Deputy Commissioner of Taxation v NRA Engineering Pty Ltd

Deputy Commissioner of Taxation v NRA Engineering Pty Ltd - [2019] FCA 1755 - FCA 2019 case summary — Zoe

[10]

Company's tax liability 6 The Company became indebted to the Commonwealth following an audit conducted by the Deputy Commissioner into the activity statements lodged by the Company for the period 1 July 2013 to 30 June 2017. As a consequence of the audit, all tax credits claimed by the Company for this period were disallowed and administrative penalties of $494,694 were applied. 7 The Deputy Commissioner's reasons for his decision dated 4 April 2018 recorded the following facts: (a) the Company registered for GST on 1 January 2005 and reported annually on a cash basis; (b) the Company lodged its 2013-2014 Annual BAS on 11 July 2013, revising this five times between 11 July 2013 and 7 February 2017 with an increased refund on each occasion; (c) the Company lodged its 2014-2015 Annual BAS on 22 December 2016, revising this three times between 22 December 2016 and 7 February 2017 with an increased refund on each occasion; (d) the Company lodged its 2015-2016 Annual BAS on 22 December 2016, revising this ten times between 22 December 2016 and 6 February 2018 with an increased refund on each occasion; (e) the Company lodged its 2016-2017 Annual BAS on 10 July 2017, revising this fifteen times between 10 July 2017 and 7 December 2017 with an increased refund on each occasion; (f) the Commissioner flagged the revised 2016-2017 Annual BAS lodged on 7 December 2019 (being the sixteenth revision) for review as the Company had reported total GST on sales of $63 and claimed GST credits of $530,715; and (g) on 13 December 2017, Mr Sutcliffe, on behalf of the Company telephoned the ATO and advised the correct GST credit for refund should have been $48,247. 8 The Deputy Commissioner relevantly concluded in his decision that: (a) the Company was unable to provide the Commissioner with evidence supporting the GST credits claimed, including the production of tax invoices, contracts and bank statements to prove it was conducting activities commensurate with running an enterprise; (b) Mr Sutcliffe knowingly made statements to the Commissioner that were false and misleading, although he had the accounting skills and knowledge; (c) Mr Sutcliffe's actions were considered to have been contrived for the purpose of obtaining GST refunds; (d) the Company was not entitled to be registered for GST; and (e) the Company was not entitled to GST credits that it had report in its activity statements for the 2014 to the 2017 years. 9 As a result, the Company became liable to pay the following amounts of GST in respect of the 2014 to 2017 years: Year ended 30 June 2014 $ 2,918.00 Year ended 30 June 2015 $ 4,058.00 Year ended 30 June 2016 $ 10,214.00 Year ended 30 June 2017 $ 44,547.00 TOTAL $61,737.00

[13]

Application for review 18 Section 35A(5) of the Federal Court of Australia Act 1976 (Cth) (FCA Act) permits a party to a proceeding to apply to the Court for a review of a decision of a Registrar of the Court. This power extends to reviewing questions of both fact and law: Guildford International Group Pty Ltd, in the matter of Aviation 3030 Pty Ltd v Aviation 3030 Pty Ltd [2018] FCA 600 at [1] per O'Callaghan J, cited in 3Bears Childcare Centre Pty Ltd v Deputy Commissioner of Taxation, In the matter of 3Bears Childcare Centre Pty Ltd [2018] FCA 1690 at [13] per Gleeson J. 19 The nature of a review under this provision was further explained as follows by Colvin J in Deputy Commissioner of Taxation v Melking Holdings Pty Ltd [2019] FCA 988: 11 Section 35A(1) of the Federal Court of Australia Act 1976 (Cth) provides for certain powers of the Court to be exercised by a Registrar if a judge so directs. There is express provision whereby a party to proceedings in which the Registrar has exercised any of the powers of the Court under a direction made by a judge of the Court may apply for a review of the exercise of the power by the Registrar: s 35A(5). The review of a Registrar's decision is a rehearing de novo in which the Court may receive fresh evidence and depart from factual findings by the Registrar: Deputy Commissioner of Taxation v Australian Securities and Investments Commission [2013] FCA 623 at [36] and Mazukov v University of Tasmania [2004] FCAFC 159 at [21]-[24]. It is 'a complete rehearing' in which '[t]he moving party before the Registrar has the responsibility of satisfying the Court that the orders should have been made': Callegher v Australian Securities and Investments Commission [2007] FCA 482; (2007) 218 FCR 81 at [46]. The availability of the review fulfils a constitutional imperative that the delegation of the exercise of judicial power to a Registrar is subject to real and effective control and supervision by the Court: Harris v Caladine [1991] HCA 9; (1991) 172 CLR 84 at 124-126 and HVAC Construction (Qld) Pty Ltd v Energy Equipment Engineering Pty Ltd [2002] FCA 1638 at [38]-[40] (French J). ... 14 A rehearing of the kind provided for by s 35A(5) remains a review. The question is whether or not to affirm the decision made in the exercise of the delegated power. However, it is a fresh exercise of the power to be based upon the facts and law as at the time the review is undertaken. The decision to be made on review is a decision by the Court as to how it would exercise the power, not whether there has been error demonstrated in the approach by the Registrar. A rehearing would not extend to issues that were not before the Registrar such that it was in effect a hearing in respect of an exercise of power that was not undertaken by the Registrar. The issues to be determined on the review are those that were before the Registrar and the subject of the exercise of the delegated power. It is not for the moving party on review to seek to expand the issues that were before the Registrar by seeking to raise an amendment. To allow an 'amendment' would be to allow the moving party to raise for the first time the adjudication by the Court of the wider issues introduced by the amendment. The proceeding would become more than a review of the particular exercise of power by the Registrar. 20 By way of interlocutory process dated 12 July 2019, and filed 17 July 2019, Mr Sutcliffe purported to commence an application under s 35A(5) of the FCA Act on behalf of the Company. This application was formalised on 31 July 2019 when I granted Mr Sutcliffe leave pursuant to s 198G(3)(b) of the Act for him to commence and maintain the review application on behalf of the Company.

