Deputy Commissioner of Taxation v Bayconnection Property Developments Pty... [2013] FCA 208 | Case summary

The facts 6 In the matter of Bayconnection Property Developments Pty Ltd I find that as at 7 March 2013 the sum of $179,585.82 remains due to the Commonwealth and is payable by the defendant to the plaintiff, which sum includes additional liabilities that became due and payable after the issuing of the statutory demand. As at the date of the statutory demand, 1 April 2011, the Running Balance Account deficit debt was $145,922.55. 7 In the matter of Voca Pty Ltd I find that as at 7 March 2013 the sum of $132,870.36 remains due to the Commonwealth and is payable by the defendant to the plaintiff. As at the date of the statutory demand, 19 May 2011, the Running Balance Account deficit debt was $132,320.36. 8 In the matter of Mira Investments Pty Ltd I find that as at 7 March 2013 the sum of $119,661.63 remains due to the Commonwealth and is payable by the defendant to the plaintiff. As at the date of the statutory demand, 19 May 2011, the Running Balance Account deficit debt was $119,111.63. 9 In the matter of Catarina Gardens Pty Ltd I find that as at 7 March 2013 the sum of $330,208.50 remains due to the Commonwealth and is payable by the defendant to the plaintiff. As at the date of the statutory demand, 23 November 2011, the running balance account deficit debt was $328,008.50. 10 None of the defendant corporations put in issue the proper service of or other procedural steps in relation to the statutory demands nor the calculations. They did contend that there was and would be shown to be no debt to the Commonwealth by virtue of their tax appeals to the Court. 11 Each defendant corporation submits, and this was not put in issue by the plaintiff, that the factual circumstances were the same as they had been in April 2012, the date of my judgment in Deputy Commissioner of Taxation v Bayconnection Property Developments Pty Ltd (2012) 127 ALD 64; [2012] FCA 363. In summary therefore, it was common ground that each defendant corporation had failed to comply with the Deputy Commissioner's statutory demand and that the Court was required to presume that each was insolvent: s 459C(2)(a) of the Corporations Act 2001 (Cth); each corporation is insolvent only by reason of the tax debt; although each corporation is insolvent it has no third party creditors apart from the Deputy Commissioner suing as or on behalf of the Commonwealth; each corporation has not been trading for a substantial period; and if a winding up order was made control of each corporation would pass to a liquidator. 12 It was put in submissions before me on behalf of each corporation that there were irreversible consequences if the corporations were not allowed to proceed with the appeal and there was no public interest in winding up the corporations. There would be no prejudice to the plaintiff in terms of any more ongoing debts because the corporations had not been trading since 2007. It was also put in submissions that the plaintiff Deputy Commissioner was in breach of his obligation to act as a model litigant under the Legal Services Directions 2005 (Cth) in the proceedings before the Tribunal. It was further put that if these corporations were wound up Ms Caporale would be precluded from being a director of any corporation and this would be to her detriment and to the detriment of the corporations.

