Should there be a stay?
36 In support of its stay motion, Southgate submitted that the Court should stay the Deputy Commissioner's motion for judgment and, if judgment is entered, should stay execution until after "the adjudication of objections to these assessments". The parties agreed that the principles were the same for both forms of stay. Southgate supported its motion by various affidavits, particularly an affidavit of Thomas Leslie Hollo of 8 November 2010 and an affidavit of Vanda Gould sworn on 8 November 2010 (with annexures). Southgate also referred to the affidavit of Daud Yunus sworn on 30 August 2010 and two affidavits of Vanda Gould of 6 September 2010, the last three being filed in opposition to the making of freezing orders. Southgate's written submissions also referred to another affidavit of Mr Gould of 1 September 2010.
37 The amounts assessed to Southgate and the general interest and charges accruing with respect to them are debts due to the Commonwealth and payable to the Deputy Commissioner: see TAA 1953, s 255-5(1). As noted already, Southgate can challenge the tax debts only via Part IVC of the TAA 1953. Counsel for Southgate correctly accepted that the fact the Deputy Commissioner had not yet determined Southgate's objection did not disentitle the Deputy Commissioner from pursuing recovery proceedings. The Deputy Commissioner also correctly accepted that the Court had jurisdiction to stay tax recovery proceedings or execution of judgment in such proceedings. Both parties accepted that the power to grant a stay is discretionary and is exercised, having regard to the policy of the taxation legislation, as reflected in a number of the provisions mentioned above.
38 The authorities emphasize that the power to grant a stay is exercised sparingly in respect of any proceeding for the recovery of a tax debt based on the issue and service of an assessment, and that it is incumbent on the taxpayer to justify the exercise of power. Reference may be made in this connection to Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd (2008) 237 CLR 473 ('Broadbeach') at 491-493 (Gummow A-CJ, Heydon, Crennan and Kiefel JJ); Trade World Enterprises Pty Ltd v Deputy Commissioner of Taxation (2006) 64 ATR 316 at 322-323 (Nettle JA); Snow v Deputy Commissioner of Taxation (1987) 14 FCR 199 ('Snow') at 139 (French J); and DFCT v Mackey (1982) 45 ALR 204 at 287 (Moffit P) and 289 (Hutley JA); (1982) 82 ATC 4571 at 4573 and 4575.
39 The harshness with which such provisions as 177(1) of the ITAA 1936 can operate in circumstances like the present is obvious enough: compare Broadbeach at 492. But, as the plurality observed in that case, s 177(1) and related provisions of the taxation legislation "implement a long-standing legislative policy to protect the interests of the revenue". The fact that pending objections have not been determined will not preclude a recovery action, as their Honours in Broadbeach made clear when they cited with approval the decision of Asprey J in Deputy Commissioner of Taxation v Niblett (1965) 83 WN (Pt 1)(NSW) 405 ('Niblett') at 411, who, as their Honours in Broadbeach said (at 492), "struck out pleas of non-liability to a recovery action instituted by the Deputy Commissioner in the Supreme Court of New South Wales while objections were pending under what was then s 185 of the [ITAA 1936]". Also at 492, their Honours in Broadbeach set out the following passage from Asprey J's judgment:
It may be thought to be a hardship that a taxpayer should have to pay the tax assessed when an objection to the assessment has not been decided upon but there are obvious financial considerations of high policy that must be weighed in the balance against cases of individual hardship with which the Commissioner through the appropriate use of his powers under [the Assessment Act] can cope … Where the meaning of the words of a statute is clear 'it is not open to the Court to narrow or whittle down the operation of the Act by seeming considerations of hardship or of business convenience or the like' - Attorney-General v Carlton Bank [1899] 2 QB 158 at 164.
These observations are also pertinent to the present case.
40 At the general level, the approach of Ireland J in Deputy Commissioner of Taxation v Ho (1996) 131 FLR 188 ('Ho') is consistent with the approaches of Asprey J in Niblett and the plurality in Broadbeach. In Ho as in the current case, the relevant notice of assessment was a default assessment, although, in contrast to the current case, there was some doubt as to whether a valid objection had been lodged. Ireland J stated (at 192):
Whilst most cases in which a stay of recovery proceedings was sought were commenced after an objection had been lodged and rejected by the Commissioner and thus appeals were in fact pending, either to the Administrative Appeals Tribunal or Federal Court, I do not consider this to be any basis of distinction. There is no difference in substance that the appeal from the Board of Review is pending on the one hand and that an objection is yet to be lodged on the other. Again this is, in my opinion, the direct effect of ss 14ZZM and 14ZZR. By virtue of the definition of "taxation decision" in s 14ZQ, ss 14ZZM and 14ZZR operate inclusive of an objection against a notice of assessment.
41 Referring to this reasoning, counsel for Southgate argued that Ireland J erred in Ho in assimilating, for present purposes, an undetermined objection to a tax review or appeal pending in the Administrative Appeals Tribunal or the court. Counsel argued that the lack of express provision in respect of an undetermined objection meant that in the case of an undetermined objection (as in the present case) "the bar is slightly lower" for a stay applicant. In this context, counsel also drew attention to the Commissioner's legislative obligation to determine the objection: see TAA 1953, s 14ZY.
