• The impact of this case on ATO policy is discussed in Decision Impact Statement: Wainwright and Commissioner of Taxation (2016/5850-5851 2017/1561).

Wainwright & Anor v FC of T

Members:
RI Hanger QC DP

Tribunal:
Administrative Appeals Tribunal

MEDIA NEUTRAL CITATION: [2019] AATA 333

Decision date: 5 March 2019

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RI Hanger QC (Deputy President)

INTRODUCTION

1. These applications for review concern the taxation of superannuation benefits provided to members of a self-managed superannuation fund.

2. Mr and Mrs Wainwright ('the Applicants') are farmers in Queensland. They established a self-managed superannuation fund ('the Fund') in September 1997 and signed a deed of variation of the superannuation trust deed, to take effect in January 2006.^[1] Exhibit 1, T Documents, Volume II, T45 at pages 496, 509, Trust Deed & Deed of Variation. At all relevant times, the Fund was the sole unit holder in the Bilyara Family Unit Trust of which they were trustees.^[2] Exhibit 2, Applicant’s Statement of Facts, Issues and Contentions dated 9 November 2017, para 12.

3. By August 2007, the superannuation fund had accumulated approximately $730,000.^[3] Exhibit 1, T Documents, Volume I, T11 at page 146, Information provided by Applicants containing investment details for the Fund.

4. On 29 August 2007, Mr Wainwright attended an auction for the sale of a property known as Triton Park, ( Triton ) a farming property, with the intention of acquiring that property. He was the successful bidder for a purchase price of $700,000.^[4] Exhibit 2, Applicants’ Statement of Facts, Issues and Contentions dated 9 November 2017, para 15; Exhibit 9, Statement of Gerard Wainwright dated 22 May 2017, para 27. After the auction, but before he signed the contract, Mr Wainwright had a discussion with Mr Coetzee, his financial advisor and tax agent. As a result of that discussion, it was decided that it would be in the Applicants' best interests to acquire Triton Park in their own names.

5. For the Applicant's to have the necessary money to purchase Triton Park in their own names, with Mr Coetzee's advice, they agreed to sell another property, ( Athol ), to the fund, which was currently held by Mr Wainwright for $1.1 million and to use that money to buy Triton. It was proposed that the difference between the $700,000 held by the Fund and the $1.1 million that the Fund would receive by way of the Athol property would be accounted for by 'in specie' contributions made by Mr Wainwright.

6. The Applicants' signed the contract to purchase Triton Park on 29 August 2007 and paid a deposit of $70,000 with a bank cheque drawn on the Fund's bank account.^[5] Exhibit 1, T Documents, Volume II,T51 at page 633, Contract of Sale for Triton Park dated 29 August 2007.

7. Completion of the Triton Park contract occurred on 28 September 2007, when the balance of the purchase price was paid to the vendors, being the sum of $629,885 from the Fund's bank account.^[6] Exhibit 3, Applicants’ Statement of Facts, Issues and Contentions dated 9 November 2007, para 3.

8. In September 2007, a sum of $24,995 was paid by the Applicants' to the Queensland Office of State Revenue on account of stamp duty and costs associated with their purchase of Triton Park. That money came from the fund.

9. Hence, the three sums which give rise to the present disputes are as follows:

• (a) the deposit of $70,000 for Triton Park paid from the Fund's bank account on 29 August 2007:
• (b) the balance of the purchase monies of $629,885 for Triton Park, paid from the Fund's bank account on 28 September 2007; and
• (c) the sum of $24,995 paid to the Applicants by the Fund, representing the stamp duty payable by them in respect of the purchase of Triton Park.

10. On 28 September 2007, the Applicants' executed a contract, prepared by their lawyers, in which they agreed to sell Athol to the Fund. It provided that:^[7] Exhibit 1, T Documents, Volume II, T51 at page 646, Contract of Sale for Athol dated 28 September 2007.

• (a) settlement was to occur on 31 July 2008;
• (b) the purchase price was $1.1 million;
• (c) the deposit was $700,000 (being the total sum paid for Triton Park, excluding stamp duty payable for that purchase);
• (d) an amount of $70,000 had already been paid towards the deposit of $700,000 (being the deposit paid to the vendors of Triton Park by the fund);
• (e) the balance of $400,000 was to be accounted for by way of 'in specie' contributions by Mr Wainwright to the

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  ATC 7991

  fund, to be credited to the accumulation account of Mr Wainwright in the following amounts:
  • (i) on 28 February 2008, as to $200,000; and
  • (ii) on 31 July 2008, as to the remaining $200,000.

11. It is not in dispute that these were intended to be genuine transactions. The Athol contract did not complete on 31 July 2008 because of a lack of funds to pay the stamp duty required for the transfer of the property to the fund. An extension date of the date for completion until 31 December 2008 was documented.

12. The transfer of the Athol property into the fund would also require the payment of $41,975 by way of stamp duty.^[8] Exhibit 2, Supplementary T Documents, ST58 at page 1787, Letter from Kennedy Spanner Lawyers to Gerard and Janice Wainwright dated 4 October 2007, dated 20 January 2016. Furthermore, the Athol property was subject to mortgages held by Suncorp Bank. The advice given by Mr Coetzee was that the Fund could not own a property that was mortgaged. Mr Coetzee entered into discussions with Suncorp Bank to set things in motion to release the mortgage on the Athol property and for the Bank to take a mortgage over Triton Park instead. Unfortunately, the Applicants' financial position deteriorated following the acquisition of Triton Park. They were also running a newsagency business which began to decline, and their losses mounted. Consequently, they did not have the funds available in the fund to pay the $41,975 stamp duty for the Athol transfer into the Fund. Mr Wainwright advised Mr Coetzee of their financial problems and Mr Coetzee spoke to the lawyers involved and arranged an extension of time for completion of the Athol contract to 31 January 2009. That extension was granted in a formal document.

