Deputy Commissioner of Taxation v Carter - [2018] WASC 90

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION: DEPUTY COMMISSIONER OF TAXATION -v- CARTER [2018] WASC 90

CORAM: MASTER SANDERSON

HEARD: 27 FEBRUARY 2018

DELIVERED : 27 FEBRUARY 2018

PUBLISHED : 22 MARCH 2018

FILE NO/S: CIV 2595 of 2016

BETWEEN: DEPUTY COMMISSIONER OF TAXATION
Plaintiff
AND
NATALIE ROCHELL CARTER
Defendant

Catchwords:

Practice and procedure - Application for stay of execution of debt founded on tax assessment - Turns on own facts

Legislation:

Civil Judgment Enforcements Act 2004 (WA)
Judiciary Act 1903 (Cth)
Taxation Administration Act 1953 (Cth)

Result:

Application dismissed

Category: B

Representation:

Counsel:

Plaintiff: Ms C H Thompson
Defendant: Mr W C J Zappia

Solicitors:

Plaintiff: Australian Government Solicitor
Defendant: Murfett Legal

Case(s) referred to in judgment(s):

Commissioner of Taxation v Ramsden [2005] FCAFC 39
Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd (2008) 237 CLR 473
Southgate Investment Funds Ltd v Deputy Commissioner of Taxation (2013) 211 FCR 274

