THE DEPUTY COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Corporations - Insolvency - Application to set aside statutory demand - Whether offsetting claim - Relevant principles - Section 459J - Whether service of statutory demand oppressive or unjust - Outstanding objections by applicant to other taxation debts claimed by respondent - No evidence of oppression or injustice - Whether applicant can rely on ground not raised in affidavit in support of application - Turns on own facts

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

Application to set aside statutory demand dismissed

Chadwick Industries (South Coast) Pty Ltd v Condensing Vaporisers Pty Ltd (1994) 13 ACSR 3

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

Genesis Management Services Pty Ltd v Soniclean Pty Ltd [2005] SASC 225 (FC)

Hoare Bros Pty Ltd v Deputy Commissioner of Taxation (1996) 135 ALR 677

John Shearer Ltd v Gehl Co [1995] FCA 1789; (1995) 18 ACSR 780

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

Macleay Nominees Pty Ltd v Belle Property East Pty Ltd [2001] NSWSC 743

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

Royal Premier Pty Ltd v Taleski [2001] WASCA 48

Scanhill Pty Ltd v Century 21 Australasia Pty Ltd [1993] FCA 618; (1993) 12 ACSR 341

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

Chippendale Printing v Deputy Commissioner of Taxation (1995) 15 ASCR 682

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

Missay Pty Ltd v Seventh Cameo Nominees Pty Ltd (In liq) [2000] VSC 397

Shearer Ltd & Anor v Gehl Co [1995] FCA 1789; (1995) 134 ALR 1

Solarite Air Conditioning Pty Ltd v York International Australia Pty Ltd [2002] NSWSC 411

Woodhead Firth Lee Pty Ltd v Archer Pty Ltd (1995) 13 ACLC 883

1 MASTER NEWNES: On 2 August 2005, I dismissed an application by the applicant to set aside a statutory demand served by the respondent on 29 April 2005, for reasons which I gave briefly at that time. I have been requested to provide written reasons for my decision. These are those reasons.

2 The statutory demand served by the respondent required payment by the applicant of the sum of $19,822.44 owing by the applicant to the respondent under what is described as a Running Balance Account (the "RBA"). The applicant says that it has an offsetting claim and, in any event, there are other reasons, within the meaning of s 459J of the Corporations Act 2001 (Cth), why the demand should be set aside.

3 The demand was sent by the respondent by prepaid post on 29 April 2005 to the registered office of the applicant. On the same day, an officer of the respondent received a telephone call from the applicant's solicitor requesting a copy of the statement of account for the RBA. A copy of the statement of account was faxed to the solicitor on 29 April 2005. The statement of account ran to some 13 pages and it detailed the movements in the account from September 2000 to 28 April 2005. It showed the sum owing as at the latter date as $19,822.44.

4 In fact, on 29 April 2005 payment of the sum of $3210 was received from the applicant. That reduced the amount owing by the applicant to $16,612.44. A further RBA statement was issued by the respondent on 29 April 2005 showing that the payment of $3210 had been credited to the account and that the amount now owing was $16,612.44.

5 On 30 April 2005, another RBA statement was issued by automatic mail despatch to the applicant at its registered office, showing that the sum of $3210 had been credited to the account and that the amount owing as at 30 April 2005 was $16,612.44.

6 The statutory demand and accompanying affidavit was received by the applicant on 2 May 2005. On 20 May 2005, the applicant applied to have the statutory demand set aside. That application was supported by an affidavit of Mr Martin Lowry, the sole director of the applicant, sworn on 17 May 2005. In his affidavit, Mr Lowry referred to four grounds upon which he said the statutory demand should be set aside; first, that the amount specified in the statutory demand was incorrect, the payment of $3210 on 29 April 2005 not having been taken into account; secondly, that the applicant had an extant appeal against the respondent in the Administrative Appeals Tribunal ("AAT") in respect of a decision of the respondent to assess the applicant for income tax and that if the decision of the respondent is set aside that will give rise to an offsetting claim; thirdly, that the demand was oppressive because it would have the effect that the applicant would be unable to continue with the appeal and would thus cause the applicant substantial financial hardship; and fourthly, that it was difficult to determine how the amount claimed in the statutory demand had been calculated.

