Deputy Commissioner of Taxation v Mitchell

[2011] QSC 342

[2011] QSC 342

SUPREME COURT OF QUEENSLAND

CIVIL JURISDICTION

FRYBERG J

No 9257 of 2010

DEPUTY COMMISSIONER OF TAXATION	Plaintiff
and
ALLAN MITCHELL	Defendant

BRISBANE

..DATE 04/11/2011

JUDGMENT

HIS HONOUR:  The plaintiff, the Deputy Commissioner of
Taxation, has applied in this action for summary judgment.  He
has sued the defendant for money due under an amended
assessment to income tax.  The defendant concedes that he
cannot contest the assessment in the summary judgment
application and makes no submissions in that application.
If, therefore, the application is to be heard and is to
proceed to determination, the only issue is whether the
Deputy Commissioner has shown the elements of his action.  It
is unnecessary to recite them.  Plainly, he has.

Mr Mitchell, the defendant, seeks a stay of proceedings
antecedent to the determination of the summary judgment
application and in the alternative, a stay of execution.

In his application, the onus is upon him to demonstrate that
the case is an appropriate one for a stay.  He accepts that
onus.  Mr Mitchell and the Deputy Commissioner both rely upon
the principles set out by French J, as he then was, in
Snow v DCT (1987) 14 FCR 119 at page 139:

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

The facts giving rise to the assessment are relevant only by
way of background in terms of the enforceability of the
assessment, but they are relevant directly to the question of the stay.  They are very complicated and there has been little
attempt on the part of Mr Mitchell to explain them.  It seems
that in about the year 2000, Mr Mitchell, who was associated
with a Professor Stevenson from Newcastle, wished to patent
and commercialise an invention whereby water could be
converted into hydrogen for the use of powering of
automobiles.  This idea, it must be said, has been around for
quite a while.

Mr Mitchell went to a company (“Sovereign”) whose business seems to have been establishing structures, allegedly fiduciary structures, for persons in overseas countries, and in this particular case, in a notorious tax haven, the British Virgin Islands. Such a company was established for Mr Mitchell and Professor Stevenson by Sovereign.

Mr Mitchell claims that the reason for establishing a company
offshore was to avoid provisions of the Corporations Law in
Australia regarding the raising of money.  No attempt was made
to demonstrate precisely what provisions of that law would have affected the raising of money in Australia such as to necessitate the use of an overseas company, but in any event, there is no evidence that, apart from for one company, which is an associated company in the group, that any money was raised in Australia.

Mr Mitchell alleges that there are some 250 shareholders who
contributed money, but it seems that they were induced to
join, if join they did, according to Mr Mitchell, by the fact
that the company, being incorporated in a foreign
jurisdiction, was more attractive to overseas investors.

It is all very obscure because Mr Mitchell did not identify
the investors.  Nor did he provide a certified copy of the
Shareholders' Register from the British Virgin Islands.

He claimed that the shareholders had instructed him, as the
sole director of the company, to not to copy the share
register or permit it to be removed from the British
Virgin Islands, but there is no evidence to support that
claim.  Indeed, the certified copy of the share register up to
earlier this year, which was put into evidence on behalf of
the Deputy Commissioner, discloses no such shareholders in
existence.

The basis upon which the shareholders could give such an
instruction is not demonstrated.  Ordinarily, the Board of
Directors has the running of a company and a decision such
as this would be one for the Board of Directors - at least
that is so under Australian law - and in the absence of any
evidence of the law of the British Virgin Islands, I must take
it that, relevantly, the law there is the same.

The importance of the existence or otherwise of shareholders
and their alleged contributions of capital lies in the fact
that notwithstanding the incorporation of the company in a
British Virgin Islands, the company did not have a bank
account there, or if it did, there has been no evidence of its
existence.  Instead, Mr Mitchell says he tried to open a bank
account in Australia.  He claims he went to the National
Australia Bank and was told that he could not open an account
in the name of a foreign company with that bank.  Apparently,
this was for reasons internal to the bank involving its
ability to scrutinise its client rather than for any legal
reason.