13. The Applicants' financial position did not improve as their newsagency business declined because of the advent of online sales and new competitors. They were unable to complete the Athol Transaction on 31 January 2009.The upshot of this, is that the fund had been depleted of $700,000 to buy Triton Park and $24,995 which had been used to pay the stamp duty on the purchase of Triton Park,

14. In or around June 2009, the Applicants were forced to return to their original business of dairy farming to support the declining newsagency business. They moved their financial arrangements from Suncorp Bank to Landmark, which helped them return to farming. The return to dairy farming however coincided with a severe drought, which did not break until 2011. The drought was eventually broken by catastrophic flash flooding in January 2011. The dairy market then crashed in January 2011 when Coles and Woolworths started selling milk for $1 per Litre, which had a serious detrimental impact on dairy farmers around the country. The Applicants' financial position went from bad to worse. They were forced to sell their dairy herd, had disputes with their bank at the time, and attended a mediation which resulted in an agreement to sell their properties to pay their debts. They personally received no money from the sale of Triton Park. All of the proceeds were paid to the bank in reduction of their debt.

15. The Applicants lodged their individual tax returns for the year ended 30 June 2008 on 30 June 2009.^[9] Exhibit 4, Respondent’s Statement of Facts, Issues and Contentions, Schedule 2. The Fund's tax return for the financial year ended 2008 was lodged on 30 October 2009.^[10] Exhibit 4, Respondent’s Statement of Facts, Issues and Contentions, Schedule 1. In that return, it listed non-residential real property to the value of $824,995.^[11] Exhibit 1, T Documents, Volume I, T12, pages 155-164, Income tax return for the period ended 30 June 2008 for the Wainwright Family Superannuation Fund dated 30 October 2009. That would appear to include the Athol property as an asset of the Fund, despite the fact that it had not been formally transferred to the Fund. Regardless, the Fund would no doubt have had an equitable interest in Athol to the value of $700,000. The Income Tax Return lodged on 30 October 2009 did not disclose any loans to the Applicants.

16. On 29 April 2014, the Fund lodged tax returns for the income years ended 2009 to 2013.^[12] Exhibit 4, Respondent’s Statement of Facts, Issues and Contentions, Schedule 1. The original 2007-08 return which had shown the fund owning non-residential property (presumably Athol) in the later returns was amended to show no non-residential real property but a loan of $724,995.^[13] Exhibit 1, T Documents, Volume I, T31, page 246, Income tax return for the period ended 30 June 2009 for the Wainwright Family Superannuation Fund dated 29 April 2014. This was the fund's way of treating the failure to transfer Athol into the fund.

17. On 16 January 2015, the Commissioner received a copy of a document purporting to be a signed loan agreement dated 26 September 2007 between the Applicants, as trustees of the fund, and Mr Wainwright, as borrower.^[14] Exhibit 1, T Documents, Volume II, T46, Loan agreement documentation for the Wainwright Family Superannuation Fund, pages 597-599, dated 16 January 2015. The document was sent by the Applicants' accountant, obviously attempting to retrospectively legitimise the unfortunate situation that had occurred.

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ATC 7992

Throughout the course of the objection and appeal processes, Mr Wainwright has rejected the suggestion that there was a loan by the Fund to him in the 2008 Income Year.^[15] Exhibit 9, Statement of Gerard Wainwright dated 23 May 2017, para 130. I accept that evidence.

18. On 26 August 2015, Mr Wainwright lodged his return for the 2009 Income Year. He did not report the $700,000 received from the Fund.

BACKGROUND

19. On 4 December 2014, the Respondent commenced an audit of the Fund in respect of its compliance with tax and superannuation law.^[16] Exhibit 1, T Documents, Volume I, T44 at pages 344-347, Notice of Audit dated 4 December 2014. After the completion of the audit process, on 18 August 2015 the Respondent issued amended income tax assessments to both Applicants for the income year ended 2008, and to Mr Wainwright for the income year ended 2009. The Applicants objected to the amended assessments, and the objections were allowed in part ('the Objection Decision').^[17] Exhibit 1, T Documents, Volume IV, T72, pages 981-1008, Income tax return for the period ended 30 June 2008 for Janice Wainwright, dated 30 June 2009. The Applicants have lodged an appeal of the objection decision to the extent that it was disallowed pursuant to section 14ZZ of the Taxation Administration Act 1953 ('TAA').

20. The Respondent contends that the Applicants received an equal share of superannuation benefits totalling $24,995.00 in the 2008 financial year, which should have been included as assessable income, and that the Applicants knew that the Fund's money had been used to pay stamp duty and other costs associated with the property which had been purchased in their own names. The Commissioner concluded that the omission of the benefits received resulted in a tax shortfall. The Commissioner further determined that the Applicants knew that the transfer of property into the Fund had not been completed, and that there was not a loan agreement between the Fund and themselves at the time of the transaction. As a result, the Commissioner formed the opinion that there has been an avoidance of tax due to evasion by the Applicants.

21. In relation to the 2009 Income Year, the Commissioner formed the view that Mr Wainwright received a benefit of $700,000, representing the deposit that was not repaid when the Athol contract did not proceed in that income year, which should have been included as assessable income. The Commissioner determined that the omission of the benefit received resulted in a tax shortfall.^[18] Exhibit 2, Supplementary T Documents, ST4, pages 1328-1331, Notice of Objection Decision issued to Gerard Wainwright, dated 21 February 2017.

22. The Respondent therefore contends that pursuant to subsection 170(1) of the Income Tax Assessment Act 1997 ('ITAA'), it has the power to amend the Applicants' income tax assessments for the financial year ended 30 June 2008. As the Applicants' lodged their income tax return for the financial year ended 30 June 2009 on 26 August 2015, the Commissioner was within the two year timeframe in which it may amend an individuals' assessment in relation to the 2009 Income Year.