7 On the hearing of the application, counsel for the respondent sought, without opposition from the applicant, to amend the amount claimed in the statutory demand to reduce it to the sum of $16,612.44. The applicant did not press the objection in relation to the amount claimed in the statutory demand, nor its complaint that the amount stated in the statutory demand was difficult to determine. No doubt that is because, prior to receipt of the statutory demand, the applicant had been provided with detailed statements of account going back some five years, which clearly set out how the balance had been calculated, and which showed the initial debit balance of $19,822.44, and, subsequently, that the sum of $3210 had been credited leading to the current debit balance of $16,612.44. Accordingly, even if it could be said that in the circumstances the statutory demand was defective (which I would have thought was most doubtful), it did not result in substantial injustice under s 459J(1)(a) of the Act.

8 The two grounds relied upon on the hearing of the application were therefore that service of the demand was oppressive and that there is an offsetting claim. I will deal first with the contention that there is an offsetting claim.

9 On 7 January 2005, the applicant filed in the AAT an application for review of the decision of the Commissioner of Taxation by which the Commissioner disallowed the applicant's objections to assessments of income tax in respect of the financial years ended 30 June 1999, 30 June 2000 and 30 June 2001. That application is as yet unresolved and the proceedings are continuing in the AAT. I was not informed what stage the proceedings had reached. The amount in question in the AAT proceedings was, as at 29 April 2005, the sum of $63,658.81.

10 In order to recover the income tax debt arising from the disallowance of the objections, in October 2003 the respondent served a garnishee notice on Westpac Banking Corporation to obtain moneys held in a bank account in the name of the applicant. A total amount of $9587.32 was ultimately recovered by the respondent.

11 The respondent subsequently served on the applicant a statutory demand, dated 13 February 2004, claiming the sum of $61,739.55 owing in respect of income tax. The applicant applied to have the statutory demand set aside on the ground that there was a genuine dispute between the parties as to the debt. Following discussions between the parties, the statutory demand was not pursued by the respondent and, on 3 June 2004, the applicant sought and obtained orders dismissing the application to set it aside.

12 It was not in issue that the income tax debt which is the subject of the proceedings in the AAT is unrelated to the debt claimed in the statutory demand of 29 April 2005. The applicant says, however, that if the applicant is successful in the AAT then the amount of $9587.32 obtained by the respondent under the garnishee order will be repayable to the applicant and should therefore be allocated against the debt owing under the RBA. It also claimed that it would be entitled to offset against the debt claimed the balance of the amount by which the applicant's liability for income tax was reduced. There was, I should say, no evidence as to what (if any) amount had been paid by the applicant in respect of the income tax liability, apart from the garnisheed sum of $9587.32.

13 In relation to the AAT proceedings, Mr Lowry says in his affidavit of 17 May 2005 that he is:

"informed by my solicitors and believe that they are of the view, based on my instructions to them, the income tax assessed against the Applicant is incorrect and will be reduced quite substantially with the consequential elimination of penalties and interest."

"The applicant has spent a significant amount on legal and other professional fees in relation to the AAT proceedings which has adversely affected the cash flow of the applicant, with the result the applicant does not currently have the capacity to pay an amount of $19,822.45 and would suffer substantial financial hardship and severely impact on its ability to continue in its related appeal against the respondent in the event that the statutory demand is not set aside."

15 The applicant did not dispute that the amount claimed in the statutory demand is due and payable and that it is not the subject of any challenge.

16 An offsetting claim is defined by s 459H(5) as being:

"A genuine claim that the company has against the respondent by way of counterclaim, set-off or cross-demand ... ".

