The Australian Taxation Office (ATO) has issued a draft Decision Impact Statement (DIS) on the Administrative Appeals Tribunal (AAT) decision of Merchant and Commissioner of Taxation [2024] AATA 1102 (which was decided on 16 May 2024) (Merchant).
The taxpayer sought to crystalise a capital loss on the sale of listed shares from his family trust (which family trust held capital gains from the sale of an underperforming asset to an external buyer for which had been granted a $55 million loan forgiveness within the group) to his SMSF.
In the AAT proceedings for Merchant, which was heard alongside taxation (Part IVA) proceedings in the Federal Court, the Tribunal agreed with all of the ATO’s positions that the SMSF trustee was in breach of: (1) the SMSF investment strategy requirement, (2) the sole purpose test; and (3) the prohibition against providing financial assistance to a member of the SMSF. However, the Tribunal ultimately found that disqualification as a director would not serve any useful purpose.
In the draft DIS the ATO reads down its loss in Merchant, including with the following comments:
“35. In this matter, the Commissioner had maintained that the nature, number and seriousness of contraventions by the Applicant were sufficient grounds for disqualification under subsection 126A(2). Further, as disqualification is designed to protect the investing public against the risk that people with a history of non-compliance will re-offend, the Commissioner had considered it reasonable to conclude that the Applicant posed a future compliance risk given the serious contraventions of the SISA.
36. However, we accept that, when considering the Tribunal's holistic consideration of all the particular facts as they applied to the Applicant, the decision that the Applicant was unlikely to be a future compliance risk and setting aside the disqualification of the Applicant, was reasonably available to the Tribunal on the facts before it.
37. As each case must to be decided on its particular circumstances, we take the view that this decision has limited broader application beyond the 'peculiar circumstances of this case'.”
The ATO then closes with a reference to the Coronica 2024 AAT decision (following a further review of the 2022 Federal Court decision to reconsider disqualifying Giuseppe Coronica), in that the same disqualification factors were applied for a different outcome, and as such the Merchant decision was “peculiar” and “does not restrict other consequences of contravening a civil penalty provision”.
However, this last paragraph does not make reference to why Coronica was held by the AAT to be vastly different to Merchant (and that Merchant may be more applicable to taxpayers seeking to abide by the law) as stated by the AAT in the Coronica 2024 decision (where Mr Coronica referenced this decision in Merchant to argue that his disqualification should be overturned, bold emphasis added):
123. I was not persuaded that Mr Coronica’s situation was similar to that of Mr Merchant. I was also not satisfied that the undertakings should be accepted in lieu of the disqualification of Mr Coronica acting as a trustee of a superannuation fund. As stated above, Mr Merchant had been found to be a fit and proper person by the Commissioner whereas Mr Coronica was not a fit and proper person.
124. Mr Merchant had undertaken the relevant transactions based on independent advice, and there was no suggestion at the time of entering into the transaction that his actions were unlawful. Mr Coronica did not seek external advice and was involved in multiple contraventions over many years, as set out above and in the Initial Tribunal Reasons.
It could be said that the reference to the Coronica case in the DIS has “limited broader appeal” when considering, the reasonably common circumstances, where taxpayers are fit and proper persons but make a one off mistake. Quite rightly, the Tribunal in Merchant found that such situations should not result in disqualification. That is, it could also be said that the Merchant decision could have, and no doubt will have, a broader appeal in defence of SMSF trustee/directors in analogous situations of Merchant.
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