Markit P/L & Ors v Commissioner of Taxation

[1] The applicant defendants apply to strike out a number of paragraphs of the plaintiffs' claim and statement of claim pursuant to r 171 of the Uniform Civil Procedure Rules 1999 (Qld) on the basis that no reasonable cause of action is pleaded or alleged against the first defendant, the Federal Commissioner of Taxation. For convenience, I will refer to the Commissioner and the Deputy Commissioner as "the Commissioner". It is alleged against him that, in breach of s 52 of the Trade Practices Act 1974 ("the Act"), he engaged in misleading or deceptive conduct in the course of negotiations with the plaintiffs, which resulted in the entering into of a Deed of Settlement on 7 July 2004.

[2] The central contention of the defendants is that s 52 has no application because the conduct complained of was not engaged in "in trade or commerce" within the meaning of those words in s 52. A related contention is that s 2A of the Act, which makes the provisions of the Act binding on the Crown in right of the Commonwealth insofar as it "carries on a business", has no application as the Commissioner, relevantly, carried on no business and is not alleged to have done so.

[3] The allegations in the statement of claim may be summarised as follows.

[4] The third plaintiff, Michael Dempsey, and the fourth plaintiff, Otto Wilhelm, were directors of the first and second plaintiffs. The Commissioner instituted separate proceedings in the District Court ("the District Court proceedings") against Dempsey and Wilhelm for recovery of penalties imposed in consequence of alleged breaches of their respective duties as directors of the first plaintiff in respect of PAYE deductions. The Commissioner claimed that each of the first and second plaintiffs had defaulted in the payment of tax instalments, superannuation guarantee levies, penalties and interest.

[5] Creditors of each of the companies, at separate meetings, resolved to execute deeds of company arrangement. In September 2003, the Commissioner commenced Supreme Court proceedings ("the Supreme Court proceedings") against each of the first and second plaintiffs, seeking an order that the Deeds of Company Arrangement entered into by the companies be set aside and that the companies be wound up.

[6] In June 2004, a mediation was held in respect of the Supreme Court proceedings. Negotiations continued after the mediation, in the course of which draft deeds of settlement were produced and considered by the parties.

[7] Each of the second to seventh draft deeds, inclusive, contained a clause imposing an obligation on the Commissioner to "return to Wilhelm and Dempsey such documents (originals and copies) as are held by the Commissioner which are the property of [the plaintiffs] and which were obtained or retained for the purpose of or in connection with the Markit Proceedings, the Urinda Proceedings and the District Court proceedings".

[8] The seventh draft deed of settlement was forwarded by the solicitors for the plaintiffs to the solicitors for the Commissioner on 5 July 2004. Also on that day, the solicitors for the plaintiffs requested of the solicitors for the Commissioner that they provide an undertaking that they held the subject documents on behalf of the Commissioner.

[9] The Deed of Settlement was executed on 7 July 2004. The Deed, by clause 2, provided that the Commissioner would, upon service of notices of discontinuance of the company and District Court proceedings, be entitled to collect from the Commissioner's solicitors all of the subject documents.

[10] In a letter dated 7 July 2004, the Commissioner's solicitors gave an undertaking that as at that date they held the subject documents on behalf of the Commissioner.

[11] On the same day the plaintiffs, in compliance with their obligations under the Deed, paid $600,000 into the trust account of the solicitors for the Commissioner and notices of discontinuance were delivered by the solicitors for the Commissioner to the plaintiffs' solicitors. Also on 7 July 2004 a Federal Agent obtained a warrant to search the premises of the Commissioner's solicitors.

[12] In the course of the warrant's execution on the morning of 8 July 2004, the subject documents were seized, purportedly pursuant to the powers contained in the warrant.

[13] The warrant was sought and obtained at the request of one or more of the servants or agents of the Commissioner on a date on or prior to 7 July 2004. The Australian Federal Police were not undertaking any investigations of the commission of any alleged offences under any Commonwealth legislation resulting in the issuing of the warrant.

[14] The Commissioner therefore failed and refused to make the subject documents available for collection by the plaintiffs or their solicitors.

[15] The plaintiffs terminated the Deed of Settlement by letter dated 28 July 2004.

[16] By virtue of the fact that the second to seventh draft deeds included the provision referred to in paragraph [7] above and by the undertaking given by the solicitors the Commissioner implicitly represented that:

"...it intended to perform the obligation imposed by the terms of clause 2(d) of the second draft deed or clause 2(c) of the versions of the draft deed thereafter and would return the plaintiffs' documents to the plaintiffs if an agreement was made in those terms; and

...that he would not, by himself or his servants or agents, take steps to prevent or make impossible performance of those obligations."

