Deputy Commissioner of Taxation v Ausmart Services Pty Ltd [2018] FCA 1912 | Case summary

Evidence 2 The plaintiff, the Deputy Commissioner of Taxation (the Commissioner), relied on two affidavits made by Aris Zafiriou, each sworn on 26 November 2018. Mr Zafiriou is an Executive Level Officer in the Australian Public Service, employed at the Australian Taxation Office (ATO) as Director, Significant Debt Management. Mr Zafiriou gave the following evidence. 3 In early 2014, a task force, led by the ATO, became aware of Zu Neng Shi (also known as Scott Shi) and his associated companies who were involved in the meat processing industry. Mr Shi was the head of a large labour hire business that supplied the majority of workers, through various companies, to a number of abattoirs. Mr Shi was not named as a director on ASIC's register, but appeared to be (either himself or through his associates) the controller of all the companies. In July 2015, the taskforce began an intense audit of this group of companies (the Shi Group) and persons associated with it. 4 As a result of this audit, it was determined that the companies in the Shi Group, which include the present defendants, have incurred liabilities, which include: (a) amounts withheld from the wages of employees pursuant to Div 12 of Pt 2-5 of Sch 1 to the Taxation Administration Act 1953 (Cth) but not remitted (PAYG); (b) goods and services tax (GST) pursuant to A New Tax System (Goods and Service Tax) Act 1999 (Cth) in relation to labour hire contracts with abattoirs; (c) superannuation guarantee charges (SGC) pursuant to s 16 of the Superannuation Guarantee (Administration) Act 1992 (Cth) in relation to employees; and (d) income tax. 5 The defendants are the known active companies in the Shi Group. Many companies in the Shi Group have gone into liquidation or have been deregistered without paying their tax liabilities. The directors of the companies in the group usually changed a short time before each company was wound up or deregistered. The employees of each company in the labour hire contracts with each abattoir were transferred to a new company set up in the Shi Group. Nearly all the money received by companies in the group, not used to pay wages or business expenses, was withdrawn by Mr Shi or his associates. There are usually several companies in the Shi Group in operation at any one time, with some companies having contracts with abattoirs to supply workers and other companies using their bank accounts to pay workers. 6 An audit team investigated all known companies within the Shi Group for the period 1 July 2009 to 30 June 2017 (the audit team). This was taken as an indicative time period only. Not all companies in the group operated during the entire period. The audit group determined the taxation liabilities of those Shi Group companies that held a current registration with ASIC as at 30 June 2017. An estimate of tax liabilities was determined in respect of those companies that had been placed into liquidation or which had been deregistered prior to 30 June 2017. 7 So far as the defendants are concerned, the investigation has revealed significant shortfalls in the income tax, net GST, PAYG and SGC payable by them. Following the audit, the total primary tax liability of each defendant has been determined as follows: (a) Ausmart Services Pty Ltd - $1,200,070.48; (b) Ezyrol Trading Pty Ltd - $12,105,872.90; (c) Gamma One Pty Ltd - $8,805,357.11 (on the assumption that it is providing services and not one or more of the other defendants); (d) Goyx Pty Ltd - $1,327,424.91; (e) Mondex Group Pty Ltd - $7,507,902.09; (f) Newing Glacier Pty Ltd - $5,549,274.06; (g) Rocube Holding Pty Ltd - $1,004,549.89; and (h) Spark Labour Solutions Pty Ltd - $219,472.23. 8 Notices of assessment in relation to income tax, GST and administrative penalties were issued in respect of the defendants on 26 November 2018. At the time of the hearing, these notices had not been served. PAYG withholding liabilities and SGC liabilities have not been assessed. However, estimate notices were issued in relation to each defendant on 26 November 2018. Once again, at the time of the hearing, these notices had not been served. 9 As I have noted, a large number of companies in the Shi Group have gone into liquidation or been deregistered without paying their taxation liabilities. The total primary tax shortfall that has been calculated is $83,811,754.58. When this sum is taken with the primary tax liabilities assessed or estimated in respect of the defendants, it will be appreciated that the unpaid primary tax liabilities of the Shi Group exceed $121 million. 