Commissioner of State Revenue v Laverton Property

[2008] VMC 14

IN THE MAGISTRATES COURT OF VICTORIA

AT MELBOURNE

CIVIL

Case No. X00497189

Commissioner of State Revenue	Plaintiff
v
Laverton Property Developments Pty Ltd and	Defendant
J & E Agosta Pty Ltd

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MAGISTRATE:	S. Garnett
WHERE HELD:	Melbourne
DATE OF HEARING:	17 September 2008 & 27 October 2008
DATE OF DECISION:	19 November 2008
CASE MAY BE CITED AS:	Commissioner of State Revenue v Laverton Property Developments Pty Ltd and J & E Agosta Pty Ltd
REASONS FOR DECISION

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Catchwords: DEBT: duty owed under the land rich provisions of the Duties Act 2000 – whether appropriate to exercise discretion to stay the recovery proceeding in accordance with Rule 9A.01 of the Magistrates Court Civil Procedure Rules 1999

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr Kotros
For the Defendant	Mr Tisher
HIS HONOUR:

1.  The Commissioner for State Revenue claims that the defendants’ owe duty under the land rich provisions of the Duties Act 2000, which, as at 17 September 2008 amounts to $1,116,489.57c.

2.  The issue for the Court to determine is whether the Court should exercise its discretion in accordance with Rule 9A.01 of the Magistrates Court Civil Procedure Rules 1999 to stay the recovery proceeding issued by the Commissioner of State Revenue.

3. S 44 and s 45 of the Taxation Administration Act 1997 provide that tax payable is a debt due to the State and is recoverable in this Court irrespective of the amount claimed. This Court does not have jurisdiction to consider the validity of the assessment made by the Commissioner[1].

[1] s 96 (2)

4. The essential facts not in dispute are;

a)	The substantive dispute between the parties relates to the Victorian transfer duty implications of an alleged transfer of units in the Laverton Property Developments Unit Trust.
b)	The Trustee of that trust, who is the first named defendant, purchased a property in Laverton North in July 2003.
c)	An investigation was conducted by the Commissioner into the alleged movements of unit holdings in the trust whereby it concluded that the second named defendant made acquisitions in the trust that had the effect of transfer duty becoming payable pursuant to the Duties Act 2000.
d)	On 2 June 2006, the Commissioner assessed an amount payable of $871,171 in accordance with s 8 (1) of the Taxation Administration Act 1997. The amount assessed was payable by 5 July 2006 pursuant to s 14 (3).
e)	The defendants, being dissatisfied with the assessment lodged a written objection pursuant to s 96 on 28 July 2006, within the 60-day time limit as set out in s 99 (1), and provided details of its grounds for objection in accordance with s 97.
f)	On 16 August 2007, the Commissioner disallowed the objection by issuing a Notice of Determination and reasons in accordance with s 101 (1) and s 103.
g)	On 8 October 2007, and within the time limit stipulated in s 106 (2), the defendants’ solicitors requested the matter be referred to VCAT for review in accordance with s 106 (1).

h) The Commissioner acknowledged the request for referral on that date.

i)   The Commissioner did not refer the matter to VCAT within 60 days as required by s 106 (3) and did not do so until 27 May 2008 subsequent to issuing the current recovery proceedings on 3 March 2008.

j)	On 23 May 2008, a Defence to these proceedings was filed and a letter sent by the defendants’ solicitors to the Commissioner alleging that its failure to refer the matter to VCAT was a breach of its statutory duty and its Customer Charter. It also alleged that the issuing of these proceedings was, “unfair, oppressive, lacking in integrity
and an abuse of office”. The defendants’ solicitors suggested that these proceedings be stayed until the VCAT review was heard and determined.
k)	On 29 May 2008, the Commissioner provided a response to the allegations and refused the request for a stay.
l)	On 1 August 2008, Orders were made by VCAT, which included listing the review for hearing on 23 March 2009.

Statutory Scheme

5. The Commissioner relies on the operation of the statutory scheme to contend that a stay should not be granted unless ‘special circumstances” are shown to exist by the defendants’. In particular, the commissioner relies on the following provisions of the Taxation Administration Act 1997;

s 17 Validity of assessment

6.  The validity of an assessment is not affected because a provision of a taxation law has not been complied with.

s 104 Recovery of tax pending objection, review or appeal

(1) The fact that an objection, review or appeal is pending does not in the meantime affect the assessment or decision to which the objection, review or appeal relates and tax may be recovered as if no objection, review or appeal were pending.

s 108 Must tax be paid before a review or appeal is determined?

