This Administrative Appeals Tribunal decision involved a member of a large fund becoming implicated in an early release of superannuation scheme. It is a very interesting insight into how some of these schemes are undertaken. Also, it has some very interesting tips for advisers especially tax agents of how deep they should investigate dubious or ‘smelly’ transactions.
Overview
Mr Vuong accessed $114,697 in super prior to satisfying a condition of release for the payment of a 29% fee to the promoter (a Mr Brendon Phuong Tran; ‘Phuong’). Vuong was assessed on the entire amount and luckily escaped a 25% penalty. This was largely due to the Tribunal believing that Vuong was the victim of a fraudulent scam and Vuong had a limited grasp of the English language.
Summary of the facts
The facts of this decision can be succinctly summarised as follows:
- Vuong was born in North Vietnam where his education as disrupted during the war years and had little command of the English language.
- He was a member of the Equipsuper Superannuation Fund which is a large fund with over $6 billion of investments.
- In 2008 Vuong met Phuong who said he could withdraw his super early subject to a fee of 29%. Vuong signed a blank form, which was said to be a roll-over form to Nguyen’s Superannuation Fund (‘Nguyen SMSF’). Equipsuper paid $114,697 by cheque to Nguyen in September 2008 but the request form had the false address allowing Phuong to deposit this payment into another person’s account (who was also named Nguyen). The Nguyen SMSF’s identity had been fraudulently used for this purpose – so it appeared Phuong used another person named Nguyen’s bank account and there was a complying SMSF with Nguyen in the name to allow this deception to be carried out.
- Vuong subsequently received $81,434 (ie, the full amount of his super rollover less the 29% fee paid to Phuong). This was paid in a series of payments.
- Vuong ran this past his tax agent in relation to the preparation of his FY2009 tax return. The tax agent ‘smelled a rat’ saying it was improbable it would be super (as Vuong would not be entitled to access such money) but requested documentary evidence before he could disclose the $81,434 in Vuong’s tax return. Vuong did not provide such further evidence and it appears the tax agent did not follow him up as subsequent tax returns were lodged by Vuong via that tax agent without any amendment for FY2009.
- Vuong said he approached Mr Nguyen, the police and his tax agent but no light could be shed on the whereabouts of Phuong or the balance of his super moneys.
- In July 2011, the ATO undertook an audit and issued an assessment for the primary tax of around $45,300 on the total superannuation withdrawn of $114,697 plus $11,325; being a 25% administrative penalty for Vuong and his tax agent not taking reasonable care plus around $2,900 in shortfall interest charge. Thus a total of around $59,520 was owing by Vuong (ie, 73% of his net super benefit).
- Vuong then lodged two objections:
- The first in February 2012 objected against the 25% penalty; and
- The second in September 2013 claimed a deduction for $33,262 being the 29% fee under s 8-1 of the Income Tax Assessment Act 1997 (Cth) (‘ITAA 1997’) against the assessable super proceeds.
- Vuong then appealed to the Tribunal for a review of the Commissioner’s decisions.
Both objections were disallowed in full.
Analysis of the decision
The application of the law in this decision is uncontroversial and can be briefly dealt with. The arguments and the outcome, however, prove very interesting reading.
The full amount of $114,697 was assessable as ordinary income under s 304-10 of the ITAA 1997. This section applies when you access superannuation from a complying superannuation fund when you have not satisfied a valid condition of release.
Further, while the $114,697 was paid to Phuong (of which Vuong only received $81,434 after the of 29% fee), s 307-15(2) of the ITAA 1997 provides that a superannuation benefit is treated as having been made to the taxpayer if the payment is made for the taxpayer’s benefit or to another person or entity. Thus, Vuong was assessable on the entire amount even though he only physically received $81,434.
The Tribunal was not provided any evidence on how the $33,262 was expended and therefore it was held not to be deductible under s 8-1 of the ITAA 1997. Thus, Vuong was correctly assessed on the entire $114,697.
The 25% penalty for failure to take reasonable care was imposed under s 284-75 of the Taxation Administration Act 1997 (Cth). The Tribunal did not consider that Vuong’s tax agent should necessarily have made more extensive inquiries, or acted in a more proactive manner than he did in advising Vuong on his tax affairs. It is, however, impossible to avoid the conclusion that, looking at the circumstances as a whole, the consequences could have been avoided if greater care had been taken by Vuong. The Tribunal therefore considered that the 25% penalty imposed by the ATO was appropriate.
The Tribunal nevertheless considered that the ATO should use its discretion to fully remit the penalty. The Tribunal at [54] and [56] stated:
It is the Tribunal’s opinion that the applicant [Vuong] has suffered greatly and disproportionately in the circumstances where he is culpable only of pronounced naivety, unaccompanied by duplicitous intentions.
The Tribunal is nevertheless persuaded that the applicant [Vuong] at all times acted with honest, albeit naïve, intent. He was seeking to access his superannuation early, but by legitimate means.
Conclusions
We all should be on the watch out for amounts accessed early from superannuation funds without a valid condition of release. In addition to these amounts being fully assessable, substantial penalties can be imposed. The Tribunal found the 25% penalty was correctly imposed but then decided it should be remitted. The decision to remit the penalty was, in my view, more due to luck in this decision.
What I found most surprising in this decision was the tax agent’s actions or lack thereof. In particular, there appeared to be no follow up activity in subsequent years. I would have considered Vuong’s tax agent should have been more pro-active in seeking a proper understanding of whether the $81,434 was assessable when he initially ‘smelt a rat’ in preparing Vuong’s FY2009 tax return. The facts do not go far enough to make a conclusion on this point but I consider that Vuong ‘luckily escaped’ the 25% penalty as failure to take reasonable care can also be imposed when your tax agent fails to take reasonable care. Vuong’s naivety and willingness to act honestly finally convinced the Tribunal to remit the penalty. However, a careful review of the decision, leaves you thinking that Vuong was aware of the scheme.
