SUPREME COURT OF VICTORIA
DEPUTY COMMISSIONER OF TAXATION (Vic) v HOARE
WILLIAMS AM
17 December 1987 - Melbourne
Acting Master Williams The plaintiff applies under O 22 of the rules for summary judgment against the defendant. The plaintiff claims $2,248,207.16 as a debt due by the defendant to the Commonwealth of Australia pursuant to the Income Tax Assessment Act 1936. The sum claimed comprises: income tax assessed to the defendant by the plaintiff in accordance with the Act for the year of income ended 30 June 1981; additional tax payable by the defendant pursuant to the Act, in consequence of the defendant's lodging of an incorrect return of income derived by the defendant, and additional tax upon those amounts of income tax and additional tax owing by the defendant in consequence of the failure of the defendant to pay the amounts within the time prescribed by the Act.
The application for judgment is supported by an affidavit sworn by Raymond Leslie Conwell, a Deputy Commissioner of Taxation of the Commonwealth of Australia and the plaintiff in the proceeding. As required by O 22r 03(1) of the rules, Mr Conwell has verified the facts on which the claim is based and stated that in his belief there is no defence. For verification of the facts the plaintiff relies upon a certificate given by Mr Conwell as a Deputy Commissioner of Taxation under reg 53 of the Income Tax Regulations, which certificate is in evidence. The plaintiff, having complied with O 22r 03(1), is entitled to judgment unless the defendant can, in accordance with O 22r 06(1)(b), satisfy the court that in respect of the claim a question ought to be tried or that there ought, for some other reason, to be a trial. If the defendant could so satisfy the court, he would be given leave to defend the proceeding: O 22r 06(1)(c) .
The defendant does not dispute that the plaintiff is entitled to judgment. He therefore does not seek leave to defend. Instead, the defendant contends that, pending the outcome of a certain application before the Administrative Appeals Tribunal, either I should stay the proceeding and not give judgment for the plaintiff or, if I give judgment, I should stay execution on the judgment. Either way, the plaintiff would not be able to recover the sum owing for income tax and additional tax before the application to the Tribunal was determined. That application arises out of the assessment of the Commissioner of Taxation for income tax, the basis of the plaintiff's claim in this proceeding. The defendant objected to the assessment. The Commissioner disallowed the objection and then, at the request of the defendant, referred the decision to disallow to the Taxation Board of Review. The Board no longer exists and the matter awaits hearing before the Administrative Appeals Tribunal as an application for review of the Commissioner's decision to disallow the objection. Success for the defendant before the Tribunal would mean that the defendant was not liable for the amounts which the plaintiff claims before me. It is a result which the defendant cannot achieve in this proceeding; in the Supreme Court it is not open to the defendant to challenge the correctness of the Commissioner's disallowance of his objection.
A stay of the proceeding is the only question I am required to decide. Affidavit evidence on the question was adduced by both parties. In addition, the defendant, who made an affidavit, was examined before the court. Although the defendant seeks a stay of the proceeding before judgment is given, rather than a stay of execution of judgment, I propose to treat the defendant's application as one for relief of the latter kind. In DCT (Vic) v Trower (1986) 17 ATR 473; 86 ATC 4157, a decision under O 14, the predecessor of O 22, McGarvie J held that the alternatives open to the court were to grant the plaintiff leave to enter judgment or grant the defendant leave to defend. His Honour considered that if, contrary to that conclusion, a discretion to withhold the grant of leave to enter judgment did exist, then it was a discretion that ought not to be exercised when the right of the plaintiff to judgment was clear.
In Trower, supra, the defendant sought, on the basis of the existence of a pending reference to a Board of Review, an adjournment of the application for final judgment, or a stay of execution of judgment. I consider that what was held by McGarvie J to be the position under O 14 is the same under O 22 of the new rules. Accordingly, as the defendant is not entitled to leave to defend, I must give judgment for the plaintiff. I therefore give judgment for the plaintiff for $2,248,207.16.
The question is whether I ought to stay execution. Even if there were jurisdiction to postpone giving judgment, I consider that the jurisdiction would be exercisable according to the same principles as apply to the stay of execution on a judgment given. To those principles I now turn.
The court has inherent jurisdiction to stay the execution of its judgments: Ellis v Scott [1964] 2 All ER 987n. It can stay execution of a judgment given in a proceeding to recover money due under the Income Tax Assessment Act 1936: DCT (WA) v Australian Machinery and Co (1945) 47 WALR 9 at 17(HC); see also (1945) 3 AITR 236. The power to stay execution is also conferred by O 66r 16 of the rules. In the case of a judgment the subject of an appeal to the Full Court, a stay of execution pending the appeal may be granted by the Full Court or a judge: O 64r 18. Similarly, where an appeal from a judgment or order of a master to a judge is pending, a stay of execution may be granted by the master or a judge: O 77r 05(8).
