Deputy Commissioner of Taxation v Ghaly

EVIDENCE 3 The Deputy Commissioner relied upon the affidavit of Aris Zafiriou sworn 9 June 2016 (the Zafiriou Affidavit) and the three volume exhibit to that affidavit. Mr Zafiriou is a Director in the Australian Public Service employed by the Australian Taxation Office (ATO). In that role he is responsible for conduct of more complex tax debt recovery and insolvency matters, including those involving taxpayers falling under Project Wickenby or under organised crime taskforces. 4 The Deputy Commissioner also relied upon the affidavit of Jason Powell, process server, also sworn on 9 June 2016. Mr Powell deposed to serving on Mr Ghaly notices of amended assessments for the income tax years ended 30 June 2004 to 30 June 2014 inclusive and notices of assessment of shortfall penalty for the same income tax years, together with the reasons of the Deputy Commissioner dated 9 June 2016 for the issue of the amended assessments. 5 This evidence was received solely for the purposes of the ex parte interlocutory application.

BACKGROUND 6 Mr and Mrs Ghaly are Australian citizens resident in Australia. Mr Ghaly worked as an administrative officer at the ATO between September 1989 to 18 September 2015. 7 On 9 June 2016, the Deputy Commissioner determined to issue the amended assessments following a review and audit conducted into Mr Ghaly's taxation affairs. That audit found that he had failed to disclose substantial income and had claimed deductions to which he was not entitled, thereby avoiding tax on the income and benefiting from the deductions. The Commissioner's reasons for this decision were served together with the amended assessments upon Mr Ghaly personally also on 9 June 2016. As summarised in its reasons, the ATO found that: 19. We are satisfied that you [sic] accumulation of significant wealth is disproportionate to your earnings and your spouse's earnings. 20. We have been told by numerous people that you have been preparing income tax returns for fees. We have been told that the scale of the operation is considerable. We have been told that you continued to prepare income tax returns for fees even after we had commenced a review into your tax affairs. 21. In the circumstances, we are satisfied that you have been in receipt of income other than your salary and wages from the Australian Taxation Office. We are satisfied that you have not returned this income at any time. We have calculated that you have omitted income of $1,178,672 between the 2008 and 2014 income years.… 22. Further, you have claimed substantial deductions in each income year from 2004 to 2014 inclusive to which you were not entitled. These deductions amount to $163,198. … 27. We have imposed administrative penalties in accordance with the Taxation Administration Act 1953. The penalties that we have imposed include shortfall penalties of 75% for intentionally disregarding the tax law. We have also increased some penalties by 20% as we are satisfied that you have obstructed the progress of the audit. 8 In this regard the ATO did not accept the explanations which Mr Ghaly provided for omitting income from his income tax returns, finding among other things that the explanations were unsupported by documentation and revealed multiple and significant inconsistencies, were inconsistent with information from other people and documentary evidence, and even if accepted would not explain the accumulation of wealth disproportionate to his income as disclosed in his income tax returns. 9 On the morning of 9 June 2016, the Deputy Commissioner issued amended assessments in line with his reasons to Mr Ghaly for the income tax years ended 30 June 2004 to 30 June 2014 inclusive pursuant to s 167 of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936). The quantum of the assessments and proposed penalties in Mr Ghaly's case are summarised in Table H of the Zafiriou affidavit as follows: Income year pre-audit taxable Income post-audit taxable income variation Tax Payable inclu. SIC Tax amount payable Shortfall penalties 2004 48,087 60,326 +12,239 4,854.37 4,368.90 9,223.27 2005 66,223 74,518 +8,295 8,356.74 2,941.15 11,297.89 2006 63,714 70,793 +7079 6,148.45 2,524.35 8,672.80 2007 64,545 74,736 +10,191 5,826.75 2,515.60 8,342.35 2008 67,371 122,298 +54,927 35,982.75 19,361.25 55,344.00 2009 74,568 117,838 +45,270 27,546.81 15492.55 43,039.36 2010 84,595 275,556 +190,961 116,498.04 73,287.10 189,785.14 2011 82,096 568,743 +486,647 286,519.41 193,579.85 480,099.26 2012 94,530 296,017 +201,487 108,419.51 76,968.35 185,387.86 2013 84,047 253,525 +169,478 82,276.18 59,892.55 142,168.73 2014 84,198 239,384 +155,186 70,350.08 55,923.85 126,273.93 Total 763,887 2,093,408 +1,329,521 747,924.72 502,486.60 1,250,411.32 Total of all years 811,974 2,153,734 +1,341,760 752,779.09 506,855.50 1,259,634.59

