A new Federal Court case on civil penalties

September 28, 2015


A new Federal Court case underscores the continuing relevance of pecuniary penalties under the civil penalties regime to the ATO’s enforcement toolkit.

Facts of the case
The facts in Deputy Commissioner of Taxation (Superannuation) v Ryan [2015] FCA 1037 (‘Ryan’) involve a husband and wife, Mr Joseph Ryan and Mrs Carolyn Ryan, who were the members and trustees of the Lawryran Family Superannuation Fund.

Prior to 2007, Mr and Mrs Ryan purchased and made investments in a dry-cleaning business. Despite their efforts, the business did not ultimately prove to be profitable so they sold it 2007. However, selling the business did not fully extinguish a line of credit they had been opened in relation to the business, and the Ryans began to experience financial difficulties.
By June 2009, Mr and Mrs Ryan were not generating enough income between them to cover their ongoing expenses, including servicing the line of credit that was the legacy of their foray into the dry-cleaning business. Accordingly, they began making withdrawals from their SMSF to help ease their financial predicament.
Over the course of the three year period covering 2009-10, 2010-11 and 2011-12, Mr and Mrs Ryan committed a series of contraventions involving taking money out of their SMSF and failing to rectify their burgeoning in-house asset problems.
The chronology of these withdrawals is as follows:
• FY 2009-10 — one loan to the members comprising $17,298.42.
• FY 2010-11 — 20 loans to the members comprising a total of $53,133.25
• FY 2011-12 — 19 payments to the members comprising a total of $69,570.23
• FY 2012-13 — 28 payments to the members comprising a total of $69,674.74
All of the ‘loans’ that were taken out by the couple were unsecured, with no interest rate and no repayment term. Though some of the loans were repaid, most were not. The net amount withdrawn was $181,364 leaving just $6,034.20 remaining in the fund after deducting accounting fees.
Auditor contravention reports were lodged and the Commissioner’s further audit of the fund concluded that there were contraventions of the sole purpose test, the prohibition on financial assistance to members, the arm’s length rule and the in-house asset rules.
The Commission wrote to the Ryans asking to show cause why they should not be disqualified as trustees. Mr and Mrs Ryan then submitted a contrite reply to the Commissioner acknowledging their contraventions, apologising for their actions, and offering to rectify all contraventions and roll-out their member benefits from the SMSF. However, the Commissioner elected to disqualify Mr and Mrs Ryan from being a trustee of a superannuation entity, under s 126A of the Superannuation Industry (Supervision) Act 1993 (Cth) (‘SISA’), and ultimately applied to the court for civil penalties.
The decision
The court ordered that Mr and Mrs Ryan pay monetary penalties of $20,000 each pursuant to s 193 of the SISA, with payments to be made in monthly instalments of $555.55 over 3 years.
In characterising the seriousness of the contraventions Edelman J observed:
…The contraventions in this case, amounting to almost the entire value of the Fund, put the savings of the Ryans at risk and did so in circumstances in which their contraventions were deliberate, repeated over a period of three years and were not first contraventions…
Consideration of relevant case law
In considering the Ryan case, Edelman J surveyed a number of other cases where civil penalties were applied. He noted that his review of these cases revealed that pecuniary penalties for a single individual committing a series of related contraventions varied between $10,000 and $35,000, and identified useful principles about the approach of the court in determining the appropriate quantum.
We consider some relevant points articulated by Edelman J below.
• Edelman J specifically rejected the notion that the court would be drawn into focusing on direct comparison with a small sample of recent cases in determining the appropriate penalty. Rather, in considering application of the civil penalty provisions, the court will consider [58]: the general run of cases and synthesise where the instant case falls within that general run. Three cases is not a general run of cases. The discretionary judgment involved in assessing a pecuniary penalty requires all the relevant factors to be instinctively synthesised to arrive at a single result which takes due account of them all…
• General deterrence is an important consideration in imposing pecuniary penalties under s 196 of the SISA. The application of the law needs to be sufficient to deter contravention by others, although not oppressive. Contravening conduct under the Act may be difficult to detect and its investigation can be complex and expensive.
• Edelman J also cited with approval the factors listed by Gordon J in Deputy Commissioner of Taxation (Superannuation)) v Parker [2011] FCA 1096 [73]:
(1)   the nature and extent of the contravening conduct;
(2)   the amount of any loss or damage caused;
(3)   the size of the organisation;
(4)   the deliberateness or otherwise of the contravention(s);
(5)   the period over which the contravention(s) extended;
(6)   the degree of co-operation of the person concerned, either in the investigation or the subsequent hearing;
(7)   the past record of the person;
(8)   the person’s financial position;
(9)   any amounts already paid by way of compensation or legal costs;
(10)  contrition; and
(11)  any applicable public policy position.

SMSF penalties
It must be borne in mind that the decision in Ryan involved an application to the Court by the ATO seeking orders under the civil penalty regime. The relevant contraventions in Ryan occurred prior to the new administrative penalty regime. Accordingly, it must be noted had these fact arisen from 1 July 2014 onward, it is entirely possible that the ATO would have taken the easier route of applying administrative penalties under the new regime instead of going to court. In this sense, it is arguable the civil penalty regime will be of diminishing importance in the future due to the administrative penalty regime. That said, the civil penalty regime remains a potent enforcement avenue for the ATO, and broadly, it is open to the Commissioner to seek both administrative and civil penalties concurrently.
As discussed above, in Ryan, Mr and Mrs Ryan as individual trustees had to pay total penalties of $20,000 as a result of the ATO’s application to the Federal Court under the civil penalty regime. However, had the same contraventions occurred today, the ATO could likely impose administrative penalties of at least $21,600 on each trustee, without needing to apply to the court, based on contravention of the in-house assets rules (60 penalty units) and the prohibition on financial assistance to members (60 penalty units). (Note that the arm’s length rule under s 109 and the sole purpose test under s 61 are not covered by the administrative penalty regime.)
Edelman J noted that the maximum penalty for each contravention in Ryan was 2,000 penalty units which equated to $220,000. However, he stated that the totality principle requires that the overall penalty not exceed what is proper in respect of all the contraventions [61]:
…In circumstances in which the contraventions in this case were of a very similar nature, and were part of a continuing course of conduct involving the same facts and circumstances, it is appropriate for the purposes of the totality principle, to treat $220,000, for practical purposes, as the maximum penalty…
It is worth noting that because administrative penalties are levied against trustees, the penalties are multiplied where individual trustees are involved rather than a sole purpose corporate trustee.
The Ryan case provides useful guidance on how the courts will apply civil penalties in response to contraventions of superannuation law.

This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.  Need help call our team at Leenane Templeton at 02 4926 2300.

By William Fettes,Lawyer and Bryce Figot, Director, DBA Lawyers


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