Saitta Pty Ltd v Commissioner of Taxation

REASONS FOR JUDGMENT 1 The applicant provides residential care services. Its principal source of income is the subsidies that it receives from the Commonwealth under the Aged Care Act 1997 (Cth). But the business is unprofitable. As at May 2002 the applicant was indebted to the Commissioner of Taxation in the sum of $453,574.25. The debt arose from the failure by the applicant to remit to the Commissioner the tax that it had deducted from the wages paid to its employees. A large part of the debt has been owing for some years and many promises that it would be repaid have not been honoured. 2 Section 260-5 of the Taxation Administration Act 1953 (Cth) authorises the Commissioner to give written notice to a third party who owes or may owe money to a taxpayer requiring the third party to pay that money to the Commissioner in discharge of the taxpayers liability to the Commonwealth under a taxation law. The definition of "taxation law" in s 995-1 of the Income Tax Assessment Act 1997 (Cth) is wide enough to include the debt due by the applicant. On 20 May 2002, the Commissioner issued a notice under s 260-5 to the Commonwealth Department of Health. The notice directs the Department to deduct an amount of 30 cents in every dollar from any money that becomes due to the applicant and further directs that the amount so deducted be forwarded to the Commissioner until the applicant's debt is satisfied. The applicant challenges the validity of this notice, and seeks a declaration that it is of no effect, as well as consequential relief. 3 The decision to issue the notice was taken by Ms Roberts a delegate of the Commissioner. The applicant requested Ms Roberts to furnish a statement of her reasons for making the decision. She is required to provide those reasons by s 13 of the Administrative Decisions (Judicial Review) Act 1977 (Cth). Ms Roberts has sworn an affidavit in this proceeding giving her reasons. The applicant has agreed to treat the affidavit as a sufficient compliance with the statutory obligation. 4 There are four broad grounds upon which the applicant seeks a declaration of invalidity. The grounds are: (1) That a notice under s 260-5 cannot be issued in respect of money due under the Aged Care Act; (2) That the decision to issue the notice was made in breach of the rules of natural justice; (3) That in making the decision to issue the notice Ms Roberts failed to take into account relevant considerations and took into account irrelevant considerations; and (4) That Ms Roberts' decision was made for an improper purpose. 5 The first ground is based on the proposition that the right to receive payments under the Aged Care Act does not constitute a debt. Then it is said that a notice under s 260-5 can only be served upon a third party who is a debtor of a taxpayer. If both propositions are correct the Commissioner accepts that the notice could have no operation. However, both propositions are challenged. 6 For the purposes of the argument I am prepared to accept the proposition that money due under the Aged Care Act is not a debt, though the proposition is of doubtful validity. In Health Insurance Commission v Peverill (1994) 179 CLR 226 it was necessary to decide whether the statutory reduction of a doctor's entitlement to receive Medicare payments under the Health Insurance Act 1973 (Cth) was required to comply with the requirements of just terms in s 51(xxxi) of the Constitution. The court held that the statutory reduction was within power but the judges gave different reasons. The applicant relies upon what was said by Brennan J. His reason was that the right to receive a Medicare benefit was not a debt recoverable by action in a court of competent jurisdiction. Brennan J said that the duty to pay money under the Health Insurance Act was a statutory duty enforceable by a public law remedy such as mandamus: 179 CLR 226 at 242. However, the other judges had different reasons for rejecting the challenge to the legislation. Mason CJ, Dean and Gaudron JJ accepted the premise that the entitlement to Medicare payments constituted "property" for the purposes of s 51(xxxi). They did not say that the entitlement constituted property because it was a debt, though they may have been of that view. They held that the extinguishment of the entitlement was not an "acquisition" for the purposes of s 51(xxxi). Dawson J said that the right under the statute was a chose in action (presumably he meant a debt) but held that the chose in action was not acquired for any purpose in respect of which the Commonwealth had power to make laws. Toohey and McHugh JJ, in separate reasons, held that s 51(xxxi) did not apply to a right created by statute, which could be lawfully altered by the authority that created it. So it seems that Peverill may well be against the applicant. But compare Walker v Secretary, Department of Social Security (1995) 36 ALD 513. 