Golden City Car & Truck Centre Pty Ltd v Deputy Commissioner of Taxation

REASONS FOR JUDGMENT 1 The applicants are taxpayers. On or about 9 October 1997 the respondent, Deputy Commissioner of Taxation, issued amended notices of assessment of income tax to the applicants. The assessments were issued after the Commissioner of Taxation had determined that there had been avoidance of tax due to fraud or evasion on the part of the applicants. The objections of the applicants to the amended assessments were disallowed by the respondent in June 1998 and proceedings were commenced in the Administrative Appeals Tribunal ("the AAT") for review of the decisions to disallow the objections. 2 On 30 April 1998, the respondent commenced proceedings in the Supreme Court of Queensland to recover from the applicants unpaid income tax and additional tax for late payment, together with penalty interest. The amount claimed as a debt due and payable by Leslie James Wall was $1,881,914.50, and the amount claimed against the company was $725,237.76. 3 On 20 May 1998, the applicants commenced proceedings QG43 of 1998 in this Court for review of a number of "decisions" of the respondent. Those decisions included the decision to commence the Supreme Court proceedings and an alleged decision to refuse an extension of time for payment of the outstanding tax liability based upon the amended assessments. 4 The respondent objected to the competency of the application and filed a notice of objection on 10 June 1998. He also filed a notice of motion on that date seeking to strike out paragraphs 1A, 1C, 1D, II and III of the application, together with the grounds pleaded in support of each of the specified paragraphs pursuant to O 20 r 2 of the Federal Court Rules. 5 On the hearing of the objection as to competency and the strike out application, the applicants were given leave to amend their application. Notwithstanding the amendment, the respondent sought to have struck out paragraphs 1A, 1C, 1D, IV, V and VI of the amended application. At the conclusion of the application, mutual undertakings were given to the Court which had the effect of preventing disposition by the applicants of their respective assets without the consent of the Court or the respondent, and staying the Supreme Court proceedings until further order. The decision on the respondent's application was reserved. 6 On 2 December 1998, criminal proceedings by way of complaint and summons were commenced against Leslie James Wall in respect of events concerning the 1990 income tax year. As a consequence of the criminal proceedings, on 10 December 1998 the proceedings in the AAT were stayed pending the outcome of those proceedings. 7 On 22 January 1999, the respondent's objection was upheld, the application was granted and the parts of the applicants' application objected to were struck out: see Golden City Car and Truck Centre Pty Ltd v Deputy Federal Commissioner of Taxation (1999) 99 ATC 4131. 8 The only parts of the application which remained related to paragraph 1B, that paragraph had not been objected to, and concerned an alleged decision to refuse an extension of time for payment of the outstanding tax liability. 9 By letter dated 8 February 1999 the applicants' solicitor requested an extension of time for the payment of the tax liability based on the amended assessments. That request was refused and the refusal was notified by letter dated 18 February 1999. On 26 February 1999, QG43 of 1998 was set down for hearing on 12 July 1999. The applicants commenced further proceedings, Q42 of 1999, in this Court on 12 March 1999, seeking judicial review of the decision to refuse an extension of the time to pay notified by the letter of 18 February 1999. 10 On 20 April 1999, Leslie James Wall was committed for trial on the criminal charge. 11 On 22 April 1999 the hearing of Q42 of 1999 also was set for 12 July 1999. 12 The trial of the applications was adjourned on 12 July 1999 by consent of the parties. The proceedings were adjourned on the basis that the applicants would pay $2,444,695.72 on or before 1 October 1999, being the amount of the primary tax owing by the applicants, and that the issue of payment of penalties for late payment would stand over until after determination of the proceedings in this Court. 13 Leslie James Wall was convicted of an offence of defrauding the Commonwealth by understating the income of the Golden City Trust for the year ended 30 June 1990, and was sentenced to a period of imprisonment. Now that the criminal proceedings are finished, the proceedings in the AAT have been revived and the objections are to be heard by the AAT. 14 The Court listed the adjourned judicial review proceedings for a case management conference to be held on 20 June 2000. At that conference the parties sought that the proceedings be re-listed in order that they could argue the issue of costs. Those arguments were to proceed on written submissions only and directions were ultimately given for the filing and delivery of written submissions and submissions in response. 