Consideration 13 It is necessary for the Court to re-exercise the discretion in s 459A of the Corporations Act whereby: On an application under section 459P, the Court may order that an insolvent company be wound up in insolvency. It is not appropriate merely to see what has or has not changed since April 2012, the date of my judgment in Deputy Commissioner of Taxation v Bayconnection Property Developments Pty Ltd (2012) 127 ALD 64; [2012] FCA 363. 14 I also take into account, as the parties submitted I should, the general principles set out in Southgate Investment Funds Ltd v Deputy Commissioner of Taxation [2013] FCAFC 10 at [77], bearing in mind that that was a case about whether or not execution of a judgment debt should be stayed and a case where there had been no hearing on the merits, the appeal under Pt IVC of the Taxation Administration Act 1953 (Cth) not having been heard. 15 I take into account that it is the taxpayer which bears the onus of persuading the Court that a stay ought to be granted in the particular circumstances; that great weight must be given to the clear legislative policy which gives priority to the recovery of taxation revenue notwithstanding that the taxpayer has a Pt IVC proceeding on foot; that it is too narrow a view of the discretion to grant a stay merely because Pt IVC proceedings are pending or because on review of those proceedings there appears to be an arguable case; that in cases where the Court considers that it is in a position to assess the merits of pending Pt IVC proceedings and that it is appropriate to do so, the weight to be attached to those merits will vary according to the relative strength of the merits but the taxpayer needs to have more than merely an arguable case; that irrespective of the merits of pending Pt IVC proceedings, a stay will not usually be granted where the taxpayer is party to a contrivance to avoid liability to pay the tax; and that more weight would be given to the merits factor if the case is one where the Deputy Commissioner has abused his position. 16 I have considered the notice of appeal. A most significant matter in my view is that the appeal from the Tribunal to this Court is on and limited to a question of law: see s 44 of the Administrative Appeals Tribunal Act 1975 (Cth). It is relevant to take into account that, whereas, as I held, in April 2012 each corporation had an arguable case which extended to the facts, the position now is that each corporation is limited to a question or questions of law. 17 The notice of appeal seeks to raise ten questions of law, as follows: 1. Whether the Tribunal erred in law in ignoring the extending effect of the words "in the form of" in paragraph 9-20(1)(a) of the A New Tax System (Goods and Services) Tax Act 1999 (Cth) ("the GST Act"). 2. Whether the Tribunal erred in law by failing to properly identify and apply the extended meaning of the "carrying on" definition in s 195-1 of the GST Act. 3. Whether the Tribunal erred in law by not recognising that related companies engaged in a composite business each need to be considered in relation to each other, and not in isolation, to determine whether any of them is "carrying on" an "enterprise" for GST purposes. 4. Whether the Tribunal erred in failing to consider that under the GST Act an input tax credit can be attributable to a tax period in which, "before you provide any consideration, an invoice is issued relating to the acquisition", within the meaning of s 29-10(1). 5. Whether the Tribunal erred in considering that an increasing (bad debt) adjustment under Div 21 of the GST Act - and presumably s 21-15 - could arise for a tax period even though there was no debt that was either "overdue for 12 months or more", or at all, or written off "as bad" by the supplier. 6. Whether the Tribunal erred in considering that any increasing adjustment under Div 21 of the GST Act operates to eliminate an input tax credit entitlement ab initio as opposed to itself being attributable to a particular tax period under s 29-20 of that Act. 7. Whether the Tribunal erred in considering that a penalty involving "intentional disregard of a *taxation law", under s 284-90 of Sch 1 to the Taxation Administration Act 1953 (Cth) ("the TAA") (as applied by s 3AA(1) of that Act) could arise in the absence of an actual finding that there was an intentional disregard of a taxation law when claiming input tax credits, because, according to the Tribunal, it was sufficient that: (i) the taxpayers "at least ought to have known … they were not entitled to the claim"; and/or (ii) s 14ZZK(b)(i) not only presumes the correctness of the amount of an assessment but also every reason, contention, view of the facts and assertion concerning the law that the Respondent may advance to justify the assessment. 8. Whether the Tribunal, because of the matters in the previous paragraph, misunderstood and misapplied the evidential burden imposed on the Applicants by the TAA. 9. Whether the Tribunal erred in the exercise of the discretion to remit penalties under s 298-20 of Sch 1 to the TAA, leading to its miscarriage, on the basis that it misunderstood the provisions leading to the substantive tax liability and also the basis for the imposition of penalty in the first place. 10. Whether the Tribunal adopted a matter of decision-making which failed to discharge its obligations according to law, particularly concerning the fact that it did not consider relevant evidence and refused unrepresented litigants the opportunity to present fresh, recently available evidence. 