Held v. Deputy Federal Commissioner of Taxation

Judges: Young CJ
McGarvie J
O'Bryan J

King J

Court:
Supreme Court of Victoria (Full Court)

Judgment date: Judgment handed down 15 April 1988.

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King J.

This matter is an appeal from an order of the Master giving leave to sign final judgment in an action asking for judgment for $204,974.51, being a debt due to the Commonwealth of Australia and payable to and recoverable by the plaintiff under the Income Tax Assessment Act 1936. This alleged debt comprises assessments for the tax years 1981 and 1982, tax under sec. 226 in respect of the year 1982 for not disclosing taxable income,

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and additional tax for late payment. The notices of assessment were issued on 26 November 1985 and the due date for payment was 30 December 1985. The defendant objected to the assessments early in 1986. The Deputy Commissioner disallowed the objection to the 1981 assessment on 10 June 1986; on 28 July 1986 the defendant asked that this objection be referred to a Board of Review, and the Deputy Commissioner referred it on 12 March 1987. The Deputy Commissioner disallowed the objection in respect of the 1982 assessment on 9 February 1987; the defendant requested its referral on 10 April 1987 and the Commissioner referred it to the Administrative Appeals Tribunal on 20 November 1987. On 13 March 1987 the Deputy Commissioner began this action. A defence denying liability was served on 15 June 1987. The Deputy Commissioner took out a summons for final judgment returnable on 3 December 1987; on that date the Master ordered judgment for the whole amount claimed and interest. The defendant asked for a stay of execution and this application was dismissed. On 10 December 1987 the defendant appealed against the Master's judgment and the refusal of a stay of execution and the matter came before me on 4 February 1988. The references to the appeal tribunals have not yet been heard and it is not known when they will be heard.

The facts out of which the assessments under consideration arose are that the ``family business'' of the defendant's father has been carried on by Kendaw Nominees Pty. Ltd. (called ``Kendaw'') the trustee of the Evansea Trust; the defendant and his father have been at all material times directors of Kendaw, but the role of the defendant in its business is said by him to have been nominal. He says that all decisions made by Kendaw have been essentially the decisions of his father. The Evansea Trust is a discretionary trust, in the trust deed of which, dated 17 October 1980, the defendant is named as primary beneficiary. In general terms the effect of this is that unless the trustee before vesting day duly makes other provision (which it has not done) the defendant becomes on that day solely entitled to the capital of the trust fund. In the meantime he is one of the persons to whom the trustee may distribute income. In the 1981 tax year he received $360 from the fund and in the 1982 year $4,000. In the 1981 year the trust distributed $150,000 to Forty-Ninth T.S. Co. Pty. Ltd. in its capacity as trustee of the I.P.T.A. Trust, a company associated with the interests of Mr Garrick Gray. After deduction of fees payable to Mr Gray the sum of $127,500 was lent to Cornix Anna Nominees Pty. Ltd., a company associated with the defendant's father. On 23 June 1981 the defendant was appointed a director and the secretary of this company. In respect of the tax year 1982 the Evansea Trust distributed $100,000 to Almond Banner Pty. Ltd. in its capacity as trustee of the Almond Banner Trust; this is a company associated with the interests of Mr Gray. After deduction of $10,500 payable to the latter the balance of $89,500 was lent to Olive Dawn Pty. Ltd., a company associated with the defendant's father. The defendant's father has deposed that he decided on the carrying out of these transactions for the purpose of minimising the Evansea Trust's income. The said funds lent to Cornix Anna and to Olive Dawn were used solely in business conducted by the Evansea Trust.

The defendant himself has sworn under cross-examination that not only has he had no part in the business conducted by the trustee of the Evansea Trust but also that he did not know even at the time of giving evidence that he had been a director of Kendaw and Cornix Anna in the 1981 and 1982 tax years. He said he knew that he was a director of Frank Lee Yarns, a company run by his father, and thought that documents tendered for his signature and signed by him related to that company, and that the payments made to him came from that company. He said that he did not know that he was a beneficiary of the Evansea Trust until interviewed by the plaintiff's officers late in 1984. He said that he could not recall the meetings at which the directors' resolutions already referred to were passed.