7 Be that as it may, the real answer to the applicant's case is that s 260-5 is not confined to the collection of debts which are due by a taxpayer. Subsection (2) states that the Commissioner may give a notice to a third party if the third party "owes or may later owe money to" the taxpayer. Then subsection (3) sets out the circumstances in which a third party is to be regarded as owing money to the taxpayer. Those circumstances include the situation where "money is due or accruing to the [taxpayer]", where "money [is held] for or on account of the [taxpayer]" or where the third party "has authority from some other entity to pay the money to the [taxpayer]". When a person owes money to another the amount owed need not be a debt. A person will owe money to a third party if he is either bound or obliged to pay that money. Reference should also be made to s 260-10 which provides that if the third party is the Commonwealth or a State or Territory the Commissioner may give the s 260-5 notice to the employee of the body politic (as appropriate) who "has the duty of dispersing public money under a law of the Commonwealth, or of the State or Territory (as appropriate)". This provision assumes that the money available for payment of a taxpayer's debt need not be a debt due to the taxpayer but might be money due under a statute requiring a public law remedy for its collection. 8 Next the applicant complains that the decision to issue the s 260-5 notice was made without giving it an opportunity to comment. It contends that this constituted a breach of that aspect of the rules of natural justice, which requires an administrative decision-maker to act in accordance with procedural fairness. 9 The general rule in Australia is that whenever a statute confers on an administrative decision-maker the power to affect a person's rights, interests or legitimate expectations the decision-maker must accord procedural fairness to the person affected unless the statute clearly indicates that this need not be done: Kioa v West (1985) 159 CLR 550, 582-586; Annetts v McCann (1990) 170 CLR 596, 598. To determine precisely what procedural fairness requires is a separate question the answer to which will depend upon the facts of each particular case. In some cases, the obligation to adopt fair procedures will not require the decision-maker to do anything, as in the situation where there is a need to act quickly. On other occasions, the decision-maker should not make a decision without affording the person affected the right to be heard, bringing to his attention the critical factors upon which the decision is likely to turn, and giving notice of any adverse material on which the decision might be based: Miah v Minister for Immigration and Multicultural Affairs [2001] HCA 22; Abebe v Commonwealth of Australia (1999) 197 CLR 510, 553-554. 10 In many cases, there will be no obligation on the Commissioner to give prior notice of, and an opportunity to make submissions about, the issue of a notice under s 260-5. Here I am referring to the common situation where there is an undisputed liability to pay tax, the third party upon whom the notice is to be served owes money to the taxpayer and the collection of the money by the Commissioner will not cause any undue harm to the taxpayer or to any person who deals with the taxpayer. In those circumstances the collection of tax by means of a s 260-5 notice does not sufficiently affect the taxpayer's position as to warrant the giving of prior notice. Moreover, there is really nothing that could be said against the issue of the notice. 11 But there will be cases where the Commissioner should give notice of an impending decision. That was the view of Burchett J in Edelsten v Wilcox (1988) 83 ALR 99. The case concerned the issue of a notice under s 218 of the Income Tax Assessment Act, which is the forerunner of s 260-5. The Commissioner had raised assessments for income tax against the applicant and certain companies with which he was associated for amounts in excess of $5.3 million. It was conceded that the total income tax liability of the applicant and the companies would not exceed $1.7 million. The applicant objected to the assessments, as did the companies. The Commissioner served a notice under s 218 requiring the Health Insurance Commission to pay the Commissioner money due to it by the applicant. This was followed by discussions to settle the tax claim during the course of which the Commissioner revoked the notice and served a substitute notice requiring the Commission to pay 45 cents in every dollar it owed to the applicant. Ultimately the settlement negotiations broke down, largely because the applicant could not provide security for a portion of the $1.7 million. Thereafter, the Commissioner issued a fresh notice under s 218 requiring the Health Insurance Commission to pay 100 cents in every dollar due to it by the applicant. The decision to issue this notice was attacked on a number of grounds one of which was that the Commissioner failed to give the applicant an opportunity to make submissions regarding the issue of the notice. Burchett J set aside the notice on other grounds so it was not necessary for him to resolve the procedural fairness issue. Nevertheless, he said that the applicant would have been entitled to succeed on that ground. First Burchett J said (at 114-15): "I was referred to Kioa v West (1985) 159 CLR 550. I think the principles stated in that case, when applied to s 218, make it clear that the rules of natural justice can have no automatic application. The example of Kioa's case (supra) sufficiently illustrates the point. In a case of that kind, the Commissioner must be