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CASE 43/95

95 ATC 374

Judges:
GL McDonald DP

Court:
Administrative Appeals Tribunal

Judgment date: 19 July 1995


GL McDonald (Deputy President), WG McLean and CG Woodard (Members): This is an application for a review of a decision of the delegate of the Insurance and Superannuation Commission (``the Commission''), dated 20 December 1993, confirming decisions made on 11 November 1993, that in relation to the financial years 1986/87-1991/92 (inclusive), the Commission had ceased to be satisfied that the applicant superannuation fund satisfied the superannuation fund conditions pursuant to section 12(5) of the Occupational Superannuation Standards Act 1987 (``the Act''). The Act was subsequently renamed the Superannuation Entities (Taxation) Act 1987 and was effectively replaced in 1994 by the Superannuation Industry (Supervision) Act 1993. The legislative changes do not affect the decision to be reached in this case, which is to be reached under the provisions of the Act.

2. At the hearing, Mr Goldberg, a solicitor, represented the applicant. Mr A, a member of the Fund as well as being the managing director of the employer sponsor, the latter being the Trustee of the Fund; Mr N and Mr G, being the original and the current accountants for the applicant fund; Ms C, an employee of the employer sponsor of the Fund; and Mr S.R., a business associate of Mr A, gave oral evidence on behalf of the applicant. Mr H and Ms McG, officers of the Taxation Department; and Mr D, an officer of the Commissioner for Insurance and Superannuation; and Mr G, a former employee of the employer sponsor, and, at one time, a member of the applicant fund, gave evidence on behalf of the respondent. Numerous documents were tendered in evidence by both the parties in addition to the documents filed for the purposes of section 37 of the Administrative Appeals Tribunal Act 1975.

The Issues

3. There are two matters for consideration:

(a) whether the fund complied with the superannuation fund conditions as required by section 5(2) of the Act in that it was a superannuation fund as defined by section 3(1) of the Act. In particular, the question was whether the fund was maintained solely for the purpose of the provision of benefits in the event of retirement for each member,
(b) if the answer to (a) is no, then the question for the Tribunal is whether, pursuant to section 13(1) of the Act, there


95 ATC 376

are special circumstances existing such that it would be reasonable for the Fund to be treated as if it satisfied the superannuation fund conditions.

The Legislation

4. The Act provides in section 5(2) as follows:

``5(2) A reference in this Act to a fund satisfying the superannuation fund conditions in relation to a year of income is a reference to the following conditions being satisfied in relation to the fund in relation to the year of income:''

(a) at all times during the year of income when the fund was in existence, the fund was a superannuation fund;
...

