Deputy Commissioner of Taxation v Ziolkowski

1. Pursuant to rule 5.23 of the Federal Court Rules 2011, judgment for the applicant against the respondent in the amount of $1,600,975.20 for income tax, shortfall penalties, shortfall interest charges and general interest charges to 30 April 2018.
2. A copy of these Orders and the reasons for judgment delivered on 2 May 2018 be served on the respondent by email to ziolkowski007@gmail.com and to Mr Sam Spackman of Polczynski Robinson Lawyers at SSpackman@plawyers.com.au.
3. The respondent is to pay the applicant's costs as agreed or taxed.
4. The originating application is otherwise dismissed. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

GRIFFITHS J: 1 By an originating application and statement of claim filed in this Court on 11 August 2017, the Deputy Commissioner of Taxation seeks judgment against the respondent for income tax liabilities, administrative penalties, shortfall interest charges and general interest charges for the income tax years ended 30 June 2006 and 30 June 2007. I will say something more about the history and background to the matter shortly. It is sufficient to note at this stage that on 12 December 2017, the applicant filed an interlocutory application in the Court seeking default judgment against the respondent pursuant to rule 5.23 of the Federal Court Rules 2011 (Cth) (2011 FCRs) or, alternatively, summary judgment under rule 26.01 of the 2011 FCRs and s 31A of the Federal Court of Australia Act 1976 (Cth). 2 The interlocutory application filed on 12 December 2017 is supported by four affidavits which the applicant relies upon and were read in the proceeding before me today. They are: an affidavit of Ms Sharon Campbell filed on 12 December 2017; another affidavit by Ms Campbell, filed on 1 May 2017; and two affidavits of Suami Campos Silva, dated 9 April 2018 and 23 April 2018 respectively. The applicant also relies upon a certificate of attestation filed on 15 November 2017, which attests to the fact that various documents were served on the respondent in New York in the United States, those documents being the originating application, statement of claim, affidavit in support and orders that were relevantly made by the Court prior to that date. 3 On 26 September 2017, the Court granted the applicant leave to serve the respondent with the documents referred to immediately above in the United States in accordance with the Hague Convention. As noted above, the certificate of attestation filed on 15 November 2017 attests to that service having been achieved. On 5 December 2017, the Court made orders that any application for a default judgment be filed by no later than 18 December 2017. The applicant was granted leave to serve any documents relating to such an application on the respondent in the United States in accordance with the Hague Convention. On 12 December 2017, the applicant filed its application for default judgment in the sum of approximately $1.5 million, but also seeking additional accrued general interest charge to the date of judgment. 4 On 10 April 2018, the applicant sought, and was granted, leave to file its application for default judgment and supporting material by way of substituted service. This order was made having regard to an affidavit filed on behalf of the applicant which deposed to the difficulties which the applicant had experienced in physically serving the default judgment interlocutory application on the respondent. That affidavit indicated, however, that there had been some contact with a lawyer who appears to have some professional relationship with the respondent. 5 The lawyer, Mr Spackman, told the ATO's solicitor that he did not have formal instructions to accept service on behalf of the respondent. He said that the respondent had been in hospital for a few months but was in New York. The Court made orders on 10 April 2018 for substituted service to be achieved by way of email addressed to the respondent's last known email address, which in the past had been a successful means of communication as well, as the email address of Mr Spackman. In her second affidavit, Ms Silva deposes to the fact that on 10 April 2018 she sent by email to the respondent at that known email address, as well as to Mr Spackman, a copy of the orders that were made by the Court on 10 April 2018. 6 The Court is satisfied that the respondent is in default within the meaning of rule 5.22 of the 2011 FCRs because, first, he has failed to file a notice of address for service as required by the 2011 FCRs. Secondly, he has further failed to appear at any of the hearings in this matter, including today's hearing. 7 The relevant principles applicable to the making of a default judgment under r 5.23 of the 2011 FCRs are helpfully set out in a judgment of Flick J in Speedo Holdings B.V. v Evans (No 2) [2011] FCA 1227 at [19] to [26]: 19 A number of principles that have been established in respect to the former Order 35A r 3(2)(c) continue to be equally applicable to the current r 5.23(2)(c). Some of those principles of relevance to the present application are as follows. 20 First, the power invoked by the Applicants remains discretionary. So much necessarily follows from the discretion conferred by r 1.32: cf Bank of Kuwait and the Middle East v Ship MV "Mawashi Al Gasseem" (No 2) [2007] FCA 815 at [9], 240 ALR 120 at 122 per Mansfield J; United Broadcasting International Pty Ltd v Turkplus Pty Ltd (No 2) [2010] FCA 1413 at [42] per Yates J. Just as the discretion must be exercised "cautious[ly]" where it is the applicant that is in default (cf McKenzie v South Australia [2005] FCA 22 at [26], 214 ALR 214 at 221 per Finn J; Lawson v NSW Minister for Land and Water Conservation [2007] FCA 8 at [22] per Stone J; Tucker v Western Australia [2009] FCA 1459 at [9] per Marshall J), the same caution must be exercised where it is the applicant who is seeking orders as against a defaulting respondent. 