Deputy Commissioner of Taxation v Zeqaj
[2019] VSC 194
•27 March 2019
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMON LAW DIVISION
S CI 2015 04511
| DEPUTY COMMISSIONER OF TAXATION | Plaintiff |
| v | |
| VISHO ZEQAJ | Defendant |
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JUDGE: | Mukhtar AsJ |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 21 March 2019 |
DATE OF JUDGMENT: | 27 March 2019 |
CASE MAY BE CITED AS: | Deputy Commissioner of Taxation v Zeqaj |
MEDIUM NEUTRAL CITATION: | [2019] VSC 194 |
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INCOME TAX ― Assessment for tax and administrative penalties ― Assessable income included net capital gain from taxpayer’s disposal of land ― Recovery proceedings for payment of income tax and shortfall penalty on notices of assessment ― Statutory conferral of evidentiary conclusiveness of the notices of assessment subject to statutory process of review and appeal ― Confirmation of assessments on review ― No grounds to allege conscious maladministration in making of assessments and anterior audit ― Conclusiveness of assessment in tax recovery proceedings in any event ― Commissioner of Taxation v Futuris Corporation Ltd (2008) 237 CLR 146 applied
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Ms F Shand | The Australian Government Solicitor |
| The Defendant in person |
HIS HONOUR:
This judgment concerns the Court’s determination of the second, and final, stage of the defendant’s application to set aside a monetary judgment entered against him by the plaintiff (‘the Deputy Commissioner’) upon his default in filing a notice of appearance to the writ. The default judgment was entered on 13 July 2016, and in a practice that I think ought be encouraged in all litigation, it was entered not before a warning letter from the Australian Tax Office (‘the ATO’). The judgment is for: $540,163.44 for outstanding tax; $45,788.79 for interest; and $1,453.20 for costs. The tax payable included a component for capital gains tax on disposal of rental properties. Under the Income Tax Assessment Act 1997, a net capital gain in a tax year is statutory income. It is brought to account as assessable income with ordinary income. Tax is then payable under the resultant taxable income.
The first stage of the defendant’s application to set aside the default judgment was confined to the question whether the judgment had been entered regularly. The defendant disputed that he had been served personally with the writ, or more precisely, that he had refused to accept service. If he had not been served then he would be entitled, as of right, to have the judgment set aside. The Court made special procedural orders on 11 September 2018 and on 16 October 2018 enabling the defendant to properly adduce affidavit evidence concerning his version of the events that occurred at his workplace where, according to the pre‑existing affidavit evidence of the Deputy Commissioner’s process server, he had been served personally with the writ after unsuccessful attempts had been made to serve him at a place of residence. The outcome was quite a contest. There were additional affidavits from the Deputy Commissioner to support the effectuation of personal service, and a substantial hearing at which the defendant was cross‑examined on his affidavit, but the process server and another witness was not.
On 15 November 2018, the Court made a finding that personal service of the writ had been effected personally on the defendant in accordance with the Court’s procedural rules. Therefore, the default judgment was entered regularly. The elements of the dispute over service are exposed in the Court’s statement of reasons attached to the Court’s order of 15 November 2018.
The defendant’s summons to set aside the default judgment was filed on 23 August 2018. That was about two years after the default judgment was entered and about eight months after the Police served him with a bankruptcy notice that included the Court’s form of the default judgment. Even though I have found that personal service of the writ was effected in March 2016, and even though the defendant has not given an explanation for the lengthy delay in making this application (beyond insisting he was not served with the writ), that does not deprive him of the opportunity to contend that he has a defence on the merits which, if strong enough, can overcome the demerit of his delay in applying to set aside the default judgment. In that regard, I take leave to repeat a previously stated approach in these applications (omitting citations):[1]
Assuming the judgment was regularly entered (as this one was), the appellate authorities have endorsed the principle that if merits are shown it is undesirable to let a judgment pass on which there has been no proper adjudication. The language of the test varies. If a ‘defence on the merits’ or a ‘prima facie defence’ or ‘some defence’ or ‘adequate defence’ is shown, the courts say the strengths or weakness of the case does not matter, for it is not the function of the judge on the application to decide whether the defence would succeed. There will usually be matters of facts to be investigated, and it will be a miscarriage of discretion to make decisions about the credibility of factual assertions made by the defendant.
A contiguous principle in forming the exercise of the discretionary judgment is whether the defendant has given an adequate explanation for the failure to file an appearance. The cogency of the explanation can reflect on the merits of the defence. But the absence of a sufficient reason for the procedural default does not necessarily mean that the application to set aside the judgment must fail. What dominates, in the end, is whether the defendant is able to show a prima facie defence on the merits. If so, the law’s attitude is not to inflict the serious prejudice of preventing the defendant from defending the claim especially if there is no actual prejudice to the plaintiff that cannot be compensated by an indemnity costs order with security.
