Mr Huang's submissions
5 Mr Huang seeks a stay of the execution of the judgment.
6 Mr Huang accepted that the principles identified in Southgate Investment Funds Limited v Deputy Commissioner of Taxation [2013] FCAFC 10; (2013) 211 FCR 274 at [77] were applicable. At [77] the Full Court said:
It is appropriate if we say something further regarding the criteria which may apply in determining whether or not execution of a judgment debt should be stayed. We agree with the observations of Hutley JA in Mackey at 289 [Deputy Commissioner of Taxation (NSW) v Mackey (1982) 45 ALR 284] that the discretion to grant a stay of the execution of a judgment debt based upon a taxation assessment involves "an open-ended discretion" and that it "is not possible to work out in advance all possible bases for the exercise of such a discretion and it would not be proper even to attempt to do so". Bearing in mind those salutary words and without wishing to be prescriptive or exhaustive, we consider that it is possible, however, to extract from the caselaw the following general principles which guide the exercise of that discretion:
(a) the power to grant a stay should be exercised sparingly and the taxpayer bears the onus of persuading the Court that a stay ought to be granted in the particular circumstances;
(b) great weight must be given to the clear legislative policy manifested in provisions such as ss 14ZZM and 14ZZR of the TAA which give priority to the recovery of taxation revenue notwithstanding that a taxpayer has a Part IVC proceeding on foot. The Commissioner is placed by the legislation in a position of special advantage and is generally free to pursue recovery proceedings despite the pendency of Part IVC proceedings;
(c) the merits of pending Part IVC proceedings may be a relevant consideration to be taken into account in the exercise of the discretion, but the court should not attempt to determine the merits unless it has sufficient material before it to do so and it should avoid speculation;
(d) in cases where a judge is unable to form even a tentative view of the strength of Part IVC proceedings, it is unlikely that the judge's discretion in refusing a stay will miscarry by reason only of the judge being unable on the material before him or her to reach a view as to the taxpayer's prospects of success in having the assessment overturned;
(e) it is too narrow a view of the discretion to grant a stay of proceedings or execution merely because Part IVC proceedings are pending, or because on review of those proceedings there appears to be an arguable case or complex questions to be determined by the AAT or the Court;
(f) that is not to say, however, that the outcome of Part IVC proceedings has to be certain in the sense that they are bound to succeed or fail. That puts the bar too high;
(g) in cases where the Court considers that it is in a position to assess the merits of pending Part 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;
(h) similarly, more weight would be given to the merits factor if the case is one where the Commissioner has abused his position or it is clear that the Commissioner is endeavouring to collect tax in defiance of a decision of the High Court or other superior court which is precisely in point;
(i) due acknowledgment should be given to the asperity with which provisions such as ss 14ZZM and 14ZZR may operate, but in appropriate circumstances a court might consider that a stay is warranted in cases of extreme hardship to a taxpayer, noting however that:
(i) the mere obligation to pay income tax of itself does not impose extreme hardship; and
(ii) the possibility that the taxpayer may be bankrupted is generally not of itself an extreme hardship, however, different considerations may arise if, for example, it is demonstrated that the execution of a judgment debt would deprive the taxpayer of the financial resources needed to prosecute extant Part IVC proceedings;
(j) irrespective of the merits of pending Part 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
(k) other considerations may need to be taken into account in determining whether to exercise the discretion in a particular case, such as any conduct on the part of the taxpayer or the Commissioner which impacts upon the efficient and expeditious conduct of Part IVC proceedings.
7 Mr Huang noted that although Southgate concerned the exercise of the discretion to grant a stay given extant proceedings under Pt IVC of the TAA 53 appealing against an objection decision, it has been held that the same principles apply to tax disputes in the objection phase: Deputy Commissioner of Taxation v Songa Offshore Pte Ltd [2013] FCA 839; (2013) 95 ATR 779 at [44]-[45].
8 Mr Huang submitted that three considerations took the case out of the ordinary course and justified the grant of a stay of execution of judgment. First, the strength of Mr Huang's objections to the amended assessments. Second, the significance of the security that the Deputy Commissioner has over Mr Huang's assets in Australia by reason of the freezing orders made on 21 October 2019, Mr Huang's Australian assets being those against which the Deputy Commissioner can enforce the judgment: Deputy Commissioner of Taxation v Huang [2019] FCA 1728. Third, the prejudice which Mr Huang will suffer as a result of the fact that his Australian assets constitute properties in Chatswood which, if sold, would be worth less at the time of sale than they would be worth at the time Mr Huang's foreshadowed Pt IVC proceedings when, in the event those proceedings are successful, Mr Huang will be entitled to reimbursement with interest calculated at the sum of 0.98 per cent per annum only: s 8I of the Taxation (Interest on Overpayments and Early Payments) Act 1983 (Cth) and s 8AAD of the TAA 53.
