On Tuesday the Federal Court dismissed an application by a company trading as a law firm to set aside a statutory demand issued by the ATO. It is an interesting case and the judgment provides a useful reminder that even though a company may have challenged a tax assessment and an objection or appeal proceedings are pending, this is no bar to the Commissioner issuing a statutory demand, and does not of itself provide grounds to have one set aside. The judgment of Murphy J is that in HC Legal Pty Ltd v Deputy Commissioner of Taxation  FCA 45.
In applications to set aside a statutory demand, the ATO is in a privileged position compared with anyone else. This is because even where the taxpayer disputes the tax debt, the ATO has the benefit of several legislative provisions which have the effect of deeming notices of assessment and declarations as conclusive evidence that the amounts and particulars are correct and due. The Hight Court has held that the operation of those provisions cannot be sidestepped by an application by a taxpayer under s 459G of the Corporations Act to set aside a statutory demand by the Commissioner: Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd  HCA 41; (2008) 237 CLR 473 (Broadbeach Properties).
Before turning to the substantive part of the case, I will first briefly address two other aspects.
Applications for review of a Federal Court Registrar’s decision
HC Legal Pty Ltd v DCOT was in fact a rehearing de novo of the set-aside application which had first been made to a Registrar and dismissed. The plaintiff (HCL) had then made application for a review of the Registrar’s decision pursuant to s 35A(5) of the Federal Court Act 1976 (Cth). His Honour said the following in relation to the nature of applications for review of a Federal Court Registrar’s decision, at  -
“It is uncontroversial that the application involves a rehearing de novo, at which the parties may adduce further evidence. The Court is to exercise its discretion afresh, unfettered by the decision of the Registrar: Martin v Commonwealth Bank of Australia  FCA 87; (2001) 217 ALR 634 at  and ; Mazukov v University of Tasmania  FCAFC 159 at -; Callegher v ASIC  FCA 482; (2007) 239 ALR 749 at .”
Background – The contractual arrangement
This case involved a rather curious contractual arrangement, which lead directly to the tax liability and statutory demand that followed. The law firm in question Hambros and Cahill Lawyers (HCL) was a small one, with two lawyers as its directors. In December 2011, HCL entered into an agreement with an entity related to the winemaker Andrew Garrett (Holy Grail). Under the agreement, for a fee, Holy Grail granted HCL the exclusive rights to provide legal services to Mr Garrett’s associated entities. Not only might it be thought unusual for a law firm to purchase the rights to represent clients, but the size of the fee HCL agreed to pay for this right was staggering: $45m plus GST – a total of $49.5m. HCL was to pay this fee pursuant to a vendor finance agreement, the vendor being Holy Grail and the borrower being HCL. The effect of this was that HCL did not need to advance any funds at the time.
In early 2012, when HCL came to lodge its BAS for that last quarter in 2011, it stated it had made a capital purchase in the sum of $49.5m in the last quarter of 2011, and claimed input tax credits from the Commissioner in the sum of $4.5m for the GST paid on that purchase. After deductions for GST amounts it owed, the input tax credits it claimed came to $4,491,954, which the Commissioner then remitted to HCL. There was no evidence as to what then happened to that money in the hands of HCL, but HCL’s counsel informed the Court that it had been used to pay certain expenses of the firm, pay a deposit to purchase Seabrook Chambers in Melbourne, and the balance of $2m each was distributed to the two directors, posted in the books as a loan, although each director had paid back $350,000 to HCL.
As Murphy J put it: “The Commissioner’s concern regarding the transaction and the claim for input credits of $4.491 was immediately apparent.” Shortly thereafter the Commissioner froze HCL’s bank accounts and moved to audit the firm.
In May 2011, following the audit, the Commissioner assessed HCL as liable to pay $4.5m in GST. However, although the ATO’s Running Balance Account (RBA) statement for the company showed that GST liability as relating to the last quarter of 2011, the notice of assessment referred to the first quarter of 2012. Under a separate notice, with the correct tax period cited, there was also a penalty imposed of $2.5m.
