Merchant and Commissioner of Taxation [2021] AATA 915 — surprise risk to SMSF acquiring listed shares

Facts

The AAT decision indicates that in September 2014, an SMSF (the Gordon Merchant Superannuation Fund) acquired over 10 million shares in Billabong International Limited from the Merchant Family Trust (MFT). There is no suggestion that the acquisition was other than on arm’s length terms. Accordingly, we infer that the acquisition was on arm’s length terms, including that the shares constituted listed securities acquired at their market value.

The decision states that the commissioner applied Part IVA (i.e. the general anti-avoidance provisions) of the Income Tax Assessment Act 1936 (Cth) to this transaction. The decision does not specify the exact basis on which the commissioner applied Part IVA. However, the decision does state that the relevant taxpayers have lodged an objection, which is yet to be decided.

The commissioner exercised his power to disqualify individuals who had contravened the Superannuation Industry (Supervision) Act 1993 (Cth) (SISA). The commissioner formed the view that the transfer of the shares contravened:

• the requirement to comply with the operating standard of giving effect to a proper investment strategy (see s 34(1) of the SISA and reg 4.09 of the Superannuation Industry (Supervision) Regulations 1994 (Cth));
• the sole purpose test (i.e. s 62(1) of the SISA) as the SMSF was maintained for a collateral purpose of obtaining a tax benefit for MFT and maintaining confidence in Billabong International Limited; and
• the prohibition on using SMSF resources to financially assist SMSF members or their relatives (i.e. s 65(1) of the SISA).

The applicants (which included Mr Merchant) requested an adjournment in respect of the disqualification review.

The applicants’ submissions

The applicants submitted that the commissioner’s disqualification decision relied on the correctness of the commissioner’s decision in the income tax audit as to the purpose of the share transfer. It was argued that the disqualification review depends upon the determination of whether Part IVA applies to the share transfer.

AAT’s findings

The AAT did not accept the above submissions. Instead, the AAT held that a decision regarding whether Part IVA applies to the share transfer is not determinative of any of the matters the subject of the disqualification review.

The AAT considered a number of arguments relied on the applicants why an adjournment should be granted. The AAT noted that a notice of assessment issued by the commissioner is conclusive evidence under s 350-10(1) of Schedule 1 of the Taxation Administration Act 1953 (Cth) of the amount due and payable subject to any review or appeal of the assessment under Part IVC of that act. After weighing up the arguments on both sides, the AAT considered that the interests of justice do not favour the granting of an adjournment of the disqualification review, which is separate and distinct from the tax dispute relating to Part IVA which may take some time to resolve.

The AAT, therefore, held that the application for an adjournment should therefore be refused.

Observations

The AAT decision does not reveal the full facts of the matter. However, it appears that the SMSF’s offending behaviour was simply to acquire listed securities from a related party at market value, particularly when this was not in accordance with the fund’s investment strategy.

Some in the SMSF industry might be surprised that such an action can cause negative implications. However, this decision appears to illustrate that such an action definitively can cause substantial negative implications.

Further, the ATO was authorised to proceed with pursuing its administration of SISA provisions despite the SMSF being involved with other parties in a (Part IVA) tax dispute.

Accordingly, this decision emphasises that before engaging in any high-value or non-vanilla transaction, there can be value in seeking expert advice and ATO input beforehand.

This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.

By Bryce Figot, special counsel (This email address is being protected from spambots. You need JavaScript enabled to view it.), and Daniel Butler, director (This email address is being protected from spambots. You need JavaScript enabled to view it.), DBA Lawyers