TAXATION - Withdrawal of funds from superannuation fund contrary to Superannuation Industry (Supervision) Act 1993 (Cth) and the Superannuation Industry (Supervision) Regulations 1994 (Cth) - claimed that this arose due to incorrect advice from an agent - assessment under section 304-10 of the Income Tax Assessment Act 1997 (Cth) - whether discretion in subsection 304-10(4) should be exercised - Commissioner's decision affirmed

SUPERANNUATION - penalties - whether penalties should be remitted pursuant to section 298-20 of Schedule 1 to the Taxation Administration Act 1953 (Cth) - Commissioner's decision set aside and penalties remitted in full

Acts Interpretation Act 1901 (Cth) s 15AA

Administrative Review Tribunal (Consequential and Transitional Provisions No. 1) Act 2024 (Cth)

Administrative Review Tribunal Act 2024 (Cth) s 70

Income Tax Assessment Act 1936 (Cth) former s 26AFB

Income Tax Assessment Act 1997 (Cth) Division 301, Division 302, ss 301-35; 304-10

Superannuation Industry (Supervision) Act 1993 (Cth) ss 31, 34, 65, 126A, 166, 169

Superannuation Industry (Supervision) Regulations 1994 (Cth) regs 6.01, 6.17

Taxation Administration Act 1953 (Cth) s 14ZZK, Schedule 1, ss 284-75(6), 298-5, 298-20

Tax Laws Amendment (Simplified Superannuation) Act 2007 (Cth)

Brazil v Federal Commissioner of Taxation [2012] AATA 192

Brooks v Federal Commissioner of Taxation [2019] AATA 1236

Commissioner of Taxation v Ross [2021] FCA 766

Drake v Minister of Immigration and Ethnic Affairs [1979] FCA 39

Drake v Minister for Immigration and Ethnic Affairs (No.2) [1979] ALD 634

Mason v Federal Commissioner of Taxation [2012] AATA 133

Peach v Federal Commissioner of Taxation [2012] AATA 781

Project Blue Sky v Australian Broadcasting Authority (1998) 194 CLR 55

Sinclair v Federal Commissioner of Taxation [2012] AATA 634

Smith v Federal Commissioner of Taxation [2011] AATA 563

Vivian (Deputy Commissioner of Taxation (Superannuation)) v Fitzgeralds (2007) 51 ATR 834

Vuong v Federal Commissioner of Taxation [2014] AATA 402

Wainwright v Federal Commissioner of Taxation [2019] AATA 333

Xiu Xu v Federal Commissioner of Taxation [2013] AATA 855

Yrorita v Federal Commissioner of Taxation [2012] AATA 716

Australian Taxation Office Practice Statement Law Administration PS LA 2020/3 Self-managed superannuation funds - administrative penalties imposed under subsection 166(1) of the Superannuation Industry (Supervision) Act 1993

Australian Taxation Office draft Practice Statement Law Administration PS LA 2021/D3 Superannuation - Commissioner's discretion where members receive benefits in breach of legislative requirements

Explanatory Memorandum to the Superannuation Legislation Amendment Bill (No 4) 1999 (Cth)

Explanatory Memorandum to the Tax Laws Amendment (Simplified Superannuation) Bill 2006 (Cth)

Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 4) 1987 (Cth)

1. This case is about amended assessments issued to each of the Applicants[1] in relation to the 2019 income year.[2]
2. This case focuses on two issues:

(a) Whether the Applicants have met their burden of proof[3] to demonstrate that discretion in subsection 304-10(4) of the Income Tax Assessment Act 1997 (Cth) ("ITAA 1997") should be exercised. Particularly, whether the Tribunal should be satisfied from the evidence that it is unreasonable for an amount calculated pursuant to section 304-10 to be included in each Applicant's assessable income having regard to the nature of the fund and any other matter considered relevant. > > (b) Whether the Applicants have met their burden of proof to demonstrate that penalties imposed upon the Applicants should not have been imposed or should be remitted in accordance with section 298-20 of Schedule 1 to the Taxation Administration Act 1953 (Cth) ("TAA"). [4]

(a) It is not satisfied that it is appropriate to exercise the discretion in subsection 304-10(4) of the ITAA 1997. > > (b) The Applicants have met their burden of proof to demonstrate that penalties should be fully remitted.

FACTUAL BACKGROUND AND EVIDENCE BEFORE THE TRIBUNAL

Evidence in one proceeding is evidence in the other

1. It should be noted at the outset that the second Applicant did not appear at the hearing for serious reasons, and that is accepted by the Tribunal. It was accepted by all parties that evidence in relation to and from the first Applicant would be taken to be evidence in relation to the second Applicant.[5]

Background - Engaging Mr W[6] and establishing a self-managed superannuation fund

1. The factual background is not substantially disputed and is set out below, including by reference to witness evidence at the hearing.
2. The Applicants are a retail worker[7] and a teacher. The Applicants were developing a property into two townhouses in 2018. The builder that was engaged to assist went into liquidation and failed to complete the work.[8] The first Applicant said in evidence before the Tribunal that he estimated the Applicants lost about $300,000 as a result of the builder's liquidation and there were additional holding costs relating to the property that arose as well. It appears there remained a lot of work to be done despite the builder being paid to do it, as the first Applicant said that the frame, the steel trusses, and all related work all remained to be completed. It is understood that the development was undertaken by the Applicants in their own names in partnership with their children.[9]
3. The Applicants sought additional funding from their broker PFG ("broker") to complete the work so they could sell the townhouses and recover some costs. The first Applicant said in evidence that they also approached banks. There was no evidence as to which banks, nor what happened to the possibility of bank funding.
4. The Applicants were referred to Mr W by the broker. The Applicants understood from their broker that Mr W had experience in advising clients about one-off construction and development activities.[10] At the time, Mr W was a registered tax agent. Effective from 2022 Mr W was deregistered by the Tax Practitioners' Board for giving false statements to the Board when he declared he had no overdue personal tax obligations, and also because he did not comply with taxation laws in the conduct of his personal affairs.[11]
5. The first Applicant had a telephone conversation with Mr W initially. The first Applicant said in evidence that they explained the problem they were facing in completing the construction to Mr W and arranged to have a meeting.
6. Both Applicants then met with Mr W around October or November 2018 and explained their problem. The first Applicant said they were advised by Mr W that a self-managed superannuation fund ("SMSF") could be set up by them, and they could access a part of the funds in their existing superannuation funds and transfer those funds to the SMSF. They understood from their discussions with Mr W that the SMSF could then use those funds to complete the work developing the townhouses.[12] The Applicants were provided an article by Mr W[13] entitled "Can an SMSF invest in property development?" which they took away and the Applicants were also shown a website at the meeting (it was not clear what)[14] which the first Applicant said in evidence confirmed to him Mr W's advice.
7. The Applicants did not make a decision straight away about establishing a SMSF, but discussed it. Mr W followed them up by phone. The Applicants said they were told on that phone call that the SMSF needed to be set up urgently, but they did not know why and seemed not to question this.[15] The Applicants then agreed to proceed, and by letter dated 12 December 2018, the Applicants instructed Mr W to establish a SMSF[16] with the Applicants "as Joint Trustees". The first Applicant said that Mr W drafted the letter dated 12 December 2018, put it before them, and the Applicants simply signed it. On or around 19 January 2019 a corporate trustee ("the Trustee") was established with the Applicants as directors[17] (so the Applicants were not "joint trustees") and the SMSF relevant to this case was established by Trust Deed.[18]
8. The first Applicant said he relied upon what he was told by Mr W, that the article was briefly considered in discussions with Mr W in person, he was told that "it was complicated," but he understood it was possible to access funds in the manner described. He said he felt there was no need to question Mr W's advice as he was a professional, and at no time did he think the steps he took were contrary to the law. He said the second Applicant thought the same. He said in evidence that had they known the correct position, the Applicants would never have taken the steps they did.

