• The impact of this case on ATO policy is discussed in Decision Impact Statement: Sinclair and Commissioner of Taxation (2011/4763).

SINCLAIR v FC of T

Members:
Deutsch DP

Tribunal:
Administrative Appeals Tribunal, Sydney

MEDIA NEUTRAL CITATION: [2012] AATA 634

Decision date: 21 September 2012

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Prof R Deutsch (Deputy President)

REASONS FOR DECISION

INTRODUCTION

2. The Applicant seeks review of the Respondent's decision dated 4 October 2011 which disallowed the Applicant's objection against an assessment issued to him in respect of the year ended 30 June 2009, and included an amount of $40,000 in the Applicant's assessable income for that year pursuant to s 304-10(1) of the Income Tax Assessment Act 1997 (the 1997 Tax Act).

3. If the Respondent is found to have correctly applied s 304-10(1), the Applicant also seeks review of the Respondent's decision not to exercise his discretion in s 304-10(4) of the 1997 Tax Act to exclude the amount of $40,000 from his assessable income.

4. If the Respondent is found to have correctly applied both s 304-10(1) and (4) of the 1997 Tax Act, the Applicant seeks review of the 25 per cent administrative penalty which has been applied.

5. If the Respondent is found to have correctly applied the administrative penalty, the Applicant seeks review of the decision not to remit that penalty.

6. The case involves some unusual features. In particular, a fraudulent rogue element appears to have been involved in enticing the Applicant into an arrangement whereby superannuation funds were accessed early. A net amount was paid to the Applicant in circumstances where the Applicant was arguably led to believe that the difference between what he received and the amount paid out would be used to pay some commission, and to pay to the Respondent the amount of tax due on the superannuation monies. It appears however that no such tax was ever paid to the Respondent and the money so withheld has vanished.

7. In addition, according to information provided by the Respondent on the day of the hearing, the Applicant was declared bankrupt on 18 April 2008 and was discharged from bankruptcy on 19 April 2011. There was some belated discussion at the hearing as to the effect of the bankruptcy of the Applicant on these proceedings but no legal opinions had been sought on this matter by either party.

FACTUAL BACKGROUND

8. The Applicant was born in 1972 and is 40 years of age.

9. On 7 November 2008 the Respondent received an "Application for Australian Business Number and Tax File Number" for the Manuel and Saeed Superfund (the Fund), which form stated that the Fund had been established on 7 November 2008 with Janette Lagat and the Applicant as the two trustees of the Fund.

10. On 8 December 2008 a bank account was opened in the name of the Fund at the Commonwealth Bank of Australia (CBA). Between 8 December 2008 and 3 February 2009 some 16 deposits and 37 withdrawals were made to that account.

11. On 22 December 2008 the Fund was issued with an ABN with a commencement date of 20 December 2008.

12. In late December 2008, when the Applicant was 36 years of age, he completed a form called a BT Lifetime - Personal Super Withdrawal Request, which was a form that called upon BT Funds Management Ltd to roll over the Applicant's superannuation benefits to the Fund. The form was signed in two places at the foot of pages two and three, but there is considerable conjecture as to exactly which parts of the form were completed by Mr Sinclair before signing. The amount which was to be transferred was $40,000.

13. The completion of this form was, according to the Applicant's testimony, done at the behest of an individual known only as John Paul, although it appears that his name may also have been John Michael Paul. This form was presented to the Applicant and completed by him at a pub at some stage in late 2008.

14. On 29 December 2008 an amount of $40,000 was rolled over into the Fund for the Applicant, and a copy of the rollover benefits statement was provided to the Tribunal as part of the materials filed under s 37 of the Administrative Appeals Tribunal Act 1975.

15. On 5 January 2009 a cheque for $40,000 from BT Funds Management Ltd was deposited into the Fund's bank account on that day.

16. There was considerable discussion in the hearing as to exactly how those funds were applied, but it appears that a large amount, on one version $25,517.53, was withdrawn on or around 8 January 2009, but it remains unclear as to exactly where those funds were transferred. According to the Applicant's testimony, the funds were transferred to his brother in the first instance and all but $10,000 of those funds were transferred by the brother to the Applicant. The $10,000 was transferred to the Applicant's uncle for safekeeping until such time as those funds might be needed by the Applicant.

