HC Legal Pty Ltd v Deputy Commissioner of Taxation

Nature of review 4 It is uncontroversial that the application involves a rehearing de novo, at which the parties may adduce further evidence. The Court is to exercise its discretion afresh, unfettered by the decision of the Registrar: Martin v Commonwealth Bank of Australia (2001) 217 ALR 634 at [6] and [12]; Mazukov v University of Tasmania [2004] FCAFC 159 at [22]-[27]; Callegher v ASIC (2007) 239 ALR 749 at [46].

The facts 5 HCL is a small legal firm with two lawyers as its directors, Mr Francis Cahill and Mr Peter Hambros. It employs three full-time staff and two part-time staff.

The agreements 6 On 22 December 2011 HCL executed a Heads of Agreement with an entity related to the winemaker Mr Andrew Garrett, named Holy Grail Hospitality Pty Ltd (in its capacity as trustee for the Andrew Garrett Family Trust No 4 and associated entities) ("Holy Grail"). Mr Cahill deposes to the execution of the Heads of Agreement, but the agreement is not in evidence and I was not taken to its terms. 7 Mr Cahill also deposes that on 31 December 2011 HCL executed a Management Rights Legal Services Purchase Deed with Holy Grail to purchase from it the exclusive rights to provide legal services to Mr Garrett's associated entities ("Legal Services Purchase Deed"). This deed is also not in evidence and I was not taken to its terms. 8 It might be seen as unusual that a law firm would purchase the right to represent clients, but the more striking feature of the agreement is that this small law firm agreed to pay $45,000,000 (forty five million dollars) plus goods and services tax ("GST") for this right, a total of $49.5 million. 9 The acquisition of the exclusive right to provide legal services was to be paid for by HCL pursuant to a Vendor Finance Agreement dated 31 December 2011 between Holy Grail and HCL ("the Vendor Finance Agreement"). This agreement is in evidence. It describes Holy Grail as "the Lender" and HCL as "the Borrower". It includes the following preamble: Background A. On 22 December 2011 the parties to this agreement entered into a Heads of Agreement pursuant to which the Lender sold to the Borrower the exclusive rights for the provision of legal services to the Lender and all associated entities. B. Clause 6.1 of the Heads of Agreement provide that the Purchase Price is $45,000,000 (forty five million dollars) plus GST of $4,500,000 (four million and five hundred thousand dollars). C. In consequence of entering into the Heads of Agreement the Borrower became liable to pay the amount of $49,500,000. D. Clause 7.1 of the Heads of Agreement provides that the Purchase Price of $49,500,000 will be paid by the Borrower under a Vendor Finance Agreement. E. Clause 7.2 of the Heads of Agreement contains some of the terms of the Vendor Finance Agreement which include: a. The Lender's rights to have the loan under the Vendor Finance Agreement paid by the Borrower are to be limited to sixty per cent (60%) of the Distributable EBIT in any Payment Period; b. the liability of the Borrower to pay the loan under this Vendor Finance Agreement is limited to sixty per cent (60%) of the Distributable EBIT in any Payment Period; c. EBIT will be calculated at the commercial billing rates (exclusive of disbursements) in accordance with the Costs Agreement and Disclosure Statement entered into between the parties and which formed schedule 4 to the Heads of Agreement; d. Distributable EBIT refers to all amounts received by the Borrower from the Lender pursuant to the Heads of Agreement and excludes all disbursements; and e. Interest will accrue on the outstanding part of the Purchase Price and will be calculated at the rate of two per cent (2%) per annum. F. The Lender will lend moneys to the Borrower for the purpose of paying in full the Purchase Price for the exclusive rights acquired under the Heads of Agreement. G. The loan under this Vendor Finance Agreement is non-recourse with the Lender to have recourse against the Borrower only to the extent of sixty per cent (60%) of the Distributable EBIT in any Payment Period. If the amounts available to pay or satisfy the loan made under this Vendor Finance Agreement are insufficient to pay the loan made under this agreement in full by the End Date the Borrower is not, in any way whether directly or indirectly, liable for any deficiency. 10 The "End Date" is defined as "the date on which this Vendor Finance Agreement ends being 21 December 2021 or the date on which the Heads of Agreement ends or is otherwise terminated whichever is earlier." The "Payment Period" is defined as "the period of one month ending 7 days from the end of each month commencing Monday, 2 April 2012 and ending on 21 December 2021 or the date on which the Heads of Agreement is terminated, whichever is earlier." 11 I cannot be certain about the full effect of the agreements entered into as HCL has not provided to the Court either the Heads of Agreement or the Legal Services Purchase Deed. However, it appears that the agreements provide for HCL to acquire the exclusive right to provide legal services to Mr Garrett's associated entities for a term of 10 years, without advancing any monies at the time. Holy Grail instead finances the acquisition costs of $49.5 million and HCL is not required to repay that sum other than from 60% of any earnings it makes from providing the legal services. Otherwise the finance is provided by Holy Grail to HCL on the basis that Holy Grail has no recourse against HCL.