(1) A taxpayer may make a request under section 106(1) for a review or appeal whether or not the tax to which it relates has been paid.

(2) If a taxpayer makes a request before the tax has been paid, the Commissioner may apply to the Supreme Court for an order that the tax, or a specified part of it, be paid before the review or appeal proceed.
(3) On an application under subsection (2), the Supreme Court may order that the review or appeal not proceed until the tax, or a specified part of it, is paid.

(4) The Supreme Court may make an order under subsection (3) only if satisfied that it is reasonably likely that, unless the order is made, any tax payable by the taxpayer in accordance with the determination of the review or appeal would not be paid within the period within which it is payable.

s 127 Evidence of assessment

7.   Production of a notice of assessment, or of a document signed by the Commissioner purporting to be a copy of a notice of assessment, is—

a)	conclusive evidence of the due making of the assessment; and
b)	conclusive evidence that the amount and all particulars of the assessment are correct, except in objection, review or appeal proceedings (in which it is proof in the absence of evidence to the contrary).

8.  S 17 and s 127 of the Act provide that the Notice of Assessment made by the Commissioner on 2 June 2006 that the duty payable for $871,171 (inclusive of penalty & interest) is a valid assessment and is conclusive evidence that it is correct except in objection, review or appeal proceedings. Importantly, s 104 provides that the amount assessed is recoverable even where objection, review or appeal proceedings exist.

9.  The legislative framework, which exists in the Tax Administration Act, which relates to tax assessment, liability and the immediacy of payment, is not unusual[2] nor is the legislative intent behind it. That is, to protect revenue notwithstanding the harsh implications of its application where the taxpayer has objected to the assessment and has initiated review proceedings[3].

[2] See Commonwealth Income Tax assessment Act

[3] See High Court decision of Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd [2008] HCA

10.The Commissioner also referred to s 115, s 116, which provides that if the defendants are successful in their review application they will be entitled to a refund of any excess duty paid, and interest.

11.The Commissioner contends that the defendants have not established the grounds to justify the exercise of the Court’s discretion to grant a stay having regards to the legislative scheme and the policy that underpins it.

Should the Court in the exercise of its discretion, grant a stay of these proceedings, or in the alternative, grant a stay either wholly or in part on the execution of judgment?

12.The defendants contend that the failure of the Commissioner to comply with its statutory obligation to refer the dispute to VCAT pursuant to s 106 (1) within 60-days of being requested to do so is an abuse of office and a breach of its Customer Charter. On this basis, the issue of recovery proceedings by the Commissioner is unfair, oppressive and lacks integrity. Furthermore, the defendant contends that if the Commissioner complied with its statutory obligation the dispute was likely to have been resolved by now.

13.In Snow v Deputy Commissioner of Taxation (WA)[4] the Federal Court, held that the Commissioner was restrained from instituting recovery proceedings until he referred the objection by the taxpayer to the AAT. French J listed seven propositions that a State court should consider when exercising its discretion to grant a stay when considering the provisions of the Income Tax Assessment Act. They were:

[4] 14 FCR 119

a)	The policy of the ITAA as reflected in its provisions gives priority to recovery of revenue against the determination of the taxpayer’s appeal against his assessment.
b)	The power to grant a stay is therefore exercised sparingly and the onus is on the taxpayer to justify it.
c)	The merits of the taxpayer’s appeal constitute a factor to be taken into account in the exercise of the discretion (although some Judges have expressed different views on this point).
d)	Irrespective of the legal merits of the appeal, a stay will not usually be granted where the taxpayer is party to a contrivance to avoid his liability to payment of the tax.
e)	A stay may be granted in a case of abuse of office by the Commissioner or extreme personal hardship to the taxpayer called on to pay.
f)	The mere imposition of the obligation to pay does not constitute hardship.
g)	The existence of a request for reference of an objection for review where appeal is a factor relevant to the exercise of the discretion.

14.On the facts of that case, Justice French was particularly concerned that as at the date of the motion before him, the Commissioner had not complied with its statutory obligation at the request of the taxpayer to refer the matter to the AAT. He said; “It is in my opinion, quite unacceptable, in the absence of explanation, that the respondent should fail to refer an objection in accordance with a request by the applicant under s 187 of the ITAA and yet seek immediately to institute recovery proceedings. It is difficult to imagine circumstances, though no doubt they may exist, in which such conduct could not be described as oppressive.”

