire. The market value ratio of a fund's in-house assets must not exceed 5% and if it does the trustee must prepare a written plan setting out steps to reduce the market value ratio so as not to exceed 5%. 28 Finally, s 109 obliges a trustee to make investments at arm's length or to deal with the other party on an arm's length basis. 29 The making of the loans to Mr Ellis infringed each of these provisions. 30 Part 21 of the Act sets out civil and criminal consequences of contravening civil penalty provisions. The Court may make declarations (s 196(2)) and order monetary penalties (s 196(3)) if it is satisfied that the contraventions are serious (s 196(4)). Penalties are payable to the Commissioner on behalf of the Commonwealth (s 200).

[19]

(a) Identifying how penalties ought be attached to the multiple contraventions 39 These proceedings relate to many separate acts, breaching four provisions, over a period of 11 months. Accordingly, the proper assessment of appropriate penalties requires consideration of three well-recognised principles regarding the treatment of multiple contraventions: If multiple provisions are simultaneously breached by the same wrongful act it is normally appropriate to penalise that act by reference to the most serious provision breached. However, by s 196, the Act allows for a single penalty for multiple contraventions constituted by the same act and does not differentiate between the contraventions by reference to the maximum penalty. The maximum penalty is 2000 penalty units (at the time a penalty unit was $110 or $220,000) for any civil penalty contravention of the Act. Separate contraventions arising from separate acts should ordinarily attract separate penalties. However, in some cases it may be appropriate to treat the contraventions as forming part of a 'course of conduct' when they are closely interrelated. A 'final check' on the cumulative effect of the proposed penalties must be conducted to ensure the total is just and appropriate. If necessary to do so, the final amount can be moderated by the 'totality' principle. 40 Although related, it is important that these principles not be conflated with one another. For example the separate and distinct nature of the 'course of conduct' principle and the 'totality' principle has been repeatedly recognised by the Full Court, for example, in Australian Ophthalmic Supplies Pty Ltd v McAlary-Smith (2008) 165 FCR 560 (Australian Ophthalmic Supplies). As the High Court emphasised in Pearce v The Queen (1998) 194 CLR 610 (in the context of criminal sentencing) this is not a mere matter of form: identifying how the principles have been addressed in a given case serves an important regulatory purpose by making clear to the parties, the public, other potential contraveners and courts in future cases, how and why the ultimate penalties were imposed (at [45]-[48]). Even where the ultimate penalty is moderated by reference to the totality principle, the process of assessing the appropriate 'starting point' penalty provides an important regulatory signal to other would-be contraveners.

[37]

The degree of co-operation provided by Mr Lyons 67 Co-operation with authorities in the course of investigations and subsequent proceedings will be a mitigating factor that may reduce the penalty that would otherwise be imposed, to reflect the fact that such co-operation: Can be evidence of contrition and an acceptance of responsibility. Increases the likelihood of co-operation in a way that furthers the object of the legislation. Frees up the regulator's resources, thereby increasing the likelihood that other contraveners will be detected and brought to justice. Reflects a willingness to facilitate the course of justice. 68 The size of the discount will vary depending on the circumstances of the case. There may be no discount, or only a low one, where the admissions come late in the proceedings and amount to little more than an acceptance of the inevitable (Mornington Inn Pty Ltd v Jordan (2008) 168 FCR 383 per Stone and Buchanan JJ at [76]-[78]). In cases involving the fullest possible co-operation, such as self-reporting contraventions prior to detection, establishment of significant compliance programs, assisting authorities in taking action against other contraveners, reaching agreement as to the penalty to be imposed and taking extensive remedial action, the discount may be as high as 50% (ACCC v Qantas Airways Limited [2008] FCA 1976 at [65]-[69]). 69 Mr Lyons did not take steps independently to report the contraventions to the relevant regulators. However, it is apparent that it was the engagement by Mr Lyons of the auditor which led to the Deputy Commissioner becoming aware of the contraventions. Mr Lyons made himself available to representatives of the Applicant for interviews on 18 October 2011, 9 November 2011 and 16 November 2011, where he made full and frank admissions. Mr Lyons forwarded all relevant bank statements in a timely fashion. Mr Lyons thereafter made further admissions in correspondence to the Applicant's representatives on 2 December 2011. 70 Mr Lyons cooperated with the Deputy Commissioner's representatives in identifying relevant materials and facts at an early opportunity and immediately entered into negotiations with the Deputy Commissioner. 71 That is, although there was a course of conduct involving a sustained series of contraventions rather than a single contravention, there was early co-operation on the part of Mr Lyons. The requirements for deterrence are such that the penalty should reflect the loss in value of a fund's assets. The Deputy Commissioner has provided a schedule derived from previous decisions which demonstrates that penalties of between one fifth and a quarter of the loss of the fund's assets have been imposed.

