QX97I and Australian Prudential Regulation Authority

[1999] AATA 6

---

(Decision by: Deputy President Dr P Gerber)

QX971
and Australian Prudential Regulation Authority

Tribunal:

Member:
Deputy President Dr P Gerber

Hearing date: 13 July 1998
Decision date: 11 January 1999

Brisbane

---

Decision by:
Deputy President Dr P Gerber

REASONS FOR DECISION

1. The applicant applied to the Tribunal on 2 December 1997 for review of a decision made by a delegate of the Insurance and Superannuation Commissioner ("ISC") on 10 November 1997, affirming a decision made by an Acting Assistant Commissioner on 14 August 1997. That decision was to issue a notice pursuant to paragraph 40(1)(a) of the Superannuation Industry (Supervision) Act 1993 (Cth) ("the Act") to a superannuation fund ("the Fund"), stating that it was not a complying superannuation fund.

2. The applicant is the trustee of the fund in question, and by reason of sub-section 344(11) of the Act, which requires the hearing of the matter to be in private, I propose to identify the applicant by the pseudonym "QX97I" and to use other pseudonyms where necessary in these reasons in order to protect the privacy of the applicant and the Fund, the key to which is contained in Appendix 1, which pursuant to sub-s 35(2) of the Administrative Appeals Tribunal Act 1975 (Cth) ("AAT Act") I propose to direct be restricted to the parties and their legal advisers and Members and officers of the Tribunal.

3. In the initial application for review, lodged on 2 December 1997, the named - and appropriate - respondent was the Insurance and Superannuation Commissioner. As from 1 July 1998, the statutory office of ISC ceased to exist with the repeal of the Insurance and Superannuation Commissioner Act 1987 (Cth) by the Financial Sector Reform (Amendments and Transitional Provisions) Act 1998 (Cth) ("the Reform Act"). Under a number of enactments, the powers and functions of the ISC are divided between the Australian Prudential Regulation Authority ("APRA") and the Australian Securities and Investments Commission ("ASIC"), formerly the Australian Securities Commission ("ASC"). Item 37 of Schedule 19 to the Reform Act provides that if the ISC was party to legal proceedings in a court or tribunal prior to 1 July 1998, either ASIC or APRA is to be substituted as a party to the proceedings with the same rights in the proceeding as the ISC had. Thus APRA is now the respondent in these proceedings. However, for the purposes of clarity, and as the ISC was the relevant authority at the time the reviewable decision was made, I shall refer in these reasons to the decisions made, and actions done, by or on behalf of the ISC, notwithstanding APRA's status.

4. At the hearing the applicant was represented by Ms Holmes of counsel, and the respondent by Mr Roberts of counsel. The documents lodged by the respondent pursuant to s 37 of the AAT Act were admitted into evidence, along with a copy of a bank statement for the Fund, a hard copy print-out of a computer screen display, purporting to show the subscription by the Trustee to the ISC's superannuation circulars, Superannuation Circular Number 2.D.6 issued by the ISC, a small book entitled "the Trustee Guidebook to Superannuation", and a copy of an internal memo between two officers of the ISC. The applicant called three witnesses whom I will describe as A1, A2 and A3. These witnesses are the directors of the Trustee and are the only three members of the Fund.

The Issue

5. The issue to be resolved is whether the Fund was or was not a complying superannuation fund pursuant to s 42 of the Act for the year of income 1 July 1994 to 30 June 1995 ("the relevant year"). More particularly, the questions are whether the Trustee of the Fund contravened the Act by holding in-house assets in excess of those permitted by the Act, and whether the entity (the Fund) failed the culpability test contained in sub-s 42(1A). If the Fund was not a complying superannuation fund for the relevant year, the ISC was entitled to issue a notice under paragraph 40(1)(a), stating that the Fund is not a complying superannuation fund.

The Legislation

6. Division 2 of Part 5 of the Act contains provisions enabling the ISC to give notices about complying funds. Sub-s 40(1) provides that:

The Commissioner may give a written notice to the trustee of an entity stating:

(a)

whether the entity is or is not a complying superannuation fund;

...

in relation to a year of income specified in the notice.

7. Sub-s 42(1) provides that for the purposes of the division an entity is a complying superannuation fund if:

(a)

either:

(i)

the entity was a resident regulated superannuation fund at all times during the year of income when the entity was in existence; or

(ii)

the entity was a resident regulated superannuation fund at all times during the year of income when the entity was in existence other than a time, before it became a resident regulated superannuation fund, when the entity was a resident approved deposit fund; and

(b)

either of the following conditions is satisfied:

(i)

the trustee did not contravene this Act or the regulations in relation to the entity in respect of the year of income;

(ii)

both:

(A)

the trustee contravened this Act or the regulations in relation to the entity in respect of the year of income on one or more occasions; and

(B)

the entity did not fail the culpability test set out in subsection (1A) in relation to any of those contraventions.

