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[2011] FCA 678
Federal Court of Australia
2011-05-27
Logan J
Original judgment source is linked above.
REASONS FOR JUDGMENT 1 The Deputy Commission of Taxation has applied, under the Corporations Act 2001 (Cth) (Corporations Act), for the winding up in insolvency of Tilley Property Management Services Proprietary Limited (TPMS). The application is made under s 459P of that Act. Upon such an application, the Court has a discretion as to whether or not to order that company be wound up: see s 459A. 2 The Commissioner presses today for the making of a winding up order, whereas TPMS submits that the circumstances of this case are such that the winding up application should be adjourned to a time after the determination of whether or not documents which it seeks to have treated as objections have been or have not been so treated by the Commissioner and, if treated as objections, determined. It is necessary to put matters that way because, in respect of the assessments or as the case may be notices, which ground the liability to the Commonwealth payable to the Commissioner and which give the Commissioner his status as a creditor, TPMS did not make objection to those assessments or notices within the prescribed time. Unlike in years gone by though, there is a discretion on the part of the Commissioner to treat documents by which a challenge to an assessment or notice is sought to be made as if they were objections within time. 3 Before turning to applicable case law, it is necessary to set out in some detail the background circumstances to this application. As apparent from the material read on the winding up application and the adjournment application, a brief chronology of events from the point of a notice of liability being issued by the Commissioner to the advertisement of the winding up application and its filing in court is as follows. 4 On 3 March 2010, the Commissioner gave a notice of liability in respect of the 2002 to 2007 income years to TPMS. That liability is a liability said to arise pursuant to the provisions of the now former Div 6D of Pt III of the Income Tax Assessment Act 1936 (Cth) (Income Tax Assessment Act), provisions which relate to certain closely held trusts. On 26 November 2010, the Commissioner gave notice of liability to TPMS in respect of the 2008 year and notice of assessment and liability to pay penalty for the 2002 to 2008 income years. On 15 February 2011, the Commissioner served a statutory demand, under the Corporations Act on TPMS in the amount of $7,808,336.56. On 12 April 2011, the Commissioner filed and also served that day on TPMS an application for the company to be wound up in insolvency. That application was advertised in the Courier Mail newspaper on 10 May 2011. 5 Thereafter, on 18 May 2011, the application came on before a registrar of the Court. The registrar, understandably in the circumstances, referred the winding up application to a judge for hearing. It is that hearing which I have conducted today. 6 There is a much more detailed background in respect of dealings between TPMS and the Commissioner to that rather terse chronology just given. That more detailed background is to be found in the affidavit of TPMS's sole director, Mr Brian William Tilley. The statements made by Mr Tilley were not the subject of cross-examination. 7 If it were not already apparent from the reference to Div 6D of Pt III of the Income Tax Assessment Act in respect of the liability of TPMS, Mr Tilley confirms in his affidavit that TPMS acts as the trustee of a trust known as the Property Consulting Services Trust. The Property Consulting Services Trust (PCST) was established pursuant to a deed of trust on 11 September 1990. 8 Mr Tilley deposes that in or about 2000, TPMS ceased any activities as a trading entity. He states that TPMS has not traded since that time and that it does not incur any trading debts. It appears, from the accounts which have been prepared in respect of TPMS, which are up to date as to the last concluded financial year, ie that ended 30 June 2010, that TPMS acts solely in its capacity as trustee for The Property Consulting Services Trust. Regard to those accounts discloses that in the year ended 30 June 2009, TPMS did derive a profit in that income year of some $110,640. In the 2010 income year, it incurred a net loss in a modest amount, namely $285. 9 There is no necessary antipathy between those particular entries in the profit and loss statement and the statement by Mr Tilley that TPMS has not traded. That is so because it may be that the profit arises from non-trading activities such as passive investment. It is not possible to confirm this one way or the other on the material to hand. Mr Tilley gives, in his affidavit, a most detailed chronology indeed of dealings as between TPMS and those accountants or solicitors acting for it from time to time and officers of the Australian Taxation Office. Especially given the nature of the application for adjournment made by TPMS, it is both desirable and necessary to set out in full that particular account, which appears between paragraphs 15 and 69 of his affidavit. Given its length, that account appears in a schedule to this judgment. 10 Mr Tilley further deposes as to the present solvency of TPMS. Apart from his exhibiting the most recent prepared financial accounts, he offers the following explanation so as to bring matters up to date. The 2010 accounts of TPMS disclose a liability in the sum of $1085 to a related entity. Mr Tilley states that this is a loan debt to the related entity, Tilley Services Development Trust, of which TPMS is also trustee. This, he states, is referable to an interest free loan payable on demand. He further states that: (a) TPMS in its capacity as trustee for the Tilley Services Development Trust has not demanded the repayment of that particular loan; (b) TPMS currently has $2400 in liquid funds in a bank account; (c) TPMS, and I infer from this in its capacity as trustee for the PCST, has no other current liabilities save for the debt owed to the Commonwealth and payable to the Commissioner. 11 Against this background Mr Ferrett of counsel, in his concise submissions on behalf of TPMS as to why an adjournment ought be granted, advanced the following propositions: (a) Apart from a small related entity loan, to which I have already made reference there is no other debt than that which is the subject of the winding up application by the Commissioner; (b) There is no recent trading activity. He points as well to an undertaking which was given, the giving of which foreshadowed in Mr Tilley's affidavit both by the company and Mr Tilley personally that TPMS in its capacity as trustee of the PCST, would not trade whilst this proceeding remains on foot. (c) Related to proposition (b) that there is no prospect of the company incurring further liabilities; (d) Accordingly, success on the objection (or a subsequent appeal to this Court or review application to the Administrative Appeals Tribunal) would mean that the company was certainly solvent; (e) All of the amount claimed to be owing is, for reasons he further developed, essentially penal in nature; (f) The lack of any property or funds to be distributed upon a winding up means that the proceeding has no utility in the protection of the revenue; (g) Related to proposition (f), the harshness of the remedy and what was submitted to be a reputational consequence for Mr Tilley as director is particularly important. 12 In advancing that submission on behalf of the company, Mr Ferrett was astute to recognise what he termed a predisposition to prioritise the integrity of the revenue over relief from "harsh consequences", referring in that regard to Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd (2008) 237 CLR 473. This acknowledged, a submission made for the company that to insist upon the harsh consequence of winding up where a prospect of benefit to the revenue from that winding up was not evident was a matter which should in the exercise of discretion, lead to an adjournment of the winding up. 13 Reference was also made to what was submitted to be a purpose of the existence of the regime for the imposition of liability under Div 6D of the Income Tax Assessment Act, which was said to be "to coerce trustees in disclosing ultimate beneficiaries of distributions so that the Deputy Commissioner can ensure that those ultimate beneficiaries meet their tax obligations". It was submitted that a corollary of this was that a winding up proceeding concerned wholly with a tax liability referable to that particular division or related penalties was not one to be characterised as a proceeding for the protection of the integrity of the revenue, but "merely to recover what amounts to fines for alleged misconduct." 14 There was also advanced the submission that it was a harsh consequence for a winding up to be ordered in circumstances where there was a challenge even if this was, as was conceded, belated to the notices or assessments concerned. The objection documents were not lodged with the Commissioner until after the filing and service of the winding up application. 15 The Commissioner, as might be expected, points to the presumption which flows from s 459C, that in circumstances where there has been no compliance with a statutory demand that the company is insolvent. Indeed, the Commissioner goes further. Taking into account the asset in the form of the bank balance of $2,400 and the related loan liability of $1085 as well as the tax and penalty liability of $7,808,36.56, the Commissioner makes the submission that TPMS is "hopelessly insolvent." 16 Further to this, the Commissioner relies upon a statutory presumption, to which I will make further reference in detail shortly, flowing from the tender of the notices or, as the case may be, assessments that there is conclusively proved the existence of the tax liability just mentioned. The Commissioner further submits, again by reference to provisions which I shall detail shortly, that even if there were objections within time that would not affect his ability to recover the taxation and penalty amount mentioned. Thus, having regard to debts which must be taken to be conclusively proved in a proceeding such as this, as well as the statutory presumption, the Commissioner submits that this is a case where a winding up order ought to be made as a matter of discretion. 17 The situation before the Court is not one free from authority. In terms of statutory provisions s 102UR(5) of the Income Tax Assessment Act and s 14ZW(1)(c) of the Taxation Administration Act 1953 (Cth) (Taxation Administration Act) have the effect that the prescribed time for the making of objection as against the notices of non-disclosure tax liability or administrative penalties as the case may be had to be lodged was within 60 days after the service of the notice or, as the case may be, assessment although there is a discretion given to the Commissioner to treat a later lodged document as if it were an objection lodged within time. 18 Section 14ZZM of the Taxation Administration Act provides that the fact that a review is pending in relation to a taxation decision does not in the meantime interfere with or affect the decision and any tax, additional tax or other amount may be recovered as if no review were pending. Like provision is made by s 14ZZR in relation to taxation appeals against taxation objection decisions which are pending in this Court. In this case the position is even stronger in the sense that there is not even, as yet, a valid taxation objection let alone an objection decision or later review or appeal. 19 In Deputy Commissioner of Taxation v Jonrich Pty Ltd (1986) 70 ALR 357 at 360 (Jonrich) Connolly J referring to the then predecessor of s 14ZZM and s 14ZZR of the Taxation Administration Act, which was s 201 of the Income Tax Assessment Act, observed: What is to be borne in mind, in my opinion, is that s 201 was, in one sense, otiose in providing that income tax might be recovered notwithstanding the pendency of an appeal or reference as by s 204 income tax is and was due and payable on the date specified in the notice or, if no date was specified, on the 30th day after service of the notice. For this obligation to be intercepted or suspended would have required a positive provision of the legislation. The real effect of s 201 was to state a policy; and its practical consequence was to provide a powerful factor influencing the courts against staying proceedings pending appeal or reference. This is recognised in a series of cases from Deputy Commissioner of Taxation (WA) v Australian Machinery and Investment Co Pty Ltd (1945) 3 AITR 236 at 241 which Latham CJ said: My brothers Rich, Dixon and Williams JJ and myself are of the opinion that the contention that there is no jurisdiction to grant a stay in these proceedings by reason of the provisions of the Income Tax Assessment Act, s 201 and the associated sections, should not be accepted. We are of the opinion that there is jurisdiction to grant a stay in such proceedings, but that in considering any application for a stay the policy of the Act as stated in s 201 is a matter to which great weight should be attached. From Australian Machinery, cf Deputy Commissioner of Taxation (NSW) v Mackey (1982) 45 ALR 284, a decision of the Court of Appeal of New South Wales and Deputy Commissioner of Taxation v Trower (1986) 86 ATC 4157. The continuing authority of that observation is in no way diminished by the later reversing, on other grounds, of the decision of the Full Court in Jonrich in Deputy Commissioner of Taxation v Moorebank Pty Ltd (1988) 165 CLR 55. 20 Some of the cases to which Connolly J made reference in Jonrich in the passage quoted had earlier fallen for consideration by Sir Nigel Bowen, then Chief Judge in Equity in the New South Wales Supreme Court (and later the first Chief Justice of this Court) in Re Roma Industries Pty Ltd (1976) 1 ACLR 296. His Honour was faced there in that case, as I am here, with an application that a winding up order ought not to be made against a company which had challenged, in that case within time, assessments giving rise to the taxation liability. His Honour observed, at page 299: The next question which arises is whether the amount claimed by the Commissioner should be treated as a disputed claim, and an order be refused on this ground. In one sense, of course, the Commissioner's claim is disputed, because appeals to the Board of Review have been lodged. However, the provisions of s 201 of the Income Tax Assessment Act require me to treat the debt as in effect undisputed. Such a statutory provision may, in some cases, lead to hardship on a taxpayer, particularly where he has paid the amount of tax assessed and later wins his appeal, whereupon the money is repaid to him without interest. This led Higgins J, in Hickman v Federal Commissioner of Taxation (1922) 31 CLR 232 at 245 to describe it as "unjust and even baneful", but it remains in the Act. It must be appreciated that from the point of view of the revenue it is a protection against that class of taxpayer who might withhold payment and use the money as the sinews of war to conduct appeals against the Commissioner and who, being finally unsuccessful, was found to be unable to meet his tax liability having spent his money on the litigation. Whatever the merits or demerits of the provision may be, it will generally leave the court to refuse a stay. His Honour then made reference to authority, including Australian Machine & Investment Co: Furthermore, where a taxpayer has been sued to judgment by the Commissioner and has lodged an appeal, there being no stay of execution granted, the Commissioner will generally be entitled to a winding up order notwithstanding the appeal has been lodged and has not been heard. (In Re Amalgamated Properties of Rhodesia (1913) Limited (1917) 2 Ch. 115, Federal Commissioner of Taxation v Trautwein (No 1) 56 CLR 211) 21 In that case, Bowen CJ in Eq was disposed to make a winding up order if, after a short adjournment, which he was also disposed to grant, agreement had not been reached as between the Commissioner and the company in relation to a particular offer to give the Commissioner a second mortgage over two particular properties to secure the payment of tax. There is no offer of that kind in the present case. Indeed, the application for the adjournment is grounded in the proposition that the prospect of any recovery, either before or after a winding up order, is unlikely. 22 Later in time and binding on me, are observations made in the High Court in Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd (2008) 237 CLR 473 at paras 40 to through to and including 49: 40 As indicated above, the familiar "conclusive evidence" provision of s 177(1) of the Assessment Act, significant for Broadbeach, is reflected in the terms of s 105-100 in Sch 1 to the Administration Act (with respect to GST notices of assessment and declarations) and s 298-30 in Sch 1 (with respect to administrative penalties including tax shortfall penalties), which are significant for Neutral Bay and Howard Racing. 41 The apparent asperity with which s 177(1) operates and its impact upon what otherwise may be avenues open to taxpayers when defending recovery proceedings has attracted comment in various decisions, including those of this Court. Section 177 is found in Pt IV of the Assessment Act but was linked to ss 208 and 209 which appeared in Pt VI. In FJ Bloemen Pty Ltd v Federal Commissioner of Taxation, Mason and Wilson JJ remarked: "[The appellants] point to the fact that notwithstanding that the assessment may be under review or appeal ... the tax assessed is payable and the Commissioner has access to the extensive powers prescribed in Pt VI ... It is true that Pt VI contains large powers to enable the recovery of tax; powers the exercise of which may make life uncomfortable both for the taxpayer and perhaps others who owe money to the taxpayer. So much may be conceded, but [the Assessment Act] does not proceed upon the hypothesis that the Commissioner will be motivated in the exercise of his powers by improper or collateral purposes." 42 The reference by Mason and Wilson JJ to the position of taxpayers may be thought to extend particularly to the position of directors of a corporate taxpayer which is a trading corporation. 43 At a time when the provision for objections and appeals was found in Pt V of the Assessment Act, Mason A-CJ said in Clyne v Deputy Commissioner of Taxation: "I was informed that it is a somewhat unusual course for the Deputy Commissioner to commence proceedings for recovery in a court relying on a notice of assessment which is under challenge in proceedings under [the Assessment Act]. It is to be hoped that this is so. The institution of proceedings for recovery on a notice of assessment which is challenged in proceedings under [the Assessment Act] may operate oppressively and unfairly to a taxpayer ... In the ultimate analysis the Deputy Commissioner's charter to commence recovery proceedings, notwithstanding a challenge ... to the correctness of the assessment, is to be found in s 201 of [the Assessment Act]. It provides: "The fact that an appeal or reference is pending shall not in the meantime interfere with or affect the assessment the subject of the appeal or reference; and income tax may be recovered on the assessment as if no appeal or reference were pending." It is a provision which has been stringently criticised. However, it appears to be impervious to criticism for Parliament has not seen fit to amend it." 44 But harsh though the operation of these provisions may be, they implement a long-standing legislative policy to protect the interests of the revenue. In Deputy Commissioner of Taxation v Niblett, Asprey J 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 Assessment Act. His Honour observed: "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." 45 Thereafter, Bowen CJ in Eq, when dealing with resistance by the taxpayer to the making of a winding up order, said in Deputy Federal Commissioner of Taxation v Roma Industries Pty Ltd: "The next question which arises is whether the amount claimed by the Commissioner should be treated as a disputed claim, and an order be refused on this ground. In one sense, of course, the Commissioner's claim is disputed, because appeals to the Board of Review have been lodged. However, the provisions of s 201 of [the Assessment Act] require me to treat the debt as in effect undisputed. Such a statutory provision may in some cases lead to hardship on a taxpayer, particularly where he has paid the amount of tax assessed and later wins his appeal, whereupon the money is repaid to him without interest. This led Higgins J in Hickman v Federal Commissioner of Taxation to describe it as "unjust and even baneful", but it remains in the [Assessment Act]. It must be appreciated that from the point of view of the revenue it is a protection against that class of taxpayer who might withhold payment and use the money as the sinews of war to conduct appeals against the Commissioner and who, being finally unsuccessful, was found to be unable to meet his tax liability, having spent his money on the litigation." (Emphasis added) 46 With regard to the reasons of Bowen CJ in Eq in Roma Industries (given in 1976) three points should now be made. The first is that the reference to repayment without interest must be treated as displaced by the enactment in 1983 of the Overpayments Act. Part III of that statute provides an interest entitlement where an amount of "relevant tax" (as defined in s 3C) is found to have been overpaid as a result of a decision to which the Overpayments Act applies (as explained in s 3(1)). This includes successful AAT reviews and Federal Court "appeals" under Pt IVC of the Administration Act. 47 The second point is that s 201 of the Assessment Act was repealed by the Taxation Laws Amendment Act (No 3) 1991 (Cth) (Sch 4), which inserted the relevantly identical provisions of ss 14ZZM and 14ZZR in the Administration Act by way of replacement. 48 The third point respecting Roma Industries is that the treatment there of disputed claims by the Commissioner indicates the appropriate path to be followed in reading the provisions for the setting aside of statutory demands now found in the Corporations Act. 49 It is true that s 459G provides for curial decisions to set aside statutory demands and that grants of jurisdiction to superior courts such as the Federal Court and the Supreme Courts are not to be construed with limitations without sufficient reason to do so. The many authorities to this effect were collected by Kirby J in Aussie Vic Plant Hire. But the provisions of the taxation legislation, with an eye to which the statutory demand provisions clearly were drawn, and, in particular, the antecedents in what was s 201 of the Assessment Act and now s 14ZZM (as to pending AAT reviews) and s 14ZZR (as to pending Federal Court "appeals"), supply sufficient reason for construing the statutory demand provisions as the Commissioner contends. 23 Even prior to those obligations in the High Court in Broadbeach Properties, a Full Court of this Court in Hoare Bros Pty Ltd v Deputy Commissioner of Taxation (1996) 62 FCR 302 at page 315, had drawn attention to earlier pre-corporations law authorities in respect of the making of a winding up order where there was a contested taxation debt. The particular issue in that case concerned not a contest as to whether or not a winding up order should be made, but whether or not a statutory demand should have been set aside. It is useful, with respect nonetheless, for the reference in it to earlier corporations law authorities. One of these is Re Norper Investments Pty Ltd (1977) 33 FLR 87 (Norper). In that case, Needham J had dismissed a winding up petition brought against a company by the Commissioner. As their Honours recite in Hoare Bros at 315: His Honour did not decide that there was a genuine dispute about the debt created by the notice of assessment issued by the Commissioner. Rather, Needham J (at p 92) relied on the principle that the trial judge had a discretion to grant or refuse a stay of the winding-up proceedings where an appeal by the taxpayer was pending. His Honour held (at 92) that, despite s 201 of the ITAA (now ss 14ZZM and 14ZZR of the TAA), the Court had a discretion to grant a stay of the winding-up proceedings, if the Company had a substantial argument that the assessment should be set aside entirely. In Norper itself, no appeal was underway but this was because the Commissioner had "omitted to obey the clear direction of the statute which he administers", by failing to forward the Company's objection to the Court. Moreover, the then current state of the law, as applied by the Board of Review, meant that the assessment was "misconceived" and the Company was not liable to tax. For these reasons, Needham J exercised his discretion in favour of the Company. The case was a special one, such as to lead Needham J to conclude that the petition was oppressive and the proceedings an abuse of process. 24 For completeness, reference should also be made to a judgment of the Queensland Court of Appeal. Deputy Commission of Taxation v Denlay & Anor [2010] QCA 217 (Denlay), in which the court dismissed an appeal by the Commissioner against a refusal by a trial judge to grant summary judgment in respect of liabilities grounded in assessments which were the subject of challenge. Denlay is not binding upon me. Further, though there is reference in the judgments in that case to Broadbeach Properties, this does not in my respectful opinion, sit happily with that case. Be that as it may, Denlay is, again with respect, explicable on the basis that the challenge made by Mr and Mrs Denlay was not just by way of the invoking of the statutory rights of objection, appeal and review, but also by way of a judicial review proceeding, the effect of which was to allege that the assessments concerned were not in truth and in law assessments at all, but rather the product of conscious maladministration. It is possible to explain the outcome both in the Trial Division and the Queensland Court of Appeal in that proceeding on the basis that reliance upon s 177 of the Income Tax Assessment Act could not rise higher than its source and if the source itself, namely the assessment, said to be conclusive evidence of a liability was the subject of a challenge which went to the very existence of an assessment at all, then the effect of s 177 was moot. Drawing these disparate threads together from the authorities, the position seems to me to be this. There is undoubtedly a discretion as to whether or not to wind up the company. It is relevant, in that regard, to take into account whether there is any conduct on the part of the Commissioner which might be said to amount, at least prima facie, to oppression or an abuse of process. It is also relevant, in that regard, to have regard not just to the existence of any challenge but also the state of progress through the statutory channels of that challenge and at least, in a summary way, what prospect that challenge might have. It is further relevant to take into account what arrangements, if any, have been made or may be in prospect of being made within a reasonable time as between the company and the Commissioner in relation to the payment of some or some agreed proportion of the outstanding tax. 25 Further, in a case such as the present, another consideration does in my opinion intrude. That is, for all practical purposes, there is but one creditor, namely the Commissioner. It is not impossible to envisage a situation where a winding up order might be sought so as to foreclose the pursuit of a challenge by the company to the underlying revenue assessment or notice. Were there evidence, and this case is not one, that the winding up application had been brought so as to lead to that foreclosing, then this might provide yet another example of that type of abuse which led Needham J in Norper to decline to make a winding up order. 26 As to the provisions of Div 6D of the Income Tax Assessment Act, they can be seen to have as their purpose the ensuring of the provision of information to the Commissioner in respect of closely held trusts, with respect to what the division terms "the trustee beneficiaries". Section 102UA(1) recites: This will allow the Commissioner to check whether the assessable income of the trustee beneficiaries includes the correct share of net income and whether the net assets of the trustee beneficiaries reflect the receipt of the tax preferred amounts. 27 Section 102UA(2) further states, accurately with respect: To achieve this purpose, the Division: (a) provides for the trustee to correctly identify the trustee beneficiaries within a specified period after the end of the year of income; and (b) if the trustee fails to do so, provides for taxation at a penalty rate (in the case of net income) or offences under the Taxation Administration Act 1953 (in the case of the tax-preferred amounts). 28 This is a case which concerns the imposition of taxation at the penalty rate on TPMS. There is undoubtedly merit in the proposition that the regime is harsh. I do not accept though that either the regime or, more importantly, a winding up application cannot seem to be a proceeding for the protection of the revenue even if it be apparently manifest on the company's accounts that at least without further investigation, recovery of any part of the penalty tax amount is unlikely. That winding up may be a sequel to non-payment of a penalty tax for which Div 6D offers but further incentive for those companies who fall within the definition of "trustee group" to furnish information as required in what are known as TB statements to the Commissioner. Further, that the effect of s 102UK and s 102UL can be that directors of a corporation have a joint and several liability adds to that particular incentive. Harsh though the regime may be it represents, as do s 14ZZM and s 14ZZR, a value judgment made by the Parliament as to what is necessary for the vindication of the revenue of the Commonwealth. 29 The counter to that harshness, in a case such as the present, is the existence of a discretion which reposes in those who exercise Commonwealth judicial power on a winding up application. 30 In respect of the exercise of that discretion, everything truly which could be submitted reasonably on behalf of TPMS has been put, and the facts well detailed, by Mr Tilley. Even so, what remains is a circumstance where a company is, and I am bound to conclude, hopelessly insolvent and where there is no challenge at all to the underlying notices or assessment within time. I accept, and a survey of the chronology in Mr Tilley's affidavit bears this out, that the company has not, in a practical sense, rested on its rights by not taking up with the Commissioner the question of liability. It has done that informally. Nonetheless, the position remains there is no objection as of right on foot. 31 Further, it would not, in my opinion in this particular case be appropriate for me to pass any comment on the merits of the documents which are asked to be treated as objections. There are difficulties in the language of Div 6D in terms of the circumstances which give rise to an excusing from liability and it would take a more developed case than that advanced today to make patent that there was a strong likelihood that it would be other than perverse for the Commissioner not to extend time and, for that matter, allow objections. All there is at present is a supplication, not an objection as of right. Further, there is nothing at all put forward which would see any assurance that any part of that demand by the Commissioner is even secured, pending the determination of the request to treat the documents as an objection. Neither, in my opinion, is there evidence which would support, even prima facie, that there has been conduct which could amount to conscious maladministration in the sense described by the High Court in Federal Commissioner of Taxation v Futuris Corporation Ltd (2008) 237 CLR 146. 32 In those circumstances, I decline to adjourn the application. I certify that the preceding thirty-two (32) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Logan.
Associate: Dated: 15 June 2011 SCHEDULE Extracts from Mr Tilley's Affidavit Chronology of Events 15. On or about 1 June 2009, the Australian Taxation Office (ATO) sent a letter to the PCST care of Gold Group (accountants engaged on behalf of the PCST) initiating a comprehensive audit on the PCST (Audit Notification) for 2002 to 2008 income years inclusive (Relevant Income Years). Now produced and shown to me and marked "BWT-6" is a true copy of the letter from the ATO dated 1 June 2009. 16. In the Audit Notification, Mr Mark Konza of the ATO invited the PCST to an initial interview on 16 June 2009 with Mr Anthony Pulvirenti, Mr Wan Hood and Ms Marissa Kurtz of the ATO in order to have an initial discussion about the audit. The Audit Notification provided, inter alia, that: (a) 'At our initial meeting we will also discuss with you: (i) the scope of the audit (ii) periods under audit (iii) ATO contacts/escalation points (iv) the audit process, and (v) the proposed audit and timelines. The purchase of this discussion is to provide you with an understanding of the audit, the tax risks being audited, the process and the proposed audit timelines. The outcome sought is to reach agreement and commitment from both parties to the timely completion of the audit in a quality manner.' (b) '[b]ased upon times for similar audits we intend to complete this audit by 23 July 2010.' 17. As part of the audit: (a) the ATO requested the PCST to lodge outstanding tax returns for the income years 2005 to 2008 inclusive; and (b) In addition, as at 1 June 2009 the Tilley Family Trust had not yet lodged tax returns for the income years 2002 to 2008 inclusive (Outstanding Tax Returns), (collectively, the Outstanding Tax Returns). 18. On or about 5 June 2009, the Mr Pulverenti sent a letter to the PCST care of Gold Group requesting that Ultimate Beneficiary Statements (UB Statements) be lodged for the PCST for the Relevant Income Years (UB Statements Request). Now produced and shown to me and marked "BWT-7" is a true copy of the letter from the ATO dated 5 June 2009. 19. In the UB Statements Request, the ATO provided general information on the situations in which a taxpayer is required to lodge UB Statements. The ATO attached an Ultimate Beneficiary Schedule ("UB Schedule") to the letter, requesting the PCST to completely the UB Schedule and UB Statements by 17 July 2009. 20. At the time of the UB Statements Request, the Outstanding Tax Returns were yet to be lodged. 21. On 16 July 2009, Mr Michael Norton-Smith of Gold Group sent a facsimile to Mr Pulvirenti (Gold Group Fax). Now produced and shown to me and marked "BWT-8" is a true copy of the letter from Gold Group dated 16 July 2009. 22. In the Gold Group Fax Mr Norton Smith advised the ATO that the PCST was not required under Division 6D of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) act to lodge UB Statements for Relevant Years because: (a) the PCST distributed all or part of its net income (calculated in accordance with section 97 of the ITAA 1936) to the Tilley Family Trust; and (b) in turn, the Tilley Family Trust distributed all of its net income (calculated in accordance with section 97 of the ITAA 1936) to Carson Ridge Pty Ltd (TFN 87 372 774) (Carson Ridge) (in its own capacity). 23. I am informed by Mr Norton-smith and verily believe that, following receipt of the Gold Group Fax, Mr Pulvirenti telephoned Mr Norton-Smith (Phone Conversation) and said words to the effect that: (a) unless the PCST lodged UB Statements by 17 July 2009, the PCST would become automatically liable to Ultimate Beneficiary Non-Disclosure Tax (UB Tax); (b) the UB Statements should be filled in showing the Tilley Family Trust as the ultimate beneficiary under a "Type - F case", which refers to the full-absorption of head trust amount. 24. I am informed by Mr Norton-Smith and verily believe that, in the Phone Conversation, Mr Norton-Smith protested to Mr Pulverenti that Gold Group was not in a position to form any other view on the UB Statements, as Gold Group was still going through the time consuming process of reviewing all of the relevant financial documents in order to complete and lodge each of the Outstanding Income Tax Returns. 25. Despite Mr Norton-Smith's complaint referred to in the preceding paragraph, I am informed by Mr Norton-Smith and verily believe that Mr Pulvirenti insisted upon his request that PCST lodge UB Statements by the following day. 26. On or about 17 July 2009, as a result of the Phone Conversation, Gold Group sent a letter to the ATO enclosing UB Statements for the Relevant Income Years (Initial UB Statements). Now produced and shown to me and marked "BWT-9" is a true copy of the letter from Gold Group dated 17 July 2009 and the Initial UB Statements. 27. The Initial UB Statements disclosed that Carson Ridge was the ultimate beneficiary of the PCST and that it was presently entitled to the net income of the Tilley Family Trust. This present entitlement is acknowledged by a capital "P" written next to the details of Carson Ridge in section 4 of the UB Statements. The amount of present entitlement for each of the Relevant Income Years is shown as "nil". 28. On 17 November 2009, the ATO sent a letter to me and the Defendant as trustee for the PCST advising that as a result of a comprehensive audit covering the 2002 to 2008 income years, there was a liability for UB Tax in the amount of $2,190,216.20 for the 2002 to 2007 income years (17 November 2009 Letter). Now produced and shown to me and marked "BWT-10" is a true copy of the letter from the ATO dated 17 November 2009. 29. In the 17 November 2009 Letter, the ATO also advised that notices of liability would be issued and that the Commissioner could amend such notices at any time. 30. Together with the 17 November 2009 Letter, the Commissioner sent his written reasons or imposing UB Tax (First Reasons). Now produced and shown to me and marked "BWT-11" is a true copy of the reasons dated 17 November 2009. 31. In the First Reasons: (a) the Commissioner applied the test in former subsection 102UK(1) of the ITAA 1936 concluding that: (i) the Tilley Family Trust included in its assessable income under section 97 of the ITAA 1936 a share of the net income of the PCST; and (ii) the Tilley Family Trust was an ultimate beneficiary of the PCST; and (iii) the PCST provided incorrect UB Statements to the Commissioner because: (A) the ultimate beneficiary has been wrongly identified as Carson Ridge when it should have been the trustee of the Tilley Family Trust; and (B) no specific monetary amounts of the head trust in each year have been identified for the ultimate beneficiary. (b) the Commissioner acknowledged and did not dispute that the Tilley Family Trust had large carried forward losses. The Commissioner in fact recognised the trustee of the Tilley Family Trust as an ultimate beneficiary under the full absorption case (with full absorption by allowable deductions) in former subsection 102UE(4) of the ITAA 1936. 32. In addition, in the First Reasons the Commissioner stated that: (a) there was a shortfall penalty of $1,095,108; (b) the liability for UB tax for the 2002 to the 2007 income years was due on 7 August 2009; (c) the amount was subject to GIC; (d) the sum of $881,453.40 would be required to be paid at that stage, and that $1,308,72.80 would currently not be required to be paid, pending the decision of the High Court in the matter of Bamford v FC of T [2009] FCAFC 66 (Bamford); and (e) he was still examining whether there would be a liability for UB Tax in the 2008 income year. 33. On or about 3 March 2010 the ATO issued a notice of liability in respect of the UB Tax for the income years 2002 to 2007 inclusive to the Defendant (First UB Tax Notice). Now produced and shown to me and marked "BWT-12" is a true copy of the First UB Tax Notice. 34. In or about April 2010, after the First Reasons were sent to the Defendant as trustee for the PCST, the Defendant and I engaged the services of Nexia ASR Pty Ltd (Nexia) as financial advisors and accountants. 35. I am informed by Mr John La Rocca of Nexia and verily believe that in or about early April 2010 Mr La Rocca telephoned Mr Pulvirenti to advise him that Nexia were the new financial advisors and accountants of the Defendant as trustee for PCST and to request the opportunity to respond to the First Reasons. 36. On 6 April 2010, Nexia sent a letter to the ATO on behalf of the Defendant as trustee for the PCST (Nexia Letter): (a) advising that an inadvertent error had been made in the identification of the ultimate beneficiary and that, consistently with the ATO's findings in the First Reasons, the correct ultimate beneficiary should have been the Tilly Family Trust under an absorption case and not Carson Ridge, which was the default beneficiary; (b) noting that the Resolutions of Director of the Trustee of the PCST clearly showed that the income of the trust was to be distributed to the Tilley Family Trust and, as such, the Tilley Family Trust was the ultimate beneficiary; (c) formally requesting that the UB Statements be amended in accordance with former subsection 102UK(2A) of the ITAA 1936 for the income years 2002 to 2007 inclusive; (d) enclosing revised UB Statements identifying the Tilley Family Trust as the ultimate beneficiary (Amended UB Statements). Now produced and shown to me and marked "BWT-13" is a true copy of a letter from Nexia dated 6 April 2010. 37. The position of the Defendant and PCST did not in substance alter in the Nexia Letter. Since 16 July 2009, the Defendant as trustee for the PCST has maintained that there were Prior Years' Losses in the Tilley Family Trust which had the effect that UB Tax was not payable, whether Carson Ridge or the Tilley Family Trust was the ultimate beneficiary. 38. The respondent to the First Reasons contained in the Nexia Letter was made less than one month after the First UB Tax Notice was issued by the ATO in respect of UB Tax for the 2002 to 2007 income years inclusive. This response was made within the 60 day time period for lodging an objection. 39. On or about 29 April 2009 the ATO sent a letter to Nexia seeking additional information (Request for Additional information) with respect to the responses in the Nexia Letter and, in particular, in relation to: (a) the error made by the Gold Group; and (b) the Prior Years' Losses deducted by the Tilley Family Trust. Now produced and shown to me and marked "BWT-14" is a true copy of the letter from the ATO dated 29 April 2010. 40. In the Request for Additional Information, the ATO: (a) applied a different test from the inadvertent error argued by Nexia in the Nexia Letter; (b) did not deny that an inadvertent error could be argued as the basis for an amendment under former subsection 102UK(2A) of the ITAA 1936; and (c) did not deal with this issue at all. 41. The Request for Additional Information was the first time, in more than 9 months following lodgement of the Initial UB Statements that the ATO requested any information in respect of the Prior Years' Losses. The ATO did not raise questions about the prior year losses until this point in time. 42. In the Request for Additional Information, the ATO also sought further financial information in respect of both the PCST and the Tilley Family Trust, which it had already requested in the course of the audit. 43. On or about 18 June 2010, Nexia sent a letter to the ATO (Response to the Request for Additional Information) stating in respect of the inadvertent error that: (a) the Defendant as trustee for the PCST formed an independent judgment from its registered tax agent that the Initial UB Statements were correct in each particular; (b) Gold Group was aware that the Tilley Family Trustee had substantial Prior Years' Losses; (c) at the time of lodging the Initial UB Statements, no external advisors were consulted on the UB Tax issue; (d) distribution minutes for the PCST make Carson Ridge the default beneficiary in the event the ATO adjusted the assessable income or allowable deductions of the PCST; (e) Gold Group erroneously interpreted the term "ultimate beneficiary" in a literal sense, believing that Carson Ridge was the ultimate beneficiary given that Carson Ridge was the ultimate entity in the chain of distributions to be potentially entitled to the net income of the PCST; (f) after its initial response in the Gold Group Fax, the Defendant was requested by the ATO to lodge the Initial UB Statements as a matter of urgency in only one day; (g) at the time of lodging the Initial Statements, the tax returns of the Tilley Family Trust had not yet been prepared and the ATO was aware of this; and (h) as the tax returns had not yet been prepared at that time, the Defendant was unable to provide specific figures for the distributions from the PCST. Now produced and shown to me and marked "BWT-15" is a true copy of the letter Nexia dated 18 June 2010. 44. In the Respondent to the Request for Additional Information: (a) Nexia in respect of the Prior Years' Losses as follows: (i) the losses were incurred when the Tilley Family Trust carried on a business of property developments; (ii) the majority of the losses were incurred in the early 1990s; (iii) they were unable to locate source documents that related to the losses because those documents were destroyed in accordance with the Defendant's policy of destroying company records every 7 years; (iv) to the extent that the losses related to any debts that were forgiven, that forgiveness of those debts would have occurred in the early 1990s; and (v) they were still looking through archives for supporting financial statements and working papers. (b) Nexia advised the ATO that the Tilley Family Trust lodged the Family Trust Election, effective from the 1995 income year, in the 1999 income tax return. A true copy of the Family Trust Election is exhibited at "BWT-5". 45. On 24 November 2010: (a) the ATO sent a letter to the Defendant as trustee for the PCST care of Nexia relating to the PCST's purported liability to UB Tax for the income years 2002 to 2007 inclusive (Second Reasons to Nexia); and (b) the ATO sent a letter to the Defendant as trustee for the PCST care of Gold Group relating to the PCST's purported liability to UB Tax for the 2008 income year and the purported liability to administrative penalties for all the Relevant Income Years (Second Reasons to Gold Group). (collectively, the Second Reasons). Now produced and shown to me and marked "BWT-16" is a true copy of the Second Reasons. 46. The Second Reasons to Gold Group was sent to Gold Group despite the fact that Nexia had advised the ATO that the Defendant changed accountants and no longer engaged Gold Group. 47. The Second Reasons to Gold Group: (a) was not a mere copy of the Second Reasons to Nexia. (b) deals in detail with issues relating to the penalties which were not covered in the Second Reasons to Nexia. There are no apparent reasons for splitting the Second Reasons and sending part thereof to Nexia and other part to Gold Group, nor has the ATO to date justified this decision. 48. In the Second Reasons, the ATO argued that: (a) the Initial UB Statements are: (i) correct in showing Carson Ridge as the ultimate beneficiary; but (ii) not correct in showing that Carson Ridge was presently entitled to nil; (b) there is sufficient evidence to establish that the Prior Years' Losses were in fact incurred; (c) therefore, Carson Ridge is presently entitled to $9,844,244 in the Relevant Income Years; (d) as Carson Ridge is presently entitled to $9,844,244: (i) there is a shortfall of tax of $4,667,623.65; and (ii) the PCST is liable to pay UB Tax amounting to $4,667,623.65; (e) the Defendant is not entitled to amend the Initial UB Statements because it does not satisfy the requirements in former subsection 102UK(2A) of the ITAA 1936; (f) GIC has accrued, and is payable, on the alleged shortfall amount; and (g) the PCST is liable to an administrative penalty under subsection 284-75(1) of Schedule 1 of the Taxation Administration Act 1953 (Cth) (TAA 1953) equal to 50% of the alleged shortfall amount. 49. On or about 26 November 2010, the ATO issued two additional notices to the Defendant (Second UB Tax Notices): (a) Notice of Liability to UB Tax for the 2008 income year (2008 UB Tax Notice); and (b) Notice of Assessment of Liability to Pay Penalty (Penalties' Notice). Now produced and shown to me and marked "BWT-17" is a true copy of the Second UB Tax Notices. Statutory Demand 50. On 21 February 2011, the Defendant received the Creditors Statutory Demand for Payment of Debt dated 15 February 2011 (Statutory Demand) from the ATO. Now produced and shown to me and marked "BWT-18" is a true copy of the Statutory Demand. 51. The Statutory Demand provided that: (a) in respect of the purported UB Tax, GIC was charged pursuant to section 102UP of Division 6D, calculated from 6 October 2009 up to and including February 2011; and (b) in respect of the purported penalties, GIC was charged pursuant to section 289-25 of Schedule 1 of the TAA 1953, calculated from 4 January 2011 up to and including 14 February 2011. 52. On or about 22 February 2011, solicitors for the Defendant, Arnold Bloc Leibler, sent a letter to the ATO foreshadowing that the Defendant would lodge an objection to the Disputed Assessments and also requesting the withdrawal of the Statutory Demand. Now produced and shown to me and marked "BWT-19" is a true copy of the letter from Arnold Bloch Leibler dated 22 February 2011. 53. On or 23 February 2011 the ATO sent a letter to Arnold Bloch Leibler stating that the ATO would not withdraw the Statutory Demand but would instead apply Chapter 28 of the ATO Receivables Policy. Now produced and shown to me and marked "BWT-20" is a true copy of the letter from the ATO dated 23 February 2011. The Plaintiff's Application 54. On or about 6 April 2011 the ATO issued the Application. 55. In support of the Application, the Plaintiff relies on the grounds set out in section 459Q of the Act based upon the failure by the Defendant to comply with the Statutory Demand. The debt the subject of the Statutory Demand is alleged to arise pursuant to: (a) the First UB Tax Notice, being a purported assessments of liability to Ultimate Beneficiary Non-Disclosure Tax (UB Tax) in relation to the income years 2002 to 2007 inclusive, notified by a notice titled "Notice of Liability Ultimate Beneficiary Non-Disclosure Tax" issued on 3 March 2010; (b) the 2008 UB Tax Notice, being a purported assessments of liability to UB Tax for the 2008 income year, notified by a notice titled "Notice of Liability Ultimate Beneficiary Non-Disclosure Tax" issued on 26 November 2010; and (c) the Penalties' Notice, being a purported assessments of administrative penalties for the relevant income years 2002 to 2008 inclusive, notified by a notice titled "Notice of assessment and liability to pay penalty" issued on 26 November 2001, (collectively, the Disputed Assessments). 56. On 13 May 2011, solicitors for the Defendant, Madgwicks Lawyers, sent a letter to the ATO stating that: (a) the Disputed Assessments are invalid, of no effect and should now be cancelled, set aside or withdrawn; (b) there are strong discretionary reasons for this Honourable Court to defer making any decision on the application for winding up until after the Plaintiff's determination on the Objection or, alternatively, for this Honourable Court to dismiss the Application; (c) there is a genuine dispute about the existence debt and that substantial injustice will be caused to the Defendant, which matters are material to the question of the Defendant's solvency, and requesting the ATO's consent to the adjournment of the Application pending the Plaintiff's consideration of and determination on the Objection. Now produced and shown to me and marked "BWT-21" is a true copy of the letter from Madgwicks Lawyers dated 13 May 2011. 57. On 16 May 2011, the solicitors for the Defendant, Madgwicks Lawyers, received an email from the ATO stating that the ATO intends to proceed with seeking orders for the winding up of the Defendant on the return date on 20 May 2011. Now produced and shown to me and marked "BWT-22" is a true copy of the email from the ATO dated 16 May 2011. Defendant's Objection to the Disputed Assessments 58. On 17 May 2011, the Defendant lodged an objection pursuant to subsection 102UR(5) of the ITAA 1936 in relation to the Disputed Assessments (Objection) issued to the Defendant as trustee for the PCST covering the Relevant Income Years. Now produced and shown to me and marked "BWT-23" is a true copy of the Objection. Due to their volume, I have not exhibited the annexures. The Objection together with its annexures will be provided to this Honourable Court at the hearing. Delay in lodging Objection 59. The Practice Statement PS LA 2003/7 provides the Commissioner will consider the following factors in determining whether to exercise his discretion to treat the Objection as having been lodged within time: (a) the taxpayer's explanation of the failure to lodge the objection within the allowable time limits; (b) the circumstances of the delay; (c) whether the taxpayers has an arguable case for the objection to be allowed in whole or in part; (d) other relevant matters that arise in the circumstances of the particular case. 60. In PS LA 20037, the Commissioner gives some general examples of circumstances where an extension of time may be appropriate including delay caused by misleading conduct of offers of the ATO. For the reasons expressed in paragraphs 6.7 to 6.49 of the Objection, the delay of the Defendant falls within this example. 61. As to the circumstances of the delay, the Defendant refers to paragraphs 6.60 to 6.62 of the Objection. 62. As to whether the Defendant has an arguable case for the Objection to be allowed in whole or in part, the Defendant refers to paragraphs 6.63 and 6.64 of the Objection. 63. As to other relevant matters, the Defendant refers to paragraphs 6.65 and 6.66 of the Objection. Failure to apply to set aside the Statutory Demand 64. By the Plaintiff: (a) continuing to dispute the issues regarding the Disputed Assessments with the Defendant; and (b) changing the basis for assessing UB Tax well beyond the time limit for objecting to the First UB Tax Notice, the Defendant was mislead to believing that the First UB Tax Notice no longer had any effect. Without having been given the possibility to object to the UB Tax imposed by the First UB Tax Notice and the disallowance of the Prior Years' Losses, the Defendant was not in a position to properly object to the 2008 UB Tax Notice and Penalties' Notice. 65. Prior to the Defendant being in a position to obtain detailed advice and prepare for lodgement the Objection to each of the Disputed Assessments, the ATO served the Statutory Demand on the Defendant and issued the Application. Defendant's opposition to Application 66. For the reasons set out in the Objection, in respect of the Relevant Income Years: (a) The making and issue of the Disputed Assessments was and is not authorised or justified by former section 102UK of the ITAA 1936. (b) the PCST is not liable to pay UB Tax because: (i) Rosenwood Investments Pty Ltd as trustee for the Tilly Family Trust (TFN 77 059 396) is not an ultimately beneficiary of the PCST for the purposes of former subsection 102UE(4) of the ITAA 1936; (ii) the Tilley Family Trust is entitled to deduct the Prior Years' Losses; (iii) Carson Ridge is presently entitled to a nil amount of the net income of the PCST; (iv) there was no mistake in the UB Statements lodged by the Defendant as trustee for the PCST; and (v) even if there was a mistake in the UB Statements lodged by the Defendant, no UB Tax is payable under former section 102UK of the ITAA 1936 as a result of the mistake; and (c) as the PCST is not liable to pay UB Tax, there is no 'shortfall' of tax for the purpose of the penalty provisions as set out in Division 284 of the TAA 1953; (d) as there is no shortfall of tax, the commissioner is unable to impose administrative penalties; and (e) as there is no shortfall of tax, the Commissioner is unable to impose interest charge, GIC or SIC. 67. In the circumstances, there is a genuine dispute as to the existence of the debt claimed by the Plaintiff in support of its Application for an order to wind up the Defendant. 68. If the Plaintiff accepts the Defendant's Objection: (a) there will not be a debt owing from the Defendant to the Plaintiff; (b) the Defendant will not have any debts that are presently due and payable; and (c) the Defendant will be able to pay its debts as and when they fall due. 69. If the Objection is rejected, the Defendant intends to appeal the determination by making an application to the Administrative Appeals Tribunal. [emphasis in original]
Deputy Commissioner of Taxation
Tilley Property Management Services Pty Ltd
[2010] QCA 217
(2008) 237 CLR 473
(1986) 70 ALR 357
(1988) 165 CLR 555
(2008) 237 CLR 146
(1996) 62 FCR 302
(1977) 33 FLR 87
(1982) 45 ALR 284
(1988) 165 CLR 55
(1922) 31 CLR 232