On 19 June 2012 HCL lodged its objection to the assessment and penalty.
On 4 July 2012 the Commissioner served the statutory demand, seeking payment of $6.95m – $4.5m in GST, $2.25 penalty and interest charges.
On 11 September 2012 the Commissioner sent a letter enclosing a new, revised assessment to HCL, asserting the first notice had contained a typographical error and that the correct tax period was the last quarter of 2011. This was followed by an email from the Commissioner’s office referring to the error in the first assessment.
The Statutory Demand – Was there a “genuine dispute” such that it should be set aside?
The Court may set aside a statutory demand on the basis that there is a genuine dispute about the existence or amount of the debt to which the demand relates: s 459H(1)(a) and (3) of the Corporations Act 2001 (Cth) (the Act).
In the hearing before the Registrar, HCL had not contended that there was a genuine dispute under s 459H because, said Murphy J in his judgment, of the statutory protection afforded to debts arising from tax assessments. In the Broadbeach Properties case referred to above, the High Court said this at - -
“Section 459G applications by taxpayers are not Pt IVC proceedings and production by the Commissioner of the notices of assessment and of the GST declarations conclusively demonstrates that the amounts and particulars in the assessments and declarations are correct ([Taxation] Administration Act, Sch 1, s 105-100 [now s 350-10]; [Income Tax] Assessment Act, s 177(1)). That being so, the operation of the provisions in the taxation laws creating the debts and providing for their recovery by the Commissioner cannot be sidestepped in an application by a taxpayer under s 459G of the Corporations Act to set aside a statutory demand by the Commissioner.
“The matter was explained, with respect, correctly by Williams J in Bluehaven Transport Pty Ltd v Deputy Federal Commissioner of Taxation (2000) 157 FLR 26 at 32. The use by the Commissioner of the statutory demand procedure in aid of a winding up application is in the course of recovery of the relevant indebtedness to the Commonwealth by a permissible legal avenue. The phrase “may be recovered” in ss 14ZZM and 14ZZR of the Administration Act applies to the statutory demand procedure. That state of affairs places the existence and amounts of the “tax debts” outside the area for a “genuine dispute” for the purposes of s 459H(1) of the Corporations Act.”
To consider that for a moment: In other words, the effect of the legislative provisions cited in the first of these two paragraphs is that when it comes to debt recovery, the ATO’s claims are in a sense “bulletproof” – the notices of assessment and declarations they issue are treated as conclusive evidence that they are correct as to the amount and particulars of the tax liabilities. The effect of the provisions in the second paragraph is that the Commissioner can continue with recovery actions even if a review on objection or an appeal pending, as if no such review or appeal were pending.
While HCL did not run it before the Registrar, before Murphy J, HCL advanced the argument that there was a genuine dispute under s 459H(1). HCL argued that the Commissioner had conceded the first notice of assessment was flawed, pointing to the issue of the second notice, and the ATO correspondence about the error. HCL argued that this negated the first assessment on which the statutory demand was predicated.
