Ngaropo v Deputy Commissioner of Taxation (No.2) - [2009] FMCA 956

FEDERAL MAGISTRATES COURT OF AUSTRALIA

NGAROPO v DEPUTY COMMISSIONER OF TAXATION (No.2)

[2009] FMCA 956

BANKRUPTCY – Application to set aside Bankruptcy Notice – whether applicant has established a set off etc equal to or exceeding the debt due – whether the set off etc could have been raised in the proceedings in which judgment was obtained or whether creditor wrongly calculated the amount of the claim in the Notice.

Bankruptcy Act 1966 (Cth), ss.40(1)(g), 41(6A), (6C), (7)
Federal Court (Bankruptcy) Rules 2005 (Cth), r.3.02
Federal Magistrates Court (Bankruptcy) Rules 2006 (Cth)
Federal Magistrates Court Rules 2001 (Cth)
Income Tax Assessment Act 1936 (Cth), s.177
Income Tax Assessment Act 1997 (Cth), Division 35

Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd (2008) 248 ALR 693; [2008] HCA 41

Re James; Ex parte Carter Holt Harvey Roofing (Aust) Pty Ltd (1993) 46 FCR 183

Applicant:

PATRICK THOMAS NGAROPO

Respondent:

DEPUTY COMMISSIONER OF TAXATION

File Number:

PEG 97 of 2009

Judgment of:

Raphael FM

Hearing date:

23 September 2009

Date of Last Submission:

23 September 2009

Delivered at:

Perth

Delivered on:

23 September 2009

REPRESENTATION

Counsel for the Applicant:

Mr. Jarman

Solicitors for the Applicant:

Jarman McKenna

Counsel for the Respondent:

Mr. Tsaknis

Solicitors for the Respondent:

ATO Legal Services Branch

ORDERS

The application is dismissed.
The applicant must pay the respondent’s costs to be taxed in accordance with the Federal Magistrates Court (Bankruptcy) Rules 2006 (Cth).