8. To be a regulated superannuation fund, the entity must comply with sub-ss (2) to (4) of s 19. The fund must either have a trustee which is a constitutional corporation pursuant to a requirement in the governing rules, or the governing rules must provide that the sole or primary purpose of the fund is the provision of old-age pensions. In this case it is not in contention that the Fund is a superannuation fund and its trustee, the applicant, is a constitutional corporation. Sub-s 19(4) requires the trustee to have lodged an irrevocable election with the Commissioner that the Act is to apply in relation to the fund. It was not disputed that the Fund lodged a notice of this election on 16 June 1994. As the Fund is in compliance with sub-ss (2) to (4) of s 19, it is taken to be a regulated superannuation fund.

9. In order to be a "resident regulated superannuation fund", a fund must be a resident superannuation fund within the meaning of sub-s 6E(1) of the Income Tax Assessment Act 1936 (Cth) ("ITAA"). It was not contended by the respondent either in its statement of facts and contentions or at the hearing, that the Fund did not meet this requirement. In the circumstances, in view of the fact that the Fund has been a complying superannuation fund under the Act in the years since the relevant year, I accept that the Fund is a resident superannuation fund within the meaning of the ITAA, and thus is a resident regulated superannuation fund under the Act.

10. It is also not disputed that the Fund was a resident regulated fund at all times during the relevant year, it having come into existence by the execution of a deed, dated 22 April 1986 (T document 4, page 37).

11. The dispute is founded on the ISC's decision that the trustee was in contravention of the Act, thus enlivening sub-paragraph 42(1)(b)(ii).

12. S 39 provides that for the purposes of the division:

(1) For the purposes of this Division, a contravention of this Act or of the regulations is to be ignored unless the contravention is:

(a)

an offence; or

(b)

a contravention of a civil penalty provision.

(2) For the purposes of this Division, it is sufficient if a contravention is established on the balance of probabilities.

13. I must therefore be satisfied on the balance of probabilities that the trustee has either committed an offence or contravened a civil penalty provision in order for it to be open to find that the Fund is not a complying superannuation fund.

14. If I am satisfied that the trustee contravened the Act or regulations, in order to be a complying superannuation fund, the entity must not have failed the culpability test contained in sub-s 42(1A) set out below:

(1A) For the purposes of subparagraph (1)(b)(ii), an entity fails the culpability test in relation to a particular contravention of this Act or the regulations if:

(a)

both:

(i)

all of the members of the entity were in any way directly or indirectly knowingly concerned in, or party to, the contravention; and

(ii)

the Commissioner, after considering:

(A)

the taxation consequences that would arise if the entity were to be treated as a non-complying superannuation fund for the purposes of Part IX of the Income Tax Assessment Act 1936 in relation to the year of income concerned; and

(B)

the seriousness of the contravention; and

(C)

all other relevant circumstances;

thinks that a notice should be given stating that the entity is not a complying superannuation fund in relation to the year of income concerned; or

(b)

all of the following conditions are satisfied:

(i)

one or more of the members of the entity were in any way directly or indirectly knowingly concerned in, or party to, the contravention;

(ii)

one or more members of the entity (the "innocent members" ) were not in any way directly or indirectly knowingly concerned in, or party to, the contravention;

(iii)

none of the innocent members would suffer any substantial financial detriment if the entity were to be treated as a non-complying superannuation fund for the purposes of Part IX of the Income Tax Assessment Act 1936 in relation to the year of income concerned;

(iv)

the Commissioner, after considering:

(A)

the taxation consequences that would arise if the entity were to be treated as a non-complying superannuation fund for the purposes of Part IX of the Income Tax Assessment Act 1936 in relation to the year of income concerned; and

(B)

the seriousness of the contravention; and

(C)

all other relevant circumstances;

thinks that a notice should be given stating that the entity is not a complying superannuation fund in relation to the year of income concerned.

15. Sub-s 42(1B) provides that where there is a question of whether or not a person has been directly or indirectly knowingly concerned in, or party to, a particular contravention "that question may be decided on the balance of probabilities." The use of the word "may" by the legislature in an Act passed after 18 December 1987 is subject to sub-s 33(2A) of the Acts Interpretation Act 1901 (Cth). That sub-section provides that:

(2A) Where an Act assented to after the commencement of this subsection provides that a person, court or body may do a particular act or thing, and the word "may" is used, the act or thing may be done at the discretion of the person, court or body.