15.He held that if the Commissioner had not referred the taxpayer’s objections to the AAT by the time he delivered his decision he would make a restraining order against the Commissioner in respect to issuing recovery proceedings until they had been referred.

16.In Cywinski v Deputy Commissioner of Taxation[5], the Full Court of the Supreme Court, when considering s 201 of the ITAA (which is equivalent to S 104 of TAA) and a stay of execution application in circumstances where a review or appeal was pending on a tax assessment under the ITAA held that relevant factors for a Court to consider were;

[5] [1990] V.R. 193

- the legislative policy of the scheme; - the taxpayer’s prospects of success in certain circumstances.
17.	Cywinski), Moffitt P said;

In Deputy Commissioner of Taxation (NSW) v Mackey[6], (which was referred to in ALR 342; 82 ATC 4510. However, as has been often observed, the section must be given effect to as disclosing a legislature policy. In DFC of T (WA) v Australian Machinery Co Pty Ltd (1945)3 AITR 236 at 241 the High Court said: “We are of the opinion that there is jurisdiction to grant a stay in such proceedings but that in considering any application for a stay the policy of the Act as stated in S 201 is a matter to which great weight should be attached.

The hardships upon the taxpayer in the present case is that if he is now to meet the tax assessed, he will have to realize some assets or borrow money and that the present is an unfavourable time to do so. He concedes he has means to pay the tax in question and it is not claimed that it will adversely affect him in the earning of his livelihood.”

Further, on he said;

“It would be too narrow a view to grant a stay of proceedings or execution merely because on examination of the pending appeal there appears to be an arguable case or perhaps there are complex questions involved which the Board of Review or Federal Court can best determine. The policy of S 201 is that when an assessment has been made, the Deputy Commissioner has a right to have the tax paid, despite the pendency of an appeal. While hardship to the taxpayer and the merits of the appeal are relevant matters, other considerations are involved, including the Commissioners right to have the tax assessed paid. The exercise of discretion may involve, and in my opinion in the present case it requires, some examination of the nature and basis of the liability on which the disputed tax has been assessed and the nature of the dispute.”

In this case, Hutley JA went further and said;

“The power to stay, in my opinion, under S 201 should be exercised with great caution and only under special circumstances…..The Commissioner starts off with rights under S 201 and the taxpayer is seeking on special bases to have a special discretion exercised in his favour. It is not possible to work out in advance all possible bases for the exercise of such a discretion and it would not be proper even to attempt to do so. It is an open-ended discretion.

But there are only two cases where it is clear the Court should exercise that discretion. First, the comparatively rare case where the Commissioner abuses his position[7], for example by assessing and endeavouring to collect tax in defiance of a decision of the High Court, or other superior Court precisely in point. Second, in cases of extreme personal hardship to a taxpayer called upon to pay. The obligation to pay which has been cast upon him by law is not a hardship of itself and the mitigation of the effect of inflation and the burden of interest is a matter for the legislature, not for the Court.

[7] See discussion by Kaye J in Deputy Commissioner of Taxation v Cameron 21 ATR 1091 at 1095 on Hutley

I am also of the opinion that speculation as to the result of the appeal is not a significant factor to be borne in mind. The court should be concerned only with the question of the impact of the assessment upon the particular person concerned and not with what is going to happen in the future to the appeal.”

18.The opinion of Hutley JA was cited with approval by Kaye J in Cywinski and Nettle J in Trade World Enterprises Pty Ltd v Deputy Commissioner of Taxation[8] who also considered hardship to the taxpayer and the merits of the appeal or review were relevant matters to be considered in the exercise of a discretion to grant a stay of proceedings or execution, including the Commissioner’s right to have tax assessed paid.

[8] [2006] VSCA 191

19.In the present case, there is no suggestion by the defendants’ that the Commissioner acted arbitrarily or capriciously in assessing the duty payable. In fact, the Notice of Assessment was issued after a 12-month investigation by the Commissioner into the defendants’ Unit Trust activities.

20.The defendants’ first ground for seeking a stay is the alleged abuse of office by the Commissioner as evidenced by his failure to comply with the mandatory obligation in s 106 (1) to refer the dispute to VCAT. Unlike Snow’s Case, where the merit review process had not been issued as at the date the stay application was before the Court, the application to VCAT was issued some months ago, albeit 7 months outside the mandatory time for referral, and is listed for hearing in March 2009.

