THE COURT DECLARES THAT:
Contravention of s 62(1) by failing to ensure Fund maintained for prescribed purposes
The first respondent, as trustee of the George MacDonald & Sons Pty Ltd Superannuation Fund (the Fund), contravened s 62(1) of the Superannuation Industry (Supervision) Act 1993 (Cth) (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, in that the first respondent made the loans in Annexure A to these Orders for the purpose of providing financial accommodation to George MacDonald & Sons Pty Ltd in order that George MacDonald & Sons Pty Ltd could overcome deficiencies in its working capital, and failed to obtain interest on the outstanding amount of the debt owed by George MacDonald & Sons Pty Ltd.
The first respondent, as trustee of the Fund, contravened s 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, in that the first respondent made a loan in the amount of $2,000 in the year ended 30 June 2007 for the purpose of providing financial accommodation to Vertu Pty Ltd.
Contravention of s 84(1) by breaching in-house asset rules
The first respondent, as trustee of the Fund, contravened s 84(1) of the Act by failing to take all reasonable steps to comply with s 83(2) of the Act, in that those loans listed in Annexure A to these Orders and annotated "1" were loans made by the first respondent, as trustee of the Fund, to George MacDonald & Sons Pty Ltd which increased the market value ratio of the Fund's in-house assets, which ratio was immediately prior to the making of each relevant loan already above the maximum market value ratio of 5% allowed under the Act.
The first respondent, as trustee of the Fund, contravened s 84(1) of the Act by failing to take all reasonable steps to comply with s 83(3) of the Act, in that those loans listed in Annexure A to these Orders and annotated "2" were loans made by the first respondent, as trustee of the Fund, to George MacDonald & Sons Pty Ltd which increased the market value ratio of the Fund's in-house assets, which ratio was not immediately prior to the making of each relevant loan already above the maximum market value ratio of 5% allowed under the Act, but which immediately after the making of each relevant loan was above the minimum market value ratio of 5% allowed under the Act.
The first respondent, as trustee of the Fund, admits that it contravened s 84(1) of the Act by failing to take all reasonable steps to comply with s 83(3) of the Act, in that a loan made in the year ended 30 June 2007 by the first respondent, as trustee of the Fund, to Vertu Pty Ltd increased the market value ratio of the Fund's in-house assets, which ratio was not immediately prior to the making of each relevant loan already above the maximum market value ratio of 5% allowed under the Act, but which immediately after the making of each relevant loan was above the minimum market value ratio of 5% allowed under the Act.
Contravention of s 109(1) by failing to deal with entity at arms' length
The first respondent, as trustee of the Fund, made investments in its capacity as trustee of the Fund in circumstances where the first respondent and the other party to the transactions (namely, George MacDonald & Sons Pty Ltd) failed to deal with each other at arms' length in respect of each transaction, and the terms and conditions of those transactions were more favourable to George MacDonald & Sons Pty Ltd than those which it is reasonable to expect would have applied if the trustee was dealing with George MacDonald & Sons Pty Ltd at arms' length in the same circumstances, in contravention of s 109(1) of the Act, in that the first respondent made the loans in Annexure A to these orders to George MacDonald & Sons Pty Ltd on interest-free terms.
Involvement of the Second, Third and Fourth Respondents in the Contraventions
The second, third and fourth respondents, pursuant to s 194 of the Act, contravened ss 62(1), 84(1) and 109(1) of the Act by reason of their involvement in the contraventions of those sections by the first respondent in relation to the loans by the Fund to George MacDonald & Sons Pty Ltd, in that the second, third and fourth respondents were the directors and shareholders of the first respondent and of George MacDonald & Sons Pty Ltd.
The third respondent, pursuant to s 194 of the Act, contravened s 62(1) and s 84(1) of the Act by reason of his involvement in the contraventions of those sections by the first respondent in relation to the loans by the Fund to Vertu Pty Ltd, in that the third respondent was a director and shareholder of Vertu.
AND THE COURT ORDERS THAT:
Civil Penalties
Pursuant to s 196(3) of the Act, within 28 days of the date of this order (subject to order 12) the second respondent pay to the Commonwealth of Australia a monetary penalty of $13,000 in respect of his conduct in contravention of the Act referred to in paragraph 7 above.
Pursuant to s 196(3) of the Act, within 28 days of the date of this order (subject to order 12) the third respondent pay to the Commonwealth of Australia a monetary penalty of $13,000 in respect of his conduct in contravention of the Act referred to in paragraphs 7 and 8 above.