In the instant case, the application to stay execution is not based on the existence of an appeal pending before a judge or the Full Court, or even before the High Court. The matter pending, namely, an application to the Administrative Appeals Tribunal which is not an appeal within the hierarchy of courts of which the Supreme Court of Victoria constituted by a master is part, but is a proceeding which is altogether outside it. Success in the application before the Tribunal may have the consequence that the defendant is not required to pay the sum for which he is adjudged liable in this court. That situation, however, would not result from appeal, but from the Tribunal allowing the defendant's objection to the assessment for tax and setting aside the assessment, something which this court cannot do. None the less, in my opinion, although the matter pending is not an appeal from the judgment, the discretion to stay the judgment should be exercised as if an appeal was pending. Whether the defendant challenged the claim for tax by appeal to a court or application to the Administrative Appeals Tribunal for review, the result if successful, would be the same: the defendant would not be required to pay the tax.
In the case of an appeal against a money judgment, the relief pending appeal which the defendant will seek is that payment of the judgment debt be deferred until the appeal is decided. Without a stay, the defendant must satisfy the judgment, and if he wins the appeal, the plaintiff will refund the amount. A consideration which favours the grant of a stay is that repayment of the judgment amount by the plaintiff in the event of a successful appeal will not compensate for the hardship and loss the defendant will suffer if required to make immediate payment of the amount: see FCT v Myer Emporium Ltd (1986) 17 ATR 469 at 471; 60 ALJR 300 at 301, where Dawson J referred to the risk that it will not be possible for a successful defendant to be restored substantially to his former position if the judgment against him is executed. In the present case, however, the consideration that the defendant could not be restored to his former position if a stay were refused does not have the same force. The reason lies in the special statutory provision applying to the recovery of income tax pending a review or appeal in relation to an assessment for the tax. Section 201(1) of the Income Tax Assessment Act 1936 provides:
" 201 (1) The fact that a review or appeal is pending in relation to an assessment does not in the meantime interfere with, or affect, the assessment and income tax may be recovered as if no review or appeal was pending.
"(2) In subsection (1), 'income-tax' includes additional tax under section 207 of Part VII."
Judicial interpretation of the section holds that it shows a legislative policy in favour of the revenue over the taxpayer. Further, it is a policy to which great weight must be given when the discretion to stay proceedings comes to be exercised, so that the power to grant a stay must be exercised sparingly: see Snow v DCT (WA) (1987) 18 ATR 439 at 451; 87 ATC 4078 at 4090. The burden which a defendant carries of satisfying a court that a stay should be granted is a heavy one. It is not necessarily discharged by the defendant showing that the appeal raises an arguable case, or that the refusal of a stay would cause financial hardship. Granting a stay upon considerations of that kind, though perhaps appropriate in an ordinary case of appeal, might where s 201 applies, fail to give due weight to the operation of the section.
Except to the extent that the discretion is controlled by statute or binding prior decision, discretion in a court to grant or refuse a party relief imports a discretion to select the circumstances by which the discretion is to be exercised, and also to determine what weight each circumstance should have: see Soper v Matsukawa [1982] VR 948 at 954, per Lush J. The major consideration in the exercise of discretion in this case is s 201 of the Income Tax Assessment Act 1936. Other factors that I have determined are relevant to the exercise of discretion arise from the evidence. In identifying these factors I have been guided by reported decisions in similar cases. Necessarily other cases are not the same, and the proper identification and weighing of the factors material to the exercise of discretion is a question the answer to which will depend upon all the circumstances of the particular case. A previous judicial decision as to the significance of a particular factor, if not requiring obedience, is certainly deserving of respect on the part of a later court charged with responsibility to exercise the same-discretion. However, if the later court attaches a different significance to the factor, it does not follow that the exercise of discretion has miscarried. In the precedent case the factor in question might have been just one of several considered to be relevant to the exercise of discretion, and so the later court might properly attach to the factor a different significance if it is encountered either in isolation or in conjunction with factors not those which arose in the earlier case.
The circumstances arising from the evidence which I consider are material to the exercise of the discretion of the court in this case are:
(a) whether the defendant was party to a contrived scheme for the avoidance of payment of income tax;
(b) the merits of the defendant's objection to the assessment for income tax and additional tax;
(c) financial hardship to the defendant if a stay were refused and he was required to pay the judgment amount forthwith;
(d) whether in support of the application for a stay of execution the defendant has made full and frank disclosure of his financial situation in the relevant respects.
Although the above are identified as discrete circumstances, to an extent there is some overlapping. Factors (a) and (b) are closely related, as are (c) and (d). I will deal with each consideration in turn, and as I do will refer to the cases which establish the relevance of that consideration to the exercise of discretion. However, it is necessary first to state the facts of the case, and, in particular, to describe the transaction which has given rise to the assessment for income tax, the subject of this proceeding, and of the application pending before the Administrative Appeals Tribunal. This involves an examination of the nature of the defendant's business and of the company and trust arrangements by or through which that business is carried on.
