SHAIL SUPERANNUATION FUND v FC of T

Members:
G Hughes M

Tribunal:
Administrative Appeals Tribunal, Melbourne

MEDIA NEUTRAL CITATION: [2011] AATA 940

Decision date: 23 December 2011.

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Dr G Hughes

Background

1. The applicant Nuriye Shail, as trustee for the Shail Superannuation Fund (the Fund), sought a review of a decision by the respondent to declare the Fund non-complying for the year ended 30 June 2005.The applicant further sought a review of penalties imposed by the respondent.

2. The Fund was established on 12 January 1994. The trustees of the Fund were Mr Mustafa Shail and Mrs Nuriye Shail. On 15 November 2000, the Fund became regulated as a self-managed superannuation fund under the Superannuation Industry (Supervision) Act 1993.

3. Nuriye Shail had been married to Mustafa Shail since December 1980. The applicant had originally asserted that her husband established the Fund without her knowing that she was a trustee but, for the purposes of the proceedings before the Tribunal, the applicant conceded that she was a trustee of the Fund.

4. Between 9 May 2005 and 6 June 2005, an amount totalling $3,460,000 was removed from a cash management account in the name of the Fund in the following increments:

(a)	9 May 2005 - $1,400,000
(b)	19 May 2005 - $460,000
(c)	6 June 2005 - $1,600,000.

5. The monies were transferred to a bank account in the name of Mustafa Nail Shail in Turkey. Nuriye Shail asserted this was done without her knowledge.

6. At the time of the withdrawals, neither Mustafa Shail nor Nuriye Shail had reached their preservation age (being 55 years). No condition of release for the payment of benefits as set out in Schedule 1 of the Superannuation Industry (Supervision) Regulations 1994 had been met. No income tax return for the Fund for the 2005 income year was lodged.

7. On 17 November 2006, the respondent issued a notice of non-compliance pursuant to section 40 of the Superannuation Industry (Supervision) Act 1993. On 20 November 2006, the respondent issued a notice of assessment pursuant to section 167 of the Income Tax Assessment Act 1936, assessing the taxable income of the Fund to be $3,369,944, with the tax payable being $1,583,873.68. On 24 November 2006, a notice of penalty assessment was issued, with the penalty being assessed at $1,475,322.50.

8. The respondent purported to serve a notice of assessment on the applicant in 2006. Subsequently, however, the Federal Court of Australia held that the assessment had been invalidly served.

9. On 16 April 2009, following completion of the Federal Court proceedings, the notice of non-compliance, notice of income tax assessment and notice of penalty assessment were re-served on the applicant.

10. Mrs Shail contended that she was not liable to pay tax (as a trustee or otherwise) on income stolen from the Fund by her husband.

Relevant legislation

11. The key legislative provisions considered by the Tribunal in reaching its decision in this matter are set out below.

12. With respect to the respondent's power to assess a person's taxable income, the relevant provisions are section 166 of the Income Tax Assessment Act 1936 which provides the Commissioner with the general power to make an assessment, and section 167 which provides the Commissioner with the power to make a default assessment where a person fails to complete a return. The term assessment is defined in section 6(1) of the Act.

13. Once an assessment has been raised by the respondent, it can be amended in certain circumstances. Section 170 provides that the Commissioner may amend an assessment of an individual for a year of income within two years after the day on which the Commissioner gives notice of the assessment to the individual.

14. Section 204 of the Income Tax Assessment Act 1936 determines the date upon which income tax is payable.

15. The liability of non-compliant superannuation funds is addressed in the Superannuation Industry (Supervision) Act 1993. Section 40(1) and 40(2) of the Act enables the Regulator to give notice of non-compliance by a superannuation fund. Section 42A(1) and 42A(5) sets out the test for determining whether a self-managed superannuation fund is compliant.

16. The Superannuation Industry (Supervision) Act 1993 also addresses the obligations of trustees of regulated superannuation funds. Section 62 provides that each trustee of a regulated superannuation fund must ensure that the fund is maintained solely for stipulated core purposes or for one or more of the core purposes plus specified ancillary purposes. Section 65(1) of the Act prohibits the trustee of a regulated superannuation fund from lending money of the fund to a member or relative.

