BETWEEN : ROCKET TRANSPORT SERVICES PTY LTD (ACN 090 758 759)

DEPUTY COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Corporations - Application to set aside statutory demand - Income tax assessment - Objection lodged by applicant - Whether genuine dispute as to debt - Whether conduct of respondent in serving statutory demand was unconscionable or gave rise to substantial injustice - Turns on own facts

Administrative Decisions (Judicial Review) Act 1977 (Cth)

Corporations Act 2001 (Cth), s 459J(1)(b)

Income Tax Assessment Act 1936 (Cth), s 167

Arcade Badge Embroidery Co Pty Ltd v Deputy Commissioner of Taxation [2005] ACTCA 3

Energy Equity Corporation Ltd v Sinedie Pty Ltd [2001] WASCA 419

Hoare Bros Pty Ltd v Deputy Commissioner of Taxation (1996) 62 FCR 302

KW & KM Quinn Investments Pty Ltd v Deputy Commissioner of Taxation [2003] QSC 336

KW & KM Quinn Investments Pty Ltd v Deputy Commissioner of Taxation [2004] QCA 91

Moutere Pty Ltd v Deputy Commissioner of Taxation [2000] NSWSC 379

Process Machinery Australia Pty Ltd (t/as DCL Engineering) v ACN 057 260 590 [2002] NSWSC 45

Softex Industries Pty Ltd v Commissioner of Taxation [2001] QSC 377

Willemse Family Co Pty Ltd v Deputy Commissioner of Taxation [2002] QSC 292; [2003] 2 Qd R 334

David Grant & Co Pty Ltd v Westpac Banking Corporation [1995] HCA 43; (1995) 184 CLR 265

Graywinter Properties Pty Ltd v Gas & Fuel Corporation Superannuation Fund [1996] FCA 822; (1996) 70 FCR 452

Kalis Nominees Pty Ltd v Deputy Commissioner of Taxation (1995) 31 ATR 188

Robowash Pty Ltd v Robowash Finance Pty Ltd [2000] WASCA 409

SAS02 Pty Ltd v Deputy Commissioner of Taxation of the Commonwealth of Australia [2005] WASC 279

Vitalia Pty Ltd v Deputy Commissioner of Taxation of the Commonwealth of Australia [2005] WASC 179

1 MASTER NEWNES: This is an application to set aside a statutory demand served on the applicant on 26 July 2006, by which the respondent demanded payment of the sum of $156,368.87 said to be income tax owing by the applicant to the respondent.

2 It was not in issue that, following an audit into the taxation affairs of the applicant, the respondent issued to the applicant notices of assessment for the financial years ended 30 June 2002 and 30 June 2003, pursuant to s 167 of the Income Tax Assessment Act 1936 (Cth). The notices of assessment were dated 15 June 2006 and served on the applicant's registered taxation agent. They created a debt which was immediately due and payable by the applicant. The respondent had previously provided to the applicant, by letter dated 19 May 2006, detailed reasons for decision which had formed the basis of the decision to issue the notices of assessment.

3 It appears from the correspondence put into evidence by Mr Luciano Uratoriu, the sole director of the applicant, that, no payment of the debt having been made, on 24 July 2006 the respondent gave notice of its intention to commence proceedings to recover the amounts of the assessments.

4 On 26 July 2006, the statutory demand was served at the registered office of the applicant, although I was told by counsel for the applicant that Mr Uratoriu says he did not become aware of it until 31 July 2006. There is, however, no evidence to that effect from Mr Uratoriu in his affidavit in opposition to the application.

5 I was informed by the applicant's counsel that on 26 July 2006 the applicant instructed its solicitors to prepare and lodge on its behalf objections to the notices of assessment.

6 The applicant wrote to the respondent by letter dated 31 July 2006 applying for a deferment of the date by which the amount of the assessments was required to be paid.

7 On or about 14 August 2006, the applicant lodged objections to the notices of assessment. In the letter enclosing the objections, the applicant's solicitors requested that the respondent deal with the objections as if they had been lodged within time. They said that the reason for the late lodgement was that the applicant "only recently instructed us to prepare and lodge the objections."