16. It appears then that this Tribunal, being a body in the terms of the Acts Interpretation Act, has a discretion as to the appropriate onus of proof to be applied to questions of whether or not a person was directly or indirectly knowingly concerned in, or party to, a particular contravention of the Act or regulations. This point was not addressed in submissions by counsel for the parties, and I merely observe that this Tribunal is not necessarily bound by the rules of evidence, and that ordinarily there is no legal or evidential onus of proof on either party. For a recent analysis of the authorities concerning this point see re Elvin and Comcare (unreported AAT 12818; 21 April 1998; Deputy President Forgie, Miss Brennan and Associate Professor Smithurst, particularly at paragraphs 171-177).

17. On balance, I am satisfied that the discretion contained in sub-s 42(1B) is most properly exercised by this Tribunal not requiring either party to make out sufficient weight of evidence to reach a formal balance of probabilities, but rather to apply the Tribunal's normal processes of assessing the weight of evidence absent any formal onus requirements. That the discretion may be exercised in this way, it seems to me, arises from the fact that decisions made under s 40 are reviewable by tribunals of fact, which vary in the degree of formality applied to their processes, ranging from the ISC's internal reconsideration to the Administrative Appeals Tribunal and ultimately, albeit in rare circumstances, to the Federal Court or High Court under either the provisions of the Judicial Review (Administrative Decisions) Act 1977 (Cth) (para 10(1)(a)) or the Judiciary Act 1901. At these different levels of review the discretion as to choice of onus of proof to be applied would no doubt be exercised subject to different considerations, and may result in a different onus being applied.

18. The contravention relied upon by the ISC is of the in-house assets provisions found in Part 8 of the Act (T document 3). S 84 provides that:

84(1) The trustee of a regulated superannuation fund must take all reasonable steps to ensure that the provisions of Divisions 2 and 3 are complied with.

(2) Subsection (1) is a civil penalty provision as defined by section 193, and Part 21 therefore provides for civil and criminal consequences of contravening, or of being involved in a contravention of, that subsection.

19. S 76 is contained within Division 2 and provides as follows:

Private sector funds established on or after 12 March 1985 - historical cost ratio for the 1994-95 year of income

76. (1) This section applies to a regulated superannuation fund, if the fund is a private sector fund established on or after 12 March 1985.

(2) At all times during the fund's 1994-95 year of income when the fund was in existence, the historical cost ratio of the funds in-house assets must not exceed 10%.

20. For the purpose of Part 8 the historical cost ratio of a fund's in-house assets is the percentage worked out pursuant to the formula in s 74:

[Number of whole dollars in cost of in-house assets of the fund / Number of whole dollars in value of all the assets of the fund] * 100


21. "In-house asset of a superannuation fund" is defined in s 71 thus:

71. (1) For the purposes of this Part, an in-house asset of a superannuation fund is an asset of the fund that is a loan to, or an investment in, a standard employer-sponsor, or an associate of a standard employer-sponsor, of the fund, but does not include: ...

22. The types of investments which are excluded by sub-s 71(1) include life policies issued by life insurance companies, deposits with approved banks and non-approved financial institutions, investments in pooled superannuation trusts where the trustees of the respective trusts are at arms length, assets of public sector funds which are State or Commonwealth issued investment securities, and other assets that the ISC may determine are not in-house assets of the fund. In this case the relevant asset is in the form of shares, and is not excluded by any of the paragraphs following sub-s (1).

23. A standard employer-sponsor is defined in s 16 as follows:

16. (1) An employer-sponsor of a regulated superannuation fund is an employer who:

(a)

contributes to the fund; or

(b)

would, apart from a temporary cessation of contributions, contribute to a fund;

for the benefit of:

(c)

a member of the fund who is an employee of:

(i)

the employer; or

(ii)

an associate of the employer; or

(d)

the dependants of such a member in the event of the death of the member.

Standard employer-sponsor

(2) If an employer so contributes, or would contribute, wholly or partly to an arrangement between the employer and the trustee of the regulated superannuation fund concerned, the employer is a standard employer-sponsor of the fund (as well as being an employer-sponsor of the fund). If the employer only so contributes, or would contribute, pursuant to arrangements between the employer and a member or members of the fund, the employer is not a standard employer-sponsor.

24. For the purposes of Part 8, an associate of a standard employer-sponsor is defined by s 70:

70. For the purposes of this Part:

(a)

a person is an associate of a standard employer-sponsor of a superannuation fund other than a public sector fund if, and only if, the person is an associate of the employer-sponsor within the meaning of subsection 26AAB(14) of the Income Tax Assessment Act;

25. Sub-s 26AAB(14) of the ITAA provides that an "associate", in relation to a person (in the definition referred to as the "taxpayer") is:

(a)

where the taxpayer is a natural person ...