…
I would add this. I do not think it is enough to say that a defence is arguable. Anything is arguable as a perfunctory exercise. The primary consideration is whether there is a defence on the merits to which the Court should pay heed, or put another way, whether a defence has been raised which carries some degree of conviction. That gives meaning to the test of a prima facie defence.
[1]See O’Toole v Kent [2015] VSC 470, [11]-[15].
The default judgment was based on an action for recovery of a ‘tax related liability’ under the Commonwealth tax legislation following an audit of the defendant’s tax affairs for the year ended 30 June 2006, 2008, 2009, 2010 and 2011. The Deputy Commissioner issued notices of amended assessments for those income years on about 15 November 2013. Payment on those amended assessments was due on 9 December 2013.
Those assessments included shortfall penalty because, as one notice of assessment says ‘…you or your agent intentionally disregarded a taxation law and you have a shortfall amount because of that disregard’. Another says ‘you or your agent made a false and misleading statement’. The shortfall penalty is an assessed amount. It is an increase in tax liability as at the date of assessment. The interest component of the judgment is referrable to a General Interest Charge. That is not an assessed amount but a separate statutory charge which accrues where an amount of tax as assessed is not paid by the taxpayer by the original due date on the notice of assessment. As the taxpayer is informed on the notice of assessment, that interest charge accrues on the outstanding balance until the entire amount is paid.
Under the Taxation Administration Act, a notice of assessment is conclusive evidence that the assessment was properly made, and, except in proceedings under Part IVC of the Taxation Administration Act for a review or appeal relating to the assessment, the notice is conclusive evidence that the assessment was properly made and the amounts and the particulars of the assessment are correct.[2] Further, s 175 of the Income Tax Assessment Act 1936 provides that ‘The validity of any assessment shall not be affected by reason that any of the provisions of this Act have not been complied with’.
[2]Section 350-10(1) (Item 2). This was previously s 177 of the Income Tax Assessment Act 1936.
The defendant objected to the assessments. The Deputy Commissioner allowed the objection to the extent of reducing substantially the defendant’s income for the year ended 30 June 2006 resulting in an amended taxable income for that year. But the Deputy Commissioner also increased the defendant’s taxable income for the year ended 30 June 2011. Amended assessments were issued on 21 July 2015 for those two tax years. On the same day a notice of assessment for shortfall penalty for the year ended 30 June 2011 was also issued.
The defendant then lodged an application to review that objection decision to the Administrative Appeals Tribunal (‘the AAT’) under Part IVC of the Taxation Administration Act. Soon after that step, the writ in this proceeding was filed. The review proceedings do not prevent the Deputy Commissioner from recovering the tax payable under the assessments.[3]
[3]See s 14ZZM.
The hearing at the AAT occurred on 15 February 2016. Under s 14ZZK of the Taxation Administration Act the burden is on the tax payer in any review in the AAT to prove that the assessment is excessive or otherwise incorrect or that the taxation decision should not have been made or should have been made differently. The defendant conducted the review in the AAT in person. The AAT gave its written decision on 6 April 2016.[4] The Member remarked:[5]
Much of the hearing time was taken up by Mr Zeqaj’s complaints about the conduct of officers of the Australian Taxation Office (ATO). In fact, as best as I could gather, Mr Zeqaj was particularly upset by the fact that the ATO conducted an audit of his financial affairs without first notifying him. He also expressed concern that the ATO’s methodology in coming to its conclusions was not explained. That is despite the fact that the Commissioner’s objection decision, and in particular his reasons for decision, are comprehensive, comprising detailed calculations and a narrative of some 161 paragraphs.
[4]Re Zeqaj and Federal Commissioner of Taxation [2016] AATA 218 (Senior Member E. Fice).
[5]At [7].
It is unnecessary for me to analyse the detailed content of the Tribunal’s decision. It is apparent that the Tribunal exposed the way in which the Commissioner went about coming to his assessments, and then analysed those conclusions to determine whether the taxpayer had discharged his onus of proof. Mr Zeqaj did not rely on any evidence other than the documents provided by the Commissioner under s 37 of the Administrative Appeals Tribunal Act which requires the decision maker to lodge all documents in its possession or documents relevant to the review of the decision by the Tribunal. The Tribunal member stated:[6]
… I have gone carefully through all of those documents in order to determine whether the Commissioner’s assessment following objection was correct. I have found that the Commissioner’s amendments made to Mr Zeqaj’s assessable income for the 2006 income year were correct. I have also found that the Commissioner’s amendment made to Mr Zeqaj’s assessable income in the 2011 income year was correct.
…
… I find that Mr Zeqaj has not discharged the onus of proving that the assessments made by the Commissioner in his objection decision were excessive. Nor has Mr Zeqaj discharged the onus of proving that the tax shortfall penalty and the shortfall interest charge assessments are excessive or that they should not have been made or made differently. Accordingly, I find that the Commissioner’s objection decision made on 26 June 2015 was correct, subject to the consequential amendment to Mr Zeqaj’s taxable income for the 2011 income year and the shortfall penalty imposed as a consequence of that amendment. With that qualification, I affirm the Commissioner’s objection decision.