21 Other than necessarily recognising that the power must be exercised with caution, there is little detailed consideration as to how the discretion must otherwise be exercised. One source of assistance may, however, be found in ACOHS Pty Ltd v Ucorp Pty Ltd [2009] FCA 577. The applicant had there sought an order for judgment pursuant to the former Order 35A r 3(2) by reason of the respondents' "repeated and serious breaches of interlocutory orders made by the court". Jessup J there referred to Lenijamar Pty Ltd v AGC (Advances) Ltd (1990) 27 FCR 388 in which Wilcox and Gummow JJ were considering the terms of Order 10 r 7(1)(a), a provision which later became Order 35A r 3(1)(a). Their Honours said of that provision: It is to be noted that the power given by this rule is conditioned on one circumstance only: the failure of a party to comply with an order of the Court directing that party to take a step in the proceeding. There is no requirement of intentional default or contumelious conduct, although the attitude of the applicant to the default and the Court's judgment as to whether or not the applicant genuinely wishes the matter to go to trial within a reasonable period will usually be important factors in weighing the proper exercise of the discretion conferred by the rule. There is no requirement of "inordinate and inexcusable delay" on the part of the applicant or the applicant's lawyers, although any such delay is likely to be a significant matter. There is no requirement of prejudice to the respondent, although the existence of prejudice is also likely to be significant. And it must be remembered that, in almost every case, delay adversely affects the quality of the trial and is an additional burden upon the parties. … The observations which we have just made about the scope of O 10, r 7 are not intended to convey the impression that any failure to comply with a procedural direction will appropriately result in the dismissal of the proceeding. On the contrary, the rules must be administered sensibly and with an appreciation both of the fact that some delays are unavoidable, and unpredictable, by even the most conscientious parties and their lawyers, and of the likely serious consequences to an applicant of staying or dismissing a claim; … We would not wish our observations to cause respondents to apply for dismissal of proceedings simply because there has been a non-compliance with a direction by the applicant, even though it does not cause or indicate a continuing problem in preparing the matter for an early trial. The discretion conferred by O 10, r 7 is unconfined, except for the condition of non-compliance with a direction. As it is impossible to foresee all of the circumstances under which the rule might be sought to be used, it is undesirable to make any exhaustive statement of the circumstances under which the power granted by the rule will appropriately be exercised. We will not attempt to do so. But two situations are obvious candidates for the exercise of the power: cases in which the history of non-compliance by an applicant is such as to indicate an inability or unwillingness to cooperate with the Court and the other party or parties in having the matter ready for trial within an acceptable period and cases - whatever the applicant's state of mind or resources - in which the non-compliance is continuing and occasioning unnecessary delay, expense or other prejudice to the respondent. Although the history of the matter will always be relevant, it is more likely to be decisive in the first of these two situations. Even though the most recent non- compliance may be minor, the cumulative effect of an applicant's defaults may be such as to satisfy the judge that the applicant is either subjectively unwilling to cooperate or, for some reason, is unable to do so. Such a conclusion would not readily be reached; but, where it was, fairness to the respondent would normally require the summary dismissal of the proceeding. In the second of the two situations we postulate, a significant continuing default, it does not really matter whether there have been earlier omissions to comply with the Court's directions. Ex hypothesi the default is continuing and is imposing an unacceptable burden on the respondent. But the continuance of the non-compliance is of the essence of this situation. If, when the Court looks at the matter, the direction has already been complied with, the defaulting applicant may be ordered to pay any wasted costs; but it would be difficult to justify the dismissal of the proceeding solely because of that default. After having set forth these observations, Jessup J in ACOHS Pty Ltd continued as follows: [27] In the present case the applicant relies upon each of the "candidates" referred to in Lenijamar. It accuses the respondents of defaults which demonstrate an inability or (more specifically) an unwillingness to cooperate with the court and itself in having the matter ready for trial. It says also that those defaults are continuing, and are occasioning delay, cost and prejudice for itself in the prosecution of the proceeding. The applicant contends that the defaults of the respondents are sufficiently serious to justify an order shutting them out permanently from defending the applicant's claims. Indeed, the effect of the order which the applicant seeks would be to deliver complete success to it in the proceeding, without any investigation of the merit of its claims, and without consideration of the substance that the respondents' defences may possibly have. As I made clear to counsel in argument, that would be a very large step for the court to take, and I did not understand counsel for the applicant to propose that it should be taken save in a clear case of quite serious defaults by the respondent concerned. His Honour declined to "shut the respondents out from defending this proceeding": [2009] FCA 577 at [29]. 