10 The audit team determined that many of the labour hire companies in the Shi Group treated their workers as contractors, rather than as employees. This had a number of tax consequences. In particular, although the companies withheld PAYG withholding amounts, with minor exceptions the companies did not remit any PAYG withholding amounts to the ATO. Further, the companies did not comply with the obligations of employers under the Superannuation Guarantee (Administration) Act 1992 (Cth). As a consequence, they became liable for superannuation guarantee charge shortfalls, which they did not pay. Further, the companies lodged Business Activity Statements (BAS) in which they claimed GST input credits equivalent to 1/11 of the wages they paid to the employees. However, as none of the employees were registered for GST, no GST was in fact invoiced to the companies by the employees or paid by the employees to the ATO. This caused the companies to receive refunds for GST that they never paid. 11 The audit team also determined that the labour hire companies were either under-paying, or not paying GST at all, on the fees they received from abattoirs. The money flowing into many of the Shi Group companies' bank accounts far exceeded any income declared in tax returns, even after deductions were allowed for obvious expenses such as wages. 12 Most of the companies in the Shi Group did not lodge tax returns at all or did not lodge them for all income years. Many did not lodge BAS at all or did not lodge them for all quarters. Where tax returns or activity statements were lodged, they were generally found to have understated income and GST payable, while over-claiming GST input credits. 13 Initially, the labour hire companies operated on a "standalone" basis in which the same company that entered into a labour hire contract with an abattoir would pay wages to the workers pursuant to that contract. However, in about 2014, the companies changed to a tiered structure in which the companies that had entered into labour hire contracts (head companies) with abattoirs no longer directly paid wages to most of the workers provided under the contract. Instead, the head companies began transferring funds from their bank accounts to one or more other companies in the Shi Group (payer companies) that then used those funds to pay the workers. The head companies provided payslips to the workers indicating that they were the employer companies. 14 Analysis of the companies' bank statements, AUSTRAC records and other documents indicates that the wound up or deregistered companies in the Shi Group had their assets stripped prior to liquidation or deregistration. In particular, the analysis shows that funds in the companies' bank accounts that were not used to pay wages or other business expenses were transferred to other companies in the Shi Group, or were withdrawn or transferred offshore for the benefit of Mr Shi, his relatives and associates. The audit team undertook a comprehensive analysis of the bank statements of relevant individuals and companies. This showed a number of significant cash withdrawals from ATMs at locations that included casinos, such as Star City Casino (Star City) and other gambling locations. The majority of the cash withdrawals made at ATMs from the Shi Group companies' accounts were made at or in the vicinity of Star City. Mr Shi was a diamond member of Star City, and regularly gambled there. He also had a spouse card which he gave to a long-term employee, Jiong (Jane) Xue. This enabled Ms Xue to invite associates of the labour hire group to the casino as guests. The Commissioner relied on this as evidence of Mr Shi profiting personally from the funds of the companies in the Shi Group. 15 Mr Shi (or one of his close relatives or associates) was also a signatory (in most cases, the sole signatory) to the Shi Group company bank accounts. He was able to make or direct withdrawals in cash from ATMs, as well as cashing cheques and transferring funds offshore. Investigations undertaken with respect to the bank accounts show that they were all accessed by Internet users from the IP Address subscriber account of Scottwell International Pty Ltd (Scottwell). Scottwell carries on a meat-exporting business and is the administrative head company of the Shi Group, although it does not itself supply labour hire. For various periods since its incorporation up to 1 July 2017, Mr Shi was Scottwell's sole director and shareholder. On 1 July 2017, Mr Shi ceased to be the sole director and shareholder, and was replaced by Qun Yang, a Chinese national. Qun Yang lists his primary business and residential address as 47A Rodd Street, Birrong, New South Wales. This is the same primary business and residential address listed by Mr Shi in his income tax return for the year ended 30 June 2017. The evidence discloses the Shi Group companies whose accounts were accessed by IP Addresses traced to Scottwell. These include all the defendants other than Rocube Holding Pty Ltd. 16 In the income years ending 30 June 2010 to 30 June 2016 inclusive, the evidence shows that a total of $4,078,130.84 in cash cheques were drawn on bank accounts of companies in the Shi Group; a total of $150,086.93 in EFTPOS withdrawals were drawn from bank accounts of companies in the Shi Group; and a total of $2,007,879.60 was drawn in cash through ATMs from bank accounts of companies in the Shi Group. 