Softex Industries Pty Ltd, Re [2001] QSC 377 (5 October 2001)

CORPORATIONS - PRACTICE AND PROCEDURE - STATUTORY DEMAND - application to set aside statutory demand - demand issued by Commissioner of Taxation for payment of debt for outstanding sales and income tax - applicant precluded from relying on s 459H of Corporations Act 2001 (Cth) - whether existence of application for special leave to appeal to High Court in relation to sales tax refund relevant to the exercise of discretion under s 459J(1)(b) of the Act - whether applicant has arguable estoppels as to liability for disputed sales tax and penalties - whether existing AAT proceeding relating to disputed income tax relevant to exercise of discretion under S459J(1)(b) of the Act - whether it was oppressive for the amount of the disputed income tax to be included in the claim made in the statutory demand

Corporations Act 2001 (Cth) s 459F, s 459H, s 459J

Income Tax Assessment Act 1936 (Cth)

Sales Tax Assessment Act 1992 (Cth)

Taxation Administration Act 1953 (Cth)

Chippendale Printing Co Pty Ltd v Deputy Commissioner of Taxation (1995) 55 FCR 562

Collins v The Queen [1975] HCA 60; (1975) 133 CLR 120

Eumina Investments Pty Ltd v Westpac Banking Corporation [1998] FCA 824; (1998) 84 FCR 454

FJ Bloemen Pty Ltd v Commissioner of Taxation (Cth) [1981] HCA 27; (1981) 147 CLR 360

Graywinter Management Pty Ltd v Deputy Commissioner of Taxation (1996) 22 ACSR 636

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

Moutere Pty Ltd v Deputy Commissioner of Taxation [2000] NSWSC 379; (2000) 34 ACSR 533

Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd [1997] FCA 681; (1997) 76 FCR 452

[1] MULLINS J: On 19 June 2001 the Commissioner of Taxation ("the respondent") served on Softex Industries Pty Ltd (formerly Cosco Holdings Pty Ltd) ("the applicant") a form 509H creditor's statutory demand for payment of debt in respect of a total sum of $15,302,967.42. The applicant filed the application on 10 July 2001 to set aside the statutory demand.

[2] The amount of $15,302,967.42 comprises the following components:

Tax Instalment Deductions for period 20 March 2000 to 30 June 2000

Business Activity Statement to period ending 30 June 2001

[3] The applicant does not dispute liability for the fringe benefits tax, tax instalment deductions and the amounts owing under the Business Activity Statement the total of which is $899,056.63. As to the balance of the components, the applicant seeks to raise a genuine dispute or offsetting claim in respect of a significant part of the debt and therefore seeks the exercise of the power under s 459J of the Corporations Act 2001 (Cth) ("the Act") to set the statutory demand in its entirety aside. As alternative relief, the applicant seeks an order under s 459F(2)(a) of the Act extending the time for compliance with the statutory demand. The respondent opposes each of the claims for relief being pursued by the applicant and seeks an order that the application filed on 10 July 2001 be dismissed.

[4] The applicant is in the business of recycling paper and manufacturing both recycled and non-recycled paper products such as facial tissues and toilet paper. The applicant has been in business since 1983 and has been recycling paper since the late 1980's.

[5] Affidavits filed in support of the applicant's application were from the applicant's managing director, Mr SA Coco, and Messrs JJ O'Connell and NG Thorburn who are chartered accountants with Price Waterhouse Coopers, the tax advisers retained by the applicant.

[6] The respondent relied on 4 affidavits of taxation officer Ms S Hollyock and an affidavit of another taxation officer Mr T Pemble-Smith.

[7] The total amount claimed by the respondent in the statutory demand under the heading of sales tax is $10,337,091.09 calculated as follows:

General interest charge from 1 July 1999 to 18 May 2001

[8] The claim for sales tax is in respect of two periods: May 1995 to September 1996 inclusive ("the first period") and August 1999 to June 2000 inclusive ("the second period").

[9] There are three bases upon which the applicant disputes its liability to the respondent for sales tax: the applicant's pursuit of a claim for refund of sales tax in the sum of approximately $4.5m, an arguable estoppel against the respondent in respect of the recovery of interest and penalties on the sales tax for the first period until proceedings in the High Court relating to the applicant's claim for refund of sales tax are concluded, and an arguable estoppel against the respondent from seeking the amount of the sales tax for the second period of $1,970,021.50 until negotiations of an overall settlement between the applicant and the respondent have concluded.