[17] The plaintiffs allege that the making of the representations constituted conduct by the Commissioner "that was misleading and deceptive contrary to s 52 of the Trade Practices Act".

[18] The plaintiffs also allege that the representations were made by the Commissioner knowing them not to be true or recklessly not caring whether they were true or false.

Was the Commissioner carrying on business so as to attract the operation of s 2A of the Act?

[19] In order to succeed against the Commissioner on the s 52 claim, the plaintiffs must establish that the Crown in right of the Commonwealth is bound by the Act. The Commonwealth Crown is bound by operation of s 2A of the Act "in so far as it carries on a business, either directly or by an authority of the Commonwealth".

[20] The statement of claim is defective in that it alleges a breach of s 52 but does not plead the material facts relied on to sustain that allegation. In particular, it is not pleaded that the Commissioner carried on a business and that the representations were made in trade or commerce. Rule 149(2), and general principles of pleading, require that material facts of this nature be pleaded.

[21] It is desirable, however, that the strike out application be determined on the merits of the substantive challenges to the pleading rather than on narrow grounds which can be readily cured by the making of minor additions to the pleaded allegations.

[22] The Commissioner argues that the plaintiffs do not and cannot identify any business being carried on by the Commissioner. Particulars in that regard were sought but not supplied; the plaintiffs asserting, inter alia, that disclosure was required in order to enable them to respond to the request. They further asserted that the request was not a proper one.

[23] As matters stand, the allegations of carrying on business must be sustained by reference to the Supreme and District Court proceedings described above. The Commissioner concedes that the phrase "carry on a business" has wide import.[1] The concession is properly made. It is stated in 47 Halsburys Laws of England 4th ed, paras 6 and 7, that:

"'Business' is a wider term than 'trade', and not synonymous with it, and means almost anything which is an occupation as distinguished from a pleasure... Profit, or the intention to make profit, is not an essential part of the legal definition of a trade or business; and payment or profit does not constitute a trade or business unless the particular context so requires; and payment or profit does not of itself constitute a trade o business."

[24] The breadth of meaning attributed to the concept of "business" is further illustrated in cases such as Rolls v Miller[2] and Grainger & Son v Gough.[3] As the plaintiffs' counsel points out, "business" is defined inclusively in subsection 4(1) of the Act as including "a business not carried on for profit".

[25] The Commissioner relies on s 2C of the Act, which provides:

"(1) For the purposes of s 2A and 2B, the following activities do not amount to carrying on a business:

(a) imposing or collecting:

(i) taxes; or

(ii) levies; or ..."

[26] In the Supreme Court proceedings the Commissioner was seeking to set aside the Deeds of Company Arrangement so that the companies could be wound up to facilitate the recovery of taxes, superannuation guarantee levies and penalties which the companies had failed to pay. The plaintiffs contend that the Supreme Court proceedings should be categorised as ones "concerned with the setting aside of Deeds of Company Arrangement and the winding up of companies". It is argued that the recovery of moneys by means of a dividend in a winding up could not be described as a "tax" and therefore the proceedings cannot be said to be concerned with the collection of tax.

[27] I do not accept that "collecting taxes" in s 2C(1) is limited to the issuing of notices of assessment and the receipt of moneys paid in consequence of the assessment or in response to a demand or demands made after the taxpayer's failure to pay by the due date. Recourse to legal proceedings by the Commissioner for the recovery of taxes due by a taxpayer does not warrant the conclusion that the Commissioner's activities can no longer be regarded as the collection of taxes. Such litigation is simply the means by which the taxes are collected. The character of the Commissioner's activities in this regard is not changed because the process of collection is rendered more complex and indirect through a taxpayer's failure to pay. The same observation applies where, in order to collect taxes which are due and owing by a corporate taxpayer, the Commissioner causes the taxpayer to be wound up.

[28] Section 2C(1), however, cannot provide an answer to the plaintiff's contentions as the District Court proceedings were for claims for recovery of penalties imposed on the defendant directors pursuant to Part VI, Division 9 of the Income Tax Assessment Act 1936 (Cth). Such a penalty is not a tax.[4]

[29] It was argued on behalf of the Commissioner that the collection of taxes, penalties and superannuation guarantee charges (pursuant to the Superannuation Guarantee Charge Act 1992 (Cth) and the Superannuation Guarantee (Administration) Act 1992 (Cth)) were functions which were inherently governmental in nature and that the undertaking of those functions has been regarded traditionally as not carrying on business. In that regard, reliance was placed on JS McMillan Pty Ltd v Commonwealth[5] and Village Building Co v Canberra International Airport Pty Ltd (No 2).[6]

"(4) While repetition, systems and regularity are indicia of carrying on a business, they are not on their own sufficient to compel a conclusion that such is the case: Sirway Asia Pacific Pty Ltd v Commonwealth of Australia [2002] FCA 1152 at [60]. There must be present some element of commerce or trade such as a private citizen or trader might undertake: R T & Y E Falls Investments at [131].