17 In addition, a number of payments were made through Money Chain Foreign Exchange (Money Chain), a business specialising in providing remittance services/foreign exchange trading services for Chinese around the world. In the income years ending 30 June 2010 to 30 June 2016 inclusive, the audit team identified at least $28,699,047 in overseas funds transferred through Money Chain to overseas accounts of Mr Shi, his relatives and companies suspected to be under his control in China. The audit team formed the belief that Mr Shi provided to Money Chain a list of names and personal details of former employees of companies in the Shi Group, which Money Chain then used for this purpose. The audit team formed the view that the funds transferred to Money Chain by the Shi Group companies was not for the purpose of purchasing overseas goods. This view was supported by records held by the Australian Customs Service. Taking into account the Money Chain transfers, and other direct transfers, the Commissioner believes that, in the period 30 June 2010 to 30 June 2016, more than $43.1 million has been remitted overseas by companies in the Shi Group at Mr Shi's direction. Mr Zafiriou detailed some of the income determined at audit as being withdrawn for Mr Shi's personal benefit or for the benefit of others at his direction. 18 As I have noted above, in cases where a company in the Shi Group is wound up or deregistered, the employees of that company are transferred to another company in the group. Payments due to the wound-up company under contracts with abattoirs and meat processing facilities are generally redirected to another company in the group. Mr Zafiriou gave evidence that the multi-tier fund flows of the Shi Group appeared to be a haphazard and ad hoc method of paying wages from whichever company in the Shi Group has sufficient funds. Mr Zafiriou said that the general pattern, across the Shi Group, is that a head company contracts with an abattoir to provide labour and transfers large amounts to other companies in the group, particularly intermediary companies. The intermediary companies in turn transfer almost all of their purported contract income to payer companies. The funds which are transferred to the payer companies are sometimes not used to pay the wages of the workers of the relevant head company but instead are used to pay the workers for another head company. He said, however, that there is a single controlling mind behind the companies - which is Mr Shi. 19 Mr Zafiriou said that there is a history of companies in the Shi Group not complying with their tax reporting obligations and subsequently being placed into administration or liquidation owing substantial taxation debts. The routine de-registration of the payer companies, and regular transfer of labour hire contracts between Shi Group companies shows that there is a history of "phoenix" activity within the group. 20 Taken at face value, the evidence reveals systematic and deliberate non-compliance of companies in the Shi Group, including the defendants, with various taxation obligations. The evidence also reveals "phoenix" activity. There is a justifiable lack of confidence in the administration of the companies' affairs and a risk to the public interest, both in terms of a risk that employee entitlements will not be paid and a risk to the revenue, which warrants protection by the appointment of a liquidator.

Analysis 21 The Originating Process seeks an order, on alternative grounds, that the defendants be wound up. One ground is the just and equitable ground: s 461(1)(k) of the Corporations Act 2001 (Cth) (the Act). Section 472(2) of the Act provides that the Court may appoint a registered liquidator provisionally at any time after the filing of a winding up application and before the making of a winding up order. 22 The Court's power to appoint a provisional liquidator is a wide one. The appointment is, however, a drastic intrusion into the affairs of the company, and an appointment will not be made unless the Court is satisfied, firstly, that there is a reasonable prospect that a winding up order will be made on the application to wind up and, secondly, some good reason is shown for placing the affairs of the company under external control prior to the hearing of the winding up application, such as public interest considerations, to preserve the status quo, or to protect the company's assets and affairs: Allstate Explorations NL v Batepro Australia Pty Ltd [2004] NSWSC 261 at [27] and [30]; Australian Securities and Investments Commission v Uglii Corporation Ltd [2016] FCA 1099; 116 ACSR 389 at [72]. It may be appropriate to appoint a provisional liquidator where the affairs of the company have been carried on casually and without due regard to legal requirements so as to leave the court with no confidence that the company's affairs will be properly conducted: Australian Securities Commission v Solomon (1996) 19 ACSR 73 at 80, citing Montgomery Windsor (NSW) Pty Ltd v Ilopa Pty Ltd (1984) 2 ACLC 224. 