entitled to act swiftly, before the target of action escapes. However, it is argued that here, after examination of the applicant's position had been made in December 1986 and it had been accepted that the taking of 100 per cent of the health insurance payments was inappropriate, he acquired a legitimate expectation that this decision would not be changed without his being afforded an opportunity to answer any suggestion that there had been a relevant change in the situation, particularly if that suggestion involved an assertion of some improper or inappropriate conduct on his part." Then by reference to the particular facts, the most important being those outlined earlier, Burchett J found that there was a legitimate expectation that the rules of natural justice would be observed. In particular, the fact that the first notice to the Health Insurance Commission requiring payment of 100 cents in the dollar had been withdrawn because it was accepted as inappropriate in the circumstances gave rise to the expectation. 12 Whether or not the Commissioner was required to warn the applicant of the impending issue of the notice in the present case requires some examination of the facts. Since at least 1998, and even before then, the applicant has failed to comply with its obligations to remit to the Commissioner amounts of income tax deducted from the wages paid to its employees. The total amount deducted from wages and not remitted to the Commissioner exceeded $464,000. The applicant is still deducting income tax from wages and not remitting the amount to the Commissioner, so the debt is increasing. No objection has been lodged in respect of the tax due to the Commissioner. A number of cheques received from the applicant in part payment of unpaid tax were dishonoured when presented to the applicant's banker. Penalty notices were served on the directors of the applicant in respect of the unpaid tax. On a number of occasions the applicant agreed to discharge its debt to the Commissioner but failed to honour the agreements. The applicant put forward many proposals for the payment of the unpaid tax by instalments but no agreement was reached and no payments were made save for some relatively small amounts. All in all, the Commissioner waited four years to receive the unpaid tax and all the while the debt was increasing with an ever-diminishing prospect for its recovery. In those circumstances, it is my view that fairness did not require the Commissioner to give notice of his intention to issue the notice. 13 The next ground of complaint is that the decision to issue the notice was made without regard to relevant matters. Some of the matters are referred to in a summary from the applicant's written submissions. They are: (a) The nature of the applicant's business as a provider of aged care accommodation; (b) The applicant's dependency on Commonwealth subsidies and its lack of other income producing activities; (c) The nature and purpose of the residential care subsidy; and (d) The extent to which the payment required to be made pursuant to the notice threatened the viability of the applicant's business. 14 The other matter which is said should have been taken into account requires a little more discussion. Prior to the service of the notice, the Commissioner decided to apply to wind up the applicant on account of its deemed insolvency. To that end, the Commission served a statutory demand on the applicant requiring it to pay $282,083.65 within 21 days of the service of the demand. The applicant applied to the Supreme Court of Victoria to have the demand set aside on the ground that it had an offsetting claim against the Commonwealth, which exceeded the quantum of the claim for unpaid tax. The Supreme Court was satisfied of the existence of a genuine offsetting claim and set aside the statutory demand. The offsetting claim is based upon an allegation that in November 1993 the Commonwealth made representations that it would provide additional funding to the applicant if it established an aged care facility at a particular location in Keilor. The applicant says that when it established the facility at Keilor the full amount of the additional funding was not forthcoming. The applicant alleges that it has suffered damages exceeding the amount of tax due. The heads of damage include loss of capital, loss of fee income, costs of the Supreme Court proceeding, loss of the opportunity to invest surplus funds, disruption losses, and aggravated and exemplary damages. An action to recover those losses was commenced in September 1999, just within the limitation period. 