Deputy Commissioner of Taxation (Superannuation) v Ryan - [2015] FCA 1037 - FCA 2015 case summary — Zoe

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Deputy Commissioner of Taxation (Superannuation) v Ryan

[2015] FCA 1037

Federal Court of Australia|2015-09-18|Before: Edelman J

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At a glance

Source facts

Court

Federal Court of Australia

Decision date

2015-09-18

Before

Edelman J

Catchwords

SUPERANNUATION - pecuniary penalties for admitted contraventions of ss 62(1), 65(1), 84(1), and 109(1) of the Superannuation Industry (Supervision) Act 1993 (Cth) - declarations of contraventions

Source

Original judgment source is linked above.

Catchwords

SUPERANNUATION - pecuniary penalties for admitted contraventions of ss 62(1), 65(1), 84(1), and 109(1) of the Superannuation Industry (Supervision) Act 1993 (Cth) - declarations of contraventions

Judgment (26 paragraphs)

[1]

Declarations The 2009 contraventions

The Respondents, as trustees of the Lawryan Family Superannuation Fund (the Fund), caused the Fund: (a) On 12 June 2010, to make a loan to the Respondents, being members of the Fund, in the total sum of $17,298.42 without authorisation of the governing rules of the Fund, and thereby contravened: 1.1. Section 62(1) 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 62(1) of the Act. 1.2. Section 65(1)(a) of the Act by lending money using the resources of the Fund to the Respondents, being members of the Fund. 1.3. Section 84 of the Act by making loans to members of the Fund which caused the market value ratio of the Fund's in-house assets to exceed 5% and thereby failing to take all reasonable steps to ensure that the provisions of Division 3 of Part 8 of the Act were complied with in respect of the Fund. 1.4. Section 109(1)(b) of the Act by making investments in their capacity as trustees of the Fund in circumstances where the other parties to those transactions, being the Respondents in their personal capacities, were not dealing with each other at arm's length in respect of each transaction and the terms and conditions of those transactions were more favourable to other parties than those which it is reasonable to expect would have applied if the trustees were dealing with those other parties at arm's length in the same circumstances. The 2010 contraventions
The Respondents, as trustees of the Fund, caused the Fund between 1 July 2009 and 30 June 2010: (a) to make 20 loans to the Respondents, being members of the Fund, in the total sum of $53,133.25 without authorisation of the governing rules of the Fund and (b) to fail to prepare or carry out a plan to address the excess in-house assets of the Fund that existed at the end of the year ended 30 June 2009 and thereby contravened: 2.1. Section 62(1) of the 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. 2.2. Section 65(1)(a) of the Act by lending money using the resources of the Fund to the Respondents, being members of the Fund. 2.3. Section 84 of the Act by making loans to members of the Fund which caused the market value ratio of the Fund's in-house assets to exceed 5% and by failing to prepare a plan setting out steps to ensure the disposal of in-house assets in excess of the 5% limit, and thereby failing to take all reasonable steps to ensure that the provisions of Division 3 of Part 8 of the Act were complied with in respect of the Fund. 2.4. Section 109(1)(b) of the Act by making investments in their capacity as trustees of the Fund in circumstances where the other parties to those transactions, being the Respondents in their personal capacities, were not dealing with each other at arm's length in respect of each transaction and the terms and conditions of those transactions were more favourable to other parties than those which it is reasonable to expect would have applied if the trustees were dealing with those other parties at arm's length in the same circumstances. The 2011 contraventions

[6]

