The Australian Taxation Office (ATO) said that while it accepts that mistakes can be made by trustees in the management of a fund’s affairs, what is important is that the trustee demonstrates a willingness to comply with their obligations.
The decision of Merchant v Commissioner of Taxation [2024] AATA 1102 found that while there were contraventions of the SIS Act, Merchant’s disqualification was set aside because the Administrative Appeals Tribunal (AAT) found that the risk of future non-compliance was unlikely.
Its reasons for this decision were that Merchant was a fit and proper person and that there was no evidence that he was advised that the transaction in question risked breaching the SIS Act.
Merchant had also given undertakings to mitigate the future risk of non-compliance, and the AAT stated that the contraventions of the SIS Act, while serious, related to a single course of conduct.
The AAT ruling stated that in relation to protecting the investing public, Merchant was only likely to be a director of the trustee of his own superannuation fund and that the offending transaction was suggested by the fund’s auditor without any warning of compliance issues, and as such, there was no useful purpose served by disqualification in this instance.
The ATO’s decision impact statement stated that the tribunal’s decision that there were serious breaches of subsections 34(1), 62(1), and 65(1) is consistent with its own.
“When considering all of the specific facts of this case, the tribunal concluded that there was an unlikely risk of future non-compliance by the applicant,” it said.
“This holistic consideration by the tribunal of all of those particular facts is consistent with the commissioner’s approach as outlined in Law Administration Practice Statement PS LA 2006/17 Self-managed superannuation funds – disqualification of individuals to prohibit them from acting as a trustee of a self-managed superannuation fund.”
It continued that before implementing a disqualification under subsection 126A(2), the commissioner should consider the acts of the individual, all the facts of the case, and whether there is a future compliance risk.
“The nature, number, and seriousness of contraventions are questions of fact and degree, and it is not possible to apply prescriptive rules to the decision to disqualify,” it said.
“An individual may be considered to be a future compliance risk if it is reasonable to draw that conclusion from their compliance history. This includes considering matters in relation to the management of their superannuation fund as well as their own personal tax affairs, or that of any other entity in which they have been in a position of responsibility.”
It continued that in this matter, the commissioner had maintained that the nature, number, and seriousness of contraventions by the applicant were sufficient grounds for disqualification under subsection 126A(2).
“Further, as disqualification is designed to protect the investing public against the risk that people with a history of non-compliance will re-offend, the commissioner had considered it reasonable to conclude that the applicant posed a future compliance risk given the serious contraventions of the SISA,” it said.
“However, we accept that, when considering the tribunal’s holistic consideration of all the particular facts as they applied to the applicant, the decision that the applicant was unlikely to be a future compliance risk and setting aside the disqualification of the applicant, was reasonably available to the tribunal on the facts before it.”
It added that as each case must be decided on its particular circumstances, the ATO’s view is that this decision has limited broader application beyond the “peculiar circumstances of this case”.
“Furthermore, the decision does not displace the longstanding principle that the primary responsibility for operating a self-managed super fund rests with the individual trustees or the directors of the corporate trustee nor restricts other consequences of contravening a civil penalty provision,” it said.
It concluded that the decision in Coronica and Commissioner of Taxation [2024] AATA 2592 by the tribunal on 19 July 2024 applied the same factors considered in the Merchant case and arrived at a different outcome, affirming the commissioner’s original trustee disqualification decision.
Before ATO had to decide if Gorden Merchant is a Fit and Proper person to be a Trustee. Let’s look at why he was at the AAT in the first place.
The story goes that his Disc. Trust was going to make a Capital Gain of $80M for a sale of a business but was holding shares in Billabong (Then listed as BBG ticker – Gorden’s Business) at un-realized loss of a similar amount. Hence it was important to crystallize the loss to avoid paying any CGT on sale of a business.
On EY advice (accounting team which did not consult the SMSF team) Gordon sold these shares to the SMSF – and realized the loss – so that the Disc. Trust does not have to pay any CGT tax on sale of some other business.
Now had EY told Gorden to sell the Disc. Trust shares in the Stock Exchange and if the SMSF really wanted to invest in BBG – they could have simply purchased these shares from the market before or after the Disc. Trust sale – there would have been no ATO enquiry – as the SMSF would be seen as purchasing a listed share for investment purposes.
This case should be seen as an example of the mess which the advisors can get their clients into rather than what has become.
Lastly and most importantly, financial planners should be warned about how they advise on the Sole purpose test. Many funds are set up for the purpose of acquiring business real estate to lease to a related party or for buying residential real estate or investing in Crypto etc.. whereas the purpose should be “retirement benefits” !