17. According to the Applicant's testimony, the difference between the amount rolled and the amount received by the Applicant, that is $14,482.47, was the amount of commission and tax that he was paying in respect of the superannuation payment. He has no record of any such tax ever having been paid to the Australian Taxation Office (ATO).

18. On 3 February 2009 the Fund bank account was closed with a nil balance.

19. On 18 February 2009, to prevent any further rollovers, the Fund was suppressed from Super Fund Lookup, a Commonwealth Government initiative which contains publicly available information about super funds that have an ABN and which are regulated by the ATO and the Australian Prudential Regulation Authority (APRA).

20. On 14 August 2009 the Applicant's 2009 income tax return was lodged by his tax agent, Frank Moliterno, but the amount of $40,000 was not returned as income in this tax return.

21. In March 2010 the Respondent commenced an audit of the Fund.

22. On 24 March 2010 a "Notification of Audit" letter was sent to the Fund's business address requesting a copy of the trust deed, bank statements and other relevant documents but no response was ever received. On 21 April 2010 a registered reminder letter was sent to the same address.

23. On 28 April 2010, in a telephone conversation, Janette Lagat advised the Respondent that she did not know the Applicant was the other trustee, did not open any bank accounts for the Fund and did not know what a trust deed was.

24. On 3 June 2010 a separate "Notification of Audit" letter was sent to the Applicant as there was an indication from Janette Lagat that the Applicant may not be aware of the audit.

25. On 17 November 2010 a "Completion of Audit for superannuation" letter was sent to both trustees advising them that they had both been disqualified as trustees.

26. On 27 January 2011 the Applicant contacted the Respondent by telephone and made statements to the effect that:

• • he had never been a trustee of a self-managed superannuation fund;
• • he did not recall signing any documents to become such trustee;
• • he had no knowledge of the bank account opened at CBA;
• • he had been approached by a third party to assist him to roll over his benefits. The third party's name was Michael; that he did not know his surname or the company he was from; and he had lost contact with him;
• • he had rolled over $40,000 from BT Funds Management Ltd but had not accessed any of his superannuation - instead he kept it in the superannuation system;
• • he meant to roll his benefits into AustralianSuper but Michael advised him to leave the receiving fund field of the rollover request blank;
• • he did not know where his superannuation benefit was now and would not worry about it until he retires.

27. In response the Respondent advised the Applicant to provide by 3 February 2011:

• • a copy of the rollover request form to show that the signature was not his signature and that part of the handwriting on the form was not his handwriting;
• • his personal bank statements from ANZ;
• • a letter outlining the details provided in the telephone conversation of 27 January 2011;
• • if his superannuation had gone missing to report this to the police and send a copy of the police report to the Respondent.

28. He was advised that failure to do so by the stipulated date would lead to his 2009 income tax return being amended to include as assessable income the amount which was accessed.

29. The Fund has not lodged any income tax or regulatory returns since its establishment and it appears that the Fund was never issued with a notice of compliance by the Respondent.

30. On 29 November 2010 the ABN of the Fund was cancelled by the Respondent as the Respondent was satisfied that at the time it was registered the Fund was not entitled to an ABN.

31. On 4 March 2011 the Respondent issued a completion of audit letter to the Applicant, advising that the Applicant's 2009 income tax assessment would be amended to include the $40,000 of superannuation benefits in assessable income, since he had not provided evidence that the rollover monies were still held in a superannuation account, even though he had been given opportunities to do so. A 25 per cent administrative shortfall penalty for failure to take reasonable care was also applied.

32. On 23 March 2011 the Respondent issued a "Notice of income and assessment - year-end at 30 June 2009" to include the amount of $40,000 of preserved superannuation benefits in assessable income. On the same day a "Notice of assessment of shortfall penalty" was issued by the Respondent, the amount of the penalty assessed being $4,150.