23 A provisional liquidator may be appointed ex parte. However, as Davies J observed in Deputy Commissioner of Taxation v A & S Services Australia Pty Ltd [2017] FCA 437 at [4]: … there should be cogent evidence that the delay involved in effecting service, or at least in giving notice of the application, or the very fact of notice itself is likely to be such as to defeat the purpose of appointing a provisional liquidator: South Downs Packers Pty Ltd v Beaver [1984] 2 Qd R 559; (1984) 8 ACLR 990 at 994 (McPherson J). In Carr v Darren Berry International Marine Pty Ltd (No 1) [2013] FCA 1150, Perram J ordered the appointment of provisional liquidators on an ex parte basis. His Honour considered that the potentially fraudulent nature of what was taking place combined with the inherent mobility of the company's property made it impracticable for the application to be heard on notice in the ordinary way. 24 In the present case, the Commissioner relies on that consideration. The Commissioner submits that given the nature of the conduct complained of (alleged fraud, "phoenix" activity and tax evasion) the Court might be more readily inclined to grant interim relief to maintain a company's assets where those assets are inherently mobile (for example, cash or other liquid assets) and where the applicant for relief demonstrates the risk that the assets might be dissipated. 25 The principles applicable to winding up a company on the just and equitable ground are conveniently summarised in Australian Securities and Investments Commission v ActiveSuper Pty Ltd (No 2) [2013] FCA 234; 93 ACSR 189 at [20] to [24]: 20 It has long been established that a company may be wound up where there is "a justifiable lack of confidence in the conduct and management of the company's affairs" and thus a risk to the public interest that warrants protection: Loch v John Blackwood Ltd [1924] AC 783 at 788. In Australian Securities and Investments Commission v ABC Fund Managers (2001) 39 ACSR 443 at [119], Warren J (as her Honour then was) set out three "general fundamental principles": First, there needs to be a lack of confidence in the conduct and management of the affairs of the company … Second, in these types of circumstances it needs to be demonstrated that there is a risk to the public interest that warrants protection. Third, there is a reluctance on the part of the courts to wind up a solvent company. (Citation omitted.) 21 In relation to the first, a lack of confidence may arise where, "after examining the entire conduct of the affairs of the company" the court cannot have confidence in "the propensity of the controllers to comply with obligations, including the keeping of books, records and documents, and looking after the affairs of the company": Galanopoulos v Moustafa [2010] VSC 380 at [32]; see also Australian Securities Commission v AS Nominees Limited (1995) 62 FCR 504 at 532-3; ABC Fund Managers at [117]-[118]; Australian Securities and Investments Commission v International Unity Insurance Pty Ltd (2004) 22 ACLC 1416 at [135]-[139]. 22 There is thus a significant overlap between the matters relevant to the just and equitable ground and the matters which weigh in favour of the exercise of the court's discretion to appoint a provisional liquidator. For example, matters which indicate "the propensity of the controllers to comply with obligations, including the keeping of books, records and documents, and looking after the affairs of the company" might also demonstrate that "the company's affairs have been conducted in a manner without regard to legal requirements or accepted principles of corporate management". 23 In relation to the second, a risk to the public interest may take several forms. For example, a winding up order may be necessary to ensure investor protection or where a company has not carried on its business candidly and in a straightforward manner with the public: International Unity Insurance at [138]; see also Australian Securities and Investments Commission v Finchley Central Funds Management Ltd [2009] FCA 1110 at [3]. Alternatively, it might be justified in order to prevent and condemn repeated breaches of the law: Kingsley Brown Properties at [96]; see also AS Nominees at 527; Australian Securities and Investments Commission v Chase Capital Management Pty Ltd (2001) 36 ACSR 778 at 793. Again, there is an overlap between matters which would pose a risk to the public interest for the purpose of s 461(1)(k) and which are relevant to the appointment of a provisional liquidator. 24 In relation to the third, it has been said that "a stronger case might be required where the company was prosperous, or at least solvent": Kingsley Brown Properties at [96]. Solvency, however, is not a bar to the appointment of a liquidator on the just and equitable ground, particularly where there have been serious and ongoing breaches of the Act: ABC Fund Managers at [124]-[130]. 