18 There are nine grounds relied on in the notice of appeal, as follows: 1. The Tribunal failed to give effect to the words "in the form of" in the expression "an activity, or series of activities, done … in the form of a *business" in s 9-20(1)(a) of the GST Act, interpreting the expression as if they did not exist. 2. While identifying that the words "carrying on" in s 195-1 of the GST Act have a meaning that extends the notion of "in *carrying on your *enterprise" in s 11-15(1), the Tribunal failed to properly construe that expression, particularly so far as it concerns "anything done in the course of the commencement… of an enterprise", as interpreted in cases such as Cssr of Taxation v Swansea Services (2009) 72 ATR 120 and HP Mercantile v Cssr of Taxation (2005) 143 FCR 553. 3. The Tribunal ought to have considered how provisions in the GST Act such as those concerning GST groups (Div 48) and associates (Div 72 ), as well as the general law (eg, FCT v Suttons Motors (Chullora) Wholesale Pty Ltd (1985) 157 CLR 277), required consideration of the collocation of an entity amongst its related parties to precisely ascertain whether it was carrying on an enterprise. 4. The Tribunal misunderstood the operation of the attribution rules in the GST Act, particularly in how taxpayers not accounting on a cash basis can attribute credits to tax periods in which they have issued to them invoices and tax invoices in particular. 5. The Tribunal misunderstood the bad debt adjustment provisions, which require a debt which was due and unpaid and in any event only are attributed to tax periods subsequent to those in which there may have been an initial claim of input tax credits. 6. The Tribunal ought to have understood that there is no basis for the imposition of a penalty for intentionally disregarding taxation laws in the absence of a finding that the requirement of the law was in fact known by the taxpayer and also disregarded. 7. The Tribunal did not understand the operation of the evidential burden in s 14ZZK(b)(i) of the TAA, applying it as if the presumption as to correctness of the amount in the assessment extended to a presumption of the correctness of the contentions (if any) in support of it. 8. The Tribunal purported to exercise the discretion to remit penalty in circumstances where it misconceived the operation of the penalty provisions and in the absence of findings concerning culpability for the penalty in the first place. 9. The Tribunal failed to discharge its obligation to provide the Applicants with a fair hearing that took into account the evidence they wished to rely on. 19 The first five grounds relate to the substantive tax liability. Grounds 6 to 8 relate to the question of penalty. Ground 9 raises an issue of procedural fairness centring on the circumstances I have set out in [4] above. 20 I make the general observation that there is a lack of close relation between the grounds of the notice of appeal and the terms of the Tribunal's decision, including its findings of fact. I understand this to be in part because of the way in which the matter was then put to the Tribunal in submissions to it on behalf of the defendant corporations. In my opinion, the grounds in relation to the tax liability have more form than substance. 21 Assuming in favour of the corporations that it is necessary to weigh only whether the grounds are reasonably arguable, in my view the first five grounds relating to the substantive tax liability, both as drafted and as outlined to me in submissions, are not reasonably arguable. 22 Grounds 1 and 2 seem to me to relate to immaterial matters in light of the Tribunal's findings I set out below. Although it was put on behalf of the corporations that the Tribunal failed to take into consideration the relationship of the corporations, the Tribunal in fact did that, particularly at [71]. 23 Grounds 3, 4 and 5 are put at such a level of generality that I do not discern reasonably arguable questions of law or grounds in relation to such questions in light of the Tribunal's findings I set out below. 24 Grounds 6 and 7 in relation to penalty were not developed in submissions, although it was put that the corporations had asked the Tribunal to reduce penalties in relation to intentional disregard of a taxation law and the Tribunal had not done so. In my opinion, however, the Tribunal did address that question at [98]-[99] and it is well established that the reasons of a tribunal should not be construed minutely and finely and with an eye keenly attuned to the perception of error. 25 The Tribunal considered the discretion to remit (ground 8) at [100] and this ground seems to be entirely consequential on grounds 6 and 7. 26 I find that these grounds are not reasonably arguable. In any event, the question of penalty is relatively minor in monetary terms as compared to the amount of substantive tax in the case of each corporation. For that reason, if only the grounds in relation to penalty were reasonably arguable I would not exercise my discretion to adjourn or stay the winding up proceedings. 