James v Deputy Commissioner of Taxation

[2008] FMCA 1189

FEDERAL MAGISTRATES COURT OF AUSTRALIA

JAMES v DEPUTY COMMISSIONER OF TAXATION [2008] FMCA 1189

BANKRUPTCY – Sequestration order – whether there is other sufficient cause for not making sequestration order – admissibility of evidence as to dispute concerning underlying taxation debt.

BANKRUPTCY – Power of the court to determine validity of dispute to notices of assessment issued by Deputy Commissioner of Taxation.

BANKRUPTCY – Power of the court to go behind judgment debt based on notices of assessment issued by Deputy Commissioner of Taxation.

BANKRUPTCY – Admissibility of evidence seeking to dispute notices of assessment issued by Deputy Commissioner of Taxation.

Bankruptcy Act 1966, s.52
Income Tax Assessment Act1936, s.175, 177
Judiciary Act, s.39B
Taxation Administration Act 1953, s.14ZZM, 14ZZR, Part IVC

FCT v Clarke (1927) 40 CLR 246
Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd [2008] HCA 41
Neutral Bay Pty Ltd v Deputy Commissioner of Taxation (2007) 25 ACLC 1341
Commissioner of Taxation v Futuris Corporation Ltd [2008] HCA 32
R v Hickman & Ors; ex parte Fox and Clinton (1945) 70 CLR 598
McAndrew v FCT (1956) 98 CLR 263
FJ Bloemen Pty Ltd v Federal Commissioner of Taxation (1980-1981) 147 CLR 360
Deputy Commissioner of Taxation v Richard Walter Pty Ltd (1995) 183 CLR 168
Wren v Mahony (1972) 126 CLR 212
Clyne v DCT (1983) 57 ALJR 673
Re Holland (1934) 7 ABC 217
Re Parkes ex parte Campbell [1961] QWN 35
Cain v Whyte (1933) 48 CLR 639
Totev v Sfar [2008] FCAFC 35
Re Svir; ex parte Commissioner of Taxation (1998) 83 FCR 314
DCT v Ho (1996) 131 FLR 188
Commonwealth of Australia v Duncan 81 ATC 4228
Re Trevaskis; ex parte Commissioner of Taxation [1993] FCA 572
General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125

Applicant: TREVOR ARNOLD JAMES

Respondent: DEPUTY COMMISSIONER OF TAXATION

File Number: BRG 111 of 2008

Judgment of: Wilson FM

Hearing date: 15 August 2008

Date of Last Submission: 15 August 2008

Delivered at: Brisbane

Delivered on: 9 September 2008

REPRESENTATION

Counsel for the Applicant: Dr Hassell

Solicitors for the Applicant: Mamdouh Elmaraazey

Counsel for the Respondent: N/A

Solicitors for the Respondent: ATO Legal Services Branch

ORDERS

The preliminary questions set out in the orders of the Court made on 1 August 2008 be answered as follows:

1. This court does not have jurisdiction to determine any challenge to the efficacy of the notices of assessment issued by the respondent to the applicant pursuant to the Income Tax Assessment Act 1936, whether pursuant to Part IVC Taxation Administration Act 1953, or otherwise;

2. For the purpose of these proceedings, the notices of assessment issued by the respondent constitute conclusive evidence as to the correctness of the amounts and particulars stated therein;

3. It is not necessary for this court, in deciding the application for review, to directly consider the correctness or efficacy of the notices of assessment;

4. This court, on the application for review, has the power to receive evidence from the applicant that there is other sufficient cause for not making a sequestration order, pursuant to s.52(2)(b) Bankruptcy Act 1966.

5. Such evidence may include evidence that there is a genuine dispute as to the nature and extent of the applicant’s liability to the respondent.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
BRISBANE

BRG 111 of 2008

TREVOR ARNOLD JAMES

Applicant

And

DEPUTY COMMISSIONER OF TAXATION

Respondent

REASONS FOR JUDGMENT

1. This application raises a matter of considerable practical importance, and concerns the interaction of the law of bankruptcy with the collection of the revenue.  At its heart is the issue of whether or not the Deputy Commissioner of Taxation in practical terms enjoys a preferred status in bankruptcy proceedings.

2. On 11 October 2005 the respondent Deputy Commissioner of Taxation (“the Deputy Commissioner”) obtained a default judgment against the applicant in the Supreme Court of New South Wales.  The judgment was obtained in proceedings that relied upon notices of assessment issued by the Deputy Commissioner.

3. On 22 February 2007 the Official Receiver issued a bankruptcy notice at the request of the Deputy Commissioner, requiring payment by the applicant of $69,339.35.

4. The bankruptcy notice was served on the applicant on 12 September 2007.  This was within the extended time for service allowed by the Official Receiver.

5. On 20 May 2008 the Deputy Commissioner caused a creditor’s petition to be filed, alleging a failure on behalf of the applicant to comply with the bankruptcy notice.

6. On 26 May 2008, the applicant, then acting for himself, filed a Notice Stating Grounds of Opposition to the Petition, which set out the following grounds:

   (1)The debt claimed by the A.T.O. is not owing, retunes (sic) of lodgements were incomplete, and never amended

   (2)The business loss has never been claimed or amended, to show the amount claimed by the A.T.O. is incorrect

   (3)The offset (sic) by way of a counter claim from the business figures will prove I will have a tax credit, once copies are provided by A.T.O. Lodgments Sections which I have applied for

7. Two short affidavits were filed in support of the applicant’s notice of opposition to the making of a sequestration order.

