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Merchant and Commissioner of Taxation
[2024] AATA 1102

The impact of this case on ATO policy is discussed in Decision Impact Statement: Merchant and Commissioner of Taxation [2024] AATA 1102 (2020/6932).

(Decision by: T Thawley J)

Merchant and Commissioner of Taxation

Tribunal:

Administrative Appeals Tribunal

Legislative References:
Administrative Appeals Tribunal Act 1975 (Cth) - The Act
Income Tax Assessment Act 1936 (Cth) - The Act
Superannuation Industry (Supervision) Act 1993 (Cth) - The Act
Superannuation Industry (Supervision) Regulations 1994 (Cth) - The Regulation

Case References:
The Taxpayer v Commissioner of Taxation - [2002] AATA 1233; 51 ATR 1192
Aussiegolfa Pty Ltd v Commissioner of Taxation - [2018] FCAFC 122; 264 FCR 587
Merchant v Commissioner of Taxation - [2024] FCA 498

Decision date: 16 May 2024

Brisbane

Decision by:
T Thawley J

INTRODUCTION

The application for review

1. On 6 November 2020, Mr Merchant applied for a review of a decision made on 9 October 2020 by the Commissioner of Taxation as regulator under the Superannuation Industry (Supervision) Act 1993 (Cth) (SISA). By the decision, the Commissioner:

(a): decided, under s 126A(2) of the SISA, to disqualify Mr Merchant from acting as a trustee or responsible officer of corporate trustees of superannuation entities (Disqualification Decision);
(b): reconsidered his original position to disqualify Mr Merchant under s 126A(3), being satisfied that he was a fit and proper person to be a responsible officer of a body corporate that is a trustee.

2. The application for review is brought under s 344(8) of the SISA and s 25(1) of the Administrative Appeals Tribunal Act 1975 (Cth).

3. The application for review was heard together with three proceedings in the Federal Court of Australia and two other proceedings in the Tribunal. Reasons for judgment were published in the Federal Court proceedings on 14 May 2024: Merchant v Commissioner of Taxation [2024] FCA 498.

4. Each of the parties to the Federal Court proceedings and the AAT proceedings wanted the proceedings to be heard together, with evidence in the Federal Court proceedings being evidence in the AAT proceedings and (subject to limited exceptions) vice versa. The proceedings were conducted on that basis.

5. References in these reasons to "CB", followed by a number, is a reference to the relevant Tab number of Exhibit 1, being the "Court Book". The references in these reasons to the relevant affidavits are provided by stating the name of the deponent and the relevant paragraph number of the affidavit. Other references used in these reasons are:

•: "AOS" is a reference to the applicants' written opening submissions;
•: "ROS" is a reference to the respondent's written opening submissions;
•: "AORS" is a reference to the applicants' written opening reply submissions; and
•: "T" is a reference to the transcript.

6. It is useful to begin with an overview of the factual background.

Overview of factual background

7. In 1973, Mr Merchant co-founded the business which was to become Billabong. Billabong Holdings Australia Limited was later formed and changed its name to Billabong Limited (BBG). BBG was listed on the Australian Securities Exchange (ASX) on 11 August 2000. Through related entities, Mr Merchant remained a shareholder in BBG during the events which are centrally relevant to these reasons for decision. At the time of those events, Mr Merchant wanted to maintain a significant interest in BBG. His interests in BBG were ultimately purchased by the time BBG was delisted from the ASX in August 2018.

8. Mr Merchant was the director and controlling mind of a number of Australian corporate entities, referred to in these reasons as the Merchant Group. The main entities of relevance for present purposes are described in the following diagram:

The main entities of relevance for present purposes are described in the following diagram

9. As depicted in this diagram, the Merchant Family Trust (MFT) (Gordon Merchant No 2 Pty Ltd as trustee for the MFT) held all the shares in what was, when it was acquired in 2010, a start-up company. The company is now called Plantic Technologies Ltd.

10. Plantic relied on the Merchant Group for funding from the time it was acquired by the MFT until the time the MFT sold its shares in Plantic on 2 March 2015. Between 2011 and 2015, three entities in which Mr Merchant held all the shares lent about $55 million to Plantic: GSM Pty Ltd lent about $50 million; Tironui Pty Ltd lent a little over $4 million; and the Angourie Trust (Kahuna Pty Ltd as trustee for Angourie) lent a little under $1 million (the Plantic Loans).

11. Mr Merchant became increasingly unhappy about the level of funding Plantic required. By May 2014, if not earlier, he was considering the sale of Plantic. By June 2014, Sealed Air Corporation (a US company) had expressed interest in acquiring Plantic. Ernst & Young (EY), which had acted as Mr Merchant and the Merchant Group's accountants for a number of years, was consulted about the structure of a sale to Sealed Air and provided advice. It was anticipated that the sale might result in a substantial capital gain in the MFT. EY's advice included that the preferable structure of a future sale of Plantic from Mr Merchant's perspective was for:

(a): the MFT to sell its shares in Plantic rather than for Plantic to sell its assets;
(b): the relevant Merchant Group entities to forgive the Plantic Loans of about $55 million; and
(c): the Gordon Merchant Superannuation Fund (GMSF) (GSM Superannuation Pty Ltd (GSMS) as trustee for the GMSF) to acquire from the MFT a substantial number of the MFT's high cost shares in BBG with the result that the MFT would crystallise a significant capital loss.

12. The GMSF was settled as a self-managed superannuation fund for the purposes of the SISA with GSMS as corporate trustee: CB30; CB833j. Mr Merchant was, at relevant times, the sole shareholder in, and a director of GSMS: CB732. There was also a second director at relevant times, Ms Colette Paull, who has since died.

13. On 4 September 2014, the MFT sold 10,344,828 shares in BBG (the BBG Shares) to the GMSF for $5,844,827.82 (the BBG Share Sale). The result was that the MFT crystallised a capital loss of $56,561,940.

14. The potential sale to Sealed Air did not eventuate.

15. On 15 October 2014, a representative of Kuraray Co Ltd, a Japanese company which had earlier expressed an interest in Plantic, indicated that he and others were going to recommend to the Kuraray board that they should start due diligence to acquire Plantic. Negotiations with Kuraray were successful and, by a Share Sale Agreement exchanged on 31 March 2015 (SSA), the MFT sold all of its shares in Plantic to Kuraray.

16. On 2 April 2015, as a condition precedent to completion of the SSA, the Plantic Loans of $55 million were forgiven by GSM, Tironui and Kahuna as trustee for Angourie under a Deed of Forgiveness. Completion of the SSA occurred on that day.

17. The MFT's capital gain on the sale of its shares in Plantic to Kuraray was around $85 million. By reason of the BBG Share Sale, the MFT had capital losses sufficient to absorb the whole capital gain.

18. The preceding transactions – particularly the crystallising of the capital loss and the debt forgiveness – piqued the interest of the Commissioner and resulted in an audit of the affairs of Mr Merchant and the Merchant Group. The audit resulted in the Commissioner issuing two sets of "Reasons for Decision" on 20 July 2020.

19. One concerned the "BBG Share Sale Scheme". The Commissioner considered that, for the purposes of s 177D(1) in Part IVA of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936), it would be concluded that a person entered into or carried out a scheme, or part of it, for the dominant purpose of enabling GSM to obtain a tax benefit, GSM being the only presently entitled beneficiary of the MFT.

20. In summary, the Commissioner took the view that the predominant reason why the GMSF acquired the BBG Shares from the MFT on 4 September 2014 was to crystallise a capital loss in the MFT which could be applied against the capital gain from the MFT's anticipated sale of its shares in Plantic, resulting in a reduction in GSM's assessable income. The Commissioner considered that the BBG Share Sale was analogous to a 'wash sale' given that the BBG Shares would remain in the Merchant Group of which Mr Merchant was the ultimate owner.

21. The Commissioner made a determination under s 177F(1)(c) of the ITAA 1936 that the amount of $56,561,940, referable to a capital loss incurred by the MFT in the year ended 30 June 2015, was not incurred by the MFT in relation to that financial year.

22. The second transaction concerned the "GSM and Tironui Debt Forgiveness Scheme". The Commissioner considered that the forgiveness of debts by two of the three lenders – GSM and Tironui – were schemes having substantially the effect of schemes by way of or in the nature of dividend stripping within the meaning of s 177E(1)(a)(ii) in Part IVA. No consideration was provided for the forgiveness of the debts such that the forgiveness had the effect of:

(a): reducing the undistributed profits of GSM and Tironui; and
(b): converting the Plantic Loans to equity, thereby increasing the value of Plantic's shares and the consideration paid by Kuraray for those shares.

23. The Commissioner made a determination under s 177F(1)(a) of the ITAA 1936, that the debts forgiven by GSM and Tironui be included in Mr Merchant's assessable income in the 2015 income year as dividends.

24. The Commissioner issued assessments to give effect to his determinations under s 177F. Penalty assessments were also issued. All of these assessments were objected to and the objections disallowed. The objection decisions became the subject of appeals to the Federal Court and reviews in this Tribunal, being the proceedings heard together with this proceeding.

25. The Commissioner's decision as regulator under the SISA was, as mentioned, made under s 126A(2) which provides:

(2) The Regulator may disqualify an individual who is, or was, a responsible officer of a trustee, investment manager or custodian (the body corporate) if satisfied that:
(a) the body corporate has contravened this Act or the Financial Sector (Collection of Data) Act 2001 on one or more occasions; and

(b) at the time of one or more of the contraventions, the individual was a responsible officer of the body corporate; and

(c) in respect of the contravention or contraventions that occurred while the individual was a responsible officer of the body corporate--the nature or seriousness of it or them, or the number of them, provides grounds for the disqualification of the individual.

26. The position the Commissioner took, and has since kept, is that:

(a)

GSMS (the trustee of the GMSF), in using the GMSF's resources to acquire the BBG Shares from the MFT in September 2014, contravened:

(i): the requirement to comply with operating standards under s 34 of the SISA, in particular to give effect to the investment strategy and the requirements of sub-reg 4.09(2) of the Superannuation Industry (Supervision) Regulations 1994 (Cth) (SISR);
(ii): the sole purpose rule in s 62 of the SISA; and
(iii): section 65 of the SISA, by using the resources of the fund to give financial assistance to a member of the fund or his relatives.

(b)

contraventions were serious and made at the direction of the guiding mind and responsible officer of the trustee, Mr Merchant.

Procedural Background

27. On 21 July 2020, the Commissioner sent a letter to Mr Merchant stating that the Commissioner had finished his audit and that Mr Merchant, as director of the corporate trustee of the GMSF, had contravened ss 34(1), 62(1) and 65(1) of the SISA: CB833f.

28. The letter stated that administrative penalties had been charged to GSMS under Div 3 of Part 20 of the SISA for contraventions by Mr Merchant of s 34(1) and 65(1) and that the directors (Mr Merchant and Ms Paull) needed to pay the amount either jointly or severally. The Commissioner also sent letters to GSMS notifying it:

(a): of the penalty in an amount of $13,600: CB833h; and
(b): that Mr Merchant and Ms Paull has been disqualified: CB833g.

29. On the same day, the Commissioner issued to Mr Merchant a "notice of disqualification" (Disqualification Notice) stating that Mr Merchant had been disqualified under both s 126A(2) and s 126A(3) of SISA. The notice included:

I have disqualified you as I am satisfied that the corporate trustee of one or more superannuation entities has contravened the SISA on one or more occasions, and at the time of the contraventions you were a responsible officer of the corporate trustee and the seriousness of the contraventions provides grounds for disqualifying you.

I have disqualified you as I am satisfied that you are not a fit and proper person to be a trustee or a responsible officer of a body corporate that is a trustee, of a superannuation entity for the purposes of the SISA.

30. The decision to disqualify Mr Merchant was a "reviewable decision" within the definition in s 10(1)(qa) of the SISA. Section s 344(1) of the SISA permits a person affected by such a decision to request that the Commissioner reconsider the decision.

31. On 7 August 2020, Mr Merchant requested that the Commissioner revoke the disqualification decisions under s 126A(5) of the SISA: CB789. The letter stated that, if there was no revocation by 11 August 2020, Mr Merchant would seek a formal review of the Disqualification Notice under s 344 of the SISA. The letter was treated by the parties as a request for review.