23. The Respondent subsequently amended the Applicants' taxable income as follows:

• (a) With respect to the 2008 Income Year:
  • (i) to Mrs Wainwright - increasing her taxable income by $12,497, resulting in a total taxable income of $28,203; and
  • (ii) to Mr Wainwright - increasing his taxable income by $12,497, resulting in a total taxable income of $28,203
• (b) With respect to the 2009 Income Year:
  • (i) to Mr Wainwright - increasing his taxable income by $700,000, resulting in a total taxable income of $728,548^[19] Respondent’s Amended Statement of Facts, Issues and Contentions dated 26 July 2018, para 3.1.2

24. The Respondent further determined that the Applicants were liable to administrative penalties as follows:

• (a) With respect to the 2008 Income Year:
  • (i) Mrs Wainwright was liable for the amount of $1148.78, representing 50% of the tax shortfall for the year; and
  • (ii) Mr Wainwright was liable for the amount of $1148.80, representing 50% of the tax shortfall for that year; and
• (b) With respect to the 2009 Income Year, Mr Wainwright was liable for the amount of $188,155.56 representing 50% of the tax shortfall for that year plus a 20% uplift.

LEGISLATIVE FRAMEWORK

25. Section 170 of the ITAA allows the Commissioner to amend an individual's tax assessment for a year of income, within 2 years after the day on which the Commissioner gives notice of the assessment to the individual,^[20] Income Tax Assessment Act 1936 (Cth), s 170(1) Item 1. or at any time if they are of the opinion that there has been fraud or evasion.^[21] Income Tax Assessment Act 1936 (Cth), s 170(1), Item 5.

26.

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The concepts of fraud and evasion in relation to tax law are outlined in Practice Statement Law Administration 2008/6 ('PS'). The PS indicates that the threshold for an opinion of 'evasion' is lower than the threshold to establish fraud. The PS adopts Dixon J's judgment in Denver Chemical Manufacturing v Commissioner of Taxation when defining evasion.

27. Dixon J held that for the Commissioner to form the opinion that there has been evasion, it must be established that there has been both an avoidance of tax, resulting in a shortfall amount, and a blameworthy act or omission on behalf of the taxpayer or their agent.

28. Under Schedule 1 of the TAA, a person is also liable for an administrative penalty if they make a statement to the Commissioner and the statement is false or misleading in a material particular.^[22] Taxation Administration Act 1953, Schedule 1, Section The base penalty liability is calculated as follows:^[23] Taxation Administration Act 1953, Schedule 1, Section 284-90.

• • 25% of the shortfall amount if the shortfall arose due to a failure to comply with a taxation law;
• • 50% of the shortfall amount where the shortfall arose due to recklessness as to the operation of a taxation law; or
• • 75% of the shortfall amount where the shortfall arose due to an intentional disregard of the taxation law.

29. The TAA indicates that the taxpayer bears the onus of proving that they did not avoid their tax liabilities through fraud or evasion. That is confirmed by the full Federal Court in
Binetter v Commissioner of Taxation (2016) 346 ALR 357 at [93]:

"Although the Tribunal re-examines whether, on the evidence before it there was an avoidance of tax due to fraud or evasion and is able to substitute its opinion for that of the Commissioner, the issue for the Tribunal is whether the taxpayer has discharged the onus of showing that the opinion that there was fraud or evasion should not have been formed, and therefore, that the statutory condition for the power to amend is not satisfied. Unless the taxpayer discharges that onus, the assessments are not shown to be excessive and the effect of section 14ZZK is that the Tribunal must affirm the amended assessments, such assessments having been made by the Commissioner in compliance with the statutory requirements. (McCormack v Commissioner of Taxation
(1979)143 CLR 284 at 303; Millar v Commissioner of Taxation
[2015] FCA 1104. In Millar, Griffiths J correctly held that on a merits review before the tribunal, the onus of proof imposed by section 14ZZK places on the taxpayer the burden of disproving fraud or evasion".

30. The legislative scheme subjects superannuation funds to supervision and regulation by the Commonwealth's powers, and in exchange for compliance with the relevant regulations, the supervised funds may be eligible for concessional taxation treatment.^[24] Superannuation Industry (Supervision) Act 1993 , s 3(2). The applicable case law confirms that the scheme allowing tax concessions to self-managed superannuation funds is a privilege, which is only to be conferred upon compliant superannuation funds.^[25] See for example: ZDDD and Commissioner of Taxation [2011] AATA 3 ; Vivian (Deputy Commissioner of Taxation (Superannuation)) v Fitzgeralds (2007) ATR 834 . As noted by Senior Member Walsh in
Mason and Commissioner of Taxation [2012] AATA 133 at [27], "an important element of the scheme of the regulation is the deterrent effect of legislative provisions."

31. The objects of the Superannuation Industry (Supervision) Act 1993 ('SISA') were further elucidated by Logan J in
Vivian (Deputy Commissioner of Taxation (Superannuation)) v Fitzgeralds (2007) ATR 834:

• [25] Our Parliament has deliberately constructed a scheme whereby, in return for submission to [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…
• [30] … it seems to be part of the scheme on the legislation, in its provision for self-management, that those who take advantage of the utilisation of a self-managed fund do, indeed self-manage that fund in accordance with the terms of the deed and the legislation, rather than have a much wider and more detailed policing of that… the Parliament is entrusting those who manage a

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  ATC 7994

  self-managed fund with a duty of adhering to the terms of the deed and the terms of the legislation… Any trustee… is obliged to discharge his or her duty according to the terms of a governing trust deed.

32. When superannuation benefits are withdrawn from a regulated superannuation fund, and the Member has not met a condition of release as required by Part 6 of the Superannuation Industry (Supervision) Regulations 1994 ('the SISR'), or the benefits were received when the fund was not maintained as required by section 62 of the SISA, the benefits are deemed to be in be non-compliant and ineligible for concessional taxation treatment.^[26] Income Tax Assessment Act 1997 , section 304-10. Superannuation benefits received in breach of the legislative scheme pursuant to section 304-10 ITAA are considered 'statutory income' for the purposes of section 6-10; as opposed to 'ordinary income.' Accordingly, the benefits are taxed at marginal rates instead of the concessional rates and are assessable income in the income year that they were received.^[27] Income Tax Assessment Act 1997 , section 304-10.

33. Section 307-5 of the ITAA defines a 'superannuation benefit' to include, relevantly, a payment made to a person from a superannuation fund, because that person is a fund member.^[28] Income Tax Assessment Act 1997 , section 307-5, Item 1. Subsection 307-5(2) clarifies that a payment is deemed to be made by a person, or received by that person, if it is made for that person's benefit, or made at that person's direction or request to another person or entity.

