AAT, ATO, Compliance, Legislation, Regulation

Disqualification overturned despite breaches

AAT ATO Trustee disqualification SMSF Gordon Merchant

The Administrative Appeals Tribunal has overturned the disqualification as trustee of the founder of Billabong despite several breaches of superannuation laws.

The Administrative Appeals Tribunal (AAT) has overturned a decision by the commissioner of taxation to disqualify an SMSF trustee despite being found to have breached superannuation laws and the anti-avoidance provisions of the Income Tax Assessment Act (ITAA) 1936.

The AAT ruled Gordon Merchant, the founder of Billabong, could continue acting as an SMSF trustee after the tax commissioner originally disqualified him from doing so in July 2020.

The disqualification followed claims by the ATO that Merchant, as the sole corporate trustee for the Gordon Merchant Superannuation Fund (GMSF), had breached the Superannuation (Industry) Supervision (SIS) Act in regards to the fund’s acquisition of shares from a controlled discretionary trust to realise a capital loss.

This matter was recently heard in the Federal Court (Merchant v Commissioner of Taxation [2024]), which found the Part IVA provisions of the ITAA applied when a $50 million capital loss occurred on the sale of shares by a related discretionary trust to GMSF, but there was no real change in their ownership, and the transaction was used to offset a capital gain on a related transaction.

As such, the regulator disqualified Merchant under section 126A(2) of the SIS Act for several breaches of the legislation and under section 126A(3) for not being a fit and proper person to be a director of an SMSF corporate trustee, however, this latter action was overturned in October 2020.

Following an appeal by Merchant, the AAT also overturned the disqualification after finding he made the transaction following advice from the GMSF auditor, which was a finding of the Federal Court case, and there was no indication the transaction would breach the act.

Commenting on the case to its members, the SMSF Association noted that due to these circumstances, “it was fair for the member to have thought that the transaction was lawful from a superannuation compliance perspective – further emphasising that disqualification served no useful purpose in this case”.

While the AAT found the contraventions had taken place, it noted the ATO’s revised position on the section 126A(3) breach and agreed Merchant was a fit and proper person and the risk of future non-compliance was highly unlikely, and as such set aside the disqualification decision.

The association added the decision did not alter the ATO’s compliance approach in regards to trustees and enforcement action was continuing.

“This case should not signal a shift in the ATO’s focus on disqualification of SMSF trustees, but rather highlights that while the ATO’s enforcement actions are stringent, there remains room for individual assessment and appeal,” it stated.

“The number of trustee disqualifications continue to rise. Reference to the ATO’s register of disqualified trustees and the Federal Register of Legislation shows that more than 500 individuals have been disqualified so far in 2023/24.”

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