17. Stolen moneys may be deductible in some circumstances. The Income Tax Assessment Act 1997 section 25.45 deals with the deductibility of losses caused by theft.

18. With respect to penalties and interest, the Income Tax Assessment Act 1936 section 204(3) provides for the imposition of a General Interest Charge on unpaid tax. The Taxation Administration Act 1953 section 8AAG gives the Commissioner the power to remit the General Interest Charge (GIC) in certain circumstances. The Taxation Administration Act 1953, section 280-160 of Schedule 1, gives the Commissioner the power to remit all or part of a short fall interest charge in certain circumstances.

19. The Taxation Administration Act 1953, section 284-75(1) of Schedule 1, provides for payment of an administrative penalty in respect of false or misleading statements made to the Commissioner. Section 284-75(3) of Schedule 1 provides for payment of an administrative penalty for failing to furnish a return. Section 298-20 of Schedule 1 gives the Commissioner the power to remit an administrative penalty in certain circumstances.

Discussion

Relationship between Mr & Mrs Shail

20. Mr Shail was born in Cyprus and migrated to Australia in 1972. Mrs Shail was born in Cyprus and migrated to Australia in about 1969.

21. Mr and Mrs Shail were married in December 1980. Mr Shail worked in the Australian Taxation Office and Mrs Shail worked at National Mutual Assurance and then Rowntree Hoadley Limited until 1983.

22. There are two children of the marriage, a son Levent (born 1983) and a daughter Rana (born 1988).

23. In 1979, the couple purchased a vacant block of land at Glencairn Crescent, Broadmeadows, where they moved after building a house in 1983. In 1990 they bought another vacant block in Cameron Court, Greenvale and in 1992 they moved into a house which they had constructed on the property.

24. The marriage was troubled and in 1992 they sought legal advice regarding a divorce. In 1992 there was a division of marital assets pursuant to a consent order before the Magistrates' Court at Broadmeadows which included the transfer to Mrs Shail of title and interest in the property at Broadmeadows and the property at Greenvale.

25. Following the transfer of assets to Mrs Shail, she required the services of a financial adviser. She relied upon her husband to act in this role. Mr Shail also acted as her tax agent.

26. The couple separated following the division of marital assets but they reunited shortly afterwards and moved back into the house in Greenvale.

27. Mrs Shail was living in Cyprus at the time of the hearing.

28. The above history of the relationship between Mr and Mrs Shail does not appear to be in contention. The Tribunal is not in a position, however, to assess the current status of the relationship between the two individuals.

Validity of assessment

29. The applicant claimed that the assessment for the year ended 30 June 2005 was invalid on two grounds. First, it was contended that the notice of assessment was invalid on its face; secondly, it was asserted that the assessment had been invalidly amended in that it had failed to comply with the requirements of section 170 of the Income Tax Assessment Act 1936.

30. In relation to the assertion that the notice of assessment was invalid on its face, the applicant's principal submission focused on the following wording contained in the notice:

"This assessment has been raised in accordance with the provisions of section 167 of the Income Tax Assessment Act 1936."

31. Section 167, which provides the Commissioner with the power to make an assessment in default of a person completing an income tax return, provides:

"If:

• (a) any person makes default in furnishing a return; or
• (b) the Commissioner is not satisfied with the return furnished by any person; or
• (c) the Commissioner has reason to believe that any person who has not furnished a return has derived taxable income;

the Commissioner may make an assessment of the amount upon which in his judgment income tax ought to be levied, and that amount shall be the taxable income of that person for the purpose of section 166."

32. Section 166 deals with a Commissioner's powers of assessment and provides:

"From the returns, and from any other information in the Commissioner's possession, or from any one or more of these sources, the Commissioner may make an assessment of the amount of the taxable income (or that there is no taxable income) of any taxpayer, and of the tax payable thereon (or that no tax is payable).

33. It follows that the reference in the notice of assessment to the effect that the assessment was raised in accordance with the provisions of section 167 means that, in turn, the assessment is of the nature referred to in section 166.