34. Division 6.3 of Part 6 of the SISR requires a person to satisfy the condition of release set out therein in order to receive their superannuation benefits in compliance with the scheme. The conditions of release are specified in Schedule 1 of the SISR and include, relevantly:

• • Retirement;
• • Death;
• • Terminal medical condition;
• • Permanent incapacity;
• • Severe financial hardship;
• • Attaining age 65; and
• • Compassionate grounds.

35. Section 62 of the SISA requires, relevantly that the fund is maintained solely for one of the purposes contained within that subsection, including for the provision of benefits for each member of the fund following:^[29] Superannuation Industry (Supervision) Act 1993 , s 62(1).

• • their retirement;
• • the attainment of the age specified in the regulations; or
• • the member's death.

36. Section 304-10(4) also confers a discretion on the Commissioner, allowing amounts to be excluded from assessable income if 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 Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 4) 1987, which enacted a discretion materially similar to the one under consideration contemplated that the discretion "would be exercised where there are no tax avoidance implications and whether the excessive benefit arose fortuitously or in other circumstances beyond the effective control of the recipient..."

37. Senior Member Walsh considered the meaning of 'unreasonable' in the context of section 304-10(4), deciding that:^[30] Mason and Commissioner of Taxation [2013] AATA 133 at [31].

… 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.

However, it will not be "unreasonable" to include a superannuation benefit in a person's assessable income… merely because the taxation consequence prescribed by Parliament is difficult for the taxpayer to meet or is regarded

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ATC 7995

by the taxpayer as undesirable. If this were so, the important deterrent effect of section 304-10 of the ITAA 1997 would be undermined…

ISSUES

38. In order for the Tribunal to make the correct and preferable decision in this matter, it must first resolve the following issues:

• (a) Whether the $700,000 deposit paid by the Fund to the Applicants was received in the 2008 or 2009 Income Year; and whether it was received by the Applicants jointly or by Mr Wainwright in his sole capacity as vendor of the Athol property;
• (b) Whether the Commissioner's opinion that there was an avoidance of tax due to evasion was incorrectly held;
• (c) Whether the amended assessments were excessive;
• (d) Whether the Commissioner should have exercised his discretion under section 304-10(4) of the ITAA to exclude the superannuation benefits from the Applicants' assessable income; and
• (e) Whether the Applicants are liable for administrative penalties pursuant to section 284-75 of Schedule 1 to the TAA and whether the discretion to remit the Shortfall Interest Charges ought to have been exercised.

CONSIDERATION

39. Timing is important in this matter. The Applicants submit that the three payments that had been made from the fund were superannuation benefits in the 2008 Income Year. The Fund's amended tax return for that year was lodged on 21 January 2014, and Applicants' individual tax returns were lodged on the same day. If the superannuation benefits were all received in the 2008 Income Year, then the Commissioner may only amend the Applicants' assessment if a finding of evasion is upheld.

Taxation Treatment of Payments

$70,000 and $629,885 Payments

40. I am satisfied that these payments were made utilising the Fund's money in order to give effect to a plan of rationalisation with respect to farming assets. The prospect of rationalising the family holdings had been on the Applicants' agenda, in consultation with their financial planner for a considerable period of time. The plan was for the Fund to acquire Athol at a proper price. Unfortunately, for the reasons that I have set out above, the Fund paid out the money which was used to buy Triton Park but did not receive the Athol Property as consideration. The taxation consequences of what occurred are somewhat complex.

41. Section 307-5 of the ITAA defines a superannuation benefit as being "a payment to you from a superannuation fund because you are a fund member".

42. The Applicants accept that the deposit and settlement payment are superannuation fund benefits under section 307-5 paid in the 2008 income year. They rely on the fact that the payments were in fact made from the Fund's account in that financial year and submit that whether or not those payments are later also classified as the $700,000 deposit for the purchase of Athol does not change the application of the legislation.^[31] Applicants’ Closing Submissions dated 23 July 2018, para 30. They submit that because the two payments were made from the fund in the 2008 Income Year they should be dealt with in that year. If dealt with in that year, the respondent would have to establish fraud or evasion.

Should the $700,000 payment ('the Athol Deposit') be treated as income in the 2008 Income Year or the 2009 Income Year?

43. In the Objection Decision, the Respondent considered the $700,000 as assessable income in the 2009 Income Year for Mr Wainwright solely. The Respondent deemed the payment to be a "superannuation benefit" for the purposes of section 304-10 (1) because it was a benefit received by Mr Wainwright in 2009 income year out of, or attributable to, the assets of a superannuation fund. In deciding that Mr Wainwright was the sole beneficiary of the funds in the 2009 Income Year, the Respondent concluded that the funds were dispensed to Mr Wainwright, acting in his capacity as the owner of the Athol property, as opposed to being dispensed to the Applicants because they were members of the Fund.^[32] Exhibit 2, Supplementary T Documents, ST4, pages 1328-1331, Notice of Objection Decision issued to Gerard Wainwright, dated 21 February 2017.

44. Section 307-15 of the ITAA provides:

• 1 This section applies for the purposes of:
  • (a) determining whether a payment is a superannuation benefit; and

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  • (b) determining whether a superannuation benefit is made to you, or received by you.
• 2 A payment is treated as being made to you, or received by you, if it is made:
  • (a) for your benefit; or
  • (b) to another person or to an entity at your direction or request.

45. Further, benefits that are treated as ordinary income by reason of section 304-10 of the ITAA are assessable income in the income year that they were received (emphasis added).^[33] Income Tax Assessment Act 1997 , s 304-10.

46. The deposit payment of $70,000 was made to Ray White, the agent acting for the sellers of Triton Park and the settlement payment was made to the seller's lawyers. There can therefore be little doubt that the monies withdrawn from the Fund were payments that were made either to one or both of the Applicants, or at their direction for their benefit.