8. On 13 June 2008 Deputy Registrar Baldwin made a sequestration order against the applicant’s estate.

9. On 3 July 2008 an application for review of the Deputy Registrar’s decision was filed.

10. The Deputy Commissioner has filed an affidavit of Lisa Anne Everingham sworn 14 July 2008.  Ms Everingham in her affidavit:

    a)Deposes that proceedings were commenced against the applicant in the Supreme Court of New South Wales on 9 August 2004 in relation to unpaid income tax for the 1997 – 2000 years of income, and for additional charges for late payment;

    b)Exhibits copies of four notices of assessment;

    c)Deposes that an amended notice of assessment for the year ending 30 June 1997 was issued on 27 October 2004;

    d)Exhibits a copy of the amended notice of assessment;

    e)Deposes that the judgment obtained on 11 October 2005 was a default judgment;

    f)Deposes that no application has been filed to set aside the default judgment or the bankruptcy notice;

    g)Asserts that as at 7 July 2008 the amount owed by the applicant to the Commissioner was $177,282.09.

11. Exhibited to Ms Everingham’s affidavit are photocopies of one page of each of the notices of assessment for the financial years ending 30 June 1997 to 2000 inclusive.  Each of the photocopied pages has at the foot thereof “Please see the reverse for important information about your assessment”.  Also exhibited is a photocopy of one page of the notice of amended assessment for the financial year ended 30 June 1997.  It has the same notation.  Complete copies of the relevant notices of assessment are exhibited to a subsequent affidavit of Ms Everingham.

12. Two amended applications for review have been filed on behalf of the applicant.  Numerous grounds are relied upon by the applicant, but for the purposes of the present argument, they can be conveniently grouped into three broad headings:

    a)The applicant is solvent;

    b)The bankruptcy notice is defective and must be set aside;

    c)There is a dispute about the extent of indebtedness of the applicant to the respondent, and the court should go behind the default judgment on the hearing of the creditors’ petition.

13. When the matter was listed for a directions hearing on 1 August 2008, an issue was raised by the legal representative for the Deputy Commissioner. It was submitted that this court did not have jurisdiction to inquire into the validity of the Deputy Commissioner’s debt, and accordingly any evidence that the applicant sought to adduce about a dispute as to his liability was irrelevant and therefore inadmissible.

14. If correct, the Deputy Commissioner’s submission would curtail the hearing of the application for review in a substantial respect. There would be no need for the applicant to put on any evidence seeking to raise a genuine dispute about the Deputy Commissioner’s judgment debt. The application for review would effectively be confined to the first two broad grounds of review set out above.

15. Accordingly I made an order that:

    “The issue of whether the court has the power to and if so whether it should permit evidence to be adduced to challenge the efficacy of notices of assessment issued by the respondent and whether the court needs to do so to determine the application for review, be determined as a separate issue . . . “

16. Directions were made for the filing of submissions and the hearing of the separate issue.

17. At the heart of the submissions of the Deputy Commissioner is s.177 Income Tax Assessment Act 1936 which provides:

    177 (1)  [Notice of assessment is conclusive evidence].

    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.

    (2)     [Gazette containing notice]

    The production of a Gazette containing a notice purporting to be issued by the Commissioner shall be conclusive evidence that the notice was so issued.

    (3)     [Copy of document]

    The production of a document under the hand of the Commissioner, a Second Commissioner, or a Deputy Commissioner, purporting to be a copy of a document issued by either the Commissioner, a Second Commissioner, or a Deputy Commissioner, shall be conclusive evidence that the document was so issued.

    (4)     [Extract from return or notice of assessment]

    The production of a document under the hand of the Commissioner, a Second Commissioner, or a Deputy Commissioner, purporting to be a copy of or extract from any return or notice of assessment shall be evidence of the matter therein set forth to the same extent as the original would be if it were produced.

    (5)[Document on data processing device or by way of electronic transmission]

    To avoid doubt, subsection (4) applies to a copy or an extract of a document that was given to the Commissioner on a data processing device or by way of electronic transmission unless the taxpayer can show that the taxpayer did not authorise the document.

18. As the authorities to which I will shortly refer make clear, this section must be read in conjunction with s.175 of the Income Tax Assessment Act which provides:

    175   Validity of assessment

    The validity of any assessment shall not be affected by reason that any of the provisions of this Act have not been complied with.

19. The limits placed by the legislature on the ability of a taxpayer and the court to examine the legitimacy of an assessment issued by the Deputy Commissioner have intrigued the courts virtually since the passing of the legislation: see eg FCT v Clarke (1927) 40 CLR 246 at 276.

20. The Deputy Commissioner submits:

    “It has been accepted, since the decision in FJ Bloeman Pty Ltd v Federal Commissioner of Taxation (1981) 147 CLR 360, that the production of a notice of assessment in definitive form is conclusive evidence that the assessment has been duly made and that the taxpayer is liable for the tax stated in it. The production of the notice of assessment precludes any enquiry into the circumstances giving rise to it and any dispute concerning the substantive taxation liabilities must be made in accordance with the procedures set out in Part IVC of the Taxation Administration Act.”

21. The Deputy Commissioner submits that Part IVC of the Taxation Administration Act 1953 provides an exclusive procedure for challenging an assessment made by the Commissioner.  It is contended that in these proceedings the applicant is seeking to challenge the assessments which underpin the default judgment.  It is submitted that is impermissible.

22. In my view, the submission of the Deputy Commissioner conflates a number of issues that must be separately determined:

    a)Can the applicant, other than in Part IVC proceedings, directly challenge the notices of assessment;

    b)Does this court have jurisdiction to determine any challenge to the notices of assessment;

    c)In exercising its jurisdiction in bankruptcy is this court entitled to examine whether there is any arguable basis available for the applicant to challenge the notices of assessment;

    d)In exercising its discretion under s.52(2)(b) Bankruptcy Act, to what extent can this court examine the existence of and genuineness of a dispute by a taxpayer to issued notices of assessment.