27 Ground 9 was the subject of the majority of the submissions put on behalf of each corporation. The point was put in a number of ways which related to alleged misconduct on behalf of the present plaintiff and breach of the model litigant obligations, that misconduct being alleged to have been evident in the proceedings in the Tribunal. This in turn related to the question of whether the company, Sappia Investments Pty Limited, referred to at [71] of the Tribunal's reasons, was carrying on an enterprise. It was said that the present plaintiff omitted to inform the Tribunal of that information "known to be true" and, I infer, that the Tribunal erred in law in failing to accede to the present defendants' application to put before it part of the evidence of a tax officer given in proceedings in the Local Court involving Sappia Investments Pty Limited. It was put that the facts found by the Tribunal had been based on a false premise in that a critical piece of the puzzle had not been considered because it was not before the Tribunal at the time. I was taken to the judgment in the Local Court involving that company but there was no reference there to the evidence of the tax officer said to be crucial and I rejected the tender of the Local Court judgment as irrelevant. I also find nothing of consequence in the transcript of proceedings before the Local Court. I was not taken to any specific passage in that transcript but I have read the pages in which the tax officer was cross-examined. 28 As to the reliance in submissions on behalf of the corporations on the model litigant obligations of the plaintiff Deputy Commissioner, in my view they are of no assistance to the corporations in the present context. Assuming for the moment, in favour of the corporations, that that matter is raised in the notice of appeal to this Court, the terms of s 55ZG of the Judiciary Act 1903 (Cth) and the decision of the Full Court in Croker v Commonwealth of Australia [2011] FCAFC 25 particularly at [19] show that compliance with those legal services directions was not enforceable by the corporations and could not be raised in any proceeding other than by or on behalf of the Commonwealth. 29 In any event the same conduct was said to establish misconduct on behalf of the present plaintiff. On the material before me, I am not persuaded that there was any misconduct on behalf of the present plaintiff, either at all or within the concept of "conscious maladministration" explained in Commissioner of Taxation v Futuris Corporation Ltd [2008] HCA 32; (2008) 237 CLR 146 at [23]-[25] or within the concept of abuse of position referred to in Southgate Investment Funds Limited [2013] FCAFC 10 at 77 or within the alleged denial of a fair hearing by the Tribunal as pleaded in the notice of appeal. I am also not persuaded that there was an arguable error of law in the Tribunal refusing to accede to the application by the present defendants to put further material before the Tribunal. Also I am not persuaded, assuming that information to have been before the Tribunal, that it was critical or that it would have "made a difference and possibly changed the result" as put in submissions before me on behalf of the corporations. Neither am I persuaded that the findings of the Tribunal were based on a false premise: that contention depended on the information about Sappia Investments Pty Limited being critical which, in light of the Tribunal's findings to which I have referred and the contents of the transcript before the Local Court, has not been made out to the standard relevant to the determination of the adjournment or stay application on behalf of the defendant corporations. I find this ground is not reasonably arguable. 30 In my opinion, contrary to the submission on behalf of the corporations, the legislative scheme enacted by the Parliament gives priority to the recovery of taxation revenue notwithstanding that the taxpayer has an appeal on foot and that is where the public interest lies absent countervailing factors of the kind to which I have referred above. 31 I also take into account the findings of the Tribunal under the heading "Were the applicants carrying on an enterprise?", as follows: [67] The problem with Ms Caporale's evidence as to the enterprises allegedly being conducted by the first four applicants [the present defendants] is that she provided no concrete detail of any kind as to the specific activities that were supposedly being carried on. The only information that she gave supported the overall IETC project. [68] None of the first four applicants had any involvement with the promotion, marketing or development of either the IETC project, or any part of its establishment. None of the applicants had any interest in the Dapto property the subject of the purchase contracts. None of the applicants had entered into any agreements for the training activities that they had been allocated to conduct or done anything to advance the training programs. [69] In our view, Ms Caporale has merely formulated a structure as to where the first four applicants will "sit" within the structure if the IETC project materialises. Accordingly, we are of the view, and accordingly find, that the first four applicants had not commenced any activities by the time they became registered for GST, and still had not done so at any time during the relevant period. [70] It follows, in our view, that these applicants were not carrying on an enterprise at all during the relevant period, even allowing for the extended definition of "carrying on" which includes doing anything in the course of commencement of the enterprise. This is because the first four applicants