15 The applicants submit that they should be awarded the costs of the applications or that they should follow the outcome of the objection proceedings in the AAT. They submit that the merits of the applications favour the applicants and invite the Court to determine the merits of the applications, notwithstanding that the substantive issues have been resolved, for the purpose of deciding costs. 16 The respondent submits that as the applications are not to be proceeded with by the applicants, they should be dismissed and the applicants ordered to pay the respondent's costs. Costs, the respondent submits, should be ordered as a consequence of dismissal of the proceedings for want of prosecution. In any event, the respondent submits that the proceedings were bound to fail. 17 Where proceedings are compromised and the parties do not wish them to proceed, the Court is not required to determine the merits of the issues in order to predict which party would have won if the proceedings had gone to trial and been determined on the merits. The relevant principles applicable to the making of a costs order in such circumstances are discussed by Hill J in Australian Securities Commission v Aust-Home Investments Ltd (1993) 44 FCR 194. Hill J, after a consideration of the decisions in JT Stratford & Son Ltd v Lindley (No 2) [1969] 1 WLR 1547, South East Queensland Electricity Board v Australian Telecommunications Commission [1989] FCA 20, Liddle v Kooralbyn Pty Ltd (No 3280 of 1987, Unreported, Supreme Court of Queensland, 9 October 1987, Ryan J), R v Gold Coast City Council; ex parte Raysun Pty Ltd [1971] QWN 13, and Austcorp Finance and Leasing Pty Ltd v Thomas (No 1420 of 1990, Unreported, Supreme Court of Queensland, 23 August 1991, White M), set out the relevant principles supported by those authorities. His Honour said (at 201) : "These cases seem to me to support the following propositions being made. (1) Where neither party desires to proceed with litigation the Court should be ready to facilitate the conclusion of the proceedings by making a cost order: Stratford and the SEQEB case. (2) It will rarely, if ever, be appropriate, where there has been no trial on the merits, for a Court determining how the costs of the proceeding should be borne to endeavour to determine for itself the case on the merits or, as it might be put, to determine the outcome of a hypothetical trial: Stratford. This will particularly be the case where a trial on the merits would involve complex factual matters where credit could be an issue. (3) In determining the question of costs it would be appropriate, however, for the Court to determine whether the applicant acted reasonably in commencing the proceedings and whether the respondent acted reasonably in defending them (SEQEB). (4) In a particular case it might be appropriate for the Court in its discretion to consider the conduct of a respondent prior to the commencement of the proceedings where such conduct may have precipitated the litigation: cf Sunday Times Newspaper Co Ltd v McIntosh (1933) 33 SR (NSW) 371. (5) Where the proceedings terminate after interlocutory relief has been granted, the Court may take into account the fact that interlocutory relief has been granted: cf Re Asiatic Electric Co Pty Ltd [1973] 1 NSWLR 603 at 606, a case which, however, depended upon the specific wording of the statute under consideration." 18 In my opinion, the proper course in the present case is to order that each application be dismissed and that the question of costs be determined in accordance with the above principles. In determining whether the applicants have acted reasonably I have made some assessment of the strength of the case advanced by them without attempting an ultimate prediction of the outcome of the matters had they proceeded to trial. 19 Paragraph 1B of the amended application should not be considered in isolation from the paragraphs previously struck from the application by the decision of 22 January 1999. Those parts of the application were struck out as incompetent and/or disclosing no arguable case for the reasons set out in my decision. Those proceedings were brought to avoid payment of the disputed debt for outstanding income tax and additional tax for late payment, and to stop the Supreme Court proceedings from being pursued to judgment against the applicants. The case advanced by the applicants in the Supreme Court to avoid judgment, was that there was a specific agreement to grant an extension of time to pay the disputed tax until sixty days following the disposition by the respondent of the objections lodged by the applicants to the amended assessments. That agreement was said to follow from correspondence from the respondent's solicitors to the applicants' solicitors dated 5 February 1998. The letter in question and all relevant correspondence passing between the parties is set out in the previous reasons for judgment (99 ATC at 4133 - 4134); I do not propose to set it out again. 20 The correspondence did not support the agreement contended for. Nor does it show a specific request to extend the time for payment of the disputed taxation liability for any specific period or put any specific proposal for the payment of the disputed tax. The respondent, by letter on 24 February 1998, put the applicants on notice that no satisfactory arrangements had been put in place for the respondent not to take steps to recover the tax and that no extension of time had been granted for payment of the disputed tax. The letter required either payment or a satisfactory arrangement by 3 March 1998. 