MASTER SANDERSON: This was the defendant's application seeking to stay a judgment entered against her on 3 May 2017. I dismissed the defendant's application and indicated reasons would be published. These are those reasons. The judgment was for an amount of $1,916,030.57 and was obtained summarily. The facts leading up to the entry of judgment and other relevant matters were not in dispute between the parties. What follows is a summary largely taken from the defendant's outline of submissions filed in support of the application.
The underlying basis for the judgment was an amended tax assessment made by the plaintiff for the defendant for the year ended 30 June 2014. The amended assessment was made because the plaintiff formed the view after undertaking an audit of an entity known as the Whitby Trust (the Trust) that the defendant, together with her four siblings, were presently entitled to the net income of the Trust for the year ended 30 June 2014. The plaintiff concluded that the entitlement arose because the trustee had failed to make a valid appointment of the net income of the Trust for that income year and therefore as takers in default of such appointment they were presently entitled to the net income of the Trust in equal shares. The plaintiff also issued alternative assessments with respect to the same income against the trustee of the Trust and another beneficiary.
When the amended assessment was issued to the defendant she had already disclaimed her entitlement as a taker in default. That disclaimer was effected by the defendant's execution of a Deed of Disclaimer dated 5 June 2014 [2014 Deed]. This Deed was executed to address amended assessments that the plaintiff had issued to the defendant for the financial years ending 30 June 2011 to 30 June 2013 pursuant to which the plaintiff assessed the defendant on the basis that she was presently entitled to an equal share of the net income of the Trust.
The plaintiff accepted the effectiveness of the 2014 Deed insofar as it concerned those financial years and consequently upheld objections that the defendant raised with respect to the amended assessments issued to her for those financial years. After receiving the amended assessment for the year ended 30 June 2014 and for the avoidance of doubt (in the defendant's submission) the defendant executed a further Deed of Disclaimer on or about 3 November 2015 [2015 Deed] which was in similar terms to the 2014 Deed.
The defendant lodged an objection to the amended assessment on the ground, amongst others, that the defendant disclaimed her vested interest as a taker in default for all the accounting periods both past and future. The objection was disallowed. After obtaining the plaintiff's reasons for disallowing the objection, the defendant executed a further Deed of Disclaimer on 30 September 2016 [2016 Deed] which was in slightly different terms and sought to clarify the effect of the 2014 and 2015 Deeds. On 11 November 2016 the defendant applied for a review of the plaintiff's decision to disallow her objection in the Administrative Appeals Tribunal (AAT). It is to be noted that judgment was obtained by the plaintiff against the defendant some five months after the plaintiff's application for review by the AAT was lodged.
Upon obtaining summary judgment, the plaintiff issued the defendant with a bankruptcy notice, in effect demanding payment of the judgment debt. The defendant has applied to set aside the bankruptcy notice on the grounds that its issue constituted an abuse of process. The plaintiff has refused to agree to the defendant's request that the plaintiff provide an undertaking not to apply for a sequestration order pending the conclusion of the review proceedings in the AAT. The defendant's review application was heard by the AAT on 23 ‑ 25 October 2017. The decision is reserved.
On or about 3 October 2017 the defendant filed an application for a suspension order pursuant to s 15 of the Civil Judgments Enforcement Act 2004 (WA). An issue arose between the parties as to whether the Act was 'picked up' as Commonwealth law by s 79 of the Judiciary Act 1903 (Cth). To avoid unnecessary debate the parties resolved the issue by agreeing that the application be dismissed and for the defendant to file a fresh application for a stay of judgment relying upon the court's inherent jurisdiction. Both parties agree that a State court has inherent jurisdiction to stay recovery proceedings by the Commissioner of Taxation or his delegates.
There was no issue between the parties as to the defendant's financial position. She is not employed and cares for her children full‑time. Her only significant asset is a rental property worth approximately $650,000 which is mortgaged in an amount of approximately $300,000. The defendant was receiving $450 per week in rent with respect to the rental property however the plaintiff has since about late August 2017 garnisheed the rent. The defendant's primary residence is owned by her husband. Other than utility bills, the mortgage and the judgment debt, the defendant has no other liabilities. The defendant does not have the means to pay the judgment debt in full.
In the light of what was said by the majority of the High Court in Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd (2008) 237 CLR 473, particularly at 491 ‑ 494, it might be thought odd that the court retains a power to stay execution of a judgment for a tax debt based upon an assessment issued pursuant to the Taxation Administration Act 1953 (Cth) (the Act). But a body of case law has now grown up which will ameliorate the effect of the so‑called 'pay first argue later' principle which appears to be embodied in the relevant legislation. In essence, the Commissioner starts off with rights under s 14ZZR of the Act and the taxpayer must establish a special basis to have the court's discretion to grant a stay exercised in his or her favour. It is not possible to work out in advance all possible bases for the exercise of such a discretion. It is open‑ended. Nonetheless, it must be exercised judicially and is dependent upon all relevant circumstances. Perhaps if an overriding principle can be derived from the authorities it is to the effect that in cases of extreme personal hardship to the taxpayer called upon to pay, the court should exercise discretion in favour of the taxpayer.
There was no disagreement between the parties as to the presently relevant principles in determining whether the discretion ought be exercised. These were set out by the Full Court of the Federal Court in Southgate Investment Funds Ltd v Deputy Commissioner of Taxation (2013) 211 FCR 274. The following summary is taken from the defendant's submissions and is consistent with the plaintiff's submissions. The factors to be considered include:
1.the merits of the pending review proceedings can be taken into consideration 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;
2.in cases where a judge is unable to form even a tentative view of the strength of the review proceedings, it is unlikely 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;
3.it is too narrow a view of the discretion to grant a stay of execution merely because the review 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; that is not to say, however, that the outcome of the review proceedings has to be certain in the sense that they are bound to succeed or fail. That puts the bar too high;
4.in cases where the court considers that it is in a position to assess the merits of the review proceedings and that it is appropriate to do so, the weight to be attached to those merits will vary according to the relevant strength of the merits. The taxpayer needs to have more than an arguable case;
5.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 on point; and
6.due acknowledgment should be given to the asperity with which the collection provisions may operate but in appropriate circumstances a court might consider that a stay is warranted in cases of extreme hardship. However, mere obligation to pay income tax of itself does not impose extreme hardship and the possibility that a taxpayer may be bankrupt is generally not in itself an extreme hardship. The position may be different if it is demonstrated execution of a judgment debt would deprive the taxpayer of the financial resources needed to prosecute the review proceedings.