34. The term assessment as used in section 166 is defined in section 6(1) of the Act. Relevantly for the purposes of these proceedings, paragraph (d) of that definition provides:

" assessment means:

…

• (d) for any other taxpayer that is the trustee of a trust estate but excluding a taxpayer that is the trustee of a complying superannuation fund, a non-complying superannuation fund, a complying approved deposit fund, a non-complying approved deposit fund or a pooled superannuation trust the ascertainment of so much of the net income of the trust estate as is net income in respect of which the trustee is liable to pay tax (or that there is no net income in respect of which the trustee is so liable) and of the tax payable on that net income (or that no tax is payable);"

35. It was contended by the applicant that as paragraph (d) expressly excludes a taxpayer that is the trustee of a complying superannuation fund [or] a non complying superannuation fund, there was no power to issue a default assessment pursuant to section 167 as stipulated on the Notice of Assessment.

36. The respondent contended, on the other hand, that the assessment fell within paragraph (a) of the definition in section 6(1) of the Income Tax Assessment Act, specifically:

" assessment means:

• (a) the ascertainment of the amount of taxable income (or that there is no taxable income) and of the tax payable on that taxable income (or that no tax is payable)."

37. The Tribunal does not accept that the notice of assessment was invalid on its face. It considers that it falls squarely within the definition of assessment as set out in paragraph (a) of section 6(1) of the Income Tax Assessment Act 1936 as it applied at the relevant time. That is, it related to an assessment of the amount taxable income, and the tax payable on that income, for the 2005 income year.

38. In the alternative, the applicant contended that the assessment was invalid because it was not authorised by section 170(2) of the Income Tax Assessment Act 1936, particularly by reference to the power of the respondent to amend assessments and timeframes.

39. The original assessment was issued on 24 November 2006. Mrs Shail was served with this notice on 16 April 2009. The applicant contended that the assessment was stale because, after being issued on 24 November 2006, more than two years elapsed before it was served (due to the intervening Federal Court proceedings) and hence the notice had been the subject of an amendment which was out of time.

40. The respondent pointed out that section 174 of the Income Tax Assessment Act 1936 required service of written notice of assessment on the taxpayer as soon as conveniently. The respondent argued it had complied with this requirement.

41. It was emphasised by the respondent that the income tax assessment was issued to the address for service for the Fund as advised by Mr Shail on 6 February 2006 as a trustee of the Fund. Following proceedings in the Federal Court of Australia, in which the respondent was advised that the trustee may not have become aware of the assessments, the notice was re served. This re-service of the notice did not affect the date on which the tax was due and payable, as provided in section 204 of the Income Tax Assessment Act 1936.

42. Any non-compliance with section 174 of the Income Tax Assessment Act 1936 was, according to the respondent, in any event deprived of any legal consequence by section 175. In support, the respondent cited
Trisnawati Tanumihardjo v Commissioner of Taxation [1997] FCA 735. In other words, the income tax assessment made under section 167 of the Income Taxation Assessment Act 1936 remained valid.

43. The Tribunal rejects the applicant's contention that the notice of assessment was served out of time. This is not the effect of section 170 of the Income Tax Assessment Act 1936. The requirement of section 174 that notice be served as soon as conveniently was complied with in all the circumstances.

44. To the extent that, notwithstanding compliance with section 174 of the Income Tax Assessment Act 1936, there was an uncommonly long time lapse between the date of issue of the assessment and the date of effective service, the Tribunal observes that this would appear to provide grounds for a claim by the taxpayer for a remission of the charge pursuant to section 8AAG of the Taxation Administration Act 1953. The GIC is not a matter which is subject to review by the Tribunal but the Tribunal would nevertheless expect the respondent to take into account the Tribunal's findings of fact when reviewing its position in this regard.

Withdrawal of funds

45. It was not disputed that Mustafa Shail had taken the funds, that they had been transferred out of the Fund without the knowledge or consent of Nuriye Shail and that Mrs Shail had received no benefit from the transaction. The Tribunal proceeded on the assumption that these were accepted facts.

46. It was asserted on behalf of the applicant that she could not be held liable for a breach of trust by a fellow trustee.