8 On 14 September 2006, the respondent wrote to the applicant refusing the request to defer the time for payment. In the letter the respondent set out what it said were the applicant's total taxation liabilities of some $797,055.47. The respondent said it was not satisfied that the applicant was in an unusual circumstance, outside its control, as contemplated by the respondent's policy on deferment of payments. The respondent also noted that the assessments were default assessments and the applicant had not provided any supporting documentation to show that it had not derived any taxable income during the relevant period or to demonstrate that the assessments were excessive. The respondent observed that while the applicant had been in operation since 1 December 1999, it had never lodged a business activity statement. The respondent said the applicant was rated as a taxation debtor who does not comply with the law and is a risk to revenue.

9 On 6 October 2006, the applicant filed in the Federal Court an application for an order of review of the decision refusing the deferment of payment and served the application on the respondent on that day.

10 It was submitted on behalf of the applicant, first, that there was a genuine dispute as to the existence or amount of the applicant's indebtedness to the respondent and, secondly, that the respondent's conduct was unconscionable, an abuse of process or gave rise to substantial injustice and therefore the statutory demand should be set aside under s 459J(1)(b) of the Corporations Act 2001 (Cth) ("the Act").

11 It was submitted that as the notices of assessment were issued as default assessments, as opposed to assessments resulting from the applicant's self-assessment, there was a good prospect that the assessments would be found to be either wholly or partially excessive. That was a plausible contention which required further investigation through the objection process, which process the applicant had initiated.

12 Counsel also referred to Arcade Badge Embroidery Co Pty Ltd v Deputy Commissioner of Taxation [2005] ACTCA 3 as authority for the proposition that where an objection has been lodged and an application made to the Federal Court for review of a refusal to defer payment, that is sufficient to establish that there is a genuine dispute as to the existence of the debt.

13 It was further submitted that the conduct of the respondent was unconscionable, an abuse of process or gave rise to substantial injustice in that the respondent had served the statutory demand as a debt recovery or coercive measure, without allowing the applicant to have the assessments reviewed, in circumstances where, if successful, the objections would have the effect of reducing or extinguishing the amount claimed.

14 Counsel referred to the respondent's policy with respect to the recovery of taxation liabilities which are the subject of dispute and, in particular, to par 28.4.3 of the Australian Taxation Office Receivables Policy, which is as follows:

"Generally, where an objection is lodged promptly after receipt of an assessment, and the Commissioner is satisfied that there is little to no risk, it is unlikely that recovery action for collection will be initiated until the objection is determined."

15 It was submitted that there was no evidence that funds or assets of the applicant were being dissipated and the respondent could not have reasonable grounds for believing that the revenue was at risk. In the present circumstances, the statutory demand was an attempt to coerce the applicant into paying alleged taxation liabilities before the applicant had the opportunity of having the notices of assessment reviewed through the objection process.

16 It was further submitted that it was unfair and unjust to force the applicant to pay the liability in circumstances where a request for deferment of payment had been refused and the refusal was the subject of an application for review under the Administrative Decisions (Judicial Review) Act 1977 (Cth).

17 It was submitted on behalf of the respondent that the contention that there was a genuine dispute as to the applicant's indebtedness was simply untenable. The service of the notices of assessment created a debt which was due and payable. While a taxpayer was entitled to challenge the assessment, in the meantime the tax had to be paid. The fact that an objection was lodged or that a review of a decision of the respondent was sought, does not establish a genuine dispute as to the existence or amount of the relevant debt or the taxpayer's liability to pay it.

18 As to the applicant's contention that the service of the demand was unconscionable, an abuse of process or gave rise to substantial injustice, it was submitted, first, that it was not open to the applicant to rely on that ground as it was not identified in the application to set aside the statutory demand and supporting affidavit: Energy Equity Corporation Ltd v Sinedie Pty Ltd [2001] WASCA 419; and secondly, that in any event there was no basis in fact for the contention.