17 The test to be applied, as with the test to be applied to determine whether there is a genuine dispute as to the debt claimed, has been expressed in a number of ways. In Scanhill Pty Ltd v Century 21 Australasia Pty Ltd [1993] FCA 618; (1993) 12 ACSR 341, Beazley J said at 357:

"The test to be applied for the purposes of s 459H is whether the Court is satisfied that there is a serious question to be tried that the applicant has an offsetting claim."

18 In Chadwick Industries (South Coast) Pty Ltd v Condensing Vaporisers Pty Ltd (1994) 13 ACSR 37 Lockhart J, having reviewed a number of the authorities, including Scanhill Pty Ltd v Century 21 Australasia Pty Ltd, considered that the various tests enunciated in the cases were not inconsistent, although the highest threshold was probably that stated by Beazley J. His Honour concluded (at 39) that the Court must be satisfied that the claim is not plainly frivolous or vexatious and that it may have some substance.

19 In John Shearer Ltd v Gehl Co [1995] FCA 1789; (1995) 18 ACSR 780, Von Doussa, Hill and Tamberlin JJ said at 787:

"In order to show that an offsetting claim is genuine it must be put forward in good faith. There must be something more than mere assertion."

20 The concept of good faith was considered in Macleay Nominees Pty Ltd v Belle Property East Pty Ltd [2001] NSWSC 743, where Palmer J said:

"In my opinion, a genuine offsetting claim ... means a claim on a cause of action advanced in good faith, for an amount claimed in good faith. 'Good faith' means arguable on the basis of facts asserted with sufficient particularity to enable the Court to determine that the claim is not fanciful. In a claim for unliquidated damages for economic loss, the Court will not be able to determine whether the amount claimed is claimed in good faith unless the plaintiff adduces some evidence to show the basis upon which the loss is said to arise and how that loss is calculated. If such evidence is entirely lacking, the Court cannot find that there is a genuine offsetting claim for the purposes of s 459H."

21 The need for the plaintiff to adduce evidence of the basis of the claim and the manner in which it has been calculated was also considered in Royal Premier Pty Ltd v Taleski [2001] WASCA 48, in which Ipp J said, in relation to an offsetting claim for unliquidated damages (at [57]):

"Of course, at this stage, it is not necessary for evidence as to damages to be given in meticulous detail. But there must be at least some material upon which the court can conclude that some damage has been sustained and which will enable the court to make a reasonable assessment as to the amount thereof. In this case, however, there is simply no way of determining whether damage was suffered by the appellant in consequence of the alleged negligence or misleading or deceptive conduct, and there is no evidentiary material from which damage suffered by the appellant can be calculated. This absence of evidence as to damage is, of itself, fatal to the appellant's argument."

22 I should say that the respondent did not seek to argue on this application that the outcome of the AAT proceedings was not capable of giving rise to an offsetting claim as defined in s 459H of the Act: cf Willemse Family Co Pty Ltd v Deputy Commissioner of Taxation [2002] QSC 292; [2003] 2 Qd R 334 at 342 - 344. It was simply submitted on behalf of the respondent that on the evidence no offsetting claim had been established by the applicant.

23 I accept that submission. There is in the present case no evidence indicating the amount of the alleged offsetting claim if the proceedings in the AAT were resolved in favour of the applicant. There is no indication, even in general terms, of the amount of any refund to which the applicant would become entitled, or even of the extent to which the income tax debt would be reduced, were those proceedings to be successful. There is no evidence that if the applicant were to be successful any offsetting claim which would then arise would reduce the amount of the debt set out in the statutory demand below the statutory minimum. Mr Lowry simply says that he is informed by his solicitors that they believe the income tax assessed against the applicant "will be reduced quite substantially". That, in my view, falls a long way short of establishing a relevant offsetting claim which would entitle the applicant to have the statutory demand set aside.

24 The other ground relied upon by the applicant was that the service of the statutory demand was oppressive and would cause substantial injustice to the applicant, and that that constituted "some other reason" why the statutory demand should be set aside, within the meaning of s 459J(1)(b) of the Act.

25 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 (1996) 135 ALR 677. 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.

