Deputy Commissioner of Taxation v. Bluebottle UK Ltd. & Ors. [2006] NSWCA 223

Monday 7 August 2006 DEPUTY COMMISSIONER OF TAXATION V. BLUEBOTTLE UK LTD. & ORS. Judgment 1 HIS HONOUR: I am dealing with an application by the appellant, the Deputy Commissioner of Taxation, for a stay of orders made by Gzell J on 21 July 2006, and for expedition of the appeal. The circumstances giving rise to the proceedings in which the primary judge's orders were made are set out in paragraph 1 to 12 of his judgment 1 On 11 November 2005, Virgin Blue Holdings Ltd, the second defendant, resolved to pay a final fully franked dividend of 25 cents per ordinary share on 15 December 2005. 2 On 12 December 2005, the first defendant Deputy Commissioner of Taxation issued a notice to Virgin Blue stating that, when required by him, Virgin Blue was to pay the tax due and payable by Cricket SA, and requiring Virgin Blue to retain $72,518,346.06, said to be the amount of the tax, from the amount Virgin Blue had "receipt, control or disposal of, belonging to" Cricket. 3 On the same day, the Commissioner issued a similar notice with respect to Virgin Holdings SA requiring the retention and payment on requisition of $20,839,554.45. 4 It was common ground that Cricket and Virgin Holdings were non-residents for the purposes of the Income Tax Assessment 1936 (Cth). Cricket and Virgin Holdings were companies incorporated in Switzerland. 5 On 13 December 2005, Cricket executed a deed of assignment of its right, title and interest to receive the dividend to Bluebottle UK Ltd, the first plaintiff. Virgin Holdings did likewise. 6 On the same day, Bluebottle gave Virgin Blue an irrevocable direction to pay the dividends to Barfair Ltd, the fourth plaintiff. 7 On 14 December 2005, Cricket and Virgin Holdings gave notice to Virgin Blue of the assignments and of the irrevocable direction. 8 Also on that day, the Commissioner notified Virgin Blue that the amounts specified in his notices with respect to Cricket and Virgin Holdings were required to be paid to him. 9 On 15 December 2005, I granted an injunction restraining Virgin Blue from paying the amount of the dividends with respect to Cricket and Virgin Holdings to the Commissioner. 10 On 16 December 2005, I dissolved the injunction and ordered Virgin Blue to deposit the amount of the dividends into an interest bearing account, to retain that amount and any interest accrued in the account, and not pay it to any person. 11 Bluebottle, Cricket, Virgin Holdings and Barfair seek declarations that the deeds of assignment and the irrevocable direction are valid and effective, that the dividends are payable to Barfair, that the notices of the Commissioner have no force or effect, and that payment under the Commissioner's notices would not give Virgin Blue a good discharge of its obligation to pay the dividends. They also seek an order that Virgin Blue pay the dividends to Barfair. 12 By a cross-claim, Virgin Blue seeks a declaration that it created a dividend with payment to be made on 15 December 2005. 2 In relation to the issues on appeal, the proceedings raised questions concerning the application of s.255 subs(1) and (2) of the Income Tax Assessment Act (Commonwealth) 1936: 255 Person in receipt or control of money from non-resident (1) With respect to every person having the receipt control or disposal of money belonging to a non-resident, who derives income, or profits or gains of a capital nature, from a source in Australia or who is a shareholder, debenture holder, or depositor in a company deriving income, or profits or gains of a capital nature, from a source in Australia, the following provisions shall, subject to this Act, apply: (a) he shall when required by the Commissioner pay the tax due and payable by the non-resident; (b) he is hereby authorized and required to retain from time to time out of any money which comes to him on behalf of the non-resident so much as is sufficient to pay the tax which is or will become due by the non-resident; (c) he is hereby made personally liable for the tax payable by him on behalf of the non-resident to the extent of any amount that he has retained, or should have retained, under paragraph (b); but he shall not be otherwise personally liable for the tax; (d) he is hereby indemnified for all payments which he makes in pursuance of this Act or of any requirement of the Commissioner. (2) Every person who is liable to pay money to a non-resident shall be deemed to be a person having the control of money belonging to the non-resident, and, subject to subsection (2A), all money due by him to the non-resident shall be deemed to be money which comes to him on behalf of the non-resident. 3 The primary judge held that the notices issued by the Deputy Commissioner of Taxation had no force or effect in relation to dividends determined, and subsequently declared, by Virgin Blue; and the primary judge ordered that Virgin Blue pay to Barfair the dividends and interest accrued on the interest bearing account into which the money had been paid. He stayed those orders for 14 days, and the Deputy Commissioner of Taxation now seeks in effect an extension of that stay. 4 The primary judge held in substance that Virgin Blue was not, when the liability to pay the dividend arose on 15 December 2005, liable to pay money to Cricket and Virgin Holdings, because they were then bare trustees by reason of the equitable assignments of 13 December 2005. On appeal, the Commissioner seeks to challenge that holding, on the basis that Virgin Blue was liable to pay money to Cricket and Virgin Holdings even if they were bare trustees, and that in any event the obligations created by a requirement pursuant to s.255 took effect in priority to the effect of the subsequent equitable assignments. 