MASON v FC of T

Members:
CR Walsh SM

Tribunal:
Administrative Appeals Tribunal, Perth

MEDIA NEUTRAL CITATION: [2012] AATA 133

Decision date: 24 February 2012

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CR Walsh (Senior Member)

Introduction

1. Mr Mason seeks a review of the Commissioner's objection decision, dated 30 August 2011, which disallowed Mr Mason's objection against an assessment issued to him in respect of the year ended 30 June 2010 and included $20,0000 received by him from a self-managed superannuation fund (The Mason Tennyson Superannuation Fund), in breach of the payment standards prescribed by section 31(1) of the Superannuation Industry (Supervision) Act 1993 ( SISA ), in his assessable income for that year pursuant to section 304-10(1) of the Income Tax Assessment Act 1997 ( ITAA 1997 ).

2. If it is found that the amount of $20,000 was correctly included in Mr Mason's assessable income for the year ended 30 June 2010, Mr Mason also seeks a review of whether the Commissioner should exercise his discretion in section 304-10(4) of the ITAA 1997 to exclude the $20,000 payment from his assessable income, if the Commissioner is satisfied that it would be unreasonable not to do so having regard to the nature of the fund and any other matters that the Commissioner considers relevant.

3. These issues are dealt with in turn below.

Relevant facts

4. The facts relevant to the application, as agreed between the parties, are as follows.

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  • Mr Mason has almost 20 years of experience in business and commercial property management and holds two university degrees - a B.Comm (Land Economy) from the University of Western Sydney and a B.A (Management Sciences) from the University of Canberra. In 2003 Mr Mason purchased a Jim's Bookkeeping franchise and from that time carried on a bookkeeping business as a sole trader, trading as Jim's Bookkeeping (Northwest Perth). He also operated as a Jim's Bookkeeping Franchisor.
• • In 2005 Mr Mason and, his partner, Joanna Tennyson established a self-managed superannuation fund called The Mason Tennyson Superannuation Fund ( MTSF ). The trustees and members of the MTSF are Mr Mason and Ms Tennyson.
• • On 27 March 2009 the MTSF paid Mr Mason a superannuation benefit of $25,000. Mr Mason included this amount as a superannuation lump sum in his income tax return for the year ended 30 June 2009 as a "taxed element". In accordance with the self-assessment regime the Commissioner issued Mr Mason with an assessment, on 4 May 2010, allowing a tax offset of $7,500 which ensured that the rate of tax on the $25,000 did not exceed 0%. This was on the basis that Mr Mason had reached the preservation age (55 years) and the benefit did not exceed his low rate cap amount for the income year concerned.
• • On 28 October 2009 the MTSF paid Mr Mason a further superannuation benefit of $20,000. Mr Mason did not include this amount in his income tax return for the year ended 30 June 2010. On 10 March 2011 the Commissioner issued Mr Mason with an assessment for the year ended 30 June 2010 in accordance with his return.
• • Mr Mason's (undated) Witness Statement (Exhibit A1) states that the superannuation benefits paid to him on 27 March 2009 (i.e.$25,000) and 28 October 2009 (i.e. $20,000) respectively were subsequently loaned by him to a business associate and have not been repaid. His Witness Statement also states:

  "After discussing changes to SISA 1993 with tax professionals, I sincerely believed that I could legally withdraw from my SMSF because I had passed the age of 55 years. Later on I came to know that this was not totally correct and for which I must accept responsibility. I didn't have the funds to put the money back into the SMSF because I had loaned it to my business associate."

  And later:

  "I have fulfilled the condition of release in 2009/10 income year but my retirement date was a few months after two instalments of superannuation benefit had been paid to me due to my incorrect understanding of Transition to Retirement rules."