15 In this area of public law it is important to bear in mind the distinction between obligatory considerations, that is those which the empowering Act expressly or impliedly requires the decision-maker to take into account and permissible considerations, that is, those that may, but need not, be taken into account. For a discussion about the distinction see Ashby v Minister for Immigration [1981] 1 NZLR 222, 224 per Cooke J. It is also necessary to recall the observations of Mason J in Minister for Aboriginal Affairs v Peko-Allsend Ltd (1986) 162 CLR 24, 39-40: "(a) The ground of failure to take into account a relevant consideration can only be made out if a decision-maker fails to take into account a consideration which he is bound to take into account in making that decision … (b) What factors a decision-maker is bound to consider in making the decision is determined by construction of the statute conferring the discretion. … In the context of judicial review on the ground of taking into account irrelevant considerations, this court has held that, where a statute confers a discretion which in its terms is unconfined, the factors that may be taken into account in the exercise of the discretion are similarly unconfined, except insofar as there may be found in the subject matter, scope and purpose of the statute and some implied limitation on the factors to which the decision-maker may legitimately have regard. … (c) Not every consideration is a consideration that a decision-maker is bound to take into account but fails to take into account will justify the court setting aside the impugned decision and ordering that the discretion be re-exercised according to law. A factor may be so insignificant that the failure to take it into account could not have materially affected the decision. … (d) The limited role of a court reviewing the exercise of an administrative decision must constantly be borne in mind. It is not the function of the court to substitute its own decision for that of the administrator by exercising a discretion which the legislature has vested in the administrator. …" 16 I think that I am bound to accept, in accordance with authority, that in considering whether to issue a notice under s 260-5, the Commissioner must have regard to the particular position of the individual taxpayer. This is what was decided in Edelston v Wilcox. There are two passages in the judgment of Burchett J to which reference should be made. Each passage should be considered by reference to the background facts, namely that the taxpayer had engaged the objection and appeal procedures in the Income Tax Assessment Act in respect of the Commissioner's assessments, which were admittedly too high. Burchett J said (at 111): "The statutory context of Pt VI [Income Tax Act] includes such discretions as that contained in s 206, clearly requiring the Commissioner of Taxation to have regard to the particular position of an individual taxpayer. Section 218 must, I think, be seen as part of the whole scheme of the Act for the collection and recovery of tax, which of course includes rights of objection and appeal. It is a strong power designed to protect the revenue, but it was not intended to subvert the principle which has been established at least since Magna Carta, that a citizen's property should not be subject to arbitrary seizure. It cannot have been contemplated that the power should be used to negate the rights to contest assessments contained in the Act by the complete wiping out of the business of a taxpayer who is genuinely pursuing proper avenues of appeal. And later (at 112): "It is clear from the Act, the authorities, and the policy guidelines which the Commissioner himself has issued, that the collection of tax in cases where appeal procedures have been properly invoked and genuine questions are outstanding is, in general, the subject of discretions, which must take account of that situation, and of the effect upon the individual taxpayer of the contemplated recovery. The legislature cannot have intended that s 218 should confer a more despotic power, not subject to the same discretionary considerations." 17 It is evident that Burchett J was heavily influenced by the fact that there was a bona fide dispute about the quantum of the unpaid tax, a dispute which the Commissioner was likely to lose. Yet it would be wrong for me to conclude (although the point seems at least arguable) that Burchett J's finding that the Commissioner was obliged to have regard to the position of the individual taxpayer sprung only from the facts of the case and not from the statute itself. 18 My acceptance of the proposition that the Commissioner is required to take into account the particular circumstances of the taxpayer should not be understood as imposing a universal requirement that in every case the Commissioner must consider every way the service of a s 260-5 notice may affect a taxpayer. Nor must the Commissioner in every case take into account the effect on third parties of the service of a notice. The principal object of s 260 is to establish an efficient means of recovering money due to the Commonwealth. When a taxpayer pays his taxes that may cause him inconvenience. On other occasions, the effect of the payment might be more dramatic. Third parties, including creditors of the taxpayer, may be affected especially if the taxpayer does not have the funds with which to pay all of his liabilities. Speaking generally, none of this is of any concern to the Commissioner. On the other hand, when, as in Edelston's case, the collection of taxes by the use of a power such as that conferred by s 260-5 may be unfair for one reason or another, the position is different. It is in that type of case where the particular position of the taxpayer might become relevant and should be considered by the Commissioner. 