47. The Tribunal was referred to paragraph 2204 of Jacobs' Law of Trusts in Australia (5th edition) by RP Meagher and WMC Gummow which states, in part:

"The liability of trustees is joint and several, and the persons entitled to sue in respect of loss to the trust estate caused by a breach of trust may sue any or all of the trustees. There is no primary liability of any particular trustee where they are all guilty of a breach of trust or of different breaches of trust resulting in the same loss. However, the fact that the liability of co-trustee's is joint and several does not now, and probably never has meant, that a co-trustee is always responsible if his co-trustee commits a breach of trust - it simply means that, if both commit breaches of trust, they are jointly and severally liable. … [I]t appears always to have been the rule of equity that a trustee is liable only for his own acts and defaults, for his own breach of duty to a beneficiary. Where there are two trustees and one of them commits a breach of trust, the other trustee will be liable if he is personally in breach of his duty to the beneficiaries, as where he participates in the breach, or where he has improperly delegated the administration of the trust to his co-trustee, or where he has failed to exercise reasonably care to prevent his committing a breach of trust or where he subsequently approves or acquiesces in or conceals his co-trustee's breach of trust or fails to take proper action to compel his co-trustee to redress the breach of trust. … These rules have been given statutory force by the Trustee legislation of all States (… Vic s 36 …), but now the co-trustee is not liable for his mere neglect in any of the ways indicated above which may permit his co-trustee to commit or to conceal a breach of trust. As a result of the legislation he will only be liable if in such circumstances the loss occurs through his own default …

Relevantly, the Trustee Act 1958 (Vic) section 36, dealing with the implied indemnity of trustees, provides in subclause (1):

A trustee shall be chargeable only for money and securities actually received by him notwithstanding his signing any receipt for the sake of conformity, and shall be answerable and accountable only for his own acts, receipts, neglects or defaults, and not for those of any other trustee, nor for any banker, broker or other person with whom any trust money or securities may be deposited, nor for the insufficiency or deficiency of any securities, nor for any other loss unless the same happens through his own wilful default."

48. The applicant referred to the High Court decision of
Austin v Austin (1906) 3 CLR 516 in which it was held that a joint trustee could not be held liable for a breach of trust by a fellow trustee in circumstances where there was no proof of negligence or breach of trust by the first mentioned trustee. The general principle espoused by the court was that a trustee sufficiently discharges his or her duty if he or she takes, in managing the trust affairs, all those precautions which an ordinary prudent business person would take in managing similar affairs of their own.

49. The applicant contended that as she had no knowledge of her husband's acts as co-trustee, she could not be held accountable for his actions. She had not derived any income, as a trustee or in her own right or in any other way, as a consequence of her husband's breach.

50. The respondent contended that the Commissioner was correct in issuing a non-compliance notice to the Fund in respect of the year ending 30 June 2005. It was non-compliant because it failed to satisfy the requirements of section 42A of the Superannuation Industry (Supervision) Act 1993 and, in particular, the test set out in section 42A(5) of the Act in respect of the 2005 income year. By making the withdrawals and transfers, Mustafa Shail, as trustee of the Fund, had contravened sections 62 and 65 of the Act and Part 6 of the Superannuation Industry (Supervision) Regulations 1994.

51. Section 42A(5) of the Superannuation Industry (Supervision) Act 1993 provides:

"An entity passes the test in this subsection in relation to a year of income or part of a year of income if:

• (a) no trustee of the entity contravened any of the regulatory provisions in relation to the entity during the year of income or the part of the year of income; or
• (b) if a trustee of the entity contravened one or more of the regulatory provisions in relation to the entity during the year of income or the part of the year of income, the Regulator, after considering:
  • (i) the taxation consequences that would arise if the entity were to be treated as a non-complying superannuation fund for the purposes of the Income Tax Assessment Act 1997 in relation to the year of income concerned; and
  • (ii) the seriousness of the contravention or contraventions; and
  • (iii) all other relevant circumstances;

thinks that a notice should nevertheless be given stating that the entity is a complying superannuation fund in relation to the year of income concerned."

52. It is relevant to note the objects of the legislation as set out in section 3:

"Supervision of certain superannuation entities

• (1) The object of this Act is to make provision for the prudent management of certain superannuation funds, approved deposit funds and pooled superannuation trusts and for their supervision by APRA, ASIC and the Commissioner of Taxation.