21 On 14 March 1998, the respondent advised that no payment or satisfactory proposal having been made, recovery proceedings would be commenced. That letter did not generate payment or a specific proposal which was acceptable. 22 It is worth recording that there was never any suggestion by the applicants that any part of the disputed tax liability would be paid by either of them. The materials do not show any identifiable request for an extension of time to pay the disputed tax which required the respondent to make a decision under s 206 of the Income Tax Assessment Act 1936 (Cth) ("the ITAA") to grant or refuse an extension. There is no readily identifiable decision of the type alleged in paragraph 1B of the amended application. Rather, there is a course of conduct wherein the applicants were seeking to dissuade the respondent from deciding to institute proceedings in the Supreme Court. That was the decision which the applicants sought to overturn in paragraph 1A of the amended application. The allegations of decisions to refuse an extension (para 1B), or to grant then revoke an extension (para 1C), are stated as alternative decisions to the decision to sue and, in my view, are attempts to divine out of the correspondence and conduct, other decisions to ground an application for judicial review in this Court to obtain a stay, or delay, of the Supreme Court proceedings. In fact, in paragraphs 18 and 19 of the Supreme Court defences delivered by the applicants, such a stay was sought on those grounds. 23 The bringing of proceeding QG43 of 1998 was not a reasonable course to take. The proceedings were brought with no real prospect of success and for the purpose of frustrating the Supreme Court proceedings. The defence of proceedings QG43 of 1998 by the respondent was entirely reasonable. That mutual undertakings were given which had the effect of staying the Supreme Court proceedings pending determination of the application to strike out the major part of the amended application, does not alter my view of the reasonableness or lack of reasonableness of the parties in respect of the conduct of the litigation. 24 In the result, proceedings QG43 of 1998 will be dismissed for want of prosecution and costs will be ordered against the applicants. 25 Proceeding Q42 of 1999 was filed on 12 March 1999. The proceeding was based on a refusal of a request for an extension contained in a letter dated 8 February 1999 from the applicants' solicitor to the respondent. 26 The refusal was contained in a letter from the respondent in reply dated 18 February 1999. That letter said : "Reference is made to your letter of 8 February 1999 and to your request for an extension of time to pay Income Tax. Sections 14ZZM and 14ZZR of the Taxation Administration Act provide that:- the fact that a review (or appeal) is pending (other than a registration-type sales tax 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 (or appeal) is pending. The law provides for the Commissioner to recover outstanding tax even where the tax is subject to dispute. As a general principle, the Commissioner expects that all debts, including those subject to dispute, will be paid on time. Where tax is paid and the dispute is resolved in favour of the taxpayer (in whole or in part), the Commissioner will pay interest on overpayments under the Taxation (Interest on Overpayments and Early Payments) Act to a taxpayer in respect of the tax which has been overpaid. It has been decided not to grant an extension of time to pay as requested in your letter, and the following points have been considered: The size and age of the debt: The excessive time requested as an extension, with no committment [sic] indicated to a reasonable time frame for payment: The fact that the debt was raised on the basis of fraud and evasion: The fact that a property once offered as part security was disposed of and subsequently sold back to Mr Wall and his family trust The fact that no acceptable offer of security has yet been made: The fact that no payments, or offer of payment by instalments have been received: The fact that these points cause a concern about the risk to the revenue: Your client has had sufficient time to consider the above and accordingly it is requested that payment, or a satisfactory arrangement be put forward by 3 March 1999." 27 The grounds of the application as pleaded in the amended application were contained in paragraphs 11, 12 and 13. 