Deputy Commissioner of Taxation v Bonnell
[2008] FMCA 483
•16 April 2008
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| DEPUTY COMMISSIONER OF TAXATION v BONNELL | [2008] FMCA 483 |
| BANKRUPTCY – Application to transfer proceedings to the Federal Court of Australia – application dismissed. |
| Bankruptcy Act 1966 (Cth), s.52(5) Federal Magistrates Act 1999 (Cth), ss.39, 40 Federal Magistrates Court Rules 2001 (Cth), r.8.02 |
| Briggs v Federal Commissioner of Taxation (WA); Ex parte Briggs (1986) 86 ATC 4779 Bonnell v Deputy Commissioner of Taxation [2008] FCA 60 |
| Applicant: | DEPUTY COMMISSIONER OF TAXATION |
| Respondent: | DAVID NEIL BONNELL |
| File number: | SYG 2597 of 2006 |
| Judgment of: | Lloyd-Jones FM |
| Hearing date: | 2 April 2008 |
| Delivered at: | Sydney |
| Delivered on: | 16 April 2008 |
REPRESENTATION
| Counsel for the Applicant: | Mr P Rodionoff |
| Solicitors for the Applicant: | Australian Government Solicitor |
| Counsel for the Respondent: | Mr M Cashion SC and Mr C Robinson |
| Solicitors for the Respondent: | BHS Legal Pty Ltd |
ORDERS
An application for an order under r.8.02(1) of the Federal Magistrates Court Rules 2001 (Cth) to transfer bankruptcy proceedings SYG 2597 of 2006 to the Federal Court is dismissed.
The bankruptcy proceedings SYG 2597 of 2006 is adjourned to
17 June 2008at 9.30 am.
Liberty for either party to apply on five days notice to address any issue arising from the creditor’s petition.
Costs are reserved.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG 2597 of 2006
| DEPUTY COMMISSIONER OF TAXATION |
Applicant
And
| DAVID NEIL BONNELL |
Respondent
REASONS FOR JUDGMENT
The proceedings
This is an interim application filed on 16 March 2007 seeking the following interim orders:
i)An order under r.8.02(1) of the Federal Magistrates Court Rules, transferring bankruptcy proceedings number SYG 2597/2006 to the Federal Court;
ii)An order under r.8.02(2) of the Federal Magistrates Court Rules, extending the time for this application;
iii)An order for costs; and
iv)Such further or other orders as the Court sees fit.
Rule 8.02(2) of the Federal Magistrates Court Rules 2001 (Cth) (“the Rules”) provides that unless the Court otherwise orders, a request for a transfer must be made on or before the first Court date in the proceedings. Such an order is sought here. The Creditor’s Petition was filed on 14 September 2006 and returnable on 1 November 2006. The respondent relies upon the affidavit of Bruce Elliot Rowntree sworn on 19 March 2007.
Background
In respect of the year of income ending 30 June 1999, Mr Bonnell claimed an allowable deduction, being an amount of $5 million. The original assessment of the Deputy Commissioner of Taxation (DCT) proceeded on the basis that the deduction was properly allowed. However, on 29 July 2004 the DCT issued a Notice of Amended Assessment disallowing the deduction of $5 million with the consequences that primary tax of approximately $2.4 million became payable. The amount due specified in the Notice of Amended Assessment consisted of three parts:
a)Taxable income
b)General interest charged
c)Additional tax
The additional tax was imposed automatically by the operation of s.226K of the Income Tax Assessment Act 1936 (Cth). Section 227(3) of the Income Tax Assessment empowers the DCT to remit, in whole or in part, the additional tax. Antecedent to issuing the Notice of Amended Assessment, the DCT decided not to remit any part of the additional tax imposed under s.226K.
On 2 March 2006, the Deputy Commissioner of Taxation obtained a judgment against Mr Bonnell in the Supreme Court of New South Wales in the sum of $5,411,557.65. That judgment was based upon the Notice of Amended Assessment. On 23 June 2006, the DCT served
on Mr Bonnell a Bankruptcy Notice based on the judgment.
On 14 September 2006, the DCT filed a Creditor’s Petition based on Mr Bonnell’s failure to comply with the Bankruptcy Notice.
