FEDERAL COURT OF AUSTRALIA Olesen v Eddy [2011] FCA 13 Citation: Olesen v Eddy [2011] FCA 13 Parties: NEIL OLESEN IN HIS CAPACITY AS THE DEPUTY COMMISSIONER OF TAXATION (SUPERANNUATION) v ANTHONY WADE EDDY File number: SAD 87 of 2010 Judge: MANSFIELD J Date of judgment: 14 January 2011 Catchwords: SUPERANNUATION – contraventions of ss 62(1) and 65(1) of the Superannuation Industry (Supervision) Act 1993 (Cth)– civil penalties pursuant to s 197(1) imposed – contraventions deliberate and serious – consideration of personal circumstances relevant to assessment of appropriate penalty PRACTICE AND PROCEDURE – power of Court to order periodical payments as part of order imposing civil penalty Legislation: Superannuation Industry (Supervision) Act 1993 (Cth) Crimes Act 1914 (Cth) Trade Practices Act 1974 (Cth) Cases cited: NW Frozen Foods Pty Ltd v Australian Competition and Consumer Commission (1996) 71 FCR 285 cited Secretary, Department of Health and Ageing v Pagasa Australiat Pty Ltd [2008] FCA 1545 cited Raelene Vivian, suing in her capacity as the Deputy Commissioner of Taxation (Superannuation) v Fitzgeralds [2007] FCA 1602 discussed Australian Prudential Regulatory Authority v Holloway (2000) 45 ATR 278 discussed Australian Prudential Regulation Authority v Derstepanian (2005) 60 ATR 518 discussed Schneider Electric (Australia) Pty Ltd v Australian Competition and Consumer Commission (2003) 127 FCR 170 cited Australian Competition and Consumer Commission v High Adventure Pty Limited [2005] FCAFC 247 cited Australian Competition and Consumer Commission v Dataline.Net.Au Pty Ltd (in liquidation) and Others (2007) 161 FCR 513 cited Date of hearing: 17 December 2010 Date of last submissions: 23 December 2010 Place: Adelaide Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 35 Counsel for the Applicant: T Duggan Solicitor for the Applicant: Australian Government Solicitor Counsel for the Respondent: A Macdonald Solicitor for the Respondent: Belperio Clark IN THE FEDERAL COURT OF AUSTRALIA SOUTH AUSTRALIA DISTRICT REGISTRY GENERAL DIVISION SAD 87 of 2010 BETWEEN: NEIL OLESEN IN HIS CAPACITY AS THE DEPUTY COMMISSIONER OF TAXATION (SUPERANNUATION) Applicant AND: ANTHONY WADE EDDY Respondent JUDGE: MANSFIELD J DATE OF ORDER: 14 JANUARY 2011 WHERE MADE: ADELAIDE THE COURT DECLARES THAT: 1. The respondent as trustee of the A Eddy Superannuation Fund (the Fund) caused the Fund to: (a) allow the respondent unauthorised early access in the year ended 30 June 2006 of an amount of $59,650 from the Fund contrary to the governing rules of the Fund; (b) allow the respondent unauthorised early access in the year ended 30 June 2007 of an amount of $6,003.60 from the Fund contrary to the governing rules of the Fund; (c) allow the respondent unauthorised early access in the year ended 30 June 2008 of an amount of $5,866.63 from the Fund contrary to the governing rules of the Fund; and (d) allow the respondent unauthorised early access in the year ended 30 June 2009 of an amount of $4,050.11 from the Fund contrary to the governing rules of the Fund and thereby contravened: (i) section 62(1) of the Superannuation Industry (Supervision) Act 1993 (Cth) (the Act) by failing to ensure that the Fund was maintained for one or more of the purposes set out in s 62(1), instead maintaining the Fund as a source of unauthorised early access for the respondent's withdrawals thereby benefiting himself; and (ii) section 65(1) of the Act by using the resources of the Fund and giving financial assistance to the respondent who is member of the Fund. THE COURT ORDERS THAT: 2. The respondent pay to the Commonwealth of Australia a monetary penalty in the sum of $15,000. 3. The respondent pay the applicant's costs of and incidental to the application, fixed in the sum of $5,000. 4. The respondent pay the monetary penalty and fixed costs over two (2) years by fifty two (52) weekly instalments of $192.31, the first instalment to be paid on or before 31 January 2011. 5. Upon default in the payment of any one instalment, the balance then remaining becomes immediately due and payable. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court's website. IN THE FEDERAL COURT OF AUSTRALIA SOUTH AUSTRALIA DISTRICT REGISTRY GENERAL DIVISION SAD 87 of 2010 BETWEEN: NEIL OLESEN IN HIS CAPACITY AS THE DEPUTY COMMISSIONER OF TAXATION (SUPERANNUATION) Applicant AND: ANTHONY WADE EDDY Respondent JUDGE: MANSFIELD J DATE: 14 JANUARY 2011 PLACE: ADELAIDE REASONS FOR JUDGMENT Introduction 1 The applicant as delegate of the Commissioner of Taxation seeks that a civil penalty be imposed on the respondent pursuant to s 197(1) of the Superannuation Industry (Supervision) Act 1993 (Cth) (the Act) for contraventions of ss 62(1) and 65(1) of the Act. 2 The respondent was at all material times since about 18 May 2005 a trustee of the A Eddy Superannuation Fund (the Fund), which was a regulated superannuation fund within the meaning of s 19 of the Act. 3 The parties agreed upon the facts, by a Statement of Agreed Facts dated 29 September 2010. I am prepared to act upon the agreed facts. On that basis, it is clear that the respondent secured the unauthorised early release of the Fund's superannuation benefits, and so contravened ss 