28 Paragraph 11 stated : "11. The second refusal ('the Decision') was an improper exercise of the power conferred by the Act and/or an exercise of the power conferred by the Act that no reasonable person could have made by reason that the Respondent failed to take into account the following relevant considerations: (a) The Applicants had paid the undisputed amount of the tax; (b) The Applicants offered security on the outstanding disputed amount; (c) The value of the security offered was adequate to secure the debt; (d) There was a genuine dispute between the parties as to the amount of tax payable; (e) The merits of the tax dispute could not be resolved until the criminal proceedings were completed; (f) Payment of the tax prior to a hearing of the merits of the tax dispute would cause undue hardship to the Applicants; (g) Payment of the alleged outstanding debt would result in the devastation of the business of the corporate Applicant and the livelihood of the natural Applicant and that remedies contemplated by the Interest on Overpayment and Early Payments Act would not compensate the Applicants for the loss of the business; (h) The natural Applicant has a substantial connection with the jurisdiction in that he lives and works in the jurisdiction; (i) There is no risk to the revenue; (j) The assets of the corporate Applicant are currently the subject of substantial undertakings given to the Court and thereby secured; (k) The Applicants have been diligent in adhering to the undertakings." 29 Paragraph 12 stated : "12. There was no evidence or other material to justify the making of the Decision in that the Decision was made based upon the existence of the following particular facts, and those facts do not exist: (a) There is a risk to the revenue; (b) The debt was raised on the basis of fraud and evasion; and (c) No payment or offer by instalments have been received." 30 Paragraph 13 stated : "13. Alternatively to 12, any evidence or other material used to justify the making of the Decision was of such weight that no reasonable decision-maker could have based its decision on that evidence or material." 31 The decisionmaker, Linley Anne Hopkins, addressed each of the issues raised in paragraphs 11 and 12 of the amended application in an affidavit filed on 30 June 1999. She deposed in paragraph 3(k) : "(k) In relation to the matters alleged in paragraph 11 of the application I say as follows :- (i) Before making a decision on the request for an extension of time contained in the letter dated 8 February 1999, which is exhibit LAH-1 hereto, I did take into account the following matters :- A. the fact that the Applicants had paid an undisputed amount of tax, namely an amount of $338,478.00 as follows : Date of Payment Amount of Payment 17 February 1998 $100,000.00 6 March 1998 $100,000.00 31 March 1998 $138,478.00; B. the fact that the Applicants had offered certain security in respect of the balance outstanding being an amount of $2,597,984.19, as follows : Golden City Car and Truck Centre Pty Ltd Leslie James Wall $725,237.76 $1,872,746.43; C. the relevant correspondence in relation to the offer of security is exhibited to the affidavit of Paula Fragoudakis filed in on 10 June 1998 in application no QG43 of 1998 and marked 'PF2' and, in this regard I crave leave to refer to exhibit 'PF2' to the said affidavit; D. I do not consider that the security offered was adequate to secure the debt because - (i) the Australian Taxation Office, not being a lending instuitution [sic], did not and does not have the facilities to review a floating charge or a bill of sale and was not prepared to accept the same as security; and (ii) as the Applicants' bank was not prepared to provide a guarantee over the Applicants' trading stock, which would be acceptable to the Respondent, the Respondent would not accept a lesser form of security. E. I did take into account that there was a dispute between the parties as to the amount of tax payable; F. I did take into account the fact that the tax dispute could not be resolved until the criminal proceedings against Mr Wall had been completed; G. I did take into account the fact that payment of the balance of the tax outstanding prior to a hearing of the merits of the tax dispute could cause some hardship to the Applicants but I did not consider that that factor outweighed the other factors in favour of requiring payment of the tax outstanding or the provision of adequate security as outlined in my letter of 18 February 1999; H. I did consider that payment of the alleged outstanding debt would not be likely to result in the 'devastation of the business of the corporate Applicant and the livelihood of the natural Applicant'; I. I did take into account the fact that Mr Wall had a substantial connection with the jurisdiction in that he lives and works in the jurisdiction; J. I did consider that there was a substantial risk to the revenue if the outstanding tax was not either paid or adequate security offered for the payment of the outstanding tax; K. I did take into account the fact that some of the assets of the company, Golden City, were currently the subject of undertakings given to his Honourable Court on 31 July 1998 but I did not consider that that security was adequate for the reasons set out in sub-paragraph 3(i)(D) hereof; L. I did take into account the fact that the Applicants had generally adhered to the undertakings given to the Court on 31 July 1998, but, as can be seen from the following schedule, there are instances of invoice numbers missing from what appear to be consecutive sequences of invoice numbers : INV NO INV DATE AMOUNT ADV DATED MISSING NO'S [Details of invoices were set out in sequential order] M. In relation to paragraph 12 of the application I say that my decision was based upon evidence that there was a risk to the revenue, that the debt was raised on the basis of fraud or evasion and that no payments or offers of payment by instalments had been received in respect of the amount of tax in dispute." 