(b)

where the taxpayer is a company, other than a taxpayer in the capacity of a trustee:

(i)

a partner of the taxpayer or a partnership of which the taxpayer is a partner;

(ii)

if a person who is an associate of the taxpayer by virtue of subparagraph (i) is a natural person - the spouse or child of that person;

(iii)

a trustee of a trust estate where the taxpayer or another person who is an associate of the taxpayer by virtue of another subparagraph of this paragraph benefits or is capable (whether by the exercise of a power of appointment or otherwise) of benefiting under the trust, either directly or through any interposed companies, partnerships or trusts;

(iv)

another person where:

(A)

the taxpayer company is, or its directors are, accustomed or under obligation, whether formal or informal to act in accordance with the directions, instructions or wishes of that person, or of that person and other persons, whether those directions, instructions or wishes are communicated directly to the taxpayer company or its directors, or through any interposed companies, partnerships or trusts; or

(B)

that person is, or that person and the persons who, if that person were the taxpayer, would be associates of that person by virtue of paragraph (a), by virtue of sub-subparagraph (A), by virtue of another subparagraph of this paragraph of by virtue of paragraph (c) are, in a position to cast, or control the casting of more than 50% of the minimum number of votes that might be cast at a general meeting of the taxpayer company;

(v)

another company where:

(A)

the other company is, or its directors are, accustomed or under an obligation, whether formal or informal, to act in accordance with the directions, instructions and wishes of the taxpayer company, of a person who is an associate of the taxpayer company by virtue of another subparagraph of this paragraph, or a company that is an associate of the taxpayer company by virtue of another application of this subparagraph or of any 2 or more of such persons; or

(B)

the taxpayer company is, the persons who are associates of the taxpayer company by virtue of sub-subparagraphs (A) and the other subparagraphs of this paragraph are, or the taxpayer company and the persons who are associates of the taxpayer company by virtue of that sub-paragraph and those subparagraphs are, in a position to cast, or control the casting of, more than 50% of the maximum number of votes that might be cast at a general meeting of the other company; or

(vi)

any other person who, if a third person who is an associate of the taxpayer by virtue of subparagraph (iv) were the taxpayer, would be an associate of that third person by virtue of paragraph (a), by virtue of another subparagraph of this paragraph of by virtue of paragraph (c);

(c)

where the taxpayer is a trustee of a trust estate ...

(d)

where the taxpayer is a partnership ...

Conclusion

Contravention of s 84

26. Ms Holmes conceded on behalf of the applicant in her submissions that the historical cost ratio of the Fund's in-house assets exceeded 10% during the relevant year. The applicant relied instead on the notion that for the purposes of deciding whether to issue notices under s 40, the Act envisioned "excusable contraventions" which would not result in the Fund being non-complying. This submission is dealt with at greater length below. Despite the applicant's concession on this point, I have considered and will set out the findings of fact which lead to the conclusion that the Fund had in fact contravened the in-house assets provisions for all but two days of the relevant year. I have done so because the facts comprising the contravention are also relevant to a consideration of the culpability of the members of the Fund, and whether the discretion not to issue the notice ought be exercised.

27. The parties agreed that for most of the relevant year of income, QX97I owned 6,455,000 shares in a company I will describe as "CoyB", which had an issued share capital of 11,776,777 ordinary one dollar shares (T documents 9, page 128). Of the shares owned by QX97I, 55,000 were held on trust for the Fund.

28. A1, A2 and A3 each subscribed their name to the deed establishing the Fund on 22 April 1986 as members (T document 4, at page 39). The deed, and the amended deed executed on 20 November 1990, refer to QX97I both as trustee and "Principal Employer". Clause 20 of the amended deed provides that the employer (defined in clause 3 as the 'Principal Employer') shall nominate persons who are employees to membership of the Fund. Clause 20.4.(c) provides that a person shall cease to be a member of the Fund ninety days after his resignation, dismissal or retirement from the service of the employer (T document 4 pages 38, 49, 75, 76). Each of A1, A2, and A3 continued as members of the Fund from its inception to the date of hearing. I therefore find that, at least for present purposes, each of A1, A2 and A3 were employed by QX97I throughout the relevant year, and that QX971 was their employer.

29. QX97I contributes to the Fund on behalf of its employees pursuant to clause 21.3 of the deed, which is an arrangement between QX97I as employer of the members, and the Trustee (T document 4, page 78). As such QX97I is a standard employer-sponsor of the Fund. It is not material that the employer and Trustee are in this case the same entity.

