Contravention of s 84(1) by breaching in-house rules
On or about 1 May 2005, each of the First and Second Respondents contravened s 84(1) of the Superannuation Industry (Supervision) Act 1993 (Cth) (the Act) by failing to take reasonable steps to comply with s 83(2) of the Act, in that they made a loan of $65,000 to Triton 2001 Pty Ltd (Triton) increasing the market value ratio of the in-house assets of the D&C Parker Superannuation Fund (the Fund), which ratio was immediately prior to the making of that loan already above the maximum market value ratio of 5% allowed under the Act.
On or about 4 July 2005, each of the First and Second Respondents contravened s 84(1) of the Act by failing to take reasonable steps to comply with s 83(2) of the Act, in that they made a loan of $128,538 to Triton increasing the market value ratio of the Fund's in-house assets, which ratio was immediately prior to the making of that loan already above the maximum market value ratio of 5% allowed under the Act.
On or about 6 July 2005, each of the First and Second Respondents contravened s 84(1) of the Act by failing to take reasonable steps to comply with s 83(2) of the Act, in that they made a loan of $60,000 to Triton increasing the market value ratio of the Fund's in-house assets, which ratio was immediately prior to the making of that loan already above the maximum market value ratio of 5% allowed under the Act.
On or about 1 December 2005, each of the First and Second Respondents contravened s 84(1) of the Act by failing to take reasonable steps to comply with s 83(2) of the Act, in that they made a loan of $7,000 to Triton increasing the market value ratio of the Fund's in-house assets, which ratio was immediately prior to the making of that loan already above the maximum market value ratio of 5% allowed under the Act.
On or about 21 February 2007, each of the First and Second Respondents contravened s 84(1) of the Act by failing to take reasonable steps to comply with s 83(2) of the Act, in that they made a loan of $20,000 to Cherchem Pty Ltd (Cherchem) increasing the market value ratio of the Fund's in-house assets, which ratio was immediately prior to the making of that loan already above the maximum market value ratio of 5% allowed under the Act.
On or about 5 March 2007, each of the First and Second Respondents contravened s 84(1) of the Act by failing to take reasonable steps to comply with s 83(2) of the Act, in that they made a loan of $20,000 to Cherchem increasing the market value ratio of the Fund's in-house assets, which ratio was immediately prior to the making of that loan already above the maximum market value ratio of 5% allowed under the Act.
On or about 14 March 2007, each of the First and Second Respondents contravened s 84(1) of the Act by failing to take reasonable steps to comply with s 83(2) of the Act, in that they made a loan of $10,000 to Cherchem increasing the market value ratio of the Fund's in-house assets, which ratio was immediately prior to the making of that loan already above the maximum market value ratio of 5% allowed under the Act.
On or about 23 March 2007, each of the First and Second Respondents contravened s 84(1) of the Act by failing to take reasonable steps to comply with s 83(2) of the Act, in that they made a loan of $10,000 to Cherchem increasing the market value ratio of the Fund's in-house assets, which ratio was immediately prior to the making of that loan already above the maximum market value ratio of 5% allowed under the Act.
On or about 22 October 2007, each of the First and Second Respondents contravened s 84(1) of the Act by failing to take reasonable steps to comply with s 83(2) of the Act, in that they made a loan of $35,000 to Cherchem increasing the market value ratio of the Fund's in-house assets, which ratio was immediately prior to the making of that loan already above the maximum market value ratio of 5% allowed under the Act.
On or about 7 November 2007, each of the First and Second Respondents contravened s 84(1) of the Act by failing to take reasonable steps to comply with s 83(2) of the Act, in that they made a loan of $15,000 to Cherchem increasing the market value ratio of the Fund's in-house assets, which ratio was immediately prior to the making of that loan already above the maximum market value ratio of 5% allowed under the Act.
On or about 29 December 2007, each of the First and Second Respondents contravened s 84(1) of the Act by failing to take reasonable steps to comply with s 83(2) of the Act, in that they made a loan of $5,000 to Cherchem increasing the market value ratio of the Fund's in-house assets, which ratio was immediately prior to the making of that loan already above the maximum market value ratio of 5% allowed under the Act.
Contravention of s 84(1) by failing to prepare written plans
On or about 30 June 2007, each of the First and Second Respondents contravened s 84(1) of the Act by failing to take reasonable steps to comply with s 82 of the Act and prepare a written plan on or by that date to dispose of the Fund's in-house assets which exceeded the 5% market value ratio for in-house assets (which ratio stood at 98% as at the end of the financial year ended 30 June 2006).
On or about 30 June 2008, each of the First and Second Respondents contravened s 84(1) of the Act by failing to take reasonable steps to comply with s 82 of the Act and prepare a written plan on or by that date to dispose of the Fund's in-house assets which exceeded the 5% market value ratio for in-house assets (which ratio stood at 85.02% as at the end of the financial year ended 30 June 2007).
Contravention of s 109(1A) by failing to deal with entities in arm's length manner
On or about 30 June 2005, each of the First and Second Respondents contravened s 109(1A) of the Act by failing to deal with a party that was not at arm's length to each trustee, namely Chemical & Marketing Services Pty Ltd (CMS), in the same manner as if CMS was at arm's length, in that on or about that date each Respondent failed to obtain payment of interest on the debt owed by CMS to the Fund or any part thereof.
On or about 30 June 2006, each of the First and Second Respondents contravened s 109(1A) of the Act by failing to deal with a party that was not at arm's length to each trustee, namely Cherchem, in the same manner as if Cherchem was at arm's length, in that on or about that date each Respondent failed to obtain payment of interest on the outstanding amount of the debt owed by Cherchem to the Fund or any part thereof but added to the capital amount of the debt the interest payable for the financial year ending 30 June 2006.
On or about 30 June 2007, each of the First and Second Respondents contravened s 109(1A) of the Act by failing to deal with a party that was not at arm's length to each trustee, namely Cherchem, in the same manner as if Cherchem was at arm's length, in that on or about that date each Respondent failed to obtain payment of interest on the outstanding amount of the debt owed by Cherchem to the Fund or any part thereof but added to the capital amount of the debt the interest payable for the financial year ending 30 June 2007.
On or about 30 June 2008, each of the First and Second Respondents contravened s 109(1A) of the Act by failing to deal with a party that was not at arm's length to each trustee, namely Cherchem, in the same manner as if Cherchem was at arm's length, in that on or about that date each Respondent failed to obtain payment of interest on the outstanding amount of the debt owed by Cherchem to the Fund or any part thereof but added to the capital amount of the debt the interest payable for the financial year ending 30 June 2008.
On or about 30 June 2005, each of the First and Second Respondents contravened s 109(1A) of the Act by failing to deal with a party that was not at arm's length to each trustee, namely Triton, in the same manner as if Triton was at arm's length, in that on or about that date each Respondent failed to obtain payment of interest on the whole or any part of the sum of $185,000 that had been loaned to Triton and repaid on or about 27 June 2005.
On or about 30 June 2006, each of the First and Second Respondents contravened s 109(1A) of the Act by failing to deal with a party that was not at arm's length to each trustee, namely Triton, in the same manner as if Triton was at arm's length, in that on or about that date each Respondent failed to obtain payment of interest on the outstanding amount of the debt owed by Triton to the Fund or any part thereof but added to the capital amount of the debt the interest payable for the financial year ending 30 June 2006.
On or about 30 June 2006, each of the First and Second Respondents contravened s 109(1A) of the Act by failing to deal with a party that was not at arm's length to each trustee, namely Adzparadox Pty Ltd (Adzparadox), in the same manner as if Adzparadox was at arm's length, in that on or about that date each Respondent failed to document the loan from the Fund to Adzparadox and further, failed to obtain payment of interest on the outstanding amount of the debt owed by Adzparadox to the Fund or any part thereof.