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
PERTH

PEG 97 of 2009

PATRICK THOMAS NGAROPO

Applicant

And

DEPUTY COMMISSIONER OF TAXATION

Respondent

REASONS FOR JUDGMENT

There comes before me an application to set aside bankruptcy notice NN 1469/2009 issued by the Official Receiver on 17 April 2009 and served on 30 May 2009. The bankruptcy notice claims that the debtor owes the creditor Commissioner $147,120.16, based upon a judgment of the District Court of Western Australia for $144,757.39 and $783.75 costs, together with $1579.02 interest. The debt is in respect of notices of assessment for the income years 2001 to 2003.
The application which was filed in this Court on 19 June 2009 seeks orders that the notice be set aside on the grounds that the applicant has a counter-claim pursuant to s.40(1)(g) and s.41(7) of the Bankruptcy Act 1966 (Cth). Pursuant to s.41(6A), upon the filing of this application, the time for compliance of the bankruptcy notice was extended until today.
The applicant has filed some written submissions which set out the history of the debt due to the Commissioner. It would appear that the applicant became involved in a managed investment scheme known as the Paulownia Tree Project No. 3 as long ago as 1994 (the “Scheme”). Pursuant to certain tax rulings, the applicant received the benefit of allowance of deductions as a result of entering into this Scheme. In 2001, Division 35 of the Income Tax Assessment Act 1997 (Cth) was introduced in respect of non-commercial loss enterprises. The product ruling which applied to the Scheme ceased to have effect after 30 June 2001. The notices of assessments which issued for the years 2001 to 2003 took into account these changes in the legislation. The effect of them was that the deductions were no longer allowed, and the applicant had, instead of a tax refund, a tax debt which he owed to the Commissioner.
The applicant objected to the new tax assessments, and those objections were disallowed. The applicant then had two courses of action available to him. The first was to apply to the Administrative Appeals Tribunal for reconsideration of the disallowance of the objection, and the second was to make a similar application to the Federal Court of Australia. The applicant did not take either of those steps. As a result, the Commissioner was able to commence the proceedings and obtain judgment, based upon what is known as the conclusive certificate provisions, found in s.177 of the Income Tax Assessment Act 1936 (Cth). This is what occurred in the District Court of Western Australia. When the applicant was served with the proceedings out of the District Court, it would have been possible for him to have raised the possibility of a cross-claim against the Commissioner. Such a cross-claim has been indicated to me in the applicant’s submissions. It consists of a claim that the tree plantations the subject of the Scheme have been damaged because, as a result of the disallowance of the deductions, the applicant has not been able to put any money into the Scheme to keep up maintenance upon the trees.
Leaving aside the question of whether or not this claim for pure economic loss against the Commissioner is likely to have any prospect of success, it was capable of being raised, and as a result of being raised it was possible for the District Court to have granted the applicant a stay of execution in relation to the debt. It would not have been possible for the District Court to have considered the applicant’s defence to this claim, being that the assessment was wrongly made, as the only outlet for such a claim was the AAT or Federal Court proceedings that I have previously referred to.
These matters were discussed comprehensively by the High Court of Australia in Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd (2008) 248 ALR 693 at [40-50].
The applicant did not raise the cross-claim in the District Court proceedings. The Federal Magistrates Court Rules 2001 (Cth) incorporate the Federal Magistrates Court (Bankruptcy) Rules 2006 (Cth), which are identical to those found in the Federal Court (Bankruptcy) Rules 2005 (Cth). Rule 3.02 deals with the setting aside of a bankruptcy notice under s.41(6A), (6C) and (7). The rule requires:
(1) An application to set aside a bankruptcy notice must be accompanied by:
(a) a copy of the bankruptcy notice; and
(b) an affidavit stating:
(i) the grounds in support of the application; and
(ii) the date when the bankruptcy notice was served on the applicant; and
(c) a copy of any application to set aside the judgment or order in relation to which the bankruptcy notice was issued and any material in support of that application.
(2) If the application is based on the ground that the debtor has a counterclaim, set-off or cross‑demand mentioned in paragraph 40 (1) (g) of the Bankruptcy Act, the affidavit must also state:
(a) the full details of the counterclaim, set-off or cross-demand; and
(b) the amount of the counterclaim, set-off or cross demand and the amount by which it exceeds the amount claimed in the bankruptcy notice; and
(c) why the counterclaim, set-off or cross-demand was not raised in the proceeding that resulted in the judgment or order in relation to which the bankruptcy notice was issued.
(3)The application and supporting documents must be served on the respondent creditor within three days after the application is filed.
It is now well established that the affidavit in support of an application pursuant to s.41(7) must do more than merely assert the existence of a counterclaim, set-off or cross-demand. It must contain some evidence which establishes that there is an effective and bona fide claim which is real: Re James; Ex parte Carter Holt Harvey Roofing (Aust) Pty Ltd (1993) 46 FCR 183 at 188-189, per Hill J. Mr Jarman, who appeared for the applicant, conceded that he was unable to quantify the amount of the alleged cross-claim. Certainly, no affidavit from his client has been placed on the court record doing that. It is to be remembered that the cross-claim, cross-demand or set-off must be equal to or exceed the amount of the debt, and I have no evidence that this is the case. It would appear to me for that reason alone I will be unable to set aside the bankruptcy notice under s.41(7).
In addition to the problems that the applicant faces in quantifying his cross-claim, he has not told us why he was unable to set it up in the District Court and obtain the stay which would have prevented the issue of the bankruptcy notice in the first place. We know that the judgment of the District Court was a default judgment, which would indicate that the applicant was served but did not consider it worthwhile attending. That does not constitute being unable to raise the matter in the District Court. It seems to me that for this additional reason, I will be unable to set aside the bankruptcy notice.
The applicant’s written submissions give a number of other grounds why the bankruptcy notice should be set aside. They are mostly based upon what one might consider to be “fairness” arguments, i.e., that the applicant should be allowed to contest the assessments and that his bankruptcy might prevent this, and arguments based upon the fact that other persons involved in the Scheme have entered into arrangements with the Commissioner. Once again, there is no real evidence of this, they are assertions contained in Mr Jarman’s helpful submissions.
In any event the assertions are not grounds for the setting aside of a bankruptcy notice which is only the first step in the process that might eventually lead to a sequestration order against this applicant. It seems to me that the applicant does have a further opportunity to persuade a court that it should not make such an order at the time that the petition based upon this bankruptcy notice is heard. If the applicant is well advanced in his review of the assessments by that time it may well be that a sympathetic court might be prepared to adjourn a petition. But I cannot bind a court in that way.
I have considered the arguments put by Mr Jarman on behalf of his client. I am unable to see that there is any case made out that the applicant has a cross-claim, cross-demand or set-off that is equal to or exceeds the amount of the judgment debt, or that was one which could not have been raised in the proceedings in which the judgment was obtained. There was at some stage an argument raised by the applicant that the amount of the judgment debt contained in the bankruptcy notice was incorrect and was in excess of the amount that was properly owing. This, it was said, arose out of the fact that the Commissioner had held onto certain refund payments that were due to the applicant but were not credited to him in the calculation. However, I have seen an affidavit from Mr Chisholm filed in this Court on 22 July 2009 which exhibits the Commissioner’s calculations of the debt and I am satisfied from the exhibit “RAC 2” to that affidavit that the three credits arising out of the previous years’ assessments were taken into account when assessing the amount for which judgment was obtained.
In all these circumstances the application is dismissed, the applicant must pay the respondent’s costs to be taxed in accordance with the Federal Magistrates Court (Bankruptcy) Rules 2006 (Cth).

I certify that the preceding thirteen (13) paragraphs are a true copy of the reasons for judgment of Raphael FM

Associate:

Date: 1 October 2009