9 As to the first of these considerations, Mr Huang submitted that it was apparent that his objections to the amended assessments, lodged on 6 November 2019, were cogent and well-founded.
10 The amended 2014 assessment, which includes an amount of $105,303,942, depends on the Commissioner's assumption, which was admittedly fostered by Mr Huang's tax advisors, that a company he controlled (Jinhong Xicheng Investment Development Co Ltd or JHXC) was a controlled foreign company or CFC, so that income made by that company was attributable to Mr Huang for the 2014 tax year: Pt X of the ITAA 36. Mr Huang submitted that the Commissioner's assumption was unsound. According to Mr Huang, in light of the law as identified by the High Court in Bywater Investments Limited v Commissioner of Taxation [2016] HCA 45; (216) 260 CLR 169, JHXC is not a CFC because it was at the relevant time a PT X Australian Resident, with the consequence that the income earned by JHXC is not attributable to Mr Huang. As the submissions for Mr Huang identified:
A company is only a CFC within Part X of the ITAA 1936 if it was a resident of a listed or unlisted country at the relevant time: s 340 ITAA 1936. The People's Republic of China is an unlisted country.
Notwithstanding the taxation laws of any other country, a company will not be a resident of a listed or unlisted country for the purposes of Part X of the ITAA 1936 if it is a "Part X Australian Resident": s 332(2), s 333(1)(b), s 333(2)(a).
A company is a Part X Australian Resident if it is a resident as defined by s 6 of the ITAA 1936, unless there is a double tax agreement in force in respect of the relevant foreign country and a tiebreaker provision of that double tax agreement deems the company to be a resident of the foreign country: s 317. There is a double tax agreement between Australia and the People's Republic of China.
By s 6 of the ITAA 1936, a corporation is a resident of Australia (a) if it is incorporated in Australia; or (b) if not incorporated in Australia, carries on business in Australia, and has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia. These concepts are explained in Bywater at [39]-[41] and [77] per French CJ, Kiefel, Bell and Nettle JJ.
As explained in Bywater, a company which has its central management and control in Australia carries on business in Australia: Bywater at [57] per French CJ, Kiefel, Bell and Nettle JJ. Consequently, the critical question is whether the central management and control of JHXC was located in Australia in the 2014 year.
The CFC component of the 2014 Assessment can only stand if JHXC was not a Part X Australian Resident. JHXC would be a Part X Australian resident if it were both an Australian resident:
a. by reason of s 6 of the ITAA 1936; and
b. by reason of the tiebreaker provision in the Agreement between the Government of Australia and the Government of the People's Republic of China for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (Australia-China Treaty) (which is given effect by s 5 of the International Tax Agreements Act 1953 (Cth)).
11 According to Mr Huang all indicia point to JHXC being an Australian resident. In particular, Mr Huang pointed out that the evidence establishes that:
a. the First Respondent was the ultimate beneficial owner of 97.55% of JHXC: RFD Appendix A YD-1 [Exhibit YD-1] at 128;
b. from the period 1 February 2013 when the First Respondent became an Australian tax resident to 30 June 2013, the First Respondent spent only 19 out of 138 days outside Australia: YD-1 at 54;
c. from the period 1 July 2013 to 30 June 2014, the First Respondent spent only 58 out of 365 days outside Australia: YD-1 at 53-54;
d. from the period 1 July 2013 to 30 June 2015, the First Respondent spent only 58 out of 365 days outside Australia: YD-1 at 52-53;
e. the First Respondent was employed or otherwise engaged in the economically productive activities of the Yuhu Group in Australia: Deng [affidavit of Yi Deng sworn 16 September 2019] [68];
f. JHXC was not a trading company and entered into a limited number of financing and (abortive) property development arrangements: RFD [86]-[92], [103]-[105] YD-1 at 90, 92-93.
12 Mr Huang would have it that the irresistible inference from these circumstances is that Mr Huang controlled the affairs of JHXC from Australia, which was his residence at the relevant time. As Mr Huang put it, the amended assessment for the 2014 year was based on the inherently improbable factual predicate that Mr Huang did not have central control of and manage JHXC in Australia, his place of habitual residence.