Pursuant to s 196(3) of the Act, within 28 days of the date of this order (subject to order 12) the fourth respondent pay to the Commonwealth of Australia a monetary penalty of $13,000 in respect of his conduct in contravention of the Act referred to in paragraph 7 above.
Each of the second to fourth respondents has liberty to apply to the District Registrar to pay his monetary penalty by such time and by such instalments as the District Registrar may allow.
Costs
The second respondent pay a contribution to the applicant's costs of and incidental to this proceeding fixed by agreement in the amount of $5,000, such costs to be paid within 28 days of the date of this order (subject to order 16).
The third respondent pay a contribution to the applicant's costs of and incidental to this proceeding fixed by agreement in the amount of $5,000, such costs to be paid within 28 days of the date of this order (subject to order 16).
The fourth respondent pay a contribution to the applicant's costs of and incidental to this proceeding fixed by agreement in the amount of $5,000, such costs to be paid within 28 days of the date of this order (subject to order 16).
Each of the second to fourth respondents has liberty to apply to the District Registrar to pay his costs by such time and by such instalments as the District Registrar may allow.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
[2]
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION NSD 1523 of 2012
[3]
BETWEEN: NEIL OLESEN, DEPUTY COMMISSIONER OF TAXATION (SUPERANNUATION)
[4]
JUDGE: FOSTER J
DATE: 23 January 2015
PLACE: SYDNEY
[5]
REASONS FOR JUDGMENT
1 On 6 August 2013, I made declarations and final orders in this proceeding by consent.
2 These Reasons for Judgment are my reasons for making those declarations and final orders on that day.
3 The applicant is the Deputy Commissioner of Taxation (Superannuation) (the Commissioner). He brought this proceeding in his capacity as a Regulator entitled to sue for the imposition of a civil penalty under s 196 of the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act) and for other relief.
4 In the period from 31 March 2000 to August 2013, the first respondent, Early Sunshine Pty Ltd (Early Sunshine), was the trustee of the George MacDonald & Sons Pty Ltd Superannuation Scheme No 2 (the Fund). For approximately five years before March 2000, another corporation, George MacDonald & Sons Pty Ltd (GMS) was the trustee of the Fund. At all relevant times, each of the second to fourth respondents, Brent Christopher Jameson, Erron Douglas Jameson and Blaine Kenneth MacDonald, was a shareholder and director of Early Sunshine.
5 When this proceeding was commenced, the Commissioner alleged that the respondents had contravened ss 62(1), 65(1), 84(1) and 109(1) of the SIS Act in connection with the Fund. For the purposes of s 196 and s 197 of the SIS Act, each of those provisions is a civil penalty provision.
6 Before I made declarations and final orders, the Commissioner abandoned his claim that the respondents had contravened s 65(1) of the SIS Act.
7 As I have already mentioned, the orders which I made on 6 August 2013 were made by consent. That is to say, all of the parties agreed to all of the declarations and all of the orders, including the orders imposing civil penalties upon each of the second to fourth respondents. .
8 The declarations and final orders which I made on 6 August 2013 were based upon a Statement of Agreed Facts dated 30 July 2013 (SOAF) and upon a detailed Joint Written Submission dated 30 July 2013 to which all parties subscribed. I have attached to these Reasons for Judgment as Attachment A a copy of the SOAF.
9 Under s 191 of the Evidence Act 1995 (Cth), in a proceeding, evidence is not required to prove the existence of an agreed fact and evidence may not be adduced to contradict or qualify an agreed fact unless the Court gives leave (see s 191(2) and see also s 191(1) for the definition of agreed fact for the purposes of s 191).
10 By the time I came to make declarations and final orders, there was no dispute among the parties as to any aspect of the case. Nonetheless, I was required to consider for myself whether the Court should give effect to the resolution of the matter which the parties had agreed or whether some other course of action was appropriate.
11 The SOAF and the Joint Written Submission are both in the Court file and available for inspection. In those circumstances, and given that the proceeding was resolved by consent, I do not propose to provide reasons in the same detail as I would have done had the matter been contested.
12 I was satisfied that the resolution of the matter agreed by the parties was appropriate and I was also satisfied that I could and should make the declarations and final orders which I had been requested to make by consent.
[6]
A Brief Summary of the Relevant Facts
13 GMS was incorporated in or about 1981. Upon its incorporation, it assumed control of a business which had previously been carried on by Joseph George MacDonald in his individual capacity.
14 In the period between about June 1995 and 31 March 2000, GMS was controlled by the second to fourth respondents. Throughout that period, GMS carried on a freight trucking business based on the New South Wales Central Coast.
15 In 2001, the business lost its principal customer, Rosemount Estate Wines. This caused significant financial stress to the business.