23. The submissions of the Deputy Commissioner, if taken at face value, deprive this court of any ability to assess the legitimacy of any argument that a debtor might have as to the correctness of notices of assessment, when exercising its discretion as to whether to visit upon the debtor the considerable consequences of bankruptcy.  According to the argument of the Deputy Commissioner, once a notice of assessment is issued then unless and until it is set aside or varied in Part IVC proceedings, nothing can be done by a taxpayer to prevent judgment being entered, a bankruptcy notice issued and a sequestration order made: for, it is argued, the notices of assessment are unimpeachable.

24. This stance is, it seems to me, inconsistent with that taken by the Deputy Commissioner in analogous corporate insolvency proceedings.  I will in due course make reference to the decision of the High Court of Australia in Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd [2008] HCA 41, a decision handed down after the present application was argued. In that matter, counsel for the Deputy Commissioner made an important concession, referred to by the majority justices at [13]. The appeal was argued before the hearing of the present application: [2008] HCA Trans 243, 244. It is unfortunate that the Deputy Commissioner, as a model litigant, did not draw the attention of the Court to the decision of the Queensland Court of Appeal (sub nom Neutral Bay Pty Ltd v Deputy Commissioner of Taxation (2007) 25 ACLC 1341) nor to the argument on the hearing of the appeal. That is particularly so when the argument advanced before this court seems to run directly contrary to the position of the Deputy Commissioner in that other litigation.

25. At paragraph 9 of the written outline filed on his behalf the applicant submits:

    “It is not appropriate for the respondent ATO to try, as it were and “in advance”, to “close out” the applicant from requesting, as part of his Application for Review, that this Court “go behind the judgment”. It is the standing and status of the judgment debt that is thus attacked, not the statutory status of the taxation assessment. Such assessment and the making of it may be deemed correct by s. 177, but s. 177 does not preclude an application to invite the court to “go behind the judgment”; nor does it preclude or take away the Court’s discretion under s. 52 of BA 1966. Nor is its wide and usual power to decide “matters of bankruptcy” for itself taken away by s. 177, which is not a provision dealing with bankruptcy.”

26. Thus, as in Broadbeach Properties, the present application concerns the interaction between two statutory regimes established by federal law.

27. In a decision that was referred to by the Deputy Commissioner, the High Court has clarified that ss.175 and 177 Income Tax Assessment Act do not preclude a challenge to the notices of assessment on the ground of ‘jurisdictional error’ as that term is now understood.  In Commissioner of Taxation v Futuris Corporation Ltd [2008] HCA 32 the Court held that review for such error was available, although discretionary. The majority justices made it clear, at [10], that the availability of remedies by way of Part IVC proceedings may lead the court to decline to exercise its powers of judicial review. The concept of jurisdictional error as forming the permitted basis of attack on notices of assessment outside of the Pt IVC procedure should now be used, rather than the previous arguments that focussed on issues such as bona fides in accordance with decisions such as R v Hickman & Ors; ex parte Fox and Clinton (1945) 70 CLR 598, a characterisation now eschewed by the High Court justices.

28. At paragraphs [23] – [24] their Honours said:

    “The significance of s 175 for the operation of the Act and for the scope of judicial review outside Part IVC is to be assessed in the manner indicated in Project Blue Sky Inc v Australian Broadcasting Authority. That case decided that the description of provisions as either mandatory or directory provides no test by which the consequences of non-compliance with a statutory criterion can be determined. Rather, consistently with the reasons in Project Blue Sky of McHugh, Gummow, Kirby and Hayne J, the question for the present case is whether it is a purpose of the Act that a failure by the Commissioner in the process of assessment to comply with provisions of the Act renders the assessment invalid; in determining that question of legislative purpose regard must be had to the language of the relevant provisions and the scope and purpose of the statute.

    Section 175 must be read with s. 175A and s 177(1). If that be done, the result is that the validity of an assessment is not affected by failure to comply with any provision of the Act, but a dissatisfied taxpayer may object to the assessment in the manner set out in Pt IVC of the Administration Act; in review or appeal proceedings under Pt IVC the amount and all the particulars of the assessment may be challenged by the taxpayer but with the burden of proof provided in s 14ZZK and s 14ZZO of the Administration Act. Where s 175 applies, errors in the process of assessment do not go to jurisdiction and so do not attract the remedy of a constitutional writ under s 75(v) of the Constitution or under s 39B of the Judiciary Act.”

29. At [55] – [56] the majority justices made it quite clear that if the Deputy Commissioner committed jurisdictional error as that term is properly understood, nothing in ss.175 or 177 of the Income Tax Assessment Act precluded judicial review by the Court. However, jurisdictional error amounts to more than a factual dispute about the basis on which any assessment was made. Kirby J at [134] set out those types of jurisdictional error that presently seem to be accepted by the courts.

30. The majority justices at [60] said:

    “Allegations that statutory powers have been exercised corruptly or with deliberate disregard to the scope of those powers are not lightly to be made or upheld. Remarks by Hill, Dowsett and Hely JJ in Kordan Pty Ltd v Federal Commissioner of Taxation(2000) 46 ATR 191 at 193; [2000] ATC 4812 at 4815 are in point. Their Honours said:

    "The allegation that the Commissioner, or those exercising his powers by delegation, acted other than in good faith in assessing a taxpayer to income tax is a serious allegation and not one lightly to be made. It is, thus, not particularly surprising that applications directed at setting aside assessments on the basis of absence of good faith have generally been unsuccessful. Indeed one would hope that this was and would continue to be the case. As Hill J said in San Remo Macaroni Company Pty Ltd v FCT it would be a rare case where a taxpayer will succeed in showing that an assessment has in the relevant sense been made in bad faith and should for that reason be set aside."