42 Whilst I consider that there is some force in Southgate's proposition that, contrary to Ireland J's view, the effect of the definition of "taxation decision" in s 14ZQ is not to assimilate an objection to the "review" or "appeal" of which ss 14ZZR and 14ZZM speak, this does not in fact diminish to any material extent the need for the taxpayer to justify the exercise of power to grant a stay in the taxpayer's favour. The policy of the legislation is not affected by the fact that an objection is pending and undetermined. In any event, as Southgate itself acknowledged, the absence of an express provision dealing with undetermined objections could at best from its point of view do no more that slightly lower the bar for a stay. For the reasons that follow, even if this were correct, Southgate would not cross the bar.
43 The parties agreed (though, as can be seen, not unreservedly) that the principles governing the grant or refusal of a stay were as stated by French J in Snow at 139 as follows:
1. The policy of the ITAA as reflected in its provisions gives priority to recovery of the revenue against the determination of the taxpayer's appeal against his assessment.
2. The power to grant a stay is therefore exercised sparingly and the onus is on the taxpayer to justify it.
3. The merits of the taxpayer's appeal constitute a factor to be taken into account in the exercise of the discretion (although some judges have expressed different views on this point).
4. Irrespective of the legal merits of the appeal a stay will not usually be granted where the taxpayer is party to a contrivance to avoid his liability to payment of the tax.
5. A stay may be granted in the case of abuse of office by the Commissioner or extreme personal hardship to the taxpayer called on to pay.
6. The mere imposition of the obligation to pay does not constitute hardship.
7. The existence of a request for reference of an objection for review or appeal is a factor relevant to the exercise of the discretion.
At a general level, this statement of principles was re-iterated by French J in Warrick (No 2) at [105]-[106] and has been repeatedly cited with approval by other judges.
44 In written submissions relating to the stay of motion for judgment dated 8 November 2010, Southgate argued that a stay was appropriate because: (1) its assets could only be sold at significant financial loss; (2) Southgate has strong grounds of appeal in the Part IVC proceedings; and (3) Southgate has done everything possible to progress its Part IVC appeal.
45 Southgate also argued that it would suffer prejudice, or possible prejudice, in the event a judgment was entered by virtue of the principle that the cause of action merges in the judgment and the difficulty it would face in setting the judgment aside. The Deputy Commissioner responded that, if the judgment debt had been wholly or partly satisfied at the time Southgate succeeded in its Part IVC challenges, then the Commissioner would make restitution and would, if requested, provided appropriate confirmation of that outcome, with a view to nullifying any adverse commercial impact. The Commissioner's conduct in this regard was, plainly enough, consistent with the overarching policy of the taxation legislation. Even if I were to accept that Southgate would suffer some commercial injury by the entry of judgment against it, such injury would not amount to exceptional hardship sufficient to militate in favour of a stay. This kind of commercial injury is not akin to the "extreme personal hardship" that has justified a stay in other circumstances: cf Deputy Commissioner of Taxation v Denlay [2010] QCA 217.
46 Also as to hardship, Southgate submitted in writing that Mr Gould's 8 November 2010 affidavit showed that Southgate held shares in the Australian Stock Exchange "which are trading at a discount to their purchase prices". Southgate also said:
It is also significant that a number of the shareholdings in 'small cap' listed entities represent a large proportion of these entities' issued capital. The sale of the shares under forced circumstances, which would also be a matter of public knowledge, is likely to result in still further losses. The hardship likely to result is that [Southgate] would incur a financial loss of disproportionate size to the face value of its tax liabilities, when … Southgate has a high likelihood of successfully challenging the primary liability.
Even if I were to accept that there was some evidentiary basis for these submissions, claims of commercial hardship of this kind do not militate strongly in favour of a stay, particularly having regard to the evident policy of the taxation legislation and the observations below as Southgate's 'merits' argument.
47 As to the merits of Southgate's Part IVC challenges, in written submissions, Southgate claimed that the propositions that its "dealings in shares have constituted trading rather than capital investment, and also that [its] central management and control … is located in Australia" "can be only partly true, and both may be shown to be incorrect". Southgate argued that its Part IVC challenge could eliminate its tax liability altogether. Southgate also stated that the quantum of the liability was in issue and that the Deputy Commissioner's failure to allow it the benefit of a trading stock election cast doubt over the correctness of the assessments. At the hearing, Southgate relied on Mr Gould's 8 November 2010 affidavit and its annexure in support of the proposition that Southgate was not to be properly characterized as a share trader. Counsel for Southgate submitted that, as a matter of general impression, the pattern of transactions was not that of a share trader, referring to John v Commissioner of Taxation (1989) 166 CLR 417 at 430; Smith v FCT 2010 ATC 10-146; FC of T v Shields 99 ATC 4783 and 99 ATC 2037; and Williams v Federal Commissioner of Taxation (1972) 128 CLR 645 at 656. Also, by reference to the table which formed the annexure, counsel submitted that the quantum of the assessments was clearly wrong. Furthermore, Southgate challenged that proposition that it was an Australian tax resident, arguing that the Deputy Commissioner placed too much emphasis on the aspect of benefit, instead of focussing on the place where high level decisions were made. In this connection, Southgate referred to Koitaki Para Rubber Estates Limited v Federal Commissioner of Taxation (1940) 64 CLR 15 at 17.