33. On 29 March 2011 the Applicant telephoned the Respondent and advised:

• • he had lost his job in December 2008 and needed money to look after his family;
• • he used the money to buy a car, pay rent and bond and deposited $10,000 into his uncle's bank account;
• • he received only $25,000 and the rest was for tax and fees;
• • he explained that he did not reveal the receipt of $25,000 because he was asked whether he had accessed $40,000 not $25,000.

34. On 9 August 2011 the Applicant lodged an objection to the amended notice of income tax assessment and made the following comments:

• • he received $25,517.53 of $40,000, the balance being 30 per cent tax and application fees;
• • the Respondent is double taxing him by including the full amount accessed in the applicant's 2009 income tax return;
• • he should not be held accountable for the promoter's failure to remit what the Applicant thought was income tax;
• • he is suffering stress and grief.

35. On 4 October 2010 the Respondent allowed the objection in part to allow partial remission of shortfall interest charge due to ATO delays. The substantive tax and the liability for administrative penalty of 25 per cent were upheld by the Respondent.

THE ISSUES

36. Essentially there are four issues that need to be resolved:

• • Should the amount of $40,000 withdrawn from BT Funds Management Ltd be included in the Applicant's assessable income for the year ended 30 June 2009 under s 304-10(1) of 1997 Tax Act?
• • Should the Respondent have exercised the discretion available to him under s 304-10(4) of the 1997 Tax Act in favour of the Applicant?
• • Should the Applicant be liable for an administrative penalty under s 284-75(1) of Schedule 1 of the Taxation Administration Act 1953 (the TAA) for the year ended 30 June 2009?
• • Should the administrative penalty be remitted either in full or in part under section 284-2 to 5 of Schedule 1 of the TAA?

ISSUE 1 - LIABILITY UNDER SUBSECTION 304-10(1)

37. If the terms of s 304-10(1) are satisfied and s 304-10(4) is held not to apply, the amount of $40,000 withdrawn from BT funds Management Ltd must be included in the Applicant's assessable income for the year to 30 June 2009.

38. Section 304-10(1) provides:

"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 benefits 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 receive the benefit) maintained as required by section 62 of the Superannuation Industry (Supervision) Act 1993;
  • (ii) you receive the benefit otherwise than in accordance with payment standards prescribed under sub section 31 (1) of the Superannuation Industry (Supervision) Act 1993."

39. Section 304-10(4) provides:

"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.

40. The payment in question, which needs to be examined in the context of these two statutory provisions, is the payment made by BT Funds Management Ltd to the Fund at the direction of the Applicant.

41. The Respondent argued that s 304-10(1) applies because:

• • there is a superannuation benefit;
• • the Applicant received the benefit from a complying superannuation fund (hence paragraph 304-10(1)(a)(i) applies;
• • the Applicant received the benefit otherwise than in accordance with payment standards prescribed under s 31(1) of the Superannuation Industry (Supervision) Act 1993 (SISA) (hence paragraph 304-10(1)(b)(ii) applies).

42. A superannuation benefit is defined in item 1 in the table in subsection 307-5(1) of the 1997 Tax Act as "a payment to you from a superannuation fund because you are a fund member."

43. Further, under s 307-15(2)(b) of the 1997 Tax Act, a superannuation benefit is treated as being received by an individual when that benefit is paid to another person or entity at the individual's direction or request.

44. Accordingly, in this case where the Applicant requested that BT Funds Management Ltd transfer his preserved benefits to the Fund, the payment made from BT Funds Management Ltd into the bank account of the Fund is logically treated as a superannuation benefit received by the Applicant from a complying superannuation fund, namely BT Funds Management Ltd. In other words, the payment is a superannuation benefit received from a complying superannuation fund (that is BT Funds Management Ltd - a superannuation fund that is regulated by the Australian Prudential Regulatory Authority (APRA) which has continually been assessed as a 'complying superannuation fund').

45. The other question I am called upon to consider is whether the payment was received otherwise than in accordance with the payment standards?

46. Subsection 31(1) of the SISA provides that the regulations may prescribe operating standards for regulated superannuation funds.

47. Part of those operating standards are payment standards which are set out in Part 6 of the Superannuation Industry (Supervision) Regulations 1994 (SISR).