[6]At [70].
Under s 14ZZN of the Taxation Administration Act, an appeal to the Federal Court against the AAT’s objection decision must be lodged with the Court within 60 days after service of the Notice of Decision. No such appeal has been lodged by the defendant. In any case, the fact that an appeal is pending does not in the meantime interfere with the decision or the recoverability of the amount payable.[7]
[7]Section 14ZZR of the Taxation Administration Act.
The default judgment was obtained after the AAT’s decision. A bankruptcy notice was issued on 1 March 2017 which could not be served on the defendant until December 2017. The Deputy Commissioner has since filed a creditor’s petition in the Federal Circuit Court for a sequestration order, the hearing of which has been adjourned by the Federal Circuit Court depending on the outcome of this application to set aside the default judgment.
For the purposes of this application, in its totality, the defendant has filed four affidavits. They were affirmed on 17 August 2018, 17 September 2018, 22 October 2018 and 4 March 2019. The last of those affidavits was after the Court’s determination on the question of personal service of the writ. Allowances have to be made for a litigant in person, but I am afraid to say much of the discourse in the affidavits is convoluted and difficult to comprehend. It is mostly a vehement denouncement of the ATO. But he has also ventured into legal matters to which the Deputy Commissioner has had to respond, and with which the Court must deal.
The defendant’s first affidavit has 170 paragraphs, some of which concern the question of service. But, apart from that, it asserts the following:
(a) the Supreme Court of Victoria does not have the jurisdiction to hear this matter as it relates to a breach of the Constitution by the Australian Taxation Office or the Federal Government;
(b) he owes nothing, and in fact, the Federal Government and the Australian Taxation Office owes him money and ‘the ATO’s attempts to bully, threaten and harass me only strengthens my resolve’;
(c) ‘the Constitution does not recognise the Australian Taxation Office or its commissioner’;
(d) the imposition of capital gains tax and s 14ZZK of the Taxation Administration Act 1953 are not constitutionally valid and violate Human Rights; and
(e) the ATO had not only acted in a way which was not constitutionally valid, but acted contrary to personal rights under the Magna Carta that ‘no free man shall be seized or imprisoned, or stripped of his rights or possessions, or outlawed or exiled, or deprived of his standing in any way, nor will we proceed with force against him, or send others to do so, except by the lawful judgment of his equals or by the law of the land’.
The second affidavit is for the most part concerned with the question of service of the writ and an explanation for his delay. It is only paragraph 9 and 10 of that affidavit which asserts a defence that first, the Commonwealth Constitution does not recognise the Australian Taxation Office or the Deputy Commissioner and that the ATO does not represent the Australian government. I distil the contention to be that the ATO or the Deputy Commissioner is not identified or recognised in the Constitution as authorised to assess or collect tax. Secondly, paragraph 10 of that affidavit states that: ‘… The relevant tax law pointed out in my matter was not Constitutionally valid to begin with’. His taxable income included capital gains. He contends that a capital gain is not income, and therefore a capital gains tax is not an income tax, and only an income tax is within the legislative competence of the Parliament under s 51(ii) of the Constitution. He believes the Parliament’s power under that section to make laws ‘with respect to taxation’ is confined to income taxation, even though the words of s 51(ii) do not say that. Nor is it said elsewhere in the Constitution.
The third affidavit is confined to the question of personal service and can be put to one side.
In the fourth affidavit, the defendant has, by organisation, stipulated ‘My Defense Against The Writ’. In it he also contends the government and the ATO owes him $298,395,355.63 of which $200,000,000 is for his ‘Pain , Suffering and Potential Future Losses’ and ‘Interest Defrauded’ of $98,350,636.95. This affidavit contains what has, on testing in Court, emerged as his real personal grievance in this case against the ATO which has spawned the farrago of defences. The grievance is twofold.
First, he is resentful that the ATO took out garnishee orders and freezing type orders on his bank accounts which he regards as having deprived him of basic human rights (including the right to pay for the cost of living) and in effect preventing him for paying for the necessities of life. That I think explains the reference to Magna Carta. The second grievance concerns what I will call an official ‘information swap’ between Victoria Police and the ATO. As this came to be the dominant basis on which he contends that the tax audit on him and the consequential tax assessments should be ‘thrown out’, I must state the facts of the matter. The following facts are taken from the comprehensive reasons for an order given by the Victorian Civil and Administrative Tribunal (constituted by Senior Member Dea) dated 20 November 2018 in proceedings brought by the defendant against Victoria Police under the Privacy and Data Protection Act 2014.[8]
[8]Zeqaj v Victoria Police (Human Rights) [2018] VCAT 1733. Exhibit ZA-10 to the fourth affidavit affirmed 4 March 2019.