On or about 30 June 2007, each of the First and Second Respondents contravened s 109(1A) of the Act by failing to deal with a party that was not at arm's length to each trustee, namely Adzparadox, in the same manner as if Adzparadox was at arm's length, in that on or about that date each Respondent failed to document the loan from the Fund to Adzparadox and further, failed to obtain payment of interest on the outstanding amount of the debt owed by Adzparadox to the Fund or any part thereof but added to the capital amount of the debt interest payable for the financial year ending 30 June 2007.
On or about 30 June 2008, each of the First and Second Respondents contravened s 109(1A) of the Act by failing to deal with a party that was not at arm's length to each trustee, namely Adzparadox, in the same manner as if Adzparadox was at arm's length, in that on or about that date each Respondent failed to document the loan from the Fund to Adzparadox and further, failed to obtain payment of interest on the outstanding amount of the debt owed by Adzparadox to the Fund or any part thereof but added to the capital amount of the debt interest payable for the financial year ending 30 June 2008.
Contravention of s 62(1) by failing to maintain the Fund for a purpose under s 62(1)
On or about 1 May 2005, each of the First and Second Respondents contravened s 62(1) of the Act by lending to Triton the sum of $65,000 and thus failing to ensure that the Fund was maintained solely for one or more of the core purposes set out in s 62(1)(a) of the Act or one or more of those core purposes and one or more of the ancillary purposes set out in s 62(1)(b) of the Act.
On or about 4 July 2005, each of the First and Second Respondents contravened s 62(1) of the Act by lending to Triton the sum of $128,538 and thus failing to ensure that the Fund was maintained solely for one or more of the core purposes set out in s 62(1)(a) of the Act or one or more of those core purposes and one or more of the ancillary purposes set out in s 62(1)(b) of the Act.
On or about 6 July 2005, each of the First and Second Respondents contravened s 62(1) of the Act by lending to Triton the sum of $60,000 and thus failing to ensure that the Fund was maintained solely for one or more of the core purposes set out in s 62(1)(a) of the Act or one or more of those core purposes and one or more of the ancillary purposes set out in s 62(1)(b) of the Act.
On or about 1 December 2005, each of the First and Second Respondents contravened s 62(1) of the Act by lending to Triton the sum of $7,000 and thus failing to ensure that the Fund was maintained solely for one or more of the core purposes set out in s 62(1)(a) of the Act or one or more of those core purposes and one or more of the ancillary purposes set out in s 62(1)(b) of the Act.
On or about 21 February 2007, each of the First and Second Respondents contravened s 62(1) of the Act by lending to Cherchem the sum of $20,000 and thus failing to ensure that the Fund was maintained solely for one or more of the core purposes set out in s 62(1)(a) of the Act or one or more of those core purposes and one or more of the ancillary purposes set out in s 62(1)(b) of the Act.
On or about 5 March 2007, each of the First and Second Respondents contravened s 62(1) of the Act by lending to Cherchem the sum of $20,000 and thus failing to ensure that the Fund was maintained solely for one or more of the core purposes set out in s 62(1)(a) of the Act or one or more of those core purposes and one or more of the ancillary purposes set out in s 62(1)(b) of the Act.
On or about 14 March 2007, each of the First and Second Respondents contravened s 62(1) of the Act by lending to Cherchem the sum of $10,000 and thus failing to ensure that the Fund was maintained solely for one or more of the core purposes set out in s 62(1)(a) of the Act or one or more of those core purposes and one or more of the ancillary purposes set out in s 62(1)(b) of the Act.
On or about 23 March 2007, each of the First and Second Respondents contravened s 62(1) of the Act by lending to Cherchem the sum of $10,000 and thus failing to ensure that the Fund was maintained solely for one or more of the core purposes set out in s 62(1)(a) of the Act or one or more of those core purposes and one or more of the ancillary purposes set out in s 62(1)(b) of the Act.
On or about 22 October 2007, each of the First and Second Respondents contravened s 62(1) of the Act by lending to Cherchem the sum of $35,000 and thus failing to ensure that the Fund was maintained solely for one or more of the core purposes set out in s 62(1)(a) of the Act or one or more of those core purposes and one or more of the ancillary purposes set out in s 62(1)(b) of the Act.
On or about 7 November 2007, each of the First and Second Respondents contravened s 62(1) of the Act by lending to Cherchem the sum of $15,000 and thus failing to ensure that the Fund was maintained solely for one or more of the core purposes set out in s 62(1)(a) of the Act or one or more of those core purposes and one or more of the ancillary purposes set out in s 62(1)(b) of the Act.
On or about 29 December 2007, each of the First and Second Respondents contravened s 62(1) of the Act by lending to Cherchem the sum of $5,000 and thus failing to ensure that the Fund was maintained solely for one or more of the core purposes set out in s 62(1)(a) of the Act or one or more of those core purposes and one or more of the ancillary purposes set out in s 62(1)(b) of the Act.
On or about 30 June 2005, each of the First and Second Respondents contravened s 62(1) of the Act by failing to obtain interest on the total amount of $185,000 that had been loaned to Triton (and was repaid on or about 27 June 2005) or any part thereof and thus failing to ensure that the Fund was maintained solely for one or more of the core purposes set out in s 62(1)(a) of the Act or one or more of those core purposes and one or more of the ancillary purposes set out in s 62(1)(b) of the Act.
On or about 30 June 2006, each of the First and Second Respondents contravened s 62(1) of the Act by failing to obtain interest for the financial year ended 30 June 2006 on the outstanding amount of the debt owed by Triton to the Fund or any part thereof and thus failing to ensure that the Fund was maintained solely for one or more of the core purposes set out in s 62(1)(a) of the Act or one or more of those core purposes and one or more of the ancillary purposes set out in s 62(1)(b) of the Act.
On or about 30 June 2006, each of the First and Second Respondents contravened s 62(1) of the Act by failing to obtain interest for the financial year ended 30 June 2006 on the outstanding amount of the debt owed by Adzparadox to the Fund or any part thereof and thus failing to ensure that the Fund was maintained solely for one or more of the core purposes set out in s 62(1)(a) of the Act or one or more of those core purposes and one or more of the ancillary purposes set out in s 62(1)(b) of the Act.
On or about 30 June 2007, each of the First and Second Respondents contravened s 62(1) of the Act by failing to obtain interest for the financial year ended 30 June 2007 on the outstanding amount of the debt owed by Adzparadox to the Fund or any part thereof and thus failing to ensure that the Fund was maintained solely for one or more of the core purposes set out in s 62(1)(a) of the Act or one or more of those core purposes and one or more of the ancillary purposes set out in s 62(1)(b) of the Act.
On or about 30 June 2008, each of the First and Second Respondents contravened s 62(1) of the Act by failing to obtain interest for the financial year ended 30 June 2008 on the outstanding amount of the debt owed by Adzparadox to the Fund or any part thereof and thus failing to ensure that the Fund was maintained solely for one or more of the core purposes set out in s 62(1)(a) of the Act or one or more of those core purposes and one or more of the ancillary purposes set out in s 62(1)(b) of the Act.
On or about 30 June 2005, each of the First and Second Respondents contravened s 62(1) of the Act by failing to obtain interest for the financial year ended 30 June 2005 on the outstanding amount of the debt owed by CMS to the Fund or any part thereof and thus failing to ensure that the Fund was maintained solely for one or more of the core purposes set out in s 62(1)(a) of the Act or one or more of those core purposes and one or more of the ancillary purposes set out in s 62(1)(b) of the Act.