31. It is not apparent from the face of the applications for review whether the applicant in the present proceedings asserts jurisdictional error on the part of the Deputy Commissioner. No proceedings seeking to impugn the notices of assessment for jurisdictional error have been brought. If what the applicant seeks to do is to mount a factual attack on the correctness of the notices of assessment, then Commissioner of Taxation v Futuris Corporation Ltd supports the Deputy Commissioner’s argument that such a course is impermissible in proceedings outside of the Part IVC procedure.

1. At [64-5] the majority justices said:

   “The evident policy reflected in the terms of s 177(1) is the facilitation of proceedings for the recovery of tax which are instituted by the Commissioner under s 209 of the Act in a court of competent jurisdiction. Corresponding provision is made elsewhere in the Act for the recovery of other amounts. The action for recovery is facilitated by the "conclusive evidence" provision in s 177(1). That sub-section, as the Commissioner correctly submitted, is not a privative clause in the ordinary use of that term. It does not purport to oust the (necessarily federal) jurisdiction conferred upon any other court in matters arising under the Act. To the contrary, it recognises that there may be Pt IVC proceedings and in those proceedings the "conclusive evidence" provision does not apply. ‘

   In recovery proceedings s 177(1) operates to change what otherwise would be the operation of the relevant laws of evidence. But, given the presence of Pt IVC, s 177(1) does not operate to impose an incontestable tax or otherwise fall foul of the principles which were considered in Nicholas v The Queen and which respect usurpation of the federal judicial power by deeming to exist an ultimate fact. “

2. There is a consistent line of authority that, jurisdictional error aside, a notice of assessment cannot be questioned except in Pt IVC proceedings.

3. In McAndrew v FCT (1956) 98 CLR 263 Dixon CJ, McTiernan and Webb JJ said at 270:

   “It is the manifest policy, one may now almost say the historical policy, of the legislation on the one hand to give to the taxpayer full opportunity on objecting to his assessment of contesting his liability in every respect before a Court or before a Board of Review but on the other hand to require that in proceedings for the recovery of the tax the taxpayer will be concluded by the assessment and will not be entitled to go behind it for any purpose.”

4. The policy which underlies and is manifest in s.177(1) Income Tax Assessment Act was discussed in the joint judgment of Mason and Wilson JJ in FJ Bloemen Pty Ltd v Federal Commissioner of Taxation (1980-1981) 147 CLR 360 at 375.

5. At page 375 their Honours said:

   “An explicit and, in our view, correct statement of the effect of s. 177(1) was made by Taylor J in McAndrew at pp 281-2. For the reasons there expressed his Honour concluded that “s. 177(1) was intended to make it impossible for a taxpayer, in proceedings other than an appeal against it, to challenge an assessment on any ground”

   . . .

   . . . once the Commissioner takes advantage of s. 177(1) by producing an appropriate document, the taxpayer is precluded from contesting that the Commissioner has made an assessment or that in making the assessment he has complied with the statutory formalities. The taxpayer is entitled to dispute his substantive liability to tax in proceedings under Part V”.

6. At page 376 their Honours said:

   “It does not necessarily follow from what we have said that the Act excludes the general jurisdiction of the Supreme Court. Section 177(1)  specifically operates by compelling a court, for example the Supreme Court, in the exercise of its jurisdiction to treat a notice of assessment on its production as conclusive evidence that the assessment has been duly made and thereby foreclosing that issue. In theory s. 177 leaves the Supreme Court with jurisdiction to decide whether an assessment has been duly made in a case in which an appropriate document is not produced.”

7. At page 378 their Honours said:

   “Accordingly, in our opinion the Supreme Court is bound, on production of a notice of assessment, to rule that the assessment was duly made both in statutory proceedings and in the exercise of its general jurisdiction.”

8. Deputy Commissioner of Taxation v Richard Walter Pty Ltd (1995) 183 CLR 168 was a case stated concerning whether the production of notices of assessment precluded a challenge to the assessments in proceedings under s.39B Judiciary Act, by reason of the operation of s.177 Income Tax Assessment Act. In its consideration of the case stated the Court was required to consider the effect and validity of s.177(1). In Commissioner of Taxation v Futuris Corporation Ltd the majority justices expressly noted that the correctness of Richard Walter was not raised in that case.

9. In Richard Walter at pages 184-7 Mason CJ said:

   “Underlying the arguments in the present case is the question whether s. 177(1) attempts to oust or cut back the jurisdiction of the courts or whether it merely gives conclusive evidentiary effect to a notice of assessment as to the steps which constitute ‘due making’ and, except in Part IVC proceedings, as to the amount of tax and the particulars in the notice. For reasons stated in the earlier discussion of s 75(v) of the Constitution, s. 177(1) could not affect the constitutional jurisdiction of this Court. And, in none of the judgments in the cases in this Court has it ever been suggested that the subsection might be seen as an attempt to qualify the jurisdiction of this Court. Nor, for that matter, has it been suggested in those cases that the sub-section might be seen as an attempt to qualify the jurisdiction of the Supreme Court of a State or the Federal Court. The terms of the first limb of the sub-section are not directed to curial jurisdiction or to a party’s right to resort to the courts. Instead, the sub-section gives conclusive evidentiary effect to a notice of assessment when produced in much the same way that parties by contract give conclusive effect to a certificate stating the amount of one party’s indebtedness to another.