Summary of the circumstances of the contraventions 4 Prior to 2007, the Ryans jointly purchased a dry-cleaning business. They invested their money in the business and obtained a line of credit to continue to support the business. But the business was not successful and in 2007 they sold it. 5 The proceeds of the sale of the dry-cleaning business did not clear the line of credit the respondents had taken out to support the business. The respondents continued to service the line of credit. 6 By 12 June 2009, the Ryans were unable to meet their everyday personal expenses including the line of credit and their other expenses. They started making withdrawals from the Fund to enable them to meet their expenses. 7 At the time the withdrawals commenced, Mr Ryan was employed as an insurance loss adjuster and Mrs Ryan was not employed. In the second half of 2010, Mrs Ryan obtained casual employment as an administrative assistant at a hospital. 8 The withdrawals occurred from 12 June 2009 until June 2012. Over this period some of the withdrawals were made as loans, and repaid. But the loans were unsecured, had no interest rate and no repayment term. Other withdrawals were not repaid. The total net amount withdrawn was $181,364 ($209,677 net of the repayments of around $28,313). 9 Between August and December 2012 the Fund lodged income tax returns and auditor reports for the financial years ending 30 June 2009, 30 June 2010, 30 June 2011, and 30 June 2012. The authors of the income tax returns and the auditor reports raised the possibility of contraventions of the SIS Act for those four financial years. 10 As a result of the income tax returns and the auditor reports, on 2 November 2012 the Commissioner commenced a further audit of the Fund. The Commissioner concluded from the audit that there appeared to have been contraventions of ss 34, 62, 65, and 109 of the SIS Act in relation to the management of the Fund. 11 On 16 October 2013, the Commissioner wrote to the Ryans asking each of them to show cause why they should not be disqualified from being trustees of superannuation entities. 12 On 19 November 2013, both Mr and Mrs Ryan wrote to the Commissioner acknowledging the contraventions, apologising for their actions, and offering to rectify the contraventions and then roll-over the superannuation benefits in the Fund and close the Fund. 13 On 14 January 2014, the Commissioner disqualified each of the Ryans from being a trustee of a superannuation entity, under s 126A of the Act. 14 Mr and Mrs Ryan did not rectify the contraventions. As a result of the contraventions, and accountants' fees related to the Fund, at 1 June 2015, their superannuation benefits in the Fund have been reduced to $6,034.20. 15 On 22 May 2015, the Commissioner wrote to the Ryans advising that proceedings would be commenced for contraventions of the SIS Act. 16 On 1 June 2015, the Ryans transferred their superannuation benefits in the Fund to a public fund.

[7]

The relevant provisions of the SIS Act 17 The sections of the SIS Act that the Ryans admit that they contravened are ss 62, 65, 84, and 109 of the SIS Act. 18 The object of the SIS Act, in s 3(1) includes making provision for the prudent management of certain superannuation funds. Those funds may also become eligible for concessional tax treatment (s 3(2)). 19 The first two provisions which the Ryans admit that they contravened are ss 62(1) and 65. 20 Section 62(1) provides for a "sole purpose test" and requires that each trustee of a regulated superannuation fund must ensure that the fund is maintained solely for one or more of the following purposes (the core purposes). In broad summary, these include matters such as (i) the provision of benefits for each member of the fund on or after the member's retirement from any business; (ii) the provision of benefits after the member attains a particular age; (iii) the provision of benefits after death, and so on. The Ryans admit, and I find, that none of the circumstances in s 62(1) applied when they withdrew the money from the Fund. The Ryans knew this to be the case. 21 Section 65(1) contains prohibitions which include prohibiting a trustee of a regulated superannuation fund lending money of the fund to a member of the fund or a relative of a member of the fund or giving any other financial assistance using the resources of the fund to a member of the fund or a relative of a member of the fund. The Ryans admit, and I find, that their withdrawals from the Fund gave them financial assistance and contravened s 65(1). 22 The Ryans also admit that they contravened ss 84(1) and 109(1). 23 Section 84(1) provides, relevantly, that each trustee of a regulated superannuation fund must take all reasonable steps to ensure that the provisions of Division 3 are complied with. Those provisions include ss 82 and 83. Section 82 requires the trustees of a regulated superannuation fund to prepare and carry out a plan to reduce the Funds in-house asset (ie loans to, or investments in, a related party) market value ratio if it exceeds 5% at the end of a year of income. Where this market value ratio exceeds 5%, or will exceed 5%, s 83 prohibits a trustee from acquiring an in-house asset. The withdrawals from the Fund by the Ryans, of loans for their own purposes, caused the market value ratio to exceed 5%. They did not prepare or carry out a plan to reduce the in-house assets. They contravened s 84(1) by infringing ss 82 and 83. 24 Section 109(1) has the effect that a trustee of a superannuation entity must not invest in that capacity unless the trustee and the other party to the relevant transaction are dealing with each other at arm's length in respect of the transaction or, if not, the terms and conditions of the transaction are no more favourable to the other party than those which it is reasonable to expect would apply if the trustee were dealing at arm's length. The withdrawals by the Ryans, of loans for their own purposes, were not at arm's length and were on more favourable terms than was reasonable to expect if they were at arm's length. The Ryans contravened s 109(1).

[19]