Mr Mitchell says that he registered the Virgin Island
company's name as a business name in Queensland and then
opened a bank account in the business name.  He showed himself
as the proprietor of the business name.  He says that the
eight or $10 million that went into the bank account at one
time or another was the money which came from share
subscriptions by the shareholders and was not income of his.
However, he has not produced any evidence of the nature of
deposits, deposit slips or identification of the sources of
money in the bank and it remains completely opaque.

On the basis of Mr Mitchell's evidence, his counsel submits
that this was not a sham, but a real project.  It follows, so
the submission goes, that the money in the bank account was
the money of the company.  It could not at the same time be
income of Mr Mitchell, according to ordinary concepts.

Two things must be said at the outset about that submission. First, it depends entirely upon Mr Mitchell's credibility.  If
he is not believed, the remaining evidence is quite
insufficient to support that view of things.  I say at once
that I do not believe Mr Mitchell.  I would not accept
anything which he said in evidence without corroboration from
an independent, reliable source.  Mr Mitchell's answers in
evidence were frequently inconsistent, they were frequently
evasive and they were frequently nonresponsive.

When caught in an apparent inconsistency, Mr Mitchell was
willing to put up propositions which were commercially
ridiculous, or allege a state of his own mind which is
incredible.  It must be remembered that Mr Mitchell is a
middle aged to elderly gentleman with training in accountancy
and a long experience, according to his CV, in establishing
international business operations.  Yet, he said in evidence:
"I was under the impression that as a disability pensioner, I
did not have to keep records of offshore companies."

It was true that he was a disability pensioner.  He sought
that pension for his heart condition and told the Commonwealth that his income was such as to entitle him to a pension.  He
received it.  He now receives an aged pension.  What is
incredible is the belief that as a disability pensioner, he
did not have to keep records of offshore companies.  A man of
his knowledge and experience simply could not have such a
belief.

He was forced into saying this because there were no records
kept of the British Virgin Islands company, or if there were,
they certainly have not been put into evidence and Mr Mitchell
claims he did not keep them.  He says that there were bank
statements and other primary documents and he claims that he
gave them to a Thai company to carry out an audit.  They are
not in evidence.  I'll come back to the question of the audit
in due course.

Further on the question of credibility, Mr Mitchell was argumentative in his evidence and I thought he
tailored his evidence to suit what he perceived to be his
case.  Toward the end of his cross-examination, when pressed
with an earlier inconsistent answer, he explained the
inconsistency by saying - and I quote from my note - "What I
say is not what I mean."  That may have been true but in a
sense which Mr Mitchell did not intend.

He sought to explain his inability to give proper answers by
the tender of two medical certificates regarding his 1984
heart condition and an assertion in one of them to the effect
that his memory has been affected.  The medical evidence does
not in any way explain the tenor of his answers in evidence.
In any event, it certainly does not turn them into reliable
answers.  In short, I don't believe Mr Mitchell's evidence.

The second aspect of Mr Mitchell's case is that the money in
the bank account was indeed that of the company.  I have
already said why I am not prepared to make such a finding, but
let it be assumed that it was company money. The Commissioner
certainly seems to have issued his assessment on some sort of
assumption that part at least of the money may have been
company money for he did allow some expenditure as company
expenditure.  Quite why he did that, I do not understand, but
in any event, let it be assumed that the money in the account
was company money. The evidence shows that Mr Mitchell has
steadily, over a period of years, drawn a large part of the
money from the account for private use.  He has used it for
his own expenses or to distribute to members of his family or,
in one case, to a person with the same surname who he claims
is not a member of his family but a lady in the Philippines.

It does not seem to me that that really makes any difference.
The Commissioner is entitled to defend the assessment, not
only on the basis of the money being income according to
ordinary perceptions, but also on any other basis which
legally may be available.  If Mr Mitchell has been extracting
the money from the company funds in a way which might be
regarded as fraudulent, it does not mean that the money so
extracted is not income in his hands.

