Deputy Commissioner of Taxation v TDE Nominees Pty Ltd (No 2)
[2011] NSWSC 1528
•09 November 2011
Supreme Court
New South Wales
Medium Neutral Citation: Deputy Commissioner of Taxation v TDE Nominees Pty Ltd (No 2) [2011] NSWSC 1528 Hearing dates: 9 November 2011 Decision date: 09 November 2011 Jurisdiction: Equity Division Before: Gzell J Decision: Motion dismissed with costs
Catchwords: TAXES AND DUTIES - Income Tax - notice of motion for a stay of tax recovery proceedings until an appeal under Part IVC of the Taxation Administration Act 1953 (Cth) is determined by the Federal Court Legislation Cited: Taxation Administration Act 1953 (Cth)
Income Tax Assessment Act 1936 (Cth)
Income Tax Assessment Act 1997 (Cth)
Corporations Act 2001 (Cth)Cases Cited: Trade World Enterprise Pty Ltd v Deputy Commissioner of Taxation [2006] VSCA 191; (2006) 64 ATR 316
Clyne v Deputy Commissioner of Taxation (NSW) (No 3) (1983) 48 ALR 545
Deputy Commissioner of Taxation (NSW) v Mackey (1982) 13 ATR 547
Deputy Commissioner of Taxation v Ho (1996) 131 FLR 188
Deputy Commissioner of Taxation v Feldman [2006] NSWSC 378; (2006) 62 ATR 253
Deputy Commissioner of Taxation v Alvaro (1990) 21 ATR 726
Deputy Commissioner of Taxation v Gergis (1991) 22 ATR 1
Cywinski v Deputy Commissioner of Taxation [1990] VR 193
Deputy Commissioner of Taxation v Enal Pty Ltd (1987) 19 ATR 23
Deputy Federal Commissioner of Taxation v Akers 89 ATC 4725
Deputy Commissioner of Taxation (Vic) v Trower (1986) 17 ATR 473
Snow v Deputy Commissioner of Taxation (1987) 14 FCR 119
Deputy Commissioner of Taxation v Stjepovic 91 ATC 4715
Deputy Federal Commissioner of Taxation v Roma Industries Pty Ltd (1976) 6 ATR 54Category: Costs Parties: Deputy Commissioner of Taxation (Plaintiff/Respondent)
TDE Nominees Pty Ltd (Defendant/Applicant)Representation: D Jay (Plaintiff/Respondent)
J Hyde Page (Defendant/Applicant)
ATO Legal Services (Plaintiff/Respondent)
Argyle Lawyers (Defendant/Applicant)
File Number(s): 2010/418724
EX TEMPORE Judgment
The applicant, TDE Nominees Pty Ltd, has filed a notice of motion that seeks an order that there be a stay of these recovery proceedings pending the outcome of any appeal or review under Part IVC of the Taxation Administration Act 1953 (Cth).
That is, prior to there being a judgment against it, TDE seeks a stay of these proceedings for the duration of the period in which it may seek to exercise rights of appeal in the Federal Court of Australia.
In about September 2010, a Deputy Commissioner of Taxation issued notices of amended assessment to TDE for income tax years ended 30 June 2005, 30 June 2006, 30 June 2007, 30 June 1995 (x 2), 30 June 1996 (x 2), 30 June 1997 (x 2), 30 June 1998 (x 2), 30 June 1999 (x 2) and 30 June 2002 (x 2).
On 8 November 2010, TDE lodged an objection to all notices of assessment issued to it by the Deputy Commissioner.
On 17 December 2010, the Deputy Commissioner commenced these proceedings by filing a statement of claim.
On 4 March 2011, an amended statement of claim was filed with leave and a defence was filed on 5 April 2011.
On 1 August 2011, the Deputy Commissioner issued a notice of objection decision disallowing the objection.
On 12 August 2011, TDE filed its notice of motion and on 24 August 2011 it filed a notice of appeal against the notice of objection decision in the Federal Court.
TDE is the trustee of the TDE Superannuation Fund. The Deputy Commissioner's claim seeks recovery of income tax, penalties for tax shortfalls and shortfall interest charges.