Rollover of funds to the SMSF and withdrawal of funds

1. After the SMSF was established, the Applicants withdrew funds from their respective superannuation funds (Mercer and VicSuper) totalling in aggregate $380,000, and deposited those funds into the SMSF bank account.[19] The first Applicant said in evidence that this had to be done by each Applicant obtaining a cheque from their pre-existing superannuation funds, and then depositing that cheque in the SMSF's bank account. The Applicants had to be engaged personally in doing this.
2. Between 13 February 2019 and 28 April 2019 $380,000 of the funds in the SMSF were transferred to the Applicants' joint bank account.[20] Neither Applicant was at preservation age nor did either Applicant meet any of the other conditions of release.[21] The first Applicant said in evidence that the Applicants used the funds that were transferred to their joint account to complete the property development. There was no evidence about what happened to the property development after that. The Commissioner says some of the withdrawn funds were deposited into other bank accounts.[22]
3. In cross-examination, the first Applicant acknowledged the following:

(a) He did not read the article Mr W provided him beyond the first page (potentially), and instead the Applicants both relied upon what they were told by Mr W. The first Applicant said he still has not read the article. > > (b) Mr W did not provide any written advice to the Applicants. The first Applicant said he did not consider this unusual. He said he had no reason to question Mr W's advice given to him in person. Mr W was a professional adviser. Mr W was older than the Applicants and had been in the advisory business some time, so he had experience. > > (c) Mr W assisted the Applicants to establish the bank account for the SMSF,[23] instructed the service providers that established the Trustee[24] and the SMSF Trust Deed,[25] and arranged everything other than the actual transfer of the funds from their former superannuation funds to the SMSF which the Applicants had to do themselves. > > (d) The Applicants did not read the Trust Deed,[26] the constitution of the Trustee,[27] nor any of the other documents that Mr W presented to them (such as the consent to be a director and an application for the ABN)[28] for signing. They relied upon Mr W's advice that this was what was required and merely signed what was presented. The first Applicant said he did not feel it was necessary to read all of the material. They trusted and relied upon Mr W. The first Applicant said that they still have not read the material.

4. On or around 28 February 2019 a dispute arose between the Applicants and Mr W over fees. The Applicants describe Mr W as "demanding $10,000" as "commission" from each of them.[29] The first Applicant said this level of fees had not been discussed with the Applicants and they refused to pay it. The relationship with Mr W was terminated by way of an email from the first Applicant to Mr W dated 28 February 2019.[30] The first Applicant said that while he was disgruntled in relation to the fees that Mr W charged, he had no reason to think that Mr W's advice was wrong or unlawful. He said there were no "alarm bells." There is a vague (after the event) handwritten note on the T documents setting out what the Applicants say happened.[31]
5. The first Applicant also said in evidence that he engaged a new tax agent solely for the Applicants' individual tax returns, and did nothing further in relation to the SMSF as he did not think it was necessary. He understood the SMSF was not operating. What is confusing about that evidence is that the Applicant also said withdrawals occurred from the SMSF after Mr W's services were terminated (i.e., up to 28 April 2019), so there were assets in the SMSF and the SMSF was operating after February 2019 or early March 2019 when the new tax agent was (presumably) engaged. The Tribunal understands the Applicants to have assumed that once the funds were withdrawn from the SMSF there was nothing further to do.
6. No tax returns were filed for the SMSF, and the Applicants each filed their income tax returns without including the amounts withdrawn from the SMSF.[32]

Engagement between the Applicants and the Commissioner

1. On 11 December 2020[33] the Commissioner directed a letter to the Trustee because the SMSF had not filed any returns, advising that the Trustee was removed from Super Fund Look Up which meant it could not accept any rollovers or super guarantee payments. The SMSF was given until 5 February 2021 to file the overdue returns.
2. The first Applicant said in evidence that he called the Commissioner on 23 December 2020, which he said was the date or around the date he received the letter. He said Mr W had told him to send a letter telling the Commissioner to cancel the ABN issued to the Trustee and to advise that the SMSF had not been legally established. He said he had previously sent that letter and explained that to the Commissioner on 23 December 2020. He was asked to resubmit that and sent a document dated 23 December 2020[34] which was to that effect. In cross-examination, the first Applicant said he understood the SMSF was not properly legally established because it had no assets.
3. The first Applicant then called the Commissioner again on 11 January 2021 to make sure that the Commissioner had received the correspondence he had sent. He understood from that call that the SMSF ABN would be cancelled within 28 days. He also contacted the Australian Securities and Investments Commission ("ASIC") to deregister the Trustee, and received letters to that effect from ASIC on 19 March 2021[35] and 19 May 2021.[36]
4. About 18 months later, the Commissioner called the first Applicant, and the first Applicant returned that call on 23 January 2023. The Commissioner's phone note of that call was put to the Applicant.[37] It was entirely appropriate to put that phone note to the Applicant, and the Tribunal accepts this note is a business record. However, the Tribunal noted that Mr Rees did not at any stage ask the first Applicant whether the phone note was an accurate record of the call. That question should have been put for the cross-examination on this note to be completely fair. Of course, Mr Egan did not ask this either and the first Applicant accepted he had said the statements recorded on the phone note, so the point is not of huge significance in light of that.
5. The Commissioner's phone note is not good news for the Applicants when the Tribunal is assessing the first Applicant's credibility. It records a number of statements were made by the first Applicant to the Commissioner that were not correct. Those statements included denying that funds were withdrawn from the SMSF for personal use, stating that there was never any money in the SMSF, stating the SMSF had no bank account, stating he had not undertaken real estate business at all, and stating that no funds from his former Mercer superannuation fund were rolled into the SMSF. The phone note records that the first Applicant was challenged on that last point by the relevant official engaged in the call. The note records the first Applicant said he would look into it. It would be fair to say that Mr Rees spent a lot of time at the hearing asking questions about this phone note for glaringly obvious reasons.
6. In his evidence at the Tribunal, the first Applicant accepted he did not make correct statements on the call at issue but also said it was some time ago. The first Applicant explained he made incorrect statements because he really did not know who he was talking to, and was not certain it was the Commissioner. He said he also thought it had all been dealt with in 2021, he was reluctant to answer personal questions, and he was suspicious there was some sort of scam. He reiterated that he thought at the time that what he had done with Mr W was lawful. These submissions are consistent with the "Contentions" part of the Applicants' SFIC.[38] Mr Rees pointed out to the first Applicant that despite thinking this was a scam, the first Applicant gave his address and contact details which might be considered to undermine his explanation that he was concerned about a scam. The Applicants' Closing submits that the first Applicant was not deceptive, and because of his discomfort about who he was talking to, he merely did not "provide fulsome answers to the ATO's questions."[39]
7. It is hard to accept the first Applicant's explanation for the statements recorded on the Commissioner's phone note. In his evidence before the Tribunal, he appeared to accept he said those statements, or they were said to him. It is difficult to understand how a scammer would have received information about funds being rolled over from Mercer to the SMSF as the phone note records the official put to the first Applicant. In addition, from the phone note, at no point did the first Applicant raise his concerns about the person he was speaking to so he could get clear evidence that he was engaging with the Commissioner. It is hard to see why the first Applicant answered questions at all if he felt in the manner he explained.
8. Even taking into account that there may be some inaccuracies in the phone note, from the first Applicant's evidence before the Tribunal, the Tribunal has concluded that the first Applicant misled the Commissioner on 23 January 2023. It was not a case of a lack of fulsome answers as the Applicants' Closing suggests, rather answers were provided that were incorrect and the first Applicant knew they were incorrect. It is obvious that it is not acceptable to mislead the Commissioner. The significance of what the first Applicant said may, to some degree, be reduced if the misleading statements are promptly corrected. The first Applicant said that after the phone call he engaged a lawyer. Shortly after the call, as described below, the Applicants were fully open with the Commissioner and explained the correct background facts.
9. Soon after that call the Commissioner directed a letter dated 25 January 2023 to the Applicants advising that the SMSF was under audit and requesting information.[40] By letter dated 1 March 2023 the Applicants set out the background to the SMSF, including all of the above facts about the steps they had taken and Mr W's advice, and providing the information the Commissioner requested.[41] The Tribunal accepts this was a fairly prompt correction of the misleading statements previously made by the first Applicant on the 23 January 2023 call.[42] That letter included comments describing what had occurred as the Applicants being "negligently advised by [Mr W]" being "victims of negligent advice", Mr W's conduct was described as "abhorrent", and the Applicants are described as having "relied on the advice of [Mr W] in good faith." [43] The Applicants' SFIC seems in some respects to be a cut and paste from this letter.[44] The Applicants' Closing describes the Applicants as being "everyday Australians" who were "led astray" by the advice of Mr W.[45] The Commissioner's position is that it is not clear what Mr W's advice was, including whether it was incorrect or not,[46] but in its objection decision the Commissioner suggests it may accept there was incorrect advice.[47]
10. Despite the Applicants' submissions and serious allegations about Mr W's advice, when asked directly by the Tribunal, the first Applicant acknowledged that he had not considered making a claim against Mr W for professional negligence. The Applicants' Closing says that this is "immaterial" and there are a number of reasons why the Applicants might not pursue such action. Those reasons include the difficulty of calculating loss, that Mr W may have no assets, that action could be fruitless, and that any insurance Mr W might have might vigorously defend the claim.[48] This matter is considered further below.
11. Mr W was not called to give evidence and provided no witness statement. The evidence of his advice is as given in witness evidence by the first Applicant and in both Applicants' Witness Statements. It would have been sensible for at least an email to be sent outlining the Applicants' understanding of what the advice was, and seeking Mr W to correct any misunderstanding. That did not occur. However, in saying that, for reasons specified below, I do not accept the Commissioner's Submissions that it is "highly unusual" for there to be no written advice in such "complex transactions."[49]
12. Further correspondence between the Commissioner and the Applicants included a letter dated 4 May 2023 from the Commissioner advising the Applicants of potential penalties, assessments and disqualification,[50] and further information provided by the Applicants on 2 June 2024.[51]
13. The result was the Commissioner's Notice of Disqualification to each of the Applicants dated 5 July 2023[52] and Reasons for Decision[53] to issue amended assessments to each Applicant imposing tax pursuant to section 304-10 of the ITAA 1997. Penalties were also imposed. Notices of administrative penalty were issued on 5 July 2023.[54] Amended assessments were issued for the 2019 year on 13 July 2023.[55]
14. Each of the Applicants objected to the amended assessments and penalty assessments on 30 August 2023.[56] Those objections were each disallowed on 23 May 2024.[57] Each Applicant filed an application for review in this Tribunal[58] on 22 July 2024.[59]
15. The first Applicant appropriately acknowledged that he and the second Applicant are now aware that what the Applicants did was wrong, and the superannuation they withdrew from their original funds was unlawfully distributed.[60] The Applicants' Closing acknowledges that it is not disputed that the Applicants' actions contravened the Superannuation Industry (Supervision) Act 1993 (Cth) ("SIS Act") - particularly by not meeting prescribed operating standards and contravening the prohibition on lending or giving financial assistance to a member of a fund.[61]

