Deputy Commissioner of Taxation v Jacond Holdings Pty Ltd

Amended grounds of opposition to winding up 14 On 7 December 2011 the defendant filed amended grounds of opposition to winding up. These grounds were clearly taken from the second affidavit of Mr Arcuri. They are as follows: 1. That the assessment by the ATO on 2 April, 2007 was incorrect and should be set aside. 2. That the objection process was not properly finalised. That additional assessed income of $645,105.00 was an assessment not capable of being verified by the ATO. 3. That the correct assessment should have reflected a reduction in gross sales of $34,762.00 which would have resulted in a nil adjustment on 30 July, 2007 and a tax credit to the Defendant. The purported amended assessable income of an additional $5645,015 raised for the McKenzie Trust No 6 for year ending 30 June 2005 is incorrect and unreasonable and not capable of being supported by the ATO as being a true and fair view of the Trust's financial position; The purported amended assessable income of an additional $645,015 raised for the McKenzie Trust No 6 for year ending 30 June 2005 was based solely on erroneous statistical date (sic) and financial models which do not correlate to the true position of the Trust's or its business activities; The purported amended assessable income of an additional $645,015 raised for the McKenzie Trust No 6 for year ending 30 June 2005 was incorrect and unreasonable and not capable of being supported, verified or substantiated by the ATO using GAAPs [Generally Accepted Accounting Principles] principles despite the full co-operation of the Respondent company in furnishing the ATO with prima-facie documentations substantiating its financial position in initial objections lodged by the Respondent to the ATO; As the purported amended assessable income of an additional $645,015 raised for the McKenzie Trust No 6 for year ending 30 June 2005 is incorrect, unreasonable and not capable of being supported by the ATO as being a true and fair view of the Trust's financial position it therefore logically follows that the distribution of its surplus being $645,015 to the Respondent Company must also be erroneous, unreasonable, unverifiable; As a direct consequence, the purported amended income tax liability of $182,015.10 raised with the Responded (sic) Company is incorrect and without foundation; The Respondent company was restricted in finalizing its objections to the ATO and seeks leave to continue those objections for the purposes of calculating its correct tax liability; The Respondent company is confident that revised and completed financial statements would reveal a tax credit. In the alternative, even if the purported amended assessable income of an additional $645,015 raised for the McKenzie Trust No 6 for year ending 30 June 2005 was correct, an assertion which is not admitted to by the Respondent, the said distribution of $645,015 would not have been wholly distributed to the Respondent company but would have been distributed to a differing discretion of the Trustees. ITR's for 2010 and 2011 and have now been completed and filed electronically showing no outstanding tax liability for the Company. This information was not available to the company at the time of the issue of the relevant Creditors Statutory Demand that information having only been available since the first return date of this matter. The company now seeks leave to file an application pursuant to sections 459S and 459(1)(b) of the Corporation Act 2001. A notice of objection to the assessment by the ATO has also been completed and filed electronically and is annexed to the affidavit of Salvatore Arcuri. Evidence of solvency has been provided by way of three affidavits of Salvatore Arcuri together with comparative trial balances for 2010 and 2011 and attached explanations whereby he concluded the Company was not solvent. (Reproduced as in original.)

Consideration 15 At the hearing both parties made extensive oral submissions. The submissions of Ms Willmer for the plaintiff were supported by written submissions filed by the plaintiff. 16 The key questions which emerged for consideration were in my view as follows: 1. Were the issues raised in the grounds of opposition relevant to the debt the subject of the statutory demand? 2. Should the Court exercise its discretion to either set aside the demand on a new ground pursuant to s 459J(1)(b), or allow the defendant to oppose the winding up application on a new ground pursuant to s 459S, both grounds relating to new information available suggesting that the defendant has no outstanding income tax liability to the plaintiff? 3. Although there is a statutory presumption that the defendant is insolvent pursuant to s 459C, nonetheless is there evidence before the Court that the defendant is solvent, such as to enliven the discretion of the Court in s 459A to refuse the winding up order to which the Commissioner is otherwise entitled? 4. At the hearing, Mr McCartney for the defendant submitted that the defendant had made a without prejudice offer to the plaintiff to pay the debt the basis of the winding up application within 14 days. In the event that the defendant is unsuccessful in respect of its grounds of opposition, should the Court order the proceedings adjourned to allow the defendant to discharge its debt to the plaintiff and allow the parties to make further submissions in light of such payment? 17 I will consider each of these issues in turn.

