Deputy Commissioner of Taxation v Doutch
[2014] WASC 126
•10 APRIL 2014
DEPUTY COMMISSIONER OF TAXATION -v- DOUTCH [2014] WASC 126
| SUPREME COURT OF WESTERN AUSTRALIA | Citation No: | [2014] WASC 126 | |
| Case No: | CIV:2883/2012 | 31 MARCH 2014 | |
| Coram: | MASTER SANDERSON | 10/04/14 | |
| 12 | Judgment Part: | 1 of 1 | |
| Result: | Adjournment refused | ||
| A | |||
| PDF Version |
| Parties: | DEPUTY COMMISSIONER OF TAXATION JOHN WALLACE DOUTCH |
Catchwords: | Summary judgment application by plaintiff in relation to unpaid tax Application for adjournment of application pending determination of objections Principles to be applied |
Legislation: | Nil |
Case References: | Cywinski v Deputy Federal Commissioner of Taxation (Vic) [1990] VR 193 Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd (2008) 237 CLR 473 Deputy Commissioner of Taxation v Denlay (2010) 80 ATR 109 Snow v Deputy Federal Commissioner of Taxation (WA) (1987) 14 FCR 119 Southgate Investment Funds Ltd v Deputy Commissioner of Taxation [2013] FCAFC 10 Trade World Enterprise Pty Ltd v Deputy Commissioner of Taxation (Cth) (2006) 64 ATR 316 |
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
- IN CHAMBERS
- Plaintiff
AND
JOHN WALLACE DOUTCH
Defendant
Catchwords:
Summary judgment application by plaintiff in relation to unpaid tax - Application for adjournment of application pending determination of objections - Principles to be applied
Legislation:
Nil
Result:
Adjournment refused
Category: A
Representation:
Counsel:
Plaintiff : Ms C Kovacevic & Ms M A Spurge
Defendant : Mr M P Bruce
Solicitors:
Plaintiff : Australian Government Solicitor
Defendant : Bennett + Co
Case(s) referred to in judgment(s):
Cywinski v Deputy Federal Commissioner of Taxation (Vic) [1990] VR 193
Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd (2008) 237 CLR 473
Deputy Commissioner of Taxation v Denlay (2010) 80 ATR 109
Snow v Deputy Federal Commissioner of Taxation (WA) (1987) 14 FCR 119
Southgate Investment Funds Ltd v Deputy Commissioner of Taxation [2013] FCAFC 10
Trade World Enterprise Pty Ltd v Deputy Commissioner of Taxation (Cth) (2006) 64 ATR 316
1 MASTER SANDERSON: This is the plaintiff's application for summary judgment. The plaintiff required an extension of time to bring the application. At the commencement of the hearing counsel for the defendant indicated there was no objection to the extension being granted. As the delay was adequately explained by the plaintiff I made an order extending time within which to bring the application. Counsel for the defendant then applied for an adjournment. This was opposed by the plaintiff. Whether or not an adjournment should be granted is really the only issue between the parties. Counsel for the defendant conceded if the adjournment was not granted judgment should be entered for the plaintiff for the full amount of the claim.
2 The summary judgment application relates to tax payable on amended and other notices of assessment. On 31 October 2013 the defendant lodged an objection to an amended assessment issued in September 2011 in respect of the 2007 tax return (the 2007 objection). On 19 December 2013 an objection in respect of his 2009 tax return was lodged (the 2009 objection).
3 The Australian Tax Office (ATO) decisions on both objections are pending. The ATO had anticipated making a decision on the 2007 objection by 22 January 2014. A decision was not made by that date and the defendant was advised accordingly. The ATO have not advised the defendant of the date by which it anticipates making a decision on the 2009 objection. Counsel for the defendant conceded - and quite properly conceded - that the ATO will deal with both objections expeditiously as required by s 14ZY of the Taxation Administration Act 1953 (Cth) (the Act). But the fact remains objections have been lodged and these objections have not been determined.
4 Essentially the defendant was seeking an adjournment until after both objections had been determined. Counsel submitted if the objections were successful the claim for unpaid tax would largely fall away and the summary judgment application would not proceed. On the other hand if the objections failed the defendant could seek to have the ATO's decision reviewed in the Administrative Appeals Tribunal or he could appeal to the Federal Court. Either way counsel conceded the defendant would not be in a position to resist judgment.
5 The difficulty for the defendant is provided by s 14ZZM and s 14ZZR of the Act. These sections read as follows:
14ZZM Pending review not to affect implementation of taxation decisions
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.
...
14ZZR Pending appeal not to affect implementation of taxation decisions
The fact that an appeal 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 appeal were pending.