   Legislative attempts to regulate the way in which a court is to exercise its jurisdiction may amount to an attempt to oust or exclude the jurisdiction of the court or to a usurpation of, or interference with, the exercise of judicial power. . . A conclusive evidence provision would not ordinarily be regarded as ousting jurisdiction or interfering with the exercise of judicial power. That is because a provision of that kind usually does no more than attach definitive legal consequences to an act, transaction or instrument. However, it would be very different if an attempt were made to give conclusivity to a document or certificate which was in its terms determinative of the very issue for determination in a pending case.

   The question whether the legislature can prescribe a conclusive rule of evidence to be applied by federal courts has not been considered in this Court. The vesting of the judicial power of the Commonwealth in Ch III courts requires those courts to determine facts in controversy. Consequently, a statutory provision which attempts to preclude the determination by a federal court of facts in controversy constitutes an impermissible intrusion into the exercise of judicial power.

   . . .

   On the other hand, a rule of substantive law, which will not intrude into the exercise of judicial power, may be expressed in the form of a conclusive evidence provision.

   It follows that the characterisation of s. 177(1) is the critical consideration. Does it prescribe a substantive rule that all procedural steps, other than those going to substantive liability and so going to the excessiveness of the assessment, are directory only and do not touch the validity of the assessment? Or is it a jurisdictional provision which simply attempts to preclude the court from inquiring into matters which do go to the validity of the assessment?

   . . .

   The sub-section leaves the jurisdiction of the relevant court intact but requires the court in the exercise of its jurisdiction to treat the notice of assessment as having been duly made.

   . . .  “

10. At page 192 Brennan J observed:

    “By bringing the process of assessment to an end, service of the notice of assessment has two effects: first, it crystallises the taxpayer’s liability under the Act and makes the tax assessed due and payable at a certain date (s. 204) and, secondly, it enlivens the objection, review and appeal procedures prescribed by s. 175A of the Act and Part IVC of the Administration Act. As the process of assessment in exercise of the Commissioner’s statutory power is apt to affect the rights and liabilities of a taxpayer in these ways, an exercise of those powers is amenable to judicial review by this Court under s. 75 of the Constitution. The jurisdiction of this Court under s. 75 of the Constitution judicially to review the exercise of statutory power by an officer of the Commonwealth cannot be excluded by any law enacted by the Parliament.”

11. At pages 197-8 Brennan J said:

    “It is conceivable that a purported assessment could be made in bad faith so as to forfeit the protection which s 175 would otherwise confer on the assessment. If such a case were to occur, neither s. 175 nor s. 177(1) would transform the purported but invalid assessment into a source of liability. The purported assessment would be a nullity. But an assessment which has been made in a bona fide attempt to exercise the power to make it is not invalid merely on account of a disconformity between the amounts assessed and the amounts properly assessable under the general provisions of the Act

    . . .

    Section 177(1) does not itself confer validity on an instrument that is not otherwise a valid notice of assessment. If it stood alone as an evidentiary provision, it could not preclude an effective exercise by this Court of its constitutional jurisdiction to review an exercise by the Commissioner of his power of assessment. But if s 175 be construed according to the Hickman principle and each of ss 175 and 177(1) be construed as having an operation corresponding with the operation of the other, the evidentiary edifice is seen to be constructed on the foundation of s. 175. So construed, the immunity from review produced by the conclusive evidence provision of s 177(1) is co-extensive with the validity of assessments produced by the operation of s 175 or, when s 175 has no work to do, by the general provisions of the Act. The “notice of assessment” to which s. 177(1) attaches a conclusive evidentiary effect is a notice of assessment which is either valid under the general provisions of the Act or is validated by s 175.

    . . .

    The width of that jurisdiction [i.e. the objection and appeal procedure] and the evident purpose of the Act to channel all issues as to the true tax liability of the taxpayer into the objection, review and appeal procedures found the clearest implication that exceptions to the broadest literal application of s 175 must be narrowly confined and a corresponding operation must be attributed to s 177(1).

    As the scheme of the Act is to protect the validity of notices of assessment while allowing a taxpayer a full opportunity to have the general provisions of the Act affecting tax liability applied, I would construe the term “due making of the assessment” in s 177(1) as extending to every purported exercise of the power to ascertain the taxable income and tax liability of a taxpayer which satisfies the criteria expressed by the Hickman principle.”   

12. Deane and Gaudron JJ held that s. 177(1) cannot be relied on in proceedings brought under s.39B Judiciary Act because it is inconsistent with s.75(v) of the Constitution. They too applied the Hickman test to the construction of s. 175 (page 211). Their Honours then said:

    “The result of its application is that s 175’s protection from invalidity is applicable only if the purported “assessment” (i) is “a bona fide attempt” by the Commissioner or other authorised officer to exercise powers conferred by the Act, (ii) “relates to the subject matter” of the Act and (iii) “is reasonably capable of reference to” those powers. If a purported assessment does not satisfy those three requirements, the protection of s 175 will be unavailable and the purported “assessment” will be invalid. That being so, s 177(1) of the Act is inconsistent with s 75(v) of the Constitution to the extent that it purported to make a certificate of the Commissioner or a Second or Deputy Commissioner conclusive evidence of the due making of an assessment in proceedings in the original jurisdiction of this Court under s 75(v) in which it is alleged that the assessment does not satisfy one or more of those requirements. In want follows, references to an assessment (or a determination) not being “bona fide” should be understood as encompassing not only failure to satisfy the first requirement but also a failure to satisfy either the second or third.