32 In their written submissions on the question of costs, the underlying factual contention used by the applicants to attack the decision not to grant the extension of time to pay is that valuable security, in the view of the applicants, was offered and not accepted by the respondent. That circumstance is put forward as sufficient in itself to justify the granting of the extension sought. Additionally, the submissions suggest, although it is not pleaded as a ground upon which the decision miscarried, that the decisionmaker automatically and uncritically applied the provisions of the respondents' "Debt Collection Policy Guidelines" to exclude consideration of relevant circumstances, or, failed to conclude that the circumstances of the applicants satisfied the Guidelines. 33 The decision of which judicial review was sought in Q42 of 1999 was the decision not to grant an extension of time to pay the outstanding taxation liability which was notified on 18 February 1999. Whether or not that decision was affected by an error of law falls to be determined as at that date. Whether or not it was reasonable to commence proceedings Q42 of 1999 also falls to be determined by the circumstances which existed at or about that date and the date the proceedings in fact were filed. 34 On 22 January 1999 proceedings QG43 of 1998 were listed, for further directions as to the conduct of the proceedings, for hearing on 5 February 1999. 35 On 1 February 1999 the solicitor for the respondent in QG43 of 1998 gave notice to the applicants' solicitor that the respondent wished to bring QG43 of 1998 on for trial as soon as possible and would seek directions for that to occur. By agreement of the parties the directions hearing scheduled for 5 February 1999 was vacated and the matter was re-listed for 26 February 1999. 36 The request for an extension of time was made on 8 February 1999 and was made pursuant to s 206 of the ITAA. The request cited the circumstances which the applicants contended justified the granting of an extension until sixty days after the objection proceedings were concluded in the AAT. Those circumstances were : (a) the proceedings in the AAT had been stayed in view of the criminal proceeding brought against Leslie James Wall; (b) the merits of the objection proceedings would not be resolved until the conclusion of the criminal proceedings; (c) to pay the tax would require the stock of trucks of Golden City Car & Truck Centre Pty Ltd to be run down completely thus jeopardising its business; (d) that it was unjust to expect a taxpayer with genuine objections to the amended assessments to sacrifice the company's business and Wall's livelihood when it was the actions of the Crown [in charging Wall with a criminal offence] which rendered the taxpayers unable to have the merits of the tax dispute determined. 37 The request contained no proposal to pay any of the taxation liability then due and payable in respect of the amended assessments. Nor did the request contain any proposal to secure to the benefit of the Commonwealth, either wholly or in part, the then outstanding taxation liability. 38 The request was refused with reasons by the respondent's letter of 18 February 1999. 39 On 26 February 1999 QG43 of 1998 was set down for hearing on 12 July 1999. 40 It was in these circumstances that Q42 of 1999 was filed. 41 It is not self-evident from the grounds pleaded in paragraphs 11 and 12 of the application that the applicants were bound to succeed on the application, or even had good prospects of success. As the request contained in the letter of 8 February 1999 made no offer to provide any security, the grounds contained in paragraph 11(b) and 11(c) prima facie lacked any substance. The contents of the letter of refusal dated 18 February 1999 and paragraph 3(k) of the affidavit of Linley Hopkins filed 30 June 1999 prima facie disclose that the decisionmaker took each of the matters pleaded in paragraph 11 of the application, and other relevant matters, into account in determining not to grant an extension of time to pay the outstanding taxation liability. In those circumstances, what the applicants sought was a merits review of the decision with respect to each of the matters alleged not to have been taken into account by the decisionmaker, and for that merits review to have proceeded on the false premise that there was before the decisionmaker at the time of the decision a current offer to provide valuable security. The Court has no jurisdiction to engage in such a review and it is not the function of the Court to substitute its own decision for that of the decisionmaker by exercising a discretion which the legislature has vested in the decisionmaker: Minister for Aboriginal Affairs v Peko-Wallsend Ltd (1986) 162 CLR 24 at 40 per Mason J. 42 In my view the matters pleaded in paragraph 11 of the application do not disclose any reasonable likelihood that the applicants would succeed on trial on those issues. 