32. By a letter dated 9 October 2020, the Commissioner informed Mr Merchant that a decision had been made on the review request: CB793. The letter stated that the Commissioner had reconsidered the disqualification decision and that the Commissioner:

(a): was satisfied that while Mr Merchant was a director of the corporate trustee of the GMSF, the trustee contravened the SISA and the nature and seriousness as well as the number of the contraventions provided grounds for his disqualification under s 126A(2) of SISA; and
(b): set aside the decision to disqualify Mr Merchant under s 126A(3) of the SISA because the Commissioner was satisfied that Mr Merchant was a fit and proper person to be a responsible officer of a body corporate that is a trustee.

33. The Commissioner's reasons for concluding that Mr Merchant was a fit and proper person were expressed in the following way (CB793 at pages 41 and 42):

Our overall position

[86] With regards to your skills, knowledge, expertise and experience, we have considered the following:

•
As the controlling head of the Merchant Group, it is considered that you have years of experience in the management and directorship of corporate entities.

•
You do not possess tax, law or accounting qualifications. In relation to your tax affairs you have sought professional advice from a reputable accounting firm (EY); they were engaged as your tax advisor in 2006 and have been with you since.

[87] With regards to the 'diligence and soundness of judgment to undertake and fulfil particular duties and responsibilities of being an SMSF trustee', we note the following:

•
Regarding the BBG share transfer, it was noted that the application of Part IVA was considered at one point by your advisor however they were of the view that it was unlikely to be applied by the Commissioner. However, there is not evidence of whether potential contraventions of the SISA as a result of the BBG share transfer were discussed between you and EY prior to the decision to go through the transaction.

•
The Commissioner conceded that you had a reasonably arguable position in relation to the s 177E (dividend stripping arrangement) component of the Part IVA issues, and this element may reasonably be open to dispute.

[88] Notwithstanding our view that the non-consideration of potential contraventions of the SISA to be a potential instance of where poor judgment was exercised, we consider that your positions at audit were at least in part able to be supported by legal precedence as well as documentation, therefore demonstrating a degree of soundness of judgment on your part. Furthermore, we note that you have appropriately delegated your affairs to a trusted tax advisor given your lack of background in tax and/or accounting.

[89] We have also assessed your general behaviour and conduct in the discharge of your taxpayers' [sic] duties as well as your reputation and character relating to the conduct of your relevant business activities, and have noted the following:

•
Although we have found that you have contravened subsections 34(1), 62(1) and 65(1) of the SISA in undertaking the BBG share transfer, you showed full cooperation with the ATO throughout the audit and review processes.

•
Your compliance history also shows that you willingly rectified any errors and contraventions made, e.g. when EY provided voluntary disclosure of omitted interest from a South African bank account for the 2008 to 2010 income years in response to a preliminary risk review for those years, and your prompt correction of the section 67 contravention by GMSF in 2009.

•
You and the other entities in the Merchant Group have never been subject to disciplinary action or sanctions by relevant professional or regulatory bodies such as ASIC and ASX. You also do not have a history of dealing with shareholders' monies in an egregious way.

•
You have never been subject to any ATO-related litigation or prosecution activity and have never filed for bankruptcy. It is also noted that apart from the current tax payable resulting from the Part IVA audit you do not have any outstanding obligations to the ATO.

•
You have never had a substantial involvement in the management of entities which have been wound up or failed.

[90] We also note that as there was only one transaction that led to disqualification under subsection 126A(3), and the status of that transaction is in dispute, we consider the additional disqualification under subsection 126A(3) to be harsh and unjust outcome.

[91] >The Commissioner has therefore reconsidered his position regarding your disqualification on the basis that you were not a fit and proper person and revokes that decisions. The Commissioner considers that you are a 'fit and proper' person to be a trustee of an SMSF.

Mr Merchant's undertaking

34. At the hearing of the review, Mr Merchant gave to the Tribunal an undertaking in the following terms:

Gordon Stanley Merchant undertakes that, so long as the Gordon Merchant Superannuation Fund ( the Fund ) remains in existence:

(a) he will not act as sole director of the trustee of the Fund and will cause to be appointed to the trustee of the Fund another director (an Independent Director ) who is unrelated to Mr Merchant, save that he may act as sole director:
(i) for a period of up to 30 days from the acceptance of this undertaking prior to the appointment of the first Independent Director; and

(ii) for a period of up to 90 days from the date that any Independent Director ceases to hold office in order to appoint a suitable replacement Independent Director; and

(b) he will cause the trustee of the Fund to:
(i) engage a financial planner to provide advice to the trustee in respect of the Fund's investment strategy at least once per year;

(ii) review the Fund's investment strategy at least once per year ( Annual Strategy Review );

(iii) make a written record of the following within 60 days after each Annual Strategy Review:
(1) the Fund's investment strategy;

(2) any change to the Fund's investment strategy since the last Annual Strategy Review;

(3) for the sale or acquisition of any investment in the Fund since the last Annual Strategy Review, the trustee's consideration of the Fund's investment strategy in relation to the sale or acquisition; and

(c) he will, on request by the Regulator, cause the trustee of the Fund to provide any records made pursuant to paragraph (b)(ii) above within 30 days of the request.

FACTUAL BACKGROUND

35. A full account of the factual background is set out in Merchant, in which the Court held (amongst other things) that:

(1): having regard to the eight matters in s 177D(2), it would be concluded for the purposes of s 177D(1), that the dominant purpose of Mr Merchant, the MFT and the GMSF (GSMS as trustee for the GMSF) was to obtain a tax benefit: Merchant at [405]; and
(2): Mr Merchant had not discharged the onus of establishing that there was not a scheme which had substantially the effect of a scheme by way of or in the nature of dividend stripping to which s 177E(1)(a)(ii) applied: Merchant at [573].

36. The facts and reasoning relevant to these conclusions are lengthy and not fully repeated here. These reasons for judgment should be read with the reasons in Merchant.

37. It is appropriate to repeat some of the facts of particular relevance to these reasons.

38. Mr Merchant was assisted for many years in the day-to-day management of various entities in the Merchant Group, including the GMSF, by Ms Colette Paull. Ms Paull initially did part-time bookkeeping work, but her role expanded and she became a close and trusted colleague and friend of Mr Merchant. At the time of the relevant events, Mr Merchant and Ms Paull spoke regularly, typically on a daily basis. Ms Paull held a power of attorney for Mr Merchant. Ms Paull implemented decisions on her own behalf and often on behalf of Mr Merchant for the GMSF. She typically signed GSMS and GMSF documents as Mr Merchant's attorney. Ms Paull died on 6 August 2021.

39. Mr Ian Burgess was a tax partner at EY and was the Merchant Group's tax agent and the GMSF's auditor for a number of years. Mr Merchant did not often speak directly to Mr Burgess about the Merchant Group's affairs. Ms Paull and Mr McGrath (Mr Merchant's investment adviser) had discussions (and other communications) with Mr Burgess about the Merchant Group's affairs. Mr Burgess did not give evidence in the proceedings, but his absence is readily explained – see Merchant at [25] and [38].

The GMSF in 2008 and 2009

40. The GMSF was established on 30 June 2006: CB30. The assets of the GMSF were primarily sourced from a significant roll over of funds in the 2008 and 2009 financial years from a super fund in which Mr Merchant was previously a member, in addition to his ongoing concessional and non-concessional contributions: CB33 and CB39.

41. In the financial year ended 30 June 2009, the GMSF acquired a factory at Yamba which was at all relevant times the GMSF's only real property asset and which was recorded in the GMSF's 2009 Financial Statements as having a value of $1,154,202: CB39.

42. The remaining and predominant assets of the GMSF in the year ended 30 June 2009 were: (a) "investment in foreign fund", with a value of $4,573,926; and (b) "cash at bank" of $12,188,934. As at 30 June 2009, the net assets available to pay benefits was $17,879,735: CB39.

The pension paid to Mr Merchant

43. On 1 July 2009, the GMSF commenced an account based superannuation income stream for payment of a pension to Mr Merchant who was then aged 66 and stated to be retired. A letter to Mr Merchant dated 3 November 2009, signed by Ms Paull for herself and as Mr Merchant's attorney, confirmed that the minimum income stream payment for the year ended 30 June 2010 was $458,750:CB 780 at page 37.

44. Various resolutions to commute the income stream pension and to start a new income stream pension were made in respect of the 2010, 2011 and 2012 financial years: CB780 at pages 32 and 38. Mr Merchant received a pension of at least $450,000 from the year ended 30 June 2010. In the year ended 30 June 2013, Mr Merchant received a pension of $470,500, leaving a total benefit balance of $10,116,862: CB149 at page 8. The pension continued in the 2014 financial year. In the financial year ended 30 June 2015, Mr Merchant received a pension of $523,500: CB593. As noted below, one of the consequences of the BBG Share Sale was that the GMSF made a decision to cease the pension from 1 July 2015 and for the fund to go back into the accumulation phase.

GMSF acquired BBG shares: 29 February 2012

45. On 29 February 2012, the GMSF acquired 2,523,600 shares in BBG for $7.89 million (approximately $3.13 per share) in an on-market purchase: Merchant at [119]; CB537. By 30 June 2012 (the opening balance at 1 July 2012), those shares were recorded in the GMSF financial statements at $2,712,870: CB590, page 3. By 30 June 2013, they were recorded in the GMSF financial statements at $378,540: CB149; CB559; CB590.

46. Mr Merchant stated in cross-examination that he did not receive any advice from EY in relation to this transaction: T75.21.

47. This transaction was addressed in statutory declarations prepared by Ms Paull and Mr Merchant in the context of the audit conducted by the Commissioner into the affairs of the GMSF.

48. In her statutory declaration at [15] to [19], Ms Paull stated that she had discussions with Mr Merchant before the GMSF acquired shares in BBG in February 2012: CB443. She stated:

15. In February 2012, GMSF acquired 2,523,600 BBG shares on market (2012 shares). GMSF paid approximately $7.89 million for these shares.

16. Before GMSF purchased the 2012 shares, Gordon and I discussed investing GMSF's cash in assets that generated more wealth for GMSF. Gordon and I agreed that it would be good to try to invest the cash in other growth assets, rather than just having cash in GMSF. I can't remember how long we had been having these discussions, but it had been for a number of years before GMSF purchased the 2012 shares.

17. During these discussions before February 2012, Gordon suggested that GMSF purchase BBG shares. At that stage, the BBG share price had been decreasing for some time and Gordon and I discussed the share price and BBG's performance regularly.

18. Gordon said words to me to the effect that:
(a) he believed that BBG's performance would improve and the share price would increase;

(b) he wanted to buy BBG shares because he saw them as a good investment - the share price was low and he was confident that BBG would improve over time; and

(c) he wanted to hold BBG shares for a long time.

19. At the same time, there were a lot of good offers for BBG shares - for example, they were offering two shares for every one purchased.

49. In his statutory declaration made on 17 October 2019, Mr Merchant stated (CB442):

Investing in BBG

10. I have always (through various entities in the Merchant Group) been a significant shareholder of BBG.

11. I discussed buying BBG shares with Colette on a number of different occasions. Different entities in the Merchant Group owned BBG shares, including MFT and GMSF.

12. BBG started to decline in around 2010 - I believe that BBG was affected around this time from the global financial crisis.

13. Throughout this time, I continued to purchase BBG shares in the Merchant Group. I always believed that:
(a) BBG would improve and trade out of its difficulties;

(b) as a founder, it was important for me to show the public that I believed that BBG would improve and trade out of its difficulties;

(c) my investment in BBG was a long-term investment; and

(d) BBG would return to paying dividends and I would make a good return on my investment in BBG.

14. Colette and I regularly discussed BBG and me wanting to purchase BBG shares. Whenever I wanted to purchase BBG shares, I spoke to Colette about it.

15. In February 2012, GSMF purchased around 2.5 million BBG shares for approximately $7.89 million. At that stage, the BBG share price had been decreasing. I believed that:
(a) the share price had taken into account BBG's trading difficulties, so the BBG shares were good value;

(b) the BBG share price would increase;

(c) as a founder, it was important for me to show the public that I believed that BBG would improve;

(d) my investment in BBG was a long-term investment;

(e) I wanted to continue to own (through my various entities) a sufficient number shares that gave me some control - this was around 12% to 15% of the shares in BBG; and

(f) BBG would return to paying dividends and I would make a good return on my investment in BBG.