The defendant is aged 45 years. He left school at 13 in grade six and has received no further formal training. At 16 he obtained a licence to drive trucks and earth movers and since then he has worked exclusively as a driver and operator of trucks and earth moving vehicles and equipment in various parts of Australia. In time the defendant established a highly successful business as an earth moving contractor. During the period which is relevant in this case the business activities of the defendant have been carried on by him not as proprietor but as employee or director of certain companies. One company, Hoare Bros Pty Ltd, was formed by the defendant's father and the rest by the defendant. In each company the defendant holds a major or controlling interest as shareholder. Such was the success of the defendant's enterprises that in the year of income ended 30 June 1981 one entity, Hoare Bros (Quarries) Pty Ltd, held some $3,500,000 as undistributed profit. It is in relation to the distribution of that fund that the Commissioner made the assessment against the defendant for the payment of tax which is challenged before the Administrative Appeals Tribunal.
According to the defendant, his skill and experience lies in conducting operations in the field. He has had neither the time nor the expertise to become involved with the financial aspects of running his businesses. For financial matters the defendant relied upon the advice of one Boyd, an accountant who was employed full-time by Hoare Bros Pty Ltd, and also of an independent firm of accountants practising in Geelong, Messrs Davidson, England & McNaughton. Indeed, the assistance which these persons gave the defendant was not limited to providing financial advice upon request. The defendant invested Boyd and members of the accountancy firm with authority to act on behalf of himself and of certain of his companies in relation to a wide variety of matters. In the case of Boyd, the authority which he held is of considerable importance in deciding the question of a stay of execution. In relation to the merits of the objection to the assessment to income tax, the knowledge and belief of the defendant as to the various transactions by which the sum of $3,500,000 held by Hoare Bros (Quarries) Pty Ltd was distributed is critical to the question of his liability for tax. In certain of these transactions the defendant did not participate. Boyd took his place, and what Boyd may fairly be presumed to know or believe as to what occurred can be imputed to the defendant.
The companies by which the defendant engages in business number six. They are Hoare Bros Pty Ltd, Hoaredow Contractors Pty Ltd, Galaxie Investments Pty Ltd, PLH Haulage Pty Ltd, Geelong Civil Constructions Pty Ltd, and MKA Investments Pty Ltd. As appears from a letter to the plaintiff from Davidson, England and McNaughton on behalf of the defendant, dated 26 March 1986, which letter is in evidence, these companies are called by the defendant the Hoare Bros Group. An entity, the precise nature of which was not explained, known as the Hoare Services Trust, provides what are described as management, clerical, administration and supervisory services to the companies of the group. Two other companies with which the defendant has been associated must also be mentioned. They are Fourth Lendale Pty Ltd, a trustee for a family trust, the Leopold Investment Trust and Hoare Bros (Quarries) Pty Ltd. The latter is the company the disposal of the profits of which, in the year of income ended 30 June 1981, has given rise to the assessment to the defendant for income tax.
The information set out below concerning the companies in question is derived mainly from annual returns field with the National Companies and Securities Commission for the financial year ended 30 June 1986. The returns were put into evidence by the defendant.
1 Hoare Bros Pty Ltd
The principal activities of the company are stated to be "earthmoving and cartage contractors". The directors are the defendant, his father, Dennis Francis Hoare, and his solicitor, Kenneth Edward Hampson. The members of the company and the number of shares held by each are: Dennis Francis Hoare, 1 A ordinary; Kenneth Edward Hampson, 1 A ordinary; the defendant, 10,000 A ordinary and 2000 B ordinary; Galaxie Investments Pty Ltd, 9998 A ordinary.
Hoare Bros Pty Ltd is the operating company within the Hoare Bros Group. It is the company by which the defendant's earth moving business is carried on, and is the principal source of the income which in due course finds its way into the hands of the defendant and members of his family.
The defendant contends that his shares in the company are held by him in trust for his sons Anthony Peter Hoare and Matthew Charles Hoare. In support he relies upon a statement to that effect noted in pencil on the copy of the annual return received into evidence. Also, beneath the name Galaxie Investments Pty Ltd are pencilled the words "as trustee for D F Hoare family trust". No evidence was given as to whether the return filed with the National Companies and Securities Commission has these notations. With respect to the notation for his own shares, the defendant in cross-examination was unable to explain how the notation came to be pencilled on the document in evidence rather than typed. The identity of the person who made the entry was not disclosed.
In further support for the contention that the defendant holds the shares in trust the defendant relied upon a document headed declaration of trust bearing the date 1 July 1983. The form of the document and the answers of the defendant in cross-examination in relation to the document cause me to doubt whether the defendant signed the document in good faith, and also whether it was signed on 1 July 1983. Both the document itself and the evidence of the defendant suggest that the defendant did not intend to declare a trust of his shares and that signing the document was a subterfuge designed to place his beneficial interest in the shares beyond the reach of creditors. According to the defendant, the document was prepared by his solicitor, Mr Hampson, yet nothing in the document would indicate that it was prepared by a solicitor. The document is a single page and nowhere does the name of a solicitor appear. If a solicitor had prepared the document it could be expected that the document would bear the solicitor's name. The document carries a $10 duty stamp which has been cancelled by initialling. The defendant signed the document and, in my opinion, it is clear that he also initialled the duty stamp. However, when asked whether the stamp bore his initials, he replied that he was not sure, and that either he or the solicitor had done the initialling. That was not a truthful answer. In all the circumstances, which include those relating to the pencilled notation on the form of annual return, I conclude that there was no genuine declaration of trust and that the document by which the defendant purports to declare himself trustee of the shares does not have that effect.