Payment of $4.491 million to HCL 12 On 8 February 2012 HCL submitted its Business Activity Statement ("BAS") for the period 1 October 2011 to 31 December 2011. In its BAS, HCL selected the option of itself calculating the GST and reporting quarterly. HCL stated that it had made a capital purchase in the sum of $49.5 million and claimed that the Commissioner was required to pay it input credits in the sum of $4.5 million for the GST paid on that purchase. After a reduction for other GST amounts owed by HCL, it claimed a payment of $4,491,954. 13 On 23 February 2012 the Commissioner electronically transferred the amount of $4,491,954 to HCL's operating account. 14 There is no evidence as to the present whereabouts of the $4,491,954 paid to HCL by the Commissioner. However, Dr Orow of counsel for HCL informed the Court that the funds have been utilised as follows: (a) to pay outstanding counsel's fees and the like; (b) for the directors of HCL to pay a deposit of about $500,000 for the acquisition of Seabrook Chambers (a well known barristers' chambers in Melbourne), in their name but acting for and on behalf of HCL; (c) to update equipment and employ two new staff; and (d) to make loans to the two directors of $2 million each, although each director has paid back $350,000 of these loans. 15 The Commissioner's concern regarding the transaction and the claim for input credits of $4.491 million was immediately apparent. The Commissioner's first response was to freeze HCL's bank accounts on 1 March 2012 as part of his attempts to recover the money.

The audit 16 On 5 March 2012 the Commissioner advised HCL by letter that it would be the subject of an audit. The letter relevantly stated: The audit will initially cover, but will not be limited to, the tax period 1 October 2011 to 31 December 2011. … We will be auditing the transactions used to prepare your activity statement for the period 1 October 2011 to 31 December 2011…

The assessment of 11 May 2012, and the notice of assessment 17 It is common ground that on 11 May 2012 the Commissioner made an assessment that $4.5 million GST was payable by HCL ("the 11 May 2012 Assessment"). There is though a dispute as to the tax period to which the assessment relates. 18 Ms Alyx Sudall, a public servant employed in the Commissioner's office, deposes that the Commissioner established and maintained a Running Balance Account ("RBA") in respect of HCL's primary tax debts. Annexure "AS-1" to her affidavit sworn 22 August 2012 is a copy of the RBA statement relating to HCL dated 22 August 2012 ("the RBA Statement"). The RBA Statement records that the 11 May 2012 Assessment related to the period 1 October 2011 to 31 December 2011. 19 However, on 11 May 2012 the Commissioner provided to HCL a notice of assessment ("the First Notice of Assessment"). The heading of the notice describes the period to which the assessment relates as being the period 1 January 2012 to 31 March 2012 (rather than the period 1 October 2011 to 31 December 2011). The schedule to the notice also describes the tax period as being the first quarter of 2012 rather than the last quarter of 2011. HCL contends that this illustrates that the Commissioner in fact made the assessment for the incorrect period, rather than the period to which its BAS related.

The penalty assessment 20 On 15 May 2012 the Commissioner also imposed a penalty of $2.25 million on HCL for a GST shortfall relating to a statement made for the period ended 31 December 2011 ("the Penalty Assessment"). On the same day the Commissioner provided a notice of assessment to HCL setting out the penalty ("Penalty Assessment Notice").