[10] I shall set out the facts relating to the applicant's claim for refund of sales tax.

[11] On 21 September 1995 the applicant applied to the respondent for a sales tax refund of $14,750,972.81 in relation to goods purchased during the period 1 January 1993 to 30 June 1995. The rationale for the claim is that waste paper purchased by the applicant was, at one point, sold in new condition as letterhead, copy paper and computer paper to persons who were consumers of such goods and sales tax had been paid on that paper. After it was used, it was sold as scrap paper to collectors which shredded and baled it and then sold it to the applicant and the applicant has claimed that the tax was passed onto the applicant in the price of the scrap paper.

[12] On 1 December 1995 the respondent disallowed the applicant's claim for such sales tax refund. The applicant then lodged an objection against that decision.

[13] On 28 November 1996 the respondent disallowed the objection in full.

[14] On 24 January 1997 the applicant applied to the Administrative Appeals Tribunal ("AAT") for a review of the respondent's decision dated 28 November 1996. On 16 December 1998 the AAT affirmed that decision.

[15] The applicant appealed the AAT's decision to a single judge of the Federal Court. The appeal was heard by Drummond J who on 22 November 2000 allowed the appeal and ordered that the matter be remitted to the AAT as originally constituted for determination in accordance with the reasons of the Federal Court whether in respect of relevant purchases of bales of waste paper by the applicant (other than purchases of unused letterhead) the applicant had borne tax and whether, if the applicant had so borne tax, the applicant was entitled to any and, if so, what credit in respect of sales tax.

[16] The respondent then appealed to the Full Court of the Federal Court which on 11 April 2001 allowed the appeal from the decision of Drummond J, set aside the orders made by Drummond J and ordered that the appeal to the Federal Court from the decision of the AAT be dismissed.

[17] On 9 May 2001 the applicant filed its application for special leave to appeal to the High Court from the whole of the judgment of the Full Court of the Federal Court. In connection with that application, the applicant has filed its summary of argument. When Mr Coco swore his affidavit on 10 July 2001, he had been advised by his solicitors that the application for special leave might be heard in a period of 3 to 6 months.

[18] Although the applicant's application for the sales tax refund was initially for a sum of approximately $14m, the position of the applicant is now that if it obtains special leave and its appeal is ultimately successful, the quantification of any refund or credit will need to be remitted for further consideration.

[19] For the purpose of this application, the applicant relies on an estimate made by the respondent of the amount of the refund for the period to 30 June 1995 which was set out in the letter from the respondent to the applicant's accountant Mr O'Connell dated 22 August 1996. That letter was sent following a meeting which had occurred on 20 August 1996 relating to the applicant's sales tax objection at which Messrs Coco, O'Connell and Thorburn were present on behalf of the applicant and Messrs Pflaum and Pemble-Smith were present on behalf of the respondent. The letter referred to the calculation issue discussed at the meeting based on the information provided to that date by the applicant, described the respondent's "rough cut" preliminary figures and stated that would result in the maximum refund claim working out somewhere between $1m and $1.5m. The respondent's letter requested confirmation as to whether or not that was the case. On 30 October 1996 the applicant's accountants responded to the letter of 22 August 1996, but did not provide the confirmation in respect of the respondent's calculation of the maximum refund claim, as requested.

[20] Mr Pemble-Smith deposes that in the applicant's submissions to the AAT and through one of its witnesses in the AAT, the applicant departed from the "rough cut" figures which had been set out in the respondent's letter of 22 August 1996. Mr Pemble-Smith exhibits to his affidavit an extract from the applicant's submissions to the AAT which states that if the AAT were to find that the paper collectors were manufacturers, the applicant claimed a refund of $720,593. Mr Pemble-Smith also exhibits estimates of the refund claim given by one of the applicant's witnesses before the AAT which ranged from $370,557 to $576,660.

[21] With respect to the amount of the sales tax refund for the period to 30 June 1995, Mr O'Connell states in para 19 of his affidavit:

"While I am not in position to state the amount of the refund with any precision, I agree that the respondent's `rough cut' preliminary figures as set out in its letter dated 22 August 1996 are not unreasonable."