6 On top of these two provisions there are the evidentiary provisions contained in the Act. Pursuant to s 255-1 and s 255-5 in sch 1 to the Act income tax administrative penalty, shortfall interest charge, director penalties, running balance account (RBA) and deficit debt constitute tax related liabilities due to the Commonwealth and payable to the plaintiff and may be sued for in a court of competent jurisdiction. Section 255-50(1) of sch 1 to the Act provides that in proceedings to recover an amount of a tax related liability, a statement or a averment about a matter in the plaintiff's claim is prima facie evidence of the matter. The production of an RBA statement is prima facie evidence that the RBA was duly kept and that the amounts and the particulars in the statement are correct: see s 8AAZI of the Act.
7 A certificate under s 255-45 in sch 1 to the Act is prima facie evidence of the matters stated on the certificate and in a proceeding to recover an amount of tax related liability. Section 8AAH of the Act provides that when judgment is obtained the unpaid amount is not taken (for the purposes of the general interest charge provisions) to have ceased to be due and payable only because of the judgment. Accordingly, general interest charge will continue to accrue on the unpaid judgment.
8 Pursuant to s 255-45(1) and (2) of sch 1 to the Act in a proceeding to recover an amount of a tax related liability a certificate signed by the Deputy Commissioner of Taxation stating the matters listed below is prima facie evidence of these matters, namely:
1. a person named in the certificate has a tax related liability;
2. an assessment relating to the tax related liability has been made under a taxation law;
3. notice of an assessment or any other notice required to be served on a person in respect of an amount of a tax related liability was served on the person under a taxation law; and
4. a sum specified in the certificate is, at the date specified in the certificate, a debt due and payable by a person to the Commonwealth.
9 These so-called 'conclusive evidence' provisions taken together with s 14ZZM and s 14ZZR make it abundantly clear a tax payer is obliged to make payment of a tax debt based upon an assessment notice even where an objection to an assessment has not yet been determined by the ATO. In his written submissions counsel for the defendant maintained in this case the defendant was not obliged to make payment based on the notices of assessment. But during the course of his oral submissions he abandoned that position and conceded if no adjournment was granted judgment ought be entered.
10 In seeking an adjournment counsel relied on a line of authorities which are to the effect s 14ZZM and s 14ZZR of the Act do not create an absolute rule which requires the merits of the 'review' and 'appeal' proceedings to be disregarded in a case where a court is asked to exercise a discretionary power which could have some impact upon the Commissioner's recovery of the taxation debt. These cases commence with Snow v Deputy Federal Commissioner of Taxation (WA) (1987) 14 FCR 119 and can be followed through such cases as Cywinski v Deputy Federal Commissioner of Taxation (Vic) [1990] VR 193 and Trade World Enterprise Pty Ltd v Deputy Commissioner of Taxation (Cth) (2006) 64 ATR 316 to the decision of the Full Federal Court in Southgate Investment Funds Ltd v Deputy Commissioner of Taxation [2013] FCAFC 10. In that last case the Full Court examined the relevant authorities in some detail and then set out the relevant criteria in determining whether or not a stay ought be granted. They put the position as follows:
It is appropriate if we say something further regarding the criteria which may apply in determining whether or not execution of a judgment debt should be stayed. We agree with the observations of Hutley JA in Mackey at 289 that the discretion to grant a stay of the execution of a judgment debt based upon a taxation assessment involves 'an open-ended discretion' and that 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'. Bearing in mind those salutary words and without wishing to be prescriptive or exhaustive, we consider that it is possible, however, to extract from the caselaw the following general principles which guide the exercise of that discretion:
(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 [77].
11 It is worth noting in passing in settling upon these principles the court took into account the decision of the High Court in Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd (2008) 237 CLR 473. That case was concerned with a statutory demand procedure. There was no doubt there was a dispute between the Deputy Commissioner of Taxation and the tax payer in relation to the assessments issued by the ATO. But the High Court concluded this did not amount to a 'genuine dispute' as that phrase is used in s 459G of the Corporations Act 2001 (Cth). That was because the conclusive evidence provisions rendered the tax payer liable to make payment on an assessment even if the underlying dispute was unresolved. Nor could the existence of this underlying dispute be 'some other reason' for setting aside the demand under s 459J. Their Honours concluded the case was not relevant to the question of whether a stay of execution on a judgment already obtained ought be granted. They approved of the Queensland Court of Appeal decision in Deputy Commissioner of Taxation v Denlay(2010) 80 ATR 109.
12 Because of the need for uniformity across jurisdictions I am bound to follow the decisions in both Southgate Investment Funds and Denlay. Of course if I was of the view that both decisions were 'plainly wrong' then I could reach a different conclusion. But both are decisions of intermediate appellate courts and these decisions must be respected. Were it not for those two decisions I would not have followed the decision in Snow and the other single judge decisions. It will be of interest to see what approach the High Court adopts should this question ever fall for determination.