26 In Hipages Group Pty Ltd v Reach Aussie Pty Ltd [2017] FCA 112 at [47] and [48], Perry J said: 47 Secondly, it is well established that the Court may order that a company be wound up on the ground that it is just and equitable where the company in question is simply being used as a vehicle to carry on unlawful conduct: Re London and County Coal Company (1866) 3 LR Eq 355. Subcategories of the just and equitable ground include where there has been serious fraud, misconduct or oppression in the conduct of the company's affairs, or where a company has operated an illegally managed investment scheme: see the discussion by Barrett J in Macquarie Bank Ltd v TM Investments Pty Ltd [2005] NSWSC 608; (2005) 223 ALR 148 at [11]-[13]. It may also be just and equitable to wind up a company in circumstances where "the management are operating fraudulently, misleadingly or in breach of the law": Australian Securities & Investments Commission v Centro Financial Synergy Group [2007] FCA 2084 at [5] (Gilmore J). Similarly, Lander J said in Australian Securities & Investments Commission v International Unity Insurance Pty Ltd [2004] FCA 1059 at [139]: An order may be made if a company has not carried on its business candidly and in a straightforward manner with the public: Australian Securities & Investments Commission v Austimber Pty Ltd [1999] FCA 566; (1999) 17 ACLC 893. Such an order would also be appropriate where the corporation has acted fraudulently or entered into sham transactions. 48 In Australian Securities & Investments Commission v Stone Assets Management Pty Ltd [2012] FCA 630, Besanko J, after holding that the power of the plaintiff to seek this form of relief on public interest grounds is well established, held that a winding up order should be made having regard to a number of factors: 47 In the present case, I have found that the defendant has engaged in repeated contraventions of the Act, and as such, there is a real risk to actual and potential investors that such breaches will continue. This is particularly so in a case where the defendant has no director present in Australia, against whom any required action could be taken. Further, and perhaps most relevantly, the defendant failed to comply with the interim injunction I made on 8 December 2011, requiring the company to cease publication of its website (www.aftfx.com.au). In addition, the affidavit of Lily Yang, sworn 27 January 2012, and the translation therein contained, shows that the defendant continued to publish a Chinese language version of the website (www.aftfx.com) which persisted in making reference to the possession of an AFSL licence. Such conduct, in clear disregard of the orders of this court, also favours the order sought by the plaintiff. Finally, the overall misconduct and mismanagement of the defendant justifies a finding that there is cause for a lack of confidence in the future conduct and management of the defendant, should it be allowed to continue trading. The defendant does not have a director who ordinarily resides in Australia and appears never to have had such a person (s 201A(1)). It appears to have been prepared to make false or misleading statements contrary to subs 1308(2) in relation to the address of Ms Liang (ss 205B and 205D) and the defendant's principal place of business in its application for registration as an Australian company. For all these reasons I will make the winding up order sought by the plaintiff under s 461(1)(k) of the Act. 27 On the evidence before me, I was satisfied that the Commissioner had established a prima facie case that the defendants were engaging in systematic and deliberate non-compliance with their taxation obligations to the tune of many millions of dollars. I was also satisfied that the Commissioner had established a prima facie case that the flow of funds through the defendants was haphazard and ad hoc. On the evidence presented, I had no confidence that the conduct and management of the defendants' affairs were being undertaken in a manner that was consistent with their lawful and proper compliance with their taxation responsibilities and obligations and that the revenue of the Commonwealth was, as a result, at substantial risk. This was particularly so given the flow of the defendants' liquid assets to Mr Shi, his relatives and/or associates, including by transfer offshore to entities either controlled by or associated with him. 28 I was thus satisfied that the Commissioner had established, on the evidence before me, that there was a real and substantial likelihood that winding up orders on the just and equitable would be made against the defendants as final relief. 29 Further, I was persuaded that, on balance, interim relief should be granted by the appointment of provisional liquidators to preserve the assets of the defendants and to protect them from potentially fraudulent dissipation to the detriment of the Commonwealth and, perhaps, other creditors. I was persuaded that ex parte relief was warranted given the risk, on the evidence provided, that giving notice of the application might well defeat the purpose for which the provisional liquidators were to be appointed.

Deputy Commissioner of Taxation v Ausmart Services Pty Ltd

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Judgment (6 paragraphs)

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