• • On 7 April 2010 an Independent Auditor provided a report to the trustees of the MTSF on the MTSF's financial report for the year ended 30 June 2009. At the conclusion of his report the Independent Auditor stated his opinion as follows:

  "In my opinion the trustees of the fund have contrived (sic) [i.e. contravened] R.6.17 of the SIS Act by providing payment of benefits to member and have not complied with the condition of release, under the requirements of the SIS Act and SIS Regulation specified above."

• • Mr Mason ceased carrying on his bookkeeping business in March 2010 and sold his Jim's Bookkeeping Master Franchise on 12 April 2010.
• • The annual return for the MTSF for the year ended 30 June 2009 was lodged on 26 April 2010.
• • On 12 May 2011 the Commissioner notified the MTSF that it had been selected for a review on the basis that the annual return of the MTSF for the year ended 30 June 2009 indicated that a contravention of the SISA may have occurred. The letter stated that if the MSTF had initiated steps to rectify the contraventions then details of those actions and supporting evidence should be provided.

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• • On 17 May 2011 the trustees of the MSTF provided information to the Commissioner for the purposes of the review.
• • Following communications between the taxation officer conducting the review, and Mr Mason's tax agent, Mr Mason lodged an amended income tax return for the year ended 30 June 2010 in which he returned the $20,000 as a superannuation lump sum as a "taxed element".
• • On 7 June 2011 the Commissioner notified the trustees of the MSTF of the completion of the review of the fund for the years ended 30 June 2009 and 30 June 2010. The attached Compliance Activity Report stated:
  • (i) In respect of the payment of benefits to Mr Mason on 27 March 2009 and 28 October 2009 the member has been provided with illegal early access to benefits in contravention of section 34 of the SISA;
  • (ii) As a consequence of the illegal access to member's benefits by Mr Mason the MTSF contravened section 62 of the SISA; and
  • (iii) Despite the serious contraventions of sections 34 and 62 of the SISA the Commissioner exercised his discretion under the SISA to allow the Fund to maintain its complying status.
• • On 17 June 2011 the Commissioner issued a Notice of Amended Assessment for the year ended 30 June 2010 in accordance with the amended return lodged by Mr Mason. The amended assessment allowed a tax offset of $808.20 which ensured that the rate of tax on the $20,000 did not exceed 15%.
• • On 23 June 2011 the Commissioner notified Mr Mason of the completion of an audit into his participation in the illegal early access of superannuation benefits in the year ended 30 June 2010. The Commissioner noted that an amended return had been lodged, declaring the $20,000, and an amended assessment had issued, and advised that no further action would be taken in respect of the illegal early access of superannuation benefits.
• • On 12 July 2011 Mr Mason lodged an objection against the amended assessment for the year ended 30 June 2010.
• • On 30 August 2011 the Commissioner's disallowed Mr Mason's objection. Mr Mason now seeks a review of the Commissioner's objection decision by this Tribunal.

Was the Commissioner's decision to include the $20,000, paid by the MTSF to Mr Mason, in breach of SISA, in his assessable income for the year ended 30 June 2010 the correct and preferable one?

5. Division 301 of the ITAA 1997 sets out the tax treatment of superannuation benefits received by members of complying plans etc. Broadly, this treatment varies depending on the age of the member when they receive the benefit.

6. If a member has reached his/her preservation age, (in Mr Mason's case, 55 years), but is below age 60 when receiving a superannuation lump sum benefit, the element untaxed in the fund is assessable income and is subject to tax at the following rates:

• • on the amount up to the low rate cap amount ($150,000 in 2009/2010) - up to a maximum rate of 15%;
• • on the amount up to the untaxed plan cap amount ($1.1m in 2009/2010) for each superannuation plan (excluding any low rate cap amount) - up to a maximum rate of 30%; and
• • on the amount exceeding the untaxed plan cap amount - the top marginal tax rate: section 301-105 of the ITAA 1997.