50. In cross-examination, Mr Merchant denied that this purchase had anything to do with him wishing to retain his position as a substantial shareholder in BBG: T78.3. I do not accept this evidence. It is inconsistent with [15(d)] of his statutory declaration. Mr Merchant acted consistently over this period to maintain his position as a substantial shareholder in BBG. The GMSF had cash available to make the purchase and Mr Merchant wanted to maintain the Merchant Group's relative shareholding position in BBG.

51. Notwithstanding the statutory declarations of Ms Paull and Mr Merchant, I conclude that the predominant reason these shares were purchased was Mr Merchant's desire to maintain the Merchant Group's substantial shareholding in BBG.

GMSF formulates and adopt an investment strategy: 15 March 2012

52. On 15 March 2012, Ms Paull (on her own behalf and as Mr Merchant's attorney) signed a resolution of the directors of GMSF: CB84. The resolutions were said to have been made at a meeting on 16 February 2012 at which Ms Paull and Mr Merchant were "present (on phone)". The resolution refers to sub-reg 4.09 of the SISR. The following was set out next to the heading "Investment Objectives & Strategy":

IT WAS RESOLVED that the primary investment objective of the Fund will be to achieve an after tax rate of return which is at above the rate of inflation.

The strategy is to invest assets as follows:

•
0 - 40% in Shares in Listed Companies;

•
0 - 20% in Shares in Unlisted Companies;

•
0 - 10% in Units in Listed Unit Trusts;

•
0% in Units in Unlisted Unit Trusts;

•
0 - 10% in Managed Funds;

•
0% in Property;

•
0 - 5% in Loans;

•
0 - 50% in Shares in Unlisted Hybrid Funds;

•
0 - 100% in Cash ie Bank Bills/ Term Deposits etc

•
0 - 20% in Fixed interest;

•
0% in other investments

53. Attached to the resolution was a document dated 15 March 2012, signed by Ms Paull for herself and as Mr Merchant's attorney, which was headed "Investment Strategy" (the 2012 Investment Strategy Document or 2012 ISD). It stated:

Investment Objectives

Effective from 16 February 2012 the investment objectives of the Fund are as follows:

•
to earn an investment rate of return above the inflation rate on the assets under its control;

•
to invest so as to have a very low expectation of a negative return in any 12 month period;

•
to hold assets in such a form to enable the trustee to discharge the Fund's liabilities as and when they fall due and to discharge the member's benefits in a manner that satisfies the member.

Investment Strategy

In order to achieve the investment objectives of the Fund, the investment strategy of the Fund is as follows:

•
To maintain asset class holdings in the following ranges:

Investment (%)

Shares in Listed Companies 0 - 40

Shares in Unlisted Companies 0 - 20

Units in Listed Unit Trusts 0 - 10

Units in Unlisted Unit Trusts 0

Managed Funds 0 - 10

Property 0

Loans 0 - 5

Shares in Unlisted Hybrid Funds 0 - 50

Fixed Interest 0 - 20

Cash ie Bank Bills/Term Deposits etc 0 - 100

•
To pursue a high growth strategy in order to provide strong returns with diversification of risk. Diversification of risk will be achieved by ensuring the portfolio maintains an exposure to most main investment sectors. At this stage the focus will be mainly through investments in shares in listed companies, and fixed interest and cash. Also, consideration will be given to investments in shares in unlisted companies, units in listed trusts, and managed funds where appropriate.

The Trustee will take into account the following factors when acquiring, selling or replacing assets:

(i) the marketability of the asset, including costs of realisation;

(ii) the risk involved in making, holding and realising, and the likely return from the asset;

(iii) anticipated liquidity requirements;

(iv) the Fund's ability to discharge its existing and prospective liabilities; and

(v) if the Fund should hold a contract of insurance that provides insurance cover for one or more members of the Fund.

Where appropriate, the Trustee will consult with their financial advisers in relation to the purchase and disposal of investments.

Short term cash flow requirements for the ongoing administration of the Fund and member payment requirements will be met via returns on investments, contributions received and the holding of cash amounts. Investments in equities can also be easily realised to cover cash flow requirements, both in the short term for ongoing administration costs, and in the long term to meet member payment requirements.

In determining the above strategy, the Trustee has taken into consideration all the circumstances surrounding the Fund and the Fund's investment objectives. The Trustee has also considered the risk and likely return of the investments, the adequacy of the diversification, the Fund's expected cash flow requirements and the Fund's ability to meet its existing and prospective liabilities.

The Trustee will continue to monitor the appropriateness of the investment strategy adopted. Depending on the Trustee's view of the financial markets, the Trustee may vary the investment strategies in order to ensure the Investment Objectives of the Fund will be met.

This Investment Strategy has been adopted.

54. Mr Merchant gave evidence that he did not recall seeing the 2012 ISD at or before the time it was signed. He stated that he did recall discussing the GMSF's investments with Ms Paull from time to time and he understood that Ms Paull sought advice from EY about GMSF matters: Merchant at [121], [122]. Although the minutes record Mr Merchant as being present at the meeting by phone, his evidence in cross-examination was that he could not recall whether he was at the meeting or not: T75.36-41.

55. As Mr Merchant noted in his evidence, the resolution included a strategy to invest in assets including 0% in property which did not reflect the fact that, by 30 June 2012, a factory in Yamba comprised approximately 9% of the GMSF's assets: Merchant at [121]. As noted above, the resolution also included a strategy which provided for investment of up to 40% of the GMSF's assets in listed securities.

The GMSF as at June 2013

56. The GMSF financial statements for the year ended 30 June 2013 record that:

(a): an income stream based pension of $470,500 was paid to Mr Merchant, leaving a total benefit balance of $10,116,862: CB149 at page 8.
(b): the GMSF investments comprised: BBG shares recorded at a value of $378,540; a "Flaik (SSIWDI Pty LTD) loan" of $547,341; the Yamba factory valued at $1,154,202 and cash of $8,187,967: CB149 at page 4;

BBG renounceable rights issue: September 2013 to March 2014

57. On 19 September 2013, BBG entered into agreements with Centerbridge Partners, LP and Oaktree Capital Management, LP entities (Centerbridge/Oaktree) for Centerbridge/Oaktree to provide long term finance to BBG: Merchant at [189], [190]. Under the agreement, a $135 million equity placement would be issued to Centerbridge/Oaktree and a $50 million renounceable rights issue would be available to BBG shareholders other than Centerbridge/Oaktree. The entitlement offer was made by a prospectus dated 26 February 2014.

58. The equity placement and rights issue would dilute Mr Merchant's shareholding in BBG, so he decided to acquire BBG shares under the renounceable rights issue to reduce the extent of dilution of his shareholding: Merchant at [191].

59. Consideration was given to whether the GMSF could take up the entitlements of other Merchant Group entities. Ultimately, however, this did not occur because of various potential taxation issues raised by EY: CB186.

60. On 31 March 2014 (Merchant at [199]):

•: the MFT acquired 24,679,850 BBG shares for approximately $6,910,357;
•: GSM acquired 850,873 BBG shares for approximately $238,244; and
•: the GMSF acquired 946,350 BBG shares for approximately $264,977 (0.28 cents per share):.

61. After the rights issue, the Merchant Group held approximately 10% of the voting power in BBG, and was no longer the largest shareholder: Merchant at [202]. Mr Merchant's evidence as to why he (through the Merchant Group entities) acquired the shares included (Merchant at [203]):

At the time, Rider had acquired approximately 10% of BBG's share capital and was pushing to have a seat on the board. Rider had plans to increase the distribution channels that Billabong products were sold through - for example, selling Billabong products through lower-end retailers like Kmart. I disagreed with this plan because I thought this would cheapen the brand. I considered that selling Billabong products at a 'discount' retailer would diminish the value of the brand forever. I disagreed with Rider's plans for BBG and wanted to make sure they did not get a seat on the board. These kinds of considerations are why I felt that I needed to keep acquiring BBG shares.

The GMSF as at 30 June 2014

62. The GMSF Financial Statements for 30 June 2014 record that:

•: Mr Merchant's total benefit balance was $10,464,744 – see: Member's Statement at CB592 at page 9.
•: the GMSF investments comprised: a parcel of BBG shares recorded at a value of $1,734,975; the "Flaik loan" at $347,342 (reduced from $547,341); the Yamba factory at $690,000 (reduced from $1,154,202); and
•: cash at bank was $7,855,587.

Negotiations with Sealed Air for the sale of Plantic

63. By June 2014, Mr Merchant wanted to sell Plantic. There were negotiations with Sealed Air which continued in June and July 2014. Sealed Air was aiming to obtain approval to send a non-binding offer by 24 July 2014: CB226.

64. Mr McGrath had a discussion with Mr Burgess on 9 July 2014 about structuring a potential sale. Mr Burgess advised that he thought a share sale would be the best option, although it would be necessary to determine how to deal with the Plantic Loans: CB261.

65. On 12 July 2014, Sealed Air wrote an email to Mr Morris providing a proposal which was close to their "walk away point": CB233. Mr McGrath forwarded this email to Mr Merchant and recommended to him that he permit Sealed Air to do their due diligence if they provide a non-binding, indicative offer letter: CB233.

66. On 13 July 2014, Mr McGrath sent an email to Mr Burgess (and others) stating that Mr Merchant "has agreed to move to the next phase [of the sale to Sealed Air] and obtain the conditional letter of offer so we need to sort out our end with regard to structure of purchase etc asap": CB233.

67. On 21 July 2014, Mr McGrath sent an email to Mr Merchant reporting that Sealed Air had "decided to do an Executive Committee Circular Resolution by email to approve moving to a formal Letter of Offer": CB236. Mr Merchant replied asking "if we were to sell Plantic what would the tax implications be for me?" Mr McGrath replied that day stating:

EY have modelled it and the way to go would be a share purchase by Sealed Air of Plantic shares and not an asset purchase.

By doing that and by transferring some of your high cost base BBG shares - remember some of the BBG shares have a $7 cost base from one of the capital raisings and other ones have a $2 cost base etc. - from GM No 2 to your Super Fund you will get a good "loss" on paper so they reckon there will be zero tax payable on a lump sum payment which is very good.

68. On 24 July 2014, Sealed Air provided its letter of intent to acquire Plantic for US$70 million: CB245. The letter provided that Plantic and the MFT would exclusively negotiate with Sealed Air up until 15 September 2014 in relation to a broad range of transactions similar to the kind of transaction it contemplated.

69. The tax consequences of the potential sale continued to be considered by Mr Merchant's advisors. There were also negotiations between Sealed Air and Mr Merchant's advisors about the tax consequences, for each side, of various possible ways of structuring the deal. EY's advice was that a share sale was the most desirable option and that the MFT should sell shares in BBG to the GMSF in order to crystallize a capital loss.

The BBG Share Sale: 4 September 2014

70. On 4 September 2014, Mr Merchant and Ms Paull signed a standard transfer form, effecting the transfer of 10,344,828 BBG shares from the MFT to the GMSF for consideration of $5,844,827.82 (56.5 cents per share) with a "date of transfer" stated to be 2 September 2014 (CB284). The consideration of $5,844,827.82 was credited to the MFT on 5 September 2014: CB689 at page 1027.

71. Mr Merchant's evidence included:

[231] At some point in August or September 2014, I decided to transfer BBG shares from MFT to GMSF to free up some cash that I could use to fund Plantic.

[232] I knew I would need to continue funding Plantic if the sale to Sealed Air did not go through and as I say above, I had the impression that Sealed Air was raising a number of issues to drive down the price. I did not expect the deal with Sealed Air would complete. Sealed Air were raising a number of issues and I thought they were raising these so I would accept a lower price than US$70 million.

...

[243] I transferred the BBG shares to GMSF on 2 September 2014 because I needed to free up cash as soon as possible to continue funding Plantic.

...

[247] As stated above, in August and September 2014 I also believed that BBG shares were a good investment for GMSF. I thought that the share price had been discounted by the market to take into account BBG's difficulties, so BBG shares were good value and would increase in value in the future.

[248] At around the time that GMSF acquired the BBG shares from MFT, GMSF was earning modest interest on the cash it held in its bank accounts. I considered the BBG shares were a better investment than continuing to hold the cash in a bank account.

72. Mr Merchant also gave detailed evidence in his affidavit about why other funding options for Plantic were not pursued: Merchant at [233]-[238] and [251]-[254].

73. In Merchant, the Court did not accept that the BBG Share Sale was undertaken for the purpose of funding Plantic or the MFT more generally. The Court concluded that Mr Merchant's participation in the BBG Share Sale transaction was undertaken because it was recommended to him by EY as part of what was desirable for the anticipated sale of shares in Plantic, in particular because it would crystallise a capital loss.

