A recent AAT decision demonstrates circumstances of a successful challenge to a disqualification made pursuant to s 126A of the Superannuation Industry (Supervision) Act 1993 (Cth) (SISA).
The decision of Merchant v Commissioner of Taxation [2024] AATA 1102 also highlights the dangers of what may, at face value, seem like ordinary investments such as acquiring listed securities from a related party at market value.
Facts
The facts of this decision involve a number of entities (Merchant Group) controlled by Gordan Merchant that were subject to a recent Federal Court case (see Merchant v Commissioner of Taxation [2024] FCA 498). That case concerned pt IVA of the Income Tax Assessment Act 1936 (Cth) and is outside the scope of this article.
In summary:
- The Gordon Merchant Superannuation Fund (Fund) acquired listed securities at market value from the Merchant Family Trust (MFT).
- The Commissioner contended that the predominant purpose of the acquisition was to crystalise a capital loss. That loss would be used to offset a future capital gain of the proposed sale of Plantic Technologies Pty Ltd, a company of which MFT was the sole shareholder.
- On 9 October 2020, the Commissioner disqualified Mr Merchant pursuant to s 126A(2) and (3) of the SISA.
- the Commissioner asserted that the reasons for the disqualification were:
- contraventions of the operating standards in s 34, the sole purpose test in s 62 and the provision of financial assistance in s 65 of the SISA; and
- Mr Merchant not being a fit and proper person.
- Mr Merchant requested the Commissioner review the decision.
- The Commissioner upheld the decision to disqualify Mr Merchant under s 126A(2). However, the Commissioner reconsidered the disqualification under s 126A(3) finding that Mr Merchant was a fit and proper person.
- Mr Merchant then sought an application for review that was heard in conjunction with the Federal Court proceedings.
Contraventions
The AAT was satisfied that the three provisions of the SISA were contravened.
In relation to s 34 the AAT found that in relation to the acquisition of the listed securities:
- Fund did not give effect to its investment strategy;
- Mr Merchant had no genuine purpose of investing for the Fund; and
- there was no evidence that Mr Merchant turned his mind to a number of matters as required by the Fund’s investment strategy.
The AAT found that the predominant purpose of the transaction (ie, crystallising a capital loss in the MFT) and the substantial purpose of retaining economic ownership of certain shares in the Merchant Group were not core purposes within the meaning of s 62(1) of the SISA.
The tribunal also found that financial assistance was provided to Mr Merchant as an object of the MFT. The tribunal further stated that s 65(1)(b) prohibits financial assistance via an intermediary, including via a discretionary trust.
The Judgement
However, despite finding that there were contraventions of the SISA, Mr Merchant’s disqualification was set aside. Specifically, the AAT found that the risk of future non-compliance was unlikely for the following reasons:
- Mr Merchant was a fit and proper person.
- There was no evidence that Mr Merchant was advised by his advisers that the transaction risked breaching the SISA.
- Mr Merchant had given undertakings to mitigate the future risk of non-compliance.
- The contraventions of the SISA, while serious, all related to a single course of conduct.
- In relation to protecting the investing public, Mr Merchant was only likely to be a director of the trustee of his own superannuation fund. Further, he did not need protecting from himself.
- The offending transaction was suggested by the Fund’s auditor without any warning of compliance issues.
- There was no useful purpose served by disqualification in this instance.
Conclusion
Advisers should be aware that transactions that appear ‘ordinary’ may still attract ATO scrutiny, particularly where additional facts might exist. In this instance, the Fund was acquiring listed securities from a related party at market value. However, the acquisition still led to the initial disqualification of Mr Merchant and contravened multiple provisions of the SISA.
Related articles
- Merchant and Commissioner of Taxation [2021] AATA 915 – surprise risk to SMSF acquiring listed shares
- Are you disqualified from having an SMSF?
- New option for SMSFs with bankrupt member
- More clarity for SMSFs with a bankrupt member
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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional. The above does not constitute financial product advice. Financial product advice can only be obtained from a licensed financial adviser under the Corporations Act 2001 (Cth).
Note: DBA Lawyers hold SMSF CPD training throughout the year. For more details or to register, visit www.dbanetwork.com.au or call 03 9092 9400.
For more information regarding how DBA Lawyers can assist in your SMSF practice, visit www.dbalawyers.com.au.
By Fraser Stead ([email protected]) Lawyer, and Bryce Figot ([email protected]), Special Counsel, DBA Lawyers
DBA LAWYERS
21 May 2024