2 Hoaredow Contractors Pty Ltd
The principal activity of this company is stated to be "trustee for unit trust whose main activity is excavation and earthmoving". That trust is the Hoaredow Unit Trust. The business name of the company is Hoare Dowling Excavations. Its directors are the defendant and David Ronald Dowling, each of whom holds one share. The company participated in the transaction the subject of the assessment to the defendant for income tax.
3 Galaxie Investments Pty Ltd
The principal activity of the company is "trustee for two discretionary family trusts whose main activities are investment and property landlords". One of the trusts is the Peter Hoare Family Trust, a trust established by the defendant. The directors of the company are the defendant, his father, and the solicitor, Kenneth Edward Hampson. One share each in the company is held by the defendant, Hampson and Cambra Nominees Pty Ltd. The last is a company the directors and members of which are the four partners who comprise the firm of Davidson, England & McNaughton, the defendant's accountants.
Galaxie Investments Pty Ltd was made trustee of the Peter Hoare Family Trust by deed. A copy of the deed is in evidence. The document is not dated but it appears that the trust was created some time in 1979. The beneficiaries include the defendant and his wife and children. Also included is any corporation at least one share in which is beneficially owned or held by any beneficiary and in which no member of what is termed "the excluded class" owns or holds any share. The trust deed make the defendant appointor for the purpose of the trust. The deed empowers the defendant as appointor to remove any trustee, to appoint any additional trustee or trustees, and to appoint a new trustee or new trustees in the place of any trustee who is removed, or who resigns his trusteeship, or ceases to be a trustee by operation of law.
The balance sheet of Galaxie Investments Pty Ltd shows that the net assets of the company are only $3. The balance sheet, however, presents a far from complete picture of the assets in which the defendant has an interest. As trustee of the Peter Hoare Family Trust the company owns real estate the value of which, according to the plaintiff, is approximately $1.4 million, and according to the defendant, $1 million.
4 PLH Haulage Pty Ltd
The principal activity of this company is stated to be "haulage contractors". The directors are the defendant, his wife, Dianne Jessie Hoare, and Kenneth Edward Hampson, solicitor. The defendant holds 910 shares, his wife 900, and Hampson one. The company has virtually ceased to operate since 1982.
5 Geelong Civil Constructions Pty Ltd
The principal activity of this company is stated to be "construction and development". The directors are the defendant, Dennis Francis Hoare, his father, and Peter James MacMillan. MacMillan is an engineer who is employed by the company. The defendant and his father each hold one share, and MacMillan and Galaxie Investments Pty Ltd, as trustee for the D F Hoare Family Trust, each hold four shares.
6 MKA Investments Pty Ltd
The principal activity of this company is stated to be "financiers and property development". The directors are the defendant and his father. Each holds one share, and 100 shares are held by each of the defendant's three children, Kim Maree McDonald, Anthony Peter Hoare and Matthew Charles Hoare.
The balance sheet shows that the company owns land at Port Arlington Road, Geelong and a dwelling house at Lot 13 Grand Scenic Drive, Leopold. The values stated are $64,712 and $122,560 respectively. The defendant lives at Lot 13 Grand Scenic Drive. The value of the property is in dispute. According to the evidence of a sworn valuer adduced by the plaintiff, the value of the house is $220,000.
By contract of sale dated 1 September 1976 the defendant sold Lot 13 Grand Scenic Drive as owner to MKA Investments Pty Ltd for $50,000, payable by a deposit of $5000 and the residue on or before 1 September 1978. The residue was not paid on the due date. The residue was shown as a deferred liability in the books of the company for the year ended on 30 June 1986, and was not paid until 20 May 1987. This appears from an entry in the Memorial Book in the Office of the Registrar General, a copy of which was adduced in evidence by the plaintiff. The memorial records that the defendant conveyed the land to MKA Investments Pty Ltd on 20 May 1987. The defendant was extremely vague in his evidence in the witness box concerning the circumstances of payment of both the deposit and the residue, especially as to why the latter was not paid until nearly 10 years after the due date. Although the defendant was entitled to compel payment by the company, he did not attempt to do so. The plaintiff argues that this showed that the defendant and the company were not at arms length in relation to the transaction. It argues further that, through the control which the defendant and members of his family have of the company, the defendant could cause the land to be sold and the proceeds made available to him.
7 Fourth Lendale Pty Ltd
The activity of this company is stated to be "trustee for a discretionary family trust whose main activity is investment". The business name is Leopold Investment Trust. The directors of the company are the defendant and Alan Leslie Loney, and they each hold one share. Loney is an engineer who worked with the defendant. Due to illness he is no longer employed and it appears that he may have ceased to be a director and member of the company.
