In a recent decision before the Federal Court, two directors of the corporate trustee of an SMSF have been penalised a total of $40,000, plus made liable to pay court costs of $10,000. Refer to Deputy Commissioner of Taxation (Superannuation) v Graham Family Superannuation Pty Limited [2014] FCA 1101.
The facts of the case were as follows:
On 1 July 2007, an amount of $216,047.43 dollars and forty-three cents was rolled over to the SMSF for the wife, whilst $273,113.15 was rolled over to the fund for the husband.
The fund entered into a contract to purchase a residential property on 20 July 2007 for $285,408.92, with settlement taking place on 20 August 2007. The property was leased fully furnished ($48,500 was spent on furniture by fund) to the son of the husband and wife from settlement until 4 February 2013.
An additional amount of $2,897.10 was spent on outgoing such as repairs, rates and insurance over the lease period. However, rent was not paid by the son with arrears outstanding as at the 30 June 2012 of of $60,762.
Additional amounts spent by the fund included the following: a caravan ($24,500 plus a further $4,570.46 on storage, registration, maintenance and insurance); $56,226.50 on the purchase of a cattle stud (with a further$6,736 spent on insurance, registration fees, veterinary costs and other expenses); the purchase of two motor vehicles (with an additional amount of $4,462.95 spent on insurance, registration, repairs and maintenance). No income was derived by the fund from these expenditures.
By 30 June 2012, the fund’s loan account stood at $260,064, with around 80 contravening loans made to the members over a 4 year period.
On 22 February 2014, the Commissioner disqualified the Grahams from acting as trustee under S.126A(2) of the SIS Act 1993.
The ATO argued to the court that the loans caused the fund to contravene the following provisions:
Section 62 – by failing to ensure that the fund was maintained solely for one or more purposes set out in S.62 of the SIS Act 1993. Instead, the ATO argued that the fund was maintained for the significant purpose of making loans to provide financial accommodation to the members.
Section 65 – by lending money using the assets of the fund to the members.
Section 84 – by failing to take all reasonable steps to ensure that the in-house asset rules were complied with, instead making loans to members of the Fund which caused the market value ratio of the Fund’s in-house assets to exceed 5%. The fund also failed to prepare a plan setting out steps to ensure the disposal of in-house assets in excess of the 5% limit.
Section 109 – the trustee and the members failed to deal with each other at arm’s length, or the terms were more favourable to the third party that what would be expected if the parties were dealing at arm’s length.
The ATO argued to the court that the lease of the residential property to the son caused the fund to contravene the following provisions:
Section 62 – by failing to ensure that the fund was maintained solely for one more purposes set out in S.62 of the SIS Act 1993; instead the fund was maintained for the purpose or significant purpose of providing rental accommodation on non-arm’s-length terms to the son.
Section 84 – by failing to take all reasonable steps to ensure that the in-house asset rules were complied with, instead renting residential property to a related party which caused the market value ratio of the funds in-house assets to exceed 5% and, furthermore failing to prepare a plan setting out steps to ensure the disposal of in-house assets in excess of the 5% limit.
Section 109 – the fund making investments where the parties to the transactions failed to deal with each other at arm’s length, or the terms and conditions of the transactions were more favourable to the third party than would be reasonable to expect if the trustees were dealing with each other at arm’s length.
Note, the Commissioner did not declare the fund to be non-complying for the relevant year.
The court confirmed that the husband should pay a total penalty of $30,000 whilst the wife should pay a penalty of $10,000. Furthermore, each was held to be responsible for half of the agreed costs of $10,000. In handing down its decision, the court made the following comments:
The husband was a former school principal, and therefore the court rejected the trustee’s claim that the contraventions were unintentional or a result of reliance on the advice of others.
The court agreed with the Commissioner that the contraventions were serious, even though the husband and wife argued that they were in poor health at the time, and this had impacted on their capacity to understand their responsibilities as trustee.
The court noted that although the offences were serious, they fell well short of the worst possible case because the trustees have remedied their conduct. Therefore, the penalty should not be ‘crushing’, but should serve as a deterrent and confirmation by the court of the need to enforce the rules.