In Colaciello Super Pty Ltd v Christensen [2023] VSC 568 the Supreme Court of Victoria held that a loan in breach of sections 62 and 65 of the Superannuation Industry (Supervision) Act 1993 (SIS Act) was unenforceable under the defence of illegality.

The Defence of Illegality

In this Judgment, single judge Garde J quoted from the High Court Judgment of Gibbs ACJ in Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410:

“There are four main ways in which the enforceability of a contract may be affected by a statutory provision which renders particular conduct unlawful: (1) The contract may be to do something which the statute forbids; (2) The contract may be one which the statute expressly or impliedly prohibits; (3) The contract, although lawful on its face, may be made in order to effect a purpose which the statute renders unlawful; or (4) The contract, although lawful according to its own terms, may be performed in a manner which the statute prohibits....”

“Where a statute imposes a penalty upon the making or performance of a contract, it is a question of construction whether the statute intends to prohibit the contract in this sense, that is, to render it void and unenforceable, or whether it intends only that the penalty for which it provides shall be inflicted if the contract is made or performed....”

Garde J further provided a summary of the Defence of Illegality in the context of enforceability of contracts:

“(1) A contract does not become unenforceable merely because something illegal is done in the course of its performance.

(2) Where enforcement is said to be precluded on grounds of public policy, the illegality contended for must be of real significance in relation to the subject matter of the contract which is sought to be enforced. It cannot be a matter which is incidental or peripheral to the real purpose or object of the transaction. The illegal purpose must go to the substance of the transaction.

(3) The principle which precludes recovery on the basis of public policy is directed at preventing an affront to the public conscience or involving the court in upholding seriously anti-social conduct which is illegal or gravely reprehensible.

(4) In the modern context, courts should be slow to nullify a bargain on the basis of what may be properly characterised as regulatory non-compliance.”

Background facts

Mr Colaciello was a frequent and avid better / punter. His neighbour and friend, Mr Christensen, assisted in investing in a punting club syndicate, which was later found to be ponzi scheme.

When Mr Colaciello told Mr Christensen he had no more money to invest in the punting club, except for his superannuation, Mr Christensen took Mr Colaciello to his accountant to arrange for the Colaciello Superannuation Fund (the SMSF) to be established. An arrangement was then set up under which the SMSF would lend to Mrs Christensen (Loan 1). Mrs Christensen then on lent the funds to Mr Colaciello (Loan 2) who in turn used the funds to invest in the punting club. The terms of Loan 2 provided that the SMSF could not call for Loan 1 to be repaid until Loan 2 was repaid. The Court determined that the two loan structure was designed to avoid the prohibitions in the SIS Act of the SMSF making loans to related parties.

After the punting club failed the SMSF trustee sought to force Mrs Christensen to repay Loan 1 (even though Mr Colaciello had not repaid Loan 2 to Mrs Christensen).

Loans found to be illegal and unenforceable

Broadly, section 65 of the SIS Act prohibits a superannuation fund from providing loans or financial assistance to a member of the fund. Here, while Loan 1 was not made to a member or relative of the SMSF members, as a result of the effect of Loan 2, it was found that there was a breach of section 65 (ie indirect financial assistance). Interestingly, what was not raised in the judgement is that, unlike the in-house asset rules, there is no anti-avoidance provision in relation to section 65 of the SIS Act that would expressly catch an on-loan arrangement such as this.

Broadly, the sole purpose test in section 62 of the SIS Act requires a superannuation fund be maintained solely for the provision of retirement and/or death benefits for its members. Here, it was held that Loan 1 and Loan 2 were part of a scheme in contravention of the sole purpose test – that is, to access superannuation benefits prior to death to facilitate gambling.

In conclusion of this part of the proceedings, Loan 1 and Loan 2 were held to be unenforceable on the basis that they breached the SIS Act as “[i]t would be an affront to the public conscience and the law to disregard these provisions and uphold the loan agreements”.

Does this decision have broader consequences?

The case raises a number of interesting issues, including:

• If the loans are in breach of section 65, such that the loans are unenforceable, and therefore not loans, is there a breach of section 65. That is, do they cease to breach section 65 and become a breach of the preservation rules instead.

• A contravention of the SIS Act is not actually an illegal act, rather it is a contravention may cause (but does not compel) the ATO to issue a notice of non-compliance. For example, many contraventions of the SIS Act are rectified without consequence (other than an auditor lodging a contravention report).

• Many SIS Act provisions (for example, the in-house asset rules and section 109) provide a saving provision such that a contravention of those provisions do not make the underlying transaction void (therefore reinforcing the previous point). Mrs Christensen may have chosen sections 65 and 62 for this reason (those sections not having such saving provisions).

• A logical extension of this decision is that every breach of the SIS Act is unenforceable (exempt, maybe, those with saving provisions). This could leave many arrangements in an uncertain position. For example, if a related party loan, or investment, is in breach of the SIS Act and not enforceable, what are those purported loans or investments – do they cease to be assets of the SMSF? – are they early access? With respect, in our view, if it was intended that contraventions were to be unenforceable, and were to be treated as early access, then the legislature would have provided for such.

This case could be said to fall within the old legal maxim “bad cases make bad law”. In particular, it could be said to be unfair for Mr Colaciello to not repay Loan 2 to Mrs Christensen but force Mrs Christensen to repay Loan 1. Perhaps then this case will be confined to its particular facts rather than having a broader application such that all transactions that breach the SIS Act are void.

To discuss this further or for more information please contact:

Phil Broderick
Principal
T +61 3 9611 0163  l M +61 419 512 801  
E pbroderick@sladen.com.au    

Terence Wong
Senior Associate
T +61 3 9611 0112 l M +61 0458 846 022
E twong@sladen.com.au