ISSUE 1: WHETHER THE DISCRETION IN SUBSECTION 304-10(4) OF THE ITAA 1997 SHOULD BE EXERCISED

1. The Applicants submit that subsection 304-10(4) should apply in the circumstances because:

(a) Subsection 304-10(4) is not narrow in scope, and the "crushing taxation consequences" of section 304-10 can be militated by exercising the discretion in circumstances beyond those specified in the Commissioner's draft practice statement PS LA 2021/D3 Superannuation - Commissioner's discretion where members receive benefits in breach of legislative requirements ("PS LA 2021/D3").[62] > > (b) PS LA 2021/D3 is not consistent with the statutory language and is in draft so should not be relied upon.[63] > > (c) The Applicants' case has similarities to Wainwright v Federal Commissioner of Taxation [2019] AATA 333 ("Wainwright"), particularly the consequences of financial hardship and the Applicants' reliance on external advice.[64] > > (d) Other case law is distinguishable due to the Applicants' hardship, lack of sophistication and reliance on external professional advice. The Applicants were not in effective control due to their reliance on Mr W. The Applicants only drew on funds for financial hardship reasons and not to pay day to day expenses.[65] Hardship is relevant.[66] > > (e) Exercising the discretion does not mean that no tax applies on the withdrawn superannuation benefits. Instead, section 301-35(2) of the ITAA 1997 may apply to tax the benefits at 20% or Divisions 301 and 302 of the ITAA 1997 need to be considered.[67]

2. The Commissioner submits that section 304-10(4) should not apply because:

(a) The Applicants' case is that it is the errant advice of Mr W that caused the issues, but the Applicants' evidence does not establish what that advice was nor that they relied upon it.[68] > > (b) The ordinary tax consequences of what they did cannot be considered "unreasonable" as required by subsection 304-10(4).[69] Factors which should be considered include that: > > > (i) The Applicants did not read the article they were provided although they had weeks to do so.[70] They still have not read that article. > > > > (ii) The article included statements such as that "[a] superannuation fund is prohibited from providing non-retirement benefits to members and related parties"[71] which is the entire problem in this case. > > > > (iii) The Commissioner considers that the Applicants' evidence as to the advice they received is mistaken, as it should be assumed that Mr W gave advice consistently with the article.[72] There are also suggestions that statements made by the first Applicant to the Commissioner on 23 January 2023 more cogently summarised the likely advice.[73] > > > > (iv) The Applicants did not read the Trust Deed establishing the SMSF nor any of the other documents. The Trust Deed included clauses that also would have put the Applicants on notice. For instance, that the SMSF cannot pay benefits contrary to law.[74] The Commissioner submitted there was no pressure to sign these documents, and also says there were three weeks prior to the first rollover where the Applicants had the opportunity to review the Trust Deed and other documents.[75] > > > > (v) There are a raft of materials available on the Commissioner's website, including material written simply and not technically. The Applicants did not make any efforts to consider that material.[76] > > (c) The Applicants were not relieved of effective control of their actions so that they had no responsibility for them.[77] Mr W was not involved in the rollovers and withdrawals, which the Applicants made. Mere reliance on a professional adviser is insufficient to alleviate the Applicants from their responsibilities. [78] > > (d) The first Applicant misled the Commissioner in the call on 23 January 2023 in order to disguise or deny what he had done.[79] > > (e) PS LA 2021/D3 is reasonable and well-founded and should be applied by the Tribunal.[80] > > (f) The consequences imposed upon the Applicants are the result of their actions and Parliament anticipated the imposition of those consequences. This cannot be considered "unreasonable." It should also be noted that penalties and the shortfall interest charge have been significantly reduced.[81] > > (g) Further, hardship is not a factor that is relevant in this case. Hardship is taken into account and enables access to superannuation benefits in some circumstances,[82] but those circumstances do not apply to the Applicants.[83] > > (h) The case law is not analogous to the Applicants. Wainwright is distinguishable, particularly because the superannuation benefit arose due the events beyond the control of the taxpayer in that case. The Applicants took the steps to withdraw the superannuation benefits themselves.[84] It is not even clear that the steps were the Applicants' last resort.

1. Subsection 304-10(1) provides that a superannuation benefit is included in the assessable income of a taxpayer if:

(a) the superannuation benefit is received by that taxpayer from a complying or previously complying superannuation fund, or the superannuation benefit is attributable to the assets of a complying or previously complying superannuation fund; and > > (b) the fund was not maintained as required by section 62 of the SIS Act or the superannuation benefit was received otherwise in accordance with the payment standards set out in subsection 31(1) of the SIS Act.

2. This provision applied to the Applicants because a superannuation benefit as defined[85] was received from the SMSF in the form of the withdrawn funds deposited into their joint account. In addition, the SMSF was not maintained as required under section 62 of the SIS Act (that is, for the sole purpose of providing superannuation benefits after retirement).[86] Further, the amounts received from the SMSF were received otherwise than in accordance with the prescribed standards set out in subsection 31(1) of the SIS Act.[87]
3. Subsection 304-10(4) of the ITAA 1997 reads as follows:

(4) However, you do not have to include the amount in your assessable income to the extent that the Commissioner is satisfied that it is unreasonable that it be included having regard to:

(a) for subsection (1) or (2)--the nature of the fund; and

(b) any other matters that the Commissioner considers relevant.