30. QX97I, as the standard employer-sponsor (in the analogous position of taxpayer company in the words of sub-subparagraph 26AAB(14)(b)(v)(B) of the ITAA), holds 6,455,000 of the 11,766,777 shares in CoyB, which is 54.81%. As all the shares of CoyB are ordinary shares, with none having greater voting rights than others, QX97I is a standard employer-sponsor (taxpayer company) in a position to cast, or control the casting of, more than 50% of the maximum number of votes that might be cast at a general meeting of CoyB (the other company). Therefore, in terms of sub-s 26AAB(14), CoyB is an associate of QX97I and an associate of an employer-sponsor for the purposes of Part 8 of the Act.

31. On 8 March 1996, a delegate of the ISC issued notices to QX97I as trustee of the Fund pursuant to sub-ss 254(2) and 255(1) of the Act, requiring the Trustee to provide information and books. The Trustee complied with those notices on 20 March 1996. The notices and response are contained in T document 24, and form the basis for the findings of fact set out below.

32. QX97I acquired the 55,000 shares in CoyB held on behalf of the Fund on 27 February 1991, for one dollar each (T document 23 at page 260). The Fund's statement of financial position for the relevant year (T document 38 at page 407) shows that at 30 June 1994 the assets of the Fund were $55,000, held in unlisted Australian shares and $7,335.13, cash at bank, for a total asset value of $62,335. The investment in unlisted Australian shares is clearly made up of the shares in CoyB, which cost the Fund $55,000. As CoyB is an associate of the employer-sponsor (see above), the shareholding of QX97I as trustee of the Fund is an asset of the Fund that is an investment in an associate of a standard employer-sponsor of he fund pursuant to

s 71. There being no evidence of any transactions between 30 June and 1 July 1994, I assume that the asset position of the Fund did not change at the beginning of the relevant year.

33. The historical cost ratio of the Fund's in-house assets as at 1 July 1994 (which is the beginning of the relevant year), is calculated with reference to the formula in s 74 (set out above), and is 88.23%, rounded to two decimal places.

34. The applicant asserted that it disposed of 50,000 of the shares in CoyB it held on behalf of the Fund on 29 June 1995. It did so following receipt of notices from the ISC, notifying the Fund that it was not a complying fund for the 1991/92, 1992/93 and 1993/94 years of income due to its contravention of the in-house assets rules contained in the Superannuation Entities (Taxation) Act 1987 ("SETA") and the Occupational Superannuation Standard Regulations ("OSSR"), which comprised the previous regulatory scheme.

35. There was some confusion caused by a letter sent by an employee of the manager of the Fund to the ISC on 19 July 1997 (T document 16, page 158). That letter purported to accept that the Fund was in breach of the SETA and OSSR in relation to in-house assets, but that it was not the intention of the trustee to breach the regulations in this regard. The letter continued:

"The trustee wishes to propose that, as it was not the intention to breach the regulations or the act, and now that this has been brought to their attention, they will sell the entire shareholding in [CoyB] during the 1995/96 year of income. ..."

36. That this statement was made more than a fortnight after the purported disposal of the majority of the shares understandably aroused the curiosity of the ISC. On 27 July 1995, the same employee wrote to the ISC in an attempt to clarify matters. In that letter, acceptance by the trustee of any breach was putatively rescinded, and the author continued:

"As explained in my letter of 19th July, 1995 it has never been the intention of the trustees to wilfully breach the regulations or the Act. In an endeavour to ensure future compliance of the superannuation fund, the trustee will dispose of any of their holding in [CoyB], if this is deemed necessary by the Commissioner to maintain the fund's compliance status."

37. During the hearing, A1, A2 and A3 all gave evidence of a rather informal meeting which occurred on 29 June 1995 in A1's office. At that meeting, A1 showed the others a copy of the notice from the ISC in relation to the Fund's non-complying status and said words to the effect of: "we've got to do something about this now." They (as directors of the Trustee) agreed to dispose of 50,000 shares in CoyB at $1 each and purchase $50,000 worth of units in a unit trust.

38. That this is occurred is evidenced by a bank statement from the Australia and New Zealand Banking Group Limited, showing transactions from 6 June 1995 to 19 July 1995. The name of the account is closely analogous to that of the Fund, and I accept that it is a statement of the bank account of the Fund. It discloses that on 29 July, there was a deposit of $50,000 into the account and that cheque No 001006 was presented for payment in the value of $50,000 (Exhibit B).

39. At T document 13 on page 154, there is a certificate issued in the name of CoyB, certifying that QX97I, as trustee for the Fund, is the registered holder of 5000 ordinary shares. At T document 14 on page 155 there is a unit certificate issued by "AUT" for 50 one dollar units in the unit trust "LUT".