TDE's defence traverses the pleading of the Deputy Commissioner and also pleads positive defences.
With respect to income tax, TDE alleges that the amount of tax assessed is excessive and that amounts treated as income of TDE have been returned by Kristim Finance Pty Ltd as income and, accordingly, these amounts are not due and payable by TDE.
With respect to penalties, TDE alleges that the penalty amounts are incorrect by reason of the defect in the assessed income tax. For the same reason it is alleged that the interest charges are excessive.
Part IVC of the Taxation Administration Act makes provision for challenges to taxation assessments. A taxpayer may seek a review of the notice of objection decision in the Administrative Appeals Tribunal or may appeal against it to the Federal Court.
As to the Deputy Commissioner's right of recovery s 14ZZR of the Taxation Administration Act provides as follows:
"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."
Section 14ZZM applies to AAT review applications and is in like terms.
The Income Tax Assessment Act 1936 (Cth), s 177(1) provides:
"The production of a notice of assessment, or of a document under the hand of the Commissioner, a Second Commissioner, or a Deputy Commissioner, purporting to be a copy of a notice of assessment, shall be conclusive evidence of the due making of the assessment and, except in proceedings under Part IVC of the Taxation Administration Act 1953 on a review or appeal relating to the assessment, that the amount and all the particulars of the assessment are correct."
So far as administrative penalties are concerned, the Taxation Administration Act , Sch 1, s 298-30 is in the following terms:
"(1) The Commissioner must make an assessment of the amount of an administrative penalty under Division 284
(2) An entity that is dissatisfied with such an assessment made about the entity may object against it in the manner set out in Part IVC of the Taxation Administration Act 1953.
(3) The production of a notice of such assessment or a copy of it certified by or on behalf of the Commissioner, is conclusive evidence of the making of the assessment and of the particulars in it.
(4) Subsection (3) does not apply to proceedings under Part IVC of the Taxation Administration Act 1953 on a review or appeal relating to the assessment."
The legislative scheme established in relation to tax recovery, as manifested in provisions like s 14ZZR of the Taxation Administration Act reflects a clear policy in favour of the Revenue and against the taxpayer. The Commissioner is placed in a position of special advantage and is, in general, free to pursue recovery of proceedings, despite outstanding appeals and reviews against disallowance of an objection: Trade World Enterprise Pty Ltd v Deputy Commissioner of Taxation [2006] VSCA 191; (2006) 64 ATR 316 at [19]; 322, referring to Clyne v Deputy Commissioner of Taxation (NSW) (No 3) (1983) 48 ALR 545 at 547.
The policy of the Income Tax Assessment Act 1936 as reflected in its provisions gives priority to recovery for the Revenue against the determination of the taxpayer's appeal against the assessment.
The effect of s 177 of the Income Tax Assessment Act 1936 and s 14ZZR of the Taxation Administration Act is to give primacy to the general right of the Deputy Commissioner to have tax paid irrespective of the pendency of an appeal and its merits: Deputy Commissioner of Taxation (NSW) v Mackey (1982) 13 ATR 547 at 550; Deputy Commissioner of Taxation v Ho (1996) 131 FLR 188 at 191; Deputy Commissioner of Taxation v Feldman [2006] NSWSC 378; (2006) 62 ATR 253 at [15]; 256.
The mere fact that an appeal or review is pending is not sufficient to grant a stay: Trade World at [20]-[21]; 322.
Liability to pay the assessed tax is not suspended pending the outcome of the review: Deputy Commissioner of Taxation v Alvaro (1990) 21 ATR 726.
Great weight must be given to the effect of provisions such as s 14ZZM and s 14ZZR of the Taxation Administration Act : Trade World at [20]; 322; Mackey at 287; Feldman at [15]; 256; Ho at 190.
The Court has jurisdiction to stay recovery proceedings pending a review of or an appeal against an assessment, but the power is discretionary and should be exercised with great caution and only, in my view, in special or exceptional circumstances: Feldman at [15]; 256; Ho at 191; Deputy Commissioner of Taxation v Gergis (1991) 22 ATR 1 at 3; Trade World at [21]; 322.