7. However, by virtue of Division 304 of the ITAA 1997 the general rules for the taxation of superannuation benefits in Division 301 (and Division 302) of the ITAA 1997 do not apply where, inter alia, the person receives an amount or benefit that does not meet the payment standards prescribed under the Superannuation Industry (Supervision) Regulations 1994 ( SISR ) (or the Retirement Savings Account Regulations) in accordance with section 31(1) of the SISA: sections 304-5 and 304-10 of the ITAA 1997.

8. A superannuation benefit which is included in a person's assessable income under

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section 304-10 of the ITAA 1997 constitutes "statutory income" for the purposes of section 6-10 of the ITAA 1997 (see the list of provisions in section 10-5 of the ITAA 1997 under the heading "superannuation"), as opposed to "ordinary income". As a result, the benefit received is included as part of the recipient's assessable income and is taxed at marginal tax rates (rather than at the concessional rates ordinarily applicable to superannuation benefits, as described above in paragraph 6).

9. However, the Commissioner has a discretion to exclude an amount from a person's assessable income, and to have the amount treated as a superannuation benefit (such that it is taxed concessionally and not at marginal tax rates), where he is satisfied that it would be unreasonable not to do so having regard to the nature of the superannuation fund and any other relevant matters: section 304-10(4) of the ITAA 1997.

10. Division 304 of the ITAA 1997 (which applies from 1 July 2007) relevantly provides:

" Division 304 - Superannuation benefits in breach of legislative requirements etc.

Guide to division 304

304-1 What this Division is about

This Division overrides the tax treatment in Divisions 301 and 302 if payments from complying superannuation plans etc. are in breach of payment and other rules.

Operative provisions

304-5 Application

This Division applies despite Divisions 301,302 and 303.

304-10 Superannuation benefits in breach of legislative requirements etc.

• (1) Include in your assessable income the amount of a *superannuation benefit if:
  • (a) any of the following applies:
    • (i) you received the benefit from a *complying superannuation fund or from a *superannuation fund that was previously a complying superannuation fund;
    • (ii) the benefit is attributable to the assets of a complying superannuation fund or from a superannuation fund that was previously a complying superannuation fund; and
  • (b) any of the following applies:
    • (i) the fund was not (when you received the benefit) maintained as required by section 62 of the Superannuation Industry (Supervision) Act 1993;
    • (ii) you received the benefit otherwise than in accordance with payment standards prescribed under subsection 31(1) of the Superannuation Industry (Supervision) Act 1993.
  • …
• (4) However, you do not have to include the amount in your assessable income to the extent that the Commissioner is satisfied that it is unreasonable that it be included having regard to:
  • (a) for subsection (1) or (2) - the nature of the fund; and
  • (b) any other matters that the Commissioner considers relevant.
• (5) For the purposes of this section, treat your receipt of a benefit (other than a *superannuation benefit) out of, or attributable to, the assets of a *superannuation plan as your receipt of a superannuation benefit." [Emphasis Added]

11. Section 31(1) of the SISA states that the SISR may prescribe standards applicable to the operation of regulated superannuation funds and to trustees and RSE licensees of those funds. Specifically, section 31(1)(h) of the SSA states that the standards include those relating to the payment by funds of benefits arising directly or indirectly from amounts contributed to the funds. Section 34(1) of the SISA states that 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.

12. Part 6 of the SISR deals with "Payment Standards". Regulation 6.01(2) states that "retirement" has the meaning given in regulation 6.01(7). Regulation 6.01(7) sets out the circumstances in which the "retirement" of a person is taken to have occurred in the case of a person who: (i) has reached a preservation age

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that is less than 60; and (ii) has attained the age of 60. Both cases require that an arrangement under which the member was gainfully employed has come to an end. "Preservation age" is defined in regulation 6.01(2) and for a person who was born before 1 July 1960 (like Mr Mason) is 55 years.