[22] If the applicant is successful in obtaining special leave to appeal to the High Court and the appeal to that court is then allowed, the applicant has foreshadowed that it will be seeking a refund of sales tax for the period 1 July 1995 to 30 June 2000. Mr O'Connell has estimated the amount of that refund claim as approximately $3m in the following terms in para 22 of his affidavit:

"While I am not in a position to state with any precision the amount of any refund due to the applicant for the period 1 July 1995 to 30 June 2000, if the applicant's purchase levels remained the same, based on the respondent's figures as set out in the letter dated 22 August 1996, it would not be unreasonable to expect that the refund claim would be approximately $3M."

[23] The applicant has not yet made any application to the respondent for a refund of sales tax for the period 1 July 1995 to 30 June 2000 based on the same considerations as the claim for sales tax refund for the period 1 January 1993 to 30 June 1995 which has to date been unsuccessful.

[24] In the light of the reduction of the applicant's claim in the AAT proceeding to about $720,000, it is likely that the estimate of the refund of $3m for the period from 1 July 1995 is a considerable overestimate.

[25] It is necessary to consider whether the applicant's claim for a refund of sales tax raises an offsetting claim within the meaning of s 459H of the Act. The respondent has the benefit of a certificate under s 116(2) of the Sales Tax Assessment Act 1992 (Cth) in respect of the original application for refund made in respect of the period from 1 January 1993 to 30 June 1995. To date the applicant has been unsuccessful in establishing its entitlement to the refund of sales tax for the period ended 30 June 1995. As the applicant's application for special leave to appeal to the High Court has not yet been determined favourably, there are no proceedings involving the applicant and the respondent before the High Court. An applicant for special leave is characterised as "no more than an applicant desiring to obtain the Court's leave to commence proceedings in the Court": Collins v The Queen [1975] HCA 60; (1975) 133 CLR 120, 122.

[26] Under s 459H(5) an offsetting claim must be a genuine claim that the applicant has against the respondent by way of counterclaim, set-off or cross-demand. Because the appeals which were as of right in relation to this claim for refund of sales tax for the period ended 30 June 1995 which is also the basis of the claim for refund of sales tax subsequent to 1 July 1995 have been exhausted, the total claim for refund of sales tax cannot be characterised as an offsetting claim for the purpose of s 459H of the Act. The existence of the application for special leave to appeal to the High Court should therefore be considered only in relation to the exercise of the discretion which is conferred by s 459J of the Act: Eumina Investments Pty Ltd v Westpac Banking Corporation [1998] FCA 824; (1998) 84 FCR 454, 460.

[27] I shall now set out the facts relating to the applicant's claim that it can rely on an arguable estoppel for the deferral of interest and penalties on the sales tax for the first period.

[28] After the meeting between representatives of the applicant and representatives of the respondent held on 20 August 1996, the applicant's accountants sent a letter to the respondent dated 22 August 1996 which contained the following:

"In our discussions on 20 August 1996, in respect of these disputed returns, we are also given to understand that you will not seek payment of these disputed returns pending resolution of the sales tax refund issue. In addition we understood that the ATO would not be imposing additional tax for late payment in respect of these disputed months in view of the quantum of sales tax credits sought. Could you please provide written confirmation of our understanding of the above lodgement arrangement.

Lastly, you sought our comments on the additional tax for late sales tax payment currently existing in your accounts records for the taxpayer. We attach, as discussed, a copy of our submission to the ATO dated 5 July 1995 requesting remission of the penalty. We are unaware of any reply being received and look forward to your response to the remission request given the special circumstances that existed concerning the taxpayer during that time."

[29] The respondent's reply to that letter is dated 22 October 1996. Relevantly it states:

As you are aware sub-section 61(1), Sales Tax Assessment Act 1992 stipulates the requirement for your client, normally a monthly remitter, to continue to lodge monthly sales tax returns within twenty-one (21) days after the end of each month. The fact that an appeal or other legal action maybe taking place at that particular time does not excuse your client from not complying with this lodgment obligation of specifying the company's relevant month's sales tax liability.