The definition of superannuation fund contained in section 3(1) of the Act was as follows:

```superannuation fund' means a fund that:

(a) is an indefinitely continuing fund; and
(b) is maintained solely for either or both of the following purposes:
(i) the provision of benefits for each member of the fund in the event of the retirement of the member from any business, trade, profession, vocation, calling, occupation or employment in which the member is engaged;
(ii) the provision of benefits for dependants of each member of the fund in the event of the death of the member;
or for either or both of those purposes and for such ancillary purposes as the Commissioner approves;''

The section was amended (by section 4 of Act 61 of 1990), but that amendment (which was to sub-section (b)) does not affect the Tribunal's consideration of this case, even though the Tribunal is considering the financial years relating to the Fund up to and including the 1991/1992 year. There is no argument other than that the fund is ``an indefinitely continuing fund''.

5. The ``sole purpose'' test contained in section 3(1) is consistent with the definition developed by the Courts when considering what constituted a superannuation fund under income tax legislation, starting with
Scott v FC of T (No 2) (1966) 14 ATD 333, where Mr Justice Windeyer considering the application of the then sections 23(j)(i) and 66 of the Income Tax and Social Services Contribution Assessment Act 1936-1962 said (at 351):

``I have come to the conclusion that there is no essential single attribute of a superannuation fund established for the benefit of employees except that it must be a fund bona fide devoted as its sole purpose to providing for employees who are participants money benefits (or benefits having a monetary value) upon their reaching a prescribed age.''

(see also
Compton & Ors v FC of T (1966) 14 ATD 295; (1966) 116 CLR 233, particularly Owen J at ATD 301; CLR 252,
Mahony v FC of T (1967) 10 AITR 463, at 469 per Taylor J and
Driclad Pty Limited v FC of T (1968) 15 ATD 179; (1968) 121 CLR 45, particularly Barwick CJ and Kitto J at ATD 183; CLR 67.)

6. In order to determine whether a superannuation fund is being maintained solely for the purpose of providing benefits to members of the fund, the Tribunal, standing in the shoes of the original decision-maker, may have regard not only to the terms of the formal Trust deed (which was what was in issue, for instance, in Compton's case) but may also consider,

``... the use made by the trustee of the trust funds and of the powers and discretions conferred on the trustee, the extent to which employees actually received benefits from the fund and the extent to which the funds went to the benefit of persons who are not employees.''

(per Davies J in
Raymor Contractors Pty Ltd v FC of T 91 ATC 4259 at 4261 with whom Wilcox J agreed, see also Hill J at p. 4269; similar comments are to be found by Pincus J in
FC of T v Roche & Ors 91 ATC 5024, at p. 5027). The matters listed by Justice Davies should not be taken to be exclusive but indicative of the type of matter which can be considered in determining the purpose for which a fund was maintained. It follows from the above that the circumstances of each case will need to be considered on their merits. Neither party bears an onus of proof, and the Tribunal must be satisfied as to the facts on the balance of probabilities.


95 ATC 377

The Evidence

Background

7. In the instant case, Mr A is currently a franchisee of five fast food outlets which are operated through a company (``the employer sponsor''). He first obtained the franchise in 1976 for the operation of one outlet. At that time, he and his then wife were directors of the employer sponsor. Mr A remained a director throughout the period under review. In 1978 he instructed his accountant, then Mr N, to establish a superannuation fund for the benefit of employees. This was done and the Fund was established. The Trust deed which governed the Fund is dated 5 June 1978, was amended in a minor respect in 1979 and remained unamended until replaced by another deed in 1990 (T30, p. 335 et seq). The Trust deed covers the constitutional membership of the Fund, contributions, Investments, accounts, benefits, the Trustees, the resolution of dispute between members and the Fund and, finally, the alteration and winding up of the Fund. It is necessary to set out some of the relevant provisions. Clause 1 defines ``members'' as employees who have become members of the Fund, and the retiring age as being 65 years in the case of male employees, and 60 years in the case of female employees. Clause 4 provides two ways in which a person, once a member, ceases to be a member, viz on death or upon ceasing to be an employee. Clause 6(1) provides that nothing in the Trust deed is to affect the employer's right to terminate the service of any employee. Clause 7 provides for the employer to make contributions into the Fund in respect of members. Clauses 8 and 9 make provision for members to make contributions from their own sources. Clause 11 deals with the investment powers of the Trustees, and Clause 12 makes provision for the payment of life assurance. Clause 13 deals with income reinvestment. Clause 14 provides for the preparation of annual accounts and for their audit. Clause 15, importantly, provides that the Trustee is to keep two separate accounts for each member: one for the member's contribution and the other for the employer's contribution. Both contributions together constitute the members' accounts. Clause 17 provides that profit and loss balance, taking into account ``... all administrative costs and fees and any charges...'', shall be prepared on an annual basis. Importantly, clause 18 provides that the Trustees shall cause a valuation of the investments of the Fund to be made annually, showing the gain or loss on sale of any investment,

``... together with the amount of any appreciation or depreciation of the value of the Investments of the Fund disclosed by a comparison of the value of the said Investments as determined by the said valuation and the value of those Investments shown in the books of the Fund immediately prior to the said valuation shall be carried as a credit or debit (as the case may be) into the Member's accounts in the Fund in proportion to the amount standing to the credit of the respective accounts of the members....''

The Clause goes on to provide that the Trustee shall adopt a market value, unless for any other reason it is considered that acceptance of a lesser value is warranted. Clause 19 provides that the financial statements in the profit and loss accounts shall, along with the report of the auditor on the state and condition of the Fund, be made available for inspection of members at the principal place of the employer's business. Clauses 20 to 27 (inclusive) deal with benefits. Importantly, in these proceedings, Clause 23, where relevant, reads:

``23 Upon a Member ceasing to be in the service of the Employer before reaching the Retiring Age otherwise than by reason of his death the Trustees shall... pay to that Member so much only of his Provident Benefit as consists of the balance standing to the credit of his Members contribution account together with such part of the balance of his Provident Benefit as the employer shall direct the trustees to pay to him and the residue of his Provident Benefit (if any) shall be absolutely forfeited....''

Clauses 28 to 34 deal with the appointment and powers of the Trustees. Clause 29 appoints the principal employer as the initial Trustee of the Fund. The principal employer remained the Trustee of the Fund throughout the period under review (see Clause 1 of Mr A's statement, exhibit B). Clause 35 deals with disputes between Members and the Trustees and gives a final power of determination to the employer. The remaining provisions deal with the alteration and determination of the Fund.

8. Membership figures of the Fund are set out in exhibit M and show that in 1978, 1979 and


95 ATC 378

1980 Mr and Mrs A were the only two members of the Fund. In 1981 the membership rose to 99; it remained stable in 1982 and 1983 and thereafter declined. According to Mr A, the last new member joined in 1983. A separate superannuation fund for managerial staff was established in 1986 or 1987. Apart from Mr and Mrs A, the members in the fund were non- managerial employees - although some contributors, who were not originally employed as managers, subsequently became managers and, as will be seen, either converted or forfeited their interest in the Fund. There are a number of reasons advanced as to why the membership declined, including (and there is no particular significance attaching to the order in which these are listed):

(i) the introduction of award-based superannuation which has been applied to new staff members, which grew as the applicant's business grew and the number of franchises expanded (see witness statement of Ms G exh G);
(ii) original members dropped out of the scheme as they left the employment of the employer sponsor; and
(iii) the introduction of a different superannuation fund for managers employed by the employer sponsor with different trustees.

By the time the Tribunal heard this matter, Mr A was the only remaining member.

9. There were three areas of contention before the Tribunal: viz, the maintenance of the assets; the knowledge of members of the existence of the Fund and, hence, of their present and future entitlements under it, and the way in which benefits were determined. A determination by the Tribunal adverse to the applicant in any one of the three areas is sufficient, subject to considering the exercise of discretion contained in section 13, to lead to a decision affirming the decision under review. However, a more complete picture emerges as a result of an examination of all areas, and the Tribunal has therefore followed this course.

The Assets

10. Mr A told the Tribunal he relied on the advice of his accountant, Mr N, with respect to acquisition of assets made by the Fund. Mr N said that he provided Mr A with advice as to the type of assets which it was appropriate for the trust to acquire, but that it was Mr A who decided which assets would be purchased. The assets purchased by the trust were shares listed on the New York Stock Exchange in the parent franchiser of the company; shares in a private company (Z Pty Ltd), the only asset of which were two B class shares in National Golf Holdings Ltd; units in Mr A's family trust, the only asset of the trust being a chalet in Switzerland; a property at Sorrento and a property in Boronia Road, Bayswater: of those assets, the Tribunal has considered in detail the purchase of shares in Z Pty Ltd, the acquisition of units in Mr A's family trust and the purchase of the property at Sorrento.

Shares in Z Pty Ltd

11. In 1985, the Fund became one of three shareholders in Z Pty Ltd. The only asset of Z Pty Ltd was two B class shares in National Golf Holdings Limited (``National Golf''). The two other shareholders in Z Pty Ltd were business acquaintances of Mr A, one being Mr SR. A pamphlet from National Golf (exh 1) sets out that each B class share entitlement included the right to nominate up to three nominees to enjoy the full private membership playing rights at the golf course located at Cape Schenk in Victoria. Since there were three equal shareholders in Z Pty Ltd, the Fund was entitled to nominate two nominees. Mr A and a family friend and associate of his, Mr C, held the nominations on behalf of the Fund. Mr C, apart from having a daughter-in-law employed with the employer sponsor, had no connection to the Fund or the employer sponsor. Mr A told the Tribunal that he and Mr C had paid an annual player's subscription fee of $1250 each from their own sources and these had not been paid for by the Fund. He also gave evidence that he (and for that matter Mr C) rarely used the facility during the years in question. There is no evidence to suggest that the circumstances of his use of the facility are other than as set out by Mr A: there is certainly no evidence to support the conclusion of Mr D as set out in the exhibit to his statement (exh 13) that during the years under review ``the golf course is regularly used by the employer sponsor, Mr A''. The Tribunal is satisfied that whilst the facility was available to Mr A and Mr C they used it only occasionally.

12. Mr A said that the arrangement was entered into on the basis that the Fund stood to be advantaged by an expected capital growth attaching to the share in National Golf and that


95 ATC 379

he and the other investors in Z Pty Ltd had obtained professional advice on the investment from Duesburys, a firm of accountants. In this he was supported by the evidence of Mr S.R., who told the Tribunal that while there had been a substantial increase in the capital value of the investment in the 1987 and 1988 years that was followed by a decline in value.

13. Exhibit 2 is a copy of the financial statements for Z Pty Ltd, prepared by Deusburys for the financial year ending 30 June 1990. It is the only year for which financial returns for Z Pty Ltd were tendered to the Tribunal. The balance sheet notes the investment asset being valued at $30,009 (being the purchase price of the units in National Golf and $9 in cash). Current liabilities for that year were listed as being $8751 (up from $3910 for the previous year). A note to the balance sheet shows unsecured borrowings of three named individuals, of $2917 each. One of those individuals is Mr A. In his evidence to the Tribunal, Mr A was unable to explain his position as being a debtor to Z Pty Ltd. There was some suggestion that, while Mr A said he paid Duesburys's annual fees for the preparation of the annual account statements personally, perhaps that sum was then attributed as a loss to the company. However, the amounts involved in the annual fees did not seem to accord with the amounts shown as being borrowed. In the absence of any explanation from Mr A or any other evidence as to how the circumstances surrounding the debt was incurred, the Tribunal is left simply with the fact that the annual accounts for the 1990 year show Mr A as one of three individuals with borrowings secured against the asset held by Z Pty Ltd thereby reducing the value of the asset to the Fund. There is no suggestion from the evidence that the borrowings were applied in any other area to the benefit of the Fund.