1. Were the issues raised in the grounds of opposition relevant to the debt the subject of the statutory demand? 18 Although not numbered in the amended grounds of opposition, the grounds of opposition are the same as those set out in paragraphs 4(a) to (n) of Mr Arcuri's second affidavit. Critically, the defendant contends that the purported amended assessable income of an additional $645,015.00 raised for the McKenzie Trust No 6 for the year ending 30 June 2005 was incorrect and unreasonable and not capable of being supported, verified or substantiated by the ATO, and that therefore the purported amended income tax liability of $182,015.10 raised with the defendant is incorrect. 19 At the hearing the parties presented extensive submissions in respect of this issue. 20 In substance, Mr McCartney urged the Court to find that, because amended assessments made by the ATO of income tax payable by the defendant in respect of the year ending 30 June 2005 were incorrect and are appealable to the Administrative Appeals Tribunal, "add ons" arose which have increased the defendant's RBA debt. 21 I do not accept this submission. The debt the subject of the statutory demand is a RBA deficit debt principally relating to primary debts of the defendant in the nature of Pay As You Go (PAYG) Instalment liabilities arising under Pt 2-10 in Sch 1 to the TAA 1953, as well as general interest charges. This is a separate liability from the income tax liability to which Mr Arcuri refers in his affidavit and upon which the defendant relies in its grounds of opposition. It is not in dispute that the PAYG Instalment liabilities which were allocated to the RBA were self-assessed by the defendant through lodgement of its Activity Statements. There is no dispute before me in relation to the debt the subject of this proceeding. Indeed it would be difficult for the defendant to raise a challenge as to the provenance of the debt in light of the provisions of s 177(1) of the Income Tax Assessment Act 1936 (Cth) ("ITAA 1936"), which provides that: (1) The production of a notice of assessment, or of a document under the hand of the Commissioner, a Second Commissioner, or a Deputy Commissioner, purporting to be a copy of a notice of assessment, shall be conclusive evidence of the due making of the assessment and, except in proceedings under Part IVC of the Taxation Administration Act 1953 on a review or appeal relating to the assessment, that the amount and all the particulars of the assessment are correct. 22 Section 8AAZI and s 8AAZJ of the TAA 1953 are similarly relevant. 23 At the hearing Ms Willmer submitted, in my view correctly, that the self-assessment had been conducted in accordance with ss 45-15, 45-50, 45-110(2) and 45-320 in Pt 2.10 in Sch 1 to the TAA 1953. As these sections make plain, a dispute as to the income tax position of the defendant in 2005 has no bearing on PAYG instalment liabilities beyond 2006, in circumstances where the instalment rate for every later year is, pursuant to s 45-320, referable to the base assessment instalment income of the prior income year. 24 Finally, even if the defendant's claims as to the inaccuracy of the 2005 income tax assessment had merit because of a (as yet untested) likelihood that the decision of the ATO to amend the assessment was liable to be set aside by the Administrative Appeals Tribunal ("AAT"), it is clear that the pendency of AAT proceedings does not impede recovery of tax in the meantime: s 14ZZM of the TAA 1953, Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd [2008] HCA 41 at [29].