48. Relevantly, regulation 6.17 provides that a member's benefit in a fund may be paid by:

• • being cashed in accordance with Division 6.3; or
• • being rolled over or transferred in accordance with Division 6.4, 6.5 or 6.7; or
• • being allotted under Division 6.7.

49. Being allotted under Division 6.7 is not presently relevant.

Division 6.3

50. Under Division 6.3 of the SISR, a member's preserved benefits may only be cashed, on or after the satisfaction by the member of a condition of release. The conditions of release are set out in schedule 1 to the regulations and include most relevantly:

• • retirement;
• • death;
• • terminal medical condition;
• • permanent incapacity;
• • temporary resident permanently departing Australia;
• • terminating gainful employment on or after 1 July 1997;
• • severe financial hardship;
• • attaining age 65;
• • compassionate grounds;
• • temporary incapacity;
• • attaining preservation age.

51. Clearly the last possibility does not apply in this case as the Applicant was 36 years of age at the time the funds were accessed. Having regard to regulation 6.01 of the SISR, the Applicant's preservation age was, at all relevant times, 60.

52. Although not clearly expressed in this fashion by the Applicant, it would seem that the Applicant is arguing for the application of the condition of release known as "severe financial hardship".

53. The relevant formulation of severe financial hardship is contained in Regulation 6.01(5) which provides:

"For the purposes of Schedule 1, a person is taken to be in severe financial hardship if:

• (a) the trustee of the superannuation entity is satisfied:
  • (i) Based on written evidence provided by at least one Commonwealth department or agency responsible for administering a class of Commonwealth income support payments, that:
    • (A) the person has received Commonwealth income support payments for a continuous period of 26 weeks; and
    • (B) the person was in receipt of payments of that kind on the date of the written evidence; and
  • (ii) that the person is unable to meet reasonable and immediate family living expenses; or
• (b) the person has reached the age that is the person's preservation age +39 weeks and the trustee of a superannuation entity is satisfied:
  • (i) based on written evidence provided by at least one Commonwealth department or agency responsible for administering a class of Commonwealth income support payments - that the person received Commonwealth income support payments for a cumulative period of 39 weeks after the person reached the persons preservation age; and
  • (ii) that the person was not gainfully employed on a full-time, or part-time, basis on the date of the application for cashing of his or her preserved benefits, or restricted non-preserved benefits, in the entity.

54. Thus, there are two circumstances in which severe financial hardship can be claimed.

55. The first possibility requires the Applicant to adduce evidence to the effect that he provided information to the trustee of BT Funds Management Ltd, in written form, from a relevant Commonwealth department or agency that the Applicant was in receipt of Commonwealth income support payments for a continuous period of 26 weeks. No such evidence was provided, although the amount of $2,721 appears as 'Income from Australian Government allowances and payments' in the tax return for the year ended 30 June 2009. This clearly is insufficient evidence to support the requirement for satisfaction of regulation 6.01(5)(a).

56. The second of these two possibilities is not available to the Applicant as he has not, at the relevant time, reached the preservation age.

57. The onus to show severe financial hardship rests upon the taxpayer and it is a heavy onus. The term is not simply financial hardship but 'severe' financial hardship and, whilst the Applicant made various statements indicating that he was in a state of financial distress, insufficient concrete evidence was provided to support the view that he was suffering severe financial hardship at the time he accessed the funds, having regard to the requirements of the relevant Regulations described above.

58. Accordingly, on the evidence presented, severe financial hardship has not been demonstrated.

Divisions 6.4, 6.5 or 6.7

59. The terms "rolled over" and "transferred" are defined in regulation 5.01 of the SISR and apply to Part 6 of the SISR by virtue of subregulation 6.01(1). The definitions are:

Rolled over means paid as a superannuation lump sum (other than by way of being transferred), within the superannuation system.

Transferred includes the payment of the member's benefits out of a regulated superannuation fund into another regulated superannuation fund, otherwise than upon the satisfaction by the member of a condition of release for all those benefits.

60. As a consequence, the payment from BT Funds Management Ltd could only be transferred or rolled over if the Fund was a "regulated superannuation fund" at the time of the payment.