13. Regulation 6.18(1) states that a member's preserved benefits in a regulated superannuation fund may be cashed on or after the satisfaction by the member of a "condition of release". Regulation 6.01(2) states that "condition of release" means a condition of release specified in Column 2 of Schedule 1 of the SISR. "Conditions of release" specified in Column 2 of Schedule 1 of the SISR include, amongst others: retirement and attaining preservation age.

14. Regulation 6.18(3) states that the form in which preserved benefits may be cashed are a form specified in Schedule 1 as a "cashing restriction", relating to the "conditions of release". For each "condition of release" in Column 2 of Schedule 1 of the SISR the relevant "cashing restriction" is shown in Column 3 of Schedule 1 of the SISR.

15. Schedule 1 of the SISR provides that, if the "condition of release" is "retirement" there is a 'nil' "cashing restriction". Therefore the benefit could be paid in a lump sum or sums. In contrast, if the "condition of release" is "attaining preservation age" then there are "cashing restrictions". In this case, the member could, for example, be paid a transition to retirement income steam, but the benefit could not be paid in a lump sum or sums.

16. It is not in dispute that all of the requirements of section 304-10(1) of the SSA are satisfied in relation to the superannuation benefit of $20,000 which was paid to Mr Mason by the MTSF on 28 October 2009. That is:

• • Mr Mason received a superannuation benefit from the MTSF which is a complying superannuation fund: section 304-10(1)(a)(i) of the ITAA 1997; and
• • Mr Mason received the benefit from the MTSF in contravention of the payment standards prescribed under subsection 31(1) of the SISA: section 304-10(1)(b)(ii) of the ITAA 1997.

17. At the time of the payment to Mr Mason on 28 October 2009 he had attained the preservation age of 55 (he was, in fact, 60 years of age) but the payment of a lump sum did not satisfy the "cashing restriction" relating to that "condition of release". That is, Mr Mason had not met the "retirement" condition of release (where there is nil cashing restriction) because the arrangement under which he was gainfully employed did not come to an end until 12 April 2010 (by which time he had ceased carrying on his bookkeeping business and had sold his Jim's Bookkeeping Master Franchise).

18. Before the Tribunal, Mr Mason's representative submitted:

• "5. Benefits included in assessable income under section 304 are to be treated as superannuation benefits under section 304-10(5).
• 6. Benefits in breach of legislative requirements included in assessable income under Division 304 is a statutory income under section 6-10 of the ITAA 1997 and is included in the list of provisions under section 10-5. Statutory income is legislative income. However, section 6-10 is not an assessing provision. The assessment mechanisms are in the specific sections themselves and the specific provisions may be said to operate as parallel provisions, each directed to the exclusive treatment of a particular object of taxation.
• 7. A note given under section 6-10(2) states that "many provisions in the summary list in section 10-5 contain rules about ordinary income. These rules do not change its character as ordinary income".
• 8. According to section 6-25 of the ITAA 1997, where item potentially falls within both ordinary income and statutory income, the rules relating to statutory income prevail."

19. Mr Mason's representative further contended:

"Amendments effective from 1 July 2007 inserted by No 15 of 2007 [i.e. Superannuation Legislation Amendment (Simplification) Act (No 15) 2007] having following effects:

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  • Superannuation benefits added to the assessable income under Division 304 are to be considered as statutory income under section 6-10 of the ITAA 1997 hence specific provisions may be said to operate as parallel provisions, each directed to the exclusive treatment of a particular object of taxation (Schedule 1 Part 2, paragraph 156);
• • Superannuation benefits added to assessable income under Division 304 are considered as non-assessable non-exempt income under section 6-23 of the ITAA 1997 (Schedule 1 Part 2 paragraph 161);
• • Under Section 304-10(5), benefits paid will be considered as receipt of superannuation benefits in the hands of the taxpayer (Schedule 3 paragraph 35)

Hence, income added to assessable income under Davison 304 retains its character i.e. it is a statutory income and superannuation benefit. Hence tax rates applicable to superannuation benefits must apply.