2. Should the Court exercise its discretion pursuant to either section 459J(1)(b) or section 459S of the Corporations Act? 25 Section 459J(1)(b) provides as follows: Setting aside demand on other grounds (1) On an application under s 459G, the Court may by order set aside the demand if it is satisfied that: (a) because of a defect in the demand, substantial injustice will be caused unless the demand is set aside; or (b) there is some other reason why the demand should be set aside. (2) Except as provided in subsection (1), the Court must not set aside a statutory demand merely because of a defect. 26 Section 459S in turn provides: Company may not oppose application on certain grounds (1) In so far as an application for a company to be wound up in insolvency relies on a failure by the company to comply with a statutory demand, the company may not, without the leave of the Court, oppose the application on a ground: (a) that the company relied on for the purposes of an application by it for the demand to be set aside; or (b) that the company could have so relied on, but did not so rely on (whether it made such an application or not). (2) The Court is not to grant leave under subsection (1) unless it is satisfied that the ground is material to proving that the company is solvent. 27 The grounds for the application for leave pursuant to ss 459J(1)(b) and 459S appear in the grounds of opposition, as follows: ITR's for 2010 and 2011 and have now been completed and filed electronically showing no outstanding tax liability for the Company. This information was not available to the company at the time of the issue of the relevant Creditors Statutory Demand that information having only been available since the first return date of this matter. The company now seeks leave to file an application pursuant to sections 459S and 459(1)(b) of the Corporation Act 2001. 28 These grounds were supplemented at the hearing, where Mr McCartney for the defendant submitted in summary that: new information as to the outstanding tax liability of the defendant had come to light; and the defendant could seek review by the AAT of the decision of the Commissioner concerning the amended assessment of the 2005 year. 29 Section 459J(1)(b) was considered by the High Court in Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd [2008] HCA 41. 30 In relation to s 459J(1)(b), the plurality observed at [61]: The "material considerations" which are to be taken into account, on an application to set aside a statutory demand, when determining the existence of the necessary satisfaction for par (b) of s 459J(1) must include the legislative policy, manifested in s 14ZZM and s 14ZZR of the Administration Act, respecting the recovery of tax debts notwithstanding the pendency of Pt IVC proceedings. (Emphasis added, footnotes omitted.) 31 I also note comments of Olney J in Kalis Nominees Pty Ltd v DCT (1995) 31 ATR 188 at 193, to which the plurality of the High Court in Broadbeach Properties referred with oblique approval, as follows: The legislative policy of the tax law is clear enough. Once tax is due and payable it may be recovered from the taxpayer notwithstanding that the taxpayer has sought to exercise his rights or review of appeal under Pt IVC of the Taxation Administration Act. The policy of the law would be defeated if a demand were set aside under s 459J(1)(b) simply because a review of an objection decision is pending. A taxpayer must, in the context of a case of this nature, demonstrate more than the fact that he disputes his liability for the tax as assessed and that he is actively pursuing his remedies. It is both unnecessary and undesirable to endeavour to list the circumstances which would justify the exercise of the discretion under s 459J(1)(b) except to say that in a case in which the Commissioner is not shown to have acted oppressively or to have treated the applicant in a manner different from other taxpayers in a similar position, it is not appropriate that the discretion to set aside the demand should be exercised. Section 459J(1)(b) does not provide an occasion for the court to express its view on the reasonableness or otherwise of the taxation legislation. 32 Even were the issues in respect of the 2005 income tax position of the defendant relevant - which in my view they are not - the fact that the defendant may be contemplating an administrative challenge to an earlier amended assessment does not enliven the discretion of the Court in s 459J(1)(b) in the context of this proceeding. In light of the decision in Broadbeach, and in the absence of any dispute by the defendant as to the amount of the tax debt set out in the statutory demand, I am unable to identify any scope for the exercise of the discretion of the Court in relation to s 459J(1)(b) in the circumstances before me. 33 In relation to s 459S, I am not satisfied that the Court should allow the defendant to oppose the plaintiff's application in reliance on that section. This is because: In my view the defendant has not properly articulated new grounds for opposition which would enliven the Court's discretion under s 459S. I have already expressed the view that grounds of opposition referable to the 2005 income tax position of the defendant are irrelevant in this proceeding. To the extent that the defendant relies on the fact that it has now filed income tax returns for the 2010 and 2011 financial years, I am not satisfied that this in itself provides any basis upon which the Court can reach a level of satisfaction as to the solvency of the defendant (which is relevant pursuant to s 459S(2)). The defendant claims that the 2010 and 2011 income tax returns demonstrate that it has no outstanding tax liability. However: Sections 8AAZI and 8AAZJ of the TAA 1953 provide respectively that the production of a RBA statement is prima facie evidence that the amounts and particulars in the statement are correct and as to the evidentiary value of the Commissioner's certificate. I also note s 177 of the ITAA 1936 to which I referred earlier. Further, in her affidavit sworn 8 December 2011, Ms Little-Owl deposes that, as a result of credits resulting from the lodgement of the defendant's income tax return for the year ended 30 June 2010 in the amount of $14,190.45, the balance of the defendant's RBA deficit debt will be reduced by this amount but an amount of $104,949.47 will remain outstanding in respect of the defendant's deficit debt (paragraph 15). No additional evidence was given by Ms Little-Owl in relation to the 2011 Income Tax Return, and her evidence was not challenged at the hearing. In my view, the "new" information which has come to light in respect of the 2010 financial year would have no impact on the solvency of the defendant as required by s 459S(2), as a sizeable debt to the plaintiff remains. Further, I have been directed to no specific material in the defendant's 2011 income tax return which would support the defendant's position in respect of its application under s 459S and its claim that it now has no outstanding tax liability.