21.Additionally, the defendants’ point to the Commissioner’s Customer Charter which includes an undertaking by him to treat customers fairly, to act with integrity and to be professional in his dealings. The Commissioner also undertakes to explain to his customers their rights, including time limits within which they may request that the Commissioner refer determinations to VCAT.

22.In order to determine whether the Commissioner’s failure to comply with the Act and his Customer Charter amounts to an abuse of office, it is necessary to examine the relevant circumstances surrounding the period when the referral to VCAT should have been made ( by 7 December 2007) and when it was eventually made on 27 May 2008.

23.It is not in dispute that on 4 December 2007 a discussion occurred between the defendants’ solicitors and a representative from the Commissioner’s office whereby it was agreed that a meeting might resolve the dispute. The Commissioner’s representative indicated he would need time to examine the case in detail, which was agreed to.

24.Subsequently, a meeting did take place on 1 April 2008 in an attempt to resolve the dispute. It is alleged but denied by the defendants’ that their counsel indicated that the matter should not be referred to VCAT until the Commissioner had conducted a further review. Obviously, the dispute was not resolved and the Commissioner notified the defendants’ solicitors on 6 May that the matter would be referred to VCAT, which occurred some 21 days later. It also indicated that it would consent to an extension of time for the defendants’ to lodge their Defence to these proceedings.

25.Leaving aside the disputed issue of what may have been said by the defendants’ Counsel at the meeting on 1 April 2008, it is agreed that ongoing discussions were occurring between the Commissioner and the defendants’ in an attempt to resolve the dispute without recourse to VCAT. As the Commissioner contends, which is not disputed by the defendants’, these discussions were a genuine attempt to avoid costly and perhaps protracted litigation between the parties. In my opinion, having regards to these discussions taking place, the Commissioner’s breach of the mandatory referral obligation in s 106 does not constitute an abuse of office.

26.The defendants also contend that they would suffer extreme hardship if required to pay the amount claimed prior to the review application being determined.

27.In support, Joseph Agosta, company director of the defendants and John Pagounis, the defendants’ accountant, filed affidavits. Mr Agosta deposes that the defendants would suffer extreme personal hardship if required to pay and that they would not be able to continue their business activities or proceed with the review application before VCAT.

28.Financial documents in the form of profit and loss statements, balance sheets and projected cash flow statements were annexed to the affidavit of Mr Pagounis. In relation to the first defendant, he deposed that;

- liabilities exceed assets in an amount of $232,287.11c;

- assets total $6.5m of which its current assets consist of cash on hand-$300, cash
in bank-$54,078.64 and land for re-sale valued at $1.145m. He noted that a
recent contract for sale was entered into in an amount of $495,675 and the
remainder of the land will sell for approximately $870,000 in the future. The fixed
assets consisting of factory buildings are valued at $3.340m and mortgaged to an
amount of $3.387m.

- liabilities total $6.783m made up of an inter-company loan to the second
defendant in an amount of $1.036m, trade creditors in an amount of $138,804,
loans from Perpetual Nominees Ltd of $3.908m to be repaid within 12 months,
GST payable to the ATO in an amount of $584,242 and the amount payable to
the Commissioner in these proceedings in an amount of $1,116,489.57c.

29.Mr Pagounis expects the defendant to remain in a trading loss position for the 2008- 9 financial period with an expected cash balance of $158,540 at 30 June 2009. Importantly, he deposes that should it be required to pay the amount claimed by the Commissioner, it will not be able to pay its other debts and may become insolvent.

30.In relation to J & E Agosta P/L, which is the trustee of the Agosta Family Trust No. 2, he deposes that;

- it has assets totalling $6.389m made up of current assets totalling $2.183m and
fixed assets of $4.199m;

- its current assets consist of cash, trade debtors and inter-company loans, which
amount to $2.167m. Fixed assets comprise land and buildings in an amount of
$2.713m, plant and equipment, which includes a boat valued at approximately
$200,000-250,000 and motor vehicles valued at $1.072m.

- it has liabilities in an amount of $6.387m made up of inter-company, beneficiary
and secured loans and hire purchase arrangements.

31.Mr Pagounis deposes that profit, if any, to be small for 2008-9 financial year with a cash balance of approximately $5,147. On this basis, he states that this defendant, if required, cannot pay the amount claimed nor its other debts and liabilities when they fall due and would become insolvent.

32.In summary, Mr Pagounis deposes that the financial documentation indicates that the defendants’ will not be able to continue their business activities if required to pay the amount claimed by the Commissioner in this proceeding and furthermore will not be able to contest the merits of the assessment at VCAT.