It was explained to me by Mr Merkel Q.C., who appeared for the defendant, that the Deputy Commissioner must have decided to treat the distribution of moneys to the Forty-Ninth T.S. Co. Pty. Ltd. and Almond Banner Pty. Ltd. as part of an illegal tax minimisation scheme under sec. 260 and as if it had not taken place. He has then treated such moneys as undistributed income which is deemed to have been distributed to the defendant as principal beneficiary under the trust deed, thereby making the defendant assessable. He submitted that the effect of

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resolutions passed by the directors of the trust deed was that in the event of the said tax minimisation scheme being struck down the income distributed pursuant to it fell to be distributed to beneficiaries specified in the resolutions, including the defendant, and that the residual distribution clause in the trust deed had thereby been rendered inoperative. This, he submitted, would have the effect that the said income should be regarded as being undistributed to the beneficiaries named in the resolutions so that under the Act the trustee would be the person bound to pay tax on it. This, he said, is the case which would be put to the appeal tribunal in respect of both years. Mr Kendall, for the Deputy Commissioner, agreed that there is an argument available on appeal on this point.

The Deputy Commissioner relies on sec. 177(1) of the Income Tax Assessment Act, which provides as follows:

``The production of a notice of assessment, or of a document under the hand of the Commissioner, a Second Commissioner, or a Deputy Commissioner, purporting to be a copy of a notice of assessment, shall be conclusive evidence of the due making of the assessment and (except in proceedings on appeal against the assessment) that the amount and all the particulars of the assessment are correct.''

Mr Merkel's first submission to me was that the Deputy Commissioner had issued inconsistent assessments in respect of the same tax in respect of the 1981 tax year and that he is not entitled to proceed to judgment on one such assessment without withdrawing the other. This submission was based on an adjusted assessment issued against the trustee for the Held No. 2 Trust, that is, Cornix Anna, in respect of the said year for $127,500. It is common ground between the parties that this is the sum said to have been lent to Cornix Anna by Forty-Ninth T.S. Co. Pty. Ltd. In the adjustment sheet relating to this assessment the assessment is justified as:

``being profit assessable under s. 26(a) from a profit-making undertaking or scheme whereby a benefit was received. The assessment may also be supported on the grounds that the above-mentioned amount represents income according to ordinary concepts, or, alternatively, that the amount is assessable as a distribution of trust income.''

Mr Kendall of counsel for the plaintiff has offered an undertaking not to seek to recover under Assessment No. 127500 issued against the Held No. 2 Trust for the year of income ended 30 June 1981 until all objections and appeals brought by the defendant against an assessment issued against him for the same income have been finally determined, and an undertaking to withdraw the said assessment issued against the Held No. 2 Trust if the plaintiff is finally successful against the defendant in the present action.

I have earlier considered a similar submission that the Deputy Commissioner cannot proceed on one assessment while an alternative assessment is in existence in
D.F.C. of T. v. McGinley 87 ATC 4601 . In that case I was inclined to take the view of the effect of sec. 177(1) expressed by Lee J. in
D.F.C. of T. v. Crowl 87 ATC 4001 at p. 4004 , namely:

``As I have said, the substantial claim made by the defendant is that the assessment of the defendant and the assessment of the trusts are mutually contradictory and that they cannot have attributed to them the conclusiveness to which sec. 177 refers.''

His Honour then referred to
Bloemen's case ( 81 ATC 4280 ) and proceeded:

``Counsel for the defendant contends that the issue of mutually contradictory assessments is itself a demonstration of lack of bona fides on the part of the Commissioner and that that in itself is a ground justifying a court intervening and staying the present proceedings.

In my opinion, the fact that the Commissioner has assessed the defendant on income which according to the Trusts is attributable to the beneficiaries thereof in no way stands in the path of the Commissioner receiving the full benefit of sec. 177 of the Act in proceedings taken by him to recover the amount assessed.''