5 Mr Gibb SC for the Commissioner submits that the appeal is on reasonable grounds, and that if the money is paid away the appeal would be rendered nugatory. The Commissioner would have entirely lost the benefit of s.255, and would be left to pursue two Swiss companies for tax. The difficulty of this was to be assessed having regard to the principle that courts do not generally enforce tax laws of foreign companies. 6 Mr Sullivan QC, for the respondents apart from Virgin Blue, relied on evidence that the assessments relied on by the Commissioner were under challenge, and that the Commissioner had requested an extension of time to respond to the taxpayers' objections to the assessments. He also relied on evidence that Cricket and Virgin Holdings had assets in Australia, namely shares in Virgin Blue respectively worth $386 million and $35 million. He submitted that the Commissioner's case on appeal was weak. He submitted that the Virgin companies could be expected to utilise the money, that is of the order of $65 million, more profitably than interest on the interest bearing account; and he noted that no undertaking as to damages had been offered by the Commissioner. He proffered an undertaking by Virgin Holdings and Cricket to maintain assets in Australia to the amount of the dividends declared in their favour until the decision of the appeal, provided certain conditions were satisfied, and provided that the Commissioner undertook the appeal expeditiously. 7 In my opinion, the appeal is reasonably arguable. If the money is paid over now, it seems that the Commissioner will have entirely lost the benefit of s.255. It seems to me that the Commissioner could not rely on s.255(1)(c), because it could not be said that, where Virgin Blue had paid money as ordered by a Court order, it should have retained it. It does not appear that the money would then be recoverable from Bluebottle or Barfair; and even if it were so recoverable there would be difficulties with its recovery. 8 It seems to me that the offer of an undertaking by Virgin Holdings and Cricket is not adequate to deal with the situation. The undertaking is made only until resolution of appeal. If the appeal is successful, it seems to me, that would not provide a basis for further continuing any restraint on Virgin Holdings and Cricket. 9 What the Commissioner really needs, in order to have some protection equivalent to what would be given by s.255, would be an undertaking which would last until the whole question of liability for tax had been resolved, and the tax actually paid. I note also that no undertaking is offered by Virgin Holdings and Cricket to accept service in Australia of process seeking judgments for the tax. In those circumstances I think a case is made out for a stay, but only if the Commissioner gives an undertaking as to damages. 10 It may be that, if the appeal fails, the Virgin Group could prove that the money could have been used to greater advantage than the interest accruing on the interest bearing account. And it seems to me that fairness would require that, if this stay is given and ultimately the Commissioner does not establish entitlement to access to this money, the Virgin Group should be compensated for that difference. I think it is appropriate to expedite the hearing, and I think also the Commissioner should undertake to prosecute the appeal expeditiously. 11 What I propose to do is to give an injunction, but give it conditionally on a written undertaking as to damages of the usual kind being provided to the Court by the Commissioner no later than Wednesday this week. 12 I note I am now informed by Mr Sullivan that an undertaking is offered to accept service of process in Australia as being enforcement proceedings. However, that does not alter my ultimate conclusion, so I will formulate the orders that I propose. 13 I should say one more thing. Mr Sullivan did submit that there should not be an extension of stay in relation to the orders as to costs. I think it is appropriate that the stay apply to those orders as well, and that it would not be appropriate to deal with that question separately. 14 The orders I make are these: 1. I note that the Commissioner undertakes to the Court to proceed expeditiously on the appeal. 2. I order that orders 7, 8, 9 and 10 made by Justice Gzell on 21 July 2006 be stayed pending determination of the appeal, or until further order. 3. I order that the hearing of the appeal be expedited. 4. The order as to a stay is conditional on the Deputy Commissioner submitting to the Court a written undertaking as to damages on or before Wednesday, the 9 August, and if that undertaking is not provided to the Court by that date that stay will come to an end on that date. 5. I order that the costs of this application be costs in the appeal. 6. The appeal will be listed before the Registrar at 11.00 a.m. on Thursday. **********

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Judgment (11 paragraphs)

Cases Cited (1)