33.The issue to be resolved is whether in these circumstances the defendants’ financial positions are such that they would suffer extreme financial hardship if required to pay the claimed amount prior to the review application being determined by VCAT. The defendants’ accept, as per Snow’s case and Mackey’s case, that the obligation to pay the amount assessed in itself does not amount to hardship.

34.In Held v Deputy Commissioner of Taxation[9], the Full Court of the Supreme Court, when considering a stay application sought by a taxpayer pending the outcome of proceedings in the AAT held that the applicants’ case for a stay depended upon whether he had shown that he would suffer extreme personal hardship if execution were levied. In that case, the taxpayer feared bankruptcy proceedings as he was unable to pay the amount assessed. The Court, noted the principles set out by French J in Snow’s case and was not convinced that the taxpayer would suffer extreme personal hardship based on the limited financial information presented to the Court.

[9] 1988 19 ATR 1213

35.In Commissioner of State Taxation (WA) v Kitchener Mining NL[10], Master Adams also noted the principles set out by French J in Snow’s case and accepted the evidence placed before him that the defendant was not in a strong financial position and was bereft of funds with which to pay any judgment relating to the duty assessed. On the facts of that case he found that as the company was continuing to trade that it did have some capacity to find funds when required. Ultimately, he was persuaded that the consequences of a judgment against it would be more than just inconvenience and that there was a real risk it would suffer grave prejudice by endangering its business activities which would make it impossible for the taxpayer, even if successful in its appeal, to be restored to substantially its former position.

[10]1992 23 ATR 166

36.After considering, the taxpayer’s financial predicament and balancing that with the statutory policy he did not believe the taxpayer should face immediate judgment for the full amount nor should the Commissioner be kept out of all of the money claimed. He proceeded to order that the taxpayer pay an amount of $250,000 (the assessable amount being $1,078,385) within 14 days and other consequential orders. It is worth noting that the appeal by the taxpayer was due to commence within 3 months.

37.In Deputy Commissioner of Taxation v Ho[11], Ireland J of the Supreme Court of NSW also considered a stay application brought on the grounds of extreme personal hardship. He held that the possibility that the taxpayer may be bankrupted and may be deprived of an ability to object or appeal of itself does not justify the granting of a stay. He found that the applicant had failed to “discharge the considerable onus upon him to demonstrate special or exceptional circumstances justifying the grant of a stay of proceedings.”

[11] 1996 32 ATR 269

38.The High Court in the Broadbeach case cited with approval what was said by Bowen CJ in Deputy Federal Commissioner of Taxation v Roma Industries Pty Ltd[12]:

[12] (1976) 6 ATR 54 at 57.

“In one sense, of course, the Commissioner’s claim is disputed, because appeals to the Board of Review have been lodged. However, the provisions of s 201 of [the Assessment Act] require me to treat the debt as in effect undisputed. Such a statutory provision may in some cases lead to hardship on a taxpayer, particularly where he has paid the amount of tax assessed and later wins his appeal, whereupon the money is repaid to him without interest.[13]This led Higgins J in Hickman v Federal Commissioner of Taxation[14]to describe it as “unjust and even baneful”, but it remains in the [Assessment Act]. It must be appreciated that from the point of view of revenue it is a protection against that class of taxpayer who might withhold payment and use the money as the sinews of war to conduct appeals against the Commissioner and who, being finally unsuccessful was found to be unable to meet his tax liability, having spent his money on the litigation.”

[13] Not in the present case by virtue of s 115 and s 116.

[14] (1922) 31 CLR 232 at 245.

39.I am of the opinion, based on the financial information provided, that the defendants’ would suffer some hardship and prejudice if immediate judgment was entered for the total amount claimed by the Commissioner. However, when balancing these factors against the statutory scheme and the policy that underpin it, I am also of the opinion that the defendants have the capacity to pay a significant portion of the amount sought. This may require the realization of some assets or increased borrowings by the defendants but it appears to me on the material supplied that there is capacity for them to do so.

ORDERS:

40.Accordingly, I will order that the defendant(s) pay an amount of $500,000 to the plaintiff within 60 days with the proceeding being otherwise stayed until further order of the court.

41 Para 40-45 and decisions referred to therein.

[6] (1982) 13 A.T.R. 547

JA opinion. His Honours example of an abuse of power by the Commissioner was where an
assessment was made arbitrarily or capriciously.