1. Subsection 304-10(4) of the ITAA 1997 has its ancestry in section 26AFA and the former section 26AFB of the Income Tax Assessment Act 1936 (Cth) ("ITAA 1936"). The language has not changed, and as was noted in Smith v Federal Commissioner of Taxation [2011] AATA 563 at [10] subsection 304-10(4) is no more than a rewrite, and the history of the predecessor provisions is relevant.
2. The legislative history was fully set out in Mason v Federal Commissioner of Taxation [2012] AATA 133, at [21] and [24]-[26]:

[21] Section 304-10 of the ITAA 1997 was inserted into the ITAA 1997 by the Tax Laws Amendment (Simplified Superannuation) Act 2007 ... The Explanatory Memorandum to the Tax Laws Amendment (Simplified Superannuation) Bill 2006,[88] which introduced the 2007 Act, relevantly states:

Superannuation benefits if there is a breach of statutory requirements

2.81 The taxation arrangements set out in relation to superannuation benefits paid from a complying superannuation fund do not apply where a superannuation fund has not adhered to requirements set out in section 62 of the Superannuation Industry Supervision Act 1993. [Schedule 1, item 1, section 304-5]

2.82 Further, these arrangements do not apply where a person receives an amount or benefit that does not meet the payment standards prescribed under subsection 31(1) or 32(1) of the Superannuation Industry Supervision Act 1993 relating to the operation of regulated superannuation funds and regulated approved deposit funds respectively. This means that where a person receives a superannuation benefit that does not meet these requirements, it must be included as part of his or her assessable income and is therefore subject to marginal tax rates. [Schedule 1, item 1, subsections 304-10(1) and (2)]

2.84 The Commissioner of Taxation ... retains discretion to provide that an amount may be excluded from a person's assessable income and treated as a superannuation benefit where the Commissioner is satisfied that it would be unreasonable not to do so. The Commissioner may have regard to the nature of the superannuation fund, where relevant, and any other matter that he or she may consider to be relevant. [Schedule 1, item 1, subsection 304-10(4)]

[24] Section 304-10 of the ITAA 1997 has evolved from the enactment of a number of similar preceding provisions of the Income Tax Assessment Act 1936 [...], namely: (i) section 26AF of the ITAA 1936, which was enacted in 1980; (ii) section 26AFA of the ITAA 1936, which was enacted in 1984, and (iii) section 26AFB of the ITAA 1936, which was enacted in 1987. Former sections 26AFA(2) and 26AFB(4) of the ITAA 1936 each contained a discretion similar to that which is provided in subsection 304-10(4) of the ITAA 1997.

[25] Former section 26AFB of the ITAA 1936 was inserted into the ITAA 1936 by Taxation Laws Amendment Act (No.4) 1987 .... The Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 4) 1987[89] ... which introduced the 1987 Amendment Act, states:

Clause 11 will insert new section 26AFB in Division 2 of Part III of the Principal Act in order to continue the policy embodied in existing sections 26AF and 26AFA designed to prevent abuse of concessions available to approved funds by payment of excessive or unauthorised benefits, following establishment of the new supervisory arrangements. The new section will ensure that where a taxpayer receives any such benefits from a fund approved by the Insurance and Superannuation Commissioner (or a fund which was formerly approved by the Insurance and Superannuation Commissioner) then the benefits will be subject to tax unless the Commissioner of Taxation is satisfied that this would be unreasonable. As noted above, this section will apply to benefits received from those funds which have at any time obtained tax exemption under section 23FC after Regulations have been made under the Standards Act embodying requirements relating to the level and nature of benefits paid.

New section 26AFB will assume the discretion currently available under section 26AFA in order to ensure that taxpayers are treated appropriately such as where loss of tax exemption by a fund may be regarded as a sufficient penalty for a breach of the relevant standards.

[26] The 1987 EM referred to the discretion in former section 26AFA(2) of the ITAA 1936, as follows:

The Commissioner has indicated that this discretion would be exercised where there are no tax avoidance implications and where the excessive benefit arose fortuitously or in other circumstances beyond the effective control of the recipient or the employer. [Emphasis added]

1. The cases on the discretion in subsection 304-10(4) and its forebears include the following relevant cases:

(a) Smith v Federal Commissioner of Taxation [2011] AATA 563 ("Smith") - the taxpayer's real estate agency was in serious financial trouble. The taxpayer lost the family home as a result of considerable expenses in legal proceedings. The taxpayer's bank advised that it would not extend credit to the real estate business, and suggested it should be put into administration. The taxpayer did not wish to do that, and she accessed a total of $87,000 from her SMSF to preserve the business. The taxpayer argued the discretion in subsection 304-10(4) was unfettered and the overall circumstances supported the view that it was unreasonable for tax to be imposed upon her under section 304-10. The Tribunal held[90] that the context in which subsection 304-10(4) appears and the history of the legislation supports the position that funds in a SMSF are not to be used as a lender of last resort. The Tribunal affirmed the Commissioner's decision.[91] > > (b) Mason v Federal Commissioner of Taxation [2012] AATA 133 ("Mason") - the taxpayer accessed funds in his SMSF early. He had not met any of the conditions of release. When considering subsection 304-10(4) of the ITAA 1997, the Tribunal held[92] that it was not "unreasonable" to include a superannuation benefit paid in breach of the legislation as there were no other consequences that arose (because the Commissioner decided to allow the SMSF to maintain its complying fund status), the taxpayer had not sought to rectify the withdrawals, to apply the discretion would undermine the deterrent effect of section 304-10, and because the superannuation benefit was not beyond the taxpayer's "effective control". > > (c) I specifically note that I agree with the Tribunal's analysis in Mason at [31]-[32]:

[31] Having regard to the above legislative history and context of section 304-10(4) of the ITAA 1997, and the use of the word "unreasonable" in the corresponding discretionary provisions in former sections 26AFA(2) and subsection 26AFB(4) of the ITAA 1936 (as described above), the Tribunal considers that it may be "unreasonable" to include a superannuation benefit paid in breach of the legislative requirements in a persons' assessable income (with the result that it is taxed at marginal tax rates) in circumstances where, for example:

(i) This would be in addition to other taxation consequences which flow from the breach. (For example, a superannuation fund no longer gets the benefit of an exemption or becomes non-compliant for the relevant tax year); and/or

(ii) The benefit arose in circumstances beyond the effective control of the recipient.

[32] However, it will not be "unreasonable" to include a superannuation benefit in a person's assessable income (to be taxed at marginal tax rates) merely because the taxation consequence prescribed by Parliament is difficult for the taxpayer to meet, or is regarded by the taxpayer as undesirable. If this were so, the important deterrent effect of section 304-10 of the ITAA 1997 would be undermined and an unintended taxation benefit would thereby be conferred on the recipient of the payment.

(d) Brazil v Federal Commissioner of Taxation [2012] AATA 192 ("Brazil") - on the advice of friends and being referred to a third party, the taxpayer rolled over his superannuation funds from a fund operated as the AON Master Trust to a fund called Western Eagle Super Fund (NSW) which was registered as a regulated SMSF. The majority of the superannuation funds were then withdrawn by the taxpayer and were not included in his tax returns in the year of rollover or the year of withdrawal. The SMSF filed no returns. The taxpayer claimed he thought the SMSF had retained the remaining funds from the rolled over amount to pay tax on his behalf and as a commission. He claimed the advice he received was he could access his superannuation because of financial hardship. The Tribunal accepted that Western Eagle Super Fund (NSW) was a fraudulent enterprise operated by others.[93] However, subsection 304-10(4) was not applied as the taxpayer should have suspected the SMSF was not a bona fide fund, and he made no effort to find out information as to why he could receive the superannuation funds from Western Eagle Super Fund (NSW) when he could not from the AON Master Trust.[94]

(e) Sinclair v Federal Commissioner of Taxation [2012] AATA 634 ("Sinclair")- the taxpayer established a superannuation fund and rolled over $40,000 from a BT Funds Management complying fund into that new fund. He then accessed $25,517.53 of the funds. This was on the basis of advice received from a promoter. He did not return the $40,000 in his income tax return for that year. The taxpayer thought the remaining amount which comprised 30% of the funds, was withheld to pay tax. He said he was under considerable stress. When considering whether the discretion in subsection 304-10(4) should be exercised, the Tribunal held that facts such as the taxpayer's signing of documents without them being fully completed leaving them to be completed by others, weighed in favour of the discretion not being exercised.[95] In addition, the taxpayer's circumstances, while difficult, were held to insufficient to justify the exercise of the discretion given the purpose of the legislation. The Tribunal held at [73] "[m]ere financial difficulties experienced by members cannot be enough to bring the discretion into play".