[41]

CONCLUSION 77 I have had regard to the agreed facts, the submissions of the parties and the fact that both parties submit that the proposed orders are appropriate, including an order for payments by instalments, to reflect Mr Lyons' capacity to pay. I have also taken into account the facts and principles outlined in these reasons. I note that the discount that is proposed is advanced on the basis that it takes into the account the circumstances of this case, including the fact that Mr Lyons relied on professional advice, in effect self-reported (through his auditor) and gave early and full cooperation, and has not sought to join his professional advisor or, indeed, to seek payment from his former wife. 78 These, of course, are the matters relevant to Mr Lyons and specific deterrence. I have also considered the question of general deterrence and the other matters that are not dependent on Mr Lyons' personal mitigating factors, such as the course of action that constituted the contravening conduct. Taking all the relevant matters into account, and giving each due weight, I am of the view that the proposed orders are appropriate. 79 As to the figure of the penalty, I note that the proposed penalty is proportionally less than that imposed in the relatively comparable cases advanced by the Deputy Commissioner (e.g. Vivian, Olesen v Eddy [2011] FCA 13 and Olesen v MacLeod [2011] FCA 229). Mr Lyons has submitted that the one case in which a lesser penalty was imposed (Olesen v Parker & Anor [2011] FCA 1096) should be regarded as "an outlier" because in that case repayments were made to the relevant fund in respect of a number of contraventions, whereas Mr Lyons has made no repayments. In my view the proposed penalty is appropriate, as are the proposed orders. 80 As to the question of costs, the agreement between the parties is that Mr Lyons pays $5,000 towards the costs of the Deputy Commissioner. The Deputy Commissioner says that this represents a significant compromise of his right to seek costs. I certify that the preceding eighty (80) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Bennett.

[42]

Associate: Dated: 12 December 2014 Annexure A (1) Mr Lyons, as a trustee of the Lyons Family Superannuation Fund ("the Fund") caused the Fund: (a) On 3 July 2008 to lend to Paul Ellis, a relative of Mr Lyons, the sum of $35,000 from the Fund without authorisation of the governing rules of the Fund; (b) On 7 July 2008 to lend to Paul Ellis, a relative of Mr Lyons, the sum of $50,000 from the Fund without authorisation of the governing rules of the Fund; (c) On 7 July 2008 to lend to Paul Ellis, a relative of Mr Lyons, the sum of $15,000 from the Fund without authorisation of the governing rules of the Fund; (d) On 21 July 2008 to lend to Paul Ellis, a relative of Mr Lyons, the sum of $20,000 from the Fund without authorisation of the governing rules of the Fund; (e) On 10 October 2008 to lend to Paul Ellis, a relative of Mr Lyons, the sum of $20,000 from the Fund without authorisation of the governing rules of the Fund; and (f) On 25 May 2009 to lend to Paul Ellis, a relative of Mr Lyons, the sum of $50,000 from the Fund without authorisation of the governing rules of the Fund. (2) By way of the conduct set out above in (1), Mr Lyons contravened: (a) Section 62 of the Superannuation Industry (Supervision) Act 1993 (Cth) (Act) by failing to ensure that the Fund was maintained solely for one or more of the purposes prescribed in s 62(1) of the Act, instead maintaining the Fund for the purpose or significant purpose of making back-to-back loans to provide working capital for Mr Lyons' retail business. (b) Section 65 of the Act by lending money using the assets of the Fund to a relative of Mr Lyons, who was a member of the Fund. (c) Section 84 of the Act by failing to take all reasonable steps to ensure that the provisions of Division 2 and Division 3 of the Act were complied with in respect of the Fund, instead making loans to a relative of a member which caused the market value ratio of the Fund's in-house assets to exceed 5% and failing to prepare a plan setting out steps to ensure the disposal of in-house assets in excess of the 5% limit. (d) Section 109 of the Act by making investments in his capacity as trustee of the Fund in circumstances where Mr Lyons and the other parties to those transactions failed to deal with each other at arm's length in respect of each transaction, or the terms and conditions of those transactions were more favourable to the third party than those which it is reasonable to expect would have applied if the trustee was dealing with that third party at arm's length in the same circumstances.