The objection 21 On 19 June 2012 HCL lodged its objection to the 11 May 2012 Assessment and the Penalty Assessment ("objection").

The statutory demand 22 On 4 July 2012 the Commissioner served the statutory demand which is the subject of these proceedings. The demand seeks payment of the sum of $6,946,444.46 being the RBA deficit debt as at that date. The RBA deficit debt is made up of the 11 May 2012 Assessment of $4.5 million, the Penalty Assessment of $2.25 million and interest charges.

The second notice of assessment 23 On 11 September 2012 the Commissioner sent a letter to HCL enclosing another notice of assessment ("the Second Notice of Assessment"). The letter sought to address the fact that the wrong tax period was specified in the First Notice of Assessment. The Commissioner relevantly stated: We have enclosed a Notice of Assessment for the tax period 01/10/2011 to 31/12/2011 relating to the audit we completed on 11 May 2012. The Notice of Assessment that issued on 11 May 2012 contained a typographical error with respect to the period for which it was issued. (Emphasis added.) 24 On 17 September 2012 Mr Brett Swanson of the Commissioner's office sent an email to HCL which relevantly provided: As you will no doubt be aware by now, the notice of assessment relating to the audit we completed on 11 May 2012 was incorrect in that it specified that it was for the tax period 01/01/2012 to 31/03/2012 when it should have been for the tax period 01/10/2011 to 31/12/2011. Unfortunately you can't object against a notice - you can only object against an assessment therefore it's all the more important that we clearly set out the correct position: • The assessment was for the tax period ended 31 December 2011 notwithstanding the error in the Notice of Assessment; • The error in the Notice of Assessment does not invalidate the assessment; • The objection has been treated as an objection against the assessment for the tax period ended 31 Dec 2011 notwithstanding your objection notice also refers to the incorrect tax period; • The objection decision under s 14ZY will be in respect of the assessment for the tax period ended 31 Dec 2011; • Your notice under s 14ZYA will not be invalidated. With that in mind can you please confirm in writing, via email will suffice, to say that you were/are objecting to the Assessment for the tax period 01/10/2011 to 31/12/2011. The affidavits filed do not record a response by HCL. 25 Mr Cahill also deposes to other events which primarily go to the Commissioner's conduct in seeking to recover the monies paid. I will set out these events when dealing with the application under s 459J of the Act.