His Honour rejected these arguments, on a number of grounds -
- The Commissioner had not discharged the first assessment made, as evidenced by the RBA statement showing no adjustment;
- The contentions of HCL were misconceived as they equated an “assessment” with a “notice of assessment”, the former being the official act or operation of the Commissioner, the second being the piece of paper informing of it (see - and the authorities and provisions there cited);
- The first notice of assessment with its error as to the relevant tax period did not affect the assessment itself. Indeed under s 105-20(1), Schedule 1 of the Taxation Administration Act 1953 (Cth), the assessment would remain valid even if notice of the assessment was not given at all (-);
- It was clear, including from HCL’s objection and submissions, that HCL was not mislead by the error in the first notice ();
- In any event, the Commissioner corrected the error by way of the second notice of assessment, which was provided prior to the hearing. The existence of a genuine dispute must be determined at the time the Court hears the application (see  and the authorities there cited);
- The Commissioner also has the benefit of s 8AAZI of the Taxation Administration Act, which provides that the production of an RBA statement is prima facie evidence that the RBA was duly kept and that the amounts and particulars in the statement are correct. The relevant RBA was in evidence before the Court and showed that the amount reflected in the statutory demand was the amount of HCL’s debt to the Commissioner as at the date of the statutory demand (see - and -);
- Various other legislative provisions have the effect that the amounts set out in the RBA statement were now due and payable by HCL: see subsection 8AAZH(1) of the Taxation Administration Act 1953 (Cth), and s 255-5 and 255-1 of Schedule 1 of that Act (see );
- The Commissioner also relied upon the above-mentioned s 350-10 of Schedule 1 of the Taxation Administration Act, which provides that the production of a notice of assessment is conclusive evidence that the assessment was properly made, and the amounts and particulars of the assessment are correct. His Honour was not persuaded that in the circumstances of this case that provision operated as the Commissioner contended, with regards to the first notice of assessment. However in light of his conclusions above, it was unnecessary to decide this question (see ).
The Court found that HCL’s contentions raised a spurious rather than bona fide or real ground of dispute. His Honour did not accept that the error in the first notice of assessment gave rise to a genuine dispute under s 459H of the Act as to the existence or amount of the debt to which the statutory demand related. The assessment itself was unchanged. (See  and the authority there cited.)
Whether the Statutory Demand should be set aside for some other reason
HCL also argued that the statutory demand should be set aside as there was “some other reason” which would justify the Court’s exercise of its discretion to do so pursuant to s 459J(1)(b) of the Act. HCL based this upon the Commissioner’s conduct, upon the fact that HCL had disputed the assessment by lodging an objection, and upon the contention that it had a reasonably arguable case on its objection.
In Hoare Bros Pty Ltd v Deputy Commissioner of Taxation (1995) 19 ACSR 125 at 139, the Full Federal Court observed that the discretion might be exercised where it is “shown that the Commissioner’s conduct was unconscionable, was an abuse of process, or had given rise to substantial injustice.”
Later judgments have indicated that the discretion is of broad compass, and Murphy J expressed the view that he did not consider the Court in Hoare Bros was seeking to exhaustively set out the situations it comprehends (although I suggest it provides a useful guide). HCL argued, and his Honour accepted, that it was not necessary to show that substantial injustice would be caused if the discretion were not exercised, although he qualified that, noting that in Broadbeach the High Court had overturned one of the decisions HCL relied upon in this submission. In other words, it indeed might be necessary to demonstrate substantial injustice would follow were the statutory demand allowed to stand.
HCL argued that the existence of proceedings disputing a tax assessment may be relevant to the exercise of the discretion, and pointed to a line of authority in support of that view (see ). However, as his Honour noted -
- Section 14ZZM of the Taxation Administration Act provides -“The fact that a review is pending in relation to a taxation decision does not in the meantime interfere with, or affect, the decision and any tax, additional tax or other amount may be recovered as if no review were pending.”
- Section 14ZZR provides – “The fact that an appeal is pending in relation to a taxation decision does not in the meantime interfere with, or affect, the decision and any tax, additional tax or other amount may be recovered as if no appeal were pending.”
- In 2008 in Broadbeach, subsequent to the authorities HCL relied upon, the High Court observed at - that – “[T]he hypothesis in the present appeals must be…that there is no “genuine dispute” within the meaning of s 459H(1). Both the primary judge and the Court of Appeal emphasised the importance of the disruption to taxpayers, their other creditors and contributories that would ensure from a winding up, together with the absence of any suggestion that the revenue would suffer actual prejudice if the Commissioner were left to other remedies to recover the tax debts. But these considerations are ordinary incidents of reliance by the Commissioner upon the statutory demand system….The “material considerations”…which are to be taken into account, on an application to set aside a statutory demand, when determining the existence of the necessary satisfaction for para (b) of s 459J(1) must include the legislative policy, manifested in ss 14ZZM and 14ZZR of the Administration Act, respecting the recovery of tax debts notwithstanding the pendency of Pt IVC proceedings.”