48 As French J observed in Snow, there is a difference in judicial opinion about the significance of the merits of the taxpayer's challenge to an assessment or assessments: compare Ho at 191, Mackey at 4575 with Cywinski v DFCT (1989) ATC 4512 ('Cywinski') at 4517-8 (Kaye J, with whom Gobbo J agreed). Here, as noted, the Part IVC process is at the stage of undetermined objections. Perhaps there are cases in which consideration of the merits may assist in determining whether or not to grant a stay. This is not such a case. It would be inappropriate for me in this case to enter on the very questions that the Commissioner or, perhaps, at a later date the Administrative Appeals Tribunal or this court on a taxation appeal may be called on to determine. Furthermore, the material on which Southgate relies is insufficiently detailed to permit me to take any clear view. As most, Southgate's case might support the proposition that it has arguable grounds for challenging the assessments in question. Even if I were to accept this proposition, however, this would not justify the grant of a stay, given the clear policy of the taxation legislation, as discussed in the authorities previously mentioned: see, for example, Cywinski at 4518.
49 As to the parties' conduct in progressing the tax objections and this proceeding, Southgate relied on Warrick (No 2) in support of the proposition that a stay should be granted. In that case as in this a Deputy Commissioner instituted recovery proceedings for unpaid income tax and penalties and subsequently applied for summary judgment. French J held that the taxpayer in that case had no arguable defence to the recovery action, but also held (at [2]) that "because the Australian Taxation Office … delayed in resolving the taxpayer's objections without any satisfactory explanation, execution of the judgment [would] be stayed" until a specified date that permitted the objections to be determined. French J concluded (at [106]) that:
… the priority given to recovery of the revenue should be qualified by an appropriate recognition of the taxpayer's right to object and to have his objection determined and the Commissioner's duty in that respect … I … consider that no satisfactory explanation has been given for the delay in and failure to deal with the objections to the assessments. In my opinion, execution of the judgment should be stayed for a period sufficient to enable Mr Warrick to require the making of an objection decision pursuant to s 14ZYA of the TAA and to take advantage of the deemed refusal at the expiry of 60 days from that period to institute a review process. The stay will be subject to liberty to apply.
The result was that the Court granted a stay from 13 July 2004 until 28 January 2005 when the objections were to be adjudicated.
50 In this case, Southgate relied on the fact that it had lodged its objections on 14 September 2010, within about a month of receiving the notices of assessment. Southgate submitted that it had acted expeditiously notwithstanding its foreign domicile and that, as in Warrick (No 2), the objections were yet to be determined. Southgate noted that it was unable to apply under s 14ZYA of the TAA 1953 to cause the Commissioner to determine the objection (in default of which there would be a deemed disallowance) because the Commissioner had since made a request for further information. Southgate estimated that it would be unable to make such an application before the end of January assuming Southgate was able to provide the Commissioner with the information sought within the relevant time. Southgate's contention was that the Deputy Commissioner had moved expeditiously for judgment; that it had lodged its objections with the Commissioner speedily; but the Commissioner had moved at a more leisurely pace with respect to determining its objections.
51 In the case of Southgate, it may be that, in contrast to the Bank in Bank Berhad (No 2), it was served with the notices of assessment before the recovery proceeding was instituted: see Mr Zafiriou's 12 August 2010 affidavit at par [81].
52 The Deputy Commissioner informed the court that the objections would not be determined before March 2011 - some seven months after the assessments were issued and these proceedings were instituted. The Deputy Commissioner stated and Southgate conceded that this date was the date agreed between them at a meeting in September. Further, as the Deputy Commissioner pointed out, once the proceedings were instituted and the freezing orders sought and obtained, the Deputy Commissioner was obliged to move in the recovery proceedings with some alacrity. In these circumstances, including the fact that the date for determining Southgate's objections was an agreed date, the analogy with Warrick (No 2) breaks down.
53 I have reached the conclusion that the present case comes squarely within the principles in Niblett, as stated by Asprey J and referred to with approval in Broadbeach: see [39] above. As Asprey J said, it might well be thought to be a hardship that the taxpayer should have to pay the tax assessed when the objections to the relevant assessments have not been decided but there is the clear policy of the taxation legislation to be weighed in the balance.
54 Southgate also referred to some miscellaneous matters in written submissions, including the fact that it had paid substantial withholding tax. It also submitted that the freezing order gave the Deputy Commissioner "a higher than usual level of security in respect of the prospective debts", noting too that interest continued to accrue. I do not consider that these considerations would in the circumstances discussed justify the grant of a stay.