3. Is there evidence before the Court that the defendant is solvent? 34 As I observed earlier in this judgment, s 459A vests the Court with discretion to refuse to make a winding up order in circumstances where the Court is satisfied that the defendant is solvent, notwithstanding that the defendant has failed to comply with a statutory demand and is therefore presumed to be insolvent under the Corporations Act. 35 The relevant definition of solvency is found in s 95A of the Corporations Act, which provides: Solvency and insolvency (1) A person is solvent if, and only if, the person is able to pay all the person's debts, as and when they become due and payable. (2) A person who is not solvent is insolvent. 36 Helpful principles in respect of whether the Court should exercise its discretion to refuse a winding up order may be found in the decision of Weinberg J in Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728. In that case his Honour said: 44 The authorities which govern the operation of s 459G of the Corporations Law seem to me to establish the following propositions: * The respondent is presumed to be insolvent and as such bears the onus of proving its solvency: s 459C(2) and (3); Elite Motor Campers Australia v Leisureport Pty Ltd (1996) 22 ACSR 235 per Spender J; Commissioner of Taxation v Simionato Holdings Pty Ltd. (1997) 15 ACLC 477 per Mansfield J. * In order to discharge that onus the Court should ordinarily be presented with the "fullest and best" evidence of the financial position of the respondent: Commonwealth Bank of Australia v Begonia (1993) 11 ACLC 1075 at 1081 per Hayne J. * Unaudited accounts and unverified claims of ownership or valuation are not ordinarily probative of solvency. Nor are bald assertions of solvency arising from a general review of the accounts, even if made by qualified accountants who have detailed knowledge of how those accounts were prepared: Simionato Holdings Pty Ltd (supra); Re Citic Commodity Trading Pty Ltd v JBL Enterprises (WA) Pty Ltd [1998] FCA 232 per Heerey J; Leslie v Howship Holdings Pty Ltd (1997) 15 ACLC 459 at 463 per Sackville J. * There is a distinction between solvency and a surplus of assets. A company may be at the same time insolvent and wealthy. The nature of a company's assets, and its ability to convert those assets into cash within a relatively short time, at least to the extent of meeting all its debts as and when they fall due, must be considered in determining solvency: Rees v Bank of New South Wales [1964] HCA 47; (1964) 111 CLR 210; Re Tweeds Garages Ltd [1962] Ch 406 at 410 per Plowman J; Simionato Holdings Pty Ltd (supra); Melbase Corporation Pty Ltd v Segenhoe Ltd [1995] FCA 1225; (1995) 13 ACLC 823 at 832 per Lindgren J; Leslie v Howship Holdings Pty Ltd (supra) at 465-466. * The adoption of a cash flow test for solvency does not mean that the extent of the company's assets is irrelevant to the inquiry. The credit resources available to the company must also be taken into account: Sandell v Porter [1966] HCA 28; (1966) 115 CLR 666 at 671 per Barwick CJ (with whom McTiernan and Windeyer JJ agreed); Leslie v Howship Holdings Pty Ltd (supra) at 466; Taylor v ANZ Banking Group Ltd (1988) 6 ACLC 808 at 812 per McGarvie J. * The question of solvency must be assessed at the date of the hearing. However, this does not mean that future events are to be ignored: Leslie v Howship Holdings Pty Ltd (supra) at 466-467. * It is no abuse of process for an applicant to seek to wind up a company presumed to be insolvent by reason of its failure to comply with a statutory demand merely because that company contends that it is solvent, or because there may be alternative means available to the applicant to vindicate its rights: Elite Motor Campers Australia v Leisureport Pty Ltd (supra). 