The onus is on the applicant to demonstrate sufficient circumstances to warrant the grant of a stay: Ho at 192. The power to grant a stay is exercised sparingly and the onus is on the taxpayer to justify it.
The effect of s 14ZZM and s 14ZZR of the Taxation Administration Act is said to preclude the Court from considering the prospects of success of any review or appeal by a taxpayer to either the Administrative Appeals Tribunal or the Federal Court: Feldman at [15]; 256, although there are statements to the contrary.
Hardship to the taxpayer is a relevant matter: Trade World at [21]; 322. If the taxpayer can establish "extreme personal hardship" a stay may be granted: Cywinski v Deputy Commissioner of Taxation [1990] VR 193 at 197; Ho at 193; Deputy Commissioner of Taxation v Enal Pty Ltd (1987) 19 ATR 23 at 24.
The mere obligation to pay the assessment, however, is not hardship in itself: Cywinski at 197; Ho at 273. The possibility that the taxpayer may be bankrupted is not, of itself, an extreme personal hardship: Ho at 274; Deputy Federal Commissioner of Taxation v Akers 89 ATC 4725 at 4727.
The extreme personal hardship must be in relation to the taxpayer called on to pay: Mackey at 551.
In exercising the discretion to grant a stay, whether the Commissioner has abused his or her position, is a relevant matter: Cywinski at 197. Delay by the Commissioner is also a relevant matter: Deputy Commissioner of Taxation (Vic) v Trower (1986) 17 ATR 473 at 478.
If a taxpayer has been party to a contrivance to avoid his or her liability to tax, the Court should not stay proceedings or execution otherwise than in the most exceptional circumstances: Trade World at [21]; 322; Gergis at 3; Mackey at 287.
The principles are conveniently summarised by French J in Snow v Deputy Commissioner of Taxation (1987) 14 FCR 119 at 139:
"It may generally be concluded from the preceding review, that the power of State courts to stay recovery proceedings instituted in them under the ITAA is well established and that courts exercising it have regard to the following propositions:
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."
TDE proffers the following analysis of the merits of its case. While I favour the proposition that success in an appeal or review is not relevant to the exercise of discretion with respect to a stay, I am prepared, in this case, to proceed upon the basis that it is. What is proffered by TDE is as follows:
1. The TDE superannuation fund was established in 1977, and from 1993 until 25 June 1998, its trustee was Tabvil Pty Ltd.
2. TDE has been the trustee of the superannuation fund since 25 June 1998, and the tax debts that form the subject matter of the current recovery proceedings have been assessed to TDE in that capacity.
3. The members of the TDE superannuation fund are all members of the Higgins family - Christopher Higgins and Helen Higgins, as well as Catriona Heming and Annelise Higgins.
4. In September 2010 the Deputy Commissioner in these proceedings issued assessments to the TDE superannuation fund for the income years ended 30 June 1995 to 30 June 2007 which purported to impose substantial liability on the superannuation fund, including penalties. The Deputy Commissioner now seeks recovery of this amount.
5. TDE objected to the assessments and has now commenced proceedings in respect of the entire liability under Part IVC of the Taxation Administration Act .
6. The basis for the primary liability asserted by the Deputy Commissioner for the years 1995 to 2007 is two-fold, although the majority of the amount sought in the recovery proceedings consists of penalties and interest. The plaintiff asserts that:
(a) In the year ended 30 June 1995, TDE superannuation fund wrongly claimed a deduction of $1,526,058, and in subsequent years applied the resulting tax loss to its taxable income.
(b) In the years ended 30 June 1998, 1999 and 2000, TDE superannuation fund wrongly applied a capital loss against gains that would otherwise have been included in its taxable income for those years, resulting in tax benefits of $305,494, $238,709 and $428,043 respectively.
7. The prima facie liability occasioned by these alleged errors has been increased by substantial penalties on the hypothesis that TDE has shown intentional disregard of the tax law and a tax shortfall was due and payable in corresponding years of income so that interest has accrued.