13 As to the tiebreaker provisions under the Australia China double tax treaty, Mr Huang said it may be assumed for present purposes that JHXC is a resident of China under its domestic law, albeit that there was no evidence about the domestic laws of China. The Australia-China Treaty provides for a corporate residency tiebreaker rule in Art 4 in these terms:
Where by reason of the provisions of paragraph (1) a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident solely of the Contracting State in which its place of effective management or head office is situated. However, where such a person has its place of effective management in a Contracting State and its head office in the other Contracting State, the person shall be deemed to be a resident solely of that other State.
14 The place of effective management of a company "may 'ordinarily' be the place where the board of directors makes its decisions, but 'all relevant facts and circumstances must be examined to determine [where] the place of effective management' of a company is located": Bywater at [169]. Accordingly, in the present case, the place of effective management is the same as the place of central management and control of the company, which would be Australia for the reasons already advanced for Mr Huang. Mr Huang also said that the "head office" tiebreaker provision in the Australia-China treaty would also be resolved in favour of his contention. Mr Huang submitted that the expression contemplated a functional concept rather than a registered office or headquarters. As a special purpose vehicle JHXC does not have a head office so that test does not resolve its residency any differently from the place of effective management test.
15 For these reasons, Mr Hung said that his objection on the basis that JHXC is a Pt X Australian Resident and not a CFC was well-founded so that the increase in his assessable income for the 2014 tax year by some $105 million must be excessive within the meaning of ss 14ZZK and 14ZZO of the TAA 53. Mr Huang also noted that his objection disputed the Commissioner's valuations and that he would be contending that even if JHXC is a CFC there was no taxable capital gain of the company in the 2014 tax year.
16 Mr Huang also objected to his 2013 amended assessment, the balance of his 2014 amended assessment, and his amended 2015 assessment in which the Commissioner had included in his assessable income so-called unexplained deposits which, according to Mr Huang's objections, were in fact the repayment of loans.
17 Mr Huang submitted that in circumstances where it was common ground that he was a person of very considerable wealth in Hong Kong and China, before he became resident in Australia, it was not an unlikely inference that he would be in this position. According to Mr Huang, the burden of proof imposed on him by ss 14ZZK and 14ZZO of the TAA 53 did not demand that he disclose the identity of the borrowers but rather required an explanation for the receipt of those amounts which had been given in the objections. The explanation given is cogent and as long as Mr Huang's credit was not impugned he will have shown the assessment to be excessive: Hua-Aus Pty Ltd v Commissioner of Taxation [2010] FCA 341; (2010) 184 FCR 430 at [45]; Ma v Commissioner of Taxation [1992] FCA 359; (1992) 37 FCR 225 at 230. Accordingly, there was a real prospect of success of the foreshadowed Pt IVC proceedings on this basis.
18 As to the second of these considerations, Mr Huang submitted that the only practical avenue for execution of the judgment was against Mr Huang's assets in Australia consisting of two properties in Chatswood. The Deputy Commissioner, however, already had the freezing orders in place which prevented Mr Huang from dealing with those properties. Accordingly, to the extent practicable, the Deputy Commissioner has in place the security afforded by the freezing orders. By analogy to the position of a judgment creditor who has offered security for the judgment debt, this is a relevant factor in the exercise of the Court's discretion: Kalifair Pty Limited v Digi-Tech (Aust) Limited; McLean Tenic Pty Ltd v Digi-Tech (Aust) Ltd [2002] NSWCA 383; (2002) 55 NSWLR 737 at [28]. There will be no prejudice to the Deputy Commissioner if the Court grants a stay of the execution of judgment. Further, Mr Huang has offered a second registered mortgage over his real property in Australia. The Deputy Commissioner rejected this genuine offer of security and should not be able to rely on this rejection as a reason for refusing the grant of the stay.
19 This leads to the third consideration, the prejudice to Mr Huang. The execution of judgment against the Chatswood properties would occur in a rising market. In circumstances where, if Mr Huang is ultimately successful in his Pt IVC appeals, the Deputy Commissioner has not undertaken to compensate Mr Huang for any appreciation in value between the time of sale and the determination of the Pt IVC proceedings, Mr Huang will be left with the statutory rate of interest, currently at 0.98%. The comparative prejudice to Mr Huang is another significant discretionary factor, which together with the merits of the objections and the proposed PT IVC proceedings are sufficient to outweigh the special position of the Deputy Commissioner, with the consequence that the Court should exercise its discretion to order a stay of execution of judgment.