On or about 30 June 2006, each of the First and Second Respondents contravened s 62(1) of the Act by failing to obtain interest for the financial year ended 30 June 2006 on the outstanding amount of the debt owed by Cherchem to the Fund or any part thereof and thus failing to ensure that the Fund was maintained solely for one or more of the core purposes set out in s 62(1)(a) of the Act or one or more of those core purposes and one or more of the ancillary purposes set out in s 62(1)(b) of the Act.
On or about 30 June 2007, each of the First and Second Respondents contravened s 62(1) of the Act by failing to obtain interest for the financial year ended 30 June 2007 on the outstanding amount of the debt owed by Cherchem to the Fund or any part thereof and thus failing to ensure that the Fund was maintained solely for one or more of the core purposes set out in s 62(1)(a) of the Act or one or more of those core purposes and one or more of the ancillary purposes set out in s 62(1)(b) of the Act.
On or about 30 June 2008, each of the First and Second Respondents contravened s 62(1) of the Act by failing to obtain interest for the financial year ended 30 June 2008 on the outstanding amount of the debt owed by Cherchem to the Fund or any part thereof and thus failing to ensure that the Fund was maintained solely for one or more of the core purposes set out in s 62(1)(a) of the Act or one or more of those core purposes and one or more of the ancillary purposes set out in s 62(1)(b) of the Act.
[2]
Pursuant to s 196(3) of the Act, on or before 24 October 2011, or by such time and by such instalments as the District Registrar may allow, the First Respondent pay to the Commonwealth of Australia a monetary penalty of $35,000 in respect of his conduct in contravention of the Act referred to in paragraphs 1 to 42 above.
Pursuant to s 196(3) of the Act, on or before 24 October 2011, or by such time and by such instalments as the District Registrar may allow, the Second Respondent pay to the Commonwealth of Australia a monetary penalty of $15,000 in respect of her conduct in contravention of the Act referred to in paragraphs 1 to 42 above.
The Respondents pay the Applicant's costs of and incidental to this proceeding fixed in the sum of $5,000, such costs to be paid on or before 24 October 2011, or 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.
[3]
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION VID 302 of 2011
[4]
BETWEEN: NEIL OLESEN, DEPUTY COMMISSIONER OF TAXATION (SUPERANNUATION)
[5]
JUDGE: GORDON J
DATE: 23 SEPTEMBER 2011
PLACE: MELBOURNE
[6]
INTRODUCTION
1 Mr Parker and Mrs Parker, collectively the Respondents, were the trustees of a self-managed superannuation fund known as the D & C Parker Superannuation Fund (the Fund) from May 2001.
2 The Applicant alleges the Respondents contravened provisions of Pts 8 and 12 of the Superannuation Industry (Supervision) Act 1993 (Cth) (the Act) from 1 May 2005 to 30 June 2008 (as that Act was in force at the time of the allegedly contravening conduct). The alleged breaches were identified during an audit of the Fund and were said to comprise:
1. loans to, and one investment in, companies which were related to the Respondents or either of them: contraventions of s 84(1) by reference to s 83(2) of the Act;
2. failures to prepare written plans for the disposal of assets required in the relevant circumstances: contraventions of s 84(1) by reference to s 82 of the Act;
3. failures to obtain payment of interest on loans to related companies, constituting failures to deal with parties in the requisite arm's length manner: contraventions of s 109(1A) of the Act; and
4. failures to ensure that the Fund was maintained for the requisite purposes: contraventions of s 62(1) of the Act, relying on the same facts alleged in relation to the loans to related companies referred to in paragraph [2(1)] above and the Respondents' failures to obtain interest referred to in paragraph [2(3)] above.
3 The "related companies" were Chemical & Marketing Services Pty Ltd (CMS) (of which Mr Parker was sole director and secretary), Cherchem Pty Ltd (Cherchem) (of which Mr Parker was sole director and secretary), Triton 2001 Pty Ltd (Triton) (of which Mr Parker was sole director and secretary) and Adzparadox Pty Ltd (Adzparadox) (of which Mr and Mrs Parker were joint members and held the majority voting interest).
4 The parties prepared a Statement of Agreed Facts. Based on that statement and some additional factual matters which are considered below, the Applicant seeks declarations of contraventions, the imposition of monetary penalties for those contraventions and an order that the Respondents pay the Applicant's costs.
5 These reasons will address the relevant legislative framework, then address the facts which gave rise to the issues raised in these proceedings, consider the parties' positions in relation to the alleged contraventions and, finally, the question of penalties.
[7]
RELEVANT LEGISLATIVE FRAMEWORK
6 The applicable legislation is that in force at the date of the alleged contraventions: Geraldton Building Co Pty Ltd v May (1977) 136 CLR 379 at 399-400 and the authorities cited. None of the relevant provisions of the Act have been relevantly amended since 1 May 2005, the date of the first alleged contravention.
7 Part 7 of the Act is entitled "Provisions applying only to regulated superannuation funds". A defining characteristic of a regulated superannuation fund is that its trustees have made an election in proper form that the Act is to apply: s 19(4) of the Act. There is no dispute that the Fund was a regulated superannuation fund and a self-managed superannuation fund within s 17A of the Act. (Section 17A has been amended since the date of the first alleged contravention but those amendments do not affect or concern the issues raised in this proceeding).
8 Section 62, in Pt 7 of the Act, is headed "Sole purpose test", and imposes obligations on each trustee of a regulated superannuation fund to ensure that the fund is maintained solely for one or more of certain defined purposes. The mandated purposes are either a category of one or more purposes described as the core purposes (s 62(1)(a) of the Act) or a combination of one or more of the core purposes with a second category of one or more purposes described as ancillary purposes (s 62(1)(b) of the Act). The purpose of supporting a business in which a member has an interest is not a core purpose or an ancillary purpose.
9 Part 8 of the Act is entitled "In-house asset rules applying to regulated superannuation funds". In Australian Prudential Regulation Authority v Holloway (2000) 104 FCR 521 at [17], Mansfield J described Pt 8 of the Act as follows:
Part 8 of the Act controls the extent to which "in-house" asset rules apply to regulated superannuation funds. The objective is to restrict the extent to which superannuation funds may "reinvest" in the employer-sponsor so that those monies which attract a taxation concession are invested in a way which does not put them at risk.
(Emphasis added.)
10 An "in-house asset" of a superannuation fund is defined in s 71 of the Act as:
... an asset of the fund that is a loan to, or an investment in, a related party of the fund, an investment in a related trust of the fund, or an asset of the fund subject to a lease or lease arrangement between a trustee of the fund and a related party of the fund …
(Emphasis added.)
11 Other definitions are important. "Employer-sponsor", in relation to a regulated superannuation fund, is generally speaking an employer who makes contributions to the fund on behalf of a member: s 16(1) of the Act. The other important definition is "related party" of a superannuation fund which is defined in s 10(1) to mean any of the following:
(a) a member of the fund;
(b) a standard employer-sponsor of the fund;
(c) a Part 8 associate of an entity referred to in paragraph (a) or (b).
(Emphasis added.)
12 The phrase "Part 8 associate" is relevantly defined in s 70B of subdiv B of Pt 8 of the Act as follows:
70B. For the purposes of this Part, each of the following is a Part 8 associate of an individual (the primary entity), whether or not the primary entity is in the capacity of trustee:
(a) a relative of the primary entity;
(b) if the primary entity is a member of a superannuation fund with fewer than 5 members:
(i) each other member of the fund; and
…
(d) if a partner of the primary entity is an individual - the spouse or a child of that individual;
(e) a trustee of a trust (in the capacity of trustee of that trust), where the primary entity controls the trust;
(f) a company that is sufficiently influenced by, or in which a majority voting interest is held by:
(i) the primary entity; or
(ii) another entity that is a Part 8 associate of the primary entity because of another paragraph of this section or because of another application of this paragraph; or
(iii) 2 or more entities covered by the preceding subparagraphs.