74. In his statutory declaration made on 17 October 2019, Mr Merchant stated (CB442):

GMSF acquiring the 2014 BBG Shares

23. GMSF purchased 10,344,828 BBG from MFT for approximately $5.84 million on 2 September 2014 ( 2014 BBG Shares ).

24. Before GMSF acquired the 2014 BBG Shares, I spoke to Colette on several occasions about buying BBG shares using GMSF's cash.
(a) I asked Colette to find out, from Ian, whether GMSF could acquire the 2014 BBG Shares.

(b) GMSF acquiring the 2014 BBG Shares was not a transaction I took lightly. I knew that there were various obligations that I had as a director of the Trustee. I wanted to make sure that I wouldn't breach any of the superannuation rules if GMSF purchased 2014 BBG Shares.

25. By September 2014, BBG had stopped paying dividends and the price of BBG shares had declined further. I believed that:
(a) the market had over corrected so the BBG share price was good value;

(b) the BBG share price would increase;

(c) as a founder, it was important for me to show the public that I believed that BBG would improve;

(d) my investment in BBG was a long-term investment; and

(e) BBG would return to paying dividends and I would make a good return on my investment in BBG.

26. I also wanted GMSF to buy the 2014 BBG shares so MFT could use the cash it received to continue to fund Plantic.

27. As a part of responding to the ATO's audit of GMSF, I have reviewed regulation 4.09 of the Superannuation Industry (Supervision) Regulations 1994.

28. I address each of the matters in regulation 4.09 below.
(a) I, together with Colette, formulated, reviewed and gave effect to an investment strategy for GMSF.

I discussed each investment and GMSF's overall investments with Colette.

29.When GMSF acquired the 2014 BBG Shares:
(a) I considered the risk involved in making, holding and realising, and the likely return from the 2014 BBG Shares. Colette and I discussed BBG's performance. I believed that BBG would trade out of any difficulties. Colette and I discussed these issues and came to a conclusion on them.

(b) I had regard to the cashflow requirements and objectives of GMSF. I received a pension from GMSF. At the same time, I wanted GMSF to use its cash to invest in other growth assets.

(c) I considered GMSF's investments as a whole. I was aware that GMSF held a number of ASX listed shares and those were mainly BBG shares.

(d) I considered GMSF's abilities to discharge its existing and prospective liabilities. I received a pension from GMSF. However, my retirement can also be supported by other assets in the Merchant Group if GMSF stopped paying me a pension.

(e) I considered whether GMSF should hold insurance cover for me.

30. Taking all of this into account, I decided, together with Colette, that GMSF should acquire the 2014 BBG Shares.

75. In Merchant, the Court stated at [337] to [340]:

To the extent the statutory declaration implies that the BBG Share Sale was Mr Merchant's idea, that proposition cannot be accepted. The proposal to transfer BBG shares from the MFT to the GMSF (ultimately occurring on 4 September 2014) originated from Mr Burgess as something which should occur in connection with the proposed sale of Plantic in order to provide a loss. This was reported to Mr Merchant by Mr McGrath on 21 July 2014: CB236.

In his email of 21 August 2014, Mr Burgess advised Ms Paull, Ms Lyons and Mr McGrath that the best structure for the sale of Plantic was a share sale, but noted that the sale of shares by the MFT to the GMSF as part of the structure gave rise to some risk because it would crystalise a capital loss in the MFT, giving rise to "wash sale" issues: CB260.

There was no contemporaneous evidence to support the proposition that Mr Merchant "formulated, reviewed and gave effect to an investment strategy for GMSF" or that he did the various matters referred to in his statutory declaration at [29]. I do not accept that he did. Mr Merchant's evidence was that he was unaware of the written investment strategy, being the 2012 Investment Strategy Document. The acquisition of the BBG Shares was inconsistent with the 2012 ISD. I do not accept that entering into the BBG Share Sale constituted a formulation or review of the GMSF investment strategy. And it did not give effect to any investment strategy, whether written or not, that had earlier been formulated. The evidence establishes that the predominant reason for entering into the BBG Share Sale was to crystalise a capital loss in the MFT, not for the investment purposes of the GMSF.

Mr Merchant's statutory declaration is not consistent with the contemporaneous documentary evidence and it does not sit easily with Mr Merchant's evidence in cross-examination that, in entering into the BBG Share Sale, he did what he was "directed" by EY. I do not accept that it provides an accurate account of what occurred.

76. In her statutory declaration, Ms Paull stated:

31. Before the end of year meeting for the 2013 income year, Gordon and I had also discussed GMSF buying more BBG shares.
(a) In the 2013 and 2014 income years, GMSF was paying Gordon a pension of around $500,000. Gordon also has substantial assets, through various entities. At around this time, I liked to ensure that I had:
(i) enough accessible cash to invest in Plantic Technologies Limited (Plantic) – around $1 million to $1.4 million a month;

(ii) $1 million accessible cash set aside for Gordon to use on expenses that I didn't know about; and

(iii) sufficient cash to fund any development costs that the Merchant Group was incurring at the time.

(b) From my conversations with Gordon at around the end of the 2013 income year, I understood that he still:
(i) believed that BBG's share price would increase – so he would make a good return on the BBG investment;

(ii) wanted to buy BBG shares because he saw them as a good investment;

(iii) believed that BBG would return to paying dividends; and

(iv) wanted to hold BBG shares for a long time.

32. After discussing these issues with Gordon, I agreed that BBG shares was a good investment for GMSF and that the September 2014 Shares in particular, were a good investment for GMSF.

77. In Merchant, the Court stated at [331] to [333]:

In relation to Ms Paull's statutory declaration, I do not accept that Mr Merchant considered that BBG would return to paying dividends at any time in the then reasonably foreseeable future. There was no objective basis for such a view. For his part, Mr McGrath considered there was no realistic prospect of BBG paying dividends at any time in the then reasonably foreseeable future: T120.36-47. There is no contemporaneous document which suggests that Ms Paull considered that BBG shares were a good investment for GMSF or that she discussed with Mr Merchant that she considered that an acquisition of the BBG Shares from the MFT on 4 September 2014 was a good investment for GMSF.

Ms Paull's statutory declaration was made after she had her s 353-10 interview and at a time when the Commissioner was considering taking action against Mr Merchant and Ms Paull in relation to their duties concerning the GMSF. Ms Paull was not able to be tested in relation to the content of her statutory declaration.

In the face of the contemporaneous documents indicating the tax reasons why the GMSF acquired the BBG shares from the MFT on 4 September 2014 and the lack of any contemporaneous document lending any real support for the contention that the BBG Shares were acquired because they were considered to be a good investment from the perspective of the GMSF, I cannot accept Ms Paull's statement in [32] of her statutory declaration as accurate.

78. The amount of $5,844,827.82 was drawn out of the GMSF' account on 4 September 2014 to purchase the BBG Shares. The GMSF retained a cash balance in the account of $1,868,241.18: CB494 at page 3. At the time, the GMSF was paying a pension to Mr Merchant. The pension paid to Mr Merchant in the year ended 30 June 2015 was $523,500: CB593 at page 4.

MFT sells its shares in Plantic

79. As noted earlier, the MFT ultimately sold all of its shares in Plantic to Kuraray. The SSA was executed on 31 March 2015: CB370. On 2 April 2015, a Deed of Forgiveness between GSM, Tironui, Angourie and Plantic was executed. Completion of the sale occurred on 2 April 2015.

Decision to cease pension: 30 April 2015

80. On 30 April 2015, discussions occurred at a meeting of the Merchant Group concerning cash flow issues in the GMSF, which included consideration of whether to "make a contribution to the fund in FY15 in order to fund his pension" with a decision being made make a non-concessional contribution, cash flow permitting, and cease the pension from 1 July 2015 to commute the pension payable from 1 July 2015 to preserve cash reserves: CB675 at 2 and 7.

81. Minutes of a meeting of directors held on 25 June 2015, at which Ms Paull and Mr Merchant are recorded as being present, state that Mr Merchant requested the GMSF commute his existing account-based income stream with effect from 1 July 2015 and roll his account balance into accumulation mode: CB716 at pages 285-286. The minutes were signed by Ms Paull for herself and as Mr Merchant's attorney.

82. The financial statements and reports for the GMSF in the year ended 30 June 2015, show that Mr Merchant made a non-concessional contribution of $180,000: CB593 at page 4. The Commissioner submitted that this was made "in order to meet the expenses of the GMSF": ROS[630(c)]. I accept that, without the contribution, the expenses would have exceeded the income of the GMSF in that year, but note that the predominant expense in that year was payment of Mr Merchant's pension of $523,500.

The GMSF formulates a new investment strategy: 19 November 2015

83. On 17 November 2015, Ms Reeves of EY sent an email to Ms Sue Lyons of the Merchant Group in relation to the finalisation of the audit for the GMSF: CB700. Ms Reeves stated that "the investment strategy for the superannuation fund needs to be updated for the current allocation of investments". Ms Reeves provided an investment strategy template and resolution for the trustee to complete. Ms Reeves provided an investment summary report.

84. On 19 November 2015, Ms Paull (on her own behalf and on behalf of Mr Merchant) signed a resolution of the directors of the Super Fund. The resolution recorded a new investment strategy for the Fund (the 2015 ISD). It was in broadly similar terms to the 2012 ISD, save that the targeted asset allocation was stated as follows:

*Investment*	(%)
Shares in Australian Listed Companies	0 - 80
Shares in International Companies	0 - 20
Shares in Unlisted Companies	0 - 10
Units in Listed Unit Trusts	0
Units in Unlisted Unit Trusts	0
Managed Funds	0 - 10
Property	0 - 20
Artwork/Collectables	0
Fixed Interest	0 - 50
Cash ie Bank Bills/Term Deposits etc	0 - 50
Other	0 - 100

85. Mr Merchant stated that he did not have a recollection of seeing the 2015 ISD at the time it was signed or discussing it with Ms Paull: Merchant at [306].

INVESTMENT STRATEGY: SECTION 34 SISA

86. Part 3 of the SISA is directed towards providing a system of prescribed standards applicable to the operation of regulated superannuation funds and the trustees of those funds: s 30 of the SISA. Section 31(1) of the SISA contemplates that "regulations may prescribe standards applicable to the operation of regulated superannuation funds (funds) and to trustees ... of those funds".

87. Section 31(2)(l) provides:

(2) The standards that may be prescribed include, but are not limited to, standards relating to the following matters:
...
(l) The investment of assets of funds and the management of the investment;

88. Section 33A(1) provides:

(1) A standard application to the operation of a superannuation entity may be prescribed that elaborates, supplements or otherwise deals with any aspect of:
(a) a matter relating to the operation of the entity to which a covenant referred to in section 52 to 53 or prescribed under section 54A relates; or

(b) a matter relating to the operation of the entity to which a provision of this Act or another provision of the regulations relates.

89. Regulation 4.09(2) of the SISR provides:

(2) The trustee of the entity must formulate, review regularly and give effect to an investment strategy that has regard to the whole of the circumstances of the entity including, but not limited to, the following:
(a) the risk involved in making, holding and realising, and the likely return from, the entity's investments, having regard to its objectives and expected cash flow requirements;

(b) the composition of the entity's investments as a whole, including the extent to which they are diverse or involve exposure of the entity to risks from inadequate diversification;

(c) the liquidity of the entity's investments, having regard to its expected cash flow requirements;

(d) the ability of the entity to discharge its existing and prospective liabilities;

(e) whether the trustees of the fund should hold a contract of insurance that provides insurance cover for one or more members of the fund.

90. This is the prescribed standard by which a trustee is to invest the assets of the fund and manage the investment: s 31(2)(l). By virtue of s 34 of the SISA, a trustee must ensure compliance with the prescribed operating standard at all times. Section 34(1) provides:

Prescribed operating standards must be complied with

Standards must be complied with

(1) Each trustee of a superannuation entity must ensure that the prescribed standards applicable to the operation of the entity are complied with at all times.

Note: Section 166 imposes an administrative penalty for a contravention of subsection (1) in relation to a self managed superannuation fund.