Division 304 does not specify any tax rates. Hence, superannuation benefits added to the assessable income should be assessed according to tax treatment specified under Division 301, section 307-345 and section 6-23 of the ITAA 1997.

Marginal tax rates cannot apply to Division 304 because in that case taxpayer will be paying tax at same rate on taxed element, untaxed element and tax free element of superannuation benefit. Hence, nature and character of the income will change.

As Applicant is over 60 years in 2010 income year, tax element of superannuation benefit is considered as non-assessable non-exempt income hence tax free."

20. It is clear from the words used in Division 304 that the Division is intended to override the concessional tax treatment that ordinarily applies to superannuation benefits under Divisions 301 and 302 of the ITAA 1997. Specifically, section 304-1 of the ITAA 1997, which is titled "What this Division is about" and appears immediately under the heading "Guide to Division 304", clearly states "This Division overrides the tax treatment in Divisions 301 and 302 if payments from complying superannuation plans are in breach of the payment and other rules." Further, section 304-5 of the ITAA 1997, which is titled "Application" and appears immediately under the heading "Operative provisions", plainly provides "This Division applies despite Division 301, 302 and 303."

21. Section 304-10 of the ITAA 1997 was inserted into the ITAA 1997 by the Tax Laws Amendment (Simplified Superannuation) Act 2007 ( 2007 Act ). The Explanatory Memorandum to the Tax Laws Amendment (Simplified Superannuation) Bill 2006 ( 2006 EM ), which introduced the 2007 Act, relevantly states:

" Superannuation benefits if there is a breach of statutory requirements

• 2.81 The taxation arrangements set out in relation to superannuation benefits paid from a complying superannuation fund do not apply where a superannuation fund has not adhered to requirements set out in section 62 of the Superannuation Industry Supervision Act 1993. [Schedule 1, item 1, section 304-5]
• 2.82 Further, these arrangements do not apply where a person receives an amount or benefit that does not meet the payment standards prescribed under subsection 31(1) or 32(1) of the Superannuation Industry Supervision Act 1993 relating to the operation of regulated superannuation funds and regulated approved deposit funds respectively. This means that where a person receives a superannuation benefit that does not meet these requirements, it must be included as part of his or her assessable income and is therefore subject to marginal tax rates . [Schedule 1, item 1, subsections 304-10(1) and (2)]
• 2.84 The Commissioner of Taxation (Commissioner) retains discretion to provide that an amount may be excluded from a person's assessable income and treated as a superannuation benefit where the Commissioner is satisfied that it would be unreasonable not to do so. The Commissioner may have regard to the nature of the superannuation fund, where relevant, and any other matter that he or she may consider to be relevant. [Schedule 1, item 1, subsection 304-10(4)]" [Emphasis added]

22.

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Consequently, unless the Commissioner exercises his discretion in subsection 304-10(4) of the ITAA 1997, the superannuation benefit of $20,000 which was paid by the MTSF to Mr Mason in breach of the payment standards prescribed under section 31(1) of SISA is assessable to Mr Mason under section 304-10(1) of the ITAA 1997 at marginal tax rates (rather than at the concessional rates ordinarily applicable to superannuation benefits). No tax offset, such as those that may apply if the benefit was assessed under Division 301, is available. Accordingly, in the notice of amended assessment, issued by the Commissioner to Mr Mason in respect of the year ended 30 June 2010 (dated 17 June 2011), the Commissioner incorrectly allowed Mr Mason a tax offset of $808.20.

(II) Should the Commissioner exercise his discretion under section 304-10(4) of the ITAA 1997 to exclude the $20,000 paid to Mr Mason by the MTSF from his assessable income for the year ended 30 June 2010?

23. As stated earlier, the Commissioner has a discretion under section 304-10(4) of the ITAA 1997 to exclude an amount, included in a person's assessable income under section 304-10(1) of the ITAA 1997, from that person's assessable income to the extent that the Commissioner is satisfied that it is unreasonable that it be included, having regard to the nature of the fund and any other matters that the Commissioner considers relevant. The provisions of section 304-10(4) are set out above at paragraph 10.