19 On the first point, counsel for the respondent pointed out that the affidavit of Mr Uratoriu in support of the application simply referred to the fact of the audit, the service of the notices of assessment and the applicant's instructions to its solicitors to lodge, and the lodgement of, objections to those assessments. Mr Uratoriu said he believed that there was a genuine dispute in respect of the amount claimed and that the applicant had lodged an application for a deferral of time to pay. There was nothing to suggest that the applicant went further and contended that in the circumstances the conduct of the respondent was unconscionable, an abuse of process or gave rise to substantial injustice.

20 Counsel for the respondent further submitted that there was nothing in Mr Uratoriu's affidavit which could possibly lead to the conclusion that the respondent's conduct had been unconscionable, an abuse of process or gave rise to substantial injustice.

21 At the time the statutory demand was served the debt was due and payable and there was no obligation on the respondent to await the expiration of the 60-day period for lodgement of objections. At the time the statutory demand was served, no objections had been lodged. Even if objections had been lodged, that would not, in any event, be capable of establishing that the conduct of the respondent was unconscionable. This is not a case where it was clear that the applicant was solvent and there was no justifiable basis for the service of a statutory demand. On the contrary, the notices of assessment had resulted, not from returns submitted by the applicant, but as a result of an audit and default assessments where the total amount of tax owing by the applicant was very substantial indeed and where the applicant was a sole director company with a paid up capital of $10. Nor does the applicant's application for a deferral of time to pay, made after the time of service of the statutory demand, give rise to any unconscionable conduct on the part of the respondent.

22 I do not consider that there is any genuine dispute as to the applicant's indebtedness to the respondent. It is clear that the service of a notice of assessment creates a debt which is due and payable and that an objection to the assessment by the taxpayer does not affect that: Hoare Bros Pty Ltd v Deputy Commissioner of Taxation (1996) 62 FCR 302 at 311A - F. There is nothing to distinguish this case from any other case where a taxpayer objects to an assessment and nothing, therefore, which could put in issue the applicant's liability to pay the amount of the assessments.

23 I do not accept the applicant's submission that a genuine dispute is made out where the objection or review procedures have been invoked by the taxpayer and I do not consider that the decision in Arcade Badge Embroidery Co Pty Ltd v Deputy Commissioner of Taxation (supra) is authority for such a proposition. In that case, the Court held that an assertion in the supporting affidavit that there was a genuine dispute, coupled with a statement that the matter was subject to government review, met the minimum requirements of s 459G, so that the applicant was entitled to supplement the initial affidavit with further evidence of a genuine dispute and the Court had jurisdiction to set aside the statutory demand.

Should the demand be set aside under s 459J(1)(b)?

24 It was contended on behalf of the respondent that the application under s 459J(1)(b) of the Act - that the demand should be set aside on the basis that the respondent's conduct in serving it was unconscionable, an abuse of process or gave rise to substantial injustice - was not a ground which was raised in the application and affidavit filed within the 21-day period after service of the statutory demand and is therefore not open to the applicant.

25 Section 459G of the Corporations Law requires that any application to set aside a statutory demand must be made within 21 days after service of the demand and an affidavit "supporting the application" must be filed and served within that time.

26 In Energy Equity Corporation Ltd v Sinedie Pty Ltd (supra), the question was whether the plaintiff could seek to establish that it had an offsetting claim in negligence in relation to a contract when all that was relevantly said in the affidavit was that there were "a string of offsetting claims". Wallwork J (with whom Steytler J and Olsson AUJ agreed) said at [185]:

"In my view it now seems to be accepted that an affidavit filed outside the 21 day period which raises a new ground or grounds to set aside a statutory demand (as opposed to an affidavit which expands on grounds in an earlier affidavit which has satisfied the threshold test) cannot be used in an application of this nature."

27 In Process Machinery Australia Pty Ltd (t/as DCL Engineering) v ACN 057 260 590 [2002] NSWSC 45, Barrett J said (at 22):

"The real point is that the application and affidavit filed and served within the 21 day period must fairly alert the claimant to the nature of the case the company will seek to make in resisting the statutory demand. The content of the application and affidavit must convey, even if it be by necessary inference, a clear delineation of the area of controversy so that it is identifiable with one or more of the grounds made available by s 459H and s 459J. That process of delineation may not be extended after the end of the 21 day period, although it is open to the plaintiff to supplement the initial affidavit by way of additional evidence relevant to the area of controversy identified within the period."