8. TDE has consistently maintained that its tax losses were all validly incurred, and accordingly there was no intentional disregard of the tax laws.
9. By way of outline, TDE intends to put the following case in Part IVC proceedings:
(a) The $1,526,058 deduction claimed in the 1995 income year was claimed for payment of an equivalent amount from the TDE superannuation fund to Kristim Finance. This deduction was properly claimed because, as a complying superannuation fund the TDE superannuation fund was entitled to a deduction under former s 279C of the Income Tax Assessment Act 1936. The entire amount was then returned as income by the recipient Kristim Finance, pursuant to s 82AAQ of the Income Tax Assessment Act 1936.
(b) The substantial tax loss occasioned by the 1995 deduction was then carried forward in the ordinary course and applied to income for subsequent years pursuant to s 79E of the Income Tax Assessment Act 1936 and then Division 36 of the Income Tax Assessment Act 1997 (Cth).
(c) The capital losses applied in 1998, 1999 and 2000 were the result of a transaction entered into by TDE superannuation fund whereby the trustee acquired shares in a company called C & T Higgins (Properties) Pty Ltd in 1990 and then sold these shares in the 1992/1993 year at a capital loss of $972,246.00. This amount was then carried forward in the ordinary course and applied to capital gains of the fund in subsequent years.
(d) TDE was not the trustee of the TDE superannuation fund in at least three of the years where the Deputy Commissioner now asserts liability (specifically: 1995, 1996 and 1997). Accordingly, even if the amount of liability is correct for these years, it has been imposed on the wrong taxpayer.
(e) In light of the foregoing there was no intentional disregard by the taxpayer and no factual foundation for the penalties and interest that have been imposed.
The Deputy Commissioner says that he concedes for the purpose of this application that TDE is not liable as trustee of the trust and that for the years ended 1995, 1996 and 1997 Tabvil was the trustee for those years and is the proper defendant. The Deputy Commissioner does not press its claim in these proceedings in respect of the tax years 1995, 1996 and 1997. A draft further amended statement of claim has been provided to the defendant's legal representatives, which takes into account that amended position.
TDE sought to assert further material, in the most part irrelevant to the motion, as follows:
1 In past decades the Higgins family conducted a diverse range of business activities through a number of separate corporate and trustee entities. During the relevant period these entities included:
(a) 246 Arabella Investments Pty Ltd (formerly Wanaka Developments Pty Ltd);
(b) Higgins Family Trust;
(c) CL Higgins Family Trust;
(d) Kristim Finance;
(e) Surrdes Pty Ltd;
(f) Onyer Products Pty Ltd;
(g) Ctech Equipment Pty Ltd;
(h) Australian Stone Pty Ltd;
(i) Australian Stone Technology Pty Ltd;
(j) TDE Nominees.
2. In recent years TDE alleges that the Deputy Commissioner has issued revised assessments and engaged in litigation with five of the above entities, as well as Mr Higgins personally. Proceedings in respect of 246 Arabella Investments, Mr Higgins in his personal capacity, the Higgins Family Trust and the CL Higgins Family Trust are currently on foot. This has placed great financial and personal pressure on all the members of the Higgins family.
3. With the exception of TDE, all the corporate entities listed have either been deregistered or placed in voluntary liquidation because the Higgins group was winding down its operations at the time the Deputy Commissioner commenced his audits. Both Mr Higgins and Mrs Higgins are at the age of retirement.
4. It is said that a consequence of the Higgins entities being in liquidation is that it has been difficult for the Higgins family to effectively respond to the amended assessments raised by the Deputy Commissioner. Not only are the necessary financial records of those entities often in the custody and possession of liquidators, frequently the liquidators have not been disposed to assist with challenges to the asserted tax liabilities. For example, 246 Arabella was in liquidation at the time the Deputy Commissioner issued tax assessments to this entity for $10,395,717.34 and it was necessary for Mr Higgins (as a past director of that company) to apply to the Federal Court under s 511 of the Corporations Act 2001 (Cth) simply in order to be allowed to commence Part IVC proceedings.