- His Honour considered that the legislative policy in ss 14ZZM and 14ZZR is that tax assessments are to be paid, even though a review or appeal is on foot;
- His Honour also pointed to the judgment of Olney J in Kalis Nominees Pty Ltd v Deputy Commissioner of Taxation 91995) 31 ATR 188 at 193 where Olney J – with a note of regret at the end – said: “…The policy of the law would be defeated if a demand were set aside under s 459J(1)(b) simply because a review of an objection decision is pending. A taxpayer must, in the context of a case of this nature, demonstrate more than the fact that he disputes his liability for the tax as assessed and that he is actively pursuing his remedies. It is both unnecessary and undesirable to endeavour to list the circumstances which would justify the exercise of the discretion under s 459J(1)(b) except to say that in the case in which the Commissioner is not shown to have acted oppressively or to have treated the applicant in a manner different from other taxpayers in a similar position, it is not appropriate that the discretion to set aside the demand should be exercised. Section 459J(1)(b) does not provide an occasion for the Court to express its views on the reasonableness or otherwise of the taxation legislation.”
In response, HCL pointed to the concession the Commissioner had made in Broadbeach that upon the hearing of a winding up application, the court might properly have regard to whether the taxpayer had a “reasonably arguable” case in pending proceedings in which it was objecting to the tax assessment. HCL argued that there was no reason why the existence of a “reasonably arguable” case cannot be taken into account at the statutory demand stage, rather than at the winding up stage as suggested by their Honours in Broadbeach.
His Honour rejected this also. In Broadbeach at  the Hight Court had said -
“…Such consideration [of the time which has elapsed and the progression of the Part IVC proceedings towards determination], if it were supported by evidence of the state of progression of the Pt IVC proceedings, would be relevant in the operation of Pt 5.4 of the Corporations Act, if at all, at the later stage of the hearing of any winding up application.”
In any event, Murphy J could not be satisfied on the evidence before him that HCL had a reasonably arguable case, and HCL did not seek to develop its submissions beyond a mere assertion that its acquisition of the right to provide legal services was a “creditable acquisition” within the meaning of the GST Act, and that it was therefore entitled to the input tax credit of $4.5m claimed.
In relation to conduct of the Commissioner which it argued justified the Court exercising its discretion under s 459J(1)(b) to set aside the statutory demand for “some other reason”, HCL pointed to -
- the Commissioner’s freezing of HCL’s accounts – which lasted for 1 day,
- an alleged breach of undertaking to defer recovery proceedings – his Honour found that the agreement was only for the Commissioner to defer them until after an extension for HCL to lodge its objection had expired, which the Commissioner did,
- a refusal to agree to defer recovery until after the determination of HCL’s objection and any appeals – the Commissioner refused to do so unless HCL was prepared to provide acceptable security for the debt, which HCL declined to provide,
- the garnishee notice the Commissioner issued and directed to HCL’s bank – which resulted in recovery of a small amount and which was rescinded after a short time, and
- HCL’s suspicion that the assessments were tainted by bad faith. It had made several FOI requests for the Commissioner’s documents relating to the freezing of accounts and the audit, and had received documents in response – his Honour found none of the documents he was taken to evidenced any bad faith on the part of the Commissioner.
His Honour held that in all the circumstances of the case he did not consider the Commissioner’s actions, considered individually or collectively, were unconscionable, oppressive, abusive, or productive of substantial injustice. There was nothing to justify the exercise of his discretion.
His Honour noted, perhaps wryly, that 11 months later, HCL and its directors still had the benefit of the almost $4.5m remitted to it by the Commissioner. He dismissed the application to set aside the statutory demand and awarded costs of the application, and of the hearing before the Registrar, against HCL.
I will endeavour to monitor the Federal Court portal to see if the judgment is appealed, and if so will post an update to that effect.