26 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. The Commissioner should not, therefore, use the statutory demand procedure to apply coercive pressure to a taxpayer who genuinely objects to the Commissioner's decision. If the Commissioner elects not to await the outcome of the objection the proper course will usually be to take recovery proceedings rather than use the statutory demand procedure. If the Court forms the view that the Commissioner has acted oppressively or unfairly by issuing a statutory demand in such circumstances, 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 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.

27 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.

28 In Willemse Family Co Pty Ltd v Deputy Commissioner of Taxation (supra), 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."

29 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."

30 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.

31 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.

32 In the present case, there is no challenge to the debt set out in the statutory demand nor is it suggested that the proceedings in the AAT are relevant to the applicant's liability for that debt. The applicant's liability for the debt is not disputed. Moreover, it is by no means evident that the applicant is solvent. The debt has not been paid. A relatively small part-payment was made on 29 April 2005. It would appear from Mr Lowry's affidavit statement that as at 17 May 2005 the applicant was unable to meet a debt of $19,822.44 (albeit that the amount then owing was in fact $16,612.44). There are therefore some grounds to believe that the applicant may be unable to meet its debts when they fall due.

33 The fact that there are on foot proceedings in the AAT between the applicant and the respondent in respect of other taxation liabilities of the applicant does not establish that the service of the statutory demand is oppressive or unjust. Nor does the fact that a previous statutory demand in respect of the disputed tax liability was served and ultimately not pursued. There is no evidence that the respondent was motivated to serve the current statutory demand by a desire to inhibit or prevent the applicant from prosecuting the proceedings in the AAT or for any other improper reason.

34 In the circumstances, I do not consider that the respondent's conduct was unconscionable, was an abuse of process or gave rise to a substantial injustice. In my view, no reason has been shown for setting aside the demand.

35 The applicant sought, on the hearing of the application, to rely upon a further ground. It was submitted by counsel for the applicant that, upon reading the respondent's affidavit in opposition to this application, the applicant had noticed that its previous tax agent had completed its business activity statements erroneously and not in accordance with the applicant's instructions. It was submitted that the applicant had found other errors in its taxation liabilities as a result of the engagement of that tax agent. The applicant's counsel the applicant was concerned that the remaining business activity statements "may be tainted and may require amendments reducing the liability owed to the respondent".

36 It was argued on behalf of the applicant that the Court should therefore exercise its discretion to set aside the statutory demand so that the applicant was afforded a proper opportunity to investigate this concern. The applicant, by way of written submissions, said that "once the tax liabilities have been properly ascertained, the applicant undertakes to pay all tax liabilities". I might say that the latter statement is to be contrasted with the statement in Mr Lowry's affidavit that, as at 17 May 2005, the applicant was unable to pay an amount of $19,822.45.

37 The respondent objected to reliance on this ground on the basis first, that it had not been raised in Mr Lowry's affidavit and it could not therefore be raised now, and secondly, and in any event, that there was no evidence that the applicant had in fact noticed such errors, nor was there evidence of circumstances which indicated that there may be other errors which would reduce the applicant's tax liability.

38 In my view, this ground was not open to the applicant.

39 In Energy Equity Corporation Ltd v Sinedie Pty Ltd [2001] WASCA 419, Wallwork J (with whom Steytler J and Olson AUJ agreed), having reviewed a number of authorities, concluded 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_._ See also Genesis Management Services Pty Ltd v Soniclean Pty Ltd [2005] SASC 225 (FC) at [57] - [58].

40 Moreover, there was simply no evidence to support this ground. No affidavit was filed dealing with the matters asserted in the applicant's submissions and, indeed, in those submissions it was conceded that the applicant "has little evidence" of such errors. That may explain why no affidavit evidence in support of it was sought to be adduced. The assertion itself was framed in the submissions in terms of the utmost generality, if not vagueness, and the suggestion of, to date, undetected errors in the applicant's business activity statements does not rise above the speculative.

41 It was for those reasons that, on 2 August 2005, I dismissed the application to set aside the statutory demand.