On 16 March 2007, Mr Bonnell filed a Notice Stating Grounds of Opposition to Petition:
1. The Respondent [Bonnell] disputes the judgment debt upon which the applicant [Deputy Commissioner of Taxation]relies in bringing this application as:
a) The judgment upon which the Applicant relies is founded upon a purported notice of assessment of income tax (“the assessment”), issued on or about 29 July 2004 which, the Respondent asserts is invalid.
b) The Respondent commenced proceedings NSD 1963 of 2006 which are presently before Graham J in the Federal Court, to set aside the Assessment as invalid, and asserts as a consequence that the judgment upon which the Applicant relies is bad and should be set aside.
Justice Graham of the Federal Court handed down the decision in Bonnell v Deputy Commissioner of Taxation [2008] FCA 60 on
8 February 2008.
The bankruptcy proceedings have been adjourned from time to time pending the outcome of the application in the Federal Court. On
11 September 2007, Hedge R made orders for the period of the petition to be extended to 24 months until 14 September 2008 in accordance with s.52(5) of the Bankruptcy Act 1966 (Cth).
Federal Court proceedings
The interlocutory decision of Graham J relates to the application seeking to set aside the Notice of Amended Assessment. The relevant Notice of Amended Assessment is not in evidence before this Court. However, a convenient summary is found in the judgment at [11]-[12]:
[11] In short compass the facts of the present case are that in respect of the year of income ended 30 June 1999, the taxpayer claimed as an allowable deduction an amount of $5 million. The Commissioner’s original assessment of the taxpayer’s taxable income and the tax payable thereon proceeded on the basis that the deduction of $5 million was properly allowed.
[12] By a Notice of Amended Assessment issued on 29 July 2004 the Commissioner disallowed the claimed deduction of $5 million with the consequence that tax of approximately $2.4 million became payable in respect of the applicant’s taxable income…
Justice Graham found that Mr Bonnell’s claim in those proceedings as presently formulated was bound to fail and accordingly ordered that he be given an opportunity to amend his pleadings, restricted to a challenge to the DCT’s exercise or failure to exercise his discretion under s.227(3) of the Income Tax Assessment Act in relation to the penalty imposed under s.226K. This is set out at [126]:
[126] I would not be disposed to grant leave to the applicant to file and serve an Amended Application in the form of the draft Amended Application attached to the affidavit of Bruce Elliott Rowntree sworn and affirmed (sic) 5 March 2006. However an opportunity should be afforded to the applicant to file and serve an Amended Application. The claims for relief in such an application would have to be confined to the applicant’s challenge to the Commissioner’s exercise or failure to exercise his discretion under s 227(3) of the Assessment Act. It could not ‘contest the validity of’ the assessment in accordance with s 170(1) of the Assessment Act of the amount of the applicant’s taxable income and of the tax payable thereon or the validity of the assessment under s 227(1) of the Assessment Act of the additional tax payable by the applicant under s 226K of the Assessment Act.
Accordingly, Graham J upheld the validity of the Assessment but allowed Mr Bonnell the opportunity to challenge the decision (if any) not to remit the s.226K penalty in whole or in part.
Application for transfer to Federal Court
Part 5 of the Federal Magistrates Act 1999 (Cth) covers the transfer of proceedings from the Federal Magistrates Court to the Federal Court. Section 39 entitled “Discretionary transfer of proceedings to the Federal Court or the Family Court” states:
(1)…
(2) The Federal Magistrates Court may transfer a proceeding under this section:
(a) on the application of a party to the proceeding; or
(b) on its own initiative.
(3) In deciding whether to transfer a proceeding to the Federal Court under subsection (1), the Federal Magistrates Court must have regard to:
(a) any Rules of Court made for the purposes of subsection 40(2); and
(b) whether proceedings in respect of an associated matter are pending in the Federal Court; and
(c) whether the resources of the Federal Magistrates Court are sufficient to hear and determine the proceeding; and
(d) the interests of the administration of justice.
(4)…
(5) If an order is made under subsection (1), the Federal Magistrates Court may make such orders as it considers necessary pending the disposal of the proceeding by the Federal Court or the Family Court, as the case requires.