In May 2011, Victoria Police sent a notice under the Taxation Administration Act to the ATO requesting taxation information about the defendant and others for the period 30 June 2004 to 30 June 2010. Under such a notice, an entity seeking information is required to describe the serious indictable offence in relation to which the information was being sought, and to explain how this information would assist. In its request, Victoria Police said ‘the investigation seeks to determine what legitimate income is declared by the subjects to compare against known assets in order to determine the extent of income derived from criminal activity’.
There was reciprocation. On 23 May 2012, the ATO issued a notice to Victoria Police under s 264 of the Income Tax Assessment Act 1936 requesting specified information about the defendant (and others) for the period 1 July 2003 to the date of the notice. The information sought was that ‘concerning the income or assessment of’ the named person. It is a statutory offence for a recipient not to comply with such a notice, subject to exceptions that did not apply in this case.
In January 2015, the defendant made a request to the ATO under the Freedom of Information Act for ‘all documents from the 1st January 2010 onwards that relate to Debt Action on me’. In his fourth affidavit, the defendant exhibits a document produced to him by the ATO on that request. It is an internal ATO document and is much redacted.[9] The document has the headlines ‘Sensitive’ and ‘Audit Case Plan’ and ‘Key Risks’ and ‘Identified Risk and Proposed Actions’. Under that last headline, the document states ‘Visho Zeqaj was identified via Victorian Police. It is alleged that the Visho Zeqaj … is involved in the cultivation, distribution and sale of cannabis based in Melbourne … Previous review of the greater Visho Zeqaj group was undertaken’. On the second page of the document it says this –
[9]Exhibit ZA-7 to the fourth affidavit affirmed 4 March 2019.
1. Is the taxpayer linked to organised crime?
Yes – the case was referred by the Victorian Police which alleges that
Visho Zeqaj as part of the [redaction] group is involved in the cultivation,
distribution and sale of cannabis.
The defendant’ application in the VCAT was a claim against the Victoria Police under the Privacy and Data Protection Act 2014 for breaches of the statutory Information Privacy Principles for the collection and handling of personal information. In substance, he complained that the police had breached those Privacy Principles by disclosing information to the ATO. The basis for the complaint was the ATO document which refers to the Victoria Police allegation that he was part of a criminal group. His case against the police was that disclosures were made to the ATO for an unrelated purpose, namely to maliciously disclose allegations to third parties. He said the police had no evidence to show any involvement by him with cannabis related crimes; he had never been charged with any crimes; and charges against him in 2009 of assaulting police, resisting police and hindering police had been withdrawn.
In the VCAT, the position of Victoria Police was that the disclosure to the ATO was in the context of a current police investigation into the defendant’s family, and the financial information being sought was a relevant and important part of the police investigation into the defendant’s activities. Accordingly, the police said, the ATO had to be told why the information was being sought.
The VCAT observed that the defendant had a long-standing antipathy towards Victoria Police. It accepted that part of Victoria Police’s role was to work and cooperate with other law enforcement agencies such as the ATO. More pertinently, the Tribunal found that under exceptions in the legislation, the police had not interfered with the defendant’s privacy as a result of the disclosure to the ATO. That is, the police had reason to suspect that unlawful activity had been, was being, or may have been engaged in by the defendant, and the police used or disclosed the personal information to the ATO as a necessary part of its investigation of the matter.
The Tribunal accepted that at the time the disclosure was made to the ATO, the defendant was one of a number of people being investigated and the investigation concerned, in part, the source of funds which had been used to purchase family assets. The fact that no criminal action resulted was not, the Tribunal found, material. Furthermore, the Tribunal found that the use and disclosure of the personal information by Victoria Police was required or authorised by or under law. The police were required to comply with the ATO notice under the Tax Administration Act. There were other complaints made to the Tribunal by the defendant concerning other disclosures by the police (not to the ATO) which are not relevant to this application.
The point of this exposition in which I have avoided the evidentiary details, is to establish the fact that there was no unlawful activity by the police or the ATO in requesting, providing or receiving information about the defendant. It is not unknown for a taxpayer to attempt to challenge an assessment on the basis that data has been unlawfully obtained by theft or unlawfully obtained from overseas sources so as to claim that the assessment involved conscious maladministration of the assessment process.[10]
[10]See for example Denlay v FCT (2011) 193 FCR 412 and Anglo American Investments Pty Ltd v DCT [2017] NSWCA 17.
The timing of the information swap is also relevant. The ATO issued its notice for information to the Victoria Police in May 2012. An audit of the defendant’s tax affairs was later conducted and concluded in November 2013. According to the account of facts by the AAT,[11] the ATO formed the opinion there had been an evasion of tax in the income years in question. There appeared to be undeclared business income; an undeclared source of asset purchases; and the defendant (who has described his occupation as a kitchen hand) had large amounts deposited into his bank accounts and had purchased real property from unidentified funds. The ATO did not form an opinion that the defendant had avoided tax by fraud in the years in question.
[11]Re Zeqaj and Federal Commissioner of Taxation [2016] 102 ATR 975.