5. It is said that many of the assessments issued to various Higgins entities overlap. For example, in 2010 assessments were issued to the Higgins Family Trust on the rationale that large amounts had been deposited in the bank account of the Higgins Family Trust during the period 1998 to 2008 and these amounts have not been returned as income. In response to the Higgins Family Trust's objection, the amount assessed was reduced from $2,249,762.00 to $1,365,299.00 because the trustee was able to show these amounts had already been taxed in the hands of the CL Higgins Family Trust. The Higgins Family Trust has now commenced its challenge to the balance of the liability.
6. It is said that the assessments issued to Mr Higgins in his personal capacity purported to tax the sum of $16,379.00 to Mr Higgins, notwithstanding that this amount was a tax refund that had been paid directly from the Deputy Commissioner to Mr Higgins.
7. The amounts currently being sought by the Deputy Commissioner against Higgins entities and the relevant time periods are:
(a) 246 Arabella Pty Ltd: $10,395,717.00 (1993-2003)
(b) Higgins Family Trust: $1,365,299.00 (1998-2008)
(c) CL Higgins Family Trust: $7,264,460.55 (1998-2008)
(d) Mr Higgins: $396,825.00 (2000-2007)
All these asserted liabilities are being challenged by the Higgins family.
Finally it is said in support of its application for a stay that the TDE superannuation fund relies on the affidavit of Mark Gelden, the Higgins family accountant, to show the paucity of financial resources that are available to the family to fund its ongoing legal costs.
This material goes to the question of extreme personal hardship. While it is submitted that the Deputy Commissioner has acted with exceptional aggression, no attack on the basis of improper exercise of his power is put.
So far as the question of extreme personal hardship is concerned, the mere obligation to pay is not of itself hardship or extreme personal hardship: Deputy Commissioner of Taxation v Stjepovic 91 ATC 4715 at 4728; Akers at 4727.
TDE has not demonstrated that it would suffer extreme personal hardship if the recovery proceedings are not stayed. Moreover, being a corporation, it is unlikely that TDE is capable of sustaining personal hardship. Most of the applicants for stays of proceedings on the basis of extreme personal hardship are individuals. What is submitted is that substance should prevail over form and that if TDE is sustaining hardship, it should be regarded as personal hardship.
There is no convincing or persuasive evidence of extreme personal hardship to the taxpayer being called on to pay in this case. The miscellany of incidents to which I have referred relate to corporate entities in the most part and it is a corporate entity that is the subject of tax in this case.
On the evidence, TDE holds assets of real property, cash and shares. According to the accountant for TDE the combined market value of the percentage owned by TDE of two properties is approximately $3.2M.
In addition, shares in listed foreign securities were valued at $1,106,249.00 as at 30 June 2010. The accounts show that the investment is in Tullow Oil Plc. Being listed securities it is reasonable to infer that those assets could be liquidated to fund any debt.
There was cash as at 30 June 2010 of $1,402,069.30. Most of the bank accounts are now empty.
The Court is left in the dark as to what TDE's present financial position is. There is insufficient evidence for the Court to determine whether insolvency is a prospect for TDE. Assuming the shares in Tullow Oil are still held by TDE, they might be sufficient to pay the judgment without recourse to the real property assets. On the current evidence it cannot be said that TDE does not have the means to pay.
Even if property had to be sold it does not fall into the category of property that is irreplaceable like a long-established family home: Stjepovic at 4728.
Mr Higgins speaks of the personal hardship he and his family would face if judgment was entered against TDE, but their personal position is not relevant as they are not the taxpayer being called on to pay in these proceedings.
Mr Higgins says he requires the money from the superannuation fund to attend to payments of a beach house on the Gold Coast and to fund the appeal process for members of the fund, himself included, and associated entities.
The circumstances are reminiscent of the warning given by Bowen CJ in Eq when dealing with resistance by a taxpayer to the making of a winding up order in Deputy Federal Commissioner of Taxation v Roma Industries Pty Ltd (1976) 6 ATR 54 at 57:
"It must be appreciated that from the point of view of the revenue it is 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."