47. What is in issue is whether the payments were made because the Applicants were members of the Fund. The Applicants' argue that the deposit payment and the settlement payment were made because the Applicants were members of the fund and therefore should be treated as payments made in the 2007-08 year under the provisions of section 307-5

48. The Applicants rely on the significant delay between lawyers being instructed in respect of the Triton sale and the Athol sale to support their argument that the payment was made because the Applicants were members of the Fund. Lawyers were instructed regarding the Triton Park sale on 11 September 2007 and on the Athol Transaction on or about 21 September 2007.^[34] Applicant’s Closing Submissions dated 23 July 2018, para 25. At the time that the deposit payment was paid by the Fund on 29 August 2007, as directed by the Applicants, solicitors had not been instructed in relation to the Athol sale. In fact, a contract was not prepared for the Athol Transaction for a further three weeks.

49. The Applicants argue that as the Athol Deposit was transferred by the Fund on 28 September 2007 and received by the Applicants on 29 September 2007, it should be assessed as income received in the 2008 income year. The Applicants contrasted the typical elements of an arms' length transfer of business real property into a SMSF, comprising, critically, a 10% deposit, to the receipt of a $700,000 deposit, amounting to 63% of the total transaction.^[35] Applicant’s Closing Submissions dated 23 July 2018, para 37. The Applicants argue that the excessive deposit demonstrates that the transaction was done for a purpose other than to simply perform the Fund's obligations under the contract; namely, because the Applicants were fund members and needed the money to complete the purchase.^[36] Applicants’ Closing Submissions dated 23 July 2018, para 40. The Applicants' contend that the legislation requires the payment to have been conferred in the relevant year, as contrasted to the benefit.

50. During the Hearing, Mr Coetzee confirmed that the Athol contract was originally meant to settle on or about 30 July 2008, but due to the Applicants' financial circumstances, the settlement date was extended to 30 January 2009.^[37] ST Documents, ST112 at page 2029, Letter from Kennedy Spanner Lawyer to the Wainwrights re valuation report and extension of settlement, dated 11 July 2008. Despite the extension, the Applicants endured further considerable financial distress, and the Athol transfer did not occur as the Applicants could not afford to pay the stamp duty of $41,975.^[38] Exhibit 3, Applicants’ Amended Statement of Facts, Issues and Contentions dated 9 November 2017, para 26

51. As stated above, the Commissioner concedes that at the time the contract was entered into, the $700,000 formed part of a legitimate purchase of an asset by the Fund. However, the Respondent contends that as the deposit was never repaid to the Fund after it was clear that the Athol Transaction would not be completed, the $700,000 is properly assessable as a superannuation benefit made by the Fund to Gerard Wainwright in the 2009 Income year.^[39] Exhibit 4, Respondent’s Statement of Facts, Issues and Contentions dated 30 November 2017, para 79.

52. The Respondent submits that the proper characterisation of the payment made for Triton Park on behalf of Mr Wainwright was made, not because he was a member of the fund, but because he was the vendor of Athol and the Fund was simply completing its' contractual obligations.

I cannot accept the applicant's submission that the money was transferred because he was a member of the fund and therefore falls to be assessed as a payment to which section 307.5 applies. The proper characterisation of the payment is that it was part of a business transaction into which the fund could legitimately enter. It is true that there was no written documentation in respect of the Athol contract at the time when the payment

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was made but given the fact that the transaction was in effect intrafamilial, that is unsurprising. It is common ground that purchase of Triton was to be funded by the sale of Athol. When he failed to complete the contract on 30 January 2009, the Fund could sue Mr Wainwright under common law for breach of contract, or under equity for money had and received. It is also clear that the Fund had an equitable interest in Athol, to the value of $700,000.

53. The Fund made no effort to take any action against Mr Wainwright in respect of the money after his default, and it is reasonable to assume such an action would have been pointless, given the Applicants' deteriorating financial position and the existence of mortgages over the property. Obviously, as trustee of the Fund, Mr Wainwright was not going to make a demand on himself as the vendor, knowing that he had no chance of completing the contract.

54. This in and of itself gave rise to a benefit to him pursuant to section 304-10 (1) of the ITAA. The section requires the taxpayer to include in his assessable income the amount of a superannuation benefit if the benefit is received from a complying superannuation fund. The term "superannuation benefit "has the meaning given to it in Section 307.5 which refers to a payment. There was no payment to the applicant in 2009. The only payments made were made in 2008. However, section 304.10 (5) provides as follows:

"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 benefit"

55. Mr Wainwright received a benefit after his failure to complete the contract in so far as no action was taken by the fund to recover the money that it had paid to him. He had in effect received money from the fund and then, on behalf of the fund, done nothing to obtain a refund of the money the fund had paid. The benefit received by him, being the receipt of Fund moneys, was therefore received in the 2009 Income Year. Before the default by him there was an obligation under a proper commercial transaction but when he defaulted on 30 January 2009 and did nothing about it on behalf of the fund he received a benefit to which section 304.10(5) applies. The $700,000 becomes income in the 2009 year.

56. Was the opinion that there was an avoidance of tax due to evasion correctly formed?

2008 Income Year

57. The question of tax evasion is one of objective fact. As stated above, the relevant authorities make it clear that the Applicant carries the onus of proof on the balance of probabilities.

58. The Respondent concedes that, for the 2008 income year, the $700,000 deposit received from the Fund pursuant to the Athol transaction was legitimate, and was not a superannuation benefit within the meaning of section 307-5 of the ITAA.

59. However, on 28 September 2007, a payment of $24,995 was made by the Fund to the Applicants.^[40] Exhibit 4, Respondent’s Statement of Facts, Issues and Contentions dated 30 November 2017, para 22.1. The Commissioner contends that this payment was made toward the stamp duty and costs associated with their private acquisition of Triton Park, and that the Applicants' had actual knowledge that they were using Fund money for their own personal use. The Applicants' accept that such a payment is a superannuation fund payment under section 307-5 of the ITAA.^[41] Applicant’s Closing Submissions dated 23 July 2018. As the amount of $24,995 was not included as assessable income in the Applicants' income tax return for the 2008 income year, the Commissioner therefore contends that the Applicants' have avoided their tax obligations by reason of evasion.^[42] Exhibit 1, T Documents, Volume III, T72, Notice of Objection Decision issued to Gerard Wainwright dated 31 August 2016; Volume IV, T86, Notice of Objection Decision issued to Janice Wainwright dated 31 August 2016.