Whether the statutory demand should be set aside because of a "genuine dispute" 26 The Court may set aside a statutory demand on the basis that there is a genuine dispute about the existence or amount of the debt to which the demand relates: s 459H(1)(a) and (3) of the Act. 27 Because of the statutory protection afforded to debts arising from tax assessments, in the hearing before the Registrar, HCL did not contend that there was a genuine dispute under s 459H. In Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd (2008) 237 CLR 473 ("Broadbeach") at 495 to 496, [57] to [58], the High Court per Gummow A-CJ, Heydon, Crennan and Kiefel JJ (with whom Kirby J generally agreed) said: [57]…Section 459G applications by taxpayers are not Pt IVC proceedings and production by the Commissioner of the notices of assessment and of the GST declarations conclusively demonstrates that the amounts and particulars in the assessments and declarations are correct (Administration Act, Sch 1, s 105-100; Assessment Act, s 177(1).). That being so, the operation of the provisions in the taxation laws creating the debts and providing for their recovery by the Commissioner cannot be sidestepped in an application by a taxpayer under s 459G of the Corporations Act to set aside a statutory demand by the Commissioner. [58] The matter was explained, with respect correctly, by Williams J in Bluehaven Transport Pty Ltd v Deputy Federal Commissioner of Taxation (2000) 157 FLR 26 at 32. The use by the Commissioner of the statutory demand procedure in aid of a winding up application is in the course of recovery of the relevant indebtedness to the Commonwealth by a permissible legal avenue. The phrase "may be recovered" in ss 14ZZM and 14ZZR of the Administration Act applies to the statutory demand procedure. That state of affairs places the existence and amounts of the "tax debts" outside the area for a "genuine dispute" for the purposes of s 459H(1) of the Corporations Act. 28 However, before me HCL contends that there is a genuine dispute under s 459H. HCL argues that the Commissioner has conceded that the First Notice of Assessment is flawed and invalid. It points to the Commissioner's email of 17 September 2012 which contains the concession that the First Notice of Assessment was "incorrect", and to the fact that the Commissioner issued the Second Notice of Assessment to address the error. Counsel for HCL describes this letter as a "clear and unequivocal acknowledgement by the Commissioner that the assessment on which he relied to issue the statutory demand was incorrect." 29 HCL also relies on a sentence in the Second Notice of Assessment which states: Your net amount has been changed from - $4,491,954 to $8046. HCL argues that this shows that the Commissioner has made an adjustment to the tax payable that negates the original assessment made on 11 May 2012 on which the statutory demand was predicated. 30 I do not accept these contentions. Firstly, HCL did not take me to any entry in the RBA to support its argument that the Commissioner had in fact discharged the assessment made on 11 May 2012. The Commissioner put forward the RBA Statement as evidencing there having been no adjustment which operated to reduce the assessment made on 11 May 2012. 31 More significantly, the contentions are misconceived because they equate an "assessment" with a "notice of assessment". The two are not the same. In The King v Deputy Federal Commissioner of Taxation for South Australia; Ex Parte Hooper (1926) 37 CLR 368 at 373 Isaacs J explained: An "assessment" is not a piece of paper: it is an official act or operation; it is the Commissioner's ascertainment, on consideration of all relevant circumstances, including sometimes his own opinion, of the amount of tax chargeable to a given taxpayer. When he has completed his ascertainment of the amount, he sends by post a notification thereof called "a notice of assessment."… But neither the paper sent nor the notification it gives is the "assessment." That is and remains the act or operation of the Commissioner. 32 The distinction between an "assessment" and a "notice of assessment" is made clear in the Taxation Administration Act 1953 (Cth) ("the Administration Act"). For example, subs 105-5(1)(a) of Schedule 1 of the Administration Act relevantly provides: The Commissioner may at any time make an assessment of: (a) your net amount, or any part of your net amount, for a tax period; … Section 105-20(1) of the Administration Act then provides: The Commissioner must give you notice of an assessment as soon as practicable after the assessment is made. However, failing to do so does not affect the validity of the assessment. 33 The Commissioner contends, and I accept, that the evidence shows that the 11 May 2012 Assessment related to the last quarter of 2011, and not to the first quarter of 2012. This is clear both from the entry for 11 May 2012 in the RBA Statement and also from the Commissioner's letter of 5 March 2012 which identifies the audit period as the last quarter of 2011 (although not limiting the scope of the audit to that period). 