14. Further, the asset valuation sheet, adopted as part of Mr A's statement and filed as part of his evidence to the Tribunal (exh 13), shows that, for the years 1988 to 30 June 1992, the value of the shares held by the Fund in Z Pty Ltd remained steady at $10,779. The $779 appears to be the professional costs involved in the establishment of Z Pty Ltd. Mr A, as confirmed by the evidence of Mr SR, said that the value of the two shares held by Z Pty Ltd in National Golf increased to as much as $30,000 per share (representing a 100 per cent increase in the Fund's investment) before dropping to a low of $6000 per share (trans, p. 21). Clause 18 of the Trust deed requires the Trustees to value the assets held by the Fund on an annual basis, noting the appreciation or depreciation of the assets since the last valuation, unless the Trustees have a reason to accept a lesser value. When asked why the asset had not been valued on an annual basis, Mr A responded that it was difficult to get a ``fix'' on real estate at that time because of the fluctuations in price - although he appreciated the asset concerned was not real estate (trans, p. 21). Mr N told the Tribunal that the assets were valued at their historical cost because that ``represented a fair value at the time'' (trans, p. 86). Mr N's evidence on this point is inconsistent with the evidence of Mr A and Mr S.R. concerning the value of this asset. In the Tribunal's view, there was no reason advanced as to why the asset should not have been valued at its market value in accordance with the provisions of Clause 18 of the Trust deed. Mr A eventually, in 1994, purchased the Fund's share in Z Pty Ltd for $10,000, which he said was at the top end of its then value.

15. The Tribunal is satisfied that the purchase of the share in Z Pty Ltd enabled Mr A to have access to play golf by using the Fund's capital to purchase through Z Pty Ltd an interest in National Golf. Additionally, the purchase was used as an asset against which Mr A was able to borrow funds. The fact that Mr A used the asset of the Fund to borrow against for his personal use, along with his paying the annual costs of administration personally, coupled with the access to the course for him and his friend given by the Fund's shareholding, is such that it suggests that he is treating the asset of the Fund as if it was his own. Clause 17 of the Trust deed provides for the payment of fees and charges, and it is reasonable to expect these to be debited against any increase or decrease in the value of the asset. For Mr A to pay these amounts himself did not enable the Trustees to properly account for the state of the Fund. The Tribunal has considered the fact, which it accepts, that Mr A and his friend, Mr C, paid the annual subscription so that they could utilise the course along with the fact that it was not often utilised, but this does not, in the Tribunal's view, affect the decision reached with respect to the way in which the asset was maintained.


95 ATC 380

The Swiss Chalet

16. In 1984 Mr A and his then wife acquired as Trustees for his family trust, the H Unit Trust (``the trust''), a chalet in Switzerland (``the chalet''). In his witness statement (exh B. p. 2-3, para 11), Mr A says that it was likely that the chalet would:

``... realise good capital long term growth. The purchase of a property in Switzerland was further attractive because I was a Swiss national and the Fund could purchase a property not otherwise available to foreigners. Further, I had family living there, in particular a brother who could manage the property. It was intended that because of the appreciation at that time of the Swiss franc over the previous 18 years, substantial capital gains might be realised.''

It was claimed that the Fund acquired units in the trust for which it paid $99,840. In his statement, as confirmed in his oral evidence to the Tribunal (trans, p. 33), Mr A said that the Fund held ``all the units'' in the family trust (exh B, p. 2, para 11).

17. Mr A told the Tribunal (trans, p. 32) that the purchase price of the chalet was SRf410,000 and that at that time one SRf was equivalent to $A1. Mr Pagoni provided information to the Tribunal, which remained uncontested, that as at the date of purchase of the chalet, the exchange rate was 2.0433SRf to $A1. The exchange rate varied significantly over the years under review. Assuming the latter to be correct, the purchase price of the chalet would be $A200,000 to $210,000. The latter figure accords with the value attributed to the property in the tax returns for the trust for the years 1985 to 1989 (exh A, T30, p. 268-276). Mr A was invited to comment on the disparity in the purchase price given in his oral evidence to the Tribunal and that contained in the documents. He was not able to do so. The Tribunal is unable to reconcile Mr A's oral evidence with available documentary evidence and is satisfied that his oral evidence is mistaken and concludes that the purchase price of the chalet was approximately $A210,000.

18. Mr A said that, as well as paying for the mortgage interest repayments, he paid for the chalet to be upgraded and furnished from his own sources, unconnected with the Fund. In total, he estimated that the property has cost him ``close to $250,000'' (trans, p. 35). There is no evidence of the keeping of receipts for work carried out on the Swiss chalet nor any proper books of account identifying expenditure. To offset the outgoings, it was Mr A's evidence that he kept the ``... little bit of rent coming in'' (trans, p. 35). This latter statement did not seem to be reflected in the statement of assets and liabilities prepared for the trust for the years 1986 to 1989 (exh A, T30, pp. 268-275 (inclusive)), which shows a rent return of $11,551 in 1986; $14,304 in 1987; $11,453 in 1988, and $12,105 in 1989. In his witness statement (exh B), Mr A said that at the time of purchase the property had a long-term tenant. However, the tenant left after six months and, because of the apparently remote location of the chalet, it was difficult to replace the tenant. Since the time the tenant left, according to Mr A's evidence, the chalet has been used by members of his family and his friends, for which Mr A has paid the rent from his own sources, or his family and associates who used the chalet paid rent for it. Mr A's brother, who lived in Switzerland, was made responsible for the oversight of the chalet.