62(1) and 65(1) of the Act in relation to the Fund. Each of those sub-sections is a "civil penalty provision" under s 193 of the Act. 4 Accordingly, it is clear that appropriate declaratory orders should be made: s 196 of the Act. 5 The applicant further contends that the contraventions of the Act are serious and that the Court should order that the respondent pay a monetary penalty to the Commonwealth in respect of the contraventions pursuant to s 196(3) of the Act. The submissions of the parties have largely focused on the appropriate monetary penalty. In the course of the hearing, the question arose as to the respondent's capacity to pay a significant monetary penalty, having regard to his personal circumstances. Subsequent to the hearing, the parties jointly presented a further written submission as to the appropriate monetary penalty in the circumstances, and the terms upon which it is to be paid. It is the responsibility of the Court to determine the appropriate civil penalty. However, the Court has power to give effect to, and generally should give effect to, such an agreement provided it is satisfied that the penalty agreed upon is within the range of an appropriate penalty in all the circumstances: NW Frozen Foods Pty Ltd v Australian Competition and Consumer Commission (1996) 71 FCR 285; Secretary, Department of Health and Ageing v Pagasa Australia Pty Ltd [2008] FCA 1545 at [33]-[38]. I respectfully adopt the observations of Flick J in those paragraphs. The Facts 6 The following findings are based on the Statement of Agreed Facts and the uncontroverted affidavits of the respondent of 28 October 2010 and 7 December 2010 and of Raymond Rivieri dated 19 November 2010. Mr Rivieri is an officer of the applicant. 7 The respondent procured the establishment of the Fund on or about 18 May 2005. It is in conventional terms for a superannuation fund, including that its trustees covenanted to comply with all relevant statutory provisions including the Act. The fund, as noted, was a superannuation fund under s 10(1) of the Act and a regulated superannuation fund under s 19 of the Act. Its primary purpose was the provision of old age pensions. The trustees (including the respondent) notified the Commissioner of Taxation under s 19(4) that the Act was to apply to the Fund. 8 The Fund since 18 May 2005 was a "self-managed superannuation fund" within the meaning of s 17A(2) of the Act. Its only member was the respondent. The respondent and his brother were the two trustees. Neither trustee received any remuneration from the Fund for services provided to it. 9 By 1 July 2005, two superannuation funds, Statewide Superannuation Trust and Australian Retirement Fund had made two rollover payments to the Fund, totalling $56,082 initially held by Superannuation Accounting Services Pty Ltd (SAS) on its behalf. After payment of some disbursements or fees totalling $2,400: 1. on 19 July 2005, the balance of $53,682 was paid by SAS to a Commonwealth Bank account opened by the respondent as a trustee of the Fund; and 2. on 22 July 2005, that account was closed and $48,182 was transferred to another Commonwealth Bank account in the name of the trustees of the Fund, and the balance of $5,500 was appropriated by the respondent for his personal use and benefit. 10 Between 21 September 2005 and 26 September 2008, further employer superannuation contributions were made to the Fund, totalling $21,616, into the second bank account. Over that time, the respondent by 130 separate and relatively small transactions withdrew funds from that account progressively for his personal benefit and use. The account was closed on 30 July 2009, with a small overdrawn debit of $23. In the financial years ending 30 June 2006, 30 June 2007, 30 June 2008 and 30 June 2009, the withdrawals by the respondent totalled $59,650, $6003, $5867 and $4050 respectively. The total of those amounts is $75,570. 11 None of the payments procured by the respondent were authorised by the governing rules of the Fund, or by the Act. 12 The auditor of the Fund discerned the improper withdrawals from the Fund when the audit to 30 June 2006 was completed. The unauthorised withdrawals during that year were reported to the auditor as loans to the respondent. They represented about 98% of the assets of the Fund. The auditor duly reported those contraventions to the Commissioner. The respondent was notified by the Commissioner by letter of 21 January 2008 that he was immediately to rectify the contraventions. He was similarly notified by the auditor on 14 February 2008. He did not take action to do so. He has still not replenished the Fund at all. 13 The benefit of $59,650 improperly received by the respondent in the financial year ended 30 June 2006 has, by notice of 1 August 2008, been included in the respondent's assessable income for that tax year. The Contraventions 14 Section 62(1) of the Act requires each trustee of a regulated superannuation fund to ensure that the fund is maintained, either solely for one or more of the specified "core purposes", or for one or more of the core purposes and one or more of specified "ancillary purposes". The making of payments to one of the members, not otherwise entitled to payment out of the Fund (for example, by reason of having reached retirement age), is not such a purpose. 