Basis for supervision

• (2) The basis for supervision is that those funds and trusts are subject to regulation under the Commonwealth's powers with respect to corporations or pensions (for example, because the trustee is a corporation). In return, the supervised funds and trusts may become eligible for concessional taxation treatment.

Whole industry not covered

• (3) The Act does not regulate other entities engaged in the superannuation industry."

53. The respondent referred to the Explanatory Memorandum to the Superannuation Legislation Amendment Act (No 3) 1999 which provided that members of a self managed superannuation fund must be trustees and, in particular:

"The requirement that all members be trustees will ensure that each member is fully involved and has the opportunity to participate equally in the decision making processes of the fund (ie that the fund is truly self managed)."

54. The respondent emphasised that section 42A does not have a culpability test. It was clear from the Explanatory Memorandum that trustees of the Fund would have the opportunity to participate equally in the decision making processes of the fund and would avail themselves of that opportunity.

55. It was pointed out that section 42A(5) confers a broad discretion on the Commissioner. A reference was made to Practice Statement Law Administration PS LA 2006/19 which states at paragraph 15:

"The decision [to issue a notice of non-compliance] will be made on a case by case basis, taking into account the individual circumstances of the case. The final decision will be the result of a process of weighing up the factors set out in paragraph 14 of this practice statement. No one factor by itself will be conclusive and the weight given to each factor will vary depending on the circumstances of the case."

56. The Tribunal was referred to a number of decisions of the Tribunal, specifically:
Re JNVQ and Commissioner of Taxation [2009] AATA 522;
Re ZDDD v Commissioner of Taxation v;
Re Triway Superannuation Fund v Commissioner of Taxation 11 ESL 12; [2011] AATA 302. To the extent that these cases usefully inform the Tribunal in this matter, they are referred to below.

57. In relation to the test set out in section 42A(5), the respondent submitted that the Tribunal should not exercise the discretion in favour of giving a notice stating that the fund was a complying superannuation fund in the 2005 income year.

58. In relation to the requirements of section 42A(5)(b), the respondent submitted that there had been a relevant contravention of a regulatory provision in that there had been a clear breach of section 62 and 65 of the Superannuation Industry (Supervision) Act 1994.

59. In relation to section 42A(5)(b)(i), the taxation consequences are such that if the Fund is non-complying, it will lose its concessional tax treatment and accordingly be taxed at the rate of 47 per cent. Whilst the tax consequences are significant, being an assessment of $1,583,873.68 for the year ended 30 June 2005, this must be considered in conjunction with the seriousness of the contraventions.

60. In
Re ZDDD v Commissioner of Taxation, Senior Member Redfern considered whether the tax consequences would be significant in circumstances where the applicant may have been unable to pay the debt which in turn could lead to liquidation of the fund. The applicant in that case contended that the tax consequences were so serious that they should be accorded greater weight than the contraventions. Senior Member Redfern adopted the approach that the applicant's contention was in some respects circular and concluded that, on the facts of the case, the tax consequences of the notice of non compliance did not outweigh other factors, including the seriousness of the contravention.

61. With respect to section 42A(5)(b)(ii), the respondent submitted that the contraventions were very serious in nature and, indeed, that it would be difficult to contemplate more serious contraventions of the Act by a trustee. In the respondent's submission, this weighed heavily against treating the Fund as a complying superannuation fund.

62. In Re JNVQ and Federal Commissioner of Taxation, Senior Member Carstairs observed that the seriousness of the contravention in that case (in which the fund had made loans to a trustee's company in contravention of the Superannuation Industry (Supervision) Act 1993) militated against the exercise of discretion although she added that no factor is taken alone and I must consider the particular mitigating circumstances upon which the applicants rely, which are all part of 'all other relevant circumstances' [under subparagraph (iii)].