have done nothing (including with respect to the proposed businesses which they have been allocated in the areas of agriculture, hospitality, landscaping and plasterboard) to suggest that they "intend [to] generate sales in the future", as was argued by Ms Caporale. [71] The first four applicants are clearly distinguishable from other Caporale companies such as Connectland and Sappia Investments which appear to have undertaken activities with respect to the establishment of the IETC project. The fact (if it is a fact) that these, or any other entities, were carrying on enterprises, as part of the IETC project, does not mean that the applicants in these proceedings were doing so, as an enterprise is necessarily carried on by an entity (s 9-5(b) and s 11-15(1) of the GST Act). [71] It is clear, based on the definition of "enterprise", in particular in s 9-20(1)(a) of the GST Act, that one activity done in the form of a business can be an enterprise. But the first four applicants have failed to demonstrate that they did anything during the relevant period. They did not produce any evidence of any business-like activities. They did not prove that they had undertaken an activity of any kind nor did they keep any business records. As far as we can glean, the first and second applicants were merely names in a table in an affidavit that Ms Caporale had prepared listing them next to the disciplines of agriculture and landscaping. The third and fourth applicants did not even find their way into that table which, it must be remembered, was prepared as late as October 2011. [72] To the extent that any records were produced, they weighed against the applicants. For example, Bayconnection (the only applicant that had lodged income tax returns with respect to the relevant period) showed no income or expenses despite claiming ITCs [input tax credits] on purchases in excess of $550,000. It was on the basis of Ms Caporale's representations to the effect that the companies were dormant and not trading that the previous tax agent for the Caporales had in fact lodged the nil returns whereas Mr Cavanagh, as noted above, stated that he was advised that there was no further trading by the applicants (or some of them). [73] The bank statements produced by the applicants show that nothing happened in their bank accounts. With the odd exception, the only activity was the deposit of monies (representing ITCs) by the Commissioner and the withdrawal of those monies shortly afterwards, presumably by one or more of the Caporales. As was observed by the Commissioner in one of the objection decisions, "the only recurring activities are your GST refund claims". [74] We are fortified in our conclusion by the cross-examination of Ms Caporale where, in our view, she accepted that the first four applicants had not commenced their business activities, as set out above. [75] We are concerned that the first four applicants may have been generating refunds based on ITC claims that they knew to be unfounded. We base that concern on all the circumstances surrounding the ITCs claimed, the methodology used, the absence of business records, and our suspicions that the errors and irregularities in the "tax invoices" and the BASs were not inadvertent mistakes. In addition, Ms Caporale was insistent in her submissions that the first four applicants were entitled to claim their ITCs because taxable supplies were made to these applicants. Ms Caporale stated that only Caporale Designs owed GST to the Commissioner. She submitted that as the Commissioner had already accepted that Caporale Designs had made taxable supplies (which was a matter that the Tribunal did not have to decide nor investigate), the first four applicants were entitled to the ITCs. The Commissioner's position and Ms Caporale's response are summarised in the following exchange: MR O'BRIEN: What you had going was a system where Caporale Designs would invoice all these companies; the invoices would never be paid; the company's invoice [sic - should be "companies invoiced"] would claim credits; and the only money in the whole system was the credits being paid by the ATO. Isn't that right? MS CAPORALE: There's no issue about Caporale Designs, as you can see - there's no issue that it was issuing invoices. There's no discussions about that. MR O'BRIEN: That's right. And not pay any GST? MS CAPORALE: I understand that - - - MR O'BRIEN: Yes? MS CAPORALE: But it was Caporale Designs. MR O'BRIEN: Yes? MS CAPORALE: It doesn't mean that the whole thing is not a real enterprise - someone owed the money - the issue is not that somebody didn't owe the money. What we're saying is it's not Bayconnection. [76] We do not understand how Ms Caporale could continue to maintain with such conviction that Bayconnection could not owe money to the Commissioner. Of course it must do so, and so must Catarina Gardens, Voca and Mira, unless their ITC claims were well founded. And they do not become well founded simply because (as seems to be at the heart of the first four applicants' cases) supplies were made from one registered entity to another. (footnotes omitted, emphasis in original) 32 I also take into account the findings of the Tribunal under the heading "Did the applicants acquire anything?", as follows: [82] The issue of whether the applicants acquired anything is a subsidiary issue that we do not have to answer, given our finding that the applicants were not carrying