[14]

Winding up orders 21 The statutory framework concerning the making of a winding up order by the Court in respect of a company in insolvency is contained in Pt 5.4 of the Act. This framework was summarised in Deputy Commissioner of Taxation v JGQ Developments Pty Ltd [2018] FCA 2046 at [3] per McKerracher J as follows: (1) The Court is empowered, upon application made to it, to order that an insolvent company be wound up in insolvency: s 459A of the Act. In that respect, the Court has discretion which may be exercised on any ground not extraneous to the scope and purpose of the Act: see Deputy Commissioner of Taxation v Swoosh Hand Car Wash Pty Ltd [2014] FCA 73 per Jacobson J (at [10]) and Deputy Commissioner of Taxation v T.D. Preece Pty Ltd [2013] FCA 1365 per Griffiths J (at [18]). (2) A creditor may apply to the Court for an order that a company be wound up in insolvency: s 459P(1)(b) of the Act. The question of standing to pursue a winding up order is to be determined as at the date that the application for winding up is filed: Deputy Commissioner of Taxation v Complete Liquid Transport Pty Ltd (2010) 80 ATR 523 per Collier J (at [29]). (3) A person may serve on a company a statutory demand under s 459E of the Act where it satisfies the conditions therein contained. (4) Where an application for winding up has been made, and a company has failed to comply with a statutory demand served on the company pursuant to s 459E of the Act in the period that is three months prior to the making of the application, the Court must presume that the Company is insolvent: s 459C(2)(a) of the Act. (5) A presumption of insolvency arising from the failure to comply with a statutory demand may be rebutted by the company the subject of the application: s 459C(3) of the Act. However, in order to discharge that onus, the Court should ordinarily be presented with the 'fullest and best' evidence of the financial position of the company: Commonwealth Bank of Australia v Begonia Pty Ltd (1993) 11 ACLC 1075 per Hayne J (at 1081). Unaudited accounts and unverified claims of ownership or valuation are not ordinarily probative of solvency, nor are bald assertions of solvency from a general review of the accounts, even if made by qualified accountants who have detailed knowledge of how those accounts were prepared: see, for example, In the matter of Simionato Holdings Pty Ltd The Commissioner of Taxation of the Commonwealth of Australia v Simionato Holdings Pty Ltd [1997] FCA 125; Re Citic Commodity Trading Pty Ltd v JBL Enterprises (WA) Pty Ltd [1998] FCA 232; Leslie v Howship Holdings Pty Ltd (1997) 15 ACLC 459 per Sackville J (at 463). (6) Where an application for winding up is made on the ground of a presumption of insolvency arising from the failure to comply with a statutory demand: (a) the application must set out particulars of service of the demand and the Company's failure to comply with it: s 459Q(a)(i) of the Act; (b) the application must have attached to it a copy of the demand: s 459(b)(i) of the Act; (c) unless the debt the subject of the demand was a judgment debt, the application must be accompanied by an affidavit which complies with the Federal Court (Corporations) Rules 2000 (Cth) and verifies that the total of the debts claimed in the demand is due and payable by the company: s 459Q(c) of the Act. In this regard, the affidavit under s 459Q merely is required to 'verify' debts, that is, a formal affirmation on oath that the money is due and payable and formal evidence of the debt is not required: see Deputy Commissioner of Taxation v National Skin Institute (Aust) Pty Ltd (2012) 200 FCR 146 per Finn, Gordon and Murphy JJ (at [17] and the authorities cited therein); and (d) the affidavit in support of the application must have annexed to it a record of the search of the records maintained by the Australian Securities and Investments Commission (ASIC), carried out no earlier than 7 days before the application is filed: r 2.4 of the Rules. (7) The affidavit in support must be made by the creditor or a person authorised by the creditor to make the affidavit on the creditor's behalf: r 2.5(c) of the Rules. (8) Upon the making of an application for winding up, the plaintiff must: (a) lodge a notice of the making of the application with ASIC in the prescribed form: s 465A(1)(a) of the Act; (b) within 14 days of the making of the application, serve a copy of it on the company: s 465A(1)(b) of the Act. In this regard, s 109X of the Act specifies methods of service on a company; and (c) publish a notice on the ASIC Insolvency Notices Website, at least 3 days after the application has been served and at least 7 days prior to the date fixed for hearing of the application: s 465A(1)(c) of the Act, r 5.6 of the Rules and reg 5.6.75 of the Corporations Regulations 2001 (Cth). 22 In addition, unless the court has made an order extending the life of an application for a company to be wound up in insolvency, the application must be determined within six months after it has been made: s 459R of the Act.