Accordingly, it would be appreciated if this Office could be advised of

(i) your client's relevant monthly sales tax liabilities for the period May 1995 to September 1996 inclusive; and

(ii) the date on which your client proposes to commence lodging `monthly sales tax returns on time with the necessary remittance'.

As a result of the telephone discussions held on 21 October 1996, and in view of the appeal action taking place, this Office does not consider the lodgment to date of those 'NIL' monthly sales tax returns submitted by your client to constitute false statements as specified in section 97, Sales Tax Assessment Act 1992.

Neither of this Office's representatives present at the 20 August 1996 meeting stated or inferred that additional tax for late payment would be fully or partially remitted on either current or future sales tax liabilities incurred by your client. It is considered that this matter can only be comprehensively determined when the matter in dispute is finalised and the facts associated therewith are known by each party."

[30] Mr Coco deposes to what his understanding of the respondent's letter dated 22 October 1996 was at para 34 of his affidavit:

"My understanding of the respondent's letter dated 22 October 1996 is that the respondent would wait until the applicant had exhausted all court avenues in relation to its application for a sales tax refund before imposing any interest or penalties on the sales tax owing by the applicant for the first period. That understanding was reinforced to me by the fact that, until now, the respondent has not taken any action to recover the amounts claimed in the statutory demand on account of sales tax."

[31] Mr Coco deposes that on the basis of the understanding which he had of the respondent's letter of 22 October 1996, the applicant altered its position by not making provision for the payment of the interest and penalties that have accrued on the sales tax for the first period.

[32] The applicant submits that these facts give rise to, at least, an arguable estoppel which prevents the respondent from seeking to recover the interest or penalties on the sales tax for the first period until the High Court proceedings are concluded. The amount which is the subject of this dispute includes penalties to 30 June 1999 of $1,567,500.65 and an unquantified amount (part of $2,262,193.61) in respect of penalties after that period.

[33] The respondent submits that the conclusion which Mr Coco of the applicant drew from the respondent's letter dated 22 October 1996 was "self-delusion" or "wishful thinking" and that the terms of the letter itself could not be relied on to ground the estoppel in the terms claimed by the applicant. The respondent argues that, in any event, the deferral time has passed with the determination of the refund issue by the Full Federal Court.

[34] The respondent's letter of 22 October 1996 has to be considered in light of what was raised for consideration by the applicant's accountant's letter of 22 August 1996 - deferral of recovery of the disputed sales tax and no imposition of additional tax for late payment in respect of the disputed months.

[35] The statement made in the respondent's letter dated 22 October 1996 under the heading "Late Penalty Payment" is not concerned with either recovery of the disputed sales tax or imposition of or recovery of payments by the respondent from the applicant for additional tax for late payment, but the issue of whether such additional tax for late payment of sales tax would be fully or partially remitted. It is implicit that the letter of 22 October 1996 rejected the suggestion of the applicant's accountants that there was an arrangement about deferral of recovery of the disputed sales tax and no imposition of additional tax for late payment.

[36] The understanding which Mr Coco gleaned from the respondent's letter dated 22 October 1996 was not a reasonable interpretation of that letter and cannot give rise to an estoppel in the terms claimed by the applicant.

[37] The fact remains, however, that the respondent did not after the letter dated 22 October 1996 and before the decision of the Full Federal Court pursue payment of the disputed sales tax for the period May 1995 to September 1996. In the respondent's letter dated 25 October 2000 to the applicant's solicitors request was made for payment of the undisputed sales tax for the period August 1999 to June 2000, additional tax for late payment and general interest charges up to 30 June 2000 in respect of that sales tax and additional tax for late payment of sales tax between January 1997 and May 1999. That letter referred to the respondent's preparedness to consider material in relation to a "global settlement" of the disputed amounts (which would cover the unpaid sales tax for May 1995 to September 1996), but that the respondent could see no reason why the undisputed amounts (in contrast to the "disputed" amounts) should not be paid forthwith.

[38] That approach of not pursuing recovery of the disputed sales tax was reiterated in the respondent's letter dated 17 November 2000 to the applicant's solicitors where it was foreshadowed that the respondent would institute recovery proceedings for those parts of the applicant's debt which were then outstanding and undisputed.