(5) A business activity is an activity which takes place in a business context and which, of itself, bears a business character: Paramedical Services Pty Ltd v Ambulance Service (NSW) [1999] FCA 548 at [86], [88]; Plimer at 308. Where an activity is engaged in by the Commonwealth or a Commonwealth authority the purpose of the activity will be a relevant consideration: R T & Y E Falls at [129]. An activity is unlikely to be characterised as having a business character, or to take place in a commercial context, where it involves the carrying out of a regulatory or governmental function in the interests of the community or the performance of a statutory duty in respect of which fees are charged: Mid Density Development Pty Ltd v Rockdale Municipal Council [1992] FCA 634; (1992) 39 FCR 579; Paramedical Services at [89]; J S McMillan at 355; Saitta Pty Ltd v Commonwealth [2001] VSC 170; (2001) 162 FLR 35 at 40; at [134]."

[31] I respectfully adopt the above statement of principle. There was an unsuccessful appeal from the decision in which the issue litigated was whether the conduct of the resp corporation was "in trade or commerce".

[32] Useful discussion of the application of the concept of "carrying on a business" in the context of governmental activity is to be found in Town Investments Ltd v Department of the Environment.[8] In his reasons, Lord Morris of Borth-y-Gest agreed with the views expressed by Buckley LJ in the Court of Appeal[9] that "... to carry on some part of the business of government is something different from carrying on 'a business'" and with Buckley LJ's observation:

"I do not think that in any ordinary sense of the English language Admiralty or the Treasury or the Home Office or the Foreign Office can be said to carry on a business."[10]

[33] He agreed also with the opinion of Sir John Pennycuick that:

"The expression 'a business' convey upon its ordinary meaning the notion of a distinct enterprise (not necessarily for profit) having distinct objects, distinct management and distinct assets and liabilities. It seems to me that only upon an impermissibly loose use of the words can one say that the vast and amorphous operations of the Crown or of a single government department constitue 'a business' upon the ordinary meaning of that expression." (p.1145.)[11]

[34] Lord Morris was in the minority but the majority view was based on the breadth of meaning to be given to the words, "a business", having regard to an extended statutory definition and the intendment of the subject legislation, not on the ordinary meaning of the expression.

[35] There are no pleaded allegations which give rise to an argument that the Commissioner in any relevant respect was doing other than collecting taxes, levies and penalties pursuant to his statutory obligations. In so doing he was performing functions which are quintessentially governmental.

Was the Commissioner's conduct engaged in "in trade or commerce"?

[36] The above passage from the reasons in Village Building Co Ltd relates, principally, to the question of whether the conduct of the second respondent was engaged in as part of "the carrying on of a business" for the purposes of s 2A of the Act. On appeal, it was held that the corporation which was "responsible for the conduct of the Airport's business in accordance with the requirements of the Airports Act 1996 (Cth)"[12] had not engaged in conduct "in trade or commerce" within the meaning of those words of the Trade Practices Act. The relevant conduct was the obtaining and dissemination of information relating to aircraft noise and seeking to influence public opinion and political and governmental decisions in relation to land use and planning. The Court concluded, in reliance on Concrete Constructions (NSW) Pty Ltd v Nelson,[13] that "in order to be "in trade or commerce" the "conduct must have occurred in the course of a trading or commercial relationship or otherwise to bear a trading or commercial character.[14]

[37] The meaning of the concept "in trade or commerce" in s 52 of the Act is explained in the following passage from the joint judgment in Concrete Constructions (NSW) Pty Ltd v Nelson:[15]

"It is well established that the words 'trade' and 'commerce', when used in the context of s 51(i) of the Constitution, are not terms of art but are terms of common knowledge of the widest import. The same may be said of those words as used in s.52(1) of the Act. ...The real problem involved in the construction of s.52 of the Act does not, however, spring from the use of the words "trade or commerce". It arises from the requirement that the conduct to which the section refers be 'in' trade or commerce...

The phrase 'in trade or commerce' in s 52 has a restrictive operation. It qualifies the prohibition against engaging in conduct of the specified kind. As a matter of language, a prohibition against engaging in conduct 'in trade or commerce' can be construed as encompassing conduct in the course of the myriad of activities which are not, of their nature, of a trading or commercial character but which are undertaken in the course of, or as incidental to, the carrying on of an overall trading or commercial business. ...

...conduct which is itself an aspect or element of activities or transactions which, of their nature, bear a trading or commercial character ... 'in trade or commerce' refer to 'the central conception' of trade or commerce and not to the 'immense field of activities' in which corporations may engage in the course of, or for the purposes of, carrying on some overall trading or commercial business.