40. In response to a second notice, issued on 13 August 1996, pursuant to sub-section 255(1) of the Act (T document 26), A1 stated in a letter to the ISC of 5 September 1996 that ten units in LUT were purchased on 29 July 1995 for $50,000. The units were purchased for the Fund from QX97I as trustee for a different trust, "Famtrust1". The valuation of the units was at seller's cost, as the seller had only held the units since December 1994 and all rights to receive distributions were to go to the Fund for the 1995 year. (There appears to be an error in the number of units in this statement. The unit certificate at T document 14 is for 50 units in the name of QX97I as trustee for the Fund. I accept, based on the surrounding evidence, that this error is unintentional and that the Fund held $50,000 worth of units in LUT at close of business on 29 June 1995).

41. Based on the oral evidence of A1 in regard to the letters of 19 and 27 July 1995, to the effect that the statements they contained were based on the author's misunderstanding of A1's instructions and actions, and the additional documentary evidence discussed above, I accept that QX97I as trustee of the Fund disposed of 50,000 shares in CoyB on 29 July 1995, and by the close of business that day held only 5,000 remaining shares.

42. During the course of the relevant year, the Fund received $4,209.31 in investment revenue, and $20,463.04 in employer contributions. After general administration expenses and tax, some $19,992.47 in benefits accrued as a result of operations (T document 38, page 406). The Fund's statement of its financial position discloses that at 30 June 1995, it had assets of $87,187.65. As the sale of shares in CoyB and the purchase of units in LUT which occurred on 29 June 1995 were essentially neutral with respect to the overall asset level of the Fund (with the possible exception of negligible and undisclosed transaction costs), I find that the total assets of the Fund at the close of business on 28 June 1995 was also $87,187.65. At that time the historical cost ratio of the Fund's in-house assets ($55,000 in CoyB's shares) was at, or approaching, 63%. During the course of the year from 1 July 1994 to 28 June 1995, while the Fund continued to hold 55,000 shares in CoyB, the historical cost ratio of the Fund's in-house assets varied between approximately 88% and 63%. For the two days at the end of the relevant year, the historical cost ratio of the Fund's in-house assets was 5.73%. I therefore find that for all but two days of the funds existence in the 1994-95 year of income that the historical cost ratio of the Fund's in-house assets exceeded 10%, contrary to the requirement imposed by sub-s 76(2).

43. The next question to arise is whether the Trustee took all reasonable steps to ensure that the provisions of Division 2, including sub-s 76(2) were complied with. As I have found above, and is conceded by the applicant, the requirement imposed by s 76 was not complied with, so the question arises whether that failure to comply occurred despite the Trustee having taken all reasonable steps to ensure compliance. The applicant's Statement of Facts Issues and Contentions and Ms Holmes several submissions are both relevant considering the culpability test and this question. These submissions are set out in greater detail in relation to consideration of the culpability test below, but it is sufficient to say that the basis for her submissions is that the applicant, through its directors A1 A2 and A3 was not fully aware of the requirements of the in-house assets rules and were of the belief at the time the Fund was exceeding its permitted historical assets ratio, that the only possible problem was to do with common directorships of the employer-sponsor and associated entities.

44. I would regard one of the most basic steps which any trustee of a superannuation fund would take is to familiarise him or herself with the relevant regulatory regime, particularly those provisions which, if breached, have the potential for serious consequences to the Fund. On their own admission that they were unaware of the effect of the relevant provision at the relevant time, I have no difficulty in finding that the directors, and hence the Trustee, did not take all reasonable steps to comply with the requirements of division 2, in particular s 76.

The Culpability Test

45. Ms Holmes drew a distinction between s 42 of the Act as originally passed and as amended by the Taxation Laws Amendment (No. 4) Act 1994 (the amending Act).

Section 42 of the Act was amended by items 110 and 111 of Schedule 3 of the amending Act. Section 2 of the amending Act provides that except for Part 3 of Schedule 1 the Act commenced on the day on which it received Royal Assent, which was 19 December 1994. The amendments commenced during the course of the year with which I am concerned. The effect of s 42 as originally enacted was to forgive a contravention of the Act by the trustee if the contravention was rectified within 30 days of the trustee becoming aware of it. This was the basis for Ms Holmes' putative doctrine of "excusable contravention" and the reason for much of the evidence as to when A1, A2 and A3 became aware of the fact of the contravention.