91. Part 6 of the SISA sets out rules about the content of the governing rules of superannuation entities. Section 52B of SISA provides that certain covenants are deemed to be included in the governing rules of a self-managed superannuation fund (SMSF), if they are not already contained in those rules: s 52B(1). The covenants are identified in s 52B(2) and include in (a) to (f):

(a) to act honestly in all matters concerning the fund;

(b) to exercise, in relation to all matters affecting the fund, the same degree of care, skill and diligence as an ordinary prudent person would exercise in dealing with property of another for whom the person felt morally bound to provide;

(c) to perform the trustee's duties and exercise the trustee's powers in the best financial interests of the beneficiaries;

(d) to keep the money and other assets of the fund separate from any money and assets, respectively:
(i) that are held by the trustee personally; or

(ii) that are money or assets, as the case may be, of a standard employer-sponsor, or an associate of a standard employer-sponsor, of the fund;

(e) not to enter into any contract, or do anything else, that would prevent the trustee from, or hinder the trustee in, properly performing or exercising the trustee's functions and powers;

(f) to formulate, review regularly and give effect to an investment strategy that has regard to the whole of the circumstances of the fund including, but not limited to, the following:
(i) the risk involved in making, holding and realising, and the likely return from, the fund's investments , having regard to its objectives and its expected cash flow requirements;

(ii) the composition of the fund's investments as a whole including the extent to which the investments are diverse or involve the fund in being exposed to risks from inadequate diversification;

(iii) the liquidity of the fund's investments, having regard to its expected cash flow requirements;

(iv) the ability of the fund to discharge its existing and prospective liabilities;

92. Relevant to sub-s (f) of s 52B(2) is s 52B(4) of the SISA which states:

(4) An investment strategy is taken to be in accordance with paragraph (2)(f) even if it provides for a specified beneficiary or a specified class of beneficiaries to give directions to the trustee, where:
(a) the directions relate to the strategy to be followed by the trustee in relation to the investment of a particular asset or assets of the fund; and

(b) the directions are given in circumstances prescribed by regulations made for the purposes of this paragraph.

93. Regulation 4.02 of the SISR is made for the purposes of s 52B(4)(b) and concerns covenants in governing rules about a beneficiary's investment choice. Regulation 4.02(2) provides:

(2) The circumstances in which a direction, other than a subsequent direction, may be made by a specified beneficiary or class of beneficiaries are the following:
(a) the trustee:
(i) gives the beneficiary or class a choice of 2 or more strategies for investing the interest of the beneficiary or class in the fund; and

(ii) informs the beneficiary or class that the beneficiary or class may choose a strategy or combination of strategies;

(b) the beneficiary or class is fully informed of:
(i) the investment objectives of each strategy; and

(ii) anything else the trustee reasonably believes a person would need to know to understand the effect of, and any risk involved in, each strategy;

(c) the direction specifies:
(i) which strategy or combination of strategies the beneficiary or class has chosen; and

(ii) where applicable, matters related to the choice mentioned in subparagraph (i);

Example: The chosen strategy could be one that allows the beneficiary a choice in exposure to certain classes of asset. The beneficiary may choose 60% in fixed interest loans and 40% in shares. The choice of the level of exposure to the class of assets would be information for subparagraph (ii).

(d) the beneficiary or class is fully informed of the range of directions that can be given and the circumstances in which they can be changed.

94. Clause 14.1 of the GMSF trust deed provides that, subject to the "Relevant Law", the trustee of the fund has a wide discretion in respect of the investment of the fund that is not required for immediate payment of benefits: CB30. The GMSF trust deed makes provision for a member to give directions about investment of the member's portion of the fund's assets: cl 14.3. When such an investment is made pursuant to such a direction, the Trustee must note in the Fund's records that the investment was made in accordance with a Member's investment directions and the name of the Member: cl 14.3(a). The "Relevant Law" is defined in cl 1.1 of the GMSF trust deed and relevantly includes SISA and SISR. Clause 14.1 cannot override the SISA and SISR.

Mr Merchant's submissions

95. First, Mr Merchant submitted that it is only the investment strategy that must have regard to the considerations mentioned in sub-reg 4.09(2) of the SISR, but that the SISA and SISR do not require that the trustee must have regard to those considerations in making any given investment: AOS[351].

96. Secondly, Mr Merchant submitted that sub-reg 4.09(2) of the SISR and s 34(1) of the SISA do not require a trustee to document its investment strategy: AOS[352]. The term "investment strategy" is not defined in the SISR, but the terms 'strategy' and 'investment strategy' are, Mr Merchant submitted, used throughout the SISR in a way that does not suggest that they are referring to a document. Mr Merchant referred in this regard to the frequent reference to members 'choosing' an investment strategy, for example in reg 4.02.

97. Thirdly, Mr Merchant submitted that focussing exclusively on the 2012 Investment Strategy Document is misplaced and that the real questions are (AOS[353]):

(1): whether the GSMS did "formulate, review regularly and give effect to an investment strategy"; and
(2): whether that strategy had "regard to the whole of the circumstances of the entity" including the specified matters.

98. Fourthly, Mr Merchant submitted that the SISA does not prevent a SMSF fund from effecting an investment strategy that is informed by the member's circumstances. A strategy having regard to the "whole of the circumstances of the entity" (which include 'objectives' and 'expected cash flow requirements') would have regard to the circumstances of the sole member of the GMSF bearing upon risk appetite. To say that the strategy of the fund must have regard to 'risks from inadequate diversification' does not mean that a fund breaches the SISR if it effects a strategy involving a concentration of risk: AOS[354].

99. Fifthly, Mr Merchant submitted that, when deciding to undertake the BBG Share Sale, Mr Merchant turned his mind to relevant matters of strategy from the perspective of the GMSF: AOS[356]. The context included that Mr Merchant noted in submissions that he was 71 years old at the time of the BBG Share Sale: AOS[355]. He had more than $200 million of assets across various entities in the Merchant Group. Those assets as a whole were diversified, including substantial holdings of 'blue chip' shares and real estate in the MFT. Accordingly, the demand on the GMSF to meet the ordinary living costs of Mr Merchant in his retirement was not likely to be high. Mr Merchant was well provided for. Those circumstances meant that it was open to the GMSF to adopt an investment strategy that took more risk than might be the case in a fund whose anticipated member needs might make a different strategy more appropriate.

100. It was submitted that Mr Merchant had regard to the GMSF's then current major investment (cash in a bank account); the current return on that investment (modest interest); and the merits of an alternative investment (BBG shares, which he said he considered to be underpriced and likely to increase in value – albeit that they were not paying dividends), referring to Merchant at [247]. It was submitted that this analysis involves reviewing (changing) and giving effect to an investment strategy: AOS[357]. Taking on concentration risk with a view to achieving higher long term capital gains is an investment strategy.

The Commissioner's submissions

101. The Commissioner submitted that "the decision to invest 74.4% of the cash assets of the fund in the BBG shares in 2014 was required to, [but did not], give effect to the 2012 documented investment strategy and the factors mentioned in that strategy reflecting" paragraphs (a) to (e) of sub-reg 4.09(2): ROS[626]. The Commissioner submitted it was "uncontroversial that Mr Merchant either directly or through Mrs Paull did not purport to give effect to" the 2012 ISD: ROS[627]. The Commissioner submitted that the trustee's decision failed to give effect to the fund's recorded investment strategy, in that the BBG Share Sale (AOS[628]):

(a)

used 74% of the fund's available cash to acquire an asset that was non income producing and with no identified prospect of being income producing. In this regard, Commissioner observed (at ROS[190], [629]) that as at 4 September 2014:

(i): there had been volatility in the share price including a significant spike in around late 2013 and early-2014, and a further drop around late August 2014 from which the share price was recovering by early September 2014: CB806 at page 47;
(ii): losses had been declared in each of the 2013 and 2014 financial years: CB529 at pages 440-1;
(iii): fully franked dividends had ceased to be paid after 24 October 2008 and no dividends had been declared since April 2012: CB809 at [35]; CB529 at 284, 438;

(b)

was implemented with no identified consideration of the risk of such an investment to the fund's attaining its objective of achieving a rate of return after tax above inflation;

(c)

effected an investment by the GMSF of 74% of its assets in the one class of shares in an Australian listed company with no identified consideration of the risk to the fund from such a lack of diversification; and

(d)

was seen by Mr Merchant as being a long term investment with no identified consideration by the trustee as to how the fund thereby had sufficient liquidity to meet its current and future cash flow requirements, particularly whilst in pension mode.

102. The Commissioner submitted that the trustee's failure to comply with the fund's documented investment strategy, and the factors stated in reg 4.09(2) (which were substantially repeated in the 2012 ISD), was further demonstrated by the difficulties encountered by the GMSF with cash flow and its ability to meet the ongoing pension requirements of its sole member soon after the acquisition: ROS[630].

103. The Commissioner submitted that the trustee, through Mr Merchant, failed to act as a prudent trustee in the performance of its statutory obligations and was reckless in doing so: ROS[631].

104. The Commissioner referred to the advice from EY, addressing the BBG Share Sale, noting it was "solely focused on the use of the cash in the GMSF for the purposes of generating a capital loss in the MFT in anticipation of the MFT's sale of Plantic Shares": ROS[633]. The Commissioner noted at ROS[634] that there was no material before the Tribunal which indicated that financial investment advice or advice from EY was sought or provided before 2 September 2014 addressing:

•: the "requirements" of the 2012 ISD;
•: portfolio allocation strategy, and in particular, the limited diversification of the share portfolio;
•: substantiation, or any assessment, of the rates of return and risk to the GMSF associated with the purchase of the BBG shares; and
•: the GMSF's ongoing capacity to discharge its current and future liabilities.

105. The Commissioner noted that the 2015 ISD was prepared in the context of EY's audit of the GMSF and advice that the 2012 ISD needed to be "updated for the current allocation of investments": CB700. The Commissioner noted that the new document expanded provision for investment in shares in listed companies to 80%, but observed that it retained statements to the effect that (ROS[638]):

•: the trustee expects a reasonable return to be derived from such investments and that the value will increase at least in line with inflation;
•: that the trustee will at all times act prudently to maximise the rate of return, subject to inter alia, acceptable risk parameters;
•: the trustee was to give effect to a strategy that had regard to diversification or the risk of inadequate diversification; to the liquidity of the entity's investments having regard to expected cash flow; and the ability of the entity to discharge its existing and prospective liabilities.

106. The Commissioner observed that the 2015 ISD recorded that, where appropriate, the trustee would consult with their financial advisors on the disposal and acquisition of investments. The Commissioner submitted that there was no financial advice received for the purposes of the fund, as distinct from for the purposes of Mr Merchant and the MFT in crystallising a capital loss. The Commissioner observed that there was no material before the Tribunal that suggested that the trustees in making the 2014 acquisition consulted any financial advisors on the prudency of using 74.4% of the fund's cash to acquire non-income producing assets in the form of BBG shares: AOS[639].

107. The Commissioner submitted that, while the volume of the 2014 acquisition of the BBG Shares now fell within a permissible asset class, the acquisition did not otherwise give effect to the strategy revision as recorded in the 2015 ISD, in that the acquisition failed to have regard to (ROS[640]):

(a): any expectation of a reasonable return, let alone the maximisation of return;
(b): to the risk to the fund of inadequate diversification in having 74% of its assets tied up in a long term investment in assets that had no identified prospect of income return; or
(c): to the liquidity of the fund and cash flows to meet existing and prospective liabilities at the time of acquisition.

108. The Commissioner submitted that it could not be said that, in making the decision to undertake the BBG Share Sale (or in that context) the trustee reviewed, changed and gave effect to an undocumented revised investment strategy which had regard to the matters stated in sub-reg 4.09(2): ROS[641].

109. The Commissioner submitted that Mr Merchant's statutory declaration signed 17 October 2019 setting out his decision-making process in relation to the BBG Share Sale provided no support for a contention that Mr Merchant authorised the acquisition of a long term growth asset for the purposes of the fund and in accordance with any investment strategy, written or unwritten. The Commissioner submitted (at ROS[642]):

To the contrary, Mr Merchant, acknowledging the long term decline in the value of the BBG shares, sets out his subjective belief, unsupported by any objective material or analysis, that the BBG would eventually trade out of its difficulties. He identifies various reasons extraneous to the purposes of the fund for the GMSF's acquisition of BBG shares over the years, and in particular in 2014.

110. The Commissioner submitted, by reference to AOS[354], that the fact that Mr Merchant had regard to the "whole of the circumstances of the entity" in coming to a view on risk appetite does not assist him. There is no material before the Tribunal that indicates that in September 2014, the trustee had regard to the risk to the fund of the lack of diversification in the assets of the fund caused by the acquisition of the BBG shares: ROS[643].