    On the other hand, where the minimum requirements for there to be an “assessment” for the purposes of s 175 are satisfied, the section operates to ensure validity notwithstanding any failure to comply with any of the provisions of the Act. When that is so, other provisions of the Act operate upon the valid assessment (after service) to create liability in the taxpayer. To the extent that s 177(1) makes the production of the original or a certified copy of a notice of assessment conclusive evidence of the due making and (except in review or appeal proceedings) correctness in a case where it is not alleged that the assessment is not bona fide, the sub-section does no more than reflect the substantive provisions of the Act.”

13. At page 213 their Honours said:

    “As has been seen, s 177(2) of the Act is inconsistent with s 75(v) of the Constitution only to the extent that it purportedly precludes the Court from determining, in the exercise of the original jurisdiction conferred by that subsection, a claim that an assessment is invalid on the ground that it is not bona fide. Section 177(1) is also inconsistent with any other provision of the Constitution directly conferring original jurisdiction upon the Court to the extent that it would purportedly preclude the proper judicial determination of such a claim in circumstances where the determination of the claim was a necessary step in the exercise of that jurisdiction. That inconsistency does not, however, give rise to total invalidity. Clearly, s 177(1) can be read down, in accordance with s 15A of the Acts Interpretation Act 1901, to avoid the excess of legislative power. The appropriate method of reading the subsection down is, in our view, to read it as simply inapplicable in relation to the issue of the validity of an assessment which is alleged, in such proceedings in this Court, to be not “bona fide” in the sense explained above. Similarly, s 177(1) is overridden and pro tanto repealed by the provision of s 39B(1) of the Judiciary Act only to the extent that it would otherwise be applicable in relation to that issue in proceedings in the Federal Court under that provision.”

14. McHugh J said at pages 240 – 242:

    “In my opinion the short answer to the submission for the taxpayer is that s 177(1) is not an attempt to oust the jurisdiction of the Federal Court or any court invested with federal jurisdiction. Although s 177 uses the term “conclusive evidence”, its purpose is to enact substantive rules of law which give effect to two policies which are manifest in the terms of the Act and associated legislation. The first policy is that the provisions of the Act involved in the “due making” of an assessment are directory provisions which are not legally enforceable. That policy is manifested by the terms of s 175 of the Act. The second policy is that assessments of tax are not challengeable in ordinary legal proceedings. That policy is now manifested in the terms of Pt IVC of the Taxation Administration Act . . .

    Accordingly, s 177 does not affect the jurisdiction of the Federal Court. Together with s 175, it enacts a substantive rule of law that is applicable in any legal proceedings in any court including this Court that is invested with jurisdiction to hear matters relating to the assessment or enforcement of tax liabilities. It operates “in the exercise of its jurisdiction” and does not withhold jurisdiction. Because ss 175 and 177 enact a substantive rule of law that defines the legal effect of the Commissioner’s conduct occurring in the course of making an assessment, no question of interference with the judicial power of the Commonwealth arises.”

15. The effect of these authorities is that this Court, exercising its jurisdiction in bankruptcy, plainly does not have the power to consider and determine an objection to the notices of assessment under Part IVC of the Taxation Administration Act. However, in exercising its bankruptcy jurisdiction, s.177 Income Tax Assessment Act does not deprive the court of its jurisdiction whether or not to make a sequestration order. Rather it imposes a conclusive evidentiary effect on the notices of assessment.

16. The effect of that is then to be considered as to whether the Court should “go behind” the judgment obtained by the Deputy Commissioner in reliance on the notices of assessment.

17. In Wren v Mahony (1972) 126 CLR 212 at 225 Barwick CJ said:

    “The court’s discretion is in my view a discretion to accept the judgment as satisfactory proof of (the petitioning creditor’s) debt. That discretion is not well exercised where substantial reasons are given for questioning whether behind that judgment there was in truth and reality a debt due to the petitioner.”

18. Thus it is said that the court in exercising its bankruptcy jurisdiction has the power to go behind a judgment and inquire whether there is a real and proper debt. The difficulty is that in cases such as the present when the court looks behind the judgment, it confronts the notices of assessment, which have the protection of s.177(1).

19. The applicant seeks to draw a distinction between going behind the judgment, and attacking the notices of assessment.  However, in my view, the applicant seeks to draw a distinction without a difference.  The judgment was based on the notices of assessment.  Unless the latter can be attacked, the judgment remains unimpugned: Clyne v DCT (1983) 57 ALJR 673 at 674.

20. In my view, where the Deputy Commissioner relies on notices of assessment that carry the protection of s.177(1) Income Tax Assessment Act, it is not open to the debtor to seek to go behind the judgment for the purpose of demonstrating error.

21. In my view it is s.52(2)(b) Bankruptcy Act that is of critical importance in determining the preliminary questions.

22. One starts with the uncontroversial statement that on proof of the matters in s.52(1) of the Act the court is not bound to make a sequestration order: Re Holland (1934) 7 ABC 217; ReParkes ex parte Campbell [1961] QWN 35. Against that statement, one must refer to statements such as that in Cain v Whyte (1933) 48 CLR 639 at 646:

    “Prima facie, on proof of the matters mentioned in s. 52(1) the court will proceed to make an order for sequestration, and it is for the debtor to show some cause overriding the interest of the public in the stopping of unremunerative trading, and the rights of the individual creditors who are unable to get their debts paid to them as they become due. Something has to be put before the court to outweigh those considerations before it can be said that sufficient cause is shown against the making of a sequestration order.”

23. It has been held recently by the Full Federal Court in Totev v Sfar [2008] FCAFC 35 that the discretion conferred by s.52(2)(b) is a broad one. In Clyne v DCT (1985) 5 FCR 1 the Full Federal Court considered that the circumstances which may constitute “other sufficient cause” are extremely variable, and it is not appropriate to attempt to catalogue or circumscribe them.