61. Even though the Respondent had accepted the form for the Fund to become regulated as a self-managed superannuation fund, the audit conducted by the Respondent revealed that the Fund never met the definition of a "regulated superannuation fund" within the meaning given to that term in s 10(1) of SISA.

62. The term "regulated superannuation fund" is defined by reference to s 19 of SISA as a superannuation fund which has a trustee, when the trustees have given notice to the specified body electing that the SISA is to apply in relation to the fund.

63. In this case it appears that the people nominated as trustees of the Fund have lodged the requisite application form with the ATO electing that SISA apply to the Fund.

64. However, it is also necessary to demonstrate that the Fund is a superannuation fund as defined in s 10(1) SISA.

65. No evidence was adduced by the Applicant to demonstrate that the Fund was a superannuation fund and indeed the following evidentiary problems exist in this matter:

• • no document creating the trust has ever been found to exist;
• • there appears to be no financial statements prepared in respect of the Fund;
• • there appears to be no trustee declaration in respect of the Fund;
• • the Applicant and the other trustee had no knowledge that they were ever trustees of the fund and appear not to have known each other;
• • there is no clear evidence that the parties intended the monies deposited with the Fund to be used for superannuation purposes.

66. Having regard to the above, the evidence suggests that the Fund was neither a superannuation fund nor a regulated superannuation fund at any relevant time.

67. As a result, I am of the view that the payment from BT Funds Management Ltd could not represent an amount 'transferred' or 'rolled over' as defined in the SISR. The effect is that the payment from BT Funds Management Limited to the Fund at the direction of the Applicant was the payment of the superannuation benefit from a complying superannuation fund, which was received otherwise than in accordance with the payment standards prescribed in s 31(1) of the SISA.

68. Accordingly, the $40,000 withdrawn from the fund is to be included in the Applicant's assessable income for the year ended 30 June 2009 pursuant to section 304-10(1) of the 1997 Tax Act.

ISSUE 2 - EXERCISE OF DISCRETION BY THE RESPONDENT UNDER SS.304-10(4)

69. Under s 304-10(4) of the 1997 Tax Act, it is open to the Respondent to exercise a discretionary power to reduce the amount of superannuation benefits included in the Applicant's assessable income under s 30-10(1), if the Respondent is satisfied that it would be unreasonable to include the amount having regard to:

• • the nature of the fund; and
• • any other matters the Respondent considers relevant.

70. Little in the way of argument was put to me in relation to the application of this discretion, particularly by the Applicant, and I see nothing that would be directly relevant to the exercise of this discretion in favour of the Applicant. The fund in question here is the fund that transferred the amount in question namely, BT Funds Management Ltd. That fund is and was at all relevant times a complying superannuation fund in regard to which there was nothing particularly notable in the context of this discretion.

71. Certainly there were some unusual features of this case, including the claim by the Applicant to have completed the relevant form by signing where required and allowing certain fields, which were critical to the application of the provisions in question here, to be completed later by a third party. These matters, if anything, point more to a reason not to exercise the discretion in question than to exercise it.

72. Further, it is clear from the evidence that the Applicant intended to access the superannuation funds before meeting a condition of release and he failed to declare his receipt of those funds in his tax return and, as far as the evidence shows, he made no particular effort to discover whether he needed to.

73. While the circumstances of the Applicant are clearly difficult, they are not sufficient to call into play the exercise of the discretion conferred on the Respondent by s 304-10(4). Preserving funds within the superannuation system and not having them accessed by members before retirement is the key driver behind the superannuation system, and the reason why early access possibilities are so carefully prescribed in Regulation 6.17(2) of the SISR and Schedule 1 of those Regulations. Mere financial difficulties experienced by members cannot be enough to bring the discretion into play.

ISSUE 3 - THE PENALTY

74. The next matter I need to consider is the application of the penalty.

75. The Respondent contends that it was appropriate in all the circumstances to apply an administrative penalty of 25 per cent pursuant to s 284-75(1) of Schedule 1 of the TAA to the tax shortfall, which resulted directly from the Applicant's failure to declare his superannuation benefits in his income tax return.