(Emphasis added.)
13 Section 84(1) of the Act is also relevant. It enshrines in statute the obligations of a trustee of a regulated superannuation funds as follows:
Each trustee of a regulated superannuation fund must take all reasonable steps to ensure that the provisions of Division 2, and either Division 3 or 3A (whichever is applicable), are complied with.
In the present case, Div 3 of Pt 8 is applicable. The Applicant submitted that the Respondents (as trustees of the Fund) failed to take all reasonable steps to ensure that two provisions of Div 3 of Pt 8 were complied with - namely, ss 82 and 83 of the Act.
14 Section 82 of the Act entitled "All funds-market value ratio for the 2000-2001 year of income and later years of income" provides:
(1) This section applies to a regulated superannuation fund.
(2) If the market value ratio of the fund's in-house assets as at the end of:
(a) the fund's 2000-2001 year of income; or
(b) a later year of income;
exceeds 5%, the trustee of the fund, or, if the fund has a group of individual trustees, the trustees of the fund, must prepare a written plan.
(3) The plan must specify the amount (the excess amount) worked out using the formula:
(4) The plan must set out the steps which the trustee proposes, or, if the fund has a group of individual trustees, the trustees propose, to take in order to ensure that:
(a) one or more of the fund's in-house assets held at the end of that year of income are disposed of during the next following year of income; and
(b) the value of the assets so disposed of is equal to or more than the excess amount.
(5) The plan must be prepared before the end of the next following year of income.
(6) Each trustee of the fund must ensure that the steps in the plan are carried out.
15 Section 83 of the Act entitled "Certain new in-house asset investments prohibited" provides:
(1) This section applies to a regulated superannuation fund.
(2) If the market value ratio of the fund's in-house assets exceeds 5%, a trustee of the fund must not acquire an in-house asset.
(3) If the market value ratio of the fund's in-house assets does not exceed 5%, a trustee of the fund must not acquire an in-house asset if the acquisition would result in the market value ratio of the fund's in-house assets exceeding 5%.
(4) For the avoidance of doubt, a reference in this section to acquiring an in-house asset includes a reference to making an investment or a loan, or entering into a lease or a lease arrangement, if the resulting loan or investment, or the asset subject to the lease or the lease arrangement, would be an in-house asset.
16 Other sections of the Act are also relevant. Section 109(1A) of the Act entitled "Investments of superannuation entity to be made and maintained on arm's length basis" provides:
If:
(a) a trustee or investment manager of a superannuation entity invests in that capacity; and
(b) at any time during the term of the investment the trustee or investment manager is required to deal in respect of the investment with another party that is not at arm's length with the trustee or investment manager;
the trustee or investment manager must deal with the other party in the same manner as if the other party were at arm's length with the trustee or investment manager.
(Emphasis added.)
A "superannuation entity" includes a regulated superannuation fund: paragraph (a) of the definition in s 10(1) of the Act.
17 The relevant civil penalty provisions are in Pt 21 of the Act entitled "Civil and criminal consequences of contravening civil penalty provisions". Section 193 of the Act provides that each of ss 62(1), 84(1), and 109(1A) is a civil penalty provision. Section 196 in Pt 21 of the Act entitled "Court may make civil penalty orders" provides:
(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.
…
(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.
No order of the kind referred to in s 196(5) has been made in relation to the Respondents' conduct the subject of this proceeding.
[8]
FACTS
18 As noted earlier, the parties filed a statement of agreed facts. A number of facts were not the subject of agreement. What follows is a summary of the relevant agreed facts together with the findings of fact in relation to the disputed facts.
[9]
Parties and audits
19 The Applicant brings this proceeding pursuant to s 197(1) of the Act as delegate of the "Regulator" within the meaning of s 10(1) of the Act.
20 The Respondents were at all material times from about 21 May 2001 the trustees of the Fund. The Fund is and was at all material times:
1. a "superannuation fund" within the meaning of s 10(1) of the Act; and
2. a "regulated superannuation fund" within the meaning of s 19 of the Act.
21 In addition, at all material times, the Respondents were the trustees of the Fund and the governing rules of the Fund, contained in the Fund's Trust Deed, provided that the sole and primary purpose of the Fund was to provide old-age pensions to or in respect of members or for a member's dependants in the event of the death of a member.
22 On about 21 May 2001, the Respondents gave the Commissioner of Taxation written notice in the approved form electing that the Act was to apply in relation to the Fund. As a result, from that date, the Fund was a "self managed superannuation fund" within the meaning of s 17A of the Act. In particular, the Fund has had fewer than five members, the Fund's trustees have been individuals (the Respondents who are each members of the Fund), the Fund's sole members (the Respondents) have each been trustees of the Fund, the Fund's members have been relatives (husband and wife) and the Fund's trustees have not received any remuneration from the Fund or from any person for any services performed by them in relation to the Fund.
23 Two audits of the Fund were conducted by the Australian Taxation Office (ATO) - an audit in March 2006 in respect of the income year ended 30 June 2004 (the First Audit) and an audit started in August 2008 in respect of the income year ended 30 June 2006 (the Second Audit).
24 In the First Audit, certain breaches of the Act were identified, including two that were unrectified. These contraventions were subsequently rectified by way of an Enforceable Undertaking executed by the Respondents on 25 May 2006 and accepted by the Applicant on 31 May 2006.
25 The Fund's tax agent and auditor (Lifewealth Partners Pty Ltd) lodged the Fund's regulatory return for the 2006 income year. That return disclosed that for the 2006 income year the total value of its "in-house assets" was well in excess of the maximum allowed level of 5% of total asset value: see s 71 of the Act at [10] above. As a result, the Second Audit commenced.
[10]
Related parties of the Fund
26 At all material times, the First Respondent, being a member of the Fund, was the sole director and secretary of CMS, Cherchem and Triton, effectively controlled each company, and was a "Part 8 associate" of each company: s 70B at [12] above. Accordingly, each company was at all material times a "related party" of the Fund: see [11] above.
27 The Applicant also submitted that Adzparadox was a related party of the Respondents, because Adzparadox was a "Part 8 associate" of each Respondent, who were, in turn, each a member of the Fund. The Respondents disputed this. The relevant company extract from the Australian Securities and Investments Commission (ASIC) was in evidence. It records that the Respondents were joint members of Adzparadox holding 160,000 ordinary shares and jointly held the majority voting interest in that company: ss 128 and 129(2) of the Corporations Act 2001 (Cth). I find that Adzparadox was a "Part 8 associate" of each Respondent within the meaning of s 70B of the Act and a related party of the Fund under paragraph (c) of the definition of "related party" in s 10(1) of the Act because:
1. each Respondent was a member of the Fund and was therefore an "entity referred to in paragraph (a) or (b)" within the meaning of paragraph (c) of the definition of "related party" in s 10(1): see [11] above;
2. the Respondents jointly held 160,000 out of 180,000 of the ordinary shares issued in the capital of Adzparadox;
3. Adzparadox was a company in which a majority voting interest was held by each Respondent (jointly with the other) for the purposes of paragraph (f) of the definition of "Part 8 associate" in s 70B of the Act, each Respondent occupying the position of the "primary entity": see [12] above.
Put another way, the Respondents were Part 8 associates of Adzparadox and Adzparadox was at all material times a "related party" of the Fund: see [11] above.
[11]
Triton, Cherchem and Adzparadox
28 Loans were made by the Fund to Triton:
1. $40,000 on or about 13 October 2004;
2. $60,000 on or about 1 December 2004;
3. $20,000 on or about 10 January 2005;
4. $65,000 on or about 1 May 2005;
5. $128,538 on or about 4 July 2005;
6. $60,000 on or about 6 July 2005; and
7. $7,000 on or about 1 December 2005.