[39] The determination of the appeal to the Full Federal Court obviously changed the respondent's attitude to pursuing the recovery of the disputed amounts of sales tax. Any negotiations between the parties for a "global settlement" of the disputed and undisputed amounts were considered by the respondent as having ended and that was conveyed by the respondent to the applicant's solicitors in the respondent's letter dated 24 May 2001. The demand for payment in that letter was for the total sum of $15,302,967.42 particularised exactly as it was particularised subsequently in the statutory demand.

[40] To the extent that the respondent conducted itself after its letter of 22 October 1996 in a way consistent with not pursuing recovery of the disputed sales tax that no longer prevailed after the determination of the appeal by the Full Federal Court. In the circumstances, it was not unreasonable for the respondent to proceed after the appeal had been determined by the Full Federal Court on the basis that the dispute was determined and notice of this change in conduct was given to the applicant.

[41] There is no substance in the arguable estoppel sought to be raised by the applicant as the second basis for disputing the applicant's liability for sales tax.

[42] I shall now deal with the third basis upon which the applicant disputes its liability for sales tax and that is the claim that the applicant has an arguable estoppel against the respondent from seeking the amount of the sales tax for the second period of $1,970,021.50 until negotiations of an overall settlement between the applicant and the respondent have concluded.

[43] Mr Coco deposes to the applicant's having entered into a repayment program with the respondent on or about 30 June 2000 in respect of the sales tax owing for the second period and relies on a letter from the applicant to the respondent dated 30 June 2000.

[44] The letter from the applicant to the respondent dated 30 June 2000 sent in relation to unpaid sales tax for the months June 1999 to June 2000 stated:

"It is proposed to pay off the outstanding amounts as follows:

(b) $100 000.00 being 19 weekly payments to commence on the 7th July 2000

[45] Mr Coco exhibits the letter from the respondent dated 7 July 2000 which responded to the applicant's letter dated 30 June 2000.

[46] Mr Coco deposes in para 53 of his affidavit as follows:

"Mr Ray Pflaum, an officer with the respondent, agreed to attend at the applicant's premises each week to collect the cheques."

It appears that Mr Pflaum collected a cheque from the applicant in the sum of $449,847 on 30 June 2000 and a further cheque of $100,000 on 7 July 2000 in accordance with the repayment schedule proposed by the applicant in its letter dated 30 June 2000.

[47] Despite the applicant's seeking to rely on the conduct of Mr Pflaum, it is apparent from the letter dated 7 July 2000 from the respondent that that letter sets out the respondent's response to the applicant's letter dated 30 June 2000. Clarification was sought in the respondent's letter dated 7 July 2000 in relation to the applicant's proposal, particularly in relation to what was to be included in the twentieth payment and whether the applicant was proposing to request the respondent to exercise his discretion to remit penalties and general interest charges. The letter dated 7 July 2000 also stated:

"In the interim, the company should continue to abide by the current informal arrangement whereby the company is making payment of $80,000 per week with a final payment to clear all outstanding liabilities for undisputed sales tax before the company first becomes liable to lodge and pay its GST liabilities.

I advise that collection of the company's sales tax debt has been transferred to a different office. Commencing on 14 July 2000 and weekly thereafter, payment under the current arrangement will need to be made by cheque sent to

[48] When the applicant received the respondent's letter dated 7 July 2000, Mr Coco states that he took the contents of that letter to amount to a breach of the arrangements which were put in place for Mr Pflaum to attend at the premises of the applicant and collect the cheques in respect of the "agreed" repayment program.

"On or about 18 July 2000, when Mr Pflaum visited me at the applicant's premises to collect the third payment, he said to me words to the effect that he had been instructed not to take any further payments because the unpaid sales tax for the second period would be dealt with as part of an overall settlement which was being discussed with the respondent at the time."