(f) Yrorita v Federal Commissioner of Taxation [2012] AATA 716 ("Yrorita") - the taxpayer rolled $53,000 funds out of AustralianSuper into a fund called the ETK Fund which was not a superannuation fund. He withdrew $38,370 to pay off debts, purchase a car and a computer, and gifts, and was advised this was possible. He said he was in hardship due to a marital separation, the need to pay medical expenses for his disabled son, and was unemployed with financial difficulties. He thought the remainder of the funds in AustralianSuper were used to pay tax. The discretion in former subsection 26AFB(4) of the ITAA 1936 was not exercised despite a finding that the taxpayer was in financial difficulties. This was for reasons including because the taxpayer did not make obvious enquiries, did not apply for release on the grounds of financial hardship, and did not disclose the withdrawn amount to his tax agent.[96] The Tribunal said that the taxpayer "thought he had found a way around the legislation"[97]

(g) Peach v Federal Commissioner of Taxation [2012] AATA 781 ("Peach") - the taxpayer accessed funds from his SMSF to fund his partner's yoga studio, and became aware this was not appropriate, and he was required to repay those funds. Despite this, the taxpayer continued to access funds from the SMSF. While some funds were repaid approximately $69,947 was not. It was not appropriate to exercise the discretion in subsection 304-10(4) in the ITAA 1997 in those circumstances. The taxpayer did not exhaust all other alternatives before accessing the funds, nor did he apply for an exception to be applied by the Commissioner (such as severe financial hardship).[98]

(h) Xiu Xu v Federal Commissioner of Taxation [2013] AATA 855 ("Xiu Xu") - the taxpayer was retrenched from her employment immediately before she was due to pay the balance on the purchase of a home. She withdrew funds from her SMSF and did not include that withdrawal in her personal income tax return. While subsection 304-10(4) was not directly considered, the Tribunal commented[99] (relevantly to the Applicants in this case) that where "a taxpayer is uncertain about a tax matter, reasonable care required that they enquire from someone with more specialised knowledge." The Applicants here may contend that they did just that. I consider this case when considering penalties below.

(i) Vuong v Federal Commissioner of Taxation [2014] AATA 402 ("Vuong") - the taxpayer rolled over approximately $114,000 funds from his Equipsuper Superannuation Fund to a new fund. The taxpayer subsequently accessed $81,434, while the remainder was appropriated by the scheme perpetrator, Mr Phuong. The entire $114,000 was assessed to the taxpayer. None of the conditions for release in the SIS Act and SIS Regulations for the taxpayer to receive the payment were met. The taxpayer did as he was advised, signed documents when he was told, and became the unwitting victim of a fraud. This case does not clearly consider the discretion in subsection 304-10(4). However, the Tribunal did not accept that arguments about financial hardship or compassionate grounds met the requirements in Schedule 1 of the SIS Regulations and were relevant.[100] At [34] and [36] the Tribunal recorded:

[34] The applicant was ignorant as to the law and was led to believe that if he rolled over his superannuation from one fund to another, a consequence would be that he would have a lawful entitlement to access it. His ultimate, albeit naïve, objective is not relevant in this context - the fact is that he received the payment when the Equipsuper cheque was deposited in the fraudulent bank account and, being a benefit received otherwise than in accordance with the SIS Regulations, the full amount of that deposit should have been included in his assessable income. [...]

[36] The Tribunal's conclusion that the entire amount of the payment made by Equipsuper formed part of the applicant's assessable income is consistent with decisions previously reached by the Tribunal in Sinclair and Commissioner of Taxation [2012] AATA 634 and also Brazil and Commissioner of Taxation [2012] AATA 192.

(j) In Wainwright the taxpayers, a husband and wife, were members of a SMSF. They purchased a farm using SMSF funds to complete the purchase and SMSF funds to pay stamp duty for that purchase. In order to fund that purchase of the farm the taxpayers also agreed to sell a property owned by the husband to their SMSF for $1.1m. After entering into a contract to sell the husband's property, the SMSF paid $700,000 to the husband, but the taxpayers' financial situation was such that they could not fund the stamp duty due on that sale and they could not complete the sale. Eventually they were forced to sell the farm and all other properties to reduce their debt. The Tribunal held that the discretion in subsection 304-70(4) of the ITAA 1997 should be exercised in favour of the husband, in relation to the year in which $700,000 was received by the husband (but not in relation to other years). This was on the basis that the transaction at issue was at arm's length, the taxpayer had come forward to the Commissioner about it, he had been unable to complete the sale through no fault of his own, the taxpayer had no intention of deceiving, evading or cheating, there were other consequences flowing to the taxpayer and his wife from their actions (particularly disqualification) and the transaction was entered into after receiving professional advice.[101]

(k) Brooks v Federal Commissioner of Taxation [2019] AATA 1236 ("Brooks") - the taxpayer accessed funds from a SMSF which he claimed was by way of loans. The Tribunal found that taxation should be imposed on the taxpayer for these withdrawals under section 304-10, because it did not accept the payments were loans. In addition, while the taxpayer had good intentions to rectify the problem, the principle is that concessions enjoyed by superannuation contributions and earnings cannot continue when funds are withdrawn contrary to the law. A high level of diligence is expected.[102]

1. At the outset I deal with the place of PS LA 2021/D3 in my consideration of this case. The Tribunal must apply the law when considering this matter - that is, the statutory and regulatory provisions and case law. The Tribunal should be mindful of the Commissioner's policy, but it is not law, and the Tribunal is not bound to follow any such policy. The Tribunal should be cautious to ensure the policy is consistent with the legislation.[103]
2. I have considered the Applicants' submissions about PS LA 2021/D3. I accept that from the text of subsection 304-10(4) alone there is no clear "effective control" test. I also agree with the Applicants that it is hard to understand why draft rulings hang about in draft form for years, although I do not take the same view that this factor alone makes PS LA 2021/D3 of reduced relevance.[104] As an aside, the Tribunal wonders how hard it can be to finalise something that has already been written, and how much time is needed to consider submissions and comments received. While the Commissioner has a complex and enormous job, four years have passed since PS LA 2021/D3 was first issued. Of course, in the taxation field we continue to deal with two income tax acts in the ITAA 1997 and the ITAA 1936 about 30 years after a rewrite process commenced. When applying tax law, Australians simply carry on every day managing and applying the incomplete. It is not problematic.
3. In saying the above, I do not accept that PS LA 2021/D3 is contrary to the legislation as the Applicants submit[105] taking into account the background material to the legislation as cited in Mason.[106] That background material is relevant because the word "unreasonable" is required to be interpreted, and because legislative text is to be read with its context and purpose in mind.[107]. It is in the background material that the "effective control" reference arises.
4. PS LA 2021/D3 is a relevant factor for me to consider and I have done so. I confirm however, that I have not approached the question in this case by applying PS LA 2021/D3, but rather by considering the legislation, regulations, and the case law.