19. The financial statements available to the Tribunal were those relating to the trust covering the years 1986 to 1989 (inclusive) (exh A, T30, pp. 268-275). They reflect that there were ``fully secured loans'' (emphasis added) over the chalet, but they do not reflect the entity or entities in whose favour the loans were held. In the same accounts, under the heading of ``capital'', an opening balance of 30 units valued at $30 appears for each of the years. There was no indication as to whether the 30 units related to the Fund's investment and, if, as was claimed by Mr A in his statement, the Fund held all of the units, then clearly a capital value of $30 does not reflect the Fund's $99,840 investment. Mr N said that he could not make sense of the value ascribed to the units in the trust, as set out in exhibit A, T30. Mr G suggested (trans, pp. 102-103, 108) that there was a secured loan to the bank of $104,832 and that the $99,840 invested by the Fund was also a secured loan. Mr G had never seen any security documentation. A call by Mr Pagoni for the production of such documentation remained unanswered. In the end, the documentation relating to any investment by the Fund in the trust does not allow confirmation as to whether the investment was by way of units held in the trust or by secured loan over the asset of the trust.


95 ATC 381

20. In either event, it appears that the Fund outlayed $99,840 to assist with the purchase of the chalet, that sum being the balance of the purchase price with the initial $104,832 being borrowed from a Swiss bank (exh A, T30, p. 263). Mr A's evidence compared to the limited accounting evidence contained in exhibit A, presents a confused picture. It is plain that Mr N and Mr G were given very limited information by Mr A with respect to the way in which the Fund's investment in the trust was to be treated, e.g. Mr N said that, during the time in which he kept the accounts for the trust, he drew an inference from the figures that capital improvements had been carried out to the chalet (trans, p. 84), it was Mr G's evidence (trans, pp. 102-103, 108) that bank statements provided to him by Mr A, to allow him to complete the trust's annual financial returns in relation to the asset, nominated ``capital'' for some of the outgoings. If the Fund's investment was secured, then there is no evidence of how it was secured. If, as was claimed by Mr A, the investment was for purposes of making a capital gain by way of currency fluctuations, then there is no evidence of those currency fluctuations being taken into account in the annual financial returns of the trust nor of the Fund (exhibit B shows the chalet as an asset valued at $99,840 for the years ending 30 June 1987-1991, inclusive). If the Fund's investment was by the way of purchase of units in the trust, then this is certainly not reflected in the accounts of the trust. Further, according to Mr A's own evidence, he invested considerable sums in the maintenance, upgrade and furnishing of the chalet. Neither Mr N nor Mr G had seen any receipts for such expenditure which would appear to have been personally made by Mr A. No proper accounting records were apparently kept. The accounting records made available to the Tribunal (through exhibit B) do not take into account the annualised value of the asset in apparent broach of clause 18 of the Fund Trust deed. After the tenant left, the chalet was maintained for personal use of Mr A, his family and friends. The evidence suggests that, whichever way the Fund's investment in the trust was structured, the end result was the Fund's investment was being used to support the trust's interest in the purchase and use of the chalet. The Tribunal is satisfied that the Fund's investment in relation to the Swiss chalet was such that it was used as a source of funding by the [sic] Mr A for his family trust, i.e. the Fund's capital was use for personal purposes connected with Mr A rather than for the benefit of the members of the Fund.

The Sorrento Property

21. In June 1988, the Fund purchased a property at Sorrento. The purpose according to Mr A's statement (exh B, p. 2, para 9) was ``... to permit employees to make use of the house for seminars, strategy meetings and personal use''. From his oral evidence to the Tribunal, the Tribunal is satisfied that the use of the house for seminars and strategy meetings related to such meetings occurring in the course of the business of the employer sponsor. Mr A also said that he had used the house for budget preparation, which the Tribunal takes to be a further reference to the work of the employer sponsor. The ``personal use'' extended to members of Mr A's family and his friends, as well as to employees. Rent has been paid for the use of the property and Mr A said that Fringe Benefits Tax had been paid for the recreational use made of the house by employees.

22. The Tribunal has no evidence as to whether or not all of the employees who used the property were Fund members. In any event, a present benefit to employees (whether members of the Fund or not) does not amount to the provision of a benefit ``... in the event of retirement'' (see section 3(1) of the Act). The Tribunal is satisfied that the property had a multi-use function, i.e. for purposes connected with

· employer sponsor use
· use by Mr A his family and friends
· present recreational use for employees of the employer sponsor

Consideration: The ``Sole Purpose'' Test with respect to mainstream of the assets of the Fund

23. It was submitted on behalf of the applicant that any use made of or benefits, which accrued to Mr A or his family and friends from the assets was ancillary and/or not inconsistent with the sole purpose for which the Fund was established and maintained. Mr Goldberg pointed to the following passage in the judgment of Davies J in Raymor's case (supra) where His Honour in discussing ``purpose'' in the context of section 82AAC(1) of the Income Tax Assessment Act 1936 (Cth) said, at 4260-4261:

``... the word `purpose' required that the sum set apart or paid in the year of income


95 ATC 382

effected a contribution towards superannuation benefits for or for a dependent of an eligible employee. The term did not look primarily to the subjective factors actuating the setting aside or payment of the sum claimed... It was not pertinent that the sum was set apart and paid into the fund not out of beneficence but out of a duty imposed by law or by an industrial award and not of consequence that the employer had taken into account in establishing and maintaining the fund that incidental benefits such as taxation benefits or the borrowing of sums from the fund at a low rate of interest could be obtained.''

(see also FC of T v Roche & Ors (supra), at 5027).