Alternatively, if the money has been extracted from the
company in a way which is not fraudulent but with the
agreement of the company, the Commissioner may well be able to
defend the assessment as deemed dividends.

In short, Mr Mitchell has not demonstrated that the basis of
the assessment, that is, that the money was income according
to ordinary concepts, has been disproved, nor that the
assessment cannot be upheld on any other basis.

Mr Mitchell sought to reinforce his own evidence with what he
claimed was the audited financial accounts of the company
produced this year for the first time in respect of the period
of operation of the company.  These accounts purported to
have been audited by some firm in Thailand.  That in itself is
an oddity.  Mr Mitchell, in his affidavit, deposed that when
he received the company's bank records, he sought the help of
a certified practising accountant in Australia. In oral evidence, he told Mr Flanagan that he couldn't remember the name of the accountants whom he approached for this purpose, but one was named Russell something and he couldn't remember the name of the other. 

Subsequently in his evidence, he seemed to suggest that the accounts had been prepared by the Thai firm. When the difficulty of the proposition that the firm had both
prepared the accounts and audited them was explored,
Mr Mitchell denied that the Thai firm had prepared the
accounts.  He said they had audited them.  The accounts, he
said, had been prepared by two of his employees.  He couldn't
remember the employees' names.  They were Russell somebody and
another person.

When it was pointed out that he had earlier said that they
were certified practising accountants apparently in private
practice, he changed his evidence yet again to assert that
they were consultants, not employees.

I have no confidence that the so-called accounts are genuine
or have any realistic relationship to the position of the
company.  They were not verified in any way by evidence from
the so-called auditors, and none of them was made available
for cross-examination.

Mr Mitchell further sought, as I have said, to support his
evidence with what he claimed was an extract from the company
register.  At first, he was disposed to claim that it was the
original company register, but all he produced was a set of
printed pages stapled together.  He produced this in the
witness box to demonstrate that he ceased to be a shareholder
of, though not a director of, the account in 2004.  He claimed
that he wanted to obtain the disability pension and ownership
of these very valuable shares would have prevented this.  At
first, he suggested that he relinquished the shares and one of
the earlier entries in the document which he produced suggests
that he did indeed surrender the shares.

Later, he claimed he transferred them but he didn't know to
whom since it was done by the company Sovereign, which was
managing his affairs.  Indeed, at times he seemed to suggest
that Sovereign was controlling his actions and that he acted
in response to what they instructed him to do.  I did not
believe that for a minute.

The alleged share transaction is quite inconsistent with the
certified copy of the share register obtained by the Deputy
Commissioner from the tax authorities in the British Virgin
Islands.  It must have come as something of a surprise to
Mr Mitchell to find out that Australia is now able to obtain
such documents from the British Virgin Islands.
I do not accept the document produced by Mr Mitchell, Exhibit
1, as a genuine document.

On Mr Mitchell's behalf, it was submitted that if judgment was
given against him, that is to say if there were no stay of the
proceedings, he would suffer hardship.  Counsel identified the
hardship as being his exposure to bankruptcy.  I cannot see
that any real hardship would flow from Mr Mitchell's
bankruptcy.  He claims that he has no sources of income, apart
from his pension, and no assets.  If what he says is true, it
follows that the Commissioner will be unable to execute
against any of his assets and any judgment that is given will
be of no consequence to him.  If he is made bankrupt, it will
not affect his pension.

On behalf of Mr Mitchell, it was submitted that he would lose
his job.  The evidence, according to Mr Mitchell, is that he
does not have any paid employment.  He said that he does still
work as a consultant for the company and that he does so with
the hope that some day he may get paid something.  Well,
perhaps he might.  There's no evidence to support any
realistic expectation that he will be paid something as a
consultant, nor that anything would be likely to be paid
within the period of a bankruptcy.  It is therefore not a
detriment to him.

It was submitted that he would not be able to manage the
company.  Perhaps that is so.  I do not know what the law of
the British Virgin Islands is in this regard, but I am
certainly not persuaded on the facts that any activities which
Mr Mitchell presently carries out in relation to the company,
according to his evidence, would be inhibited by his
bankruptcy.  There is, in short, on Mr Mitchell's evidence no
harm done to him by giving judgment on the claim.