In McGinley I found that the terms of the adjustment statements made in that case made it clear that there was not in the Deputy Commissioner's mind any attitude which might be said to derogate from the definitiveness of his alternative notice of assessment of the taxpayer. In this case there are no adjustment

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statements having this effect. I have reviewed the authorities referred to by me in McGinley and other cases brought to my attention by counsel, and find myself still of the same view. I think that the Deputy Commissioner is not entitled to judgment on alternative assessments at the one time but that he is entitled to proceed to judgment on his assessment of the defendant without releasing the other person assessed; however he cannot proceed to judgment on the other assessment unless he repays any tax recovered under the judgment in this case. Mr Merkel reminded me that the tax demanded in respect of 1981 included penalty tax under sec. 207 and raise somewhat fleetingly the question whether this part of the assessment fell within the terms of sec. 177(1). However, I was told by Mr Kendall that this point had been raised in
Koadlow v. D.F.C. of T. 85 ATC 4147 , and has been dealt with against the defendant by amendment of sec. 209 of the Act.

Mr Merkel's second argument was that I should in the exercise of my discretion stay the entry of judgment or execution of the judgment against the plaintiff. He put a number of matters to me. He relied on the fact that the assessments concerned are under appeal and that the Deputy Commissioner delayed in referring the defendant's objections against the assessments to the appropriate appeal tribunal. In the case of the 1981 assessment his delay was from 28 July 1986 to 12 March 1987, and in the case of the 1982 assessment from 10 April 1987 to 20 November 1987. Under sec. 188B(1) of the Act his duty is to refer a request as soon as practicable after it is made. The defendant complains also that this action was begun on 13 March 1987 and that the summons for final judgment was made returnable on 3 December 1987. Mr Merkel conceded that during the relevant period from the dates of the assessments to the references to the appeal tribunals there were substantial delays in administration of these matters in the Tax Office caused by large numbers of objections and appeals arising from tax minimisation schemes, which led to delays in this particular matter. The Deputy Commissioner has declined to join in an application to the Administrative Appeals Tribunal to have the hearing of the appeals expedited on the basis of alleged hardship to the defendant to which I have yet to refer, his counsel submitting that the Deputy Commissioner should not be required to discriminate between taxpayers suffering like inconveniences. The hardship alleged by the defendant is that he is 31 years of age and has spent most of his working life as a writer, that he cannot pay the tax assessed, and that his only asset is his ownership of Next World Films Pty. Ltd., which he manages. He says that the assets of that company are essentially the industrial property rights it has in respect of the script and films it is seeking to produce and that the success of those projects are all dependent upon investors being prepared to make funds available for the projects on a continuing basis and also upon continuing eligibility for tax benefits under Pt 10BA of the Act. He says that the effect of his being unable to meet the assessments may well be that the Deputy Commissioner will force him into bankruptcy, which will irreparably prejudice his ability to continue to manage the said company, which has extensive projects in hand. It appears that there is good ground for his argument that if he becomes bankrupt he and his company and others involved in its success are likely to be severely harmed. Mr Merkel submits that for the defendant to suffer this hardship will be unfair as he has derived no direct or indirect benefit from the income which is the subject of the assessments in issue. He submits also that it is relevant that the defendant was not a party to the tax minimisation scheme already referred to. He submitted also that the defendant's objection to the assessments is likely to succeed, and that the defendant's situation has been exacerbated by the Deputy Commissioner's unlawful delay in referring the defendant's objections to assessment and that the Deputy Commissioner should be prevented from rushing to judgment. He referred to an undertaking offered by Devlee Nominees, a company associated with the defendant's father, that it would be prepared to grant a second mortgage over property owned by it at 38 Highett Street, Richmond to secure payment of any amount found to be due and owing in respect of the 1982 assessment and if need be the 1981 assessment.

Mr Merkel also raised the point that the Deputy Commissioner has delayed since the issue of the writ in that according to the Supreme Court Rules operating in 1987 the Commissioner was out of time in applying for final judgment. The Rules now allow such an application at any time. Mr Kendall explained that it was the Deputy Commissioner's policy

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to wait for the delivery of a defence before applying for final judgment. However I cannot regard this as an important matter as the defendant's complaint is not that the Deputy Commissioner has been slow in seeking judgment but that he has got there too early.