[16]

Opposition to application for winding up order 26 Section 465C of the Act, read with r 2.9 of the Federal Court (Corporations) Rules 2000 (Cth), requires that a person may not, without leave of the Court, oppose an application for winding up unless, not later than three days before the date fixed for hearing of the application, the person has given to the applicant for a winding up order notice of grounds on which the person opposes the application. 27 The grounds on which a company may oppose the making of a winding up order are also limited by s 459S of the Act. By virtue of that provision, the Company cannot (without leave of the Court) oppose the making of a winding up order on a ground that was or could have been raised in an application to set aside the Demand (whether or not such an application was made). Further, the Court may only grant leave under s 459S if the ground sought to be raised is "material to proving that the company is solvent". 28 Black J summarised the matters relevant to an application for leave under s 459S in In the matter of Vangory Holdings Pty Ltd [2015] NSWSC 546 at [10] as follows: The matters relevant to an application for leave under this section are whether there is a serious question to be tried on the ground sought to be raised; the sufficiency of any explanation as to why that ground was not raised in an application to set aside the creditor's statutory demand, involving an evaluation of the reasonableness of the debtor's conduct at the time when the application might have been made; and whether the Court is satisfied that the relevant ground is material to proving whether the debtor is solvent: Chief Commissioner of Stamp Duties v Paliflex Pty Ltd [1999] NSWSC 15; (1999) 149 FLR 179 at [49]; DAG International Pty Ltd v DAG International Group [2005] NSWSC 1036; Perpetual Nominees Ltd v NA Investment Holdings Pty Ltd [2011] NSWSC 282 at [33]; Re Pegasus Capital Management Pty Ltd [2011] NSWSC 570 at [6]. The discretion conferred by s 459S of the Corporations Act is to be exercised cautiously and sparingly and with regard to the purpose of Part 5.4 of the Corporations Act to provide for determination of any objections to a creditor's statutory demand by an application under s 459G of the Corporations Act, rather than at the time of the winding up application: Switz Pty Ltd v Glowbind Pty Ltd above; Perpetual Nominees Ltd v NA Investment Holdings Pty Ltd above at [34].

[17]