60. Both parties accept that appropriate test to establish evasion is that laid down by Dixon J in
Denver Chemical Manufacturing Co v Commissioner of Taxation (1949) 79 CLR 296. It is uncontroversial that 'evasion' requires more than mere 'avoidance' of tax liabilities. Accordingly, evasion necessarily requires an element of fault on the part of the taxpayer; the taxpayer must have committed some "blameworthy act"^[43] Australasian Jam Co Pty Ltd v Federal Commissioner of Taxation (1953) 88 CLR 23 which results in a shortfall of tax. The Applicants rely on the statement of Dixon J, in which he opines that "some blameworthy act or omission on the part of the taxpayer or those for whom he is responsible is contemplated."

61.

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ATC 7998

At Hearing, the Applicants placed emphasis on the word "contemplated" within the above passage. The Applicants' argued that the intention to evade must have been present, or 'contemplated' at the time that the blameworthy act or evasive conduct occurred, in order for a finding of evasion to be upheld.

62. Notwithstanding their submissions, I do not think that the word "contemplated" either adds or detracts from the concept of blameworthiness. It involves perhaps an element of intention, or some thought process about the actions involved and consequences thereof but those concepts are encompassed in the notion of blameworthiness as propounded by the relevant case authorities.

63. The concept of reasonableness, or the extent to which the taxpayers' behaviour is honest and reasonable, is also a relevant consideration to determine whether the Applicants' conduct amounts to evasion. If the Applicants can demonstrate a reasonable excuse for the act or omission, they will not have evaded payment.^[44] Wilson v Chambers [1925-26] 38 CLR 131 per Isaacs J at 144. In Wilson v Chambers, His Honour considered that if a person genuinely, and without negligence is unaware of the facts which give rise to the tax liability or was advised that the law is not applicable in their circumstances, they have not avoided their tax liability by reason of evasion.^[45] Supra at 144.

Actions of the Applicants' Tax Agent

64. The Applicants' evidence throughout the audit and objection process was that they were relying at all times on advice given by their trusted financial adviser, Mr Craig Coetzee.^[46] Exhibit 9, Statement of Gerard Wainwright dated 23 May 2017, paras 5-9. The actions of a tax agent or professional adviser may be relevant in determining whether there has been evasion,^[47] SRBBB v Commissioner of Taxation [2011] AATA 529 . Generally, the taxpayer is responsible for the acts of their agent.

65. In his statement, Mr Coetzee confirmed that Mr Wainwright called him on the day that Triton Park was purchased, asking whether to purchase Triton Park in the name of the Fund or in the Applicants' personal capacity.^[48] Exhibit 6, Statement of Craig Coetzee dated 10 July 2018, para 10. During cross-examination, Mr Coetzee stated that he tried to relay to Mr Wainwright the importance of ensuring that, even if Triton Park was purchased in the Applicants' personal capacity, they needed to allow the name to be adjusted if needed, as a contingency to secure the Applicants' financial position. Mr Coetzee further confirmed that at the time of the Triton Park purchase, one of the 'strategies' available was to complete the Athol transaction, so that the Applicants could legitimately access the $700,000 required to purchase Triton Park.^[49] Ibid. During cross-examination, Mr Coetzee argued that looking at the Athol transaction in isolation was not correct or fair, and that in order to properly classify the transaction, the previous two years of advice and strategies adduced at that time in order to reduce the Applicants' debt and allow them to return to farming needs to be considered. Throughout the Hearing, Mr Coetzee reiterated that the transactions were put in place to ensure that the Fund received value in the form of real property, which would ultimately increase the total value by $400,000.

66. When it was put to Mr Coetzee that he knew that the Applicants were in fact applying the $24,995 from the Fund to meet the costs of stamp duty on the Triton Park property, he denied that he had a specific knowledge that the additional payment of $24,995 was paid for the Applicants private purposes.

67. During the Hearing, Mr Coetzee confirmed that most correspondence sent to the Applicants from his firm contained reminders regarding their obligations to disclose all assessable income and the risk of penalties if assessable income was not disclosed. While Mr Coetzee stated that superannuation matters were dealt with by a separate department of his firm, he confirmed that he would have warned them that they could not use superannuation funds for personal purposes, and conveyed the risk of receiving superannuation benefits before being entitled to do so. While Mr Wainwright stated that he could not recall seeing any written correspondence or having a conversation with Mr Coetzee in which he reiterated the responsibilities and consequences, he stated that he knew of his obligations and responsibilities as trustee of a self-managed superannuation fund.

68. In these circumstances, the Applicants, as trustees and members of a self-managed superannuation fund, must be assumed to have some knowledge of their obligations regarding the Fund, and the consequences of using superannuation funds for personal purposes.

69.

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ATC 7999

There is nothing on the facts to indicate that that the Applicants met any of the conditions of release as specified in Schedule 1 of the SISR or satisfied section 62 of the SISA. While the Applicants' clearly experienced financial difficulty, they did not contend that they met the 'severe financial hardship' condition of release during the Tribunal proceedings.

70. The simple fact of the matter is that they used the Fund's money to pay stamp duty on a contract for their own benefit rather than for the Fund's benefit. The payment of the stamp duty for the acquisition of Triton Park in exchange for the contemplated Athol transaction may well have been part of the overall plan, but it is impossible to regard that payment as being in any way related to the provision of a benefit to the fund rather than to the Applicants personally.

71. Section 304-10(1) provides that a taxpayer must include in their assessable income the amount of a superannuation benefit if certain provisions apply, in particular, if the benefit was received from a complying superannuation fund.

72. The Applicants have failed to demonstrate that section 304-10(1) of ITAA does not apply. It clearly does. I accept that Mr Coetzee had advised them that they could not use money from the fund for personal purposes, and that if money was obtained by them from the Fund before they are entitled to it, there was a risk that it would be treated as income and subject to taxation. Furthermore, as trustees of the Fund they must be taken to have known that they can't use the money of the Fund for their own private purposes. The failure to include this benefit in their income tax returns resulted in a tax shortfall.

