AAT reverses ATO decision to issue non-compliance notice to self managed superannuation fund – a win for the taxpayer

In a rare win for the taxpayer, the Administrative Appeals Tribunal (AAT) has set aside the decision of the Australian Taxation Office (ATO) to issue a non-compliance notice to the trustee of a self managed superannuation fund in Pabian Park Pty Ltd Superannuation Benefits Fund v FCT.

The issue was not whether the Fund had breached the Superannuation Industry (Supervision) Act (SIS Act), but rather, whether the ATO’s decision to issue a notice of non-compliance was an appropriate exercise of its discretion.

The facts

The Fund was used as a lender of last resort to maintain a related property development business. Over a three year period, the trustee of the Fund advanced over $300,000, which represented up to 40% of the Fund’s assets, to a related entity.

The trustees of the Fund entered into an enforceable undertaking to have the loans repaid by 30 September 2009. In October 2009, the trustees advised the ATO that the related entity had failed to sell two of its properties and had not repaid the loans to the Fund.

The ATO issued a notice of non-compliance to the trustees of the Fund.

The AAT considered the following factors counted against the taxpayer when reviewing the ATO decision:

• The loans contravened the in-house asset rules, arm’s-length provisions and sole purpose test.
• The loans were not initially documented or on commercial terms.
• Only limited attempts were made to repay the principal loan amounts until June 2010.
• The loans exposed the Fund to the high risks associated with a property development business.
• The parties did not comply with the enforceable undertaking nor did they inform the ATO when it was clear that they were unable to comply with the terms of the enforceable undertaking.
• The related party purchased an additional property in March 2010 rather than repay the Fund (this reflected poorly on the parties’ attitude to compliance).
• The trustee’s lack of knowledge of their legal obligations was not a valid excuse.

On the other hand, the AAT considered the following factors supported the trustee’s argument that the ATO decision to issue the non-compliance notice was not an appropriate exercise of the discretion:

• The trustees had engaged accountants and auditors to provide advice and monitor compliance.
• The related entity experienced difficulty in attempting to sell its properties following the GFC.
• The NAB required their indebtedness to be reduced first, prior to any money being repaid to the Fund.
• The wife had been seriously ill in late 2009 and early 2010, which required them to travel to Sydney for treatment.
• The loan had been repaid (although it was unclear if appropriate interest had been paid).
• There were no other non-compliance issues in the Fund’s history.

A finely balanced case – what was the tipping point?

In this case, age was the most significant factor in the taxpayer receiving a favourable result. The AAT commented that:

• the members were both over 65 years old and would have little opportunity to rebuild their retirement savings
• although the members had substantial assets outside superannuation, they did not have much capital as the majority of those assets had been encumbered
• despite the number of unfavourable factors against the taxpayer, the taxpayer’s biggest failure was that they did not rectify the breaches in a timely manner.

As a result, the AAT believed that the seriousness of the taxation consequences would be disproportionately harsh in the circumstances and leave the members with minimal retirement savings.

Will the next taxpayers be so lucky?

The taxpayers were very fortunate in this case. This decision once again indicates that, if the trustees of a self managed fund have breached the requirements of the SIS Act, they will maximise their prospects of avoiding the issue of a non-compliance certificate if they:

• work with the ATO
• take positive steps to rectify any breaches
• rectify breaches in a timely manner.

For further information on this topic, please contact Scott Hay-Bartlem or Clinton Jackson from our commercial team on +61 7 3231 2444.