63. In
Re ZDDD v Commissioner of Taxation, the Tribunal considered the seriousness of a contravention involving a related party investment on uncommercial terms in circumstances where the applicant acted in ignorance without evidence of deliberate impropriety. The Tribunal concluded that the contraventions nevertheless went to the heart of prudential regulation of superannuation funds as the provisions breached are designed to ensure the assets of a superannuation fund are preserved for retirement benefits. Senior Member Redfern concluded that the nature and extent of the contraventions were serious and militated against issuing a notice of compliance.

64. With respect to section 42A(5)(b)(iii), the respondent submitted that the applicant had not demonstrated any other relevant circumstances which warranted treating the Fund as a complying superannuation fund. An exercise of discretion in favour of issuing a notice of compliance would frustrate the wider objectives of the Superannuation Industry (Supervision) Act 1993.

65. In this regard, the respondent pointed to the decision in
Re Triway Superannuation Fund v Commissioner of Taxation [2011] AATA 302. The application related to a self managed superannuation fund which had three trustees - a husband and wife and their son. The son had taken money from the accounts, apparently to fund a drug addiction. In affirming the Commissioner's decision to treat the fund as non-complying, Senior Member O'Loughlin commented (at para 28):

"While tragic, the present circumstances are not those in which a discretion ought be exercised consistently with the principles governing exercise of discretionary powers. To do so would frustrate the wider objects of the SIS Act by relieving those responsible for superannuation funds of tax imposts where all of the assets of a superannuation fund are deployed inappropriately and lost as a consequence. Exercising a discretion in these circumstances is not consistent with the objects of the SIS Act."

66. In Re JNVQ and Federal Commissioner of Taxation, Senior Member Carstairs emphasised that the expression all relevant circumstances were not simply those circumstances which might lead to a favourable exercise of the discretion. It was also important to take into account factors which might be adverse to the taxpayer.

67. In
Re ZDDD v Commissioner of Taxation, Senior Member Redfern considered that a key factor in determining whether the fund in question should be given a notice of compliance was the seriousness of the contraventions and the extent to which the trustee had rectified those contraventions or taken steps to ensure the contraventions would not arise again.

68. In considering section 42A(5) generally, it is pertinent to observe that in Re JNVQ and Federal Commissioner of Taxation, Senior Member Carstairs emphasised the importance of the objectives of the legislation. She stated:

"As a general proposition, I would approach the exercise of the discretion in s42A as one to be undertaken in a manner that is consistent with objects of the Superannuation Industry (Supervision) Act 1993 (Cth) as these are set out at s3. Any exercise of discretion must have regard to considerations of unfairness in a particular case, but must be applied in a manner consistent with the objects of the relevant Act. It is important to have regard to whether, by exercising the discretion in a particular case, the decision-maker will be achieving or frustrating those objects."

69. It is not difficult to feel some sympathy for the position in which Mrs Shail finds herself. Any appearance of unfairness to Mrs Shail as an individual should not, however, obscure the nature of the Fund, the role of trustees or the regulatory regime within which they function. The requirements of section 42A(5) have been met. Consistent with the ground advanced on behalf of the respondent, the Tribunal concludes that the respondent was justified in issuing an assessment. Specifically, the Tribunal finds that the Fund was non-compliant in the year ending 30 June 2005 and that it failed to pass the test set out in section 42A(5) of the Superannuation Industry (Supervision) Act 1993 which would warrant the issuing of a notice of compliance. Although the taxation consequences are clearly significant to the applicant, this is insufficient in the Tribunal's opinion to overcome the seriousness of the contravention. A finding of compliance would, in the Tribunal's opinion, undermine the objects of the legislation and the policies underpinning the legislation.

Amount of assessment

70. As a non-complying superannuation fund, the Fund would lose its concessional tax treatment. The respondent calculated the tax payable as $1,583,873.68 for the year ending 30 June 2005, based on its assessment of the taxable income of the Fund to be $3,369,944.

71. In terms of income tax calculation, the respondent noted that no information had been provided by the trustee of the Fund regarding the exact amounts of income and deductions and that the assessment had therefore correctly been raised and correctly taxed at the rate of 47 per cent.

72. The applicant contended, on the other hand, that the Fund was entitled to a deduction in respect of the misappropriated funds, such that the taxable income was nil.