22 Second, the discretionary power to enter a default judgment is enlivened when (as in the present case) an applicant applies to the Court for an order. Rule 5.23(2) provides that where a respondent is in default "an applicant may apply to the Court". An applicant may, of course, decide not to do so. 23 Third, there is a difference in the terms in which the ambit of the power conferred by the former r 3(2)(c) ("the relief… that the applicant appears entitled to on the statement of claim") and the wording of the current r 5.23(2)(c) ("the relief claimed in the statement of claim to which the Court is satisfied that the applicant is entitled"). Notwithstanding that difference in language, the requirement imposed is not that an applicant prove by way of evidence the claim sought to be advanced; the requirement is that the Court needs to be "satisfied" on the face of the statement of claim that the applicant is entitled to the "relief" claimed: Arthur v Vaupotic Investments Pty Ltd [2005] FCA 433 at [3] per Heerey J; Australian Competition and Consumer Commission v 1Cellnet LLC [2005] FCA 856 at [14] per Nicholson J; Bucketts Road Business Services Pty Ltd v Phalona Pty Ltd [2008] FCA 57 at [12] per Sackville J; Microsoft Corporation v Short [2011] FCA 247 at [7] per Stone J; Australian Building and Construction Commissioner v Abbott (No 3) [2011] FCA 340 at [11] per Gilmour J; Rathner v Bendigo Skyrider Pty Ltd [2011] FCA 626 at [9] per Gordon J. The facts as alleged in the statement of claim are deemed to have been admitted by a respondent: Australian Competition and Consumer Commission v Dataline.net.au Pty Ltd [2007] FCAFC 146 at [42], 161 FCR 513 at 523 per Moore, Dowsett and Greenwood JJ. Perram J in CNIP Pty Ltd v Chan & Naylor Norwest Pty Ltd (No 2) [2011] FCA 1170 referred to some of the former authorities dealing with the former Order 35A and similarly concluded in respect to the current r 5.23(2)(c) as follows: [18]…However, since the introduction of Order 35A of the former Federal Court Rules 1979, it has been clear that the present default rule will be satisfied simply on the Court being satisfied that relief could be granted on the face of the pleading. … [19] Accordingly, the requirements of present Rule 5.23(2)(c) will be met if upon an inspection of the applicants' pleading I am satisfied that the applicants would be entitled to the two permanent injunctions that are now sought. 24 Fourth, to be satisfied that an applicant "is entitled" to the relief claimed in the statement of claim, the Court needs to be satisfied that "each element of the relevant civil wrong involved is properly and discretely pleaded in the statement of claim": Macquarie Bank Ltd v Seagle [2005] FCA 1239 at [24], 146 FCR 400 at 406 to 407 per Conti J; Macquarie Bank Ltd v Seagle [2008] FCA 1417 at [20] per Jagot J. 25 Fifth, in addition to the facts alleged in a statement of claim, the Court may permit recourse to limited further evidence. But it may not admit evidence which would alter the case as pleaded. 26 Thus, in Australian Competition and Consumer Commission v Dataline.net.au Pty Ltd [2006] FCA 1427, 236 ALR 665 Kiefel J traced the evolution of the rules of this Court leading to the introduction in 2004 of Order 35A and then observed in respect to the operation of that provision as follows: [45] Arthur v Vaupotic Investments Pty Ltd [2005] FCA 433 and Luna Park Sydney Pty Ltd v Bose [2006] FCA 94 confirm that the rule permits regard to be had to the face of the statement of claim in order to determine whether the relief sought is made out. Those decisions and a number of others of this court confirm that no evidence needs to be adduced … … [47] An approach that does not deny the prospect of any additional, or different, relief being granted under O 35A is consistent with the general provisions of O 35, which permits judgment to be given regardless of whether the particular claim for relief is made. Order 35A does not itself deny the right to relief which may arise from admissions of the matters alleged in the statement of claim. No general rule prohibiting additional or varied relief should be implied. Whether it is permitted in any particular case should depend upon the nature of the case, the orders sought and whether the respondent is, or can be taken to be, cognizant of the prospect of such an order being made. All these considerations are within the discretion maintained by the terms of O 35A. In the present case the principal change in the relief sought is in the content of the declarations and injunctions and argument has been addressed by the respondents to them. [48] The terms of the rule do not, however, suggest recourse to affidavit evidence, in addition to the facts alleged in the statement of claim, as appropriate. The case law supports this view. Judgment must be entered according to the pleading alone: … [49] Stronger support for the view that some evidence might be permitted, concerning the appropriateness of the relief sought, is obtained from Phonographic