[50] Mr Coco deposes to believing what Mr Pflaum told him on or about 18 July 2000 and that, based on that, the applicant stopped making the proposed payments on account of outstanding sales tax. It appears that the solicitors for the applicant and the respondent were undertaking negotiations around that time in relation to payment of the outstanding liabilities of the applicant to the respondent. The failure of the applicant to respond to the respondent's letter dated 7 July 2000 was noted in the respondent's letters dated 25 October and 17 November 2000 to the applicant's solicitors. Even if there were any basis for the applicant to act on any statement made by Mr Pflaum to Mr Coco on 18 July 2000 in relation to making payments for unpaid sales tax for the second period (which must be unlikely having regard to the clear terms of the respondent's letter of 7 July 2000), the effect of that statement of Mr Pflaum ceased on receipt by the applicant's solicitors of the respondent's letter of 25 October 2000 which stated:

"As advised in my letter of 15 September 2000 my client does not have any record of payment of sales tax since 21 July 2000. Your client has therefore defaulted on the current arrangement and on the proposed arrangement. In the absence of the material requested, my client has been unable to consider a further extension of time for payment of the undisputed sales tax. Accordingly, the whole of the undisputed sales tax, plus additional tax for late payment and general interest charge is immediately due and payable and your client is requested to make arrangements for the immediate discharge of that debt."

The undisputed sales tax was then particularised in that letter in respect of the months of August 1999 to June 2000.

[51] If there were any doubt that overall settlement negotiations were at an end, that was removed by the contents of the respondent's letter dated 17 November 2000 to the applicant's solicitors.

[52] There is no substance in the applicant's claim that it can rely on an estoppel against the respondent in respect of the sales tax for the second period.

[53] The applicant relies on its claim for an income tax adjustment in respect of the assessability of the sum of $6,791,916 received by the applicant under the Transitional Assistance Payment Scheme ("TAPS").

[54] The genesis of TAPS was the announcement by the Federal Government in around July 1989 that certain recycled paper products would be exempt from wholesale sales tax. As a result, the applicant in January 1992 made a major commitment to the establishment of a recycled paper manufacturing plant over a 3 year period. On 26 June 1992 the Federal Government reversed the preferential sales tax exemption previously allowed on recycled paper products and reintroduced a 20% sales tax. Prior to 30 June 1992 the applicant had incurred $388,088 in relation to the construction of the new recycling plant and the total estimated cost of the plant at that time was expected to be approximately $9m.

[55] Investigations by a Senate select committee showed that the decision to reintroduce sales tax had a devastating impact on the recycled paper industry. As a result, the Federal Government decided to introduce a scheme whereby companies which manufactured 100% recycled paper products would receive special purpose payments over a 3 year period. This scheme became known as TAPS. Under TAPS, payments were made via tied grants to States or Territories having relevant manufacturers which then made payments to the manufacturers.

[56] The applicant made claims for assistance under the TAPS and received the following payments:

[57] On 17 June 1994 the applicant requested a private ruling from the respondent under Part IVAA of the Taxation Administration Act 1953 (Cth) that the payments made, or to be made, to the applicant under TAPS:

(a) were not assessable under the Income Tax Assessment Act 1936 (Cth) ("ITAA"); or alternatively

(b) could be offset against the cost of depreciable plant purchased by the applicant to manufacture recycled paper, thereby reducing the depreciation income tax deduction otherwise available for the recycling plant under s 54 of the ITAA in the income years in which the payments occurred.

[58] On 21 December 1994 the respondent delivered its private ruling which was that the payments made to, or to be made to, the applicant under TAPS were assessable as income under ss 25(1) and/or 26(g) and/or 26(j) of the ITAA or, alternatively, as capital gains under Part IIIA of the ITAA.

[59] On 1 February 1995 the applicant lodged an objection against the private ruling. It took the respondent 4 ½ years to deliver its decision with respect to the applicant's objection. The notice of objection decision was given on 5 August 1999. The respondent disallowed the applicant's objection in full. An application for a review of the respondent's objection decision was filed by the applicant in the AAT on 16 September 1999. The application for review was heard by a Senior Member of the AAT on 23 November 2000. Supplementary submissions were filed by the applicant on 14 December 2000. As at the date of the hearing of the application to set aside the statutory demand, the AAT had not yet delivered its decision in respect of the applicant's application for review. The fact that the proceedings in the AAT have not yet concluded must be due in no small part to the period of 4½ years which the respondent took to give a decision on the applicant's objection.

[60] The tax that was assessed in respect of payments under TAPS was:

[61] Mr Thorburn of the applicant's accountants has calculated that if the applicant is successful with its review application before the AAT, the net effect for the 1994 to 1999 income years inclusive of the estimate of interest and penalties is an overall reduction of the applicant's outstanding income tax liability from $4,066,819.70 to $111,837.26. At para 104 of his affidavit, Mr Coco deposes to the applicant's being prepared to pay the amount of $111,837.23 to the respondent in respect of its income tax liability.

[62] Ms Hollyock exhibits certified copies of the notices of assessment for the applicant for the years ended 30 June 1994, 1995 and 1999 for the purpose of s 177 of the ITAA. The applicant concedes that it cannot claim that there is a genuine dispute as to its liability to the respondent for the sum of $4,066,819.70 for income tax pursuant to these assessments: FJ Bloemen Pty Ltd v Commissioner of Taxation (Cth) [1981] HCA 27; (1981) 147 CLR 360, 375, Hoare Bros Pty Ltd v Deputy Commissioner of Taxation (1996) 62 FCR 302, 314. The applicant therefore concedes that it relies on the existing AAT proceeding in which the decision is currently reserved as a discretionary matter relevant to whether the statutory demand should be set aside.

[63] Paragraphs 105 to 124 of Mr Coco's affidavit deal with the applicant's understanding of the history and administration of TAPS and the applicant's criticisms of the administration of TAPS by the Commonwealth Treasury, particularly in failing to clarify at the outset whether or not payments under TAPS would be subject to tax. The applicant claims that it has been paid considerably less than what it should have been paid under a fair and equitable administration of TAPS. Mr Coco deposes that he believes, if the applicant is wound up, it will not have an opportunity to progress the disputes that it has with Treasury over the administration of TAPS. The difficulty with that assertion is that apart from the applicant's existing AAT proceeding, there are no proceedings or courses of action foreshadowed by the applicant in respect of the administration of TAPS.

[64] The applicant relies on the discretionary power to set aside the statutory demand pursuant to s 459J(1)(b) of the Act that there is some "other reason" why the demand should be set aside. The requirement that substantial injustice will be caused unless the demand is set aside relates only to the exercise of the discretion pursuant to s 459J(1)(a) of the Act: Chippendale Printing Co Pty Ltd v Deputy Commissioner of Taxation (1995) 55 FCR 562, 577. The "other reason" required by s 459J(1)(b) of the Act must be a reason other than a defect in the demand: Spencer Constructions Pty Ltd v G & M Aldridge Pty Ltd [1997] FCA 681; (1997) 76 FCR 452, 458-459.

[65] The respondent was in a position to be selective about which of the debts were incorporated in the statutory demand. The respondent elected to include the claims for unpaid income tax which would be substantially reversed if the applicant were to succeed in the existing AAT proceeding.

[66] During the hearing of this application, Mr Logan of Senior Counsel on behalf of the respondent made the submission that, for all practical purposes, it would make no substantive difference if the AAT decision were handed down before I decided this application as "there are still sufficient millions outstanding". This is a reference to the AAT proceeding involving only approximately $4m, when the total claim in the statutory demand is for approximately $15m.

[67] The problem with this submission, however, is that it overlooks the difficult position in which a taxpayer is placed when it is taking proceedings to dispute a certain tax liability, but the respondent serves a statutory demand which includes that tax liability and seeks to rely on the provisions in the tax legislation which preclude the taxpayer from arguing for the purpose of s 459H of the Act that there is a genuine dispute or offsetting claim in respect of the part of the tax liability which is the subject of the dispute proceedings. Although the existence of the dispute proceedings is relevant to the exercise of the discretion to set aside the statutory demand, when that power is exercised the statutory demand must be set aside in its entirety or not at all. It is not possible when exercising the jurisdiction under s 459J of the Act to set aside the statutory demand to the extent of the debt claimed which is the subject of the dispute proceedings.

[68] In this particular case, it is not possible to reflect the existing AAT proceeding by setting aside the statutory demand to the extent of the sum of $3, 954,982.44 which the applicant calculates would be the reduction in its liability if it were to succeed in the AAT proceeding.