Application for adjournment 29 As noted above at [2], on the morning of the hearing the Registry of the Court received an email, purportedly from Mr Sutcliffe, in which he stated that he would not appear at the hearing due to health issues and difficulties with internet access. On this basis, he requested in the email an adjournment of the hearing. This section explains my decision to refuse that request. 30 After rejecting Mr Sutcliffe's stay application in the Stay Decision on 20 September 2019, I made orders that, amongst other things, fixed the hearing of Mr Sutcliffe's review application for 24 October 2019. Those orders also addressed the filing of submissions and affidavit evidence in advance of the hearing. This included the following orders with which Mr Sutcliffe had to comply: 4. By 4.00 p.m. on 3 October 2019: (a) Mr Sutcliffe, on behalf of the defendant; and (b) the plaintiff, file and serve any affidavit evidence in respect of the Interlocutory Process (or any amended Interlocutory Process) (Application). 5. By 4.00 p.m. on 10 October 2019, Mr Sutcliffe, on behalf of the defendant, file and serve a written outline of opening submissions (no more than 10 pages) in respect of the Application. … 7. By 4.00 p.m. on 18 October 2019, Mr Sutcliffe and the plaintiff confer as to the authorities and legislation to be included in the joint book of authorities (Joint Authorities). 31 At the same time, I also ordered that Mr Sutcliffe provide various documents to the Liquidator: 10. By 4.00 p.m. on 26 September 2019, Mr Sutcliffe: (a) submit to the liquidator of the defendant (Liquidator) with a Report on Company Activities and Property in respect of the defendant in accordance with s 475(1) of the Corporations Act 2001 (Cth) (Act); and (b) deliver to the Liquidator all books and records of the defendant in accordance with s 530A of the Act. 32 On 25 September 2019, Mr Sutcliffe emailed my chambers requesting an extension to this latter deadline. With the consent of the Liquidator, I ordered that the time for Mr Sutcliffe to provide the documents to the Liquidator be extended to 5.00 pm on 1 October 2019. 33 Mr Sutcliffe did not file any written submissions or affidavit evidence after the making of these orders. Despite various attempts, the representatives for the Deputy Commissioner were not able to contact Mr Sutcliffe to confer for the purposes of preparing a joint book of authorities. 34 The last communication my chambers received from Mr Sutcliffe prior to the day of the hearing of the review application was on 30 September 2019. In an email to my chambers as at that date, Mr Sutcliffe raised his belief that the Court did not possess jurisdiction to make the orders on 20 September 2019 dismissing his stay application. Mr Sutcliffe requested that I make a ruling by noon the next day. My chambers replied the next day that I would not be making rulings by email request. My chambers had previously informed Mr Sutcliffe that, subject to any amendment pursuant to the court rules or the bringing of an appeal, my orders in the Stay Decision were final. 35 The review hearing was listed for 10.15 am on 24 October 2019. At 7.36 am that morning, the Registry of the Court received an email with the subject "Attn Associate to Justice Anderson URGENT". The email was not received from the email address on the court file for Mr Sutcliffe, but it is evident that the email was sent by him. The first two lines of the email were as follows: Have had some problems since the last hearing - health and internet. Will not be able to attend today's hearing. Apologies. 36 The email continued to detail Mr Sutcliffe's "health and internet" issues. Mr Sutcliffe requested in the email that the matter be deferred to a date to be fixed. 37 Notwithstanding Mr Sutcliffe's request for an adjournment, he expressed the following in his email about the submissions that he was intending to make in respect of his review application: I was today going to run a few simple arguments taking about 2 hours and most of the documentary evidence you already have. The thrust of them is the alleged debt of the ATO is in fact invalid because it is based on a failure to exercise a duty of care (by not reading those ASX trading documents I e-mailed them showing the company was in fact running a business and therefore entitled to claim GST) when making the their tax assessment last year, which renders both the assessment & debt invalid because the legislation indicates that such a duty is implied. Most of the alleged debt is penalties and interest from a false finding that the company had made a false statement about trading securities etc... (see top sentence of attached doc which is in affidavit, and pages 7 & 9 of the assessment of 4 April 2018 also there). 38 At the commencement of the hearing, I informed Mr Giacco, appearing for the Deputy Commissioner, about Mr Sutcliffe's email. Mr Giacco confirmed that Mr Sutcliffe had not sent him any correspondence since the proceeding was last before the Court on 20 September 2019. 39 I rejected Mr Sutcliffe's request for an adjournment for the following reasons: (a) case management hearings in the proceeding had already been adjourned on a number of occasions at Mr Sutcliffe's request. This history was partly summarised at [6]-[8] of the Stay Decision; (b) since the Stay Decision, and in non-compliance with my orders dated 20 September 2019, no documents had been filed by Mr Sutcliffe and he had not conferred with the representatives for the Deputy Commissioner regarding preparation for the hearing. Moreover, as noted, Mr Giacco informed me that Mr Sutcliffe had not corresponded with him since the hearing of the stay application; (c) prior to the morning of the hearing, my chambers had not received any communication from Mr Sutcliffe since 30 September 2019; (d) importantly, and as further explained below, the basis expressed in Mr Sutcliffe's email on the morning of the hearing upon which he intended to seek to have the winding up order overturned, as extracted above at [37], was untenable. Mr Sutcliffe was seeking to challenge the validity of the underlying debt of the Company to the Commonwealth. However, Mr Sutcliffe had not sought leave to challenge the underlying assessment; and (e) based upon the history of this matter, I am not satisfied that Mr Sutcliffe has any genuine basis to make his application to set aside the winding up order. In this regard, I note that, as was discussed in my Stay Decision, Mr Sutcliffe had previously refused to comply with his statutory obligations as the sole director and secretary of the Company to provide the Liquidator with the Company's books and records, and had otherwise sought to interfere with the Liquidator undertaking his responsibilities as liquidator of the Company.