10 It should be noted that Table H refers to penalties which are less than the total referred to in the notices of assessment of shortfall penalty served on the Mr Ghaly. In this regard, the Deputy Commissioner intends to issue and serve amended assessments of shortfall penalty on Mr Ghaly reducing his liabilities for penalties to the amounts referred to in Table H. 11 The debts due to the Commonwealth as summarised in Table H total $1,259,634.59 in additional tax, penalties and interest (the liabilities). These will become due and payable by 30 June 2016, being 21 days after Mr Ghaly was given notice: s 5-5(7), Income Tax Assessment Act 1997 (Cth). 12 The Deputy Commissioner, however, anticipates that slightly over $71,000 will be recovered from Mr Ghaly's individually held bank accounts by garnishee notices issued under s 260-5 of Schedule 1 to the Taxation Administration Act 1953 (Cth) (TAA). As a result the Deputy Commissioner indicated that at the next return date they would be likely to reduce the value of the assets subject to the freezing orders to reflect any amounts recovered under the garnishee notices. 13 While the liabilities are Mr Ghaly's alone, the Deputy Commissioner submitted that it was necessary also to make a freezing order against Mrs Ghaly with respect to assets held jointly with her husband. The Deputy Commissioner explained that this was because the evidence suggested that the wealth which Mr Ghaly had accumulated from his undeclared income and disallowed deductions had, in large part, been deposited into bank accounts held jointly in his and his wife's name, and was used to pay down the mortgage in the Property jointly owned by them. 14 In the originating application, the applicant seeks final relief to the following effect: (1) judgment against Mr Ghaly for the amount of the liabilities; (2) a declaration that the funds jointly held in specified bank accounts in the names of Mr and Mrs Ghaly (the jointly held accounts) are held beneficially for Mr Ghaly; (3) in the alternative, an order under s 37A of the Conveyancing Act 1919 (NSW) (Conveyancing Act) that the deposit by Mr Ghaly of money arising from unpaid tax-related liabilities into the jointly held accounts is void and liable to be set aside.

THE POWER TO MAKE THE FREEZING ORDERS 15 The source of this Court's powers to make the orders sought is found in rr 7.32 and 7.35 of the Rules. 16 Rule 7.32 provides as follows: Freezing order (1) The Court may make an order (a freezing order), with or without notice to a respondent, for the purpose of preventing the frustration or inhibition of the Court's process by seeking to meet a danger that a judgment or prospective judgment of the Court will be wholly or partly unsatisfied. (2) A freezing order may be an order restraining a respondent from removing any assets located in or outside Australia or from disposing of, dealing with, or diminishing the value of, those assets. 17 I note that r 7.32 expressly provides that an order may be made "without notice…", as was sought here. 18 Rule 7.35 provides as follows: Order against judgment debtor or prospective judgment debtor or third party (1) This rule applies if: (a) judgment has been given in favour of an applicant by: (i) the Court; or (ii) for a judgment to which subrule (2) applies - another court; or (b) an applicant has a good arguable case on an accrued or prospective cause of action that is justiciable in: (i) the Court; or (ii) for a cause of action to which subrule (3) applies - another court. (2) This subrule applies to a judgment if there is a sufficient prospect that the judgment will be registered in or enforced by the Court. (3) This subrule applies to a cause of action if: (a) there is a sufficient prospect that the other court will give judgment in favour of the applicant; and (b) there is a sufficient prospect that the judgment will be registered in or enforced by the Court. (4) The Court may make a freezing order or an ancillary order or both against a judgment debtor or prospective judgment debtor if the Court is satisfied, having regard to all the circumstances, that there is a danger that a judgment or prospective judgment will be wholly or partly unsatisfied because any of the following might occur: (a) the judgment debtor, prospective judgment debtor or another person absconds; (b) the assets of the judgment debtor, prospective judgment debtor or another person are: (i) removed from Australia or from a place inside or outside Australia; or (ii) disposed of, dealt with or diminished in value. (5) The Court may make a freezing order or an ancillary order or both against a person other than a judgment debtor or prospective judgment debtor (a third party) if the Court is satisfied, having regard to all the circumstances, that: (a) there is a danger that a judgment or prospective judgment will be wholly or partly unsatisfied because: (i) the third party holds or is using, or has exercised or is exercising, a power of disposition over assets (including claims and expectancies) of the judgment debtor or prospective judgment debtor; or (ii) the third party is in possession of, or in a position of control or influence concerning, assets (including claims and expectancies) of the judgment debtor or prospective judgment debtor; or (b) a process in the Court is or may ultimately be available to the applicant as a result of a judgment or prospective judgment, under which process the third party may be obliged to disgorge assets or contribute toward satisfying the judgment or prospective judgment. (6) Nothing in this rule affects the power of the Court to make a freezing order or ancillary order if the Court considers it is in the interests of justice to do so. 19 Importantly for this case, Rule 7.35 expressly provides for the making of an order:

1. against a "prospective judgment debtor", being relevantly Mr Ghaly; and
2. against "another person", being relevantly Mrs Ghaly. 20 With respect to the principles by which it is determined whether an order should be made under these provisions, Flick J in Deputy Commissioner of Taxation v Greenfield Electrical Services Pty Ltd [2016] FCA 653 (Greenfield) helpfully explained that: 7 In considering the ambit of the power conferred by these provisions, and the manner of exercise of the power, it is important to recall that: • the "purpose of such an order is to protect the processes of the Court from abuse not to provide security for the applicant for such an order": Elderslie Finance Corporation Ltd v Newpage Pty Ltd [2007] FCA 61 at [14] per Stone J; • the making of an order effects a substantial encroachment on a person's basic right and freedom to deal with property: KGL Health Pty Ltd v Mechtler [2007] FCA 1410 at [12]; and • "the justice of the case may require that injunctive relief be granted even before the cause of action arises": Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319 at 329 per Gleeson CJ. 21 Importantly, Flick J also explained at [7]: • the making of an order involves a discretionary exercise of power - even if the requirements imposed by r 7.35 are satisfied, the court nevertheless retains a discretion to refuse relief: Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319 at 321 to 322 per Gleeson CJ.

REASONS FOR MAKING THE FREEZING ORDERS 22 In determining whether to make a freezing order in the exercise of discretion, it is necessary therefore to consider: (1) whether the Deputy Commissioner has a good arguable case; (2) whether there is a danger that a judgment or prospective judgment will be wholly or partially unsatisfied because the judgment debtor's assets are "disposed of, dealt with or diminished in value"; and (3) where the balance of convenience lies. 23 I note that the findings of fact, which I have made are made solely for the purposes of the ex parte interlocutory application and therefore without the benefit of hearing from Mr and Mrs Ghaly.