Performance Ltd v Maitra [1998] 2 All ER 638 at 644; 41 IPR 225 at 231 … . Lord Woolf MR confirmed the general rule that "judgment on default is given upon the facts pleaded in the statement of claim and that affidavit evidence to supplement or support those facts is not appropriate as the pleaded facts are deemed to be admitted". His Lordship went on (also at All ER 644, IPR 231): However, that cannot be rigidly applied where the judge has to exercise a discretion whether to grant the relief sought. Where an injunction is sought facts relevant to the grant of that injunction, which are not deemed to be admitted, should be brought to the attention of the judge by way of affidavit or otherwise. Further, if the judge is aware of matters relevant to the exercise of his discretion, he can seek an appropriate explanation before coming to any decision … [50] It may be accepted that some further affidavit material may be accepted by the court in relation to the relief sought. The fourth and seventh respondents accept this to be the case and that the rule would not prohibit such an approach. They seek to rely upon evidence as to their present circumstances. This does not, however, mean that any evidence can be tendered. Evidence which would alter the pleaded case should not be admitted. Her Honour's decision was affirmed on appeal: Australian Competition and Consumer Commission v Dataline.net.au Pty Ltd [2007] FCAFC 146, 161 FCR 513. See also: Australian Competition and Consumer Commission v Yellow Page Marketing BV (No 2) [2011] FCA 352 at [62] to [63] per Gordon J. It is unnecessary for present purposes to consider whether the difference in language between the former Order 35A r 3(2)(c) and the current r 5.23(2)(c) also now permits the Court to grant any relief other than that claimed in the statement of claim. 8 It is significant that the respondent's liabilities for income tax and shortfall penalties, which are the subject of these proceedings, are assessed liabilities. The applicant relies upon amended notices of assessment which have been issued to the respondent in respect of the relevant income tax years, as well as notices of assessment of shortfall penalty for the same years. I was informed by Mr Metlej, who appeared for the applicant, that the respondent lodged objections to these assessments in or around March 2016. But since that time the objections have apparently not been progressed by the respondent in any way. By reason of the issue of amended assessments under Div 280 of Sch 1 to the Taxation Administration Act 1953 (Cth) (TAA), the respondent has become liable for shortfall interest charges. Those shortfall interest charges were included in the notices of amended assessment for the relevant years. 9 The general interest charge accrued and continues to accrue on the amounts which are due and payable by the respondent by operation of s 5-15 of the Income Tax Assessment Act 1997 (Cth) and Pt IIA of the TAA, and also under s 298-25 of Sch 1 to the TAA and Part IIA of the TAA in respect of shortfall penalty amounts. 10 The applicant has filed two certificates under s 255-45 of Sch 1 to the TAA. The latest certificate, which is attached to Ms Campbell's affidavit dated 23 April 2018, shows that the respondent is indebted to the Commonwealth as at 30 April 2018 in respect of various tax-related liabilities in the total amount of $1,600,975.20, which is comprised of the liability in respect of the amended assessments for income tax for the years ended 30 June 2006 and 30 June 2007, shortfall interest charges, administrative penalties and the general interest charge calculated up to and including 30 April 2018 but less payments that have been made or credits allowed in the sum of $72,313.28. 11 Under the relevant statutory scheme, it is provided in s 175 of the Income Tax Assessment Act 1936 (Cth) that the validity of any assessment shall not be affected by reason that any of the provisions of the Act have not been complied with. Furthermore, and significantly, under s 350-10 of Sch 1 to the TAA, a notice of assessment or amended assessment produced by the applicant in respect of income tax and shortfall penalty is conclusive evidence in proceedings that the assessments were properly made and that the amounts of the assessments or notices are correct, except in proceedings under Pt IVC of the TAA. It also is to be noted that under s 280-110(3) of Sch 1 to the TAA, the production of notices stating the amount of shortfall interest charge that the respondent is liable to pay is prima facie evidence of the matters stated in those notices. 12 The applicant contends that he is entitled to default judgment against the respondent in respect of income tax, shortfall interest charges, administrative penalties and associated general interest charges as at 30 April 2018. Having regard to the background matters and the respondent's failure to participate in any way in these proceedings which were commenced as far back as 11 August 2017, the Court is satisfied that the respondent is in default within the meaning of r 5.22 of the 2011 FCRs. 13 Moreover, the effect of the statutory provisions outlined above means that the conclusive effect is given to the assessments in respect of the respondent's liability for income tax, shortfall penalties and interest charges such that the Court must regard the amounts assessed as due and payable. In all these circumstances, and for these reasons, the Court finds that the applicant is entitled to default judgment in the amounts claimed. I certify that the preceding thirteen (13) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Griffiths.