The loans listed in paragraphs [28(1)] to [28(4)] were repaid to the Fund on about 27 June 2005. Triton was ordered to be wound up by the Court on or about 26 October 2006. The loans made by the Fund to Triton before 19 April 2005 are not the subject of this proceeding - they are outside the six year limitation period.
29 Loans were also made by the Fund to Cherchem:
1. $20,000 on or about 21 February 2007;
2. $20,000 on or about 5 March 2007;
3. $10,000 on or about 14 March 2007;
4. $10,000 on or about 23 March 2007;
5. $35,000 on or about 22 October 2007;
6. $15,000 on or about 7 November 2007; and
7. $5,000 on or about 29 December 2007.
30 The loans from the Fund to Cherchem totalled $115,000. The loans listed at paragraphs [29(1)] to [29(6)] have substantially been repaid to the Fund. Mr Parker was called to give evidence. His evidence, which I accept, was that $107,700 was repaid by Cherchem as follows:
1. $50,000 on 14 January 2009 and 7 September 2009;
2. $2,000 on 1 July 2010 and 2 July 2010;
3. $1,200 on 20 September 2010; and
4. $2,500 on 9 November 2010.
31 The two sums of $50,000 were used to acquire shares in another entity, United Digital Media Pty Ltd, a company in which Mr Parker has held the position of Chief Executive and Director since at least December 2009. The Applicant also accepts that an additional $4,000 was credited to the Fund on 12 April 2010 that appears to relate to part repayment of an earlier loan.
32 The loan to Triton after 19 April 2005 and each loan to Cherchem was an "in-house asset" (see [10] above) of the Fund because it was made to a related party of the Fund. Immediately prior to making each loan, the "market value ratio" of the Fund's in-house assets (see [15] and [25] above) stood in excess of 5%, being the maximum allowed market value ratio for in-house assets under s 83(2) of the Act. Each loan further increased that market value ratio.
33 The Fund also made an investment in, and loans to, Adzparadox:
1. an investment of $160,000 in or about November 2005;
2. a loan of $60,000 on or about 2 March 2006; and
3. a loan of $70,000 on or about 16 November 2006.
Adzparadox was a related party of the Fund: see [11] and [27] above. Each loan or investment was an "in-house asset" (see [10] above) of the Fund. Immediately prior to making each loan or investment, the "market value ratio" of the Fund's in-house assets (see [15] and [25] above) stood in excess of 5%, being the maximum allowed market value ratio for in-house assets under s 83(2). Each loan further increased that market value ratio.
34 For each income year, the loan position of the Fund was as follows:
Year ended Related entity Amount advanced each year by Fund Total owing at year end including any capitalised interest Other relevant facts and matters
30.06.2005 Triton $185,000 This loan was repaid in full on 27 June 2005 excluding interest.
CMS $25,000 $25,000 CMS loan transferred to Cherchem on 1 July 2005.
30.06.2006 Triton $195,538 $195,538 Not recovered.
Triton ordered to be wound up by the Court on or about 26 October 2006.
Cherchem $27,000 CMS loan transferred on 1 July 2005 plus capitalised interest.
Adzparadox $60,000 $60,000 No capitalised interest.
30.06.2007 Cherchem $60,000 $93,960 Includes capitalised interest.
Adzparadox $70,000 $137,600 Includes capitalised interest.
30.06.2008 Cherchem $55,000 $161,622 $107,700 repaid to the Fund and then $100,000 invested in another entity: see [30] and [31] above. Balance not recovered.
Adzparadox $148,677 Includes capitalised interest.
[12]
Failing to maintain investments of the Fund at arm's length - s 109(1A) of the Act
35 It is not disputed that the Respondents, as trustees of the Fund:
1. in the 2005 income year, failed to obtain payment of interest on any portion of the $185,000 loan to Triton;
2. in the 2006 income year, failed to obtain payment of interest on any portion of the loan to Triton;
3. in each of the 2006, 2007 and 2008 income years, failed to obtain payment of interest on any portion of the loan to Adzparadox but instead simply added the interest to the capital of the loan;
4. in the 2005 income year, failed to obtain payment of interest on any portion of the CMS loan but instead added the interest to the capital of the loan; and
5. in each of the 2006, 2007 and 2008 income years, failed to obtain payment of interest on any portion of the Cherchem loan but instead added the interest to the capital of the loan.
The loan documentation for the Triton and Cherchem loans was in evidence and required payment of interest at 30 June each year. No loan documentation for the Adzparadox loan was in evidence. The failure to document the Adzparadox loan together with the failure to obtain payment of interest of any portion of each of the loans (Triton, Cherchem and Adzparadox) constituted a contravention of the Act.
36 Accordingly, the Respondents accepted that in each case they failed to maintain an investment of the Fund (a loan) at arm's length in contravention of s 109(1A) of the Act.
[13]
Failing to maintain the Fund for requisite purposes
37 It is not disputed that the Fund provided financial assistance to Triton, Adzparadox and Cherchem and that in doing so the Respondents failed to ensure that the Fund was maintained for a purpose described in either s 62(1)(a) or (b) of the Act: see [8] above. Put simply, the Respondents gave effect to a different purpose - providing financial assistance to each of the companies.
38 In relation to Triton, financial assistance was provided:
1. by lending it $65,000 on or about 1 May year: see [28(4)] above;
2. by failing to obtain payment of interest on any portion of the $185,000 loan in the 2005 income year. It must be recalled that this loan was repaid to the Fund by the income year ended 30 June 2005: see [28] above; and
3. by failing to obtain payment of any part of the principal of, or interest on, the outstanding amounts loaned in the 2006 income year: see [34]-[35] above.
39 In relation to Adzparadox, financial assistance was provided:
1. by investing, or lending, each of the amounts listed in [33] above; and
2. by failing to obtain payment of any part of the principal of, or interest on, the outstanding amounts loaned to Adzparadox in each of the 2006, 2007 and 2008 income years: see [34]-[35] above.
40 In relation to Cherchem, financial assistance was provided by failing to obtain payment of any part of the principal of, or interest on, the outstanding amount of the CMS / Cherchem Loan in each of the 2005, 2006, 2007 and 2008 income years: see [30] and [34]-[35] above.
[14]
Exceeding of market value ratio and failing to prepare written plans
41 Further, there was no dispute that from 30 June 2005 until 30 June 2008, the market value ratio (see [32] and [33] above) of the Fund's in-house assets, being the ratio of the total value of the Fund's in-house assets to the total value of all the Fund's assets, greatly exceeded the maximum permissible market value ratio of 5%. Set out below is a summary of the ratio of the total value of the Fund's in-house assets to the total value of all the Fund's assets as disclosed by the evidence:
Year ended Total value of Fund's assets Total Value of in-house assets Identity of in-house assets Market Value ratio
30.06.2005 Evidence did not disclose the identity of in-house assets. 40.3%
30.06.2006 $691,190 $677,328 Loans to CMS / Cherchem, Triton, Adzparadox - $297,738. 98%
Investment in Adzparadox - $160,000.
Residential property at 2 Vincent Court, Cranbourne leased to Mr Parker's parents - $219,590.
30.06.2007 $723,933 $619,157 Loans to related parties - $459,157. 85.52%
Investment in Adzparadox - $160,000.
30.06.2008 Evidence did not disclose. 94.42%
[15]
42 There was also no dispute that the Respondents, as trustees of the Fund, were required by s 82 of the Act to prepare a written plan by 30 June 2007 for the disposal of in-house assets of the Fund as at 30 June 2006 and a written plan by 30 June 2008 for the disposal of in-house assets of the Fund as at the 30 June 2007, to the extent that their market value ratio exceeded 5% of the Fund's total assets. No written plan was prepared and no steps were taken towards preparing such a written plan by 30 June 2007 or 30 June 2008, or at all.