The fact that TDE assets are being consumed at an apparently alarming rate to fund litigation for, in part, entities associated with the members of the fund is a factor that warrants a stay not being granted.
It would be entirely at odds with the legislative purpose of s 14ZZM and s 14ZZR of the Taxation Administration Act if a corporate taxpayer had an excess of assets over liabilities and had the means to pay but nevertheless obtained a stay. TDE has not established that it does not fall into this category.
TDE also alleges that the Deputy Commissioner has taxed the same income twice. Mr Higgins asserts that in the present case the assessments issued to TDE incorporate amounts that have already been assessed to Kristim Finance. TDE submits that the conclusion to be drawn from the 1995 Kristim Finance tax return is that the sum sought by the Deputy Commissioner in these proceedings has already been included in a separate entity's taxable income.
The Deputy Commissioner submits, however, that double recovery of taxation can only occur in circumstances where the Deputy Commissioner seeks to recover taxation liabilities that have been assessed and issued to two separate taxpayers on the same amount of income.
The Deputy Commissioner submits that Kristim Finance was not assessed with a taxation liability for any relevant period. Kristim Finance has never been assessed with a taxation liability by the Deputy Commissioner.
TDE has not produced any evidence of a notice of assessment by the Deputy Commissioner issued to Kristim Finance.
It is not possible for double recovery of taxation to occur when the second party to the alleged double taxation has never been assessed by the Deputy Commissioner.
It is said that the effect of including an amount in the assessable income of Kristim Finance was to subject it to a taxation liability with respect to that amount. But income tax was not, in fact, paid.
It is also alleged that no credit was given for $150,000.00 paid under garnishee orders. That is a matter that can be explored in Part IVC proceedings. It is not a basis for granting a stay.
So far as the merits are concerned, TDE alleges that there was an erroneous primary liability and asserts that:
1. Up until 1989 Kristim Finance was known as Kristim Design Pty Ltd and in that capacity it was the chief entity responsible for employing staff of Design Establishment, a furniture business conducted by Mr Higgins and his brother Timothy Higgins in the 1980s.
2. TDE superannuation fund held the superannuation entitlements for the employees of Kristim Finance.
3. In 1995, as a result of changes in superannuation legislation, the trustee of the TDE superannuation fund determined that it was appropriate to return funds to the employer entity where funds retained in TDE superannuation fund were in excess of the applicable reasonable benefit limits.
4. Accordingly, the trustee made a deductible payment of $1.5M to Kristim Finance, which returned this amount as income.
Whether those matters are proved and the extent to which the Deputy Commissioner can rebut them will be ventilated in full and with the benefit of cross-examination, assessment of credit and review of relevant documentation in the Part IVC proceedings that TDE has commenced in the Federal Court. A stay application is not the forum in which to prove or rebut such matters: Mackey and Ho .
This is particularly so in a case such as this where the Deputy Commissioner alleges that much of the evidence relied on in support of the stay application is unsupported by any contemporaneous documentation.
TDE argues as follows with respect to its disallowed carry forward capital loss.
1. In the early 1990s C & T Higgins (Properties) Pty Ltd was a company held by the trustee of the TDE superannuation fund, which was Tabvil. It was subsequently transferred into the beneficial ownership of Tabvil at a substantial capital loss, giving rise to a carry forward capital loss.
2. In the 1991 annual return of C & T Higgins (Properties), the shares of this entity are shown as being held by Tabvil but with beneficial ownership vested elsewhere.
3. In the 1993 annual return of C & T Higgins (Properties), the shares are shown as being held by Tabvil with beneficial ownership vested in Tabvil itself.
4. It is submitted that this is strong prima facie evidence for the taxpayer's contention that a transaction occurred resulting in a capital loss.
Evidence with respect to the payment has been given by Mr Paterson, but it seems to me that these are matters to be ventilated on an appeal to the Federal Court and not to be determined in the current application for a stay of the proceedings.
In my view the applicant has not made out a case for a stay. The motion is dismissed with costs.
Decision last updated: 12 December 2011
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