As far as execution is concerned, it is also difficult to see
how there can be any harm.  He says he has no assets.  By
definition he can suffer no harm from execution.  On the other
hand, it seems that he is concerned that the Commissioner will
attempt to seize assets held in the names of other entities,
companies or perhaps other persons, both in Australia and
overseas.  If the Deputy Commissioner attempts to do so, no
doubt there will be a contest by the claimed owner of those
assets.  Now is not the time to resolve ownership questions.

Mr Mitchell submits that there is no need for judgment to be
given against him or enforced and that the primary purpose of
the legislative provisions making the assessments conclusive
evidence is to protect the revenue from the risk of the dissipation through legal costs of the available assets in fighting the Commissioner. Reference was made to the dictum of Chief Justice Bowen in Re Roma Industries relating to the protection of the revenue against such risk.  I do not accept that that is the only purpose of the legislation.

I refer not only to the first paragraph of the passage quoted
above from Snow, but also to the general observation regarding
the protection of the interests of the revenue in the High
Court decision of Deputy Commissioner of Taxation v
Broadbeach Properties Pty Ltd (2008) 237 CLR 473.

Mr Mitchell submitted that freezing orders which were already
in place were sufficient to protect the interests of the
revenue.  They are not.  It seems that a number of the items
of property referred to in those orders have been disposed of.
Those orders were consent orders made between the Commissioner
and Mr Mitchell, but Mr Mitchell now says that notwithstanding
he was restrained from disposing of the property, it was able
to be disposed of because it was not his property.  This left
him in some difficulty in relation to some property, two motor
cars, which he claimed he held in trust, but he then asserted
that he saw no difference between holding the property in
trust and holding it as a full owner.

I suggested to counsel that it was a little surprising that a
man with accountancy training should be unaware of the nature
of a trust and the submission was made that accountants would
not necessarily be familiar with trusts.  I am quite satisfied
from Mr Mitchell's background that he has quite adequate
familiarity with trusts sufficient to have understood what he
was doing.  The freezing orders simply have not been
effective.

In the alternative, Mr Mitchell's submissions cast the
Commissioner's conduct as an abuse of office.  It was
expressly conceded that it was not a case of intentional abuse
of office, but what was contended for was conduct which
amounted to such a breach.  It seemed to be part of that
submission that the fact that further litigation would be
necessary in order to enable execution to take place meant
that there was some abuse of process in either allowing
judgment to run or in allowing it to be executed.  That I do
not accept.

It was suggested that there would be hardship if a stay were
not now granted because it would be necessary to seek another
stay in the Federal Court.  That also I do not accept.  If
bankruptcy proceedings are brought against Mr Mitchell, he can
resist on whatever ground he sees fit in those proceedings.

In the further alternative, it was submitted that there was no
contrivance in the sense referred to by French J in
paragraph 4 of the passage quoted above, yet reliance was
placed on Mr Mitchell's evidence that the structures which
were set up were for the purpose of raising capital not
avoiding tax.  The evidence is remarkable in its lack of
detail about the capital raising, as I have said.
There has been no identification of the shareholders.
Notwithstanding the amount of money allegedly subscribed, 8 or
$10 million, no accounts were kept.  The supposed 250-odd
shareholders were so trusting that they allowed Mr Mitchell to
remain the sole director for many years, notwithstanding the
fact that, according to him, he ceased to be a shareholder in
2004.

The fact is that the company was set up as a foreign company
in a tax haven.  Mr Mitchell was aware at the time it was set
up of the taxation benefits which would flow in the future if
the company were profitable.  It seems to me that there is
every indication that this was indeed a contrivance.
Certainly Mr Mitchell, upon whom the onus lies, has not

demonstrated to the contrary.

For these reasons, Mr Mitchell's application for stay of
proceedings and stay of execution should be dismissed.  The
plaintiff's application for judgment should be granted and
judgment should be entered for the plaintiff in the amount
claimed in the amended statement of claim.