In this application the defendant concentrated on two aspects of the enforcement proceedings. The first was the prospect of bankruptcy. It was said the fact the plaintiff had refused to give an undertaking not to pursue bankruptcy proceedings it appeared highly likely that the defendant would be bankrupted. As at the date of this application the defendant had responded to the plaintiff's bankruptcy notice by alleging it was an abuse of process. The evidence did not indicate when any application to set aside the bankruptcy notice might actually be heard and counsel was unable to offer even an indicative date. It was clear, however, that no hearing was imminent. The evidence did not disclose the basis upon which it was alleged the bankruptcy notice was an abuse of process and it was not possible for me to form any view as to the merits of the application to set the notice aside.
The defendant said, and I accept, that if she was bankrupted consequent upon a failure to set aside the bankruptcy notice that would be an event of default under the mortgage which might lead to the sale of her investment property. Apart from there being a prospect of that occurring there was no evidence it would actually take place. After all the rent from the property has been garnisheed by the plaintiff and presumably the mortgage is still being paid by the defendant's husband or a third party. If that were not so the mortgagee would most likely have taken steps to enforce the terms of the mortgage. So there is at least a prospect that if the payments are maintained it will not be the mortgagee who forces a sale of that property. Of course the actions of a trustee are another matter entirely.
In addition to that the defendant draws attention to the fact that if she is rendered bankrupt the stigma attached to bankruptcy will attach to her. While that may be a factor it is hardly a relevant consideration given the constraints on taking into account the fact of bankruptcy to be found in the authorities.
In my view, there was such uncertainty around these bankruptcy proceedings that they would not in and of themselves justify granting a stay. In reaching that conclusion I took into account a number of factors. First, the uncertainty as to when any hearing to set aside the bankruptcy notice might take place. The AAT heard the defendant's review application in late October last year. It may well be the case that a decision from the AAT will be handed down prior to the hearing of any application to set aside the notice. Of course if the defendant was successful before the Tribunal the notice would fall away. If she were not successful then the circumstances would be materially different to those applying at present. That degree of uncertainty is a factor against the grant of the stay.
Second, there is no certainty the bankruptcy notice will not be set aside. Beyond saying that the application was made on the basis the notice was an abuse of process there was no evidence as to why it was an abuse of process. It cannot be that the plaintiff seeking to enforce the judgment is in and of itself an abuse of process. There must be something more. Without evidence as to what that might be I am not in a position to assess the outcome of any proceedings and that degree of uncertainty operates against granting the stay.
Third, there is no evidence of extreme hardship. For instance, there is no suggestion that if the defendant was rendered bankrupt she could not pursue the review proceedings. A third party is funding those proceedings. Nor is there any evidence of any other hardship which would justify a finding of 'extreme hardship'.
That then leaves the question of the merits or otherwise of the review proceedings. It was the defendant's position that she had a very strong case and given the evidence I was in a position to conclude she was likely to succeed. In his written and oral submissions counsel for the defendant examined the defendant's arguments before the AAT in some detail. As a preliminary point counsel noted that before the AAT the defendant raised multiple grounds of appeal. However, for the purposes of this application he focused on the argument that the defendant had effectively disclaimed her entitlement as a taker in default under the Trust. In doing so he was applying what was said in the Southgate decision. In my view, counsel adopted an entirely proper approach.
In disallowing the defendant's objection the plaintiff rejected the defendant's submission that either the 2014 or 2015 Deeds were effective to disclaim her entitlement to part of the net income of the Trust for the year ended 30 June 2014. In support of its proposition the plaintiff relied upon the decision of the Full Court of the Federal Court in Commissioner of Taxation v Ramsden [2005] FCAFC 39 [47]. Relevantly the court observed:
Reduced to its essentials, Re Gulbenkian’s Settlements (No 2) was a case in which under a 1929 settlement, trustees were entitled to pay or apply the income of the trust property for all or any one or more members of a specified class of persons, including N. Until 1957 the trustees paid the greater part of the income to N, but thereafter began to accumulate the income because of doubts as to the validity of the trust. In 1958 N entered into an agreement (the 'Lisbon agreement') under which he renounced his right to the income of the trust. Thereafter, the validity of the trust was upheld. Plowman J held that as and from the date of the Lisbon agreement, N ceased to be an object of the discretionary trust and that consequently as and from that date it was no longer competent for the trustees to exercise their discretion in his favour. His Lordship held that just as a man cannot be compelled to accept a gift, he must be equally free to refuse to accept the exercise of a power which the donor has conferred on the trustees to make a gift in his favour. His Lordship applied principles of disclaimer to the gift under consideration, so as to enable N, in effect, to disclaim the proposed gift prospectively in relation to the period after 1957. The fact that N had received income distributions in the period up to 1957 by reason of the exercise of the power was not regarded as a disqualifying factor.
In Ramsden the court was considering the nature of the gift that was granted to the beneficiaries who were takers in default of the income of a discretionary trust. The terms of the trust deed under consideration were not unlike the terms of the Whitby Trust. The court concluded of a gift conferred on a taxpayer as a taker in default that the subject matter of the gift was income arising in each accounting period and not subject of a distribution. To be effective the disclaimer must extend to the whole of the subject matter and hence a disclaimer confined to one only of the accounting periods was ineffective. The plaintiff applied the reasoning in Ramsden and concluded the subject matter of the gift in that clause was income arising in each accounting period where no determination had been made. The plaintiff concluded that an effective disclaimer of the gift would need to extend to all accounting periods. The defendant alleged cl 2 of the first deed did precisely that. The plaintiff did not read cl 2 as having that effect. The defendant says the plaintiff was in error not in identifying the relevant principles but in its construction of the terms of the 2014 Deed.
Clause 2 of the Deed was in the following terms:
Without limiting the generality of the disclaimer in paragraph1, I disclaim any entitlement to any income which might otherwise have accrued under cl 3.7 of the Trust Deed.[1]
[1] Annexure 'NRC-6' pg 69 Affidavit of Natalie Rochell Carter sworn 3 October 2017.
Counsel for the defendant went into some detail as to why that disclaimer was effective. It is, I think, a fair summary of counsel's submission that what was at issue between the parties in the review proceedings was the proper interpretation of that clause and demonstrably the defendant's argument was correct.
Against that submission counsel for the plaintiff raised the point that without the benefit of all the material before the AAT I was not in a position to make any assessment of the merits of the defendant's argument. With respect that seems to me to be at odds with what the authorities suggest is the proper test. Making some assessment of the strength or otherwise of the defendant's position is inherent in determining whether or not the application for a stay has merit. Of course no final determination is to be made and any finding in a stay application could not possibly influence the ultimate decision before the AAT. But there are many occasions when the merits of an action must be assessed without in any way concluding success is inevitable. This is one of those cases.
In summary, I was not convinced that enforcement of the judgment would result in extreme hardship to the defendant nor was I satisfied that the defendant's case before the AAT was strongly arguable. That being so I was not satisfied grounds existed for granting the stay and I dismissed the defendant's application. Upon publication of these reasons, the parties can make submissions with respect to costs.