19 The actual decision-maker, Ms Roberts, explained in her affidavit the matters that she took into account when deciding to issue the notice. Although the relevant passages in her affidavit are a little lengthy, I propose to set them out in full and so avoid the danger of a summary. Ms Roberts said: "24. The decision to issue the Notice to the Department of Health was made by me having regard to the ATO's Policy on Garnishee Notices which is Chapter 12 of the ATO's Receivables Policy. … 25. I took a number of matters into account prior to the issue of the Notice. The order in which the matters are listed is not significant. The matters considered by me included: (1) the history of the dealings between the commissioner and the Applicant some of which I have summarised above; (2) the debt was due and not disputed. The debt had been established by the voluntary lodgment by the Applicant of its statutory obligations which I have referred to above; (3) the Applicant had made numerous proposals to the ATO to pay the liability but instead of reducing its indebtedness the debt has simply escalated. These proposals had the effect of simply delaying recovery action by the ATO; (4) it was the most efficient and cost effective way of obtaining payment; (5) it was appropriate in the current circumstances as the most effective manner of securing payment of a liability which had been escalating at an alarming rate since 1 July 2000 and which continues to escalate; (6) the Applicant's poor compliance record. For example, in April 2001, the Applicant told the ATO that the outstanding tax debt would be repaid in full within 90 days. The debt was not paid in whole or in part. Further, the Applicant has failed to comply with its ongoing and current statutory obligations to withhold and remit PAYG payments and it failed to comply with any previous payment arrangements; (7) the Department of Health was a major debtor of the Applicant; (8) the Applicant operated a nursing home and derived its major source of income from the Department of Health so that a notice seeking to garnishee a significant portion of the payment from the Department of Health would be likely to have a significant effect on the Applicant's business. For that and other reasons, the Notice issued by the Commissioner sought only to attach to 30% of the fees payable per month by the Department of Health to the Applicant; (9) in circumstances where the Statutory Demand was unsuccessful and there has been no meaningful proposal by the Applicant to pay the debt or even meet its current obligations to withhold and remit amounts from the salaries and wages of its employees, the issue of the Notice was appropriate; (10) in 1999, the Applicant had commenced proceedings in the Supreme Court of Victoria against the Department of Health but even after those proceedings were filed: (a) the Applicant made proposals to the ATO to pay the debt which it had failed to meet; (b) the Applicant obtained agreement from the ATO to enter into an agreement pursuant to s.222ALA of the ITAA 1936 to pay the debt. The Applicant never executed the agreement, never returned the agreement to the Commissioner and failed to comply with it; (12) the revenue was at risk. Not only is there a substantial debt which continues to escalate but the Applicant has not remitted PAYG withholding payments since the current system was introduced on 1 July 2000." 20 I should also refer to the oral evidence given by Ms Roberts. She conceded that she did not have any up to date information about the financial position of the applicant and did not seek to obtain any. Ms Roberts pointed out that her office had requested the applicant to provide up to date financial statements but the applicant had declined to do so. She did not refer to earlier financial information "because at the time it was two years out of date". But she said that she took into account the possible (presumably adverse) effect on the applicant's business of compliance of the notice by the Department of Health. She explained: "That's why I only garnisheed 30 cents in the dollar." Further, Ms Roberts was aware that the applicant had commenced a claim against the Commonwealth. She said that she did not take that claim into account in making her decision. Ms Roberts explained: "The [tax] debt was due to the Taxation Office and it was established and it was due to be paid." 21 I am satisfied that the complaint that Ms Roberts had failed to take relevant considerations into account is not made out. Quite clearly Ms Roberts did what she said is always done, namely "We treat every debtor individually. We look at every case individually." The matters that she did take into account amount to a sufficient discharge of her obligations. The fact that Ms Roberts did not pay regard to the asserted possibility that the applicant could set off against the tax due its claim against the Commonwealth does not vitiate her decision. First, Ms Roberts knew of the existence of the claim and she did pay it some regard. She said that she knew "that they [the applicant] had a case against the Department of Health but the debt was still due to the Tax Office." I do not believe that Ms Roberts was required to go any further and consider whether, according to an equity lawyer, the applicant's debt to the Commonwealth might have been reduced or even discharged. 