5.1 Good arguable case 24 As Flick J held in Greenfield: …the requirement imposed by r 7.35(1)(b) that an applicant have a "good arguable case" is "one which is more than barely capable of serious argument and yet not necessarily one the judge considers would have better than a fifty per cent chance of success": Curtis v NID Pty Ltd [2010] FCA 1072 at [6] per Edmonds J[.] 25 I am satisfied that the Deputy Commissioner has established a good arguable case for the final relief sought notwithstanding that the debt is not payable until 30 June 2016. As the Deputy Commissioner submitted, the issue of the amended assessments immediately crystallised a debt to the Commissioner in the amount of $1,259,634.59 notwithstanding that the assessments may be challenged in due course by Mr Ghaly under Part IVC of the TAA. As Bromwich J explained recently in Commissioner of Taxation v Ornelas [2016] FCA 457 at [7]: (a) section 175 of the [ITAA 1936] and s 350-10(1) of Schedule 1 to the TAA (which is in substantially similar terms to the former s 177 of the ITAA 1936) and related provisions have the effect that production of a notice of assessment is conclusive evidence of the due making of the assessment and that the amounts and particulars in the notices of assessment are correct other than in proceedings under Part IVC of the TAA on a review or appeal relating to the assessment…; (b) the production of a notice of assessment gives rise to a present debt, not one that arises in future if payment is not made by the date specified in the notice: Deputy Commissioner of Taxation (ACT) v Sharp (1988) 91 FLR 70; (1988) 19 ATR 1515 at 1519;… 26 Furthermore, I accept that there is a good arguable case for the making of the orders sought against Mrs Ghaly. 27 First, I note that the garnishee notices under s 260-5 of Schedule 1 of the TAA do not operate in respect of jointly held bank accounts: Deputy Commissioner of Taxation (NSW) v Westpac Savings Bank Ltd (1987) 18 ATR 685 at 689 (by analogy). Accordingly, this statutory mechanism provides only a means of recovering funds in accounts held by Mr Ghaly individually and does not provide an alternative remedy to the making of the freezing order sought against Mrs Ghaly with respect to the jointly held accounts. The funds held in accounts in Mr Ghaly's name alone fall well short of the quantum of the liabilities. 28 Secondly, I accept the Deputy Commissioner's submissions that the evidence suggests the wealth accumulated by Mr Ghaly from his undeclared income and disallowed deductions has in large part been deposited into the Jointly Held Accounts and used to pay down the mortgage in the Jointly Held Property. In this regard, I also agree that the evidence suggests that Mrs Ghaly's modest income could not account for the level of savings in the Jointly Held Accounts which is in excess of $1.3m. Further, as I earlier explained, in the reasons for deciding that the amended assessments should be issued, the ATO did not accept Mr Ghaly's explanations for the significant amounts which were accumulated in these accounts. As such, I consider that there is a prima facie case that the money in these joint accounts is held beneficially for Mr Ghaly or that payments into the joint accounts attract the operation of s 37A of the Conveyancing Act.

5.2 Danger that a prospective judgment will not be satisfied 29 Depending upon the circumstances, the interests of justice may support the grant of a freezing order to prevent dissipation of assets pending the hearing of an action even though the risk of dissipation is less probable than not; nor is evidence of any intention to dissipate necessarily required: Deputy Commissioner of Taxation v Hua Wang Bank Berhad [2010] FCA 1014; (2010) 80 ATR 449 at 452-455 (Kenny J) (application for leave to appeal dismissed in Berhad v Deputy Commissioner of Taxation [2010] FCAFC 140; (2010) 81 ATR 66); Deputy Commissioner of Taxation v Chemical Trustee Ltd (No 4) [2012] FCA 1064; (2012) 90 ATR 711 at 717 [22]-[23] (Perram J). Rather, what must be established is "a sufficient likelihood of risk which in the circumstances of the particular case justifies an asset preservation order": Victoria University of Technology v Wilson [2003] VSC 299 at [36] (Redlich J). 30 Applying these principles, in my view the Commissioner has also established that there is a real danger that a prospective judgment would be unsatisfied for the following reasons. First, the evidence of Mr Ghaly's apparent dishonesty in relation to his tax affairs over a substantial period is capable of supporting the inference that he is not the sort of person who would, unless restrained, preserve his assets intact so that they might be available to his judgment creditor: Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319 (Patterson) at 325-326 (Gleeson CJ) (by analogy). As Meagher JA, for example, held in Patterson at 326, in cases for example where the prima facie case against the respondent involves proof of gross dishonesty, the existence of a risk of dissipation of assets may be inferred partly or wholly from proof of the prima facie case. Added to this, the income which Mr Ghaly did not declare was derived from work preparing tax returns for a fee as an unregistered tax agent and derived from such work notwithstanding that he was employed by the ATO and thereby potentially in breach of his fiduciary duties as an employee. Furthermore, the evidence suggests that Mr Ghaly continued to provide services comprising the preparation of tax returns for a fee even after being informed by the ATO that they were conducting a review of his tax affairs on 17 November 2014 and after attending a second formal interview on 16 March 2015. This tends to suggest that he did not appreciate the potential seriousness of his conduct. 31 Secondly, Mr Ghaly's assets are highly liquid. 32 Thirdly, both Mr and Mrs Ghaly indicated during investigations that they have property in Egypt and family connections there. This includes evidence from Mrs Ghaly that she bought a property in Egypt for her retirement as a base from which to travel. Her evidence during the investigations was that as at the date of the interview on 31 March 2015, this property was unoccupied and "locked up". Furthermore, Mr Ghaly advised the Deputy Commissioner of transactions involving the transfer of money from Egypt to Australia off market. He has apparently also transferred funds to Egypt in the past albeit in small amounts although it is not known if he has any personal bank accounts in Egypt. 33 Finally, Mr Zafiriou gave evidence that he was not aware of any bilateral collection policy or other mechanisms in place between Egypt and Australia which would enable the recovery of Australian tax liabilities from assets in Egypt.