24. The learned authors of Australian Bankruptcy Law and Practice say, at [52.1.25]:

    “The court has a discretion to exercise; it is a wide discretion and must be exercised in the light of all the circumstances not forgetting on the one hand that the petitioning creditor has proved a debt and the act of bankruptcy and has a prima facie right to a sequestration order. On the other hand if a majority in value and number of creditors desires some other type of administration that is a matter to be considered and it is an important matter if the majority is substantial. The court has to decide in what manner the discretion should be exercised in all the circumstances of the particular case having regard to the interests of the various parties and the interests of the public: Re Dolman; ex parte Elder Smith Goldsbrough Mort Ltd (1967) 10 FLR 384.”

1. In determining the preliminary questions, I stress that I am focussing on whether the court has the power to receive evidence that questions the underlying taxation debt, in the exercise of its discretion under s.52(2)(b) Bankruptcy Act, and whether such evidence is relevant to the exercise of that discretion.  I am not making any judgment at this stage as to the quality of the applicant’s evidence, nor whether it is sufficient for the court to exercise its discretion one way or the other.

2. In Re Svir; ex parte Commissioner of Taxation (1998) 83 FCR 314 at 317 Burchett J made it clear that a court in bankruptcy is required to keep in mind not only the interests of the individual parties before it in the particular case, but also the public interest, which may be adversely affected by the propping up of insolvency.

3. The number and wishes of other creditors of the debtor, the availability to funds to pay creditors from sources not available to a trustee in bankruptcy and many other matters may go to the exercise of the discretion under s.52(2)(b). Bankruptcy is a status created by an order of the court. It has implications well beyond inter partes litigation.

4. It has frequently been said that the Deputy Commissioner is in a position of special advantage because of the statutory protection afforded to him or her by the various taxation statutes. Those protections include the requirement for a taxpayer to meet taxation liabilities notwithstanding that they are disputed: see, for example ss.14ZZM and 14ZZR of the Taxation Administration Act. Significant weight is given to the terms and policies underlying the taxation legislation: see, for example, DCT v Ho (1996) 131 FLR 188.

5. However, those considerations do not, in my view, affect the admissibility of evidence going to show that there is ‘other sufficient cause’ for not making a sequestration order, because there is a substantial or genuine dispute as to the underlying tax debt; nor whether the court has a discretion (as opposed to how it should exercise that discretion) not to make a sequestration order where there is such a dispute. The court will not decide the dispute, and the tax debt will remain.

6. It might be thought that to allow a debtor to raise the existence of a dispute about the underlying tax debt at the stage of deciding whether to make a sequestration order, but not to permit such a challenge to the debt at an anterior stage (such as on an application to set aside the bankruptcy notice, or to go behind the judgment) is somewhat paradoxical. In my view it is not. It is one thing for the Deputy Commissioner to maintain the integrity of the judgment and debt secured by the conclusive evidence provisions of s.177(1) Income Tax Assessment Act.  It is quite another for the court to decide whether the estate of a taxpayer should be sequestrated. The court may well conclude that, assuming the judgment sum is owing (including because it cannot be challenged) nevertheless a sequestration order should not be made.

7. The court in bankruptcy is not permitting a challenge to the notice of assessment, per se, nor will it make any determination as to the correctness or otherwise of the contentions of the parties. All the court is concerned with is whether, in the public interest, and all matters considered, a sequestration order should be made. One of the relevant background factors to the exercise of that discretion is whether the Deputy Commissioner is the sole, or substantial creditor, and if so, whether the assessments made by him or her are open to genuine or substantial dispute. The consequence of making a sequestration order may be that the trustee in bankruptcy, to whom the debtor’s rights of objection are assigned, may never exercise those rights. The trustee may be precluded from rejecting the Deputy Commissioner’s proof of debt, because it too is assumed conclusively to be correct (by analogy to Commonwealth of Australia v Duncan 81 ATC 4228). The Deputy Commissioner may, on the making of a sequestration order, thereby stymie any challenge under Pt IVC to the notices of assessment.

8. When it is borne in mind that it is the debtor who carries the onus of demonstrating ‘other sufficient cause’ under s.52(2)(b) Bankruptcy Act in my view it must follow that the debtor should be allowed to adduce evidence to demonstrate that there is a genuine dispute or a substantial dispute as to the correctness of the underlying debt, to the extent necessary to persuade the court that a sequestration order ought not be made.

9. Cooper J in Re Trevaskis; ex parte Commissioner of Taxation [1993] FCA 572 apparently accepted that he had a discretion at the ultimate stage of the bankruptcy proceedings to examine whether there was a substantial dispute about the taxpayer’s liability. In the end, his Honour was not satisfied by the taxpayer’s evidence.

10. My conclusion that this court in bankruptcy retains a discretion to admit evidence of a substantial dispute as to the underlying taxation debt, at the final stage of the inquiry as to whether a sequestration order should be made finds support in the submissions of the Deputy Commissioner in Broadbeach Properties, the decision I mentioned at the outset of these reasons. That case concerned the power of the Supreme Court of Queensland to set aside statutory demands issued by the Deputy Commissioner against various corporations, issued consequent upon the issue of notices of assessment (both for income tax and GST). At issue was whether the corporations could challenge the validity of the taxation debts at the stage of seeking to set aside the demands. The High Court ultimately decided that they could not.  However, what is important for present purposes is the concession of counsel for the Deputy Commissioner before the High Court that at the ultimate hearing of the winding up application, the court might properly have regard to whether the taxpayer had a “reasonably arguable” case in proceedings under Pt IVC, and questions of a kind canvassed in General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 might arise.

11. The setting of the threshold at the General Steel level is particularly interesting. It denotes that to establish a substantial dispute or a genuine dispute, the threshold is not particularly high.