22 In any event, the applicant did not have a good set off against the tax that was due. For present purposes I will proceed on the assumption that it is permissible to effect an equitable set off against a Crown debt. Before the passage of Crown Proceedings Acts that step was not available: The Attorney-General v McLeod (1893) 14 NSWR 121; Attorney-General v Guy Motors Ltd [1928] 2 KB 78. It seems that things are now different. The Crown Proceedings Acts have put the Crown in the same position as its subjects. And no subject could claim an equitable set off in the present circumstances. In Rawson v Samuel [1841] 41 ER 451, the general characteristic of an equitable set off was said to be that the party seeking the benefit of the set off must show that he has a claim that "impeached the title to the legal demand". At least in some jurisdictions there is a broader approach. There are cases which suggest that it will be possible to impeach the legal demand if the amount claimed to be set off is sufficiently closely connected with the claim against which the set off is to be effected. In Bank of Boston Connecticut (formerly Colonial Bank) v European Grain and Shipping Ltd [1989] AC 1056, 1103, 1106 the House of Lords held that an equitable set off was available for a claim "flowing out of and inseparably connected with the dealings and transactions which also give rise" to the principal claim. See also Roadshow Entertainment Pty Ltd v ACN 053 006 269 Pty Ltd (1997) 42 NSWLR 462, 482-3 and the cases there cited. In Meagher, Gummow & Lehane, "Equity: Doctrines and Remedies" 3rd (1992), par 3709, the authors say that it is an indispensable requirement of equitable set off that the set off actually go to the root of, that is, be essentially bound up with or "impeach" the title of the plaintiff. 23 Whatever its precise scope, there is not a sufficiently close connection between the Commonwealth's claim for tax on the one hand and the applicant's claim for damages against the Health Insurance Commission on the other to admit of set off. The two claims are almost unrelated, and it would not be unjust that there should be recovery of the tax debt without deduction of any damages that may be due by the Commonwealth. 24 The final ground of attack is that Ms Roberts made the decision to issue the notice for an improper purpose. The allegedly improper purpose was the intention to circumvent the ruling of the Supreme Court, which prevented the Commissioner from proceeding with its proposed application to wind up the applicant. 25 The applicant has not made out this ground. Ms Roberts made it plain in her affidavit why the notice was served. She was not shown to be an unreliable witness. The principal motivation was Ms Roberts' wish to recover unpaid tax by instalments and prevent the debt due to the Commissioner from increasing. All previous attempts to get in the money had failed. There was little that the Commissioner could do to obtain payment, other than obtain a judgment against the applicant for its admitted debt and enforce the judgment by writs of assistance, or exercise the power contained in s 260-5. There was nothing preventing the Commissioner from taking the latter course. 26 Indeed, the fact the Commissioner took some action, in this instance exercising his power under s 260-5, was the inevitable consequence of the Supreme Court decision to set aside the statutory demand. The purpose for allowing a statutory demand to be set aside is to ensure that the winding up process is not used for inappropriate purposes. See Fortuna Holdings Pty Ltd v Deputy Commissioner of Taxation [1978] VR 83 as to the position that existed before the statutory demand procedures were enacted. So, if it turns out that an application for winding up on the ground of deemed insolvency is inappropriate, the creditor is not deprived of the right to take alternative steps to recover his debts. 27 There is another answer to the whole of the applicant's claim. Even if Ms Roberts had erred in law in any of the ways alleged, there would be no point in setting aside her decision and remitting it for re-consideration. It is clear that on reconsideration she would reach the same conclusion. On the applicant's own case, it is conducting a business in circumstances where it is unable to pay its debts, and it has been in that position for some years. On the other hand, it goes without saying that the Commissioner is entitled to collect unpaid taxes by whatever legitimate means are available. At one time, the debts that are presently owed to the Commonwealth were given priority over preferential, secured and unsecured debts by s 221P of the Income Tax Assessment Act 1936. That position has now changed, but it is difficult to see any basis upon which the Commissioner might decide not to issue a notice directed to the Department of Health to recover part of the debt due by the applicant. It is worth remembering that Ms Roberts decided that the issue of the s 260-5 notice was the most effective method of obtaining payment of the debt and she "wanted to at least get some money in … [so that] the debt didn't keep escalating out of control". Had the applicant made out any of its grounds, as a matter of discretion I would not grant the relief sought. 28 The application will be dismissed with costs. I certify that the preceding twenty-eight (28) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein.