Deputy Commissioner of Taxation v Arico (No. 2)
[2017] VSC 746
•12 December 2017
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
TAXATION LIST
S CI 2017 02769
| BETWEEN: | |
| DEPUTY COMMISSIONER OF TAXATION | Plaintiff |
| - and - | |
| ANTONIO ARICO | First Defendant |
| ANTONIA ARICO | Second Defendant |
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JUDGE: | Kennedy J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 6 December 2017 |
DATE OF RULING: | 12 December 2017 |
CASE MAY BE CITED AS: | Deputy Commissioner of Taxation v Arico (No. 2) |
MEDIUM NEUTRAL CITATION: | [2017] VSC 746 |
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PRACTICE & PROCEDURE – Summary judgment – Whether execution ought to be stayed – Discretion – Principles to be applied in granting stay – Taxpayers’ application for stay of summary judgment refused in circumstances where court unable to be satisfied of adequate disclosure by the taxpayers
PRACTICE & PROCEDURE – Freezing order – Application for variation of freezing order enabling defendants to encumber property as security for loan to pay legal fees – Application refused absent adequate disclosure
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr I Martindale QC Dr J E Jaques | Minter Ellison |
| For the First and Second Defendants | Mr A Tragardh | Condello Lawyers |
HER HONOUR:
In this proceeding the Deputy Commissioner of Taxation (DCT) seeks judgment against the first defendant in the sum of $1,061,049.69 and against the second defendant in the sum of $1,077,652.72 (as at 6 December 2017). The amounts relate to income tax assessments for the years 2009 to 2011. The judgment is sought by way of summary judgment under s 63 of the Civil Procedure Act 2010 (CPA); alternatively as a judgment in default of defence under r 21.02 of the Supreme Court (General Civil Procedure) Rules 2015 (Vic).
The defendants neither consent nor oppose the application for such judgment. Rather, they seek a stay in circumstances where there are review proceedings being conducted in the Administrative Appeals Tribunal (AAT) in relation to the assessments the subject of this proceeding, which are currently due to be heard in March 2018.
The defendants also seek a variation to the freezing orders made on 24 July 2017 and extended on 2 August 2017. They seek to do this by borrowing a sum of $275,000 from their daughter, who will in turn lodge a caveat over a property known as 409 Albion Street, Brunswick West (the Brunswick West Property) (currently the subject of the freezing order). The funds are to be ‘quarantined’ for the purposes of the litigation and not to be recovered by the DCT.[1] Rather, they are to be deposited with the defendants’ solicitors, Condello Lawyers, for the payment of legal expenses.
[1]As accepted by Counsel for the defendants: Transcript of Proceedings (6 December 2017) 131.
The defendants have otherwise accepted that the freezing order ought to be extended until further order once judgment is entered.
The DCT opposes the application for a stay and for a variation in circumstances where he says the defendants have not made full and frank disclosure of their assets.
Accordingly, the issues before the Court are: first, whether judgment ought be entered; second, whether or not a stay ought be granted; third, whether the freezing order should be varied.
Given a primary issue in the case turned on the extent of disclosure by the defendants, it is necessary to set out the background of this matter in some detail below, before resolving the issues.
Background
As set out in my Reasons for extending the freezing orders on 2 August 2017[2] (Reasons) (which ought be read together with these Reasons), a number of the defendants’ assets were already subject to restraining orders made under the Confiscation Act 1997 (Vic) as a result of the conviction of the defendants’ son, Mr Rocco Arico, for extortion, intentionally causing injury and trafficking a drug of dependence. He had also earlier served a term of imprisonment for a conviction of attempted murder in 2001 but had been released on 4 July 2008. The restraining orders include a property at 256-264 Sydney Road, Coburg (256 Sydney Road Property) and a property at 251 Sydney Road, Coburg (251 Sydney Road Property). However, they did not relate to the Brunswick West Property.
[2][2017] VSC 453.
The defendants’ assets, including specifically the Brunswick West Property, were the subject of freezing orders made ex parte by the Honourable Justice Vickery on 24 July 2017, which were subsequently extended by the orders of 2 August 2017.
This was in circumstances where (as highlighted in the Reasons), the affidavit of Mr Aris Zafiriou sworn 18 July 2017 (Zafiriou Affidavit) (in support of the freezing order) had detailed that the defendants’ assets had generally been diminishing over the course of 2012 to 2015, in circumstances where the DCT was not aware of how the proceeds of such assets had been dealt with.
The Zafiriou Affidavit therefore warrants some close examination.
Zafiriou Affidavit
The Zafiriou Affidavit sets out assets known to have been associated with the defendants (but which have later been sold) as follows:
(a) 149 Green Gully Road, Glenlyon (Glenlyon Property);
(b) 16 Cumberland Road, Pascoe Vale South (Pascoe Vale South Property);
(c) 1804/7 Riverside Quay, Southbank (Southbank Property);
(d) 36 McLauchlin Avenue, Sandringham (Sandringham Property);
(e) 580 Moorooduc Highway, Mt Eliza (Mt Eliza Property); and
(f) Café Trevi business.
The discretionary trusts known to be associated with the defendants are as follows:
(a) A & A Arico Family Trust of which Antaric Pty Ltd (Antaric) is a trustee, (of which the defendants are directors and shareholders in equal shares);
(b) 563 Sydney Road Trust of which 563 Sydney Road Pty Ltd is a trustee, (of which the first defendant is a director and shareholder, together with his daughter-in-law, Ms Franki Arico);
(c) ARA Builders & Developers Trust of which ARA Builders & Developers Pty Ltd is a trustee, (of which the first defendant is a sole director and shareholder); and
(d) Antonio Arico Family Trust of which Ransole Pty Ltd (Ransole) is a trustee, (of which the first defendant is a sole director and shareholder).
ARA Builders & Developers Pty Ltd is a registered proprietor of the 251 Sydney Road Property; and 563 Sydney Road Pty Ltd is a registered proprietor of the 256 Sydney Road Property. Both of these properties are the subject of the restraining orders and there is evidence, at least in the case of the 251 Sydney Road Property, that rent is being received.
The Zafiriou Affidavit details the evidence of the circumstances in which the other properties were sold as follows.
First, in relation to the Glenlyon Property, the evidence was that the defendants sold the property on or about 3 March 2012 for $385,000. The DCT was not aware of how the defendants dealt with the Glenlyon Property proceeds of sale.
Second, in relation to the Pascoe Vale South Property, the evidence was that the defendants sold the property on or about 20 July 2012 for $750,000. Again the DCT is not aware of how the defendants dealt with the proceeds of the sale of this property.
In relation to the Southbank Property, the evidence was that Ransole (the trustee of the Antonio Arico Family Trust) sold this property on or about 8 August 2015. Again the DCT is not aware of how Ransole dealt with the proceeds of the sale of this property. This was in circumstances where the first defendant was in control of the Antonio Arico Family Trust.
In relation to the Sandringham Property, the evidence was that the defendants sold this property for $2.45 million in or about February 2015. In so doing, a mortgage to the ANZ Bank was also discharged. During a meeting with officers of the Australian Taxation Office (ATO), the first defendant and his representatives informed the ATO that the defendants had equity of approximately $900,000 in this property and that they owed the former owner of the Sandringham Property $300,000. Although the outcome of the discussion was that the ATO would be paid $600,000 from the proceeds of the property, the ATO was subsequently advised that the sum would not be paid to the ATO but would instead be paid to the Commonwealth Bank of Australia (CBA). In the absence of any settlement statement, the DCT was otherwise unable to provide details as to how the net proceeds (including any deposit) had been dealt with.
In relation to the Mt Eliza Property, the evidence was that the defendants sold the property on 23 April 2015 for $1,700,000. Leaving aside the deposit (which has not been accounted for), it appeared that the net proceeds of settlement went to the CBA with $1,065,236.69 being the balance of the relevant Mt Eliza Property mortgage and $471,596.27 being the balance of a ‘temporary limit facility’.
The DCT and the CBA ended up in a dispute about who should be paid the proceeds allocated to the temporary limit facility, the result of which was that the DCT was allocated the sum of $335,000. However, this still did not take into account how the funds drawn down from this facility were utilised. The evidence available to the DCT shows that the temporary limit facility was drawn down by $40,000 on 9 October 2015, and a further $429,900 on 12 October 2015. In terms of the $40,000, $15,000 appears to have been withdrawn as cash, while $25,000 was transferred to an account in the name of Mr Rocco Arico. In terms of the $429,900, the Zafiriou Affidavit highlights that, on the very day the sum of $429,900 was withdrawn from the temporary limit facility (12 October 2015), the sum of $425,600 was deposited into a CBA cheque account of the defendants. This followed on from a series of withdrawals from this cheque account during a very short period (i.e. the account had a credit balance of some $10,000 on 1 September 2015 but was in debit of $425,565 by 12 October 2015) which included three ATM cash withdrawals in the sum of $143,000.
Finally in terms of the Café Trevi business, the business was registered to Antaric Pty Ltd. The DCT believes that the A & A Arico Family Trust disposed of this business and is not aware of how the defendants dealt with the proceeds of sale.
There is also further evidence that the defendants had access to other sources of funds. By way of example, a bank statement for the ANZ Access Advantage account in the name of the defendants shows a deposit of $65,000 on 18 April 2017 from unsourced funds (with a subsequent withdrawal of $61,800 on 24 April 2017).
There was further evidence that there were overseas accounts in existence. Thus Mr Zafiriou annexes an AUSTRAC report which shows the transfer of funds overseas, including transfers to an account in the name of the second defendant in Italy.
The Zafiriou Affidavit therefore raised significant issues as to what had happened with the proceeds of sales of assets; whether the defendants had access to other funds; and the extent of the defendants’ interests in various trusts.
AAT Proceeding and loan application
As indicated already, the defendants had separately commenced review proceedings of the DCT’s tax assessment decisions in the Administrative Appeals Tribunal (AAT) under Part IVC of the Taxation Administration Act 1953 (Cth) (TAA) (AAT Proceeding).
On 24 May 2017, the defendants wrote to the AAT requesting an adjournment of the hearing listed for 3 July 2017, claiming that they were unable to fund their legal representation. The hearing was subsequently adjourned until 19 March 2018.
The DCT has subsequently learnt that, on 1 June 2017, the defendants applied for a loan for $350,000 by way of a mortgage application with Advantedge Financial Services Pty Ltd (AFS). Thus in response to a notice issued by the DCT, he obtained a mortgage application and a valuation summary report – both of which are annexed to a further affidavit of Mr Zafiriou of 26 October 2017 at AZ‑143 and AZ‑144 respectively.
Exhibit AZ‑143 includes 10 pages (with two page 7s) partly handwritten and partly typed. There appears to be a signature of both defendants on pages 7 and 9 dated 1 June 2017. At page 9, the purpose of the loan was denoted as ‘home improvements’ in the sum of $99,000 and ‘my son and daughter’s wedding’ in the sum of $251,000. Page 5 is entitled ‘Personal financial statement’ and lists the Brunswick West Property as an asset valued at $1.3 million. The property at 251 Sydney Road Property is also listed (valued at $2.5 million). On page 6 of the mortgage application, under the heading ‘Funds Position – Income details’, ‘$48,000’ is given as ‘Rental – 251 Sydney Road Coburg’.
According to an affidavit of Mr Antonino Condello of 5 September 2017, the defendants obtained $350,000 from AFS on 24 July 2017, which was secured by a new mortgage over the Brunswick West Property. This was the day the initial freezing order was made. Moreover, the funds were not used to fund home improvement or weddings. Nor were they used to fund the AAT Proceedings. Rather, the defendants chose to apply $335,000 of the funds obtained to pay out an amount to the CBA.
Statement of assets
Pursuant to the order of this Court extending the freezing order (of 2 August 2017), the defendants were required to provide an affidavit setting out their assets in Australia, giving their value, location and details (including any mortgages, charges or other encumbrances) and the extent of their interest in the assets (at paragraph 4(b)).
In the affidavit of Mr Arico sworn 28 August 2017 (which was adopted as accurate by his wife in an affidavit of the same day), Mr Arico stated that, to the best of his ability, he and his wife had interests in a number of specified assets which included three properties: the Brunswick Street Property; a property at 41-44 Marine Drive, Safety Beach (Safety Beach Property) (which was said to be by way of a joint equitable interest); and a property described as Bathing Box 56 at Safety Beach (Bathing Box 56 Property) (as a joint proprietor). The two latter properties were the subject of restraining orders. He also cites various bank accounts, vehicles and shares.
Significantly:
· he provides an estimated value of the Brunswick West Property as $750,000, which was subject to a mortgage to AFS for a loan of $350,000;
· he makes no reference to the whereabouts of the proceeds of the sales of properties set out in the Zafiriou Affidavit;
· he provides no details of his interests in any trust, including the value of any distributions received; and
· he does not disclose whether he had received any rental payments, in respect of any properties, including in respect of rental payments received on the 251 Sydney Road Property.
Form of applications to vary freezing orders
On 15 September 2017, the matter returned to this Court following a request made by the defendants for a variation of the freezing orders in circumstances where the DCT also wished to move to summary judgment. Thus, in an affidavit of Mr Condello of 5 September 2017, he deposed that the defendants wished to further encumber the Brunswick Street Property for the purpose of paying their legal expenses. He indicated that if the defendants were unable to raise finance via a third party lender, the defendants had indicated that they were ‘prepared to sell their family home’. He was instructed that the Brunswick Street Property was worth approximately $750,000 to $800,000.
The matter was adjourned until 22 September 2017 for the defendants to file a proposed form of order seeking the variation.
In the result, a proposed form of order was filed dated 19 September 2017 which proposed a private sale to a family member, Mr Franco Misale, at a sale price of not less than $750,000. On 22 September 2017, the DCT advised that an appropriate price could only be truly determined by a market sale, but if a valuation was obtained in line with the appraisal, the DCT would reassess his position.
Accordingly, provision was made in orders made on 22 September 2017 for the DCT to obtain a valuation. Further timetabling orders were also made for the return of both the application for judgment and the application for a variation.
On 2 October 2017, the DCT received a valuation report of 27 September 2017 from Herron Todd White, which valued the Brunswick West Property at $1.3 million.
On 21 October 2017, the DCT further received the loan documentation from AFS cited earlier which suggested that the defendants had provided a valuation of $1.3 million in seeking the AFS loan.
In submissions of 27 October 2017, the DCT indicated that he opposed the variation to permit the sale highlighting that the proposal was for a sale of $750,000 in circumstances where a valuation had been obtained at $1.3 million.
However, on the same day (27 October 2017), the defendants’ daughter (Mrs Antonella Misale) provided details of a second proposal in an affidavit sworn that day. Thus, she stated that she was ‘prepared to lend my parents $275,000 to fund their legal cases’ on the basis that she and her husband were entitled to register a mortgage over the Brunswick Street Property. A minute of proposed orders of 31 October 2017 was also provided, which encapsulated this second proposal.
Requests for further information by DCT
By way of correspondence dated 3 November 2017 from the DCT’s solicitors to the defendants’ solicitors, the DCT indicated that further information was needed to consider the new proposal, including details of the proposed loan agreement.
By further correspondence dated 9 November 2017 from the DCT’s solicitors to the defendants’ solicitors, the DCT sought further information in the light of the matters set out in the Zafiriou Affidavit of 18 July 2017.
First, information was sought regarding the amount of proceeds from the sale of the assets cited and how the defendants dealt with those proceeds as follows:
(a) Glenlyon Property;
(b) Pascoe Vale South Property;
(c) Southbank Property;
(d) Sandringham Property;
(e) Mt Eliza Property; and
(f) Café Trevi business.
Second, the DCT sought an explanation as to how the defendants dealt with the funds accessed from the temporary limit facility associated with the Mt Eliza Property.
Third, the DCT sought details of any expected income as a result of the defendants’ shareholdings in the various companies.
Finally, the DCT requested information as to whether the defendants were the beneficiaries of any of the trusts listed and details of any expected income.
By correspondence of 13 November 2017, the DCT further sought information as to whether or not the defendants would prosecute an application for exclusion orders in relation to the restraining orders (which had been raised previously). Further, he sought details of the basis on which they claimed an equitable interest in the Safety Beach Property and the Bathing Box 56 Property, including the timing and amount of any value contributed by them.
In submissions of 28 November 2017, the DCT submitted that the application for variation (in the second proposal) should be refused, or alternatively adjourned pending further affidavits making proper disclosure. Further, that the Court could not be satisfied that the defendants had made full and frank disclosure of their asset position justifying access to frozen assets.
On 5 December 2017 (the day before the hearing), Mr Condello provided a further affidavit which annexed correspondence of 28 November 2017. More specifically, he stated:
· that the defendants did not consider their interests in the trusts were an asset as they are ‘mere objects’ of certain discretionary trusts;
· that the defendants ‘do not currently receive distributions’ from the relevant trusts ‘for taxation purposes’;
· that a detailed analysis of where the proceeds of sale from the various assets referred was required to be undertaken and that the defendants have limited funds available to them to engage their accountants and/or legal representatives to undertake such an analysis;
· that Counsel had been briefed to prepare a detailed affidavit for Mr Rocco Arico in respect of his application for exclusion orders, which would include how various properties were funded. Once this was complete, the defendants intended to use this information to prosecute their exclusion order application;
· that Mr and Mrs Misale intended to lodge a caveat rather than registering a mortgage.
Then on the day of the hearing, a further minute of order proposed by the defendants was provided dated 5 December 2017. This was accompanied by a further affidavit of Mr Condello which annexed the details of the proposed loan agreement in an amount of $275,000. Despite reference to repayment of the loan ‘together with interest’ (at clause 2), the proposed loan agreement does not identify the amount of interest to be payable.
Counsel also confirmed that no application for an adjournment was being made,[3] nor did he wish to file supplementary material.[4]
[3]Transcript of Proceedings (6 December 2017) 120.
[4]Ibid 127.
Adequacy of disclosure
As highlighted already, a key issue before the Court was the adequacy of disclosure.
The matters of concern raised by the DCT included:
· that there was a failure to provide proper disclosure in relation to the November 2017 correspondence. In particular, there was a failure to account for the proceeds of sales of various properties;
· that there was evidence of access to other funds;
· that Mr Arico had falsely stated that the estimated value of the Brunswick West Property was $750,000 in his affidavit of 28 August 2017.
Taking each in turn, the Court still does not have any evidence from the defendants which provides an explanation as to:
· the proceeds of sales of the various assets detailed in the Zafiriou Affidavit of 18 July 2017;
· the funds drawn down under the temporary loan facility associated with the Mt Eliza Property;
· whether there has been any income derived from the various trusts, which would include any rent.
In relation to the trusts, the DCT has been advised that the defendants ‘do not receive distributions for taxation purposes’. This says nothing about whether distributions have been received in the past, nor is it clear what is meant by ‘for taxation purposes’.
In relation to the other proceeds, the only explanation that has been proffered is that the defendants have limited funds available to engage professionals to account for these proceeds. I reject this explanation. First, I am not satisfied that professionals would be needed. Rather, the matter appears to involve a relatively straightforward task of providing information which would readily be within the knowledge of the defendants. Second, even if some assistance was required, it would be relatively minor in circumstances where lawyers were already retained. Finally, there has been extensive time available to provide the explanation. The matters were first raised in the Zafiriou Affidavit of 18 July 2017. The DCT also provided further notice of his concerns in the correspondence, particularly of 9 November 2017.
There is then, simply no evidence as to the whereabouts of the proceeds of sale. Given I have not accepted the explanation proffered, I am also entitled to, and do, draw an inference that the evidence about these proceeds would not have assisted the defendants.[5]
[5]Jones v Dunkel (1959) 101 CLR 298.
This leaves a situation wherein the state of the evidence is unsatisfactory and I am unable to be satisfied that there has been full disclosure of the defendants’ asset position.
The evidence as to overseas bank accounts and unidentified sources of income fortifies the lack of satisfaction already highlighted. Equally, the absence of any details of the basis on which the defendants claim an interest in the Safety Beach Property and the Bathing Box 56 Property.
In terms of the alleged false statement, the defendants submitted that the Court should find that the material adduced was unreliable, in particular, that page 9 of the AFS loan application was not information given by the defendants but rather that the valuation contained in the subsequent exhibit (being a valuation dated 21 June 2017) was the source of the $1.3 million figure.
However, I reject this submission. First, (and notwithstanding the extra page 9), the relevant page was provided to the DCT as constituting part of the relevant loan application made (and signed) by the defendants. Second, the relevant page also included reference to other information (such as the value of home contents; a value of the 251 Sydney Road Property; as well as values for motor vehicles) which could only be within the particular knowledge of the defendants. Finally, even if these matters are unclear, they at the very least called for some explanation by the defendants. Again, in the absence of such evidence, I am able to infer that the evidence would not have assisted the defendants.[6]
[6]Ibid.
In such circumstances, the evidence before the Court suggests that the defendants provided a much lower figure for the value of their home to this Court as compared with the value they provided for the purposes of the AFS loan application. Although I accept that there was evidence of other valuations provided to the Court,[7] there was no justification provided for the defendants themselves to provide conflicting values as at June 2017 (of $1.3 million to a financier) and August 2017 (of $750,000 to the Court).
[7]As the defendants highlighted, there was a valuation from BMT Commercial Pty Ltd (trading as National Property Valuers) of $1.05 million on 16 October 2017; and a valuation from Barry Plant of $750,000 to $800,000 of 4 September 2017.
Overall, then, the state of the evidence is unsatisfactory such that I am unable to be satisfied that there has been full disclosure of the defendants’ asset position. In such circumstances, I am unable to be satisfied that the Brunswick West Property is the only asset remaining (from which legal fees ought be drawn) as the defendants seek to assert.
Judgment
The DCT sought summary judgment pursuant to s 63 of the CPA on the basis that a defence in this case has ‘no real prospect of success’ pursuant to the principles in Lysaght Building Solutions Pty Ltd v Blanalko Pty Ltd.[8]
[8](2013) 42 VR 27 at 35.
The relevant notices of assessment have been annexed to the Zafiriou Affidavit which relate to income tax and penalties for the years 2009 to 2011. Pursuant to s 350-10 of Schedule 1 to the TAA, those assessments are conclusive evidence of the matters contained therein. The DCT has further provided certificates pursuant to s 255-45 of the TAA which ‘prima facie’ provide evidence that the total amounts specified are due and payable (as at 6 December 2017). Updated certificates are to be provided prior to pronouncement of final orders.
The High Court recently confirmed the significance of the notices of assessment. Thus, in Bell Group N.V. (in liquidation) v Western Australia, the Court (French CJ, Kiefel, Bell, Keane, Nettle and Gordon JJ) stated:
The legal operation and practical effect of the Tax Acts is such that the production of a notice of assessment is conclusive evidence of the due making of the assessment of a taxation liability and, except in proceedings under Pt IVC of the TAA, that the amount and all the particulars of the assessment are correct.[9]
[9](2016) 331 ALR 408, 423 [54].
Section 14ZZM of the TAA further provides that:
The fact that a review is pending in relation to a taxation decision does not in the meantime interfere with, or affect, the decision and any tax, additional tax or other amount may be recovered as if no review were pending.
A pending review against an objection decision, as here, is therefore not a defence.
Accordingly, in a case such as this, there can be no real prospect of a successful defence.
It is therefore appropriate to give judgment pursuant to s 63 of the CPA. I do so having regard to the relevant certificates provided by the DCT; the lack of opposition; as well as the lack of any filed defence.
Stay
The discretion to grant a stay of the execution of a judgment debt based upon a taxation assessment involves an open-ended discretion and it is not possible to work out in advance all possible bases for the exercise of such discretion. Nevertheless, the following general principles have been articulated by the Full Court of the Federal Court in the decision of Southgate Investment Funds Limited & Ors v Deputy Commissioner of Taxation (Southgate)[10] as follows:
[10](2013) 211 FCR 274, 282-3 [30].
(a) the power to grant a stay should be exercised sparingly and the taxpayer bears the onus of persuading the Court that a stay ought to be granted in the particular circumstances;
(b) great weight must be given to the clear legislative policy manifested in provisions such as ss 14ZZM and 14ZZR of the TAA which give priority to the recovery of taxation revenue notwithstanding that a taxpayer has a Pt IVC proceeding on foot. The Commissioner is placed by the legislation in a position of special advantage and is generally free to pursue recovery proceedings despite the pendency of Pt IVC proceedings;
(c) the merits of pending Pt IVC proceedings may be a relevant consideration to be taken into account in the exercise of the discretion, but the court should not attempt to determine the merits unless it has sufficient material before it to do so and it should avoid speculation;
(d) in cases where a judge is unable to form even a tentative view of the strength of Pt IVC proceedings, it is unlikely that the judge’s discretion in refusing a stay will miscarry by reason only of the judge being unable on the material before him or her to reach a view as to the taxpayer’s prospects of success in having the assessment overturned;
(e) it is too narrow a view of the discretion to grant a stay of proceedings or execution merely because Pt IVC proceedings are pending, or because on review of those proceedings there appears to be an arguable case or complex questions to be determined by the AAT or the Court;
(f) that is not to say, however, that the outcome of Pt IVC proceedings has to be certain in the sense that they are bound to succeed or fail. That puts the bar too high;
(g) in cases where the Court considers that it is in a position to assess the merits of pending Pt IVC proceedings and that it is appropriate to do so, the weight to be attached to those merits will vary according to the relative strength of the merits. But the taxpayer needs to have more than merely an arguable case;
(h) similarly, more weight would be given to the merits factor if the case is one where the Commissioner has abused his position or it is clear that the Commissioner is endeavouring to collect tax in defiance of a decision of the High Court or other superior court which is precisely in point;
(i) due acknowledgment should be given to the asperity with which provisions such as ss 14ZZM and 14ZZR may operate, but in appropriate circumstances a court might consider that a stay is warranted in cases of extreme hardship to a taxpayer, noting however that:
(i) the mere obligation to pay income tax of itself does not impose extreme hardship; and
(ii) the possibility that the taxpayer may be bankrupted is generally not of itself an extreme hardship, however, different considerations may arise if, for example, it is demonstrated that the execution of a judgment debt would deprive the taxpayer of the financial resources needed to prosecute extant Pt IVC proceedings;
(j) irrespective of the merits of pending Pt IVC proceedings, a stay will not usually be granted where the taxpayer is party to a contrivance to avoid liability to pay the tax; and
(k) other considerations may need to be taken into account in determining whether to exercise the discretion in a particular case, such as any conduct on the part of the taxpayer or the Commissioner which impacts upon the efficient and expeditious conduct of Pt IVC proceedings.
The above principles regarding the merits can also be read together with the decision of the Victorian Court of Appeal in Trade World Enterprises Pty Ltd v Deputy Commissioner of Taxation.[11] In that case, Nettle JA cited the decision of Cywinski v Deputy Commission of Taxation[12] (by the Full Court) wherein Kaye J, in the leading judgment, contrasted cases where it was clear that an appeal was without merit with cases where the assessment was manifestly wrong/contrary to a decision of the High Court. However, that between those two extremes lies ‘the bulk of cases’ in which a judge in recovery proceedings may be unable to form even a tentative view of the chances of success. In such cases, a judge’s discretion in refusing a stay does not miscarry by reason only of the judge being unable on the material to reach a view as to the prospects of success.[13]
Submissions
[11](2006) 64 ATR 316.
[12][1990] VR 193.
[13]Trade World Enterprises (2006) 64 ATR 316, 323 [23].
In written submissions, the defendants submitted that a stay should be granted in the present circumstances which were said to be ‘exceptional’ for the following reasons:
(a) that the only reason that the DCT issued this proceeding (on 20 July 2017) was the fact that the AAT Proceeding had been adjourned due to the financial circumstances of the defendants;
(b) the stay is not for an indefinite or unreasonable period;
(c) the DCT does not suggest any prejudice;
(d) the defendants’ application to the AAT has merit given the defendants’ taxable income was assessed on an ‘asset betterment’ basis which was a relevant factor in Deputy Commissioner of Taxation v Gergis (Gergis);[14]
(e) extreme prejudice and resulting hardship would occur if a stay was not granted. In particular, the defendants would be denied an opportunity to prosecute their case in the AAT. The defendants were also likely to ultimately be evicted from the Brunswick West Property, being their matrimonial home since 1985.
[14](1991) 22 ATR 1.
In oral submissions, the defendants again emphasised that the only reason the proceeding was issued was because of the adjournment of the AAT Proceeding which the Court should infer was an abuse of position (which was said to be a basis for a stay in the case of Deputy Commissioner of Taxation v Denlay[15]). Secondly, they highlighted their prejudice in being shut out from exercising legal rights, notwithstanding the proximity to a hearing date. Finally, they suggested that it was only on receipt of Reply submissions that they became aware that a complaint of non-disclosure was to be made.
[15][2010] QCA 217.
The DCT opposed the stay. He did indicate, however, that he would undertake not to take steps to bankrupt the defendants until the end of the hearing of the relevant AAT Proceeding.[16] He would also undertake to not take any step to enforce judgment in this proceeding before 29 January 2018, and thereafter only on 48 hours’ prior notice.
[16]This was subject to the DCT being able to seek a release if the AAT hearing was further adjourned.
The DCT otherwise submitted that none of the matters raised (even if true) warranted the stay sought except for (potentially) the allegation of extreme prejudice and resulting hardship. However, he submitted that the sale of the house had already been proposed by the defendants. Further, that the Court could not be satisfied, given the state of the evidence, that the defendants did not have other assets available to prosecute their case.
The DCT further rejected that the dissipation issue had not been raised, highlighting that the Zafiriou Affidavit raised the matter squarely and further citing the correspondence of November 2017 (to which an appropriate response had not been received). Finally, they denied that there had been any abuse as claimed.
Resolution
The DCT is entitled to assert his rights. I am also unable to draw the inference raised by the defendants (to the effect that the issue of this recovery proceeding was an ‘abuse’) given the DCT was entitled to be concerned about the chances of actual recovery in circumstances where the submissions made in support of the adjournment application in the AAT drew attention to the fact that orders had been made under the Confiscation Act.
The fact that the stay is not indefinite does not assist the defendants, nor is the DCT required to prove any prejudice.
In terms of merits, it is true that the DCT made his assessment of the defendants’ taxable income on an ‘asset betterment’ basis.[17] Although this was said to be a relevant matter in the decision of Gergis as highlighted by the defendants, the present case appears to raise more complex questions of fact. Thus, the lines of dispute appear to turn on the characterisation of certain deposits made into bank accounts of the defendants in circumstances where they allege that those deposits are gambling winnings. The DCT intends on calling evidence that they were not gambling winnings in circumstances where the bets were placed only after the races started. Given the factual matters raised, the Court is unable to reach a view as to the defendants’ prospects of success. This was consistent with the proper concession of Counsel for the defendants that the Court could not make any determination about the merits in this case.
[17]Affidavit of Aris Zafiriou sworn 18 July 2017, [15]. The ‘asset betterment’ method involves calculating the increase in value between the taxpayers’ asset at the beginning of the year and the end of each year: see Affidavit of Farzeen Anwar affirmed 28 November 2017, Exhibit ‘FA-1’ annexing document filed in the AAT Proceeding entitled ‘Respondent’s Amended Statement of Facts, Issues and Contentions’.
In such circumstances, the issue of merits does not assist the defendants either.
Instead, the real basis for the application was extreme hardship on a twofold basis: namely, the denial of an opportunity to prosecute a case and the eviction from the family home.
The eviction from the family home, however, cannot constitute hardship in the circumstances of this case where the defendants have already demonstrated a willingness to sell the property (by way of their initial proposal to vary the freezing order).
The suggestion that the defendants are being denied an opportunity to present a case is a matter that does, however, warrant careful consideration particularly in line with the comments made by the Full Federal Court in Southgate.
Nevertheless, given the undertaking of the DCT, there should be no stultification of the defendants’ appeal rights as a result of bankruptcy. As highlighted already, I am also unable to be satisfied that there has been full disclosure of the defendants’ asset position in this case. I also reject the suggestion that the defendants were only aware of the DCT’s concerns on receipt of the Reply submissions of 28 November 2017. The Zafiriou Affidavit was filed in July 2017 and the correspondence in early November 2017 clearly put the defendants on notice of the DCT’s concerns. The defendants also did not seek an adjournment to provide any better explanation despite being invited to do so.
The defendants have therefore not satisfied me that they will suffer extreme hardship absent a stay. More particularly, I am not satisfied that they will be denied access to the AAT. Given the unsatisfactory state of the evidence, I am also unable to be satisfied that the only funds available to the defendants (for securing legal representation) would be via access to the Brunswick West Property.
In such circumstances, the defendants have not discharged their onus of persuading me that a stay ought to be granted.
Application for variation of freezing order
Submissions
The defendants submitted that it was in the interests of justice to be able to defend themselves and that the money would only be spent on this proceeding and the AAT Proceeding. They cited the decision of Kaye J in Deputy Commissioner of Taxation v Karas & Ors (Karas)[18] and submitted that it was significant that, if the defendants had cash at the bank, then this application would be necessary. This was because the freezing order already provided for an exception regarding payment of ‘reasonable legal expenses’ (at paragraph 8(b)).
[18][2012] VSC 68.
The defendants also submitted that there would be sufficient equity in the Brunswick West Property to finance their defence costs, and that the freezing order ought not give the DCT the status of a secured creditor.
The DCT accepted that, in principle, a taxpayer whose assets had been frozen ought to have access to their funds to pay reasonable legal costs. However, that this was subject to limitations (which applied here) in that:
(a) there had not been full and frank disclosure of the defendants’ asset position such as to justify access to frozen assets;
(b) if the effect of making the variation orders would be to effectively quarantine funds away from the execution process, then this would be in conflict with the principles derived from ss 14ZZM and 14ZZR. It thereby ought only be permitted in special or exceptional circumstances that would satisfy the court that a stay ought be ordered.
In relation to the second point, the DCT submitted that the exception for legal fees does not entitle the defendants to effectively use up their assets in contesting liability. In so saying, he cited a decision of Deputy Federal Commissioner of Taxation v Roma Industries Pty Ltd (Re Roma),[19] wherein Bowen CJ acknowledged that the statutory provisions may in some cases lead to hardship, particularly if the amount is paid and the taxpayer later wins an appeal. However, that the relevant provisions are 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.[20]
Principles
[19](1976) 1 ACLR 296, cited in Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd (2008) 237 CLR 473, 492 [45].
[20]Ibid 299.
In the decision of Karas,[21] Kaye J (as his Honour then was) varied a freezing order to allow the defendants to mortgage property as security for a loan to pay legal fees. In so saying, his Honour outlined the relevant principles as follows:
First, the purpose of a freezing order under order 37A.02 is to prevent the frustration or inhibition of the court’s processes by seeking to meet a danger that a judgment or a prospective judgment of the court will not be wholly or partly satisfied.
Secondly, it is recognised that such an order constitutes a significant interference with the rights of the persons against whom the order is made. Thus, at each stage of the supervision of such an order, the court must ensure that the reach of the order is no greater than that which is necessary to protect the processes of the court. In particular, it is necessary that the court, in determining an application such as this, ensure that the freezing order does not constitute an instrument of unfair oppression to the party in respect of whose assets the freezing order has been made.
The third principle is that, ordinarily, freezing orders, as they have done in this case, allow the person, against whom the orders are made, to have reasonable access to its assets, in order to be able to pay any reasonable legal fees, particularly any fees associated with litigation in respect of the debt or transaction which is the basis of the freezing order.
Fourthly, in his reasons for judgment on 23 December, Bell J identified two other important matters. They are, first, that a freezing order is not an order for the appointment of the plaintiff as the de facto administrator of the defendants’ business or assets. Secondly, and allied to that, if there is a basis for thinking that a defendant might have access to other sources of funds within its control, nonetheless that cannot justify seeking, in an application such as this, legal discovery of documents, or making detailed requests for the provision of information, which take the matter well beyond the scope of the type of application with which I am concerned.[22]
Resolution
[21][2012] VSC 68.
[22]Ibid [17]-[20] (citations omitted).
In relation to Karas, I accept that a freezing order should not constitute an instrument of unfair oppression and that, ordinarily, freezing orders allow the person against whom the orders are made to have reasonable access to assets in order to pay reasonable legal fees. I also accept that there is no justification for unnecessarily detailed requests for information, but consider that the DCT’s requests were justifiable and appropriate in the circumstances of this case.
It is also true that in Karas, his Honour acknowledged as ‘forceful’ a similar submission as made here to the effect that if the defendants had cash in the bank, the application would be unnecessary.[23] However, his Honour otherwise gave no detailed consideration to this matter. It is also significant that in Karas, his Honour was satisfied that sufficient material had been put forward to establish the need for the defendants to raise the moneys by way of the relevant loan.[24] This, for reasons given already, is to be distinguished from the present case.
[23]Ibid [38]
[24]See ibid [40].
The application in this case was also made in circumstances where the defendants explicitly stated that they seek to ‘quarantine these funds for the purposes of litigation, and we don’t want the Commissioner to get his teeth into it’.[25] The order sought thereby seeks to inhibit the DCT from recovering the sum of $275,000 in circumstances where he otherwise intends, and is entitled, to execute as soon as possible (subject to the undertakings). This must be compared with the situation where the defendants have ‘cash in the bank’. In such a situation, the freezing orders (even with the legal fees exception), would not inhibit the DCT from accessing the defendants’ cash to satisfy a judgment debt.
[25]Transcript of Proceedings (6 December 2017) 131.
I accept that such a variation order might still be justified. However, I further accept the submission of the DCT that this ought be so only if special or exceptional circumstances are demonstrated which would justify a stay. Otherwise there is a substantial risk that the DCT’s usual recovery entitlements under the legislation may be thwarted.
For reasons given already, I am not satisfied that special or exceptional circumstances exist in the present case.
In any event, given the state of the evidence before me, I am unable to be satisfied that recourse is necessary to the Brunswick West Property for the payment of legal fees as alleged.
It was also not demonstrated that the DCT would become a secured creditor by the maintenance of the freezing order (unvaried).
It follows that the application for variation is refused.
Conclusion
Subject to hearing from the parties on the question of costs, the following orders will be made:
(a) Subject to production of updated certificates under s 255-45 of the TAA, judgment will be entered against the first and second defendants in the amounts shown therein.
(b) The freezing orders made against each of the first defendant and the second defendant on 24 July 2017, as varied by orders made on 2 August 2017, be extended until further order of the Court.
(c) The defendants’ application for variation of the freezing orders is refused.
(d) The defendants’ application for a stay of the judgment against each of the first defendant and the second defendant is refused.
(e) The defendants pay the plaintiff’s costs of the proceeding on a standard basis to be taxed in default of agreement.
The Court will also note the relevant undertakings from the DCT.
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