(6) An appeal does not lie from a decision of the Federal Magistrates Court in relation to the transfer of a proceeding under subsection (1).
(7) A reference in subsection (1) to a proceeding pending in the Federal Magistrates Court includes a reference to a proceeding that was instituted in contravention of subsection 19(1).
Section 40 of the Federal Magistrates Act is entitled “Rules of Court about discretionary transfer of proceedings”:
(1) The Rules of Court may make provision in relation to transfers of proceedings to the Federal Court under subsection 39(1).
(2) In particular, the Rules of Court may set out factors that are to be taken into account by the Federal Magistrates Court in deciding whether to transfer a proceeding to the Federal Court under subsection 39(1)…
Part 8 of the Rules, “Transfer of proceedings”, also deals with transfers to the Federal Court:
8.02 Transfer to Federal Court or Family Court
(1) The Court may, at the request of a party or of its own motion, transfer a proceeding to the Federal Court or the Family Court.
(2) Unless the Court otherwise orders, a request for transfer must be made on or before the first court date for the proceeding.
(3) Unless the Court otherwise orders, the request must be included in a response or made by application supported by an affidavit.
(4) In addition to the factors required to be considered by the Court under subsections 39 (3) and (4) of the Act for transfer of proceedings to the Federal Court or the Family Court, the following factors are relevant:
(a) whether the proceeding is likely to involve questions of general importance, such that it would be desirable for there to be a decision of the Federal Court or the Family Court on one or more of the points in issue;
(b) whether, if the proceeding is transferred, it is likely to be heard and determined at less cost and more convenience to the parties than if the proceeding is not transferred;
(c) whether the proceeding will be heard earlier in the Federal Magistrates Court;.
(d) the availability f a particular procedures appropriate for the class of proceeding;
(e) the wishes of the parties;
(f) …
Mr Cashion SC, for the respondent, identifies six reasons in his written and oral submissions why the bankruptcy proceedings should be transferred to the Federal Court. These issues were identified as:
a)The Federal Court bankruptcy proceeding turns on the same issue, namely the validity of a Notice of Amended Assessment.
b)The issues should be determined at one time in one place and by one Court. Otherwise, there is an undesirable and totally avoidable risk that there may be two inconsistent decisions on the same issue between the same parties. This is not interests of the administration of justice.
c)Further, the parties would incur additional costs which may be significant and it would be a waste of judicial resources which is contrary to the public interest: Briggs v Federal Commissioner of Taxation (WA); Ex parte Briggs (1986) 86 ATC 4779.
d)Should a sequestration order be made in this Court without any determination of the validity of the Notice of Amended Assessment, the respondent’s proceeding before Graham J will be defeated without being determined on the merits.
e)Even if it were otherwise appropriate to determine the invalidity issue in this Court, it is almost certain that the issue would need to be considered by the Federal Court on an appeal in any event.
f)This Court would not permit any of those consequences and it is submitted that the appropriate course is to transfer the bankruptcy proceedings to the Federal Court so that the two proceedings be heard together.
Consideration
As I have noted in previous applications for transfer of proceedings from this Court to the Federal Court, the Federal Magistrates Court is a court of original jurisdiction in all matters arising under the Bankruptcy Act. When the Federal Magistrates Court was created, the objectives set out in that Act state that the Court is to “operate as informally as possible in the exercise of judicial power”, use “streamline procedures” and operate without undue formality. In other words, it was established to deal quickly, simply and cheaply with less complex litigation. However, this does not mean that the Court should avoid or be excluded from dealing with novel or difficult issues. The Court Rules, and in particular, Part 8, reflect these objectives.
I acknowledge that the decision of Graham J in Bonnell v Deputy Commissioner of Taxation upholds the validity of the Notice of Amended Assessment but allows Mr Bonnell to challenge the decision not to remit the s.226K penalty in whole or in part. I note the submissions made by Mr Rodionoff for the applicant that the full amount of the judgment debt remains due and payable in accordance with ss.14ZZ and 14ZZR of the Taxation Administration Act 1953 (Cth) which require the debt to be paid even when contested. Those provisions of the Act provide for a refund if it is later found that there has been an overpayment.