34 While the First Notice of Assessment incorrectly specified the tax period to which it related this did not affect the assessment itself. For example, s 105-20(1) provides that the assessment would remain valid even if notice of the assessment was not given at all. 35 It is, of course, of concern that an incorrect notice of assessment might operate to mislead a taxpayer. However, in the present case there can be no suggestion that HCL was misled by the First Notice of Assessment. It was clear from the outset that the audit and the subsequent assessment related to the purported acquisition of rights for $49.5 million on 31 December 2011, and the $4.491 million in input tax credits claimed by HCL in its BAS for the last quarter of 2011. That HCL was not in fact misled is clear in its objection and its submissions. 36 In any event, the Commissioner corrected the error in the First Notice of Assessment by way of the Second Notice of Assessment, which was provided prior to the hearing of the application. The existence of a genuine dispute must be determined at the time the Court hears the application: Andi-Co Australia Pty Ltd v Meyers [2004] FCA 1358 at [16] per Heerey J; West International Pty Ltd v Ultradrilling Pty Ltd [2008] FCA 1443 at [7] per Gordon J. 37 The Commissioner also has the benefit of s 8AAZI of the Administration Act. This section provides: (1) The production of an RBA statement: (a) is prima facie evidence that the RBA was duly kept; and (b) is prima facie evidence that the amounts and particulars in the statement are correct. (2) In this section: RBA statement includes a document that purports to be a copy of an RBA statement and is signed by the Commissioner or a delegate of the Commissioner or by a Second Commissioner or Deputy Commissioner. 38 Ms Sudall produced a copy of the RBA Statement and she deposes that it is a document under the hand of the Deputy Commissioner of Taxation. HCL did not contend otherwise. Section 8AAZI provides that this constitutes prima facie evidence that the amounts and particulars in the RBA Statement are correct. One of the particulars is that the assessment made on 11 May 2012 relates to the tax period ended 31 December 2011. 39 Various other provisions of the Administration Act operate such that the amounts set out in the RBA Statement are amounts which are now due and payable by HCL. Subsection 8AAZH(1) provides: If there is an RBA deficit debt on an RBA at the end of a day, the tax debtor is liable to pay to the Commonwealth the amount of the debt. The amount is due and payable at the end of that day. Section 255-5 of Schedule 1 provides: An amount of a tax-related liability that is due and payable: (a) is a debt due to the Commonwealth; and (b) is payable to the Commissioner. Section 255-1 of Schedule 1 provides: A tax-related liability is a pecuniary liability to the Commonwealth arising directly under a taxation law (including a liability the amount of which is not yet due and payable). 40 The RBA Statement evidences that HCL's debt to the Commissioner as at 4 July 2012 totalled $6,946,444.46 - which is the amount of the statutory demand. 41 The Commissioner also seeks to rely upon s 350-10 of Schedule 1 of the Administration Act and its predecessor provision. This section provides that the production of a notice of assessment is conclusive evidence that: (a) the assessment was properly made; and (b) except in proceedings under Part IVC on a review or appeal relating to the assessment - the amounts and particulars of the assessment are correct. The Commissioner argues that this means that the First Notice of Assessment, the Penalty Assessment Notice and the Second Notice of Assessment are all conclusive evidence that the underlying assessment was properly made, and that the amounts and particulars of the assessment are correct. Insofar as the First Notice of Assessment is concerned, I am not persuaded that in the circumstances of this case s 350-10 operates as the Commissioner contends. However it is unnecessary to decide this question given my conclusions above. 42 In Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd (1997) 76 FCR 452 at 462 to 464, a Full Court comprised of Northrop, Merkel and Goldberg JJ reviewed the authorities as to the concept of "genuine dispute". Their Honours noted at 464: In our view a "genuine" dispute requires that: • the dispute be bona fide and truly exist in fact; • the grounds for alleging the existence of a dispute are real and not spurious, hypothetical, illusory or misconceived. HCL's contention raises a spurious rather than bona fide or real ground of dispute. I do not accept that the error in the First Notice of Assessment, or its correction in the Second Notice of Assessment, gives rise to a genuine dispute under s 459H of the Act as to the existence or amount of the debt to which the statutory demand relates. The assessment itself is unchanged.