...when the section is read in the context provided by other features of the Act, which is 'An Act relating to certain Trade Practices', the narrower (i.e. the second) of the alternative constructions of the requirement 'in trade or commerce' is the preferable one.

[38] For the reasons explained earlier, the subject activities of the Commissioner are governmental in nature. The fact that, in the course of collecting taxes, penalties and superannuation levies, the Commissioner resorts to the sorts of action a commercial enterprise would take in order to recover moneys owing to it does not cause the Commissioner's conduct to "bear a trading or commercial character". The Commissioner's conduct must be considered in the light of his statutory function and undertaking.

[39] It is not arguable on the pleaded case that the alleged representations were "in trade or commerce".

[40] The plaintiff's point is a narrow one. The statement of claim alleges that each of the draft deeds and the Deed as executed contain a clause in terms of the ones described in paragraph 21 of the statement of claim. Paragraph 21 relevantly provides:

"Clause 2(d)[16] of the second draft Deed imposed an obligation on the part of the first defendant to return to the third plaintiff and the fourth plaintiff originals and copies of certain documents... held by the first defendant that were the property of the plaintiffs and which were obtained or retained for the purposes of or in connection with the Markit proceedings, the Urinda proceedings, the Dempsey District court proceedings and the Wilhelm District Court proceedings..."

[41] In fact, as the undisputed evidence shows, clause 2(c) appeared in drafts four to seven inclusive and in the Deed in these terms:

"In exchange for the Settlement Sum Upon service of the Notices of Discontinuance filed in each of the Market Proceedings, the Urinda Proceedings and District court Proceedings, Dempsey, Wilhelm and/or their solicitors, Clayton Utz, are entitled to collect from the solicitors for the Commissioner will return to Wilhelm and Dempsey such all documents (originals and copies) as are held by the Solicitors for the Commissioner which are the property of Markit, Urinda, Dempsey or Wilhelm and which were obtained or retained for the purpose of or in connection with the in relation to the Markit Proceedings, the Urinda Proceedings and the District Court Proceedings"

[42] No express obligation is imposed on the Commissioner by the clause. Any obligation to return the documents would need to be implied and could not be the pleaded unqualified obligation to return the documents.

[43] Consequently, the allegation in paragraph 36 of the statement of claim that in the second to the seventh draft deeds inclusive and in the Deed there was a clause in terms of that pleaded in paragraph 21 cannot stand.

[44] It is also difficult to see how the provision of an undertaking by the Commissioner's solicitors that they held the plaintiffs' documents on behalf of the first defendant could be in any way misleading or deceptive. That was a fact which was literally correct and could not carry with it any representation that the Commissioner would not, in the exercise of his statutory duties, do anything in relation to the documents which may interfere with the rights of the plaintiffs. A similar observation may be made in relation to the contents of clause 2(c) but in that regard the position is by no means as clear. It is perhaps arguable that the Commissioner by representing that certain of the plaintiffs were "entitled to collect" the subject documents represented that he was unaware of any impediment, present or impending, to their collection. It is unnecessary, however, for present purposes to go into questions such as this.

[45] For the above reasons, it will be ordered that paragraphs 36, 48, 49, 50, 51, 52, 53, 54, 55 and 56 be struck out. It will also be ordered that paragraphs 1, 2 and 3 of the prayer for relief is struck out. The reason for striking out some of the paragraphs of the statement of claim mentioned is that they depend for their efficacy on the existence, in particular, of paragraphs 36 and 48. I find that the plaintiff's case in respect of these paragraphs is so clearly untenable that it cannot succeed.[17]

[46] It will be ordered that the plaintiffs have leave to file and serve an amended statement of claim within 21 days of today's date.

[1] NT Power Generation Pty Ltd v Power and Water Authority (2004) 219 CLR 90.

[2] (1884) 27 Ch D 71.

[3] [1896] UKHL TC_3_462; [1896] AC 325.

[4] Woodhams v Deputy Commissioner of Taxation of the Commonwealth of Australia [1998] 4 VR 309 at 321, 322.

[6] [2004] FCA 133; (2004) 208 ALR 98.

[8] [1977] UKHL 2; [1978] AC 359.

[9] [1976] 1 WLR 1126.

[12] Village Building co Ltd v Canberra International Airport Pty Ltd (2004) 210 ALR 144 at 116.

[13] [1990] HCA 17; (1990) 169 CLR 594.

[15] [1990] HCA 17; (1990) 169 CLR 594 at 602-604.

[16] An inaccurate reference to clause 2(c).

[17] See e.g., General Steel Industries Inc v Commissioner for Railways (NSW) [1964] HCA 69; (1964) 112 CLR 125 at 130.