28 There is nothing contained in the applicant's affidavit in support of the application which appears to convey a contention that the respondent's conduct was unconscionable, an abuse of process or gave rise to substantial injustice. The only contention of the applicant appears to be that the applicant had not incurred any taxation liability and therefore there was a genuine dispute as to its liability.

29 The applicant did not, however, seek to enlarge the area of dispute by further affidavit evidence. It relied only upon the supporting affidavit of Mr Uratoriu for this ground. On the basis of the evidence I do not consider, however, that the claim that the respondent's conduct was unconscionable, an abuse of process or gave rise to substantial injustice is made out.

30 Section 459J(1) provides:

"On an application under s 459G, the Court may by order set aside the demand if it is satisfied that:

(a) because of a defect in the demand, substantial injustice would be caused unless the demand is set aside; or

(b) there is some other reason why the demand should be set aside."

31 In Arcade Badge Embroidery Co Pty Ltd v Deputy Commissioner of Taxation (supra), the Court of Appeal of the Australian Capital Territory said in relation to s 459J(1)(b) that "what the [applicant] must put in evidence is conduct on the part of the respondent, or circumstances, which enliven the court's discretionary power but which do not relate to a demand in the defect itself."

32 There is no doubt that s 459J(1)(b) confers a wide discretion on the Court: Hoare Bros Pty Ltd v Deputy Commissioner of Taxation (supra). In that case the Full Court of the Federal Court appeared to endorse the view of Olney J (at first instance) that had it been shown the Commissioner's conduct was unconscionable, was an abuse of process, or had given rise to substantial injustice, then the statutory demand would have been set aside.

33 In Moutere Pty Ltd v Deputy Commissioner of Taxation [2000] NSWSC 379, Austin J said that the statutory demand procedure is not an instrument of debt collection and it should not be used to coerce a person to pay a disputed debt. If the Court forms the view that the Commissioner has acted oppressively or unfairly by issuing a statutory demand, the Court should set aside the statutory demand under s 459J(1)(b). Austin J found that in the circumstances the Commissioner had not acted oppressively or unfairly. His Honour noted that in that case, whilst it would have been open to the Commissioner instead to take proceedings to recover the debt, it was not oppressive or unfair or an abuse of process for the Commissioner to opt not to take that course.

34 In Softex Industries Pty Ltd v Commissioner of Taxation [2001] QSC 377, Mullins J found that it was oppressive for the Commissioner to serve a statutory demand incorporating disputed income tax in circumstances where the disputed sum was the subject of a reserved decision of the AAT, the Commissioner had taken 4½ years to make the decision which was the subject of the AAT proceedings, and the Commissioner could have elected not to include the disputed sum in the statutory demand.

35 In Willemse Family Co Pty Ltd v Deputy Commissioner of Taxation [2002] QSC 292; [2003] 2 Qd R 334, the applicant had appealed to the Federal Court against a decision of the respondent to disallow the applicant's objection to an amended assessment. Subsequently the respondent issued a statutory demand for the amount of the amended assessment. Holmes J set aside the statutory demand under s 459J(1)(b). His Honour said (at 344):

"The instances of unconscionability, abuse of process and production of substantial injustice referred to in Hoare are no more than examples of matters which may impel an exercise of discretion in favour of an applicant; but the discretion is by no means confined to those particular circumstances. But in the present case, where the applicant has on foot an appeal which is at least arguable and which would, if successful, have the consequence that the bulk of the amount in respect of which the statutory demand is made would not be payable, it does seem to me that there is an injustice in permitting the statutory demand procedure to go forward."

36 A statutory demand was also set aside in KW & KM Quinn Investments Pty Ltd v Deputy Commissioner of Taxation [2003] QSC 336, where the applicant had done little or nothing to challenge the relevant taxation assessments but gave evidence of an intention to challenge them by application to the AAT. Other taxpayers who had received assessments in similar circumstances to the applicant had already applied to the AAT for review and were awaiting a decision. There was some prospect that a decision in favour of those taxpayers would indicate that the assessments issued to the applicant were incorrect. McMurdo J said (at 337):

"In an appropriate case, a court will protect a company against a misuse of the process by setting aside the demand. That process could be misused where the statutory demand is used to coerce payment and to unfairly defeat the company's genuine exercise of its statutory rights to challenge an assessment of income tax.