13 Turning then to the matters to be considered in granting an adjournment the first and perhaps most important is an assessment of the defendant's case. The facts giving rise to the tax obligation can be summarised in this way. On 15 March 2007 the defendant was granted three million options in a mining exploration company known as Golden West Resources Ltd (GWR). One million five hundred thousand of these options were described as 'Series A options' and were exercisable at $2 on or before 31 December 2010. The remaining 1,500,000 options were 'Series B options' and were exercisable at $3 on or before 31 December 2011. At the date the options were issued - that is 15 March 2007, the Series A options were 'in the money'. That means the price at which GWR shares were selling was greater than $2. The Series B options were 'out of the money' - GWR shares were selling for less than $3. None of the options were exercised and they have all expired. The ATO assessed the defendant as being liable for tax as at 15 March 2007 on the basis of the difference between the exercised price and prevailing share price. In other words the defendant was assessed for tax on a potential profit which was never actually realised. This may seem a surprising result but we are after all dealing with taxation law.
14 The defendant did not include this notional profit in his 2007 tax return. However the ATO determined the income should have been included and provided detailed reasons for coming to that conclusion. A copy of those reasons is found at attachment SP5 to the affidavit of Sean Pearce sworn 3 February 2014 and filed in opposition to the summary judgment application. The reasons are very detailed. Clearly the ATO gave this matter careful consideration and it was satisfied its decision is consistent with the statutory provisions.
15 The defendant's objection focuses on the defendant's relationship between him and GWR during the life of the options. When he was first granted the options he was a consultant to GWR. During the life of the options he became a director of the company. It is the defendant's position this changed status eliminates his liability to pay tax on the unrealised profit. A copy of the objection is found as attachment SP2 to Mr Pearce's affidavit. It has been prepared by a firm of specialist tax advisors, MKT Taxation Advisors (MKT). It is carefully reasoned and it is clearly not without merit. If any support for that last proposition was required it can be drawn from the fact the ATO has taken some time to consider the merits of the objection. It has certainly not rejected the objection out of hand.
16 Having considered all the material it seems to me the defendant has an arguable case. I am not in a position to assess whether it is likely to succeed or fail. But this is certainly not an instance where the defendant has simply lodged an objection to avoid making payment of the debt. A firm of specialist advisors has been engaged, the objection is clearly drafted and has a real prospect of success.
17 The 2009 objection relates to capital gains tax. A copy of that objection is found as attachment SP7 to Mr Pearce's affidavit. In his 2009 tax return the defendant declared certain amounts which were liable for capital gains tax (CGT). In the return the defendant did not claim CGT relief which is available under what is described in the legislation as 'Small Business Concessions'. It is the defendant's position this was an oversight and the tax assessed ought be reduced accordingly. According to Mr Pearce if the objection was successful the defendant's assessment would be reduced by approximately $1.3 million. There would also be a reduction in penalties and general interest charges. It would still leave the defendant owing the ATO an amount in excess of $1 million. That was conceded by counsel for the defendant during the course of his submissions and it is apparent from a reading of Mr Pearce's affidavit.
18 Once again this objection was prepared by MKT. It is very detailed. It runs to over 300 pages. Much of the objection is taken up with annexures dealing with certain mining tenements the sale of which resulted in the CGT liability. Nonetheless on my reading of the objection all of these documents are relevant and most need to be considered to determine the objection. As there has been no ruling by the ATO only one side of the argument in relation to the 2009 objection is available. The case is clearly arguable. However I am not in a position to determine the objection on its merits.
19 It is worthy of note that Mr Pearce, a certified practicing accountant, is a director of MKT. He holds a graduate diploma in advanced taxation law from the University of New South Wales and has been employed as a tax specialist since 1985. Mr Pearce says in his affidavit:
In my opinion there is a real merit in both the 2007 objection and the 2009 objection and, in my view, these objections ought to be upheld (par 15).
20 Turning then to the relevant criteria it is clear in this case the merits of the pending pt IVC proceedings are a relevant consideration. I have not attempted to determine the merits of the two objections largely because in the case of the 2007 objection the position is finely balanced and in relation to the 2009 objection only one side of the argument is available. But what is clear is that in this case the existence of the objections are a relevant consideration.
21 Second, all available material has been provided by the defendant. Accordingly a stay ought not be refused simply based on the fact insufficient material has been made available.
22 Third, this is a situation where the defendant does have an arguable case and there are complex question to be determined by the ATO in considering the objections. However, these facts in and of themselves are not sufficient to grant the adjournment.
23 Fourth, I could not say the objections are bound to succeed. But it is not necessary for me to make a finding to that effect before granting a stay.