The fourth affidavit, whilst maintaining an attack on the constitutional validity of capital gains tax, seems to intensify his grievance that the ATO conducted the audit against him without prior contact, and that the notices of assessment were based on allegations and opinions and lies about his alleged criminal activities as given to the ATO by the Victoria Police, information which the defendant says was untrue and which affected the opinions of the ATO and the validity of the tax assessments, as well as the validity of the AAT’s decision. This Court is powerless to review the decision of the AAT.
I squarely and repeatedly asked the defendant in Court if he was alleging corrupt conduct by the ATO in administering the audit, or corrupt conduct by the Deputy Commissioner in making the assessments. He definitely disclaimed alleging corruption, later expressed as saying there was no deliberate or conscious maladministration. As I understood his submission, he said that the ATO’s receipt of false and unproven allegations or opinions of the Victoria Police made the audit and assessment process biased against him and led to inaccuracies or errors in assessments. I translate that to be saying the ATO went about its processes and the Deputy Commissioner issued the assessments having been ‘contaminated’ by the information from Victoria Police, leading him to be viewed and treated prejudicially as a ‘known criminal identity’ involved in the cultivation distribution and sale of large quantities of cannabis.
In the course of submissions, I made a ruling or determination that the defendant’s arguments about the invalidity of the capital gains tax law were untenable. They were based on a misreading and misunderstanding of the Constitution, and the taxation of net capital gains. Putting aside the question whether this application was an interlocutory or final in nature, I decided on the authority of ACCC v CG Berbatis Holdings Pty Ltd[12] that there was no real or substantial Constitutional point, and therefore no duty on the Court under s 78B of the Judiciary Act to stay the application and direct the requisite notices to be given to the Attorney General for the Commonwealth and for each of the States and Territories.
[12](1999) FCR 292, [13]–[15].
After the close of submissions, I announced a decision that the defendant’s application to set aside the default judgment would be refused. I gave brief reasons for concluding that first, in debt recovery proceedings facilitated by ‘conclusive evidence’ provisions of the Taxation Administration Act, established authority had clearly laid down that where a notice of assessment had been received into evidence, the Court was bound to conclude that it was conclusively established that the assessment was properly made and the amounts of the assessment are correct. Any contest based on errors in the assessment ― they being non-jurisdictional matters ― was a matter for the review and appeal procedures under Part IVC of the Taxation Administration Act. Secondly, I held that a distinction had to be drawn between debt recovery proceedings on an assessment (which this was) and judicial review proceedings to nullify an assessment on the jurisdictional ground that statutory powers were exercised by officers of the Commissioner with actual bad faith or with conscious maladministration. Although the defendant was alleging bias rather than alleging a conscious wrongdoing or actual bad faith, and as this was not a judicial review proceeding, I concluded there was, in any case, no basis shown by him to even allege by inference or by construing the apparent known facts about the information swap, that the Deputy Commissioner had acted with actual bad faith or conscious maladministration in making the assessments so as to vitiate the assessment. Thirdly, I saw no injustice in letting the judgment stand. The defendant’s appeal to the AAT was his opportunity to object to the assessments and have them fully reviewed as a primary exercise. He did not adduce any evidence in the AAT and, judging by the Tribunal’s reasons did attend to discharging his burden of proof, leaving to the Tribunal to examine the evidence provided by the Commissioner to the AAT under s 37 of the Administrative Appeals Tribunal Act and decide whether the assessment were correct. The assessments were unimpeached and remain unimpeached. At law the Deputy Commissioner is entitled to a preservation and enforcement of the judgment.
The object of these additional reasons is to give some elaboration by reference to the asserted defences.
The authority of the Deputy Commissioner and the authority of this Court
The defendant asserts that as the Constitution does not recognise the ATO or the Deputy Commissioner, these proceedings are unauthorised. This seems to be an objection to the competency of the proceeding. But, there is no doubt the Deputy Commissioner is competent to bring this tax recovery proceeding and to bring it in this Court which has the jurisdiction to hear it.
The starting point is s 51 of the Constitution. It provides where relevant:
The Parliament shall, subject to this Constitution, have power to make laws for the peace, order, and good government of the Commonwealth with respect to:
…
(xxxix)matters incidental to the execution of any power vested by this Constitution in the Parliament or in either House thereof, or in the Government of the Commonwealth, or in the Federal Judicature, or in any department or officer of the Commonwealth;
The Income Tax Assessment Act 1936 vests the general administration of taxation laws in the Commissioner of Taxation.[13] Under the Taxation Administration Act, the Commissioner may, either generally or as otherwise provided by the instrument of delegation, delegate to a Deputy Commissioner or any other person all or any of the Commissioner’s powers or functions under a taxation law or any other law of the Commonwealth or a Territory.[14]
[13]See s 8. See also s 3A of the Taxation Administration Act .
[14]See s 8.
The Tax Administration Act provides[15] the statutory power for the Deputy Commissioner to commence proceedings in this Court against a person to recover a tax related liability that is due and payable:
[15]Section 255-5 of Schedule 1.