5.3 Discretion 34 Notwithstanding the seriousness of orders sought by the Deputy Commissioner and the caution which must be exercised before the making of such orders, in all of the circumstances I considered on balance that the interests of justice were best served by making the freezing orders sought against both Mr and Mrs Ghaly. 35 In reaching this view, I took into account the size of the liabilities, which appears substantial as against the evidence of Mr and Mrs Ghaly's assets. I also took into account the fact that the freezing orders are limited to the size of the liabilities and that the Deputy Commissioner gave the usual undertaking as to damages. 36 I also had regard in Mr and Mrs Ghaly's favour that, despite being on notice of the review of Mr Ghaly's tax affairs since November 2014 and later of an audit investigation by the ATO's Fraud Prevention and Internal Investigations area, they continue to hold and have not disposed of substantial liquid assets with an aggregate value of approximately $1.4 million. The evidence also suggests that Mr Ghaly has not made any large international money transfers in recent years, and that the value of international money transfers made by Mr Ghaly into and out of Australia (which were in each case to third parties) is broadly the same. Moreover, Mrs Ghaly's property in Egypt is worth approximately $45,000 only which seems relatively modest if compared with Mr and Mrs Ghaly's real property in Australia. 37 Against this, however, I have taken into account the capacity nonetheless for Mr and Mrs Ghaly to dispose of highly liquid assets which could readily be transferred offshore and out of the Deputy Commissioner's reach. The danger that these assets might be dissipated is heightened in circumstances where Mr and Mrs Ghaly have a potential base in Egypt and there is prima facie evidence of long-standing dishonesty by Mr Ghaly. Moreover, as the Deputy Commissioner submitted, the evidence that Mr Ghaly continued to prepare tax returns for a fee even during the investigation indicates that at least until the amended assessments were issued on 9 June 2016, Mr Ghaly did not fully comprehend the potential seriousness of his predicament. However, the seriousness of his position is now immediate and real given the issue of the assessments, the provision of the Deputy Commissioner's reasons for decision disbelieving his explanations and the size of the liabilities. This suggests that the danger that assets might be dissipated is greater than when the initial review began.

THE ANCILLARY ORDERS 38 The orders proposed by the Deputy Commissioner also included proposed ancillary orders requiring the provision of information within seven days of the making of the orders. This means that Mr and Mrs Ghaly will not be required to provide that information until after the next return date and therefore that they will have the opportunity to submit that those orders should be varied or revoked without the risk of being immediately in breach if any such submission is not accepted. In those circumstances, I consider that it is appropriate for the ancillary orders to be made.

CONCLUSIONS 39 In all of the circumstances I considered that it was in the interests of justice to make the freezing orders sought by the Deputy Commissioner on 9 June 2016, together with the ancillary orders sought for the provision of information after the next return date. I certify that the preceding thirty-nine (39) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Perry.