Legislative history of section 304-10(4)

24. Section 304-10 of the ITAA 1997 has evolved from the enactment of a number of similar preceding provisions of the Income tax Assessment Act 1936 ( ITAA 1936 ), namely: (i) section 26AF of the ITAA 1936, which was enacted in 1980; (ii) section 26AFA of the ITAA 1936, which was enacted in 1984, and (iii) section 26AFB of the ITAA 1936, which was enacted in 1987. Former sections 26AFA(2) and 26AFB(4) of the ITAA 1936 each contained a discretion similar to that which is provided in subsection 304-10(4) of the ITAA 1997.

25. Former section 26AFB of the ITAA 1936 was inserted into the ITAA 1936 by Taxation Laws Amendment Act (No.4) 1987 ( 1987 Amendment Act ). The Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 4) 1987 ( 1987 EM ), which introduced the 1987 Amendment Act, states:

"Clause 11 will insert new section 26AFB in Division 2 of Part III of the Principal Act in order to continue the policy embodied in existing sections 26AF and 26AFA designed to prevent abuse of concessions available to approved funds by payment of excessive or unauthorised benefits, following establishment of the new supervisory arrangements. The new section will ensure that where a taxpayer receives any such benefits from a fund approved by the Insurance and Superannuation Commissioner (or a fund which was formerly approved by the Insurance and Superannuation Commissioner) then the benefits will be subject to tax unless the Commissioner of Taxation is satisfied that this would be unreasonable. As noted above, this section will apply to benefits received from those funds which have at any time obtained tax exemption under section 23FC after Regulations have been made under the Standards Act embodying requirements relating to the level and nature of benefits paid.

New section 26AFB will assume the discretion currently available under section 26AFA in order to ensure that taxpayers are treated appropriately such as where loss of tax exemption by a fund may be regarded as a sufficient penalty for a breach of the relevant standards. " [Emphasis added]

26. The 1987 EM referred to the discretion in former section 26AFA(2) of the ITAA 1936, as follows:

"The Commissioner has indicated that this discretion would be exercised where there are no tax avoidance implications and where the excessive benefit arose fortuitously or in other circumstances beyond the effective control of the recipient or the employer."

Legislative context

27. Subsection 3(1) of SISA provides that the object of SISA is "to make provision for the

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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". An important element of the scheme of regulation is the deterrent effect of legislative provisions, including section 304-10.

28. The objects of SISA were set out by Logan J in
DFCT v Fitzgeralds 2007 ATC 5105 (at 5109):

• "25. Our parliament has deliberately constructed a scheme whereby, in return for submission to a regulatory regime found in the SISA, particular taxation benefits are given to the trustee of a superannuation fund and its members. The public policy that seems to underlie that particular concession is to encourage prudent provision by Australians for their retirement. In so doing, the burden on other Australian taxpayers in the provision of social security benefits for the aged is thereby lessened. I can, I believe, responsibly take judicial notice that a contemporary phenomenon is a recognition that Australia has, in terms of its demographics, a need for such provision to be encouraged.
• 26. Part of the scheme found in the legislation is to enable what one might term small funds or, at least, funds which have fewer than 5 members to be self-managed. That is a particular benefit conferred by the parliament on those who would wish to make provision for their retirement. It enables self-management as opposed to becoming a member of a fund the management of which may be remote from membership. It is a privilege. It is a privilege that that should not be abused. It's quite plain to me that in this case that that privilege has been abused. I am in no doubt whatsoever that, in terms of the legislation, this particular case is one in respect of which I can be satisfied that there have been contraventions which are, in terms of s 196(4) of the SIS Act, serious."