[16]
Respondents' awareness of their obligations and breaches of the Act
43 The Respondents were aware of their obligations as trustees of the Fund, including the obligations not to exceed the 5% market value ratio in respect of in-house assets, to prepare a written plan to reduce the level of in-house assets, to maintain investments of the Fund at arm's length, and to ensure that the Fund was maintained for one or more of the permitted purposes under s 62(1) of the Act.
44 Moreover, the Respondents accept that they were generally aware that they were acting in breach of the Act by exceeding the 5% market value ratio in respect of in-house assets, by failing to maintain investments of the Fund at arm's length, and by failing to ensure that the Fund was maintained for one or more of the permitted purposes under s 62(1) of the Act.
45 The Respondents submitted that they did not believe that the investments in Adzparadox (including the loans to that company) were made to a related entity and were therefore in breach of the in-house assets rules by reason of advice from an accountant to the effect that there was no problem in the Fund investing in that company. As I have earlier found, I reject that contention. Adzparadox was a related party of the Fund (see [27] above) and each loan or investment was an "in-house asset" (see [33] above) of the Fund.
[17]
Consequences of second audit and contraventions of the Act identified by the ATO
46 By reason of the contraventions of the Act identified as a result of the audit started in August 2008, the ATO decided to disqualify the Respondents as trustees of the Fund. Notices of disqualification were issued and sent to the Respondents on or about 11 May 2010.
47 Further, by a notice to the Respondents dated 13 May 2010, the Applicant informed them that, under s 40 of the Act, the Fund had been made non-complying in respect of the 2006 income year and that, unless the Commissioner of Taxation issued a notice stating that the Fund was a complying superannuation fund for a year of income, the Fund would continue to be treated as a non-complying fund in all years of income subsequent to the 2006 income year. This meant that from the 2006 income year onwards, the Fund lost its concessional tax treatment and its taxable income was to be taxed at the highest marginal rate.
48 Accordingly, amended assessments were issued by the ATO in respect of the 2006, 2007, 2008 and 2009 years totalling $139,570.38. An amount of $118.25 was paid on 30 March 2011. General interest charge continues to accrue on the outstanding debt and was calculated to 4 August 2011 in the amount of $12,064.12. The total debt exceeds $150,000.
[18]
Contraventions of s 84(1) by breaching in-house asset rules
49 In making the loans to Triton (see [28] above) and Cherchem (see [29] above), and the investment in and loans to Adzparadox (see [33] above), the Respondents breached s 83(2) of the Act. Section 83(2) prohibits trustees from acquiring an "in-house" asset where the ratio of the value of in-house assets to the total value of assets of the fund (the "market value ratio") exceeds 5%. An "in-house asset" includes a loan to, or an investment in, an entity which is a "related party" of the superannuation fund: s 71 of the Act. By failing to take reasonable steps to comply with s 83(2) in respect of each loan or investment, the Respondents each contravened s 84(1) of the Act.
50 The Respondents conceded that certain loans were made to Triton and Cherchem (see [35] above) when the market value ratio already stood at in excess of 5%. The Respondents did not accept that Adzparadox was a related party of the Fund. For the reasons stated at [27] above, I reject that contention. Adzparadox was a related party of the Fund. It is appropriate that the Court make declarations of contravention of s 84(1) of the Act in relation to Triton, Cherchem and Adzparadox.
[19]
Contraventions of s 84(1) by failing to prepare written plans
51 Section 82 of the Act requires that where a Fund's in-house assets exceed the 5% limit, the trustees must prepare a written plan by the end of the following financial year. The 5% limit was exceeded by the Fund in both the 2006 and 2007 financial years. The Respondents as trustees did not prepare a written plan to rectify each excess by 30 June 2007 and 30 June 2008 respectively. By failing to take reasonable steps to comply with s 82 on or about each of those dates, the Respondents each contravened s 84(1) of the Act. These contraventions were admitted by the Respondents. It is appropriate that the Court make declarations of contravention of s 84(1) of the Act in relation to Triton, Cherchem and Adzparadox.
[20]
Alleged contraventions of s 109(1A) by failing to deal with entities in arm's length manner
52 The Respondents, as trustees of the Fund, failed to obtain payment of interest at 30 June each year on the CMS / Cherchem loan and the loans to Triton and Adzparadox: see [35] above. Their failure constituted a contravention at about that date each year. Accordingly, the Respondents contravened s 109(1A) of the Act because they failed to deal with the three entities which owed the loans in an arm's length manner: see [16] above. These contraventions were admitted by the Respondents.
53 It is appropriate that the Court make declarations of contravention of s 109(1A) of the Act in relation to Triton, CMS, Cherchem and Adzparadox. However, I have amended the form of a number of the declarations sought by the Applicant as follows:
1. in relation to CMS in the income year ended 30 June 2005, the declaration of contravention is limited to a failure to obtain interest. There was no evidence to suggest that interest was capitalised in that year;
2. in relation to Adzparadox in the income year ended 30 June 2006, the declaration of contravention includes a failure to document the loan but is otherwise limited to a failure to obtain interest. There was no evidence to suggest that interest was capitalised in that year; and
3. in relation to Adzparadox in the income years ended 2007 and 2008, the declaration of contravention includes a failure to document the loan.
[21]
Alleged contraventions of s 62(1) by failing to maintain the Fund for a purpose under s 62(1)
54 Section 62(1) provides that a trustee must ensure that a fund is maintained solely for one or more of the core purposes set out in s 62(1)(a) or for a combination of one or more of those purposes and one or more of the ancillary purposes set out in s 62(1)(b): see [8] above. By making each of the loans to Triton, Cherchem and Adzparadox, and by failing to obtain payment of interest on those loans, the Respondents gave effect to a different purpose, namely to provide financial assistance to each of those companies. This was a contravention of s 62(1) of the Act. These contraventions were admitted by the Respondents. It is appropriate that the Court made declarations of contravention of s 84(1) of the Act in relation to Triton, Cherchem and Adzparadox.
[22]
SERIOUSNESS OF THE CONTRAVENTIONS
55 Under s 196 of the Act, the Court is empowered to make a "civil penalty order" on application by the Regulator or a delegate of the Regulator where the Court is satisfied that a person has breached a civil penalty provision of the Act. Section 10(1) of the Act defines a "civil penalty order" as a declaration or order made under s 196. The Applicant seeks a number of declarations under s 196.
56 In addition to the declarations, the Applicant submitted that the contraventions are "serious" within the meaning of s 196(4) of the Act and that the Court should impose monetary penalties on each Respondent under s 196(3) of the Act.
57 In Raelene Vivian, suing in her capacity as Deputy Commissioner of Taxation v Robert Burley Fitzgeralds [2007] FCA 1602, two trustees removed funds totalling about $150,000 from a self-managed superannuation fund in contravention of ss 62(1) and 65(1) of the Act. The trial judge accepted the applicant's contention that the contraventions were serious and identified the following considerations as significant:
1. The "immediate" object of the Act is to make provision for the prudent management of regulated superannuation funds: Fitzgeralds at [41];
2. The "long-term object envisaged by the Parliament" is to "encourage Australians that they must make provision for their retirement, and to do that by conferring taxation benefits in return for responsible management of funds": Fitzgeralds at [41]; see also Australian Prudential Regulation Authority v Holloway (2000) 45 ATR 278 at [10] where Mansfield J referred to this object in regard to the in-house asset rule as follows:
Submission by a superannuation fund to be a regulated superannuation fund under the [Act] carries with it eligibility for concessional taxation treatment. Each of the relevant superannuation funds by their trustees elected to become regulated superannuation funds under s 19 of the [Act]. Part 8 of the [Act] sets out rules about the level of in-house assets of regulated superannuation funds. Its intent is clearly to ensure that the investments of a regulated superannuation fund should not be exposed to the vagaries of the business of the employer-sponsor ...