46. While it is quite well settled that amending legislation is assumed not to be retrospective (see Maxwell v Murphy (1957) 96 CLR 261 per Dixon CJ at 265-71), s 42, as amended, requires an analysis of the entire year of income before the ISC could make a decision as to whether or not a fund is complying. This analysis must necessarily be undertaken, and a decision made as to whether or not there has been compliance after the year of income is complete. It is at this time that the culpability test first becomes relevant, and thus, although applied to acts and omissions of the applicant occurring before the amendment came into effect, is in fact prospective in operation since it affects the future rights and liabilities of the applicant in so far as the Fund's liability to taxation may be described; see La Macchia v Minister for Primary Industry (1986) 72 ALR 23 per Toohey J at 26. For this reason, it is the culpability test which must be applied rather than the test propounded by the former wording of the section, which would in my view necessitate a finding of when the Trustee became "aware of the contravention", which would not necessarily be to its benefit.

47. The first step in applying the culpability test is to assess whether or not all members of the entity were in any way directly or indirectly knowingly concerned in, or party to, the contravention. A1, A2 and A3 were the members of the Fund, as well as directors of the Trustee (T document 25, page 327). On 7 June 1995 an ASC company extract for the Trustee shows that there was one further director who had been appointed on 17 December 1993 (T document 10, page 136).

48. A1 is a tax agent and what may loosely be described as the principal of a firm bearing his name and having, with among other things, taxation (including tax agent), accountancy and superannuation management divisions.

49. A1 is married to A3 and both have a harmonious relation with A2 in addition their professional relationships as co-directors and the employer employee relationships. All work in the same office, with A2 and A3 occupying positions outside the door to A1's office. A3 is A1's secretary and A2 has responsibility for property management. They generally eat lunch together and have breakfast together on Saturday mornings.

50. A1 described the investment by the Fund in CoyB in 1990 as a good long term investment. He had read an article describing how some of BHP's staff superannuation funds held shares in BHP, and thought that CoyB was a good investment and purchased shares for the Fund on that basis. As an aside, I would note that the recent fortunes of BHP underline the sound rationale for the in-house assets rule. A1 put the proposal to invest in CoyB to the other two (not mentioning the fourth director) and they agreed. Hence the investment.

51. A2 and A3 both agreed during their evidence that they were aware of the Fund's holding in CoyB, though not that it would create any difficulties for the Fund. On the whole of the evidence outlined above I find that A1, A2 and A3 must have been aware in general terms of the total value of the fund. Thus they were in a position to know that the Fund's holding in CoyB led to its historical cost ratio of the Fund's in-house assets to be well in excess of 10%. Accordingly I find that each of A1, A2 and A3, being directors of the trustee and the entire membership of the Fund, were knowingly concerned in, or parties to, the contravention for the purpose of sub-s 42(1A)(a)(i) of the Act.

52. The next issue is whether or not this is an appropriate case in which to exercise the discretion contained in sub-s 42(1A) (ii). The taxation consequences of the Fund being treated as a non-complying entity would be that it loses its concessional rate of 15% in the relevant year. Instead, pursuant to s 286 of the ITAA and s 26 of the Income Tax Rates Act 1986, tax on the Fund's income is payable at 47%. The Fund's reported operating profit for the relevant year is $23,654.20, and the tax at 15%, after minor adjustments is $3,661.73 (T documents pages 406, 411). At 47%, and with the same adjustment, the tax payable would be $11,231.07, a difference of $7,569.34. This is a significant consequence to the Fund and its members, but one that is not excessive, given the circumstances of the Fund's contravention of the Act and the Act's stated object of providing for the prudent management of superannuation funds (s 3).

53. In relation to the seriousness of the contravention and other relevant circumstances, the following submissions were made on behalf of the applicant in its Statement of Facts and Contentions:

"(a)

the nature of the contravention ... was not a matter to which the members of the Fund were, at any time prior to 28 June, 1995, alive;

(b)

[A1]'s misapprehension as to the relevant issue being one of mutual directorship and director control, as to which he considered there to be no basis for concern, was induced at least in part by the comments of representatives of the Respondent at the meeting of 20 July, 1994;

(c)

that misapprehension is further explicable having regard to the complexity of the relevant law, in that the "associate" test varies according to which part of the Superannuation Industry (Supervision) Act 1993 is under consideration;

(d)

the contravention, when its nature was identified to the Fund, was immediately rectified;

(e)

the contravention did not result in loss to any person; ...."

54. A1's understanding of the nature of the contravention was the subject of much of the evidence and submissions. It was contended that A1, who may be fairly described as the controlling mind behind the Trustee, was under the misunderstanding that the relevant issue in relation to the in-house assets ratio was control of the employer sponsor's associate by common directors, and not the shareholding by the Trustee in CoyB. It was said that this was brought about as a result of the complexity of the legislation and the different mechanisms by which control of one entity by another is assessed in the Act.