15 The making of the payments referred to above, to or for the personal benefit and use of the respondent, deprived the Fund totally of its principal asset and caused the Fund not to be maintained for the core purposes. The respondent as trustee instead caused the Fund to be maintained as a source of unauthorised early access by the respondent's withdrawals. That purpose is not in accordance with the governing rules of the Fund. That conduct contravened the obligation on the respondent as a trustee of the Fund, imposed by s 62(1)(a) of the Act, to ensure that the Fund was maintained for one of the core purposes. Furthermore, s 65(1)(b)(i) of the Act prohibits a trustee of a regulated superannuation fund from giving any financial assistance using the resources of the Fund to a member of the fund. (The exceptions in sub-sections (2) and (3) are inapplicable.) Contrary to that provision, the withdrawals described above constituted financial assistance to the respondent, in the form of monies used to meet the financial commitments of the respondent's everyday living. 16 The Act provides for taxation benefits to trustees of superannuation funds and its members to encourage prudent provision by Australians for their retirement. It is appropriate that the Court should give effect to that policy purpose: Raelene Vivian, suing in her capacity as the Deputy Commissioner of Taxation (Superannuation) v Fitzgeralds [2007] FCA 1602 (Fitzgeralds) per Logan J at [25]. The respondent's conduct has, in respect of the Fund, totally thwarted that purpose. As Logan J said at [26], the particular benefit conferred by the Act on those who wish to make provision for their retirement through a self-managed superannuation fund is a privilege that should not be abused. 17 As Logan J concluded in Fitzgeralds at [27], in my view this is a case in which the making of civil penalty orders is appropriate and, indeed, necessary. General Principles 18 The following principles relating to the fixing of civil penalties under s 196 emerge from the authorities mentioned below. (a) Those that take advantage of the utilisation of a self-managed superannuation fund have a responsibility to manage that fund in accordance with the terms of the Deed and the legislation: Fitzgeralds at [30]. (b) A civil penalty for contravention of that obligation needs to be sufficiently high to deter contravention by others, but not so high as to be oppressive: Australian Prudential Regulatory Authority v Holloway (2000) 45 ATR 278 (Holloway) per Mansfield J at [12]. (c) General deterrence is a very significant factor: Holloway at [11]; Fitzgeralds at [29]; other objectives include denunciation and punishment: Australian Prudential Regulation Authority v Derstepanian (2005) 60 ATR 518 (Derstepanian) per Weinberg J at [26]. Contravening conduct under the Act may be difficult to detect and its investigation can be complex and expensive; Holloway at [21]; Fitzgeralds at [29]. (d) The total penalty must not exceed what is proper having regard to the conduct of the person in respect of all the contraventions: Holloway at [19]; Fitzgeralds at [31]-[33]. (e) Relevant factors in determining an appropriate civil penalty include: (i) the nature and extent of the contravening conduct; (ii) the amount of any loss or damage caused; (iii) the size of the organisation; (iv) the deliberateness or otherwise of the contravention(s); (v) the period over which the contravention(s) extended; (vi) the degree of cooperation of the person concerned, either in the investigation or the subsequent hearing; (vii) the past record of the person; (viii) the person's financial position; (ix) any amounts already paid by way of compensation or legal costs; and (x) contrition. (see generally, Derstepanian at [30]-[37]: Holloway at [11]-[12]; [32]; Fitzgeralds at [35] and [43].) dETERMINATION OF cIVIL pENALTY 19 The maximum penalty for any contravention of ss 62(1) and 65(1)(b)(i) of the Act is $220,000: s 196(3), read with s 4AA of the Crimes Act 1914 (Cth). 20 I accept the applicant's contention that the contraventions are serious within the meaning of s 196(4) so as to warrant the imposition of a civil penalty. The object of the Act is relevantly to make provision for the prudent management of regulated superannuation funds. By reference to that object, Logan J in Fitzgeralds at [41] and [42] explained the statutory requirement of regulated superannuation funds: That, though, is what one might term an immediate object. The long-term object envisaged by the Parliament, to my mind, is to encourage Australians that they must make provision for their retirement, and to do that by the conferring of taxation benefits in return for responsible management of funds. In Holloway's case, to which I have made reference, Mansfield J made reference to this in relation to the in-house asset rule. "Submission by a superannuation fund to be a regulated superannuation fund under the Act carries with it eligibility for concessional taxation treatment. Each of the relevant superannuation funds by their trustees elected to become regulated superannuation funds … Part 8 of the Act sets out rules about the level of in-house assets …. . Its intent is clearly to ensure that the investments of a regulated superannuation fund should not be exposed to the vagaries of the business of the employer-sponsor." In the same way, the provisions of section 62 and section 65 can be seen to have a role to play in ensuring that the assets of a fund are indeed available for the members as and when they become eligible in terms of the governing deed, as opposed to being prematurely accessed for unauthorised purposes. 