Fourth Lendale Pty Ltd has net assets of $2. It is the trustee of the Leopold Investment Trust, the balance sheet of which, for the year ended 30 June 1986, was put into evidence by the plaintiff. The net assets of the trust were $26,265.82. Its assets include units to the value of $375,000 in a trust called the Hoaredow Unit Trust. The trustee of that trust is Hoaredow Contractors Pty Ltd, the company noted above. A balance sheet for that trust was not in evidence.
8 Hoare Bros (Quarries) Pty Ltd
The final company to be noted is Hoare Bros (Quarries) Pty Ltd. The subject assessment relates to the disposal of the profits of this company in the year of income ended 30 June 1981. The details of that disposal are examined next. The account of what happened is based on evidence given for the plaintiff by Ian James Bryce, a Taxation Auditor employed in the Australian Taxation Office, by affidavit sworn 7 October 1987.
Impugned transaction
Hoare Bros (Quarries) Pty Ltd was a company, control of which was shared equally by the defendant and David Ronald Dowling. It was incorporated in 1977 and carried on business as an earth moving contractor. In May 1981 the company held $3,500,000 as profits which were undistributed. A transfer of control of the company occurred on 20 May 1981. By special resolution of the members of the company at a meeting held on that day the rights attaching to various classes of shares were altered, thereby giving control of the company to one B Rumpf. Payment for the acquisition of control of the company was made on 3 June 1981 by means of what is described as a "round robin" of funds. In the account which follows it is to be noted that all the payments were made at the same bank on the same day and that the companies Seventh Wakool Pty Ltd, Eighth Wakool Pty Ltd and Tenth Wakool Pty Ltd were controlled by Rumpf.
(a) A cheque for $3,500,000 was drawn by Hoare Bros (Quarries) Pty Ltd payable to Seventh Wakool Pty Ltd. Since the amount equalled the cashed up value of the company, the payment rendered the company worthless.
(b) Seventh Wakool Pty Ltd then drew a cheque for $3,500,000 in favour of Eighth Wakool Pty Ltd, which company in turn drew a cheque in the same amount payable to Tenth Wakool Pty Ltd.
(c) Tenth Wakool Pty Ltd then made the following payments by cheque:-
- (i) $2,905,000 to Hoaredow Contractors Pty Ltd (trustee of the Hoaredow Unit Trust) as the price payable to the previous controllers of Hoare Bros (Quarries) Pty Ltd for relinquishing control of the company to Rumpf;
- (ii) $208,250 to one Sam Holt as a fee for introducing the previous controllers to Rumpf;
- (iii) $386,750 to Rumpf as remuneration.
(d) With respect to the payment of $2,905,000 to Hoaredow Contractors Pty Ltd, one-half, $1,452,500, was shown in the books of the Peter Hoare Family Trust to have been a loan to the defendant which he in turn lent to the trustee of the trust, Galaxie Investments Pty Ltd. In turn that company lent $1,452,500 to Hoaredow Contractors Pty Ltd. (The payment of the other half due to Dowling was dealt with in a similar fashion in the books of his own trust, the David Dowling Family Trust.)
Hoare Bros (Quarries) Pty Ltd changed its name to Oarebros Nominees Pty Ltd in May 1981. For the year of income ended 30 January 1981, on the basis of income of $3,500,000, the company was, on 30 April 1985, assessed for tax at $1,610,000, being company tax at the rate of 46 cents in the dollar. Also, additional tax was imposed for failure to lodge a return when required and calculated at 50 per cent of the assessed tax. The company has no assets and the tax and additional tax have not been paid. The subject assessment against the defendant was raised as an amended assessment following investigation of Hoare Bros (Quarries) Pty Ltd. The defendant is assessed on the basis that he received the amount of $1,452,500 as a dividend.
It is time now to consider each of the four circumstances which, as mentioned previously, I find are relevant to the exercise of the discretion to grant a stay of execution. The first question is whether the defendant was party to a contrived scheme for the avoidance of payment of income tax.
Discretion - Party to tax avoidance scheme
The authorities, in relation to a stay of execution in cases of this kind, show that a consideration which is most important to the exercise of the discretion to order a stay is the nature of the transaction that gives rise to the dispute concerning the liability of the taxpayer for tax. There is recognised a distinction between a dispute that relates to a contrived scheme to avoid the payment of tax and one that arises out of a situation that has occurred in the ordinary course of the taxpayer's business. See DCT (NSW) v Mackey (1982) 13 ATR 547 at 550, per Moffitt P; DCT (Vic) v Trower (1986) 17 ATR 473 at 479; 86 ATC 4157 at 4163; Snow v DCT (WA) (1987) 18 ATR 439 at 451; 87 ATC 4078 at 4092. In the former case, a stay will not be granted unless there are exceptional circumstances. Extreme financial hardship to the taxpayer, were immediate payment to be required, is such a circumstance: DCT (NSW) v Mackey at 550, per Moffitt J: see also DCT (Vic) v The Hell's Angels Ltd (No 2) (1984) 15 ATR 815 at 817; 84 ATC 4548 at 4550; DCT (Vic) v Ewen (1984) 15 ATR 818 at 820. On the question of liability for tax, if the use of an artificial contrivance results, in law, in a taxpayer being not liable for tax, the means by which that result was reached is not material. However, the question of liability and the question of a stay pending the determination of the former are not the same, and the fact that the dispute as to the liability for tax relates to a scheme of tax avoidance is material to the question of a stay. The reason is the anti-social nature of an artificial scheme of tax avoidance; if successful, the scheme operates to the detriment of the general body of taxpayers, since it shifts to them the tax burden which the taxpayer would otherwise carry: see DCT (Vic) v Trower (1986) 17 ATR 473 at 479; 86 ATC 4157 at 4163, per McGarvie J. If the taxpayer is party to a contrivance to avoid his liability otherwise for tax, unless there are exceptional circumstances, the court ought not to prevent the operation of s 201 by granting a stay of execution while it is determined elsewhere whether he has been successful in avoiding the tax by the scheme: see DCT (NSW) v Mackey (1982) 13 ATR 547 at 550 per Moffitt P.