73. The use of the $24,995.00 for their own rather than the funds benefit was a blameworthy act. The Applicants have not demonstrated, on the balance of probabilities, that the Commissioner ought not to have formed an opinion that there was evasion in the 2008 Income year.

74. For the reasons canvassed above, I am satisfied that the receipt of $24,995 by the Applicants constituted a superannuation benefit for the purposes of section 304-10(1), made by a complying Fund, without the Applicants meeting any applicable condition of release, and whilst the Fund had not been maintained for the sole purpose of providing benefits to the Members' upon retirement pursuant to section 62 of the SISA.

75. The amendment of $12,497.50 for each of the Applicants represents an equal share of the $24,995 benefit that was received as members of the Fund, and which was applied to meet stamp duty and associated costs. The Applicants' have not demonstrated that this assessment is excessive.

2009 Income Year

76. For the reasons stated above, the Respondent contends that the $700,000 benefit received is correctly assessable as a superannuation benefit, as it was a benefit received out of, or attributable to, the assets of a superannuation plan.^[50] Exhibit 4, Respondent’s Statement of Facts, Issues and Contentions dated 30 November 2017, para 79.1. Further, as the Athol property was held solely in Mr Wainwright's name, and he was listed as the singular vendor under the Athol contract, the failure of the trustees of the Fund to recover the $700,000 following his failure to return the money resulted in the benefit.^[51] Exhibit 4, Respondent’s Statement of Facts, Issues and Contentions dated 30 November 2017, para 79.1.6. As a result, Mr Wainwright was obliged to include this amount in his assessable income pursuant to section 6-10 of the ITAA.

77. Given that I have accepted that the benefit of $700,000 was received in the 2009 Income year by Mr Wainwright in his sole capacity as vendor for the Athol property, I am satisfied that the Applicants have not demonstrated the amendment of $700,000 to be excessive.

Should the Commissioner have exercised its' discretion under section 304-10(4)?

78. The Applicants submit that the Commissioner should have exercised his discretion under section 304-10(4) of the ITAA because he should have been satisfied that it was unreasonable for the deposit payment of the settlement payment to be included in the applicants' assessable incomes. That section provides as follows:

• 4 … 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:

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    ATC 8000

    (a) for subsection (1) or (2) - the nature of the fund; and
  • (b) any other matters that the Commissioner considers relevant.

2008 Income Year

79. In the Objection Decision, the Commissioner applied Senior Member Walsh's reasoning in Mason and Commissioner of Taxation to conclude that, having regard to the facts of this case and the policy intent governing section 304-10 of the ITAA, it is not unreasonable to include the $12,497 in each of the Applicants' income assessments in the 2008 Income Year merely because of the financial difficulty that would be faced by the Applicants.

80. Having regard to the findings that I have made in respect of the 2008 Income Year, I am satisfied that it was not unreasonable to include the whole superannuation benefit received by the Applicants, being $12,497 each, in their assessable incomes for that Income Year.

2009 Income Year

81. The Applicants' submit that, having found that the $700,000 deposit was a superannuation benefit received by Mr Wainwright in the 2009 income year, the Commissioner should have exercised the discretion available to him by virtue of section 304-10(4) of the ITAA.^[52] Exhibit 3, Applicants’ Statement of Facts, Issues and Contentions dated 7 November 2017, para 105. In seeking the exercise of this discretion, the Applicants rely on the following matters that they consider to be relevant. Firstly, when the Applicants became aware of the issues that had arisen because the sale of Athol could not be completed, they took action to seek new advisers and meet with the Australian Taxation Office to discuss the issues in detail. It is also relevant that there was a genuine contract; that the purchaser gained an equitable interest in the land by the payment of a deposit of $700,000; that the vendor defaulted on the contract; and that the trustee of the fund knew that the Fund, while having a good action available against the vendor for performance of the contract, did not take such action.

82. The Applicants sought to differentiate their circumstances from the taxpayers in the matters of Mason and Commissioner of Taxation;^[53] (2012) ATC 237 . Brazil and Commissioner of Taxation;^[54] (2012) ATC 244 . and Peach and Commissioner of Taxation,^[55] [2012] AATA 781 . by arguing that there have been other consequences that have flowed from the breach, namely, having been disqualified as trustees of the Fund, having tax assessed on the sum of $724,995 at the marginal tax rate of 15% and losing their retirement money in the Fund; further, that they sought advice from accountants and did not use the payments to fund their everyday activities.

83. The Applicants' predominant argument lies in the fact that for many years, they retained financial advisors and accountants whom they trusted, and for whom they paid annual fees of about $4000 for the work that was completed for the super fund, acting as tax agent for the unit trust, and completing both individual tax returns for the Applicants and for the Fund. At Hearing, Mr Wainwright accepted that both the Applicants' personal tax returns, and the Fund's tax returns for the Income Years ended 30 July 2009 - 2014 were lodged late, despite his knowledge of his obligations, both personally and as trustee of the Fund, to lodge a yearly tax return. Mr Wainwright gave evidence they had always been given all the information relating to their businesses and that insofar as tax returns were lodged late, they believed what their accountants had told them, to the effect that they couldn't lodge tax returns until they knew the ATO's position regarding the impugned transactions. Mr Coetzee says the tax returns were lodged late because he was waiting for the applicants and the applicants were delaying because they could not meet his firm's costs. Mr Wainwright was aware that there was an issue in relation to his non-completion of the Athol transaction, and says he raised it with his financial planner but continued to get advice to not lodge tax returns until consultations with the tax office had been finalised. He was never told that the situation wasn't rectifiable. I accept his evidence on these particular matters.

84. He terminated the relationship with his accountants and had personal interviews with officers of the Australian Taxation Office in September 2015 to try to resolve this matter but that was unsuccessful. I heard evidence from both Mr and Mrs Wainwright and I am satisfied that they are honest and diligent people. I have accepted that they were reckless in relation to the withdrawal from the fund in the year 2008 Income Year, but the situation is somewhat

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ATC 8001

different to 2009 and subsequent years. They were certainly out of their depth financially. The evidence given by Mr Coetzee during the Hearing confirmed that the Global Financial Crisis significantly affected the Applicants' ability to complete the contract, and their ability to obtain meaningful financial advice given the uncertainty faced by the financial sector.