16 Further, in about 2007 and again in 2008, the business came under further financial stress as a result of a number of factors including:
(a) Difficulties experienced by the business in recovering amounts owed to it by its debtors; and
(b) General uncertainty in the Australian economy brought about by the global financial crisis.
17 As a result of the financial difficulties experienced by the business in 2001 and again in 2007-2008, the second to fourth respondents caused Early Sunshine to make loans from the Fund to GMS. They also caused it to make a small loan to a company controlled by the third respondent, Vertu Pty Ltd. The conduct of Early Sunshine in making these loans and of the other respondents in causing these loans to be made constituted the contraventions of the SIS Act which were the subject of this proceeding.
18 All of the respondents admitted the contraventions alleged against them.
19 A total of $553,568.20 in loans was made by the Fund to GMS during the four year period from 25 June 2007 to 23 June 2011. The amount of each of the individual loans making up that total was less than $20,000 in every case. The average amount loaned was approximately $7,768. The loans made to GMS were unsecured and did not bear interest. The loan made to Vertu Pty Ltd was unsecured but did bear interest at 8.5% per annum. The length of time during which each loan was outstanding was relatively short. Typically, the loan was outstanding for only a few weeks at a time. Each of the loans was ultimately repaid in full. For this reason, the Fund suffered no loss of capital as a result of the contraventions.
20 On 23 August 2011, Early Sunshine resolved to wind up the Fund and to roll over members' benefits to the Transport Industry Superannuation Fund. Thereafter, it took steps to implement that resolution. Since that time, the Fund has had no assets and no liabilities and has not earned any income or incurred any expenses. It is dormant.
[7]
Consideration
21 Section 62(1) of the SIS Act provides that a trustee of a regulated superannuation fund must ensure that the fund is maintained solely for the purposes specified in that subsection. These purposes may broadly be described as superannuation purposes.
22 Section 84(1) provides that each trustee of a regulated superannuation fund must take all reasonable steps to ensure that the in-house asset rules are complied with. Those rules are found in Divs 2, 3 and 3A of Pt 8 of the SIS Act. Those rules constitute a detailed regulatory scheme which governs the dealings which a regulated superannuation fund is permitted to have with associated or related parties.
23 Section 109(1) of the SIS Act requires that all dealings by a trustee of a superannuation entity must be at arm's length.
24 Section 196 of the SIS Act provides:
196 Court may make civil penalty orders
(1) This section applies if the Court is satisfied that a person has contravened a civil penalty provision, whether or not the contravention also constitutes an offence because of section 202.
Note: Section 220 provides that a certificate by a court that the court has declared a person to have contravened a civil penalty provision is conclusive evidence of the contravention.
(2) The Court is to declare that the person has, by a specified act or omission, contravened that provision in relation to a specified superannuation entity, but need not so declare if such a declaration is already in force under Division 4.
(3) The Court may also make against the person an order that the person pay to the Commonwealth a monetary penalty of an amount specified in the order that does not exceed 2,000 penalty units.
(4) The Court is not to make an order under subsection (3) unless it is satisfied that the contravention is a serious one.
(5) The Court is not to make an order under subsection (3) if it is satisfied that an Australian court has ordered the person to pay damages in the nature of punitive damages because of the act or omission constituting the contravention.
25 As I have already noted, each of ss 62(1), 84(1) and 109(1) is a civil penalty provision for the purposes of s 196 of the SIS Act.
26 Early Sunshine was the primary contravenor. The second to fourth respondents are liable in respect of its contravention as a result of the operation of s 194 of the SIS Act which provides that, for the purposes of Pt 21 (which includes s 196), a person who is involved in a contravention of a particular provision of this Act is taken to have contravened that provision. The second to fourth respondents accepted that they were "persons involved" within the meaning of s 194 of the SIS Act for present purposes. The acceptance of that proposition was justified.
27 In Minister for Sustainability, Environment, Water, Population and Communities v Woodley (2012) 194 LGERA 290, at 298-300 [40]-[50], I set out the matters which I considered pertinent to the imposition of a penalty upon Mr Woodley and the corporation controlled by him in that case and also my understanding of the relevant principles governing the imposition of civil penalties. I need not repeat here what I said in that judgment.
28 Several Judges of this Court have endeavoured to relate those general principles to the present context in order to provide a useful set of guidelines for the imposition of civil penalties for breaches of the civil penalty provisions contained in the SIS Act.