In Bonnell v Deputy Commissioner of Taxation at [64] and [65], his Honour indicates that Mr Bonnell failed to proceed with an appeal in relation to a disallowed objection. Consequently, there has been no challenge to the correctness of any of the amounts found in the Assessment to be owing. Mr Rodionoff submits that even if there was a challenge to the correctness of the Notice of Amended Assessment, s.177 of the Income Tax Assessment Act provides for conclusive evidence of the correctness of assessments. Mr Rodionoff contends that in light of Graham J’s finding that the Notice of Amended Assessment was valid even if Mr Bonnell was successful in having the s.226K penalty wholly remitted under the s.227(3) discretion, there would still remain a debt larger than the statutory minimum to found a sequestration order. It is submitted that as the s.226K penalty was for 25% of the tax payable under the Notice of Amended Assessment, the penalty is 20% of the total indebtedness.
Mr Cashion contends that there is a serious issue as to the validity of the Notice of Amended Assessment. He argues that if the Notice of Amended Assessment is held by Graham J to be invalid, the judgment against Mr Bonnell in the Supreme Court may be set aside. Mr Cashion submits that the proceedings in the Federal Court remain on foot and constitute a challenge to the validity of the Notice of Amended Assessment as a whole. It is conceded by Mr Cashion that in the future proceedings before Graham J, the only avenue which remains open is in respect of the decision not to remit the additional tax. However, Mr Bonnell continues to contend that a consequence of the invalidity of that part of the Notice of Amended Assessment is that it renders invalid the whole Assessment. This issue remains to be determined in those proceedings.
I am of the view that the validity of the Notice of Amended Assessment needs to be resolved prior to the resolution of the bankruptcy proceedings. It is clearly not in the interest of the administration of justice for the Federal Magistrates Court to undertake its own assessment of the validity of the Notice of Amended Assessment and the Federal Court proceedings that remain on foot in respect of this issue needs to be resolved by that Court.
Regarding r.8.02(4)(a) of the Rules and the Federal Court proceedings being finalised prior to the hearing of the bankruptcy matter, it is extremely unlikely that the bankruptcy would involve questions of general importance such that it would be desirable for there to be a decision of the Federal Court. Although the bankruptcy proceedings are subject to the resolution of the Federal Court proceedings, they will only require the ventilation of issues directly relating to the Bankruptcy Act. These requirements need to be addressed regardless of which Court the final determination takes place.
In respect of r.8.02(4)(b) of the Rules, the costs of proceedings are likely to be the same whether the matter is heard in the Federal Magistrates Court or the Federal Court. I am satisfied that costs are not a significant factor in determining whether the matter should be transferred.
Rule 8.02(4)(c) of the Rules has little or no bearing on this decision. The issue before the Federal Court needs to be resolved prior to the Creditor’s Petition being further considered in the Federal Magistrates Court. Similarly, with respect to r.8.02(4)(d), as I have indicated above the Federal Magistrates Court is a court of original jurisdiction in all matters arising under the Bankruptcy Act and is the normal Court where Creditors’ Petitions are filed and dealt with. I am satisfied that neither of these rules have any impact on the decision. In respect of r.8.02(4)(e) I have noted the submissions made by both counsel as to the further conduct of this matter and I do not believe that there is any compelling argument to support its transfer.
I am not satisfied that any other issue has significant bearing on the issue of transfer of these proceedings. The task of this Court is to make findings of fact and apply established legal principles to those facts, and to have regard to all the considerations required by s.39 of the Federal Magistrates Act and r.8.02 of the Rules. I am not persuaded at this point of the proceedings that the matter should be transferred to the Federal Court and I make orders to that effect.
Justice Graham set a timetable for the filing of an amended statement of claim and that if that does not occur before that date, certain consequential orders will be made. Should that situation arise, I grant liberty to either party to apply on five days notice to address the issue of the Creditor’s Petition. Bankruptcy proceedings are adjourned for further directions before this Court on 17 June 2008 at 9.30 am.
I certify that the preceding twenty-one (21) paragraphs are a true copy of the reasons for judgment of Lloyd-Jones FM.
Associate:
Date: 16 April 2008
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