24. In addition to the above, it may be that there are isolated incidents which, viewed in the overall context of the way in which a superannuation fund is being maintained, are so incidental, remote or insignificant, that they cannot, having regard to the objects sought to be achieved by the Act, be regarded as constituting a breach of the sole purpose test. Such incidents will be rare. The legislature, by adopting the ``sole purpose'' test, has expressly determined that a strict standard of compliance should be adhered to. Under the Act, the test requires more than the presence of a dominant or principal purpose in the maintenance of a superannuation fund - it requires an exclusivity of purpose commensurate with that purpose being the ``sole purpose''. In the instant case, in the absence of other relevant factors, the fact that Mr A and his friend were enabled as the result of the investment by the Fund, after paying the annual subscription fee, to play golf could by itself be regarded as so incidental or remote as to not amount to an infringement of the test. However, given that there were other relevant factors surrounding the way in which that asset was maintained and viewed in the context of the findings reached by the Tribunal with respect to other investments made by the Fund - in the units in Mr A's family trust and in the Sorrento property - a circumstance which in isolation may be insignificant or remote becomes more significant. Having regard to the totality of the way in which the three nominated assets - the shares in Z Pty Ltd, the Swiss chalet and the Sorrento property - were maintained, the Tribunal is satisfied that Mr A had a second purpose, namely to make the assets available for his use and the use of his family and friends so that it could not be said that the ``sole purpose'' in the maintenance of the assets was for the benefit of the members of the Fund. The fact that other assets of the Fund may not have been utilised for a purpose other than a purpose to give benefits to the members has been considered by the Tribunal but does not affect its decision.

The Employees Knowledge of the Fund

25. The respondent led evidence about an investigation conducted by Mr H and Ms McG aimed at establishing a level of knowledge about the Fund among former employees. An examination of this type is relevant in assessing the extent to which the Fund was established and maintained to give benefits to member employees. If the member employees were unaware of the existence of the Fund, particularly having regard to the provision allowing a discretionary early benefit of the sort contained in Clause 23, then they would be unable to exercise their rights, with respect to their present or future entitlements, viz a viz the Fund. Such an inability on the part of member employees may be evidence of a fund not being maintained for the sole purpose of providing benefits to them. In
Bayton Cleaning Co Pty Ltd v FC of T 91 ATC 4076, Sweeney AJC quoted with approval (at 4086) the Tribunal's consideration of a finding that an employer in relation to a group of employees had taken no effective steps to ensure the employees had become aware of the possibility of their future entitlements as supporting a conclusion that a superannuation fund had been established for an ulterior motive. Clearly, such knowledge is important to an employee not only because of the possibility of the exercise of the discretion mentioned earlier, but also to allow employees to decide whether, if there is a vesting scale, they should, if they were otherwise thinking of resigning from the employment of the employer sponsor, continue to enable them to gain any benefit which may arise from the application of the early vesting policy. Further, the knowledge may be important to an employee whose services are terminated just before a vesting may otherwise be anticipated. While none of the factual circumstances outlined above were evident in the instant case, they illustrate the importance of employees having knowledge about the scheme.


95 ATC 383

26. Before turning to the investigation results, it was Mr A's evidence that when it was decided to open the Fund to employees other than Mr A and his wife, an information meeting was held with the employees. At that meeting, as well as being informed about the Fund, the employees were invited to join by completing an ``Application for Membership Form'' (exh F) and return it to the employer. In subsequent years employees were selected to join the Fund. The reverse of the form is headed, ``Staff Information Sheet'' and purports to set out the main features of the Fund. There are two significant aspects of the information provided on the back of the sheet which require comment, viz:

(a) The Staff Information Sheet approaches the Fund on the basis that there will only be employer contributions. This is so despite the Trust deed making express provision for employee contributions and requiring separate accounts be kept to distinguish employer and employee contributions made to the Fund. Mr A in his evidence confirmed no employee contributions had been made and when asked about this aspect said (trans, p. 67);
``I'm surprised actually to hear that there was in fact a second account... that should have been kept.''
(b) Under the heading ``Trustees Discretion'' appears the following paragraph:
``The Trustees, after consideration of all of the circumstances, may offer further benefits if you leave the company before normal retirement, on the grounds of death, disablement or any other reason.'' (emphasis added)
The reference ``to any other reason'' is presumable a reference to the discretion contained in Clause 23 of the Trust deed to provide benefits in cases where an employee may leave prior to the ordinary retirement age. The use of the word ``further'' suggests some additional benefit to those otherwise available and is misleading. In this case, the Trustees established a vesting policy (set out in later discussion in these Reasons), but the Tribunal notes that there is no reference to any such policy in the staff information sheet.

27. Since the application form and the staff information sheet are contained on the one document and the document is returned to the employer after signing, it would have been difficult for the member employees to retain any written information concerning the Fund. Mr A told the Tribunal (trans, p. 57) that he did not discuss superannuation entitlements with employees when discussing their salary packages, and he did not discuss with staff members on an individual basis amounts which had been allotted to them in the Fund (trans, p. 53).

28. Mr H interviewed six former employees, between 5 and 10 December 1986, and Ms McG interviewed four former employees between 4 and 13 July 1988, with respect to their knowledge of the existence of the Fund. Annexed to Mr H and Ms McG's witness statements (exhs 8 and 9, respectively) are standard form question and answer records of interview. While the Tribunal notes that there is a 19-month gap between the two sets of interview being conducted, the interviews were undertaken at a time sufficiently close to the time during which employees had been members of the Fund and, hence, could be expected to know of its existence.