29. In
ZDDD v Commissioner of Taxation [2011] AATA 3 the Tribunal (Senior Member Redfern) states (at [104]):

"Tax concessions are allowed to self-managed superannuation funds provided they comply with the regulatory provisions. If those regulatory provisions are contravened, it would undermine the legislative scheme if a self-managed superannuation fund was allowed to be treated as complying simply because it would be in the best interests of members not to withdraw tax concessions and/or impose tax liability."

30. A number of consequences can flow from a breach of SISA, including: (i) the superannuation fund could be made non-complying; (ii) the trustees of the fund could be disqualified; and/or (iii) the benefit can be treated as assessable income in the hands of the taxpayer. These consequences are an integral part of the regulatory regime which has the purpose of encouraging prudent investment to meet the policy objectives, as explained by Logan J in
DFCT v Fitzgeralds (2007) ATC 5105.

Meaning of "unreasonable"

31. Having regard to the above legislative history and context of section 304-10(4) of the ITAA 1997, and the use of the word "unreasonable" in the corresponding discretionary provisions in former sections 26AFA(2) and subsection 26AFB(4) of the ITAA 1936 (as described above), the Tribunal considers that it may be "unreasonable" to include a superannuation benefit paid in breach of the legislative requirements in a persons' assessable income (with the result that it is taxed at marginal tax rates) in circumstances where, for example:

• (i) This would be in addition to other taxation consequences which flow from the breach. (For example, a superannuation fund no longer gets the benefit of an exemption or becomes non-compliant for the relevant tax year); and/or
• (ii) The benefit arose in circumstances beyond the effective control of the recipient.

32. However, it will not be "unreasonable" to include a superannuation benefit in a person's assessable income (to be taxed at marginal tax rates) merely because the taxation consequence prescribed by Parliament is difficult for the taxpayer to meet, or is regarded by the taxpayer as undesirable. If this were so, the important deterrent effect of section 304-10

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of the ITAA 1997 would be undermined and an unintended taxation benefit would thereby be conferred on the recipient of the payment.

Nature of the fund

33. The two main classes of superannuation fund are: (i) self-managed superannuation funds ( SMSFs ), as defined in section 17A of the SISA (which funds are regulated by the Commissioner of Taxation); and (ii) non SMSFs (which funds are regulated by the Australian Prudential Regulation Authority ( APRA )).

34. It is not in dispute that the MTSF is an SMSF. While SMSFs provide the same general function as APRA regulated funds, SMSFs require each fund member to be a fund trustee, having the consequence that all fund trustees also being fund members: section 17A of SISA. As a result, all SMSF members/trustees have 'effective control' over prudential management of their funds' assets and the amount and timing of all benefit payments emanating from their fund. It is this 'effective control' which clearly distinguishes SMSFs from APRA regulated funds or non SMSFs: see Logan J in
DFCT v Fitzgeralds (2007) ATC 5105 above.

Conclusion

35. Mr Mason contends that the discretion in section 304-10(4) should be exercised. In summary, the reasons for this, as stated in Mr Mason's Statement of Facts, Issues and Contentions (at paragraph 1 on page 2), are as follows:

• • The trustees of the MTSF have otherwise complied with the legislative requirements of SISA;
• • Both members of the MTSF have retired and decided to wind up the MTSF;
• • Mr Mason met a "condition of release" on 12 April 2010 (when he sold his sole trader business) which date was during the same income year that the benefit was paid;
• • Two superannuation benefits were paid to Mr Mason before he met a "condition of release" on 12 April 2010. This was not a deliberate action. Mr Mason misunderstood the transition to retirement rules and thought he could withdraw the entire benefit once he was 55 years of age (being his preservation age); and
• • Tax on the superannuation benefit will cause significant and genuine hardship to Mr Mason.