111. The Commissioner submitted that the resources of the GMSF were invested with no regard to the purposes of the fund, and used by Mr Merchant for purposes extraneous to those of the fund: ROS[643]. The Commissioner submitted:

To make light of the ability of the fund to discharge its existing and prospective liabilities by a contention that, because Mr Merchant was otherwise well provided for, the demand on the [GMSF] to meet the ordinary living costs of Mr Merchant in his retirement was unlikely to be high, demonstrates the falsity of the claim that Mr Merchant reviewed and changed the investment strategy having regard to sub regulation 4.09(2) matters. It completely ignores the fact that in September 2014, the fund had an existing obligation to pay Mr Merchant a pension of approximately $500,000 per annum.

112. As to the submission at AOS[356], the Commissioner submitted that Mr Merchant provided no evidence of any contemporaneous analysis of the merits to the GMSF of the acquisition in the non-income producing BBG Shares or of any objective basis upon which it may have been believed that the shares would eventually be traded out of difficulty. The Commissioner submitted that the material before the Tribunal objectively demonstrated that Mr Merchant's use of the GMSF cash for the acquisition of the BBG Shares was for "collateral purposes", which I understand to mean for purposes other than the purposes of the GMSF: ROS[644].

113. The Commissioner submitted that the contravention was serious because (ROS[647]):

•: it involved a complete disregard of the purposes of the fund both by way of investment and the provision of retirement benefits;
•: it "stripped" nearly $6 million of cash from the fund replacing it with a non income producing tranche of shares that had a sustained history of price reduction; and
•: it gave effect to the collateral purposes of the director and sole member.

Mr Merchant's submissions in reply

114. Mr Merchant submitted in reply that the Commissioner's submissions in relation to the GMSF giving effect to an investment strategy involved "second-guessing the merits" of the GMSF's decision to invest in BBG shares: AORS[56].

115. According to Mr Merchant, the submission that the BBG Shares had "no identified prospect of being income producing" was at odds with Mr Merchant's expectation that the BBG Shares would appreciate in value. Similarly, the GMSF's decision to concentrate its resources in BBG shares was one that was open to it.

116. Mr Merchant submitted that the fact that the GMSF was in pension mode did not preclude it from investing its cash in BBG shares. Mr Merchant could request that his pension be commuted and his balance be returned to accumulation mode, and that is what in fact occurred: AORS[57].

117. Mr Merchant submitted that the GMSF does not breach s 34 of the SISA merely because it does not obtain independent financial advice about its proposed investments. Mr Merchant was well placed to assess the merits of an investment in BBG. More generally, it was submitted, Mr Merchant was (and is) an experienced and successful businessman, with demonstrated awareness of the importance of matters like diversification. The money in the GMSF was beneficially his. The SISA does not prevent him as director of the trustee of the fund from making decisions to invest money in what the Commissioner might seek to characterise as risky or imprudent investments. It merely requires him to have regard to an investment strategy. The SISA does not dictate what that strategy is to be; or that it be a conservative one: AORS[58].

118. Mr Merchant submitted that "it is plain from [the terms of his statutory declaration] that Mr Merchant authorised the acquisition in accordance with an investment strategy": AORS[61].

Consideration

119. I address first Mr Merchant's submission at AOS[351] that it is only the investment strategy that must have regard to the considerations mentioned in reg 4.09 of the SISR, but that the SISA and SISR do not require that the trustee must have regard to those considerations in making any given investment: AOS[351].

120. The Commissioner submitted that sub-reg 4.09(2), construed in the context of ss 31(1) and 31(2)(i) of the SISA, requires the trustee, in making investment decisions for the fund, "to give effect to an investment strategy that has regard to the whole of the circumstances of the fund" and, in particular, the factors mentioned in sub paragraphs (a) to (e) of the regulation: ROS[625].

121. It is convenient to repeat the terms of sub-reg 4.09(2):

(2) The trustee of the entity must formulate, review regularly and give effect to an investment strategy that has regard to the whole of the circumstances of the entity including, but not limited to, the following:
(a) the risk involved in making, holding and realising, and the likely return from, the entity's investments, having regard to its objectives and expected cash flow requirements;

(b) the composition of the entity's investments as a whole, including the extent to which they are diverse or involve exposure of the entity to risks from inadequate diversification;

(c) the liquidity of the entity's investments, having regard to its expected cash flow requirements;

(d) the ability of the entity to discharge its existing and prospective liabilities;

(e) whether the trustees of the fund should hold a contract of insurance that provides insurance cover for one or more members of the fund.

122. Sub-regulation 4.09(2) requires that the "trustee of the entity must formulate, review regularly and give effect to an investment strategy that has regard to the whole of the circumstances of the entity including, but not limited to" the matters in subparagraphs (a) to (e) of sub-reg 4.09(2). It is the investment strategy which must have regard to all of the circumstances of the entity, including the matters in subparagraphs (a) to (e) of sub-reg 4.09(2). The trustee must formulate that investment strategy, review it regularly and give effect to it.

123. The SISA and SISR does not impose a direct requirement that, in making a particular investment decision (as opposed to formulating the strategy), the trustee must consider or reconsider each of the matters in subparagraphs (a) to (e). Rather, in making an investment decision, the trustee must "give effect" to the investment strategy which has been formulated having regard to the circumstances of the entity including the matters in subparagraphs (a) to (e) and review that strategy regularly.

124. In the present case, the written investment strategy operative at the time of the BBG Share Sale was the 2012 ISD. It is apparent from the terms of the 2012 ISD, that – in formulating that strategy – consideration was given to the circumstances of the entity and each of the matters in sub-reg 4.09(2). The 2012 ISD stated (emphasis added):

Investment Strategy

In order to achieve the investment objectives of the Fund, the investment strategy of the Fund is as follows:

•
To maintain asset class holdings in the following ranges: ...

•
To pursue a high growth strategy in order to provide strong returns with diversification of risk. Diversification of risk will be achieved by ensuring the portfolio maintains an exposure to most main investment sectors. At this stage the focus will be mainly through investments in shares in listed companies, and fixed interest and cash. Also, consideration will be given to investments in shares in unlisted companies, units in listed trusts, and managed funds where appropriate.

The Trustee will take into account the following factors when acquiring, selling or replacing assets:

(i) the marketability of the asset, including costs of realisation;

(ii) the risk involved in making, holding and realising, and the likely return from the asset;

(iii) anticipated liquidity requirements;

(iv) the Fund's ability to discharge its existing and prospective liabilities; and

(v) if the Fund should hold a contract of insurance that provides insurance cover for one or more members of the Fund.

Where appropriate, the Trustee will consult with their financial advisers in relation to the purchase and disposal of investments.

Short term cash flow requirements for the ongoing administration of the Fund and member payment requirements will be met via returns on investments, contributions received and the holding of cash amounts. Investments in equities can also be easily realised to cover cash flow requirements, both in the short term for ongoing administration costs, and in the long term to meet member payment requirements.

In determining the above strategy, the Trustee has taken into consideration all the circumstances surrounding the Fund and the Fund's investment objectives. The Trustee has also considered the risk and likely return of the investments, the adequacy of the diversification, the Fund's expected cash flow requirements and the Fund's ability to meet its existing and prospective liabilities.

The Trustee will continue to monitor the appropriateness of the investment strategy adopted. Depending on the Trustee's view of the financial markets, the Trustee may vary the investment strategies in order to ensure the Investment Objectives of the Fund will be met.

125. The 2012 ISD required GSMS, as trustee, to take into account the factors set out in (i) to (v) of the 2012 ISD when acquiring, selling or replacing assets. To "give effect" to the strategy which had been formulated, the trustee had to consider the matters in (i) to (v) in the 2012 ISD. If it made a decision without considering those matters, it would have failed to "give effect" to the strategy and thereby failed to comply with sub-reg 4.09(2).

126. By reason of s 34(1) of the SISA, the trustee "must ensure that the prescribed standards applicable to the operation of the entity are complied with at all times". Sub-regulation 4.09(2) contained a prescribed standard which required that the "trustee of the entity must formulate, review regularly and give effect to an investment strategy that has regard to the whole of the circumstances of the entity including" the matters set out in paragraphs (a) to (e).

127. I reach the following conclusions:

(a): GSMS, as trustee, had formulated an investment strategy at the time of the BBG Share Sale. That investment strategy was the 2012 ISD. There was no other written investment strategy applicable at that time.
(b): The material before the Tribunal was insufficient to show the existence of some unwritten investment strategy applicable at the time of the BBG Share Sale or the terms of it. Necessarily, the material before the Tribunal was also insufficient to show that any such unwritten investment strategy was formulated by reference to sub-reg 4.09(2). I reach no conclusion as to whether an unwritten investment strategy would have been sufficient if one had been shown to exist.
(c): I do not accept that the BBG Share Sale constituted or involved either a "review" (within the meaning of sub-reg 4.09(2)) of the 2012 ISD or the adoption of a new investment strategy and certainly not the adoption of a new investment strategy formulated by reference to sub-reg 4.09(2). This conclusion is fortified by the circumstances referred to earlier in which the 2015 ISD was prepared and adopted.

128. In breach of s 34(1) of the SISA, GSMS did not "give effect to" the investment strategy, namely the 2012 ISD.

129. First, the predominant reason Mr Merchant effected the BBG Share Sale was to crystallise a capital loss in the MFT which was expected to make significant capital gains from selling the Plantic shares. I do not accept that, in directing GSMS to acquire the BBG Shares in the BBG Share Sale, Mr Merchant had a genuine purpose of investing for the GMSF. Mr Merchant wanted to keep ultimate beneficial or economic ownership of the BBG Shares, because he wanted the Merchant Group to retain a significant shareholding in BBG.

130. Secondly, the 2012 ISD required the trustee, when making an investment, to take into account the following matters: (i) the marketability of the asset, including costs of realisation; (ii) the risk involved in making, holding and realising, and the likely return from the asset; (iii) anticipated liquidity requirements; (iv) the GMSF's ability to discharge its existing and prospective liabilities; and (v) whether the GMSF should hold a contract of insurance that provides insurance cover for one or more members of the GMSF. I do not accept that Mr Merchant turned his mind to any of those matters. There was no contemporaneous documentary evidence or material suggesting any such consideration. Rather, the transaction was undertaken for taxation considerations associated with the MFT's sale of its shares in Plantic with no active consideration given to the GMSF's investment position.

131. Thirdly, the purchase led to the GMSF holding 74.4% of its assets in the class "shares in listed companies" when the 2012 ISD stated that 0 to 40% of its assets were to be held in that class. The purchase led to a lack of diversification when the 2012 ISD stated that "[d]iversification of risk will be achieved by ensuring the portfolio maintains an exposure to most main investment sectors". Indeed, even within the class "shares in listed companies", the purchase led to the shares being held in only one listed company. No consideration was apparently given to the lack of diversification generally or within the class.

132. The 2012 ISD did not require consultation with financial advisers. Rather, the 2012 ISD contemplated that the trustee would "[w]here appropriate ... consult with their financial advisers in relation to the purchase and disposal of investments". To the extent that Mr McGrath and EY were "financial advisers", the material before the Tribunal did not establish that they were consulted about whether the BBG Share Sale was in accordance with the 2012 ISD or whether it was in the interests of the GMSF as opposed to the interests of the Merchant Group (or Mr Merchant).

133. I am satisfied that GSMS breached s 34(1) of the SISA.

SOLE PURPOSE: SECTION 62 SISA

134. Part 7 of the SISA sets out special rules that apply only to regulated superannuation funds such as a SMSF. Subsection 62(1) of the SISA relevantly provides:

Sole purpose test

(1) Each trustee of a regulated superannuation fund must ensure that the fund is maintained solely:
(a) for one or more of the following purposes (the core purposes):
(i) the provision of benefits for each member of the fund on or after the member's retirement from any business, trade, profession, vocation, calling, occupation or employment in which the member was engaged (whether the member's retirement occurred before, or occurred after, the member joined the fund);

...

(b) for one or more of the core purposes and for one or more of the following purposes (the ancillary purposes):
(i) the provision of benefits for each member of the fund on or after the termination of the member's employment with an employer who had, or any of whose associates had, at any time, contributed to the fund in relation to the member;

...