With respect to the characterisation of the transaction concerning Hoare Bros (Quarries) Pty Ltd the subject of the disputed liability for tax in this case, I adopt the language of Lee J in Gregrhon Investments Pty Ltd v FCT (1986) 18 ATR 50; 86 ATC 4906 at 4918: "By no stretch of the imagination could it be classed as an ordinary commercial dealing." Clearly, the purpose of the transaction was to strip the company of its profits, its only asset, and so render it unable to pay tax, and to leave the defendant and Dowling with the profit, less the fees of Rumpf and Holt, without any liability for tax on the profit. The transfer by the defendant and Dowling of control of the company to Rumpf also transferred to Rumpf control of the profits. However, the consideration for acquiring that control was not supplied by Rumpf; the profits provided the price. This was not really challenged by the defendant. The real question on which the liability of the defendant for tax depends is, whether he knew that by what was proposed for the transfer of control of the company, the payment of tax in respect of the cash assets of the company would be altogether avoided. That brings me to examine the merits of the defendant's objections to liability for tax.
Discretion - Merits of objection to assessment
Judicial opinion is divided on the question whether it is appropriate or proper to measure the strength of the taxpayer's objection, to the assessment to tax on an application to stay execution, pending a determination of the validity of the objection. For an account of the varying opinions, see French J in Snow v DCT (WA) (1987) 18 ATR 439; 87 ATC 4078. I consider that nothing in the authorities requires me to refrain from assessing the merits of the defendant's objection to liability to pay tax, and from taking my conclusion into account in exercising the discretion to grant or refuse a stay of execution. Certainly, I believe, there is support in the case for that approach in at least two situations. They are quite the opposite of each other. In Koadlow v DCT (Vic) (1985) 16 ATR 286 at 290; 85 ATC 4147 at 4151, a decision of the Full Court of Victoria, it was said:
Another factor is the prospect of success on such a reference [a reference of a taxpayer's objection to the Taxation Board of Review] in the sense that if it were shown that a taxpayer's objection was frivolous or hopeless, no stay of proceedings would be granted.
At the other extreme, there ought to be a stay if the taxpayer's appeal is virtually bound to succeed. In DCT (NSW) v Mackey (1982) 13 ATR 547 at 551, Hutley JA said that only in two instances was it clear that a stay should be allowed, one being "…the comparatively rare case where the Commissioner abuses his position, for example by assessing and endeavouring to collect tax in defiance of a decision of the High Court or other superior court precisely in point". This perhaps contrasts with the opinion expressed by his Honour elsewhere in his judgment that speculation as to the result of an appeal is not a significant factor to be borne in mind, and that the court should be concerned only with the impact of the assessment on the applicant for the stay.
In this case the likely outcome of the objection to the Commissioner's assessment is not as clear as in either of the situations mentioned above. None the less, I consider that on the material before the court it is reasonable to conclude that the defendant's prospects of success are slight indeed, and I do so conclude. In taking that conclusion into account on the question of stay of execution I am mindful of two factors. One is that the liability of the defendant for the tax assessed is not a question for this court to determine. The other is the possibility that evidence on which the defendant might wish to rely before the Administrative Appeals Tribunal, for the determination of the objection to the assessment, was not before this court on the application to stay execution. If the defendant did withhold from the court evidence which he intends to introduce before the tribunal, a possible explanation is that those responsible for conducting proceedings on his behalf had concluded that the merits of the objection was not something to be considered on the application for a stay, so that the evidence was not necessary at that stage. Whatever the reason, however, if the defendant did have evidence that would show he was not liable for tax, it was not adduced. On the question of liability, the defendant's material in support of a stay of execution consisted of an assertion by affidavit that from what he was informed by his tax advisers he believed that he would not be taxed on the amount of $1,452,500 which he received, as it was a capital amount paid in respect of the relinquishment of his shareholding rights, and that he had no understanding of, and no knowledge at all as to why he received the payment from a company in which he had no direct or indirect interest.