36. For the following reasons, the Tribunal considers that the Commissioner's discretion in subsection 304-10(4) of the ITAA 1997 should not be exercised:

• • For the reasons provided above, it is not "unreasonable" to include the superannuation benefit in Mr Mason's assessable income for the year ended 30 June 2010 pursuant to subsection 304-10(1) of the ITAA 1997:
  DFCT v Fitzgeralds (2007) ATC 5105 and
  ZDDD v COT;
• • There are no other adverse taxation consequences to Mr Mason or the MTSF flowing from the breach of the legislative requirements. No penalty was imposed on Mr Mason. Indeed, the Commissioner exercised his discretion under the SISA to allow the MTSF to maintain its complying status, despite the breach;
• • The superannuation benefit did not arise in circumstances beyond the 'effective control' of the recipient. The MTSF is a SMSF. Mr Mason is a trustee of the MTSF and is in a position to control the nature and timing of any superannuation benefit paid to him from the MTSF.
• • As a trustee of the MTSF (a SMFS), Mr Mason should have been aware that "retirement" was a "condition of release" if the MTSF was to pay superannuation benefits in a lump sum or sums and, further, that "cashing restrictions" would apply to the "attaining the preservation age" condition of release;
• • The superannuation benefit of $20,000, which was paid by the MTSF to Mr Mason in the 2010 year, was a significant proportion of the net assets of the MTSF available to pay benefits as at 30 June 2009 (being $71,628: T5 at p52) and of Mr Mason's withdrawal benefit as at the same date (being $60,750: T5 at p60);
• • A significant proportion of the net assets of the MTSF had previously been withdrawn, with the payment of $25,000 to Mr Mason on 27 March 2009 (during the year ended 30 June 2009). The net assets of the MTSF available to pay benefits as at 30

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  June 2008 was $124,076 and Mr Mason's withdrawal benefit as at the same date was $74,513: T5 at p52 and 60.
• • The SISR provide that the relevant "condition of release" must be satisfied at the time the benefit was paid. It is not sufficient that it be satisfied some time later in the same financial year.
• • Mr Mason did not satisfy the "retirement" "condition of release" until 12 April 2010, which was nearly 6 months following payment of the benefit on 28 October 2009.
• • The benefit paid on 28 October 2009 (in the year ended 30 June 2010) is not an isolated instance of a payment from the MTSF to Mr Mason in breach of legislative requirements. There was a benefit (of $25,000) paid to him on 27 March 2009 in the previous financial year (which was over a year before Mr Mason satisfied the "retirement" "condition of release").
• • It is not unreasonable to include the benefit in assessable income merely because the taxation consequence prescribed by Parliament will cause hardship to Mr Mason. There is no suggestion from Mr Mason that the benefits were paid because he was suffering financial hardship. Rather, the benefits paid to Mr Mason in the 2009 and 2010 years were used to lend money to a business associate.
• • The Independent Auditor's report to the trustees, for the year ended 30 June 2009, expressed the opinion that there had been a payment of benefits that had not complied with the "conditions of release". The report was dated 7 April 2010 and was, therefore, received by the trustees after the payment on 28 October 2009. The MTSF lodged its annual return for the year ended 30 June 2009 on 26 April 2010. On 12 May 2011 the MTSF was notified by the Commissioner of the review for the year ended 30 June 2009, on the basis that the annual return indicated a contravention of the SISA may have occurred. There is no evidence that during this period Mr Mason, in his capacity as a trustee of the MTSF, took any action to rectify the contraventions.

37. Having regard to the history of section 304-10 of the ITAA 1997, the legislative context in which it was enacted, the nature of the MTSF (being a SMSF) and Mr Mason's particular circumstances, the Tribunal considers that Mr Mason has not discharged the onus of proving that it is "unreasonable" to include the $20,000 superannuation benefit which was paid to him by the MTSF in his assessable income for the year ended 30 June 2010 (to be taxed at marginal rates) and, therefore, that the Commissioner's assessment is excessive: see section 14ZZK of the Taxation Administration Act 1953.

Decision

38. For the above reasons, the Tribunal affirms the Commissioner's objection decision dated 30 August 2011.