1. The broad thrust of the Applicants' case is straight forward - they relied on incorrect advice, they were in financial hardship, and they say it would be unreasonable for tax to be imposed under section 304-10 as a consequence.
2. It is well-known in the Australian community that superannuation funds are given tax concessions because the funds cannot be accessed until retirement. That is clear from the legislation as well.[108]
3. When considering subsection 304-10(4), the factors that are taken into account are the nature of the fund and any other relevant matters. When considering what is unreasonable the background material to subsection 304-10(4) and its forebears suggests that the sufficiency of other penalties or consequences imposed for the relevant breach is a relevant factor,[109] as is whether the gain was fortuitous or beyond the taxpayer's effective control,[110] and whether there are tax avoidance implications.[111] I have taken those factors into account below.
4. I accept that taxpayers accept oral advice from tax professionals they trust, and I do not accept the Commissioner's submission that it was "highly unusual"[112] for taxpayers in the position of the Applicants to not obtain written advice, and to rely on oral advice from a professional adviser. When submissions such as that are made by the Commissioner, they are not always greeted warmly by the Tribunal. It would have been sensible for the Applicants to clarify their understanding of Mr W's advice as I suggested above and taxpayers are not encouraged to act as the Applicants have.[113] However, the real world for individual taxpayers that are not taxation specialists nor schooled in tax and superannuation law should form part of the Commissioner's considerations.
5. I do not accept the Applicants' submission that the absence of the Applicants thinking about pursuing Mr W for professional negligence is "immaterial."[114] The real cause of the loss, according to the Applicants, is what they say is Mr W's negligent advice. I agree with the Applicants that there are a number of reasons why a claim for professional negligence might not have been pursued, and I record that this is a factor in my decision. It is relevant for thinking about the purpose of the discretion in subsection 304-10(4) of the ITAA 1997 and whether the discretion should be exercised in circumstances of alleged professional negligence. It is relevant when weighing up all factors, considering whether the discretion should be exercised in circumstances where, on the Applicants' own case, the Applicants' tax liability might be fully compensated by other means. That could also be put as asking whether in policy terms the tax legislation should be engaged in compensating taxpayers for alleged negligent advice when they have other options. It is also relevant when interpreting subsection 304-10(4) of the ITAA 1997 in the context of the tax legislation as a whole and whether alleged negligence by a tax agent is taken into consideration in other discretionary contexts.
6. I note that the Applicants have submitted that there is no statutory intention in the language of the statute to punish those who rely upon incorrect advice and withdraw funds improperly.[115] I reject that. In substance, this is a misguided submission that unless the legislation lists every possible factual scenario, it cannot be intended to apply if those scenarios arise. The statute makes it quite clear there is a consequence when withdrawals from superannuation funds are not authorised by the SIS Act or the SIS Regulations. The Applicants' submission can be countered by saying that there is also nothing which says that the tax legislation offers taxpayers an 'out' from taxation consequences if they can demonstrate incorrect advice was given to them. Instead, there are limited circumstances where tax agent error is taken into account.[116] I accept that incorrect advice is a fact to consider when determining whether to exercise the discretion in subsection 304-10(4) of the ITAA 1997. However, I note that in this matter there is a dispute between the Commissioner and the Applicants as to what exactly Mr W's advice was. The Tribunal did not hear from Mr W as a witness.
   1. When considering what the Applicants say was Mr W's advice, I agree with the thrust of the concerns expressed by the Commissioner.[117] For the Applicants not to read anything they were provided and to rely passively on advice which they could not articulate properly does not persuade me it is unreasonable for taxation to be imposed under section 304-10.
   2. The first Applicant could not articulate the advice given other than using the words "it is complicated" and saying he understood he could access his superannuation early. No articulation of what aspects were complicated or why it was complicated was provided by the first Applicant. His evidence about the advice can be best described as vague. My assessment is he knew that superannuation funds cannot be accessed until retirement. What is complicated is accessing them prior to that. Similarly to Yrorita, my assessment is the Applicants thought they had found a way around the superannuation regime as a result of their visit to Mr W.
   3. In my view, similarly to the holdings in Brazil and Yrorita, the Applicants should have suspected their understanding of Mr W's advice was incorrect and made obvious inquiries. It defies commonsense for the Applicants to believe that superannuation funds could be so easily accessed prior to retirement merely by rolling them into a different superannuation fund and then just withdrawing them. That is hardly a complex scheme, and they made no effort to understand why this could possibly be right. This echoes the holding in Brazil. There is a glaringly obvious 'too good to be true' factor. It also gives rise to concern about avoidance of the rules.
   4. Other obvious questions arose. The article the Applicants were provided by Mr W should have put the Applicants on notice, and they had more than enough time to read it and consider it before taking the steps they did. They still have not read that article which is 6 pages long. The article specifically states that "[a] ." That is quite clear and uses plain English. What the Applicants were doing was not allowed. Page 2 of the article specifies that property developers need to be unrelated to the SMSF. The Applicants were related to the SMSF. Even the mere of the article "" could have led the Applicants to ask "how is the SMSF ? Aren't we the ones withdrawing and then putting the funds into the development? What is the doing?" The first Applicant did not strike the Tribunal as being unable to understand basic matters. The second Applicant is a teaching professional so in principle, given her training, the Tribunal does not believe she would be unable to think of basic questions such as that.

This is a Self Managed (sic) Superannuation Fund and maintained to provide benefits in the form of a lump sum payment or an old age pension for its Members upon retirement, and for the Dependants of Members upon the death of the Members. It permits the payment of benefits to other persons connected with Members in certain circumstances. [.....]

The primary (but not necessarily the sole) purpose of this Fund is the provision of benefits to a Member or a Member's Dependant upon retirement or death of a Member.

1. Those sentences reiterate that payments to the Applicants from the SMSF can be made on retirement, which is a common understanding in the Australian community. What the Applicants were doing was not allowed. Instead, the Applicants made payments to themselves outside of retirement. The last sentence of the first paragraph cited above might have led the Applicants to say, "what are those "certain circumstances"? and "it says payments to persons other than Members - does that mean our property development?- is that a payment to "other than Members"? Aren't we just paying ourselves?" The comment about "not necessarily the sole" purpose might have led the Applicants to ask, "what other purposes are allowed?" Merely reading the index of the Trust Deed would have pointed the Applicants to clause 44 headed "What are the Conditions for payment of benefits?" and clause 109 "Purpose of the Fund". Looking at those clauses would have led to further questions. The Applicants might have asked basic questions such as those of Mr W and did not do so. But of course, the Applicants did not read those clauses nor any of the material, and they still have not done so.
2. Instead, the Applicants acted similarly to the taxpayer in Sinclair. By merely signing documents without reading them and without making any efforts to understand them, the Applicants have acted in a manner that weighs against exercising the discretion in subsection 304-10(4) of the ITAA 1997. Devolving their own responsibility by saying "Mr W was a professional and we relied upon him" is nonsense in the light of the very obvious questions which challenge their expressed understanding of Mr W's advice. In addition, as can be seen from the case law summarised above, such a submission is rarely persuasive.
3. There is no evidence before the Tribunal that the Applicants were not able to obtain other finance to complete the property development. Bank finance may have been available, it is not clear. It appeared from the evidence that the referral to Mr W was enough for the first Applicant not to pursue any other options. As was noted in Peach, not exhausting all other options for finance counts against the exercise of the discretion. Smith supports the obvious position that superannuation funds are not to be used for finance and that is a basic principle of the superannuation regime. Brooks reiterates that principle.[119] The SIS Act and SIS Regulations mean something.
4. Further, while the Tribunal appreciates the financial difficulty the Applicants found themselves in, on its own that is not sufficient to weigh in favour of the discretion being exercised. That is supported by Sinclair and Yrorita. Parliament considered circumstances of financial difficulty and determined it was in severe financial hardship that superannuation funds could be accessed and also potentially on compassionate grounds (which include the possible loss of the family home for instance).[120] There will be rare circumstances in which the discretion in subsection 304-10(4) should be exercised contrary to that intention. However, I record I do not agree that it is only in those circumstances that financial hardship is relevant to the discretion. When considering subsection 304-10(4) there is no restriction on the relevant factors that can be taken into account.[121] I agree with the Applicant that hardship is a relevant consideration, and I have considered that factor in this case. I am supported in that conclusion by Wainwright[122] and by Mason.[123] However, I agree with the Commissioner that this cannot be the only basis for seeking the exercise of the discretion in subsection 304-10(4) of the ITAA 1997 as that would be contrary to Parliament's intention. I also agree I do not have full evidence of hardship - for instance, I do not know whether or not there were profits from the property development, and I do not have evidence of the asset position of the Applicants.
5. The Applicants did not apply for release on the grounds of severe financial hardship nor on compassionate grounds (which in part include financial issues)[124] although it appears unlikely that they would have met the requirements in the SIS Regulations. The Applicants also did not tell their new tax agent about what they had done and did not return the withdrawn funds in their respective tax returns. Both of those factors were held to be against the exercise of the discretion in Yrorita and Peach. In the context of considering what the Applicants told the Commissioner, I have also considered the call the first Applicant had with the Commissioner on 23 January 2023 which I have found involved him misleading the Commissioner. That was unacceptable and is a factor against the Applicants. Taxpayers should not act in this manner with the Commissioner. However, while I have considered that call, I have reduced the adverse weight given to that call, due to the prompt correction by the Applicants of those matters.[125]
6. The Applicants did not seek to rectify their withdrawal from the SMSF. It is not clear what happened to the proceeds of the property development nor if there were profits that might have given the Applicants the ability to rectify the withdrawal. Seeking to rectify the error was a factor taken into account in Brooks and Wainwright as potentially in the taxpayer's favour.
7. The Applicants withdrew their superannuation in nine transactions.[126] They did that themselves deliberately and it was not fortuitous nor beyond their effective control. That distinguishes them from the circumstances described in Mason[127] as potentially meaning tax imposed under section 304-10 would be unreasonable per subsection 304-10(4). I do not accept the Applicants' submission that they did not have effective control because they were misled.[128] The Applicants knew that superannuation funds were to be used on retirement as that is common knowledge. In my view they did not ask obvious questions, and it is not clear whether or not they were misled due to the vague description of the advice from Mr W. The article they were provided did not mislead them. The Trust Deed did not mislead them.
8. In terms of the nature of the fund, what we have in this case is the SMSF that was set up solely for the purpose of accessing the superannuation funds improperly and now has no substance. It was used as a tool to avoid the superannuation rules. This counts against the exercise of the discretion in this case.
9. There are factors in favour of the discretion being exercised. There were repeated withdrawals in Peach which counted against the taxpayer and repeated withdrawals were made here. However, unlike Peach, it is not clear that the Applicants knew at the time they made withdrawals from the SMSF account that what they were doing was wrong.
10. The Applicants did not use the funds to pay everyday expenses. That was a factor in Peach against the exercise of the discretion, and a factor taken into account in Wainwright in favour of exercising the discretion.
11. The Applicants were suffering from financial hardship that arose as a consequence of a project they had entered into and the liquidation of a builder; that is, not due to any fault on their part. This might be said to be similar to Wainwright. However, Mason suggests what is relevant is whether the superannuation benefit arose due to circumstances beyond the Applicants' control, not whether financial hardship was beyond their control. Here, the Applicants took deliberate steps to access the funds.
12. Other consequences arose for the Applicants, particularly being disqualified as directors of the Trustee of the SMSF. This was a factor taken into account in Wainwright and in Mason. However, those cases weigh the seriousness of those consequences. The impact of the Applicants each being disqualified from being a director of the wound up Trustee of an inactive SMSF that has no assets due to the Applicants withdrawing them is not a serious consequence. The Applicants are of course more widely disqualified pursuant to section 126A of the SIS Act, but given this case, it is unlikely that there will be a future SMSF. When considering the other consequences for the Applicants they are not serious either. For instance, the SMSF's ABN being cancelled is hardly of significance - it had no remaining purpose. Of course, penalties have also been imposed on the Applicants under the SIS Act and this falls to be considered, but they have been considerably reduced by the Commissioner and are $4,200 for each Applicant.[129] The other consequence that the Applicants may have little superannuation available to them is a consequence caused by their own actions and not a factor in their favour.
13. Like Wainwright the Applicants relied upon professional advice. However, unlike Wainwright, the nature of the advice is unclear and is disputed in this case, the Applicants did not take steps to clarify the advice when obvious questions arose (similar to Brazil), and Mr W did not appear as a witness nor was there clear evidence of what advice was given (unlike the position in Wainwright).