12. On the argument of the appeal, the following exchange took place between senior counsel for the Deputy Commissioner and the justices of the High Court:

    MR WILLIAMS:    So as to outline immediately the structure of the argument that the Commissioner advances, the Commissioner accepts that in the exercise of that discretionary power, the power to wind up a company, the court can take into account the existence of Part IVC proceedings. So the court may take account of such a proceeding.

    GUMMOW ACJ: What do you mean by “take account”?

    MR WILLIAMS: Have regard to, consider as a matter relevant to the exercise of the winding-up discretion.

    GUMMOW ACJ: Yes, but consider how closely - form a view about the substance of the Part VI proceedings?

    MR WILLIAMS: Not form a view as to the deep - - -

    GUMMOW ACJ: Ask how close they are to resolution?

    MR WILLIAMS: Questions of that kind. Ask whether they are reasonably arguable. It is not necessary at this stage for the Court to go in detail into the merits of the Part IVC proceeding, but it is necessary to know whether the questions are reasonably arguable.

    CRENNAN J: Is that connected with the idea of a bona fide dispute that is familiar in this context?

    MR WILLIAMS: It may have echoes and there may in practice be no very significant difference between the tests that the court would apply at each stage and, indeed, that may not be that much different to the questions of the General Steel kind that would be considered. Of course, at the stage of the motion to set aside the statutory demand there is a quite distinct question – and I will develop this in a moment – and that is whether the demand should be set aside as opposed to the different question of whether the company should be wound up.

    So the Commissioner accepts that at the 459A discretionary stage, the court may take account of the existence and strength of the Part IVC proceeding where, for example, the debt due under a notice of assessment is decisive in rendering a company insolvent. The debt crystallised, however, by the service and notice of assessment remains due and payable and enforceable.

    . . .

    CRENNAN J: You are saying, are you not, that the provisions in the Tax Act which render notices of assessments conclusive in respect to the amounts claimed override this phrase “genuine dispute”?

    MR WILLIAMS: No, we do not put it that high, your Honour. We say that the question is, genuine dispute as to what? One starts with the elements.

    . . .

    Your Honour, our point of departure from the Court of Appeal is the stage at which these matters are to be considered. Our submission is that disputes under Part IVC are matters that properly fall to be considered, if relevant, under the general winding-up discretion at the point where the court may have submissions from other creditors and knows the position as regards the solvency of the company. The company may, for example, set out to rebut the presumption of insolvency by proving insolvency, and it is at that stage that Part IVC proceedings become irrelevant and not - - -

    But, your Honour, perhaps it is necessary to go back to my starting point in order to indicate the structure for which we do contend – that is, it is a matter to be considered, the existence of Part IVC proceedings is a matter properly to be considered, if relevant, at the stage of the winding-up discretion, and by reason of the existence of 459S which, in effect, precludes reliance at that stage on a matter which could have been relied upon for setting aside a notice, a statutory demand, there is, in effect, a division of relevant matters between those that are relevant to the setting aside stage and those that are relevant to the winding-up stage. In our submission, the question of arguable Part IVC proceedings is a matter that falls properly to be considered at the latter stage rather than at the earlier.

    . . .

    MR WILLIAMS: Well, with respect, we are not at issue with the propositions that your Honour puts. The debate is about the stage in Part 5.4 of which those matters become relevant. The debate is about whether they should be considered at the setting aside of the statutory demand stage where there is just the company as the applicant, the Commissioner as the respondent, only two parties, no significant information before the Court in the ordinary course as to the solvency or otherwise of the company, or as to the position of employees or other creditors. In that simple inter partes litigation, is it appropriate for these matters to be taken into account, or do they fall in the structure of the legislation to be considered at the 459A winding-up stage? That is the issue with which we part company, with respect, from their Honours in the Court of Appeal.

    . . .

    MR WILLIAMS: The question may well be, your Honour, as to timing. The dispute between us is not as to whether arguable Part IVC proceedings can be taken into account in deciding whether a company can be wound up, but rather at the earlier stage and we put – and it may be repetitive – since it is immediately enforceable under ZZM, notwithstanding the existence of the review proceedings, it is debt that can be sued for to judgment, enforced by the usual means of enforcement. That is a critical aspect of the debt when one comes to consider its nature in considering 459H and 459J.”

13. Senior Counsel for the Deputy Commissioner, in answer to a question by Gummow ACJ expressly accepted that there were analogies between the proceedings then before the court with the issue of bankruptcy notices. In my view no meaningful distinction can be drawn between the ultimate decision of the bankruptcy court to make a sequestration order, and that of a court to make a winding up order.

14. It is passing strange that in proceedings concerned with the winding up of a corporation, the Deputy Commissioner would concede that whether there is a genuine dispute as to the underlying taxation liability could be taken into account at the final stage of deciding whether to make a winding up order (but no earlier) but in these bankruptcy proceedings (which are admittedly analogous) contends that such a dispute is irrelevant to the determination of whether to make a sequestration order.

15. In my view, the court plainly has jurisdiction to decide whether to make a sequestration order. In making that decision, the applicant carries the onus of establishing ‘other sufficient cause’ for not making such an order. This court cannot determine any objection to the notices of assessment issued by the Deputy Commissioner. It cannot decide that the notices of assessment are incorrect. However, in deciding whether to make a sequestration order, evidence as to the existence of a genuine dispute as to the taxation debt is both relevant and admissible. The preliminary questions will be answered accordingly.

16. I will hear the parties as to costs.

I certify that the preceding seventy-one (71) paragraphs are a true copy of the reasons for judgment of Wilson FM

Associate:  Lynnette Chin

Date:  9 September 2008