[69] An issue of fairness arises about the Commissioner's decision to adopt a course in relation to the statutory demand which requires the applicant to pay about $15m to satisfy the demand, when there is a bona fide proceeding on foot awaiting a decision which has been reserved for nine months which could reduce that sum of $15m to about $11m. The issue of fairness in this particular case is brought sharply into focus against the respondent, when it took the respondent 4½ years to make the decision on the applicant's objection and it is that decision which is the subject of the AAT proceeding.

[70] The Full Court of the Federal Court in Hoare Bros Pty Ltd v Deputy Commissioner of Taxation at 317 expressly stated that it would be unwise to attempt to make out the limits of the discretion conferred by s 459J(1)(b) of the Act, but did not disapprove of the circumstances in which the primary judge in that case indicated that he would have been prepared to exercise the discretion in the taxpayer's favour if the respondent's conduct were unconscionable, an abuse of process or had given rise to substantial injustice.

[71] The relevance of the respondent's conduct in setting aside a statutory demand pursuant to s 459J(1)(b) was the subject of comment by Austin J in Moutere Pty Ltd v Deputy Commissioner of Taxation [2000] NSWSC 379; (2000) 34 ACSR 533 at paras 54 and 55:

"[54] Subparagraph (b) nevertheless has an important role to play in circumstances such as the present, as the Full Court's remarks in the Hoare Bros case (at 4174) indicate. The policy underlying s 459H is that the statutory demand procedure should not be used to coerce a person to pay a disputed amount. A statutory demand is not an instrument of debt collection. By analogy, the commissioner should not use the statutory demand procedure to apply coercive pressure to a taxpayer who genuinely objects to the commissioner's decision. To do so would be to take unfair advantage of those provisions of the taxation legislation (such as ss 14ZZM and 14ZZR of the TAA) which say that an amount owing in consequence of the commissioner's decision is recoverable, notwithstanding that an objection has been lodged against the decision.

[55] If the commissioner decides not to await the outcome of the objection, the proper course will often be for him to take proceedings for recovery of the debt rather than to summon up the spectre of liquidation by issuing a statutory demand. If the court forms the view that the commissioner has acted oppressively or unfairly by issuing a statutory demand in such circumstances, the appropriate course is for the court to set the demand aside under s 459J(1)(b). By doing so the court does not deny that the debt is recoverable although an objection has been made, but it thereby insists that the statutory demand procedure should not be used to apply pressure for payment of an amount which might ultimately be found not to be payable."

[72] In the circumstances of the history of the applicant's challenge to the inclusion in its income of the sum of $6,791,916 which it received under TAPS and the issue of the statutory demand by the respondent to include the disputed income tax when the AAT decision relating to the same had been reserved since November 2000, it was oppressive for the respondent to serve a statutory demand incorporating that disputed sum. On this basis alone, the statutory demand should be set aside.

[73] Because the inclusion of the sum of approximately $4m on account of unpaid income tax has tainted the statutory demand, it is not appropriate to impose conditions on the setting aside of the statutory demand.

[74] I do not consider that the existence of the application for special leave to appeal to the High Court in relation to the claim for a refund of sales tax would compel an exercise of the discretion under s 459J(1)(b) of the Act in favour of the applicant. Firstly, there are no proceedings between the parties on foot, because of the nature of a special leave application. Secondly, the respondent waited until this claim was disposed of by the Full Federal Court, before serving the statutory demand. Thirdly, as sales tax ceased to apply as from 1 July 2000, it is unlikely that the subject matter of the applicant's proposed appeal would attract a grant of special leave.

[75] It is also not necessary to consider the alternative relief claimed by the applicant of an extension of time for compliance with the statutory demand. When considering whether to exercise the power under s 459J(1)(b) of the Act, I did consider whether the problem generated by the respondent's including the debt of approximately $4m in the statutory demand could be addressed by extending the time for compliance with the statutory demand until after the delivery of decision of the AAT. If either party were then to appeal the decision of the AAT, it may result in a further application to extend the date for compliance with the statutory demand until after the resolution of the appeal: Graywinter Management Pty Ltd v Deputy Commissioner of Taxation (1996) 22 ACSR 636, 638. In view of my conclusion that the statutory demand is tainted, it is not appropriate to extend the time for compliance with it.

[76] I therefore order that the respondent's statutory demand for payment served on the applicant on 19 June 2001 be set aside. I will hear submissions from the parties on the issue of costs of the application.