on an enterprise. Nevertheless, in the circumstances, we consider it appropriate to record some of our observations. [83] We have grave doubts as to whether the first four applicants acquired any services from Caporale Designs notwithstanding the so called "tax invoices" that it purported to have issued to them and that were in evidence with respect to Bayconnection and Catarina Gardens. [84] Leaving aside for the moment the fact that Voca and Mira did not hold any tax invoices at all with respect to the relevant period, we are not satisfied that Ms Caporale's explanation regarding the manner in which she determined the amounts of the tax invoices issued by Caporale Designs to the applicants substantiates that any services were provided. The methodology of invoicing by reference to what the businesses might be worth on disposal provides no evidence of the services allegedly provided to those companies. Moreover, it did not make any sense that they acquired "work carried out for the development, design and construction", being the identical description on all such invoices, as none of the first four applicants had any interest in the land. 33 The Tribunal also said: [98] The factors that we considered to be relevant to the question of penalty in these matters include the following: (a) Ms Caporale has been the authorised representative of the applicants (and a director and shareholder of some of the applicants). She is an experienced businesswoman in the property industry. She understood the GST obligations of the applicants, having previously undergone other GST reviews and audits in relation to the prior developments and other current taxation investigations. (b) Ms Caporale retained tax agents to assist her in relation to the preparation of the income tax returns but always prepared and lodged all the BASs, sometimes with the assistance of her brother, Mr Tommaso Caporale. She also prepared all of the "tax invoices" that were issued by Caporale Designs. (c) She represented to the tax agents that the applicants were not trading while she lodged BASs claiming that the applicants had made significant non-capital purchases of services in order to claim ITCs. (d) She caused the applicants to claim ITCs which she probably knew, or at least ought to have known, they were not entitled to claim because they were not carrying on an enterprise, they had not purchased any taxable supplies and, in addition, they did not hold tax invoices. (e) She resisted repeated requests to provide comprehensive information and documents, especially the tax invoices. One of the explanations that she gave was that she did not want to do this in a piecemeal fashion. Another explanation that emerged only during the hearing was that she no longer had the tax invoices as they had been seized by the tax officers when they accessed the home of the Caporales on 1 September 2009. This explanation had not been advanced when the Tribunal made orders in April 2012, at the request of the Commissioner, for the applicants to produce the tax invoices for forensic examination. 34 I take into account these findings by the Tribunal as relevant to the exercise of my discretion. They are primarily findings of fact whereas, as I have said, the defendants' appeal to this Court is limited to a question or questions of law. 35 If I am wrong and the grounds of appeal in relation to the primary tax are reasonably arguable I find that the grounds are not strong and that the clear legislative policy to which I have referred above would again outweigh any merits of the appeal to this Court on a question or questions of law. 36 In addition, irrespective of the merits of the appeal, in light of the findings of the Tribunal I have set out above I would not have exercised my discretion in favour of the defendant corporations. The Tribunal identified the applications as relating to ITC claims made by each of the applicants over tax periods ranging from February 2005 to January 2009. The Commissioner made assessments so as to recover the refunds that had been paid to the applicants. In those circumstances the Tribunal held at [3] that it was clear that none of the corporations was carrying on an enterprise - even taking into account the extended statutory definition of "carrying on" an enterprise that includes "doing anything in the course of the commencement or termination of the enterprise". If the corporations made any acquisitions at all (and even this was doubtful), they did not make any creditable acquisitions because they did not acquire anything in carrying on an enterprise. Consequently, the ITC claims were entirely without foundation. 37 As to the proposition that that if these corporations were wound up Ms Caporale would be precluded from being a director of any corporation and this would be to her detriment and to the detriment of the corporations, I took this to be a reference to s 206D of the Corporations Act. Such a preclusion is not automatic and the Court not only has a discretion but must first be satisfied that the manner in which the corporation was managed was wholly or partly responsible for the corporation failing and the disqualification is justified. I do not give this factor any weight.

Deputy Commissioner of Taxation v Bayconnection Property Developments Pty Limited

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Judgment (17 paragraphs)

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