SMSF denied complying status – recent AAT decision
The recent AAT decision in Driscoll and Commissioner of Taxation  AATA 3892 has important implications that all SMSF professionals (and trustees) should be aware of. We explore the facts, the implications, and the lessons learnt from this case in this article.
On 23 January 2009, the Driscoll Superannuation Fund (Fund) was established. Mr Driscoll was the sole member and director of the trustee of the Fund.
Several months later, approximately $21,000 was deposited into the Fund’s bank account from Mr Driscoll’s MLC Masterkey Superannuation Account.
In March 2009, Mr Driscoll attended a course titled “Havingness Rundown”. The Church of Scientology conducted the course. The course cost approximately $7,000.
The course had nothing to do with SMSFs per se, but the AAT noted that it “appears on the evidence to have had something to do with making money”. Mr Driscoll claimed in his evidence that his intention in respect of the course was “to get out and make money and pump money into super”.
Mr Driscoll also purchased a limited edition 18 volume set of The Basics of Dianetics and Scientology, which were authored by L Ron Hubbard. The cost of the books was approximately $11,000. Some years later, Mr Driscoll tried to sell the books. He was unable to do so. He has kept the books ever since.
The Fund’s 2009 annual return was due on 28 February 2010. However, by September 2011, no returns had been lodged, and the ATO wrote to the Fund, requiring that the annual returns for the years ending 30 June 2009 and 30 June 2010 be lodged by October 2011.
Mr Driscoll said that he contacted the ATO about his personal problems and that someone associated with the ATO told him that he should deal with his other problems first and not be concerned about lodging the returns until after those matters were resolved. Mr Driscoll was unable to put a time or date, or name to that alleged conversation.
On 19 December 2011, the trustee lodged the annual return for the Fund for the year ending 30 June 2009, which declared that the Fund had no assets.
On 16 January 2012, the annual return for the Fund for the year ending 30 June 2010 was lodged.
What was the key issue?
These facts could – and indeed did – give rise to many issues.
For example, one issue might be whether the books were a legitimate investment of the Fund. The AAT was inclined to the view that they probably were an investment because they were:
- leather bound;
- a limited edition; and
- kept by Mr Driscoll in their original packaging and not ever used for personal use by him.
(This was despite the fact that they had been kept in his bedroom and not directly purchased via the Fund’s bank account.)
However, the books were not directly the central issue at play in the decision.
The course could have been a central issue too. The AAT noted that the reason Mr Driscoll was focused on “making money” was because of Mr Driscoll’s difficult financial circumstances.
The AAT provided a quote from Mr Driscoll that he was “on the bones of his arse”. The AAT noted that the “likelihood was that the course was undertaken by Mr Driscoll for personal purposes associated with him making money, so to deliver him an immediate benefit, and had not much at all to do with the Fund perhaps other than Mr Driscoll would have made contributions to it.” However, the course was not directly the issue at play in the decision.
The key issue in the decision was whether the Commissioner should issue a Notice of Compliance for the Fund in respect of the 2009 income year (indirectly though the other issues were considered in this regard).
The AAT determined that the facts caused contraventions, including:
- late lodgement (in contravention of s 35D of the Superannuation Industry (Supervision) Act 1993 (Cth) (SISA); and
- the expenditure on the course, which the AAT considered was to confer on Mr Driscoll a personal benefit rather than one that had anything to do with the Fund (which caused a contravention of the sole purpose test and the prohibition on the provision of financial assistance to a member in ss 62 and 65 of the SISA).
The AAT noted that the object of the SISA is “to make provision for the prudent management of superannuation funds” and “[u]sing superannuation funds for personal matters and to confer benefits extraneous to their objective … is antithetical to that object”. Also, the AAT noted that “in exercising the discretion to issue a Notice of Compliance … regard should generally be had to the need to deter ….”
Ultimately, the AAT determined that the discretion to issue a Notice of Compliance in respect of the Fund for the 2009 year should not be exercised.
The implications are obvious. However, they are important and warrant expressly stating:
- Late lodgement is a contravention. Timely lodgement is important. Sometimes, delays occur, and there can be leniency. Nevertheless, generally speaking, all efforts should be made for on-time lodgement. Late lodgement can be exacerbated where there are other issues too. The ATO has a focus on SMSF lodgements as late lodgers are seen as a significant risk to the super system, especially those seeking illegal early access via SMSFs.
- File notes and other evidence of important events (e.g. alleged extensions from the ATO) should be made, retained and potentially provided to any other party involved. Otherwise, without such evidence, claims made, such as Mr Driscoll’s contact and discussion with the ATO, may not be accepted.
- Extreme caution should be exercised before proceeding with any non-traditional investments or other expenditures (e.g. expenditure on courses or books). Where there is doubt, prospective expert advice should be sought. Naturally, DBA Lawyers can provide such advice. Additionally, the ATO can provide guidance by way of SMSF specific advice (https://www.ato.gov.au/forms/request-for-smsf-specific-advice/).
Tony Zhang is a journalist at Accountants Daily, which is the leading source of news, strategy and educational content for professionals working in the accounting sector.
Since joining the Momentum Media team in 2020, Tony has written for a range of its publications including Lawyers Weekly, Adviser Innovation, ifa and SMSF Adviser. He has been full-time on Accountants Daily since September 2021.