85. I have considered the cases referred to me by the parties including Peach and Federal Commissioner of Taxation,^[56] [2012] AATA 781 . Brazil and Commissioner of Taxation;^[57] [2013] AATA 192 . and Mason and Commissioner of Taxation. ^[58] [2012] AATA 133 . Each of those cases turns on its own particular facts. I accept that the Applicants' circumstances are sufficiently different from the facts of the aforementioned cases.

86. In Peach the taxpayer used the funds as a bank account when he should not have done so before he had retired. He had lost his job but even after being re-employed he continued to access the funds. This tribunal agreed that the Commissioner had not acted incorrectly in refusing to exercise its discretion. In Brazil the taxpayer suspected or should have suspected that the fund with which he was involved was not a bona fide fund. In Mason 'which I referred to above, Senior Member Walsh sets out the history of S 304-10(4) and comments that it may be unreasonable to include a superannuation benefit paid in breach of the legislative requirements in a person's assessable income 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".

87. Having regard to the evidence before me, I find that the Commissioner should have exercised his discretion to decide that it was unreasonable to include the deposit and settlement payment amounting to $700,000 in Mr Wainwright's assessable income under section 304-10(4) of the ITAA for the following reasons:

• (a) The transaction involved was a legitimate arm's length, documented transaction;
• (b) The taxpayer had no intention of deceiving, evading or cheating, and the transaction was entered after receiving professional advice;
• (c) The taxpayer became unable at the relevant time to complete the contract he had undertaken through no fault of his own;
• (d) The benefit he received in 2009 resulted from facts that arose after he had entered into a legitimate transaction and resulted from events principally beyond his control. It is easy to assert that being unable to complete the contract to transfer Athol he should have refunded the money to the fund, but he didn't have it. There was nothing both proper and practical that he could do. The taxpayer fell on hard times because of drought, floods, the Global Financial Crisis and a decline in the dairy industry.
• (e) Impecuniosity took over and he became unable to obtain wise professional advice and the financial advice he received was less than optimal;
• (f) There were other consequences flowing from his conduct in that he and his wife were disqualified from being trustees of the fund.

Administrative penalties

88. Pursuant to Section 284-75 (1) of Schedule 1 of the TAA, a person who makes a false or misleading statement to the Commissioner is liable to an administrative penalty. The amount of that base penalty is determined by reference to section 284-90 (1) of Schedule 1 to the TAA.

89. The miscellaneous Taxation Ruling 2008/1 (MT2008/1) provides guidance as to the imposition of penalties. When a shortfall amount results from a failure to take reasonable care, the base penalty under is 25% of the shortfall amount.^[59] Income Tax Assessment Act 1997, s 284-90(1). Item 3. Income Tax Assessment Act 1997, s 284-90(1), Item 2. Where recklessness as to the operation of a taxation law results in a shortfall amount, the base penalty amount is 50% of the shortfall amount.⁶⁰

90. The mere existence of a shortfall does not necessarily mean that there has been a failure to take reasonable care. There must be

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ATC 8002

evidence to enable one to conclude that the standard of care by the applicant fell short of what was reasonable in the circumstances.^[61] Miscellaneous Taxation Ruling 2008/1, para 42.

91. Recklessness involves more culpable conduct than a failure to take reasonable care but falls short of conduct that involves an intentional disregard of the taxation law. Recklessness assumes that the behaviour in question shows disregard of or indifference to a risk that is foreseeable by a reasonable person. It has been defined as involving gross carelessness.^[62] Miscellaneous Taxation Ruling 2008/1, para 102.

2008 Income Year

92. The Commissioner assessed the Applicants' as being liable to an administrative penalty of 50% in respect of the 2008 Income Year, necessarily importing considerations of recklessness. A finding of recklessness is an objective determination, having regard to behaviour or a risk that is reasonably foreseeable by a reasonable person in the person or entity's circumstances. The difference between a finding of recklessness as opposed to a failure to take reasonable care depends on the extent, or degree to which the conduct falls short of that expected of a reasonable person. The Applicants actual intention bears no relevance to the determination of whether they were reckless or otherwise.^[63] Miscellaneous Taxation Ruling 2008/1, para 100.

93. Recklessness has been described in the relevant case law as consisting of "gross carelessness,"⁶⁴ "a real, as opposed to fanciful risk that the material may be incorrect, or gross indifference as to whether the material is true or correct"^[65] BRK (Bris) Pt y Ltd v Commissioner of Taxation [2001] FCA 164 . and "disregard of, or indifference to, consequences foreseeable by a reasonable person."^[66] Hart v Commissioner of Taxation (2003) 53 ATR 371 per Hill & Hely JJ.

94. Having regard to the fact that the Applicants were aware of their considerable obligations as trustees of the Fund, and notwithstanding the complexity of the transactions, considerable financial troubles and their reliance on external advice, the Applicants' conduct in applying Fund money to meet their personal expenses for 2008 year fell sufficiently short of the conduct expected of a reasonable person, and was indifferent to the consequences that would reasonably be foreseen.

95. By virtue of the findings that I have made in relation to the 2008 Income Year, the Applicants have not established that the Commissioner was in error in his assessment of the penalties.

Shortfall interest charge for 2008

96. There is a discretion to remit a shortfall interest under section 298.20 of Schedule1 of Taxation Administration Act charge but having regard to the purpose of the penalty regime to deter non-compliance with the legislation, the applicants have failed to disclose any basis for the non-imposition of the Shortfall Interest Charge for the year.

2009 Income Year

97. Given my decision that it was unreasonable to include the $700,000 as assessable income there is no need to consider the issue of administrative penalties or shortfall interest in respect of the 2009 financial year.

DECISION

98. The decisions under review:

• (a) In relation to the 2008 Income Year is affirmed; and
• (b) In relation to the 2009 Income Year, is set aside, and substituted with a decision that the Commissioner should have exercised its' discretion under section 304-10(4) of the ITAA to exclude the amount of $700,000 from Mr Wainwright's assessable income.