Mr Kendall has raised as his primary argument on this aspect that the defendant cannot dissociate himself from his father's scheme to minimise tax as readily as he would wish. He relied on the defendant's directorships of the relevant companies and his apparent participation in decisions made to put the scheme into effect, and the fact that in 1981 he was living with his father and had a close relationship with him. It appears that the Deputy Commissioner intends before the appeal tribunal to raise the question whether the defendant knew as little of what took place as he says; I do not think I should form a view on this point at this stage of the action. However, whatever is decided on this point the defendant chose to lend his name to his father's activities and to take the benefit of any advantages flowing from them. I think that whether or not he knew what was happening he had control of his signature and cannot dissociate himself from the activities which his signature made possible.

Mr Kendall did not dispute that I have a discretion to stay proceedings in this Court on the execution of one of its judgments. I think that he was correct in taking this view. I am indebted to counsel and to French J. in
Snow v. D.F.C. of T. 87 ATC 4078 at p. 4090; (1987) 70 A.L.R. 672 at p. 689 et seq . for a review of the authorities relating to the principles to be observed in the exercise of this discretion. I agree with his Honour's comment at ATC p. 4090; A.L.R. p. 689 that:

``Generally speaking, those decisions support the view that the legislative scheme established in relation to income tax recovery especially as manifested in sec. 201 of the ITAA, reflects a clear policy favouring the revenue against the taxpayer. As the High Court said in
Clyne v. D.F.C. of T. 83 ATC 4532 at p. 4534 , the Commissioner is placed by the legislature in a position of special advantage.''

I note in particular the views of the Court of Appeal of the New South Wales Supreme Court applied in
D.F.C. of T. v. Mackey 82 ATC 4540 ; (1982) 64 F.L.R. 432 . Whether or not the defendant has a good chance of success before the appeal tribunal is not a matter on which I can form even a tentative view on the material before me, if it were relevant to try to do so. I can do no more than note Mr Kendall's concession that there is an arguable issue to be tried. In view of the policy underlying sec. 201 I do not think that this consideration can in the circumstances of this case be relevant. Hardship to a defendant is a factor which must be taken into account in the exercise of the discretion under consideration. However, normally a defendant's inability to pay exists against the background of a readiness to pay and a need for time to organise funds. That is not the position of the taxpayer in this case. He says that he cannot pay, and he is asking the Court to delay the enforcement of his duty to pay until it is tested, whether or not there is any such duty. It seems to me that this is equivalent to making the determination of a dispute as to whether there is such a duty a condition precedent to payment, a consideration inconsistent with the policy of sec. 201. Likewise the arguments that the Deputy Commissioner is guilty of gross delay and that his delay has been in default of the statute are not as forceful in a situation such as this where the taxpayer says he cannot pay in any event as, for example, where it can be said that the taxpayer cannot get credit to enable him to pay because the Deputy Commissioner's delay has introduced a factor of uncertainty which militates against the taxpayer getting sufficient credit. With reference to Mr Kendall's argument that the defendant cannot disclaim responsibility for the scheme under attack by the Deputy Commissioner I think that this point of itself alone places the defendant in a difficult situation. The Deputy Commissioner's overall contention is that the defendant's father's tax minimisation scheme is an unlawful scheme to evade tax and that the defendant has allowed himself to be a party to it. Whether or not it is found to be unlawful the defendant has been in part responsible for the shortfall of revenue alleged by the Deputy Commissioner which has arisen out of the conception and execution of this scheme and is therefore not in a strong position to submit that he is not liable for that shortfall, if it should prove to exist.

I think therefore that the defendant has not shown that this is a case where the entry of judgment or its execution should be stayed.

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Mr Merkel has asked that there be no calculation of damages under the Supreme Court Act in respect of the period of the Deputy Commissioner's delay. However the delay in referring the defendant's objections to the appeal tribunal has not delayed this action. In so far as delay in bringing on the application for final judgment is concerned interest under the Supreme Court Act began to run when or before the writ was issued, and if judgment had been obtained earlier would have continued to run as interest on judgment under another section of the Supreme Court Act.

My order is therefore that the appeal be dismissed and that the appellant pay the Deputy Commissioner's costs.

[The taxpayer appealed from this decision to the Full Court. The following judgment was delivered by the Full Court on 15 April 1988.]