1. On balance, taking into account the statutory provisions and the case law, and the points for and against the Applicants, I have concluded that the Applicants have not satisfied their burden of proof. I am not satisfied on the balance of probabilities that it is unreasonable for the superannuation benefits to be included in each Applicant's assessable income taking into account the nature of the fund, and all other relevant matters. The weight of those factors is against the exercise of the discretion in subsection 304-10(4) of the ITAA 1997.
2. It is not unreasonable for the Applicants to bear the consequences - the imposition of tax pursuant to section 304-10 of the ITAA 1997. The Applicants might well find those consequences "crushing,"[130] but those consequences were intended to apply to taxpayers that do what the Applicants did.
3. The Commissioner's decision is affirmed.

ISSUE 2: WHETHER THE PENALTIES IMPOSED ON THE APPLICANTS SHOULD BE REMITTED

1. The second issue relates to penalties imposed upon the Applicants. Those penalties were imposed pursuant to section 166 of the SIS Act[131] and imposed on the Applicants as directors of the Trustee in accordance with section 169 of the SIS Act.
2. Pursuant to paragraph 298-5(d) of Schedule 1 to the TAA, penalties under section 166 of the SIS Act fall within Subdivision 298-A of Schedule 1 to the TAA. Importantly, that means that the remission power under section 298-20 of Schedule 1 to the TAA applies.
3. In this case, the penalties imposed on the Applicants were significantly reduced early on by the Commissioner.[132] I acknowledge that as found above, I do not believe that the Applicants' conduct means it is unreasonable for the taxation consequences under section 304-10 of the ITAA 1997 to arise.
4. The issue is whether those penalties should be fully remitted in the circumstances.
5. The Applicants say they should because the Applicants' decision-making was "infected"[133] by Mr W's advice which they say was "negligent, incorrect and/or dishonest," and because the Applicants acted in good faith at all material times.[134]
6. The Commissioner says the penalties should not be further remitted as the penalty consequences "flow naturally from the law as provided by Parliament and applied to the Applicants' own conduct" and because they breached the law, did not report what they had done "and did all of this in ignorance or negligence of their lawful obligations as directors of the Trustee".[135] The Commissioner also says that the Applicants have already had the benefit of substantial penalty remission, and their conduct was serious, so penalties should be imposed.[136] Those submissions have some weight and I have considered them carefully.
7. I have concluded that the penalties imposed should be fully remitted.
8. The case law supports the conclusion that in circumstances where the imposition of tax under section 304-10 is substantial and a significant deterrent, there is no additional purpose in terms of deterrence to impose penalties. That is a factor that should be taken into account by the Commissioner. I acknowledge that the Commissioner has done that in part, but I see no real purpose for the penalties at all.
9. In Sinclair[137] the prior compliance of the taxpayer was taken into account as was the taxpayer's financial hardship. It was held that the significant detriment to the taxpayer from the imposition of taxation on the withdrawn funds should have been considered. The Tribunal also found that the taxpayer's carelessness was not intentional disregard of the law. Here, while I find myself unimpressed with the Applicants' case, I am not of the view they intentionally disregarded the law. The impact of section 304-10 being imposed on each of the Applicants is significant.
10. In Vuong[138] the Tribunal determined that the discretion in section 298-20 should be exercised to remit penalties in full. The Tribunal took into account the taxpayer's naivete about superannuation law, his lack of appreciation of the documents he signed other than face value and, in his circumstances, the disproportionate consequences of the imposition of tax under section 304-10. Similarly, the consequences for the Applicants are already extremely significant.
11. In Wainwright[139] the penalties were imposed. The Tribunal found that the taxpayer's conduct fell short of that expected of a reasonable person, and of course that can be argued to have also occurred here. However, Wainwright was in the context of the discretion in subsection 304-10(4) being exercised in part, and in respect of a considerable sum. Further deterrence was necessary in Wainwright. That is not necessary in this case.
12. In Yrorita[140] the taxpayer's circumstances, his employment prospects, his financial difficulties, his health difficulties and his care for a disabled relative weighed in favour of the penalties being fully remitted. Yrorita is the reverse of Wainwright - the discretion under the former section 26AFB of the ITAA 1936 was not exercised and the taxpayer bore significant consequences in the imposition of income tax under the equivalent of section 304-10 already. The same is true of the present case. There is a reason for distinguishing Yrorita from the present case as the Tribunal recorded at [57] that had the taxpayer followed the correct procedures to seek a withdrawal he may well have been entitled to withdraw the funds from his superannuation fund. I do not have evidence in the present case to find that here.
13. In Xiu Xu[141] the penalty was not remitted because the Tribunal was not satisfied that the impost of the penalty would be harsh in the overall circumstances of the taxpayer. In addition, the taxpayer did not make inquiries from a person more versed in superannuation and tax law than she was. Both factors point the other way in this case. I am satisfied that the imposition of tax under section 304-10 is a substantial burden. I am also satisfied that the Applicants believed that they had consulted with someone more versed in superannuation and tax law than they were.
14. I also record I have considered the Commissioner's policy Practice Statement Law Administration PS LA 2020/3 Self-managed superannuation funds - administrative penalties imposed under subsection 166(1) of the Superannuation Industry (Supervision) Act 1993 ("PS LA 2020/3"). This is on the same basis as I have taken into account PS LA 2021/D3 and is as described above.[142] While I agree the purpose of the penalty regime and the seriousness of breaches are factors to consider, and while I accept that the Commissioner has already substantially remitted the penalties originally imposed at audit, I do not believe that PS LA 2020/3 appropriately weighs the significance of the other taxation consequences on taxpayers when considering remission in this context.[143]
15. In my view, the consequences in this case are significant and the Applicants will not contravene the rules again. This meets the purpose of the penalty regime, and is a factor in favour of full remission. After taking into account the Commissioner's submissions, I have concluded that the balance is in favour of the Applicants and in favour of full remission.

1. For the above reasons, I am satisfied that the penalties imposed on each Applicant should be remitted in full.

........................[SGD]..................................

[1] Mr Santavas is referred to as the "first Applicant" and Mrs Santavas is referred to as the "second Applicant" in this decision.

[2] For references to the T documents from the first Applicant, the references will be labelled "HS" and for the second Applicant "VS." T20 (HS), T18 (VS). The Tribunal Book simply inserted these T documents as two document groups, and it is easier to refer to the separate T documents as a result. Where only one set of T documents is referred to, that is because the same document is relevant to the other Applicant.

[3] The burden of proof is set out in paragraph 14ZZK(b) of the TAA, and the standard is on the balance of probabilities. Commissioner of Taxation v Ross [2021] FCA 766 [46].

[4] Some of the grounds raised by the Applicants in their objections dated 30 August 2023 (T21 (HS); T19 (VS)) were not pursued at the hearing and have been conceded. Those issues included contentions that the Commissioner was out of time to issue the assessments at issue, that the shortfall interest charge should be remitted, and that penalties should not be imposed on the Applicants because they are directors of a corporate trustee and not trustees of the relevant fund. The hearing was limited to the issues specified in paragraph ‎2 above.