55. Ms Holmes submitted that while it was accepted by the applicant that A1's ignorance of the correct legislative test was no excuse for the Fund's contravention of it, his ignorance was a relevant factor to be considered when deciding whether to exercise the discretion to issue a notice that the Fund was not a complying fund in the relevant year of income. This is particularly so, it was submitted, given the apparent misapprehension of the issue by officers of the ISC in their communications with A1 at a meeting on 20 July 1994 and subsequent correspondence and internal memos between officers (T documents pages 120-121; 166). The file note of the meeting does in my view indicate that the ISC officers present seemed more concerned with common directorships than shareholdings in establishing associates of employer sponsors. However, I accept Mr Roberts' submission that, at the very least, the reference at the meeting to an in-house assets test should have put A1 on notice to examine the provisions of the Act, or obtain competent advice. This, it is admitted, he did not do.

56. The Fund's contravention of the Act is made more serious in my view by the fact that A1 is the principal of a firm which holds itself out as, among other things, a superannuation fund manager, tax agent and accountant. It is also for this reason that the applicant is less entitled than the average citizen to a beneficial exercise of the discretion not to issue notices that the Fund is non-complying. It would not be acceptable for a lay director of a superannuation fund trustee company to plead ignorance of the law, and it is even less acceptable for a person in A1's position to do so.

57. Another relevant factor, Ms Holmes submitted, is the view of ISC officers that the contravention was minor and may be overlooked. In an internal ISC memo, dated 19 January 1996, the writer observed that the investment by the Fund in CoyB was an in-house asset, noting:

"...

In relation to your question as to what to do about this I have the following suggestions:

(1) If you want to say that the Fund has contravened the in-house standards for 1994/95 and 1995/96 you will need to issue notices in order to gather evidence to show that asset still exists and that it is in excess of the limits. A contravention of the in-house assets is a civil penalty provision so we then need to decide whether we will pursue the offence.

(2) if the Fund is willing to rectify the situation we are unlikely to use the penalty but it can be a powerful persuasive tool should the trustees be unco-operative.

(3) The fact that the fund has been non-complying in earlier years under SETA which would result in a hefty tax bill for the trustees is also a strong bargaining tool, however I don't think that the Commission considers non-compliance a desirable outcome and wouldn't be something we are likely to follow through. If the trustees are willing to rectify the situation I would think that we would overlook these breaches. ..." (exhibit C)

58. An undated document described as an "Interim Report", which described its purpose as being to assess the compliance of the Fund with the in-house assets ratio provisions, contains the recommendation that:

"It is possible that the fund was in breach of section 76 during the 1994/5 financial year. However, as the position appears to have been rectified before 30 June 1995, this breach is probably not worth pursuing. ..."

59. While it does appear to me that this officer at least did not regard the contraventions as particularly serious, it is equally apparent from the initial decision of an Acting Assistant Commissioner, and its subsequent affirmation on internal review by an Acting Deputy Commissioner, that other, presumably more senior, officers took a different view of the seriousness of the contraventions. I do not think much can be made of this point in favour of the applicant.

60. I have also considered the magnitude and duration of the contravention during the relevant year. For all but two days the Fund's historical cost ratio of in-house assets was between 63% and 88%, well in excess of the prescribed limit of 10%. The effect of the Fund's investment to this extent in an associate of its employer-sponsor is effectively putting all the members' financial eggs in one basket. While the employer- sponsor continues to perform well, the members benefit from the employment it provides as well as from the growth in value of their interest in the Fund. However, should the employer-sponsor fail, then not only does it place the members' employment at risk, the value of their retirement savings is substantially reduced. This could have the effect of increasing the social welfare burden on the Australian community as a whole. For this reason, despite the fact that there is no evidence that there was any loss to any person resulting from this contravention, I consider that the additional and illegal financial risk to which the members exposed themselves and the Australian community is compounded by the magnitude and duration of the contravention, which makes it more serious.

61. Having carefully considered these matters, it is my opinion that the Fund's contravention is sufficiently serious that despite the adverse taxation effects on the Fund, a notice should have been given stating that the entity is not a complying superannuation fund in relation to the year of income. Thus it fails the culpability test.

62. Although sub-s 40(1), relating to the giving of notices is expressed in discretionary terms, the same considerations relevant to the culpability test would be relevant in the Commissioner's decision to give a notice. In this case, having found that a contravention occurred and that the Fund failed the culpability test, I find that the Commissioner was entitled to give the notice.

63. For the above reasons I affirm the decision under review.