(1) An amount of a *tax-related liability that is due and payable: (a) is a debt due to the Commonwealth; and (b) is payable to the Commissioner.
(2) The Commissioner, a *Second Commissioner or a *Deputy Commissioner may sue in his or her official name in a court of competent jurisdiction to recover an amount of a *tax-related liability that remains unpaid after it has become due and payable.
The term ‘tax-related liability’ is defined in section 255-1 of Schedule 1 of the TAA, as a pecuniary liability to the Commonwealth arising directly under a taxation law (including a liability the amount of which is not yet due and payable). Section 250-10(2) of Schedule 1 of the TAA sets out various tax‑related liabilities under the taxation law and the relevant provisions. These include:
a) income tax due and payable under s 5-5 of the Income Tax Assessment Act 1997 (item 37);
b) Shortfall Interest Charge on income tax due and payable under s 5-10 of the 1997 (item 37AA);
c) General Interest Charge[16] due and payable under s 8AAE of the Tax Administration Act (item 70); and
d) administrative penalties due and payable under s 298-15 of Schedule 1 of the Tax Administration Act (item 140).
[16]Part IIA of the TAA contains the relevant provision about the calculation of the general interest charge. Section 8AAB of the TAA lists the provisions that create liability to the charge, which include at item 12, unpaid income tax or shortfall interest charge under s 5-15 of the Income Tax Assessment 1997, and at item 38, payment of administrative penalty under s 298-25 of Sch 1 of the Tax Administration Act.
Accordingly, the Deputy Commissioner is competent to bring this recovery proceeding in this Court. The proceeding was commenced by writ indorsed with a statement of claim which commenced with the statement ‘the plaintiff pleads his cause of action, and avers and states pursuant to section 255-50 of Schedule 1 of the Taxation Administrative Act 1953, as follows’. Section 255-50 of Schedule 1 to that Act provides, in part, that in:
…a proceeding to recover an amount of a tax-related liability, a statement or averment about a matter in the plaintiff’s complaint, claim or declaration is prima facie evidence of the matter.
The constitutional validity of the capital gains tax provisions
Section 51 of the Constitution provides where relevant:
The Parliament shall, subject to this Constitution, have power to make laws for the peace, order, and good government of the Commonwealth with respect to:
…
(ii) taxation; but so as not to discriminate between States or parts of States;
…
It is not the case that the assessments in question here all concerned capital gains tax. In the first of the amended assessments, the defendant was assessed for a net capital gain of $100,210 as a result of the audit for the year ended 30 June 2008. For the tax period ending 30 June 2011 he was assessed for a capital gain of $232,850 as a result of the audit. In the amended assessments after the objection decision of the Deputy Commissioner, for the tax period ending 30 June 2011, the net capital gains was adjusted from $232,850 to $246,250.
The defendant’s contention about the invalidity of the capital gains tax was based on an obvious misreading of s 51(ii) of the Constitution. He said that that Commonwealth Parliament had powers to make laws with respect to ‘income taxation’ and a capital gain was not income. But s 51(ii) section does not say income taxation; it only says taxation. The defendant has inserted the word ‘income ‘ into the Constitution.
Under the Income Tax Assessment Act 1997, s 100-10 which has the heading ‘Fundamentals of CGT’ states that —
(1) CGT affects your income tax liability because your assessable income includes your net capital gain for the income year. Your net capital gain is the total of your capital gains for the income year, reduced by certain capital losses you have made.’
Avoiding the legislative details, under the Income Tax Assessment Act 1997, income is constituted by ordinary income and statutory income. The legislation identifies capital gains tax as statutory income. The taxpayer is required to include in the amounts of assessable income amounts that are not ordinary income, and one of those amounts under s 10.5 includes capital gains under s 102-5 of the Income Tax Assessment Act 1997. Section 102.5 of the Income Tax Assessment Act says ‘(1) Your assessable income includes your net capital gain (if any) for the income year.’ Thus, if there was to be a live or real constitutional question to possibly go to the High Court of Australia, it would be the constitutional validity of those provisions.
The defendant simply cannot say how and in what way he contends those provisions are unconstitutional as not being laws ‘with respect to taxation’. They manifestly are. A tax can be described as ‘a compulsory transfer of resources from the private to the public sector, calculated according to predetermined criteria, without reference to benefits actually received, and so as to be non-penal in character.’[17] Latham CJ in Matthews v Chickery Marketing Board (Victoria),[18] defined taxation for the purposes of the head of power under s 51(ii) as ‘A compulsory exaction of money by a public authority for public purposes, enforceable by law, and is not a payment for services rendered’. That definition was adopted by the High Court in Roy Morgan Research v FCT.[19]
[17]Barrett, Principles of Income Taxation (Butterworths, 1975), 1.
[18](1938) 60 CLR 263 at 276.
[19](2011) 244 CLR 97, [36].