76. That subsection provides as follows:

"You are liable to an administrative penalty if:

• ○ You make a statement to the Commissioner or to any entity that is exercising powers or performing functions under taxation law; and
• ○ The statement is false or misleading in a material particular, whether because of things in it or omitted from it."

77. Subsection 284-25 makes it clear that "you" are also liable if the false or misleading statement is made by your agent.

78. The amount of the administrative penalty is calculated by reference to the shortfall amount.

79. A shortfall amount arises in this case because an amount has been omitted from assessable income in the relevant tax return. This, according to the Respondent, is a false or misleading statement (albeit one of omission) made by the Applicant and his agent. According to the Respondent, the shortfall arose as a result of the Applicant or his agent failing to take reasonable care to comply with taxation law.

80. The base penalty amount is determined under s 284-90(1), and according to item 3 of that table the base penalty amount will be 25 per cent if the shortfall resulted from a failure to take reasonable care.

81. Reasonable care would require the sort of care that a reasonable person might exercise. In this case there are a number of deficiencies in the way in which the Applicant has behaved that would indicate that reasonable care has not been taken. I have traversed some of these matters before. They include:

• • the Applicant received no documentation to support the claim that tax had been withheld and paid to the Respondent;
• • the identity of the relevant third party is something about which the Applicant appears to know very little, either in terms of the name of the third party or the organisation for which he ostensibly worked;
• • the Applicant made no effort to reflect the payment received in his tax return;
• • while he seems to have been under the impression that he did not need to disclose his payout in his tax return, there seems to have been very little in the way of concrete discussions with his tax agent in respect of the inclusion of this item in the tax return. Certainly no evidence was provided as to the discussions which the Applicant had with his tax agent; and
• • the Applicant completed a document relating to the transfer of his superannuation funds (which he must have known to be an important document) in a pub with a person about whom he knew very little, and left critical matters in that document to be completed after he had signed the document twice in two different places.

82. All these matters would suggest to me that the Applicant has failed to take reasonable care to ensure that a false and misleading statement is not made to the Respondent.

83. Accordingly, the base penalty amount of 25 per cent was correctly applied to the shortfall amounts of the 2009 income year.

ISSUE 4 - REMISSION OF PENALTY

84. Where an administrative penalty has been imposed, the Respondent may, if he considers it appropriate in all the circumstances, use his discretion to remit the penalty in part or in full (see s298-20 of the TAA).

85. The Respondent does not believe it is appropriate to apply this discretion to remit the penalty in full or in part, primarily because the omitted income was significant relative to the Applicant's overall income; the disclosure that was ultimately made was not a voluntary unprompted disclosure; and there is a desire to promote consistent treatment of penalties under the penalty regime.

86. Accordingly, the Respondent contends that the administrative penalty should not be remitted in full or in part.

87. There is no doubt that the Applicant in this case has acted carelessly but there are a number of factors in play which are relevant to the remission of the penalty which are in favour of the Applicant.

88. First, there is no evidence to suggest that the Applicant's compliance history has been anything but sound. Secondly, the Applicant's personal circumstances indicate that from 18 April 2008 until 19 April 2011 he was an undischarged bankrupt. This would suggest that he was clearly in financial distress at the relevant times, even though he may not have been in "severe financial hardship" as that term is defined in the legislation. Thirdly, of the $40,000 the taxpayer improperly sought to access, he will be left with no more than something in the order of $12,000 after the funds taken by rogue elements and the tax payable as a result of my decision on the primary issue are taken into account. This would seem to be a substantial detriment to the Applicant without the necessity to impose further penalties. Finally, it has never been suggested that the Applicant had acted recklessly or intentionally to disregard the law. Clearly he acted carelessly and had been naïvely mislead by rogue financial advisers. He has suffered adequate financial consequences for having done so.

89. On balance, I take the view that on the question of remission of the penalty the factors in favour of the Applicant are stronger than those in favour of the Respondent and accordingly the penalty should be remitted in full.

DECISION

90. For the reasons set out above, the Tribunal decides that:

• (i) The objection decision under review is affirmed, so as to include $40,000 in the Applicant's assessable income for the year ended 30 June 2009; and
• (ii) The 25 per cent administrative penalty is remitted in full.