Consideration of penalty 54 My review of the cases below reveals that the general run of pecuniary penalties for a single individual who commits a series of related contraventions varies between $10,000 and $35,000. Nevertheless, some cases involve greater penalties and some involve lesser. In circumstances involving a penalty on two spouses the effect of an individual penalty can be doubled when imposed upon both spouses. 55 In written submissions for the Commission which were otherwise impeccable, there was a close focus upon the three most recent cases and an apparent suggestion that the contravention in this case is more serious than each of those cases so that penalties in this case should exceed those in each of the three most recent cases. In oral submissions, counsel for the Deputy Commissioner submitted that he had not meant to submit that the penalty must necessarily exceed those amounts. That submission is correct. It would be erroneous to submit that the penalty must exceed an amount in any of those cases for three reasons. 56 First, such a submission would ignore the fact that in Lyons and Graham Family Superannuation the penalties were agreed. The state of the current law in this Court, as set out in Director, Fair Work Building Industry Inspectorate v Construction, Forestry, Mining and Energy Union [2015] FCAFC 59 [238] by the Full Court, is that "where a penalty has been fixed in that way, the decision may not be treated as helpful in future cases, save to the extent that it indicates a position adopted by a regulator to which it should be held in later cases". 57 Secondly, there are incomparables in some of the three cases that cannot be compared with this case. In Graham there was no finding about the financial circumstances of the respondents. The periods of time over which the infringing occurred were different. In Early Sunshine it was five years. In Lyons it was 11 months. Further, in none of those cases can there be any meaningful comparison of the extent of co-operation by the respondent with the Commissioner, or the degree to which the respondent is contrite. There were also different numbers of individuals involved. In Sunshine the total penalty of $39,000 was obtained by aggregating the penalty of the three directors. The $32,000 penalty in Lyons was imposed on Mr Lyons only. 58 Thirdly, and perhaps most fundamentally, it would be an error if the imposition of a pecuniary penalty proceeded by a direct one-to-one comparison between cases. Apart from considerations of parity that arise in very similar cases, the appropriate approach is to assess the general run of cases and synthesise where the instant case falls within that general run. Three cases is not a general run of cases. The discretionary judgment involved in assessing a pecuniary penalty requires all the relevant factors to be instinctively synthesised to arrive at a single result which takes due account of them all: Markarian v The Queen [2005] HCA 25; (2005) 228 CLR 357, 374 [37] (Gleeson CJ, Gummow, Hayne and Callinan JJ); Wong v The Queen [2001] HCA 64; (2001) 207 CLR 584, 611-612 [74]-[76] (Gaudron, Gummow and Hayne JJ). 59 As Mansfield J explained in Olesen v Eddy, 767 [18], one important consideration in the imposition of pecuniary penalties under s 196 of the SIS Act is general deterrence. In particular, those who take advantage of a self-managed superannuation fund have a responsibility to manage that fund in accordance with the terms of the Deed and the legislation and a civil penalty for contravention of that obligation needs to be sufficiently high to deter contravention by others, although not oppressive. Contravening conduct under the Act may be difficult to detect and its investigation can be complex and expensive. 60 Some of the other relevant factors that have been described in previous decisions include the following, as set out by Gordon J in Olesen v Parker [73]: (1) the nature and extent of the contravening conduct; (2) the amount of any loss or damage caused; (3) the size of the organisation; (4) the deliberateness or otherwise of the contravention(s); (5) the period over which the contravention(s) extended; (6) the degree of co-operation of the person concerned, either in the investigation or the subsequent hearing; (7) the past record of the person; (8) the person's financial position; (9) any amounts already paid by way of compensation or legal costs; (10) contrition; and (11) any applicable public policy position.

[26]

Conclusions and orders 76 Taking all the circumstances into account, I consider that the appropriate pecuniary penalty is $20,000 for each of Mr and Mrs Ryan (a combined total of $40,000). On the agreed facts, and admitted facts in the statement of claim, which are before the Court, I accept the submission of counsel for the Deputy Commissioner that Mr and Mrs Ryan should be treated as equally responsible. Their financial affairs were also treated as a unity. 77 In Eddy, Mansfield J held that the power to order a pecuniary penalty carries with it an implied consequential power enabling the Court to order periodic payments. Instalment payments were also ordered in Lyons. Counsel for the Deputy Commissioner relied upon the existence of this implied consequential power and Mr Ryan said that monthly instalments would be easier for him and Mrs Ryan to pay. In light of the approach taken in these authorities I will proceed on the basis that I have such a power. In light of the financial circumstances of Mr and Mrs Ryan, the penalties should be paid over 3 years with monthly repayments of $555.55 each. 78 The Deputy Commissioner also sought declarations of contravention. Section 196(2) of the SIS Act requires the Court to declare that a person has contravened the pecuniary penalty provision in relation to a specified superannuation entity, but need not so declare if a declaration is already in force. There is currently no declaration in force. The Fund is a specified superannuation entity. 79 The form of declaration proposed by Deputy Commissioner is appropriate. 80 The Deputy Commissioner sought orders for payment of costs. It is appropriate that the Ryans pay the Deputy Commissioner's costs. Although the Deputy Commissioner sought a taxation of costs, if not agreed, it is appropriate in this case to fix the costs. I will hear from the Deputy Commissioner about the amount by which costs should be fixed. I certify that the preceding eighty (80) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Edelman.

Deputy Commissioner of Taxation (Superannuation) v Ryan

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Judgment (26 paragraphs)

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Cases Cited (14)