I have outlined earlier in my judgment the several steps by which control of Hoare Bros (Quarries) Pty Ltd passed from Dowling and the defendant to Rumpf, and the profits held by the company came into the hands of Dowling and the defendant. The evidence as to what occurred was given entirely by the plaintiff. The defendant did not dispute that evidence and there was no indication that he would dispute it before the Administrative Appeals Tribunal. The reason I conclude that the defendant's objection to the assessment to tax has little merit is that it is difficult to imagine what evidence the defendant could adduce before the Administrative Appeals Tribunal, capable of persuading the tribunal not to draw the same inferences adverse to the case of the defendant as I have drawn from the evidence on this application. That evidence consists of the account given by the plaintiff of the relevant steps in the subject transaction and of the involvement of the defendant, which the defendant did not challenge, and of the evidence of the defendant as to the part played both by himself and Boyd, the employee accountant, and as to the authority of Boyd to act on his behalf.
The transaction which is impugned has two major components-the resolution of the members of Hoare Bros (Quarries) Pty Ltd which enabled control of the company to be given to Rumpf, and payment of the consideration for the transfer of control. The first event occurred on 20 May 1981, and the second on 3 June 1981. On the earlier date, s 260 of the Income Tax Assessment Act was the provision by which it was to be determined whether a transaction of the kind in question constituted a scheme of tax avoidance so as to attract liability to pay tax. By s 10 of Act 110 of 1981, which came into effect on 24 June 1981, subs (2) was added to s 260. Sub section (2) states: "This section shall not apply to any contract, agreement or arrangement made or entered into after 27 May 1981." The subsection restricts the operation of s 260 to contracts, agreements and arrangements made or entered into on or before 27 May 1981. Section 260 will continue to operate when the relevant events occurred on or before 27 May 1981. Act 110 of 1981 substituted for s 260 a new general anti-avoidance measure in respect of schemes entered into after 27 May 1981. It is Pt IVA of the Act, comprising ss 177Ato 177G.
If it were to be assumed that subs (2) of s 260 had not been enacted, so that s 260 in the original form would be the only provision which was relevant, then, the events material to the imposition of liability in the defendant to pay tax by virtue of the section occurred after 20 May 1981, the day of the company resolution. They occurred on and after 3 June 1981, that is, after 27 May. The fact is, however, that they occurred at a time when the new Pt IVA was in force. Whether the liability of the defendant to pay tax is governed by s 260 or Pt IVA is not a question I need to decide. I proceed on the basis that were it to be held that s 260 applied and that therefore the defendant was liable for the tax, equally he would be found liable if instead it was determined that the matter was governed by Pt IV A. My evaluation of the merits of the defendant's objection to the assessment to tax is made by reference to s 260.
In argument Ms Davies for the defendant referred to Slutzkin v FCT (1977) 140 CLR 314; see also (1977) 7 ATR 166, and Gregrhon Investments Pty Ltd v FCT (1986) 18 ATR 50; (1986) 86 ATC 4906 as support for the proposition that s 260 would not operate to make the subject scheme void as against the plaintiff. On the evidence before me, however, I consider that those authorities, far from supporting the defendant, show that s 260 does have that effect.
The arrangement, in both Slutzkin and Gregrhon, supra, was similar to that which the defendant entered into. In each case the subject company was stripped of assets in respect of which tax would otherwise be payable so as to render the company incapable of paying the tax. Further, by the method employed it was intended that the cash value of the assets paid to the owners of the company in consideration of their relinquishment of control would be received by them in the form of capital. In my opinion, there are two features of the arrangements in Slutzkin and Gregrhon which distinguish them from the arrangement in this case. The features are not present here, and it was their existence in the other cases, especially Gregrhon that was critical to the decision in each; that s 260 did not operate to raise a liability to pay tax. First, the shareholders both in Slutzkin and Gregrhon, supra, after they had formally passed control of the company to the purchaser, ceased to have any interest in the conduct of the affairs of the company. By contrast, in this case, the defendant and his co-vendor Dowling, continued to act as if they were in control of Hoare Bros (Quarries) Pty Ltd, notwithstanding that by the resolution of the members of the company of 20 May 1981 control became vested in Rumpf. Secondly, in the other cases the vendors did not know that the company assets would be the source of the payment for the shares. Here, if the defendant did not actually know, he must, by reason of the participation of his agent Boyd in the events of 3 June 1981, be taken to have known that the profits of Hoare Bros (Quarries) Pty Ltd provided the price for his vote on 20 May to give Rumpf control of the company.
I now give instances of conduct on the part of the defendant in relation to Hoare Bros (Quarries) Pty Ltd that is inconsistent with his assertion that he divested himself of control of the company on 20 May 1981. No evidence was given that the defendant actually ceased to be a director after that date. Indeed, the evidence shows that the defendant, and for a short period, both the defendant and Dowling, acted as if they were directors of the company.