3. In the same way, ss 62 and 65 "can be seen to have a role to play in ensuring that the assets of the fund are indeed available for their members as and when they become eligible in terms of the governing deed, as opposed to being prematurely accessed for unauthorised purposes": Fitzgeralds at [42];
4. that Parliament perceives superannuation funds for the retirement of Australians to be of such importance is expressly recognised by the fact that regulated superannuation funds are exempted from property which may be divisible amongst creditors on a bankruptcy: s 116(2)(d)(iii)(A) of the Bankruptcy Act 1966 (Cth); and
5. the contraventions were not trifling or insignificant, and they were deliberate. While the funds involved were not sizeable, having regard to what one might apprehend to be much larger independently managed funds, nonetheless all the assets of the fund were effectively "stripped out".
58 In Olesen v Eddy [2011] FCA 13, a similar approach was adopted where the removal of funds totalling $75,570 from the relevant self-managed superannuation fund was held to be "serious" within the meaning of s 196(4) of the Act: see also Olesen v MacLeod [2011] FCA 229 at [39]-[51].
59 What then is the position here? In my view, the contraventions were serious.
60 The contraventions were deliberate, repetitive and took place over a period of more than three years. Throughout the entirety of the period of contraventions, the market value ratio of the Fund's in-house assets (as against the total value of the Fund's assets), while varying from time to time, significantly exceeded the maximum permissible market value ratio of 5%: see [41] above. From 40.3% as at 30 June 2005, up to 98% as at 30 June 2006, dropping slightly to 85.52% as at 30 June 2007 and rising again to 94.42% as at 30 June 2008: see [41] above. By 30 June 2008, (the end of the contravening period), the bank account balance of the Fund was reduced to $915.80.
61 Further, the contraventions did not occur as a result of ignorance. At all material times, the Respondents were aware of their obligations as trustees of the Fund, including the obligations not to exceed the 5% market value ratio in respect of in-house assets, to prepare a written plan to reduce the level of in-house assets, to make and maintain investments of the Fund at arm's length and to ensure that the Fund was maintained for one or more of the permitted purposes under s 62(1) of the Act. The Respondents were generally aware that they were in breach of the Act. Most significantly, they had previously been found to be in breach of the Act as a result of the First Audit in 2006 in respect of the 2004 income year and provided an enforceable undertaking in relation to those breaches of the Act.
[23]
Do SECTIONS 221 AND/OR 323 OF THE ACT APPLY?
62 Under s 221(2) of the Act, if it appears to the Court in a proceeding for a contravention of a civil penalty provision that:
... the person has, or may have, contravened a civil penalty provision but that:
(a) the person has acted honestly; and
(b) having regard to all the circumstances of the case, the person ought fairly to be excused for the contravention,
the court may relieve the person either wholly or partly from a liability to which the person would otherwise be subject, or that might otherwise be imposed on the person, because of the contravention.
(Emphasis added.)
63 Section 323 of the Act also provides a defence to a civil penalty proceeding. It provides relevantly:
(2) Subject to subsection (4), in proceedings against a person (the defendant) in respect of a contravention, it is a defence if the defendant establishes:
(a) that the contravention was due to reasonable mistake; or
(b) that the contravention was due to reasonable reliance on information supplied by another person; or
(c) that:
(i) the contravention was due to:
(A) the act or default of another person; or
(B) an accident; or
(C) some other cause beyond the defendant's control; and
(ii) the defendant took reasonable precautions and exercised due diligence to avoid the contravention.
…
(3) For the purposes of the application of subsection (2) to the defendant, a reference to another person does not include a person who was, at the time when the contravention occurred:
(a) in any case - a servant or agent of the defendant; or
(b) if the defendant is a body corporate - a director, servant or agent of the defendant.
(4) If a defence provided by subsection (2) involves an allegation that a contravention was due to:
(a) reliance on information supplied by another person; or
(b) the act or default of another person;
the defendant is not entitled to rely on that defence unless:
(c) the court grants leave; or
(d) both:
(i) the defendant has served on the person by whom the proceedings were instituted a written notice giving such information:
(A) that would identify, or assist in the identification of, the other person; and
(B) as was then in the defendant's possession; and
(ii) that notice is served not later than 7 days before the day on which the hearing of the proceedings begins.
64 The Respondents sought to rely upon one or both of s 221 and s 323 of the Act in relation to the contraventions. Section 323 of the Act provides defences in respect of a contravention. Each defence requires the defendant to establish some form of reasonableness on his or her part, namely reasonable mistake, reasonable reliance on information supplied by another person, or the taking of reasonable precautions and due diligence to avoid the contravention: see subs 323(2)(a), (b) and (c)(ii) of the Act. If s 323 applies, it precludes the making of a declaration of contravention and the imposition of a civil penalty in respect of what would otherwise have been a contravention.
65 Section 221 of the Act is different. It empowers the Court to relieve a person, either wholly or partly, from a liability to which a person would otherwise be subject, in circumstances where that person has acted honestly and ought fairly to be excused. It is similar to ss 1317S and 1318 of the Corporations Act 2001 (Cth) (the Corporations Act). In the context of ss 1317S and 1318 of the Corporations Act, whether a declaration of contravention is a "liability to which a person would otherwise be subject" which may be relieved against has been considered but not resolved: see Australian Securities and Investments Commission v Healey (No 2) [2011] FCA 1003 at [96]-[97]. In the context of the Act, Yates J in Dolevski v Hodpik Pty Ltd [2011] FCA 54 dismissed an application for declarations and civil penalties under s 323 and, to the extent that s 323 did not apply, under s 221 of the Act. The Commissioner accepted that the application in Dolevski having been dismissed in its entirety, the implication was that s 221 extends to relieving a person against the making of declarations of contravention against him or her: Dolevski at [64]-[74]. For those reasons, I will proceed to apply s 221 of the Act as if it extends to relieving a person against the making of declarations of contravention against him or her.
66 It is necessary to consider separately the contraventions in relation to each related party.
67 First, Adzparadox. The Applicant accepted, and I find, that Mr Parker was given advice by Mr Chris Kemp of Lifewealth Partners Pty Ltd that the investment in Adzparadox was not an investment in a related party. That advice appears to have been based (at least in part) on the erroneous view that because in the 2006 income year the Respondents were not working in the business of Adzparadox or exercising control by being directors of Adzparadox, that entity was not a related party: cf [25]-[27] above. I accept the Respondents' submission that, pursuant to s 221(2) of the Act, they acted honestly and in good faith and having regard to all the circumstances of the case, they should be relieved from the contraventions relating to Adzparadox.
68 For the sake of completeness, I also accept that the Respondents have a defence under s 323 of the Act in respect of Adzparadox having reasonably relied on the information supplied by Mr Kemp: s 323(2)(b) of the Act. Further and alternatively, I accept that the reliance by the Respondents on that advice was a reasonable mistake for the purposes of s 323(2)(a) of the Act.
69 I will deal with Cherchem and then Triton. In relation to Cherchem, the Respondents again submitted that they acted honestly and in good faith in relation to each of the transactions giving rise to the contraventions. In support of that contention, the Respondents relied upon the following facts and matters:
1. during 2007, seven working capital loans totalling $115,000 were made, of which $107,700 was repaid: see [29]-[30] above; and
2. $100,000 of the $107,700 was reinvested in assets owned by the Fund: see [31] above.