135. Section 62(1) is a civil penalty provision: SISA s 193. The "core purpose" and "ancillary purpose" are often referred to jointly as the "retirement purposes" of the fund. Both parties referred to Aussiegolfa Pty Ltd v Commissioner of Taxation [2018] FCAFC 122; 264 FCR 587. The Full Court considered the application of the sole purpose test to the use of an asset which fell within an exception in s 66(2) and which was leased to the daughter of the member of the fund on arm's length terms and conditions, consistently with the fund's investment strategy.

136. The principal judgment was that of Moshinsky J. Besanko J agreed with Moshinsky J. Steward J generally agreed with Moshinsky J but expressed some additional reasons for determining the appeals.

137. At [176], Moshinsky J stated (emphasis added):

Although the cases discussed above concerned other provisions, they usefully discuss the concept of "purpose" in a similar statutory context. (As noted by Gleeson CJ in News Limited v South Sydney District Rugby League Football Club Limited (2003) 215 CLR 563 at [18], the appropriate description or characterisation of the end sought to be accomplished (purpose), as distinct from the reason for seeking that end (motive), may depend upon the legislative or other context in which the task is undertaken.) Consistently with the approach taken in the above cases, the word "purpose" in s 62 of the SIS Act is concerned with the way in which the fund is being maintained; the term does not look primarily to the subjective factors actuating the trustee. Further, the statutory context in which s 62 appears does not suggest that a fund will not be treated as being maintained solely for the core purposes, or the core purposes and the ancillary purposes, simply because the trustee enters into a transaction with a related party.

138. Mr Merchant emphasised the following principles drawn from the reasons of Steward J at [231]:

(1): whether a fund has been maintained solely for the relevant purposes in a given year is a question of fact;
(2): the relevant purpose is that of the trustee (GSMS) and not that of Mr Merchant or Ms Paull, save in their capacities as directors of GSMS; the subjective motivation of Mr Merchant or Ms Paull should not be confused with the purpose of GSMS;
(3): the purpose is to be assessed by "the object of acts of maintenance" of the fund on a yearly basis;
(4): there is "no necessary dichotomy between the maintenance of a fund for core and/or ancillary purposes and the receipt by a related person or entity of a benefit";
(5): whether transactions with related persons are at market value will affect a conclusion about whether a benefit conferred on the related persons means that the fund has been maintained for collateral purposes.

139. At [231(f)], Steward J stated (emphasis in original):

...Investing directly in rental property which is leased to a relative for a peppercorn rent would justify an inference that there existed a collateral purpose. But if the rent paid is market value, and if the property otherwise constitutes a prudent investment, the personality of the tenant may not justify a similar inference. In such a case, the income and the assets of the fund are enhanced, or at least preserved, and the capacity of the fund to provide benefits to members in the future is not affected...

140. At [241], Steward J said:

... When a fund is established to invest for the purposes of providing superannuation benefits for its members in the future, the concern is with the protection of that fund from dissipation so that the fund fulfils its function and purpose. Thus, when a benefit is conferred which imperils a fund so exclusively dedicated, the presence of a collateral purpose is likely to exist. Generally speaking, this is the type of benefit with which s 62 is concerned. Here, the continued payment by the daughter of market rent did not diminish or threaten the capacity of the Benson Fund to provide superannuation benefits to its members in the future. It continued to receive the same return from this investment ...

Mr Merchant's Submissions

141. Mr Merchant submitted that the purpose of GSMS in acquiring the BBG Shares was not to provide a tax benefit to the MFT "or maintaining market confidence in BBG": AOS[362]. Rather, according to Mr Merchant, the purpose of GSMS was to acquire an asset that was expected to appreciate in value. The applicants relied in particular on the submissions that:

(1): The financial consequence of the sale for the GMSF was that it acquired shares in BBG and thus exposure to its future financial performance, this being "a readily identifiable and important objective from the [GMSF's] perspective that was achieved by the BBG Sale which did not involve obtaining a tax benefit": AOS[210]; [362].
(2): The fact that the market price for the shares at the time of the BBG Share Sale had dropped from its earlier highs did not suggest that the GMSF obtaining exposure to the future performance of BBG was not the dominant purpose of the transaction from its perspective. An investor profits from situations where the market's perception of value of an asset differs from their own (and where their own perception turns out, in time, to be more accurate than the market's perception). If an investor believes that an asset has a particular value, they make more money from buying it at a lower price than at a higher price. The GMSF had acquired shares in BBG after the significant share price drop in March 2014: AOS[213]; [362].

142. Mr Merchant submitted that the Commissioner's approach impermissibly "confuses the purpose of the [MFT] side of the transaction with the purpose of the [GMSF] side of the transaction": AOS[363].

The Commissioner's submissions

143. The Commissioner submitted that there was no evidence that the acquisition of the BBG Shares from the MFT, at market value, while within an exception in s 66(2) of SISA, was an acquisition made for the purposes of the fund providing retirement benefits to Mr Merchant: ROS[601]. The Commissioner continued:

To the contrary, the acquisition of the BBG shares ensured that resources of the fund were largely stripped, imperilling the fund in the provision of retirement benefits and made for the purpose of conferring a benefit or benefits on the related party or parties.

144. The Commissioner submitted that Mr Merchant's evidence as to his subjective optimism as to the prospective and long-term value of BBG shares should be treated with caution because it was self-serving and unsupported by contemporaneous or objective evidence: ROS[648].

145. The Commissioner submitted that the objective evidence did not establish that the acquisition of the BBG Shares was for the sole or dominant purpose of providing retirement benefits to Mr Merchant: ROS[649]. According to the Commissioner, there was no objective support for Mr Merchant's contention that the BBG Shares were acquired with an objective expectation that they would appreciate in value at all, or in a way that would have regard to the GMSF's provision of retirement benefits. The Commissioner emphasised that:

(a)

the share price of BBG had been falling since 2010;

(b)

from 2007 to late 2012 the share price dropped steadily from a peak of $18 to under $1 from late 2012;

(c)

BBG ceased paying fully franked dividends after 24 October 2008 with dividend yield decreasing until April 2012 when it ceased altogether;

(d)

the GMSF had been exposed to the deleterious effects of a multi-million dollar purchase of BBG shares in February 2012 (namely an acquisition of 2,523,600 shares for $7.89 million), including a rapid reduction in share price (to $378,540 by 30 June 2013) and, after the final dividend of April 2012 had been received, the GMSF received no further dividends;

(e)

BBG recorded significant losses in the income years 2013 and 2014;

(f)

in December 2013, the Centrebridge/Oaktree consortium undertook to provide extensive long-term finance to BBG. By February 2014, the Consortium held 40.6% of the BBG ownership interests. At that time, the prospectus, issued for the renounceable share issue, advised that the company made no representation as to when dividend payments might be resumed, noting that there were restrictions in the finance agreements against the payment of any dividend: CB189 at page 40. The GMSF took up its full entitlement under the February 2014 renounceable entitlement offer. Mr Merchant, rightly, did not anticipate that the GMSF's investment in BBG shares would be a source of dividend income;

(g)

in September 2014, before the acquisition of the 10,334,828 BBG Shares, the only documented consideration given to the value of the proposed acquisition was the EY request to Ms Paull to confirm the amount of cash available in the GMSF to acquire the maximum number of BBG shares possible: CB260;

(h)

the subsequent and further erosion of the value of the shares was consistent with the long-term decline in the value of the shares and the trading difficulties faced by BBG over a long period of time:

(i): by November 2015, BBG shares were consolidated 5:1. The 10,344,828 BBG Shares acquired in September 2014 became 2,068,966 shares;
(ii): on 24 April 2018, BBG was wholly acquired by an independent US company for $1.05 per share. The GMSF 2014 investment in BBG had been reduced to $2,172,414; and

(i)

the acquisition of the BBG Shares was not consistent with the GMSF investment strategy, being the 2012 ISD.

146. The Commissioner submitted that the acquisition of BBG Shares was for "collateral purposes":

(1): First, the dominant and overriding purpose of the transaction was to generate a capital loss in the MFT in anticipation of the MFT's sale of the Plantic shares: ROS[652].
(2): Secondly, the acquisition between the related parties ensured that the MFT could obtain the capital loss whilst Mr Merchant, through his related entities, retained the same significant shareholding status in BBG: ROS[653].
(3): Thirdly, the share acquisition by the GMSF was the means by which nearly $6 million of cash, which had been sitting in the fund since the sale of interests in the Macquarie Special Situations Fund, was used to acquire as many of MFT's BBG shares as possible, crystallising a capital loss in the MFT to offset against a significant anticipated capital gain from the Plantic sale: ROS[654].

147. The Commissioner submitted that the breach of s 62 of the SISA went "to the very core purposes of a regulated superannuation fund" and did so in a manner that diminished or threatened the capacity of the GMSF to provide benefits to Mr Merchant in the immediate term and in the future: ROS[655]. After the transaction, the GMSF had approximately $2 million in cash which, on past history, was earning at most 2.35% interest.

Mr Merchant's submissions in reply

148. Mr Merchant submitted that it was incorrect to say (as the Commissioner did) that the "resources of the fund were largely stripped": AORS[50]. To use cash to purchase ASX-listed shares at market value is not to "strip" resources of a superannuation fund. Superannuation funds do not contravene the sole purpose rule by investing their cash in assets, including in assets that do not provide regular cash returns.

149. As to Mr Merchant's optimism as to the prospective and long-term value of the BBG Shares, Mr Merchant submitted that it was supported by contemporaneous objective evidence. It was submitted that Mr Merchant's continuing to buy large amounts of BBG shares – after the start of the decline in the BBG share price and after BBG ceased paying dividends – is the best possible contemporaneous objective confirmation of his optimism about BBG: AORS[51]. It was submitted that Mr Merchant's subjective optimism was unsurprising "given the objective facts surrounding Mr Merchant's involvement in BBG".

Consideration

150. The predominant reason Mr Merchant, as director of GSMS, agreed to entering into the BBG Share Sale transaction was to crystallise a capital loss in the MFT which was expected to make significant capital gains from selling the Plantic shares. I accept that a substantial purpose (but not the predominant purpose) of GSMS was to keep ultimate beneficial or economic ownership of the BBG Shares within the Merchant Group. Neither of these purposes was a core purpose within the meaning of s 62(1).

151. It follows that GSMS did not "ensure that the fund [was] maintained solely" for one of the purposes in s 62(1).

FINANCIAL ASSISTANCE: SECTION 65 SISA

152. Section 65 of the SISA addresses the conferral of impermissible financial assistance on members and their relatives:

Lending to members of regulated superannuation fund prohibited

Prohibition

(1) A trustee or an investment manager of a regulated superannuation fund must not:
(a) lend money of the fund to:
(i) a member of the fund; or

(ii) a relative of a member of the fund; or

(b) give any other financial assistance using the resources of the fund to:
(i) a member of the fund; or

(ii) a relative of a member of the fund.

Note: Section 166 imposes an administrative penalty for a contravention of subsection (1) by a trustee in relation to a self managed superannuation fund.

153. Section 65 is a civil penalty provision: s 166 of the SISA

154. "Financial assistance" is not defined in the SISA. The phrase takes its ordinary meaning having regard to the particular statutory context in which the phrase is used. The reference to "any other financial assistance" in s 65(1)(b) refers to financial assistance other than lending money of the fund as covered by s 65(1)(a).

155. Section 65 is intended to prevent the use of the financial resources of a fund as a means of providing current day or future financial support to members and their relatives by means other than the provision of retirement benefits in accordance with the governing rules of the fund.

The Submissions

156. Mr Merchant submitted:

(1): First, in light of the cancellation of the capital loss under s 177F(1)(c), the Merchant family (through the MFT) has not obtained the use of the capital loss relied upon by the Commissioner: AOS[367].
(2): Secondly, if the assessment based on the cancellation of the capital loss is shown to be excessive such that the MFT did get the use of the capital loss, then the capital loss is not properly characterised as "financial assistance" that is "given" by the GMSF "using the resources of the fund" within the meaning of the SISA. Rather, it is simply a consequence of the operation of the (taxation) law on the sale of an asset for its market value: AOS[368].

157. The Commissioner submitted that financial assistance included assistance indirectly given to a member or relative through the intermediary of a family trust and noted that Mr Merchant and his children were beneficiaries of the MFT, a discretionary trust controlled by Mr Merchant: ROS[657], [658].