29 At [64]-[68] of the Joint Written Submission, the parties helpfully summarised and, in one case, extracted, the particular principles apt to be applied in the present context. At those paragraphs, the parties submitted:
64. In Olesen v Eddy [2011] FCA 13, the parties made joint submissions as to the appropriate penalty in relation to contraventions of sections 62(1) and 65(1) of the Act. Mansfield J reviewed the general principles relating to the fixing of civil penalties under section 196 of the Act, summarising them as follows:-
64.1. Those that take advantage of the utilisation of a self-managed superannuation fund have a responsibility to manage that fund in accordance with the terms of the Deed and the legislation (R Vivian v Fitzgeralds at [30] (Logan J)).
64.2. A civil penalty for contravention of that obligation needs to be sufficiently high to deter contravention by others, but not so high as to be oppressive (Australian Prudential Regulatory Authority v Holloway [2000] FCA 1245; (2000) 45 ATR 278 per at [12] (Mansfield J)).
64.3. General deterrence is a very significant factor (Holloway at [11]; Fitzgeralds at [29]); other objectives include denunciation and punishment (Australian Prudential Regulatory Authority v Derstepanian [2005] FCA 1121; (2005) 60 ATR 518 at [26] (Weinberg J)). Contravening conduct under the Act may be difficult to detect and its investigation can be complex and expensive (Holloway at [21]; Fitzgeralds at [29]);
64.4. The total penalty must not exceed what is proper having regard to the conduct of the person in respect of all the contraventions (Holloway at [19]; Fitzgeralds at [31]-[33]).
64.5. Relevant factors in determining an appropriate civil penalty include the following (compare the French factors in paragraph 56, above):
64.5.1. the nature and extent of the contravening conduct;
64.5.2. the amount of any loss or damage caused;
64.5.3. the size of the organisation;
64.5.4. the deliberateness or otherwise of the contravention(s);
64.5.5. the period over which the contravention(s) extended;
64.5.6. the degree of cooperation of the person concerned, either in the investigation or the subsequent hearing;
64.5.7. the past record of the person;
64.5.8. the person's financial position;
64.5.9. any amounts already paid by way of compensation or legal costs; and
64.5.10. contrition (See generally Derstepanian at [30]-[37]; Holloway at [11]-[12], [32]; Fitzgeralds at [35]and [43]);
65. Olesen v MacLeod [2011] FCA 229 involved contraventions of sections 62(1) and 65(1) of the Act. Barker J stated that:
62 It is appropriate that a monetary penalty order be sufficiently large to constitute a specific deterrent for the respondent against engaging in any like conduct in the future, as well as a form of punishment for his contravention in this case. Importantly, the order needs to send a message to persons in a like position to that of the respondent that generally deters contravening conduct of this sort.
63 In this regard, I agree with comments made in Fitzgeralds at [25] by Logan J, to which Mansfield J subscribed in Eddy at [16], that the Act provides for taxation benefits to trustees of superannuation funds and its members to encourage prudent provision by Australians for their retirement. It is appropriate that the Court should give effect to that policy purpose. The respondent's conduct here, as in those cases, has totally thwarted that purpose. The order made by the Court should ensure that the privilege of maintaining a self-managed superannuation fund is not abused.
66. Barker J listed (at [64]) the general principles relevant to setting a monetary penalties, and in doing so largely followed the principles articulated by Mansfield J in Olesen v Eddy, as outlined in paragraph 63, above. Barker J added an eleventh point to the ten points in paragraph 64.5, above; namely, any applicable public policy considerations.
67. Finally, in Olesen v Parker [2011] FCA 1096 Gordon J outlined the general principles relating to the fixing of civil penalties under the Act consistently with the authorities discussed above, as follows:
73 The general principles relating to the fixing of civil penalties under s 196 of the Act were considered in Eddy at [18]; see also MacLeod at [62]-[69]. They may be summarised as follows:
1. those that take advantage of the utilisation of a self-managed superannuation fund have a responsibility to manage that fund in accordance with the terms of the Deed and the legislation: Fitzgeralds at [30], Eddy at [18] and MacLeod at [64];
2. a civil penalty for contravention of that obligation needs to be sufficiently high to deter contravention by others, but not so high as to be oppressive: Holloway (2000) 45 ATR 278 at [12], Fitzgeralds at [29], Eddy at [18] and MacLeod at [64];
3. general deterrence is a very significant factor; other objectives include denunciation and punishment: Holloway (2000) 45 ATR 278 at [11], Fitzgeralds at [29], Australian Prudential Regulatory Authority v Derstepanian (2005) 60 ATR 518 at [26], Eddy at [18] and MacLeod at [64];
4. contravening conduct under the Act may be difficult to detect and its investigation can be complex and expensive: Holloway (2000) 45 ATR 278 at [21]; Fitzgeralds at [29]; Eddy at [18] and MacLeod at [64];
5. the total penalty must not exceed what is proper having regard to the conduct of the person in respect of all the contraventions: Holloway (2000) 45 ATR 278 at [19]; Fitzgeralds at [31]-[33]; Eddy at [18] and MacLeod at [64];
6. there is no "tariff" when it comes to the imposition of a civil penalty. The Court must have regard to the facts and circumstances of each case. Relevant factors in determining an appropriate civil penalty include:
6.1 the nature and extent of the contravening conduct;
6.2 the amount of any loss or damage caused;
6.3 the size of the organisation;
6.4 the deliberateness or otherwise of the contravention(s);
6.5 the period over which the contravention(s) extended;
6.6 the degree of cooperation of the person concerned, either in the investigation or the subsequent hearing;
6.7 the past record of the person;
6.8 the person's financial position;
6.9 any amounts already paid by way of compensation or legal costs;
6.10 contrition; and
6.11 any applicable public policy position,
Derstepanian at [30]-[37], Holloway (2000) 45 ATR 278 at [11]-[12] and [32]; Fitzgeralds at [35] and [43]; Eddy at [18] and MacLeod at [64] and [69].