21 Accordingly, the "purpose" requirements of s 62 and the prohibition in s 65 against the giving of financial assistance to members are integral to the regulatory scheme. Especially where, as here, the principal asset of a fund is disposed of other than in accordance with the governing rules of the Fund, removing it totally as a source for the benefits which a superannuation fund is intended to provide, the contravention must be regarded as serious. 22 The contraventions were neither trifling nor insignificant. They were deliberate. They involve sizeable amounts and deprived the Fund of its total assets. They extended over a period of years. On any view, they were serious. 23 The respondent as trustee of the Fund commenced his contraventions at the very first step of the self-management process – the opening of the Fund's Commonwealth Bank account on 21 July 2005. The respondent withheld for his own personal benefit and use $5,500 from the assets of his Fund (the rollover payments) when opening the Fund bank account. Thereafter, he simply took the assets of the Fund from time to time as if they were his own. 24 I have considered the respective submissions of the parties. Inevitably, one seeks an explanation for the contravening conduct. 25 The respondent has a good personal history. He is 47 years of age. He was brought up and educated to Year 10 level in Broken Hill. He then came to Adelaide at the age of 15 under a type of football sponsorship as he was a good sportsman. He played football for some four years or so. He has been in continuous employment since he came to Adelaide, with a variety of employers as a chef and more recently in management in the businesses of food catering or supplies. He has held his present position as the business development and quality control manager of an export fruit and vegetable providore since August 2008. 26 He is divorced. He has two children, now aged about 10 and 8. The birth of his second child involved complications, and his wife consequently suffered severe post-natal depression requiring prolonged hospitalisation. The relationship became strained, and he and his wife were divorced in 2004. His wife was given custody of the children. I accept that in the period 2002 to 2004 he was under considerable strain, dealing with his wife's illness, largely caring for his children, and with a full-time and demanding job. He sought psychological help during that period. 27 When the Fund was established, the respondent was under financial pressure. He was meeting the mortgage on the matrimonial home (in which he was living) and paying child support. He says he simply did not have enough to live on. Although he did not establish the Fund with the intention of using it as a financial resource, the coincidence of its establishment and his financial pressures presented too much of a temptation. The first misappropriation of $5,500 was to repay a debt to his wife. Thereafter, the various withdrawals were to meet relatively minor bills or liabilities, or to meet his daily living expenses. 28 In the period from 2005, he also started drinking heavily and gambling. He says this was partly due to loneliness, and his gambling was in search of a big win to relieve his financial pressures. He acknowledges that he had a gambling addiction, and that is confirmed by the psychotherapist now treating him. Fortunately, he now has a new relationship and he has stopped his heavy drinking and has not gambled for two years or so. The view of both his psychologist and his psychotherapist is that he has a good prognosis. It is, in my view, very unlikely that he would contravene the Act again. 29 The respondent's financial position is just comfortable. He has a good income, but it is committed to mortgage payments, child support payments and school fees, debt repayments (including the tax debt following the reassessment of his taxable income for the year ended 30 June 2006 and other regular outgoings). His only significant asset is his home, which is heavily mortgaged. When his commitment to school fees ends, he intends to replenish the Fund. 30 I accept his explanation of the circumstances in which he came to contravene the Act. I also accept that he is genuinely remorseful for what he did. 31 Each case must be determined on its own facts. The case that is more closely analogous to the present facts than others is Fitzgeralds. In that case, civil penalties of $20,000 and $10,000 on the first and second respondents respectively were imposed where the trustees had misapplied in the order of $148,000 from a self-managed fund to settle a claim by a liquidator against them in respect of a company formerly controlled by them. In a different context, but still under the Act, two other cases have considered the civil penalty provisions. In Holloway, a penalty of $40,000 was imposed on the company and $12,000 on the individual as a result of a wrongful application of $130,000 from a self-managed fund; the total penalty for multiple breaches involving a large number of funds advised by the respondents in that case was $222,000 for the company and $35,000 for the individual. In Derstepanian an agreed penalty of $100,000 was endorsed by the Court, in circumstances where the trustees of a superannuation fund with 17 members (including themselves) effectively misapplied in the order of $160,000 for the use of themselves and a company they controlled, but had subsequently paid compensation in the sum of approximately $226,000. 