43 Paragraph 12 of the application alleges that there was no evidence to justify the decisionmaker to conclude that : (a) there was a risk to the revenue in granting the extension; (b) the debt was raised on the basis of fraud and evasion; and (c) no payment or offer by instalments had been received by the respondent. 44 The letter of 8 February 1999 from the applicants' solicitors to the respondent makes clear that no payment or offer by instalments of the then outstanding taxation liability was offered or had been made. The material discloses that the only payment by instalments which had occurred by 18 February 1999 was the payment by instalments of so much of the total amount payable under the amended assessments which the applicants conceded as due and payable. 45 The material which led to the charging of Wall with a criminal charge in respect of the 1990 tax year and his subsequent conviction, and the Audit Report of Peter Mitchell of the Australian Taxation Office produced in 1996 and updated in July 1998 (Exhibit PM1 to the affidavit of Mr Mitchell filed in QG43 of 1998 on 30 July 1989), provide substantial evidence that the debt represented by the amended assessments was properly raised on the basis of fraud and evasion. 46 Finally, there was, in my view, some evidence of risk to the revenue. That evidence included a refusal of the applicants' bank to provide funds to pay the applicants' tax liability or to provide a guarantee of payment, the requirement of the applicants to have recourse to the superannuation funds in order to pay one instalment of the conceded liability, and the impending trial and possible conviction of Wall and the impact of such conviction on the worth of the business of the company and its ability to generate income to satisfy the secured and unsecured creditors of the applicants, including the Commonwealth. The weight to be given to that evidence having regard to the assets and liabilities of the applicants as disclosed to the respondent was a matter for the decisionmaker. 47 For these reasons, I conclude that the applicants had no reasonable prospect of making good the allegations pleaded in paragraph 12 of the application. 48 Paragraph 13 of the application was added by amendment pursuant to leave granted on 22 April 1999. Paragraph 13 was pleaded as an alternative ground to paragraph 12. 49 To make out the ground pleaded in paragraph 13 required the applicants to prove that the decision was manifestly unreasonable, in that on the materials available, the decision was so unreasonable that no reasonable person could come to it: Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1KB 223; Peko Wallsend at 41. In my view, the applicants, on the material which was available to the decisionmaker on 18 February 1999 and which the decisionmaker says she had regard to in making the decision, had no reasonable prospect of proving that the decision was manifestly unreasonable. 50 The material before the Court discloses that the applicants had no reasonable prospects of success in proceedings Q42 of 1999 at the time it was filed. To commence the proceedings was, in my view, unreasonable. 51 The applicants in their written submissions under the heading "Additional Submissions Relevant to Costs" set out numerous reasons why the conduct of the respondent in not granting an extension was unreasonable. The submission invited a review of the conduct of the parties from the time of the issue of the amended assessments until the settlement of the issues raised in the proceedings in this Court in July 1999. It also invited the Court to consider the strength of the applicants' prospects before the AAT on the objections to the amended assessments. In my view, such material is irrelevant to the reasonableness of initiating the proceedings in this Court and maintaining them until confronted with a trial of the issues. 52 In any event, a review of the circumstances over the period identified in the applicants submissions shows clearly that the applicants consciously determined not to pay any of the balance of tax liability which was due but disputed by them unless forced to do so, in circumstances where they appear to have earned a net profit pre-tax for 1998/1999 of $862,151.00. The contention of the applicants that they had offered proposals which fell within the Commissioner's Guidelines dealing with requests for extensions of time to pay, and within the "Taxpayers Charter", was dealt with by letters from the respondent's solicitor to the applicants' solicitors dated 1 July 1999 and 5 July 1999. The reasons advanced in those letters for rejecting any proposal put forward by the applicants to that point in time, on their face, appear cogent and within a proper exercise of the discretion to refuse to grant an extension of the time to pay the outstanding tax. 53 For the reasons given earlier, the institution and maintenance of Q42 of 1999 was unreasonable and there was nothing unreasonable in the conduct of the respondent resisting the relief sought. There are no other reasons why the respondent should be deprived of costs consequent upon the dismissal of the application. 54 In the result, proceedings Q42 of 1999 will be dismissed for want of prosecution and costs will be ordered against the applicants.