70 In relation to Triton, the Respondents submitted that they acted honestly and in good faith in relation to each of the transactions giving rise to the contraventions. In support of that contention, the Respondents relied upon the following facts and matters:
1. from 2001 to 2005, Triton was prosecuted by the Australian Competition and Consumer Commission. Its defence was unsuccessful. A penalty of $1 million was imposed and it was ordered to pay costs of more than $200,000. Triton's own legal costs exceeded $1.5 million and the company's assets were exhausted. Triton was unable to fund an appeal;
2. in the 2005 income year, the Fund advanced $185,000 to Triton to cover legal costs with the intention that the loan would be (as it was) repaid in that income year. Mr Parker erroneously believed that it was allowable to make short term loans provided the loan was repaid in the same financial year and so long as the in house-assets were below the allowable maximum at balance date. It is important to recall that all but $65,000 of this loan was not a relevant contravention of the Act because the advances were made outside the limitation period;
3. from July to December 2005, further sums totalling $195,538 were advanced to Triton but were unable to be repaid; and
4. in October 2006, Triton was wound up for non payment of the penalty of $1 million.
71 In addition to those specific facts and matters, the Respondents also relied on the following matters of a more general nature:
1. the loans were made to help meet the financial obligations of Triton and Cherchem with the intention of repaying the loans in full;
2. of the 14 separate loans made from 2004 to 2007, 10 were repaid, three Triton loans were not repaid and a balance of $7,300 remains outstanding on a $15,000 loan to Cherchem;
3. all loans were transacted by Mr Parker, not Mrs Parker. Mrs Parker was aware of the fact of the loans having been made but was not aware of the number or value of the loans until the Second Audit; and
4. at no time, did the Respondents disguise or seek to disguise the fact the loans had been made and declared the loans to the auditor each year.
72 Having regard to all the circumstances of the case (including the matters referred to by the Respondents), I reject the Respondents' submission that pursuant to s 221(2) of the Act they should be relieved from the contraventions relating to Cherchem or Triton. I am not satisfied that they each acted honestly and in good faith. Moreover, I reject the Respondents' submissions that they each had a defence to the contraventions under s 323 of the Act. I do not accept that any of these contraventions was a reasonable mistake, was due to reasonable reliance on information supplied by another person or otherwise fell within s 323(2)(c) of the Act. The Respondents were aware of their obligations as trustees of the Fund, and were aware of their breaches of the Act. They had previously been found to be in breach of the Act and had provided an enforceable undertaking in respect of those breaches: see [60] and [61] above.
[24]
MONETARY PENALTY
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].
74 In the present case, there are numerous contraventions of civil penalty provisions by each of the Respondents. The maximum penalty for a contravention of a civil penalty provision is 2000 penalty units (s 196(3)), which equates to $220,000 when read with s 4AA of the Crimes Act 1914 (Cth).
75 It was common ground that, in the circumstances of this case, it would not be appropriate to treat all of the contraventions as each separately attracting a penalty. The Court must ensure that the total penalty does not exceed what is proper for the conduct of the Respondents in respect of all the contraventions (the totality principle): Holloway (2000) 45 ATR 278 at [19]. Further, the Court must have regard to whether, or the extent to which, particular instances of contravening conduct was 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)]. In all the circumstances, I accept the Applicant's submission that it is appropriate for the Court to take a global view of the contraventions and to impose a single monetary penalty on each Respondent.
76 The next question is how to quantify the Respondents' contravening conduct. I will deal with each contravention in turn.
[25]
Contraventions of s 84(1) of the Act (by reference to s 83 of the Act).
77 The Applicant submitted that there were two ways of quantifying the Respondents' contravening conduct. The first was by asking: what advances made from the Fund are to be treated as having made in breach of the s 84(1) (by reference to s 83)? The answer is all of the advances made by the Fund within the six year limitation period to CMS / Cherchem and Triton during 2005-2008 were made in breach of s 84(1) of the Act (by reference to s 83 of the Act). The total of such advances (in nominal terms, net of interest and repayments) was $375,538.
78 The second was by asking: what amounts were put at risk during the course of the contravening conduct? As at 30 June 2008, a total of $372,360 had been put at risk as a result of the contraventions, made up as follows:
Name of Entity Description Amount
Triton Principal amount of loans to Triton (see [28.5-28.7] and [34] above): $195,538
Capitalised interest at 8% to 30 June 2006 (rounded to nearest $100): $15,200
Outstanding principal and interest at time of appointment of liquidator: $210,738
Carry forward to 30 June 2008: $210,738
CMS / Cherchem Principal amounts of loans to CMS and Cherchem (see [29] and [34] above): $140,000
Capitalised interest at 8% to 30 June 2008 (rounded to nearest $100): $21,600
Outstanding principal and interest as at 30 June 2008: $161,622
Total $372,360
[26]
Contraventions of s 109(1A) of the Act
79 The amounts lost to the Fund in respect of these contraventions are the amounts of interest on the loans to each company as at the end of each financial year, calculated at 8% per annum by reference to the amounts of principal debts outstanding. These are included in the figures at [78] above.
[27]
Contraventions of s 62 of the Act
80 These contraventions arise out of the same facts and circumstances that give rise to the s 84(1) contraventions. The same calculations apply: see [77]-[78] above.
[28]
Amount at Risk and size of penalty
81 The total amount of funds put at risk in this period (excluding the amounts invested in Adzparadox), as a result of the contraventions of the Act, was $372,360. Of that amount, $260,660 was not recovered and therefore lost: see [34] above.
82 The Applicant submitted that the Court should impose a total penalty of about 20%-25% of the funds put at risk in breach of the Act over the period from May 2005 (inclusive) to the end of the 2008 financial year. The total was $372,360: see [78] above. The penalties sought by the Applicant therefore ranged from $74,472 to $93,090. Of course, not all the funds put at risk were lost. As noted above, $260,660 was not recovered.
83 The Applicant further submitted that two-thirds of the total penalty amount should be paid by the First Respondent and one-third by the Second Respondent. The Applicant submitted that this apportionment was reasonable having regard to the evident dominant role played by the First Respondent in managing and controlling the Fund.
84 What then is the appropriate penalty? The Respondents submitted that in addition to the more limited role played by the Second Respondent and that the contraventions should be treated as a single event for penalty purposes, a Court should also take into account that the ATO has already issued the assessments (see [48] above), that those assessments are to be borne by the Respondents and that they have a limited financial capacity to pay any penalties imposed.
85 The Applicant, however, submitted that the fact that the ATO had already issued the assessments was relevant only insofar as it bore upon the Respondents' financial position - a matter the Court should have regard to in determining the appropriate penalty. I accept that submission. Neither the assessments issued, nor the notice of non compliance issued under s 40 of the Act, were punitive or intended to fulfil the functions of monetary penalties imposed under s 196 of the Act. As these reasons for decision demonstrate, 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.
86 In the circumstances of this case and having regard to all the facts and matters identified above, I consider that a monetary penalty of $35,000 should be imposed on the First Respondent, and a monetary penalty of $15,000 should be imposed on the Second Respondent. In the particular circumstances of each of the Respondents, such penalties strike an appropriate balance between deterrence (specific and general) and penalty for the contravening conduct without being oppressive. The penalty should be paid within 30 days, or by such time and by such instalments as the District Registrar may allow.
87 The last issue is the question of costs. The Applicant sought payment of its costs fixed in the sum of $25,000. He adduced no evidence of his costs. In the circumstances, I will order the Respondents to pay the Applicant's costs fixed in the nominal amount of $5,000, such costs to be paid on the same terms as the monetary penalties.
I certify that the preceding eighty-seven (87) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gordon.