68. Gordon J also noted:
68.1. at [75]: The Court must ensure that the total penalty does not exceed what is proper for the conduct of the contraveners in respect of all the contraventions (the totality principle): Holloway (2000) 45 ATR 278 at [19].
68.2. at [75]: The Court must have regard to whether, or the extent to which, particular instances of contravening conduct were part of a course of conduct: Holloway (2000) 45 ATR 278 at [19], Derstepanian at [31], Fitzgeralds at [31]-[34] and Eddy at [32(b)].
68.3. at [85]: In circumstances where a Fund has been made non-complying in respect of a relevant income year, pursuant to action taken by the Commissioner under section 40 of the Act, the consequence will be that the Fund will have lost its concessional tax treatment and its taxable income will be taxed at the highest marginal rate. However, the fact that assessments have issued to tax a Fund on the basis that it is non-complying is relevant only insofar as it bears upon the contravener's financial position - a matter the Court should have regard to in determining the appropriate penalty. Neither the assessments issued, nor the notice of non-compliance issued under section 40 of the Act, are punitive or intended to fulfil the functions of monetary penalties imposed under section 196 of the Act. It is possible for assessments and notices to issue without the imposition of monetary penalties. Each action is intended to achieve and does achieve different objectives.
30 I think that the submissions which I have extracted at [29] above accurately explain the relevant principles in the present context. I accepted those submissions and approached the present case with them in mind.
31 There is no doubt that the contraventions in the present case were serious when viewed from a regulatory perspective. As submitted by the parties, they were deliberate, repetitive and took place over a period of four years. There were numerous separate contraventions. The assets of the Fund were clearly put at risk by being lent to a business which was under financial stress.
32 However, it must be remembered that, in the end, the Fund did not suffer any loss of capital. The foregone interest income was not significant. In addition, all of the respondents admitted all of the contraventions which were ultimately pressed by the Commissioner and co-operated fully with the Commissioner both at the investigation stage and in the proceeding. Also, the Fund has now been wound up and the members' balances have now been transferred to a public fund which should ensure that they are satisfactorily protected.
33 Each of the individual respondents has taken full responsibility for their involvement in the contraventions and has expressed remorse and contrition for their conduct.
34 In the period 2007-2011, the relevant maximum penalty for a contravention of a civil penalty provision under the SIS Act was $220,000.
35 As submitted by the parties, the overall pecuniary penalty imposed for multiple contraventions should reflect the totality of the entire contravening conduct involved and ought not to exceed such amount as is a proper penalty for that total conduct. It is appropriate that the Court should have regard to whether, and to the extent to which, particular instances of contravening conduct were part of a course of conduct. That principle has application in the present case.
36 The parties agreed that there was no point imposing a civil pecuniary penalty upon Early Sunshine and I was content to give effect to that agreement. The parties also agreed that each of the individual respondents should pay a pecuniary penalty of $13,000. Each of those persons was also to make a contribution to the costs of the Commissioner in bringing the present proceeding.
37 When first informed of the quantum of the pecuniary penalties which the parties had agreed, I initially felt that the quantum of those penalties was insufficient. However, upon more mature reflection and having regard to all of the relevant circumstances, I formed the view that the quantum of those penalties was appropriate.
38 For all of the above reasons, I made the declarations and final orders which I made on 6 August 2013.
I certify that the preceding thirty-eight (38) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Foster.