Whether the statutory demand should be set aside for some other reason 43 The Court may also set aside a statutory demand on the basis that there is "some other reason" which would justify the exercise of its discretion to do so: s 459J(1)(b) of the Act. HCL argues that an exercise of the discretion is appropriate because of the Commissioner's conduct, and because it has disputed the assessment and has a reasonably arguable case. 44 In Hoare Bros Pty Ltd v Deputy Commissioner of Taxation (1995) 19 ACSR 125 at 139 per Black CJ, Einfeld and Sackville JJ, the Full Court explained that while it would be unwise to attempt to mark out the limits of the discretion conferred by s 459J(1)(b), the discretion might be exercised where it is "shown that the Commissioner's conduct was unconscionable, was an abuse of process, or had given rise to substantial injustice." The discretion is of broad compass (Arcade Badge Embroidery Co Pty Ltd v Deputy Commissioner of Taxation (2005) 58 ATR 456 at [27] per Crispin P, Gray and Marshall JJ), and I do not consider that the Court in Hoare Bros was seeking to exhaustively set out the situations it comprehends. 45 HCL contends, and I accept, that the discretion may be exercised in favour of a company even without showing substantial injustice would otherwise be caused: Hoare Bros at 139. It also relies on the observation of the Queensland Court of Appeal in Neutral Bay Pty Ltd v Deputy Commissioner of Taxation [2007] QCA 312 ("Neutral Bay") at [83] per Keane JA (with whom Holmes and Muir JJA agreed) that it is open to a court to conclude that there is reason to set aside a statutory demand without finding unconscionable conduct or unfairness on the part of the Commissioner. While I accept that this is so, this observation must be considered in light of the comments of the High Court in Broadbeach which overturned the decision in Neutral Bay. 46 HCL argues that the existence of dispute proceedings may be relevant to the exercise of the discretion. In this regard it points to decisions including Moutere v Deputy Commissioner of Taxation (2000) 34 ACSR 533 at 543, [55] per Austin J; Re Softex Industries Pty Ltd [2001] QSC 377 at [67] per Mullins J; Willemse Family Company Pty Ltd v Deputy Commissioner of Taxation (2002) 172 FLR 70 at [42] per Holmes J (as his Honour then was); KW & KM Quinn Investments Pty Ltd v Deputy Commissioner of Taxation [2003] QSC 336 at [6]; and Neutral Bay at [83]. 47 However in Broadbeach, subsequent to these decisions, Gummow A-CJ, Heydon, Crennan and Kiefel JJ observed at 496 to 497, [59] to [61]: [59] Something should be added respecting the additional alternative ground found in para (b) of s 459J(1) of the Corporations Act. That was that the statutory demands were to be set aside because the Court of Appeal and the primary judge were "satisfied" that, although there were no defects in the demands, there was "some other reason" to set them aside. [60] It first should be observed that the hypothesis in the present appeals must be… that there is no "genuine dispute" within the meaning of s 459H(1). Both the primary judge and the Court of Appeal emphasised the importance of the disruption to taxpayers, their other creditors and contributories that would ensue from a winding up, together with the absence of any suggestion that the revenue would suffer actual prejudice if the Commissioner were left to other remedies to recover the tax debts. But these considerations are ordinary incidents of reliance by the Commissioner upon the statutory demand system. [61] ….The "material considerations" (House v The King (1936) 55 CLR 499 at 505) which are to be taken into account, on an application to set aside a statutory demand, when determining the existence of the necessary satisfaction for para (b) of s 459J(1) must include the legislative policy, manifested in ss 14ZZM and 14ZZR of the Administration Act, respecting the recovery of tax debts notwithstanding the pendency of Pt IVC proceedings. (Emphasis added.) 48 Section 14ZZM of the Administration Act provides: 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. Section 14ZZR provides: The fact that an appeal 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 appeal were pending. I consider that the legislative policy in ss 14ZZM and 14ZZR is that tax assessments are to be paid, even though a review or appeal is on foot. 49 In Kalis Nominees Pty Ltd v Deputy Commissioner of Taxation (1995) 31 ATR 188 at 193 Olney J reached a similar view as to the legislative policy and stated: The legislative policy of the tax law is clear enough. Once tax is due and payable it may be recovered from the taxpayer notwithstanding that the taxpayer has sought to exercise his rights of review or appeal under Pt IVC of the Taxation Administration Act. The policy of the law would be defeated if a demand were set aside under s 459J(1)(b) simply because a review of an objection decision is pending. A taxpayer must, in the context of a case of this nature, demonstrate more than the fact that he disputes his liability for the tax as assessed and that he is actively pursuing his remedies. It is both unnecessary and undesirable to endeavour to list the circumstances which would justify the exercise of the discretion under s 459J(1)(b) except to say that in the case in which the Commissioner is not shown to have acted oppressively or to have treated the applicant in a manner different from other taxpayers in a similar position, it is not appropriate that the discretion to set aside the demand should be exercised. Section 459J(1)(b) does not provide an occasion for the Court to express its views on the reasonableness or otherwise of the taxation legislation. The criticisms of the approach in Kalis made in Neutral Bay at [83] were rejected by the High Court in Broadbeach. 50 The Full Court reached the same view of legislative policy in Hoare Bros at 133 (albeit in the context of a genuine dispute). Their Honours said: The structure of the ITAA strongly suggests a legislative intent that the issue and service of a notice of assessment (after expiry of the appropriate period) creates a debt that is immediately due and payable, and that the assessment can be challenged only in the manner provided for by the TAA, Pt IVC…In the meantime, however, the tax must be paid. 51 In response, HCL points to the Commissioner's concession in Broadbeach, commented on at 484, [13], where their Honours said: Notwithstanding the presumption of insolvency that would apply under s 459C(2)(a), in written and oral submissions to this Court the Commissioner made an important concession. This was that upon the hearing of such winding up applications the court might properly have regard to whether the taxpayer had a "reasonably arguable" case in proceedings under Pt IVC of the Administration Act, if those proceedings then still be on foot; questions of the kind canvassed in General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 might arise. It argues that there is no reason why the existence of a "reasonably arguable" case cannot be taken into account at the statutory demand stage, rather than at the winding up stage as suggested by their Honours. 52 I do not accept this contention. The High Court said in Broadbeach at 497,[62], that …Such consideration [of the time which has elapsed and the progression of the Part IVC proceedings towards determination], if it were supported by evidence of the state of progression of the Pt IVC proceedings, would be relevant in the operation of Pt 5.4 of the Corporations Act, if at all, at the later stage of the hearing of any winding up application." The thrust of the High Court's observations is that the existence of Part IVC proceedings is of little relevance to the exercise of the discretion under s 459J(1)(b), although the pendency of those proceedings may be relevant at the winding up stage. Of course, this matter is not at that stage. I also have no evidence of the pendency of any Part IVC application. 53 In any event, it is impossible for me to be satisfied at this stage that HCL has a reasonably arguable case. HCL submits that its acquisition of the right to provide legal services was a "creditable acquisition" within the meaning of The New Tax System (Goods and Services Tax) Act 1999 (Cth) ("GST Act"), and that it was therefore entitled to input tax credits in an amount equal to the GST payable on the supply of the thing acquired. However it did not develop its submissions in this regard at all. 54 Little of the information which may have established this proposition was provided by HCL, and its submissions did not address it in any detail. In fact, no application under Part IVC had been commenced as at the date of hearing, although I was advised by counsel for HCL that such an application would be issued shortly. I am unable to make any assessment as to whether HCL has a "reasonably arguable" case in these circumstances.