158. The Commissioner submitted that the GMSF, by the acquisition of the BBG Shares, indirectly provided financial assistance to Mr Merchant and his children by way of the financial assistance provided directly to the MFT: ROS[659]. The GMSF, in using cash from the fund "to purchase the higher costed BBG shares in the MFT facilitated the MFT obtaining the financial benefit of a capital loss": ROS[660]. The GMSF's acquisition of the BBG Shares enabled the MFT to generate a capital loss of $56,561,940 to offset the capital gain the MFT made from the sale of the Plantic shares. Even if that transaction had not gone ahead, the commercial reality was that the capital loss was valuable to the MFT as against any future capital gain made by the MFT.

Consideration

159. I am satisfied that financial assistance was given to Mr Merchant who was a discretionary object of the MFT. The BBG Share Sale was entered into for the predominant and immediate purpose of crystallising a capital loss in the MFT. GSMS purchased the shares with cash in the GMSF for the purpose of increasing the financial resources of the MFT for the benefit of the discretionary objects of the MFT, specifically Mr Merchant.

160. Having regard to the evident object of the provision, s 65(1)(b) is not limited to financial assistance of a direct nature. It prohibits financial assistance via an intermediary, including via a discretionary trust.

161. Mr Merchant's submission that the cancellation of the capital loss means that no financial assistance was provided elides the happening of later events as a consequence of the breach with the breach itself. The later cancellation of the tax benefit by the Commissioner does not undo the earlier breach.

162. To the extent that the provision of "financial assistance" is informed by whether the giver of the assistance has a financial or other detriment, the BBG Share Sale was to the detriment of the GMSF in that, objectively, the BBG Shares were unlikely to increase substantially in value and the purchase led to a risky and undiversified fund.

163. I am satisfied that there was a breach of s 65(1).

DISQUALIFICATION UNDER S 126A(2) OF SISA

164. Section 126A of the SISA includes:

Division 3 — Disqualified persons

Subdivision A — Disqualification by the Commissioner of Taxation

...

126A The Regulator may disqualify individuals

...

(2) The Regulator may disqualify an individual who is, or was, a responsible officer of a trustee, investment manager or custodian (the body corporate ) if satisfied that:
(a) the body corporate has contravened this Act or the Financial Sector (Collection of Data) Act 2001 on one or more occasions; and

(b) at the time of one or more of the contraventions, the individual was a responsible officer of the body corporate; and

(c) in respect of the contravention or contraventions that occurred while the individual was a responsible officer of the body corporate—the nature or seriousness of it or them, or the number of them, provides grounds for the disqualification of the individual.

(3) The Regulator may disqualify an individual if satisfied that the individual is otherwise not a fit and proper person to be a trustee, investment manager or custodian, or a responsible officer of a body corporate that is a trustee, investment manager or custodian.

165. A "responsible officer" in relation to a body corporate means a director of the body, a secretary of the body or an executive officer of the body: s 10(1) of SISA. The three contraventions, namely the contraventions of ss 34(1), 62(1) and 65(1) of the SISA, occurred whilst Mr Merchant was a director of the GMSF.

Mr Merchant's submissions

166. Mr Merchant began by observing that there was no dispute by the Commissioner that Mr Merchant "is a fit and proper person to be a director of a trustee of a superannuation fund": CB791. The reasons for the Commissioner's conclusion in this respect have been set out earlier.

167. Mr Merchant next submitted that the purpose of the disqualification power is to "protect the investing public against the risk that people with a history of non-compliance will re-offend", referring to The Taxpayer v Commissioner of Taxation [2002] AATA 1233; 51 ATR 1192, and that such a purpose would not be advanced by disqualifying Mr Merchant: AOS[371].

168. Mr Merchant submitted that he relied on advice from Mr Burgess (obtained through Ms Paull and Mr McGrath) in December 2011 that transferring BBG shares from the MFT to the GMSF was permitted under the rules for self-managed super funds provided that they were transferred at market value, referring to Merchant at [115] and CB69: AOS[372].

169. Mr Merchant also submitted that, when the issue arose in the context of acquiring shares in BBG in February 2014, the focus of the advice given by Mr Burgess was on ensuring that the GMSF was acquiring or disposing of assets at market value, referring to CB175.

170. More specifically, Mr Merchant submitted that, on 21 August 2014, Mr Burgess gave advice on the basis of the MFT's shares being sold to the GMSF and did not raise any concern about such a sale contravening any provisions of the SISA or SISR, referring to CB260.

171. Finally, Mr Merchant submitted that the acquisition of the BBG Shares, if it involved any of the contraventions alleged, was an isolated transaction and that, in light of the matters above, any such contraventions were not of a nature as to warrant disqualification: AOS[373].

The Commissioner's submissions

172. The Commissioner submitted that the contraventions were serious because (ROS[664]):

(a)

Mr Merchant, acting on behalf of the GMSF, purchased the BBG Shares from the MFT:

(i): without any regard for the adopted investment strategy (the 2012 ISD) or any other investment strategy consistent with sub-reg 4.09(2); and
(ii): believing the only relevant factor was the GMSF buying at market value;

(b)

the decisions made (by Mr Merchant) in relation to the purchase of the BBG Shares by the GMSF are not recorded in any contemporaneous documents, inconsistently with the requirements of the deed and of the SISA;

(c)

the acquisition by the GMSF of the BBG Shares from the MFT was not for the core purposes of providing retirement benefits, but rather for the collateral purposes of:

(i): providing the MFT with a capital loss of $56,561,490; and
(ii): seeking to retain substantial shareholder status in BBG;

(d)

the consequence included that:

(i): the GMSF was not able to continue paying a pension to Mr Merchant; and
(ii): the resources of the GMSF were utilised to provide financial assistance (through the MFT) to Mr Merchant or his children;

(e)

the contraventions of ss 62(1) and 65(1) of SISA exposed Mr Merchant to civil penalties; and

(f)

the contraventions of each of ss 34(1), 62(1) and 65(1) exposed the fund to the risk of being declared non-complying.

173. The Commissioner agreed that disqualification is designed to protect the investing public against the risk that people with a history of non-compliance will re-offend, also referring to 51 ATR 1192. The Commissioner submitted that "[a] key factor in making the decision to disqualify an individual is whether, by not taking such action, there will be a future compliance risk": ROS[665].

174. The Commissioner submitted that Mr Merchant presents a future compliance risk. In support of this contention, the Commissioner made the following submissions. First, the Commissioner submitted that this was not the first time that the GMSF has contravened SISA. In this regard the Commissioner submitted that, during the 2009 income year, the GMSF borrowed over $1 million from a related party in contravention of the borrowing prohibition stipulated in s 67 of SISA. Although the matter was promptly rectified and notified to the Commissioner, as regulator, it demonstrated a willingness on Mr Merchant's part not to comply with the SMSF regulatory requirements and Mr Merchant's obligations as a trustee. As a consequence of the s 67 contravention in the 2009 income year, Mr Merchant and the GMSF were issued with correspondence which clearly stated that, as a trustee of an SMSF, he was responsible for understanding and complying with the relevant laws and regulations.

175. Secondly, the Commissioner submitted that the Tribunal could not be satisfied that the GMSF's acquisition of the BBG Shares in September 2014 was an isolated incident where the GMSF used its resources for purposes other than the core and ancillary purposes of the fund.

176. Thirdly, the Commissioner submitted that Mr Merchant's claimed reliance on Mr Burgess' advice was not a mitigating factor. The Commissioner submitted that Mr Burgess' advice was to advocate for the use of the GMSF funds to facilitate the making of the capital loss in the MFT: ROS[668]. The Commissioner noted that Mr Merchant identified no advice sought from or given by Mr Burgess as to the prudency of the GMSF's investment in BBG or the potential application of ss 34, 62 and 65(1) of SISA to the trustee of the GMSF in respect of the proposed BBG Share Sale.

177. Fourthly, the Commissioner referred to Mr Merchant being "dismissive of the GMSF's consequential inability to maintain the payment of his pension, relying instead on his extensive wealth sourced in his related entities": ROS[669]. The Commissioner submitted that this approach underscores the lack of regard that Mr Merchant has for the proper performance of his duties as the director of the GMSF's trustee and is demonstrative of future risk.

178. The Commissioner submitted (ROS[670] to [671]):

Given the above, having regard to the nature of the contraventions in the overall scheme, the lack of any evidence of contrition, acceptance of responsibility by Mr Merchant, or understanding as to the distinct and separate purposes of a SMSF, it is apparent that Mr Merchant does not have sufficient understanding or competence to be involved in the management of a SMSF.

Accordingly, the contraventions are sufficiently serious to provide grounds to disqualify Mr Merchant under s 126A(2) of SISA.

Mr Merchant's submissions in reply

179. In reply submissions, Mr Merchant made clear that it was not contended that Mr Burgess gave advice on the "prudency" of investing in BBG shares: AORS[62]. That was a matter that Mr Merchant was well placed to judge.

180. Mr Merchant did contend, however, that Mr Burgess gave advice on whether the fund purchasing BBG shares was permissible under the superannuation legislation. The fact that Mr Merchant did not specifically identify particular sections of the SISA in seeking that advice was to be expected and does not diminish the significance of Mr Burgess' advice in assessing whether Mr Merchant should be disqualified.

Consideration

181. I have come to the view that the Disqualification Decision should be set aside as not being the correct or preferable decision.

182. I consider a risk of future non-compliance to be unlikely for the following reasons.

183. First, I share the reasons of the decision-maker that Mr Merchant is a fit and proper person essentially for the reasons given by the decision-maker. The decision-maker's reasons have been set out earlier. I would add that there was nothing in the material before the Tribunal which suggested that Mr Merchant was advised by EY or any other person that the transaction risked breaching the provisions of the SISA. It is true that there is no clear evidence that Mr Merchant raised the question, but that is hardly surprising in the circumstances. So far as the material before the Tribunal reveals, it was Mr Burgess who suggested that the MFT should sell BBG shares to the GMSF. Mr Burgess was the Merchant Group's tax agent and the GMSF's auditor. Mr Merchant would fairly have thought that the transaction was lawful from a superannuation compliance perspective in those circumstances. It would not be expected that the GMSF's auditor would put forward a transaction which would cause breaches of the SISA.

184. Secondly, Mr Merchant has given undertakings which the Tribunal accepts as appropriate and reasonable. These undertakings mitigate the risk of future non-compliance.

185. Thirdly, although the breaches of the SISA were serious ones, they all arose from one course of conduct, the BBG Share Sale. That is, the one course of conduct (put forward by the GMSF's auditor) has given rise to multiple breaches. This is not a case of multiple breaches on multiple occasions.

186. I do not place significant weight on protecting the investing public against the risk of re-offending. Having regard to his personal circumstances, Mr Merchant is only ever likely to be a director of the trustee of his own superannuation fund. To the extent that it is relevant, I do not believe Mr Merchant needs protecting from himself. To the extent he does, compliance with his undertakings offers sufficient protection.

187. The breaches were serious, but the circumstance that the offending transaction was one put forward by EY (being the GMSF's auditor) without apparently raising an issue from a superannuation compliance perspective is a significant mitigating factor. I acknowledge that EY advised that there were tax risks, but that is a different issue.

188. Focussing on the objects of the SISA, I do not see any useful purpose served by disqualification in the peculiar circumstances of this case.

CONCLUSION

189. The application for review should be allowed. To the extent the decision under review found Mr Merchant to be a fit and proper person, that position was uncontentious between the parties and one with which I agree. To the extent the decision under review disqualified Mr Merchant under s 126A(2), it should be set aside.

I certify that the preceding 189
(189) paragraphs are a true
copy of the reasons for the
decision herein of Justice T
Thawley, Deputy President

Associate: Annie Willox
Dated: 16 May 2024

Date(s) of hearing:

15 March 2024; 18 – 20 March 2024; 25 March 2024

Counsel for the Applicant: Mr S Doyle KC and Mr M May

Solicitor for the Applicant: Cooper Grace Ward Lawyers

Counsel for the Respondent: Ms M Brennan KC, Mr D Ananian-Cooper and Mr N Derrington

Solicitor for the Respondent: Gadens

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*Investment*	(%)
Shares in Listed Companies	0 - 40
Shares in Unlisted Companies	0 - 20
Units in Listed Unit Trusts	0 - 10
Units in Unlisted Unit Trusts	0
Managed Funds	0 - 10
Property	0
Loans	0 - 5
Shares in Unlisted Hybrid Funds	0 - 50
Fixed Interest	0 - 20
Cash ie Bank Bills/Term Deposits etc	0 - 100