[5] The Closing Submissions of the Respondent dated 14 November 2025 ("Commissioner's Closing") [19]. No objection was raised to evidence from the first Applicant as to what the second Applicant thought for example.

[6] Mr W is referred as "Mr W" as he was not called to give evidence at the hearing, was the subject of suggestions about the competence of his advice (including serious allegations that he was 'fraudulent'), and he did not have the opportunity to respond to those claims. Those allegations may or may not be correct and the Tribunal makes no findings about them. In those circumstances, an order pursuant to section 70 of the Administrative Tribunal Act 2024 (Cth) that he be referred to in this manner is issued by the Tribunal alongside this decision.

[7] It is noted that the first Applicant is also described as a "timber labourer;" T13-163 (HS) [17], T14-374 (HS) [r]; T16 -647 (HS) [13.7].

[8] Witness Statement of Harry Santavas dated 3 July 2025 ("First Applicant's Witness Statement") [2]. Witness Statement of Vicki Santavas dated 3 July 2025 ("Second Applicant's Witness Statement") [2]. T13-366 (HS).

[10] First Applicant's Witness Statement [3]. Second Applicant's Witness Statement [3].

[11] Applicants' SFIC [9]. T13-356 (HS). The Applicants' Closing Submissions dated 14 November 2025 ("Applicants' Closing") [20].

[13] T13-177 (HS) - acknowledged by the first Applicant in cross-examination as the article provided to the Applicants by Mr W.

[14] First Applicant's Witness Statement [3]; Second Applicant's Witness Statement [3]. Commissioner's Closing [5] points out that the website is not in evidence.

[17] T13-189 (HS) is the constitution for the Trustee and other relevant documents include T13-399 (HS).

[19] This occurred on 12 February 2019 for the second Applicant $135,000 (T13-268 (HS)) and 20 February 2019 $245,000 for the first Applicant (T13-268 (HS)).

[20] T13-292 to T13-296 (HS). Respondent's Updated Statement of Facts, Issues and Contentions dated 1 August 2025 ("Commissioner's SFIC") [6]-[8]. Respondent's Outline of Submissions dated 17 October 2025 ("Commissioner's Outline") [9]-[12]. Applicants' Amended Statement of Facts Issues and Contentions dated 4 July 2025 ("Applicants' SFIC") [6]-[8]. The transactions of both deposit and withdrawal are set out in the Commissioner's Closing at [7].

[21] The definition of "preservation age" in reg 6.01(2) of the Superannuation Industry (Supervision) Regulations 1994 (Cth) ("SIS Regulations"). Objection Decisions T2-16 [9] (HS); T2-15 [2] (VS).

[22] Commissioner's Outline [12]; T13-292 to T13-296 (HS).

[23] Applicants' SFIC [6]. T13-268 (HS).

[29] Applicants' SFIC [9]. Second Applicant's Witness Statement [4]. First Applicant's Witness Statement [4].

[43] Ibid [16], [17], [18]. It is noted that in each of the Applicants' Objections, Mr W's advice is also described as "fraudulent" T21-745 (HS) [25.3]; T19-669 (VS) [25.3].

[44] Applicants' SFIC [1]-[15] broadly mirror T13-160 [3]-[18].

[46] Commissioner's Closing [21]-[32].

[47] Commissioner's Objection Decision T2 (HS) [11], T2 (VS) [11].

[52] T17 (HS); T15 (VS). It is suggested in the Applicants' SFIC that disqualification occurred earlier than this - 7 May 2023: Applicants' SFIC [10].

[58] On 14 October 2024, the Administrative Appeals Tribunal became the Administrative Review Tribunal. Under the transitional provisions in the Administrative Review Tribunal (Consequential and Transitional Provisions No. 1) Act 2024 (Cth) proceedings that were not finalised before 14 October 2024 are continued and finalised by the Administrative Review Tribunal. Anything done in relation to any such proceeding before 14 October 2024 is taken to have been done by the Administrative Review Tribunal.

[60] Also see Applicants' Closing [6].

[61] These are contraventions of sections 34 and 65 of the SIS Act.

[67] Applicants' Closing [27]. The Commissioner agrees that taxation consequences would still follow: Commissioner's Closing [50]-[54].

[68] Commissioner's Closing [21], [22].

[71] Commissioner's Closing [23], [24].

[72] Commissioner's Closing [24], [55].

[78] Commissioner's Closing [29], [30].

[80] Commissioner's Closing [33]-[36].

[81] Commissioner's Closing [37]-[40].

[82] Regulation 6.01(5) and item 105 of Schedule 1 of the SIS Regulations where there is "severe financial hardship".

[83] Commissioner's Closing [41]-[44].

[84] Commissioner's Closing [46]-[49].

[85] The definition is in section 307-5 of the ITAA 1997.

[87] Ibid [6]. For example, reg 6.17 of the SIS Regulations is a prescribed standard and it requires superannuation benefits to only be provided when a condition of release (such as reaching preservation age) is satisfied.

[88] Referred to as the "2007 EM" in this decision.

[89] Referred to as the "1987 EM" in this decision.

[90] [2011] AATA 563 [21].

[91] [2011] AATA 563 [22].

[92] [2012] AATA 133, [31], [32], [36], [37].

[93] [2012] AATA 192 [25].

[94] [2012] AATA 192 [34].

[95] [2012] AATA 634 [71].

[96] [2012] AATA 716 [31], [32], [44].

[97] [2012] AATA 716 [32].

[98] [2012] AATA 781 [17]-[19].

.[99] [2013] AATA 855 [14].

[100] [2014] AATA 402 [38]-[40].

[101] [2019] AATA 333 [81], [87].

[102] [2019] AATA 1236, [129]-[130].

[103] Drake v Minister of Immigration and Ethnic Affairs [1979] FCA 39 (Full Federal Court); Drake v Minister for Immigration and Ethnic Affairs (No.2) [1979] ALD 634, 636, 641.

[106] See paragraph ‎40 above.

[107] Project Blue Sky v Australian Broadcasting Authority (1998) 194 CLR 55 [78]. Pursuant to section 15AA of the Acts Interpretation Act 1901 (Cth) an interpretation that best achieves the object of the legislative provision is to be preferred.

[108] This was recorded in an oft-cited passage from Justice Logan in Vivian (Deputy Commissioner of Taxation (Superannuation)) v Fitzgeralds (2007) 51 ATR 834, 838-839 [25]-[26]. It is also regularly repeated in legislation enacted as part of the superannuation regime. For instance, the Explanatory Memorandum to the Superannuation Legislation Amendment Bill (No 4) 1999 (Cth) states at 5 that the superannuation regime is 'designed to limit the risks associated with superannuation fund investments and to ensure superannuation savings are preserved until retirement and not accessed for current use' (emphasis added).

[109] 1987 EM as cited in Mason at [26]. See paragraph ‎40 above.

[110] 2007 EM as cited in Mason at [21]. See paragraph ‎40 above.

[111] 2007 EM as cited in Mason at [26]. See paragraph ‎40 above.

[113] See paragraph ‎29 above.

[116] For instance, subsection 284-75(6) of Schedule 1 to the TAA.

[117] Commissioner's Closing [22]-[25].

[118] Wainwright involved what was concluded to be arm's length investment by the SMSF for example.

[119] Although not directly about the discretion, Vuong also suggests that being naïve as to the law is not an excuse for withdrawing superannuation contrary to the SIS Act and SIS Regulations.

[120] Regulation 6.01(5) and item 105 of Schedule 1 of the SIS Regulations where there is "severe financial hardship". Regulation 6.19A and item 107 of Schedule 1 of the SIS Regulations.

[125] See paragraphs ‎22 and ‎27 above.

[126] Commissioner's Closing [7] and see footnote 20 above.

[130] Applicants' Closing Submissions [23].

[131] Section 166 of the SIS Act sets out penalties for the contravention of specified sections in the SIS Act, which include subsection 34(1) and subsection 65(1) which apply to the facts of this case.

[132] See each Position Paper: T14-368 (HS) T12-297 (VS) [18]-[21], [31]-[35], [155]-[161], [172]; each Reasons for Decision T18 (HS) and T16 (VS) [6]-[9], [18], [20]-[21].

[135] Commissioner's Closing [37]-[38] - although this is in the context of submissions about whether the discretion in section 304-10(4) should be exercised.

[136] Commissioner's Outline [53]-[55].

[142] See paragraph ‎42 and following above.