The conduct of the Commissioner 55 Leaving aside the issue as to the pendency of any application under Part IVC, the remaining question is whether the Commissioner has acted in a way which justifies the exercise of the discretion. The type of conduct which might enliven the discretion extends, but is not limited to, conduct by the Commissioner which is unconscionable, oppressive, an abuse of process, or gives rise to substantial injustice. HCL points to a number of events in support of its argument that the Commissioner's conduct falls within such descriptions.

Freezing of HCL's accounts 56 Shortly following the payment of $4.491 million into HCL's account the Commissioner took steps to freeze HCL's accounts, as well as the personal account of Mr Cahill. A delegate of the Commissioner took this step on 1 March 2012 but the freeze was lifted the following day following threat of legal action. Emails within the Commissioner's office indicate that the relevant officers considered that they had the power to freeze accounts when there was prima facie evidence of fraud. They then appeared to accept that there was no prima facie evidence of fraud in the present case. 57 While likely embarrassing and inconvenient to HCL and Mr Cahill the freezing of the accounts was of very short duration.

Allegation of breach of undertaking 58 HCL contends that the Commissioner breached an agreement with HCL in issuing the statutory demand as it did on 4 July 2012, rather than waiting until after 12 July 2012. Having read the emails passing between the Commissioner and HCL, I consider that the agreement was for the Commissioner to defer recovery proceedings until 12 July 2012 so as to allow HCL more time within which to lodge its objection. The Commissioner refused several requests by HCL that it defer recovery proceedings until after the objection and any appeals had been dealt with. 59 On 19 June 2012 HCL lodged its objection to the assessments. The purpose of the extension of time having been met, it appears that the Commissioner felt at liberty to commence recovery proceedings, and did so on 4 July 2012. HCL contends that the Commissioner's actions in this regard are oppressive and an abuse of power. I do not agree and can see little wrong in the Commissioner commencing recovery proceedings once he had seen and considered the objection. In any event, even if the Commissioner did issue the statutory demand eight days too soon, HCL was completely unable to identify any prejudice to it by reason of this.