There simply can be no doubt that an exaction of money by the Commissioner for a net capital gain is a tax. In submissions, the defendant could not advance anything meaningful to contend how and in what way it was not a tax. He eventually contended that the tax fell afoul of s 51 because the calculation of the tax was so complex in nature and difficult to understand that he could not see how it was assessed in his case. Despite that he contended the tax as not well designed and unfair as it calculates a capital gain fiscally without regard to the reduced value of money by the inflationary effects over time. He submitted that the complexity of the capital gains tax laws did not serve society well and could not be said to be ‘for the peace, order and good government of the Commonwealth’ and was therefore unconstitutional.
I am afraid to say none of these submissions address the essential legal question whether the capital gains taxes are a law with respect to taxation. They clearly are. This argument was untenable.
The Constitutional validity of s 14ZZK of the Taxation Administration Act
This too I think was an untenable submission. Under this section, on a review to the AAT, the applicant has the burden of proving that the assessment is excessive or otherwise incorrect or that the taxation decision should not have been made. As I understand the defendant’s submission, he regards this as an illegal reversal of the human or legal right to be assumed to be innocent until proven guilty. That is, it is unconstitutional, he says, to require him to prove the assessment to be excessive when the natural burden should be on the Commissioner to prove that it is not.
Not much need be said about this submission I think. It appears the defendant is equating the conduct of civil proceedings for a review of a taxation decision, to the conduct of criminal proceedings where the presumption of innocence prevails. Where a taxpayer is seeking to impeach the assessment or the taxation decision, it is competent for Parliament to put the burden on the taxpayer to prove that. In any event, the defendant has already availed himself of the review process under Part IVC of the Taxation Administration Act and has not appealed the AAT’s decision to the Federal Court. On the available materials, the AAT checked the assessments an found them to be correct. Thus, s 14ZZK has no applicability in the current proceeding at all.
Conclusiveness of assessments, and ‘conscious maladministration’
This is a recovery proceeding. The claim and therefore the default judgment is based on the notices of assessments to prove the amount of the income tax and the amount of the administrative penalty. With such a claim comes a settled body of law concerning the conclusiveness of the tax assessment in recovery proceedings. The law is based upon s 175 and s 177 of the Income Tax Assessment Act 1936. Section 175 provides that the validity of any assessment shall not be affected by reason that any of the provisions of the Act have not been complied with.[20] Section 177 provided that the production of a copy of a notice of assessment is conclusive evidence of the due making of the assessment, and unless there are review or appeal proceedings under Part IVC of the Taxation Administration Act, it is also conclusive evidence that the amount of the assessment is correct and all the particulars of the assessment are correct. Section 177 has been replaced by section 350-10(1) of Schedule 1 (Item 2) to the Taxation Administration Act which has an identical effect to s 177. For the purposes of exposing the law, they can be treated as the same.
[20]‘Act’ is defined in section 6 of the ITAA 1936 to include the ITAA 1936, the ITAA 1997 and certain parts of the TAA.
The effect of these provisions is that, in recovery proceedings a taxpayer cannot contest the correctness of the assessment. That can only be done through the review process under Part IVC of the Taxation Administration Act. What might be thought to be the asperity of the Commissioner’s powers of assessment has been recognised by the High Court as implementing a longstanding legislative approach to protect the interests of the revenue: see DCT v Broadbeach Properties Pty Ltd.[21] See also Bloemen v Commissioner of Taxation[22]; DCT v Richard Walter Pty Ltd[23]; and more recently in Commissioner of Taxation v Futuris Corporation Ltd.[24]
[21](2008) 237 CLR 473 at 491-2.
[22](1980) 147 CLR 360 at 375.
[23](1994) 183 CLR 168 at 188.
[24](2008) 237 CLR 146.
In DCT v Haritos,[25] I summarised the judgments of the majority in Futuris as standing for, or affirming, the following propositions:
(a)The Commissioner has the general administration of the Income Tax Assessment Act , and under s 166 makes an assessment from the returns, and from any other information in his possession. An assessment by the Commissioner identifies the completion of the process by which the provisions of that Act relating to liability to tax are given concrete application in a particular case with the consequence that a specified amount of money will become due and payable as the proper tax in that case.[26]
(b)The provisions of Part IVC of the Taxation Administration Act set up a regime for the making of taxation objections, and review, and appeals to the Federal Court. Section 177 of the Income Tax Assessment Act operates to change what would otherwise be the operation of the relevant laws of evidence. The presence of Part IVC means section 177 meets the requirement of the Constitution that a tax may not be made incontestable because to do so would place beyond examination the limits upon legislative power.
(c)When s 175 is read with s 177, the result is that the validity of an assessment is not affected by failure to comply with any provisions of the Act. But a taxpayer with a grievance may object to the assessment in the manner set out in Part IVC. The effect of s 175 is that errors in the process of assessment do not go to jurisdiction.