32 In this matter, in addition to the matters personally concerning the respondent, I take into account the following: (a) while there were 160 contraventions by the respondent of the Act by the multiple withdrawals, bearing in mind the totality principle the various contraventions may properly be seen as one contravening course of conduct, albeit over a substantial period of time, for which the respondent should be liable to a single maximum penalty of $220,000 (see as to a single act of misbehaviour being characterised as a contravention under more than one provision: Fitzgeralds at [33]; Derstepanian at [31]); (b) the respondent was first advised on 21 January 2008 that the auditor of the Fund had reported contraventions of the Fund for the financial year ended 30 June 2006 and that he was required to rectify the contraventions immediately; but he continued with his contraventions until 2 February 2009 at which time the total assets of the Fund had been withdrawn by the respondent; (c) the respondent benefited personally from the contraventions, by using the proceeds of the Fund for his own benefit and use, to meet everyday living expenses and the amounts have not been repaid to the Fund; (d) the contraventions were deliberate and of a serious kind, involving a complete departure from the respondent's obligations as a trustee of the Fund; (e) the contraventions had the effect of depriving the Fund of the totality of its assets, thereby impairing the Act's objective that people build their own retirement savings rather than rely on social security benefits; (f) the respondent also sought to benefit from the availability of concessional tax treatment as a result of operating the Fund, which the legislation confers in return for compliance with the Act (although I observe that the purpose of imposing a penalty is not to recover any amount of tax which ought to have been assessed); (g) otherwise, no third parties suffered loss as a result of the contraventions as the respondent was not acting as trustees of other persons' retirement savings; (h) the respondent has cooperated in the proceeding by agreeing the major facts constituting the contraventions. 33 I have reached the view that the agreed proposed penalty is within the range of an appropriate penalty in the circumstances discussed above. It is not useful to indicate whether it is the precise monetary penalty which I would have imposed. I indicate, however, that it is the combination of the proposed monetary penalty and the terms of payment agreed between the parties which enables me readily to conclude that the proposed monetary penalty is an acceptable one. 34 I accept the joint submission of the parties that the Court has the power and discretion to order a penalty by way of instalment payments, based upon the terms of s 196(3) of the Act. The parties have submitted, and I accept for the purposes of this matter, that the conferral of the power to order the penalty carries with it an implied consequential power enabling the Court to make an order enabling periodic payments. A similar capacity is assumed to have existed when imposing pecuniary penalties under s 76(1) of the Trade Practices Act 1974 (Cth), where orders have often been made for instalment payments. Two Full Court Federal Court examples are Schneider Electric (Australia) Pty Ltd v Australian Competition and Consumer Commission (2003) 127 FCR 170 at [7] and [35] and Australian Competition and Consumer Commission v High Adventure Pty Limited [2005] FCAFC 247 at [10]-[11]. An order for instalment payments is appropriate in circumstances of financial hardship: Australian Competition and Consumer Commission v Dataline.Net.Au Pty Ltd (in liquidation) and Others (2007) 161 FCR 513 at [38]. 35 Accordingly, in addition to the declaratory orders sought, I will impose a monetary penalty of $15,000 to be paid in weekly instalments of $192.31, with the first instalment to be paid on or before 31 January 2011. In addition, I order the respondent to pay the applicant's costs of and incidental to the application which, by agreement, I fix at $5000. It is to be paid on the same basis, so that the total sum payable of $20,000 will be paid over a period of two years by 104 weekly instalments of $192.31, with the first instalment to be paid on or before 31 January 2011. I certify that the preceding thirty-five (35) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Mansfield. Associate: Dated: 14 January 2011