73. Reference was made to the Income Tax Assessment Act 1997 section 25.45 which provides, in relation to loss by theft:

"You can deduct a loss in respect of money if:

• (a) you discover the loss in the income year; and
• (b) the loss was caused by theft, stealing, embezzlement, larceny, defalcation or misappropriation by your employee or * agent (other than an individual you employ solely for private purposes); and
• (c) the money was included in your assessable income for the income year, or for an earlier income year."

74. It was emphasised on behalf of the applicant that, pursuant to section 960.105 of the Income Tax Assessment Act 1997, the Act applied to an entity as an agent of another entity. Specifically, pursuant to subclause 1(b), the Act applied to an entity if the entity is in Australia and, on behalf of the principal, holds money the principle or has control, receipt of disposal of money of the principal. Pursuant to section 960.100(1)(g), an entity includes a superannuation fund, whilst section 960.100(2) relevantly states:

"The trustee of a trust, of a * superannuation fund or of an * approved deposit fund is taken to be an entity consisting of the person who is the trustee, or the persons who are the trustees, at any given time.

Note 1: This is because a right or obligation cannot be conferred or imposed on an entity that is not a legal person."

75. It was contended on behalf of the applicant that Mustafa Shail had acted in the capacity of investment adviser and tax agent to Nuriye Shail and was clearly her agent in respect of the superannuation funds.

76. It followed, according to the applicant, that in the financial year 2005, an assessment would have to take account of section 25.45 of the Income Tax Assessment Act 1997 and allow a deduction in respect of the misappropriated funds. This would render the taxable income of the fund to be nil.

77. On this scenario, according to the applicant, there was also an issue as to whether the Fund was non-complying. If a defalcation by a fellow trustee occurred before the end of the year in question, the Fund could not be a non complying fund.

78. The applicant contended that the reasoning of the Commissioner in respect of non-compliance showed that no consideration had been given to the fact that the funds had been taken by Mustafa Shail and that Nuriye Shail had not been involved. It was impressed upon the Tribunal that there was information available now which may not have been available at the time - such as the transcript of Mrs Shail's interview with the Director of Public Prosecutions on 27 February 2006 when she was examined about alleged offences committed by Mr Shail - of which the Tribunal could now avail itself.

79. On this basis, according to the applicant, the Fund should be regarded as a complying fund and should therefore have been taxed at the rate of 15 per cent.

80. The respondent countered by focusing on the reference to the word you in section 25.45 of the Income Tax Assessment Act 1997. It pointed out that the word you is defined in section 4.5 of the Act:

"If a provision of this Act uses the expression you, it applies to entities generally, unless its application is expressly limited.

Note 1: The expression you is not used in provisions that apply only to entities that are not individuals."

81. Section 960.100 provides, relevantly:

• (1) Entity means any of the following:
• …
• (g) a superannuation fund
• …

• Note: The term entity is used in a number of different but related senses. It covers all kinds of legal person. It also covers groups of legal persons, and other things, that in practice are treated as having a separate identity in the same way as a legal person does.

• …
• (2) The trustee of a trust, of a superannuation fund or of an approved deposit fund is taken to be an entity consisting of the person who is the trustee, or the persons who are the trustees, at any given time.

• Note 1: This is because a right or obligation cannot be inferred or imposed on an entity that is not a legal person.

• Note 2: The entity that is the trustee of a trust or fund does not change merely because of a change in the person who is the trustee of the trust or fund, or persons that are the trustees of the trust or fund.

• …
• (4) If a provision refers to an entity of a particular kind, it refers to the entity in its capacity as that kind of entity, not to that entity in any other capacity.

82. Thus, according to the respondent, the entity was Mustafa and Nuriye Shail as trustees - each was a member of the entity. The entity was the trustee, viewed collectively. Accordingly a reference to you was a reference to both Mr and Mrs Shail as trustees.

83. On the question of deductibility of the loss, the respondent referred to cases involving section 71 of the Income Tax Assessment Act 1936, being the predecessor of section 25.45 of the Income Tax Assessment Act 1997.