(d)There are two situations that may attract a remedy for jurisdictional error. First, section 175 only operates where there has been what answers the statutory description of an ‘assessment’. A tentative or provisional assessment does not answer to that description. Secondly, conscious maladministration of the assessment process may also not produce an ‘assessment’.
(e)The notion of conscious maladministration arises as section 175 should be construed to not bring within the jurisdiction of the Commissioner an assessment which is made with a deliberate failure to comply with the provisions of the Act. That is, it does not encompass deliberate failures to administer the law according to its terms. Such a failure is a manifestation of jurisdictional error. But allegations that statutory powers have been exercised corruptly or with deliberate disregard of the scope of those powers are not likely to be made or upheld.
[25][2010] VSC 275.
[26]See Batogol v FCT (1963) 109 CLR 243 at 252 (per Kitto J).
Here there has been a default judgment on the procedural basis that all allegations are taken to be admitted by the defendant who has failed to file an appearance. The Court should not have to be on the search for possible defences, but in seeing whether there can be a defence to the claim for payment of the debt created by the assessments, it needs to be emphasized that the defendant faces an insurmountable barrier: once the notices of assessment are admitted into evidence, full effect must be given to the conclusive evidence provision in s 350-10(1) and this Court is bound to conclude that the assessment was properly made and, subject to review or appeal proceedings under Part IVC, this Court is bound to conclude that the amount and particulars of the assessment are correct.[27]
[27]See Anglo American Investments Pty Ltd v DCT [2017] NSWCA 17, [44], [47], [50] and [54]. See also DCT v Murray and Pitman [2017]VSC 785.
The important distinction in Futuris is between recovery proceedings and judicial review proceedings. Although Futuris recognises the possibility that s 175 does not stand in the way of judicial review (in the context of 75(v) of the Constitution or s 39B of the Judiciary Act) of the exercise of statutory powers that have been exercised corruptly or with deliberate disregard of the scope of those powers, such a possible claim of conscious maladministration cannot be made in recovery proceedings: see Anglo American Investments Pty Ltd v DCT.[28] Thus, discourse on conscious maladministration as a ground of judicial review is academic in this case. Anyway, the defendant has disavowed claiming that that the ATO officers and the Deputy Commissioners acted unlawfully or were corrupt or had consciously abused powers. But in the way that argument was conducted by the defendant, I should also say for completeness that I think nothing in this application could possibly support an allegation of conscious maladministration, actually or constructively. Futuris warns that such an allegation is not one to be made lightly. That was pursued by the Full Court of the Federal Court in Denlay v FCT[29] a case involving stolen information copied by a third party overseas, found by the Court not to vitiate any assessment. The Court said –
Those observations highlight that their Honours [in Futuris] were concerned, in their reference to conscious maladministration, with bad faith in the exercise of the decision-making power under challenge and the need for proof of an allegation of bad faith against the Commissioner or his officers. Their Honours were concerned with actual bad faith, not with some form of ‘constructive’ bad faith established by unwitting involvement in an offence.
…
The observations of the majority in Futuris do not support the proposition that any breach of the law by officers of the Commissioner in the course of processes anterior to, or even in the course of, making an assessment, suffices to establish conscious maladministration which is apt to vitiate the assessment. Conscious maladministration, as explained in Futuris, involves actual bad faith on the part of the Commissioner or his officers. The findings of the primary judge to which we have referred at paragraphs [49] and [50] of these reasons negative bad faith on the part of the Commissioner’s officers.
Conscious maladministration as explained in Futuris relates to the integrity of the assessment. Even if the circumstances in which the information in question became available to the Commissioner’s officers involved unlawful conduct on their part, that would not necessarily deny the integrity of the assessment. What matters for that purpose is the accuracy of the information and the competence and honesty of those officers involved in making the assessment.
[28][2017] NSWCA 17, [53], [54].
[29](2011) 193 FCR 412.
The defendant’s grievance appears to be against the Victoria Police for telling the ATO of the allegations against. But that was conduct which the VCAT found was not in breach of the law, but in necessary compliance with it. As an adjunct, the defendant contends the ATO were under a duty to him to check the accuracy of the Police information. But the ATO collects taxes for the Commonwealth; it does not investigate allegations of crime. Ultimately he contended that the information created a prejudiced mindset. But there is no basis for demonstrating this, or elevating it demonstrate a corrupt exercise of powers. I think the most that can be supposed is that the information may have, naturally and reasonably, stimulated or prompted or energised the decision by the ATO to conduct an audit. But from the audit came the legally conclusive and unimpeachable assessments. Thus the defendant’s attacks on the information swap go nowhere.
It was for those reasons that I concluded that the defendant had no arguable defence on the merits and there was no other reason in the interests of justice to set aside the default judgment.
Accordingly I propose to authenticate an order that the application to set aside judgment be disallowed, and the defendant’s summons de dismissed. I can see no tenable basis for the defendant to resist an order for costs as the Deputy Commissioner has been wholly successful and there is nothing in the opposition to the application, or anything else, that warrants a departure from the general rule that costs follow the event.
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