37 Taking into account these principles, and the material before the Court, I have formed the view that the defendant has not discharged its onus of proving solvency. I take this view for the following reasons: 1. In his third affidavit sworn 6 December 2011 Mr Arcuri provided details of the current value of the defendant's assets. The "Comparative Trial Balance" at 30 June 2011 in the affidavit discloses a claimed real property value of $1.1 million together with other non-current assets. However the Comparative Trial Balance does not appear to accurately reflect the encumbrances on real property of the defendant in respect of the mortgage to National Australia Bank. Specifically, whereas the income tax return for the financial year ended 30 June 2011 states that the defendant's total debt was $350,047.00, evidence of Ms Little-Owl in her affidavit sworn 29 November 2011 following review of the National Australia Bank statements indicates that the defendant owed a debt to the bank of over $722,951.00 as at 30 June 2011. 2. The authority of the Comparative Trial Balance is questionable, as the author is not identified in material before the Court. In any event, the Comparative Trial Balance appears unaudited, and is potentially unreliable. 3. The Comparative Trial Balance purports to be as at 30 June 2011, over five months ago. The question of solvency must be assessed at the date of the hearing. 4. There is no evidence before the Court as to the ability of the defendant to pay its debts as and when they become due in accordance with s 95A. 5. Notwithstanding that the defendant appears to own real property, there is no evidence before the Court as to the speed with which its real property can be realised to satisfy debts which are due. 6. I note that the tax liability the subject of this proceeding has not been included as a current liability of the defendant. 7. Mr Arcuri's opinion as to the solvency of the defendant, as found in his second affidavit, is not supported by audited accounts or real property valuations. 8. Overall, I am not satisfied that the Court has been presented with the "fullest and best" evidence of the financial position of the defendant in this case 9. It follows that I am not prepared to exercise my discretion pursuant to s 459A to refuse to make a winding up order.

4. Offer to pay within 14 days 38 At the hearing, Mr McCartney for the defendant submitted that the defendant had made a without prejudice offer in writing to the plaintiff to, within 14 days, pay the debt the subject of the statutory demand and the basis of the winding up application. I temporarily adjourned the Court to enable the parties to discuss the defendant's offer. However after some consideration of the offer the plaintiff informed the Court that it had rejected the offer on the grounds that: it was only prepared to accept an offer of payment in full, made by the day after the hearing, so as to allow the payment to be cleared within five business days and before the end of the Court sitting year; it was not prepared to accept payments by instalments over several weeks; it did not know who would make the payment, and it had serious concerns that, should the defendant enter liquidation in any event, such a payment could constitute a voidable transaction in the hands of a liquidator. 39 Although Mr McCartney submitted that the plaintiff would make a mockery of the Court proceedings should it refuse to accept payment in full of its debt by the defendant, I do not accept that that is the case. 40 It is clear that the status of an applicant to seek a winding up order is determined as at the date the application was filed (in this case, 30 September 2011), and is unaffected by the subsequent payment of the debt identified in the statutory demand: for example, Deputy Commissioner of Taxation v Visidet Pty Ltd [2005] FCA 830, Deputy Commissioner of Taxation v BK Ganter Holdings Pty Ltd (2008) 172 FCR 385. In this case, while no payment seeking to extinguish the debt has been made, similar principles apply. The defendant has had several months to get its financial house in order so far as concerns the plaintiff, and there is no obligation on the plaintiff to accept what is truly an eleventh hour offer of payment of the debt. Further, I consider the plaintiff's caution as to the possibility of any payment at this stage being potentially voidable as an antecedent transaction a legitimate concern. I am not prepared to order that the matter be adjourned pending payment by the defendant. I certify that the preceding forty (40) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Collier.