Accordingly the court has a discretion to set aside the demand on [sic] s 459J where the circumstances include the existence of a genuine dispute as to the correctness of the assessment and the taking of appropriate steps by processes of objection or appeal to set it aside. Even given those circumstances, the company has no right to have the demand set aside, as under s 459J there is a broad discretion which must be exercised having regard to all relevant circumstances. Plainly, the conduct of the creditor is most relevant to the exercise of the discretion."

37 McMurdo J found that for the Commissioner not to await the outcome of the applicant's challenge, when it was awaiting the decision of the AAT in the case of other taxpayers which was likely to show the correctness or otherwise of the subject assessments, would involve a misuse of the statutory demand process. The statutory demand was set aside, his Honour being satisfied that the applicant did intend to pursue a challenge to the assessments.

38 An appeal against the decision of McMurdo J was dismissed: KW & KM Quinn Investments Pty Ltd v Deputy Commissioner of Taxation [2004] QCA 91. On the appeal, Davies JA (with whom Fryberg and Philippides JJ agreed) found that it was open to McMurdo J to be satisfied that it was unjust to permit the statutory demand procedure to be used in circumstances where there was no evidence that the applicant was unable to pay its debts as they fell due and there was some likelihood that the decision of the AAT in respect of other taxpayers would also resolve the liability of the applicant.

39 These cases are, of course, no more than particular applications of the general principle that a statutory demand is liable to be set aside if, in the circumstances, the conduct of the creditor in serving it was unconscionable, was an abuse of process, or gave rise to substantial injustice. Each case must turn upon its particular facts.

40 In the present case, the applicant is a sole director company with a paid up capital of $10. The assessments were served in mid-June 2006 and created a substantial debt that was immediately due and payable by the applicant. The assessments had been issued, not as a result of any self-assessment by the applicant, but as a result of an audit by the respondent and default assessments. No payment had been made, and there is no evidence that there had been any communication from the applicant to the respondent in relation to the assessments, when some weeks later, on 24 July 2006, the respondent gave notice of an intention to commence recovery proceedings. It appears that, at least up to that point, the applicant had taken no steps to dispute or lodge objections to the notices of assessment - its solicitors being first instructed to do so on 26 July 2006 - and the applicant had not provided any material to the respondent to show that the assessments were excessive.

41 Following service of the statutory demand on 26 July 2006, the applicant first applied, by letter of 31 July 2006, for deferment of time to pay the tax until 14 days after a decision on any objection to the assessments. The objections were lodged on or about 14 August 2006.

42 In his affidavit in support of the application, Mr Uratoriu simply says that he did not agree with the assessments, the applicant had not incurred any taxation liability in either year and both assessments should be reduced to zero. The objections were also put in evidence but no other material has been put in evidence to demonstrate the merits of the applicant's objections. On the available material I do not consider that any view can be reached as to the applicant's prospects of success on the objections. I do not accept the submission of counsel for the applicant that because the assessments were default assessments the objections are likely to have good prospect of success.

43 In the circumstances, I do not consider that the conduct of the respondent in serving the statutory demand can be regarded as unconscionable, an abuse of process or giving rise to substantial injustice.

44 In my view, nothing contained in the applicant's receivables policy affects that. That policy is detailed and lengthy, and the passage referred to by the applicant's counsel cannot be considered in isolation. In that connection it is sufficient to refer to the paragraph immediately preceding the paragraph to which he referred. That provides:

"28.4.2 Where a taxpayer lodges an objection against an assessment, the Commissioner may initiate recovery action for collection of the disputed debt at any time prior to the determination of the objection based on an assessment of risk."

45 The policy contains extensive provisions relating to the assessment and management of risk.

46 In the circumstances to which I have referred, I do not consider it can be said that the respondent was acting contrary to the policy of the Australian Taxation Office in serving the statutory demand when he did.

47 I do not consider that either of the grounds relied upon by the applicant has been made out and I would therefore dismiss the application.