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Following a recent high-profile SMSF trustee disqualification decision involving Billabong Surf Clothing co-founder Gordon Merchant, another case from 2021 has been handed down.
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SMSF trustee disqualification: A win for the ATO
26 July 2024
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In the original decision of Coronica and Commissioner of Taxation (Taxation) [2021] AATA 745, the factual matrix involved a range of breaches of the Superannuation Industry (Supervision) Act (SIS), including:
- Section 66(1): prohibition on a trustee intentionally acquiring an asset from a related party.
- Section 83: restrictions on the acquisition of in-house assets if the ratio of in-house assets to total assets exceeds 5 per cent.
- Entering into transactions not at market value (as defined under section 10).
- Contraventions of the accounting record keeping requirements, via the operation of a ‘suspense account’ (section 35A and section 65, which prevent the provision of financial assistance), despite the trustee arguing the approach was supported by Taxation Determination TD 2013/22, ATOID 2012/16, APRA SMSF Regulator’s Bulletin 2018/1 and ATOID 2015/21.
- Contravention of the sole purpose test (section 62) and the covenants prescribed in section 52 to keep the money and other assets of the SMSF separate from ‘those (assets) that are held by the trustee personally’.
- Breach of regulations regarding contributions mandated by section 34.
The decision confirmed that in the circumstances it would be inconsistent with the objects of SIS to issue a notice of compliance. Thus the fund was held to be non-compliant and taxed at the penalty rate of 45 per cent.
Some of the issues that supported this conclusion, in addition to those outlined above, were listed as follows, the seriousness of which were amplified by the trustee being an experienced accountant (of more than 50 years), registered tax practitioner and registered company auditor:
(a) Multiple contraventions over an extended period of time;
(b) Implementation by an experienced accountant, registered tax agent and registered company auditor, who ought to have known that the arrangements constituted contraventions of SIS;
(c) Breaches of the provisions of the trust deed;
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(d) Lodgement of misleading documents with the Tax Office;
(e) Reliance on undocumented valuation of a private investment company that, while not wilful, was grossly negligent if not incompetent; and
(f) The contravention in (e) above was not corrected within amnesty periods made public by the Tax Office and instead only corrected well after an audit activities had concluded.
In relation to the Tax Office seeking to have the trustee disqualified, this was initially rejected due to the:
- size of the monetary penalty imposed on the SMSF (due to the decision to make it non-compliant);
- attempted rectification of the breaches by the trustee;
- trustee's commitment to keep their and the fund's affairs in compliance since the breaches; and
- willingness to provide appropriate undertakings (such as not acting as the trustee of any other fund and continuing to invest only in listed shares and cash).
In the appeal decision of Coronica and Commissioner of Taxation (Taxation) [2024] AATA 2592 however it was held that disqualification was appropriate given the:
(i) nature and seriousness of the contraventions;
(ii) number of contraventions over a number of years, all arising directly from the member's own decisions and actions (that is they were not accidental or due to honest mistakes, nor did the member seek and rely on external independent advice - indeed the member had failed to act professionally, competently and with due diligence in carrying out his duties as a trustee of the fund);
(iii) conclusion that the member was not a fit and proper person to act as a trustee of a superannuation fund;
(iv) seriousness and recurrence of the past contraventions;
(v) risk of future non-compliance; and
(vi) desire of the Tribunal to issue a message of general deterrence.
While the Tribunal acknowledged the member's 'passion and enthusiasm for accounting', it concluded that it was patently clear the member did not have the proper discipline and focus with respect to the regulatory regime governing superannuation funds. Instead, the member was held to have adopted an opportunistic attitude to suit his self-interests and took advantage of his role as a trustee, while exhibiting a wilful disregard for the serious consequences.
The response of the member following audit to 'double down' to defend his questionable positions rather than taking responsibility and properly remedying all breaches was also a factor in reinforcing the need to disqualify (see Applicant in WZWK and Commissioner of Taxation [2023] AATA 872).
Finally, the attempt by the member to leverage the high profile decision in relation to allowing Billabong co-founder Gordon Merchant to avoid disqualification was also unsuccessful, given Merchant had undertaken the relevant transactions based on independent advice and there was no suggestion at the time that his actions were unlawful - a factual matrix radically different to the situation here.
Matthew Burgess, director, View Legal
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