84. In
Burgess v Commissioner of Taxation 88 ATC 4517; (1988) 80 ALR 639, the Federal Court of Australia gave consideration to the ingredients of deduction claimed in respect of a misappropriation in the context of section 71 of the Income Tax Assessment Act 1936. The Court concluded that section 71 required that a loss be incurred by the taxpayer as the result of an act of some person other than the taxpayer itself or a transfer of the taxpayer's capital or profits to its shareholders. This is significant, in the Tribunal's opinion, given its finding regarding the entity which sustained the loss.

85. The Tribunal rejects the applicant's contention that a deduction should be made in respect of the misappropriated funds, such that the taxable income of the Fund was nil. This is because the requirement of section 25.45 of the Income Tax Assessment Act 1997 that, inter alia, the loss be caused by the misappropriation of an employee or agent, has not been satisfied. It could not be the intention of section 25.45 that a fund would be entitled to deduct a loss for which the trustee was responsible.

86. The respondent made the further point that there was no evidence that anyone apart from Mr Shail was aware of the defalcation. Mrs Shail expressly disavowed any knowledge of the withdrawal. The earliest she could have been aware was in February 2006, at the time of an interview with the Director of Public Prosecutions. Accordingly there was no evidence that anyone other than the culprit knew of the loss in the financial year ending 30 June 2005. For this reason, no deduction would be available for the financial year 2005.

Penalty

87. The applicant contended that the administrative penalty imposed pursuant to section 284-75(1) of Schedule 1 of the Taxation Administration Act 1953 was incorrect. There had been no intentional disregard of a taxation law by the applicant in the circumstances and a base penalty amount of 75 per cent of the shortfall was therefore inappropriate. The respondent contended that the 75 per cent penalty was appropriate, and there were no grounds which warranted a remission.

88. In determining that the contraventions of section 62 were very serious in nature, the Commissioner considered the behaviour of Mustafa Shail which constituted a contravention resulting from recklessness or intentional disregard, the effect of the contravention on the Fund's assets, the number and duration of contraventions and the nature of the contravention in the overall scheme of the legislation.

89. The respondent pointed to section 284-75(3) of Schedule 1 to the Taxation Administration Act 1953. It further noted the level of penalty was to be determined under section 284-90(1) of Schedule 1 and that the administrative penalty under this section for a default assessment was 75- per cent of the tax-related liability. The respondent contended that the administrative penalty was correctly assessed at the rate of 75 per cent by virtue of paragraph 284-75(3)(c) of the Taxation Administration Act 1953, noting that an income tax return for the year in question had not been lodged and that the amount of tax had to be determined without the assistance of a tax return.

90. The respondent pointed out that the assessments must be allowed to stand unless the applicant is able to satisfy the Tribunal that the assessments were excessive, pursuant to the Taxation Administration Act 1953 section 14ZZK(b). The applicant bore the onus of proving that the amount of taxable income assessed exceeded the actual taxable income of the Fund, and she had failed to demonstrate that the estimates were excessive.

91. Further, the respondent submitted that there was no basis for a remission of all or part of an administrative penalty pursuant to section 298-20(1) of Schedule 1 to the Taxation Administration Act 1953.

92. The Tribunal considers the base penalty has been appropriately imposed by the respondent. Again it is not difficult to feel sympathy for the plight of Mrs Shail as an individual but this is not relevant to the flagrancy of the breach by the trustee of the Fund as an entity.

General interest charge

93. The imposition and remission of GIC and Shortfall Interest Charge (SIC) are not within the Tribunal's jurisdiction to review. The applicant nevertheless emphasised that whilst the Tribunal had no power to deal with GIC or SIC directly, it had the power to recommend or comment on the appropriateness of those penalties on the basis that it stands in the shoes of the Commissioner.

94. In this regard, the Tribunal reiterates its early observation that it would expect the Commissioner to take account of the findings of fact as set out in this decision. The Tribunal makes no other observation in this regard, apart from noting that the respondent itself implicitly acknowledged in the course of proceedings that the applicant may have grounds for claiming a remission of the GIC pursuant to section 8AAG of the Taxation Administration Act 1953 with respect to Mrs Shail's lack of knowledge of the assessment and penalty notice during the period 15 May 2006 to 16 April 2009.

Decision

95. For the reasons stated above, the decision under review is affirmed.