29. Of those canvassed by Mr H, five of the six answered, ``no'', to a question, ``were you at any time notified that you were a member of the employer's superannuation fund?''. One of the five indicated that there was a possibility that if his employee status changed from casual to part- or full-time, there was a possibility of superannuation and with the sixth, responding ``? unsure/not likely''. Of the four returns annexed to Ms McG's statement, three responded that they were unaware of the superannuation fund, with the fourth (Mr G) stating he knew that the employer sponsor had a superannuation scheme but he was unsure of the details.

30. Exhibit F consists of 60 application for membership forms to the Fund signed by employees of the employer sponsor and shows that of the 10 former employees contacted by Ms McG and Mr H, exhibit F shows 8 had signed forms to join the Fund. The Tribunal does not know, since a total of approximately 160 employees who were members of the Fund over time only 60 application forms were produced, whether the other 100 had not applied and did not qualify, or whether they had


95 ATC 384

applied and their forms were unable to be produced. The Tribunal only heard from one former member, Mr G, who worked for the employer sponsor between 1980 and 1985. Mr G said that he could not recall discussions about the superannuation fund and said that there was no discussion about the Fund at the time he left employment in 1985. However, Mr G agreed that it is his signature which appears on the application form to join the Fund (exh F, p. 7).

Consideration of Knowledge of Employees of the Fund

31. The Tribunal is satisfied that the steps taken by the employer were such as to enable employees to join the scheme, but that thereafter the scheme was maintained in such a way that they were denied access to information about it and, hence, about their possible (future) entitlements. There were no effective steps to inform employees of their rights viz a viz the Fund and, further, the rights (e.g. of employee contributions) provided for in the Trust deed were kept from them in the limited information provided to them about the Fund. Additionally, policy decisions relating to the exercise of a discretion for early vesting were withheld and not made available to them. As the evidence will show in the next section of this Decision, decisions with respect to the exercise of the discretion were made solely by the employer without reference to the employee. The fact practices adopted add further weight to the proposition that the Fund was being maintained for a purpose or purposes other than for the sole purpose of providing benefits to members.

Vesting

32. As discussed earlier in this Decision, Clause 23 of the Trust deed provides that, if an employee ceases employment before reaching the retirement age, then the Trustees can make such payment to that employee as directed by the employer. Usually, as in this case, a vesting scale is adopted by the Trustee. The Trust deed itself does not provide for such a vesting scale. In this case, there was no formal document establishing the scale. However, Mr A agreed that the vesting scale was, as set out in exhibit A, T30, p. 280 (a note generated by the respondent), namely,

5% after 10 years of service, 15% after 15 years of service, 25% after 20 years of service, 50% after 25 years of service, and Balance if > 25 years of service.

Mr A was unable to reconcile the two latter provisions, which appear to provide different benefits for employees who have served the same amount of time.

33. Mr A also told the Tribunal that since inception three or four employees (apart from his former wife) had received payment in accordance with that vesting scale. The circumstances of three employees are set out in Mr G's letter to Mr A, of 18 June 1992 (exh E), where it was suggested to Mr A that consideration be given to distribution under the provisions of Clause 23 in conjunction with the vesting scale that 5 per cent of accrued benefits should, because each employee had served a minimum of 10 years with the employer, be rolled over into a new award-based fund. Of a total of the $52,975 accrued, 5 per cent, or $2648, was rolled over on behalf of those employees, the remainder being forfeited to the Fund. All of the other 156 or 157 employees left without completing 10 years service and forfeited all of their accrued benefits. Otherwise, Mrs A, whose circumstances are discussed hereunder, and Mr A, who remains the only ongoing member of the Fund, have participated or stood to participate in the Fund's benefits.

34. Mrs A received 100% of her benefits having been an employee and director of the employer for between 15-20 years. In a letter to the Insurance and Superannuation Commission, (dated 26 November 1993), Mr A stated (T7, p. 49):

``The payment was made in accordance with the Family Court order, and the Trustee of the Fund did not exercise the discretion to pay a higher benefit.''

An order of the Family Court of Australia, dated 15 October 1991 (exh A, T5, pp. 34-38 (inclusive)), sets out the consent property settlement arrangement between Mr and Mrs A in their divorce proceedings. Clause 7 provides:

``7. On or before the 13th day of November 1991 the husband and/or the Company pay to, or at the direction of the wife, all of her entitlements and accrued interest standing to her credit in the... fund as at that date.''

In the Family Court Order, the mention of ``the Company'' is a reference to the employer sponsor (see the heading to the Family Court


95 ATC 385

action, exh A, page 36). In accordance with the vesting scale set out above, Mrs A, having served the company between 15 to 20 years, would have been entitled to 15 per cent of her provident benefit. That would have constituted ``all of her entitlements'' had it been applied according to the scale. In fact, she was paid 100 per cent, apparently on the basis that she was ``in a senior managerial position'' according to Mr A's statement (exh B, para 6). Contrary to the assertion made by Mr A, exhibit A T5 shows the Family Court Order was made by consent and did not arise as the result of a decision of the Court over which the parties had no control. That his former wife should receive such a generous payment is not in accord with the vesting scale which as a matter of general policy had been applied strictly to all other employees. The wording contained in the Family Court consent Order suggests by its reference to the ``the husband'' (Mr A) and ``the company'' that either the husband, or the employer sponsor controlled the disbursement of the Fund. Such is not, or at least should not be, the case.

Consideration with respect to Vesting

35. The employer sponsor as Trustee was obliged to manage the Fund in accordance with the Trust deed and the legislative provisions, and to apply any policies developed for the exercise of a discretion fairly for the benefit of each member. Where a fund has a vesting policy, if a member or a category of member receives benefits calculated in a different way to that set out in the policy, then a question may arise as to whether the fund is being maintained for the ``sole benefit of each member'' (section 3(1) of the Act) (emphasis added), or whether it is being maintained for the particular benefit of one or some of the members. In this case, the Tribunal is satisfied that the vesting favoured Mrs A to the detriment of the other members of the trust and, consequently, the Tribunal is satisfied that the Fund was not maintained for the sole benefit of each member, but that Mrs A was treated as a privileged member and advantaged over the other members of the Fund.