24 Fifthly, this is a case where I am in a position to make a tentative assessment of the merits of the objections. The defendant has clearly more than an arguable case. There is a real prospect the objections will be upheld. Expert opinion (albeit the expert is engaged by the defendant) supports that view.
25 Sixthly, this is not a case where the Deputy Commissioner of Taxation has abused his position or is endeavouring to collect tax in defiance of a decision of the High Court or other superior court. As I have indicated so far as the 2007 objection is concerned the ATO has given very careful consideration to the defendant's position. Insofar as the 2009 objection is concerned the assessment which issued is based upon a return submitted by the defendant. Clearly there is no conduct by the ATO which is either unfair or unreasonable and which would justify an adjournment.
26 There are two further matters which should be taken into account. First, the defendant did not lodge his returns on time. The return for the year 2007 was lodged on 28 May 2009. The 2009 return was lodged in August 2010. There is nothing to suggest in either case an extension of time for the lodging of these returns had been obtained. In fact the imposition of penalties is in part down to late lodgment of the returns. The fact the defendant has not complied with his obligations to lodge returns in a timely fashion must count against his application for an adjournment.
27 Against that, and a second factor to be taken into account, is payments which have been made by the defendant to the plaintiff. In par 3 of his affidavit sworn 3 February 2014 the defendant says he has paid the plaintiff an amount of $901,939.23. This is not disputed by the plaintiff and has been taken into account in calculating the amount outstanding.
28 The defendant also alleges if judgment is entered against him he will be unable to pay the debt and will have no choice but to declare bankruptcy. In support of this claim the defendant filed an affidavit sworn 26 March 2014 which annexes what he describes as a 'balance sheet'. It shows he has net assets of just over $68,000. However there is no material provided by the defendant which discloses the nature of his present employment, what interests he might have in any trusts, what his income is and what borrowing capacity he may have to meet the plaintiff's claim. In my view there is not sufficient evidence available to make out a claim of hardship. Furthermore the defendant acknowledges he is indebted to the plaintiff in an amount greater than $1 million. Whatever the merits of the defendant's application might otherwise be it is difficult to see how he could resist judgment being entered for part of the claim.
29 Weighing all these factors in the balance I am not satisfied it would be appropriate to grant an adjournment. In favour of granting an adjournment is the strength of the defendant's objections to both assessments. In conducting the required balancing exercise I see the strength of these objections as weighing significantly in the defendant's favour.
30 Against the adjournment is the clear legislative intent that a tax payer should make payment of a tax debt when an assessment issues. Further, in this case the defendant did not comply with his obligations to file his returns on time. That means there already has been a significant delay in the assessments being issued. While in part that is covered by the general interest charge applied by the ATO and the penalties it remains the case the defendant is seeking an indulgence in circumstances where he has not complied with his legal obligations. Once that is married up with a clear legislative intent there should be payment of tax as assessed it is a factor strongly in favour of refusing the adjournment.
31 The evidence does not disclose that hardship will result if judgment is entered. There is simply insufficient evidence to allow a decision to be made on this point. Accordingly it does not favour one side or the other.
32 While the matter is finely balanced I am satisfied the plaintiff's argument carries the day and in the balancing exercise is the more compelling. Accordingly I would refuse an adjournment.
33 It is worth noting the application in this case is for summary judgment. Many of the cases to which I have referred - and the Southgate Investment Funds decision is one - deal with applications by a tax payer for a stay of proceedings by the Deputy Commissioner of Taxation. Under O 14 of the Rules of the Supreme Court 1971 (WA) it is open to the court to decline to enter judgment because there is a serious question to be tried or 'for some other reason'. But whichever way the defendant's application is looked at it amounts to an application for a stay of proceedings. In the interests of conformity it is appropriate in my view to apply the same principles which have been developed in stay applications to an application such as the present. To do otherwise risks confusion and the possibility of different decisions depending upon how the matter gets before the court.
34 Subsequent to the preparation of these reasons in draft the defendant sought leave to file and rely on a further affidavit of Mr Pearce sworn 7 April 2014. The plaintiff raised no objection to the reception of that affidavit. Accordingly I have considered the affidavit and its attachments in reaching my conclusion. What the affidavit establishes is that, in relation to the 2009 objection, on 3 April 2014 the ATO requested further information. That information was provided by MKT to the ATO on 4 April 2014. While I accept the fact that the correspondence from the ATO shows they are dealing with the 2009 objection and giving it careful consideration it does not alter the conclusion I have reached in this matter. I accept the objection is of substance and it may well succeed. But for the reasons stated above I am satisfied an adjournment ought not be granted.
35 Having determined an adjournment ought not be granted and there being no defence to the claim there will be judgment for the plaintiff. I will hear the parties as to the precise amount of the judgment, the form of orders and as to costs.
0
5
1