[22]

Opposition by the Company 51 The Company did not file a Notice of Grounds of Opposition. However, Mr Sutcliffe, on behalf of the Company, had filed a document entitled "Statement of Claim" and dated 12 July 2019, which preceded the correct filing of the interlocutory process. 52 The Company's grounds of opposition, insofar as they can be discerned from the "Statement of Claim", are broadly that: (a) the Company disputes the decision of the Deputy Commissioner on 4 April 2018 to disallow the tax credits for the annual periods 1 July 2013 to 30 June 2017 and apply the administrative penalties. The grounds for the challenge included that: (i) the Company had previously sought to negotiate a payment arrangement with the Deputy Commissioner; (ii) the Deputy Commissioner knew that the Company was missing information about the calculation of the tax debt; and (iii) the Commissioner has been negligent in the calculation of the debt. In the Company's view, the Deputy Commissioner had erred in finding that the Company was not operating a business; and (iv) the Company has negligible assets. For the Deputy Commissioner to seek the winding up of the Company in these circumstances was a "breach of common sense" and failure to mitigate its costs; and (b) the Company did not have notice of the hearing before Registrar Luxton on 21 June 2019. The winding up order was made in the Company's absence. The Registrar should have been informed that the Company was objecting to the debt. This constitutes a denial of procedural fairness and natural justice. 53 As extracted above at [37], Mr Sutcliffe expressed in his email to the Registry on the morning of the hearing that his intention was to object to the making of the winding up order on the basis of his challenge to the Deputy Commissioner's decision on 4 April 2018. According to Mr Sutcliffe's email, this challenge centred on his contention that the penalties and interest applied by the Deputy Commissioner arose from a "false statement about trading securities" (which Mr Sutcliffe denied was false). Without going into too greater detail, Mr Sutcliffe's core complaint was summarised as follows in an email from him to my chambers on 16 July 2019: This matter has arisen because of a fundamental error made by officers of the Respondent (Federal Tax Commissioner) during an routine check of a GST BAS last year wherein critical documents e-mailed to it were not looked at. Those were documents proving this company was trading securities, and as a result of a failure to see them it determined the company wasn't running a business and all GST claims were struck out and a heavy penalty imposed. Regardless of the cause whether its negligence or a technical problem, an big error has occurred.

[23]

Exercise of discretion 54 As explained, the Company, having failed to comply with the statutory demand issued by the Deputy Commissioner, is presumed insolvent for the purposes of the winding up application. 55 In my view, for the following reasons, the matters advanced by Mr Sutcliffe on behalf of the Company do not impeach any entitlement of the Deputy Commissioner to a winding up order: (a) it is not a requirement of proceedings of this type that the Deputy Commissioner demonstrate that there are assets which would be realised in the liquidation of the Company. The contention that the Company has limited assets indicates there is little or no evidence which might be relied upon to displace the presumption of insolvency that has arisen as a consequence of the Company's failure to comply with the statutory demand. Based on the evidence filed, I am not satisfied that the Company was solvent, nor that it could pay the debt due to the Deputy Commissioner or creditors generally; (b) no application for leave under s 459S(1)(b) of the Act has been made. Accordingly, no attack on the validity of the debt the subject of the proceedings can be successful. However, even if the Court were to grant leave under s 459S of the Act, it is doubtful whether the material filed by the Company indicates any coherent basis to call into question the Company's indebtedness to the Deputy Commissioner; (c) the Company has not lodged with the Commissioner a proper objection in relation to the net amounts and administrative penalties for the years ended 30 June 2014 to 30 June 2017. Neither has Mr Sutcliffe made an application to do so on behalf of the Company; and (d) no matters have been raised by Mr Sutcliffe that weigh against the public interest in having an insolvent company wound up for insolvency. 56 Having regard to these matters, the Deputy Commissioner's procedural compliance in relation to the statutory demand, and all other relevant circumstances of the case, my view is that the court's discretion under s 459A of the Act should be exercised such as to order that the Company be wound up.

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