Refusal to agree to defer recovery 60 Mr Cahill deposes the Commissioner refused to withdraw the statutory demand and defer recovery proceedings until the determination of its objection and any appeals. The correspondence shows that the Commissioner refused to consider doing so unless HCL was prepared to provide acceptable security for the debt. HCL declined to offer such security, as did its directors Mr Cahill and Hambros. In the circumstances of this case I consider the Commissioner's request for some security was a sensible compromise and I can see nothing oppressive or unfair in his conduct in this regard.

The garnishee notice 61 Mr Cahill also complains that the Commissioner issued a garnishee notice on 4 July 2012 directed to HCL's bank for any money held in HCL's accounts up to the total of the statutory demand ("Garnishee Notice"). 62 Pursuant to this notice $20,260.46 was taken from the operating account of HCL and remitted to the Commissioner. HCL argued that the Garnishee Notice was illegal as it deprived it of its ability to conduct its ordinary business. In response to its complaints the notice was rescinded on 12 July 2012. However, the $20,260.46 taken from HCL's operating account had already been remitted to the Commissioner and could not be returned. 63 It is noteworthy that the Garnishee Notice did not differentiate between HCL's operating accounts and its trust account and one of the account numbers specified in it was a trust account. However no monies were taken from HCL's trust account through this process. Mr Cahill contends though that $10,000 of the $20,260.46 taken from the operating account belonged to him personally. 64 Again, while embarrassing and inconvenient for HCL, the garnishee operated for a short period only and yielded only a small sum in comparison to the amount in dispute. Further, contrary to HCL's complaint to the Commissioner that it was unable to operate its businesss, it seems plain from the information as to the whereabouts of the $4.491 million paid that there were ample funds available.

No bad faith alleged 65 Mr Cahill deposes that HCL suspects that the assessments were tainted by bad faith. HCL made several requests under the Freedom of Information Act 1982 (Cth) for the Commissioner's documents relating to the freezing of accounts and the audit, and received documents in response. HCL stated that it reviewed the documents. Although taken to a raft of correspondence between the parties, I was not taken to any document which evidenced any bad faith on the part of the Commissioner. I infer that no such documents were found by HCL. 66 By issuing the statutory demand without waiting for resolution of the objection the Commissioner did not attempt to subvert the statutory scheme. His approach is consistent with a scheme which expressly recognises that monies may be recovered while objections and appeals are pending. There was no breach of agreement by the Commissioner not to issue a statutory demand before 12 July 2012, but even if a breach could be established it was not productive of any detriment. The Commissioner has vigorously pursued recovery as he is entitled to do so. He sought both to freeze bank accounts and garnishee monies from accounts, but both attempts were short lived. There must also be a question as to whether the Commissioner's use of legal recovery methods available should be held against him. HCL had remedies available to it in response which it utilised. 67 In all the circumstances of this case I do not consider that the Commissioner's actions, considered individually or collectively, are unconscionable, oppressive, or abusive or productive of substantial injustice. I do not consider that the various events relied on by HCL justify the exercise of my discretion. 68 I note too that, notwithstanding the actions complained of, HCL and its directors still have the benefit of the monies paid 11 months ago. 69 I accept that the requirement to pay the assessments now may be productive of serious disruption to HCL's business, and even that it may be unable to continue to trade. In this regard there was a flavour to HCL's submissions that the fact that it trades as a law firm puts it in a different position to other companies facing a statutory demand. It cannot be that there is one rule for law firms and another for other companies. 70 While there is no evidence that the revenue would suffer prejudice if the Commissioner were left to other remedies to recover the tax debts, as the High Court put it in Broadbeach, "these considerations are ordinary incidents of reliance by the Commissioner upon the statutory demand system."

Conclusion 71 In all the circumstances the application to set aside the statutory demand must be dismissed. HCL must pay the costs of and incidental to the application, including the costs of the hearing before the registrar. I certify that the preceding seventy-one (71) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Murphy.