36. In the end, Mr A is the sole remaining member of the Fund. In his evidence, he agreed that most of the employees were young and said, ``... I was surprised myself that the turnover [of staff] was as high as it was'' (trans, p. 52). He also said in answer to a question over whether he anticipated the staff would see themselves as having a career in his organisation that:

``... it was the beginning of my business... I had only been in the system for a couple of years when I formed the super fund. My intention was to provide retirement benefits for my staff as the company started to... make some profit.''

Mr A also said that it was only when the number of members reduced to five or six that he realised what the ultimate result would be (trans, p. 62-63). In answer to a question put by the Tribunal concerning the age and turnover of staff, Mr A replied that ``things are different in hindsight'' and ``may be... we would review it'' (i.e. the reasonableness of vesting scale applicable only after 10 years of service).

37. The Tribunal does not accept Mr A's explanation with respect to these matters. It is apparent that when it suited him (e.g. in relation to his former wife), the Fund could be responsive to meeting the perceived need he had for it, but in relation to the provision of benefits for other staff members the Fund was not so responsive.

Conclusion

38. It follows from all of the above that the Tribunal is satisfied that the Fund was not maintained for the sole purpose of providing benefits to members, but also to provide benefits to Mr A, his family and in some cases his friends. Consequently, the Fund does not comply with the definition of ``superannuation fund'' contained in section 3 of the Act. It remains then to consider whether a discretion should be exercised under the provisions of section 13(1) of the Act.

Exercise of Discretion

39. Section 13(1) provides as follows:

``13(1) Where, in relation to a fund in relation to a year of income of the fund:

(a)... the Commissioner is not satisfied that the fund satisfied the superannuation fund conditions; and
(b) the trustees of the fund satisfy the Commissioner that, because of special circumstances that existed in relation to the fund during the year of income, it would be reasonable for the fund to be treated as if it had satisfied the superannuation fund conditions;


95 ATC 386

the Commissioner shall give notice in writing to the trustees of the fund stating that the Commissioner is satisfied that the fund should be treated as if it had satisfied the superannuation fund conditions in relation to the year of income.''

40. Given the above findings, the applicant raises for consideration as to whether special circumstances exist to allow the Tribunal to exercise a discretion to direct that the Fund be treated as if it had satisfied the superannuation fund conditions. The parties agree that the term ``special circumstances'' as used in section 13(1) of the Act has a settled meaning. The term is used in other legislative enactments and has come to have a settled interpretation. The Tribunal, chaired by Toohey J (then a Presidential Member), commented on its interpretation in
Re Beadle and Director General of Social Security (1984) 6 ALD 1 at page 3 as follows:

``An expression such as `special circumstances' is by its very nature incapable of precise or exhaustive definition. The qualifying adjective looks to circumstances that are unusual, uncommon or exceptional. Whether circumstances answer any of these descriptions must depend upon the context in which they occur. For it is the context which allows one to say that the circumstances in one case are markedly different from the usual run of cases. That is not to say that the circumstances must be unique but they must have a particular quality of unusualness that permits them to be described as special.''

A similar conclusion was reached by Burchett J in
Minister for Community Services and Health v Chee Keong Thoo (1988) 78 ALR 307, at 324 with the reference where His Honour said:

``[S]omething unusual or different to take the matter out of the ordinary course... As a result, the ordinary course appears less appropriate or fair....''

The ground relied on in the instant case, as constituting a special circumstance, is the length of time to which the applicant has been subject of audit. The audit started with officers of the Australian Taxation Office in 1987/1987, and was followed by an apparent gap between 1987-1992, when the investigation does not seem to have been advanced. In 1992 the officers of the Insurance and Superannuation Commission took over the investigation. Mr Goldberg submitted that the length of time has served to encourage Mr A ``to put his head in a noose'' and the authorities ``waited for him to swing'', and that the delay had led Mr A to believe that he was performing the functions in taking the necessary compliance steps, with the advice of his accountant, to the satisfaction of the authorities. Mr Pagoni pointed out, and Mr Goldberg conceded, that there had been some delays on the applicant's side in responding to requests for information made by the respondent. It was also submitted by Mr Goldberg that the methodology adopted in restricting a survey said to be randomly made amongst members to only former members was too restrictive and amounted to an ``outrage''.

41. Delay depending on the circumstances could amount to a special circumstance. Here there is nothing associated with the delay in the sense of any representation which would, or could, reasonably lead the applicant to concluded that what he was doing was approved of by the authorities. That is not to condone the time it has taken the authorities to conclude the audit of his affairs. The latter, however, is a matter of administrative efficiency for the authorities to consider and does not, in the view of the Tribunal, amount to a circumstance which could be described as ``special'' so as to warrant an exercise of discretion in the applicant's favour.

42. The manner in which the survey was conducted is open to some criticism. However, this constitutes only one aspect of the total investigation and, as pointed out in the decision, is, in as far as the Tribunal is concerned in fulfilling its decision-making function, only one of a number of factors indicative of an underlining state of affairs, rather than it being a or the determinative factor of that state of affairs.

43. In the circumstances, there is nothing which, in the Tribunal's view, could be said to amount to ``special circumstances''.

44. The Tribunal affirms the decision under review.

 



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