(a) On 20 May 1981 Hoare Bros (Quarries) Pty Ltd was engaged in construction work at Portland in Victoria for Alcoa of Australia Ltd pursuant to two contracts in writing between the parties, one dated 8 November and the other 26 November 1980. The work had yet to be completed. Subsequent to 20 May 1981 the defendant and Dowling procured the agreement of Alcoa of Australia Ltd to the substitution of Hoaredow Contractors Pty Ltd for Hoare Bros (Quarries) Pty Ltd as party to each contract. The defendant and Dowling, when requesting Alcoa to agree, purported to act for Hoare Bros (Quarries) Pty Ltd. I refer to the letter of Hoare Bros (Quarries) Pty Ltd addressed to Alcoa. It is dated 4 June 1981 and signed by Dowling as director of the company. Further, a memorandum of agreement was signed by Hoare Bros (Quarries) Pty Ltd and Alcoa of Australia Ltd in respect of the replacement in each contract of Hoare Bros (Quarries) Pty Ltd by Hoaredow Contractors Pty Ltd as party. The memorandum for the contract of 18 November 1980 was signed on 9 June 1981, and that for the contract of 26 November 1980 on 17 July 1981. Each memorandum was signed for Hoare Bros (Quarries) Pty Ltd by both the defendant and Dowling as directors.
(b) As mentioned previously, the name of Hoare Bros (Quarries) Pty Ltd was changed to Oarebros Nominees Pty Ltd in May 1981. On 16 May 1985, almost four years after the resolution passing control of the company to Rumpf, the defendant wrote to the plaintiff requesting, under the Freedom of Information Act, access to the income tax return file of Oarebros Nominees Pty Ltd and copies of all documents contained in it relating to the year of income ended 30 June 1981. The defendant, in signing the letter, called himself director of Oarebros Nominees Pty Ltd.
(c) Land at McCanns Lane, Fyansford near Geelong is registered in the name of Hoare Bros (Quarries) Pty Ltd. The company is listed in the 1986 Geelong telephone directory as located there. There is a telephone in a shed on the land, and the defendant uses the telephone in the course of his business to order spare parts for machinery.
On the question whether the defendant knew that the price for the transfer of control of Hoare Bros (Quarries) Pty Ltd was to be paid out out of the profits of the company, the defendant denies that he had that knowledge. In the witness box the defendant professed to have only a slight knowledge and understanding of the financial aspects of his business and of the affairs of the companies through which the business was carried on. His expertise lay in the day-to-day conduct and supervision of work in the field, not in office and paper work. The latter he left to others. In matters of finance he gave accountants, Boyd, the employee of Hoare Bros Pty Ltd, and the independent firm, Davidson, England & McNaughton, general authority to make decisions and to act on his behalf. Further, it appears that for most situations the defendant allowed that authority to be exercised without reference to him.
I believe that the defendant had a better understanding of his financial position and of the workings of the various companies with which he was associated than he cared to admit in the witness box. However, I consider that it is not necessary for me to determine whether he actually knew of the critical details concerning the payment for his surrender of control of Hoare Bros (Quarries) Pty Ltd, and in particular, that the payment was to be made out of the profits of the company so as to render it incapable of paying tax. The reason is the participation of the accountant Boyd in the events of 3 June 1981.
A meeting of the parties to the scheme was arranged for that day at the branch of the CBA bank at Geelong West. The purpose of the meeting was to get the profits of Hoare Bros (Quarries) Pty Ltd into the hands of the interested parties by the process I have described already. Pressure of work prevented the defendant from attending the meeting and he appointed Boyd to act in his place. Boyd was at the meeting as the defendant's agent; he knew what occurred and that knowledge must be imputed to the defendant. See FCT v Bidencope (1978) 140 CLR 553; 8 ATR 639, per Gibbs J. Boyd was present when the various cheques were exchanged. He deposited, in the defendant's bank account at the Geelong West branch, a cheque for $1,452,500 drawn in favour of the defendant. That amount was the price due to the defendant. It is certain that Boyd knew that the payment to the defendant was one in a series and that the source was the first in the series, namely, the payment by Hoare Bros (Quarries) Pty Ltd to Seventh Wakool Pty Ltd of an amount which represented all the undistributed profits of the company. That first payment was made by cheque drawn by Hoare Bros (Quarries) Pty Ltd on its account with the bank at the Geelong West branch.
Discretion - Financial hardship
I examine now the matter of financial hardship to the defendant were a stay of execution to be refused; the third of the four factors which I consider to be material to the exercise of my discretion. The authorities that I have mentioned establish that, given the imperative of s 201 of the Income Tax Assessment Act, the court ought not allow a stay of execution to a taxpayer, a party to a contrived scheme to avoid the payment of tax, unless the refusal of a stay would cause the taxpayer extreme financial hardship. What constitutes extreme hardship for this purpose must depend on the circumstances, and clearly in any particular case opinion on the question may reasonably be divided.
The amount for which I give judgment for the plaintiff is $2,248,207.16. To that must be added the interest which the plaintiff claims under s 60 of the Supreme Court Act 1987. The parties agreed that in the event that I gave judgment for the plaintiff in the amount of $2,248,207.16, the interest I should award the plaintiff under s 60 was $133,000. That was calculated for the period from the date of the writ, 15 April 1987, to 1 December 1987 at the rate of 12.3 per cent per annum. Since this judgment is given on December 17 1987, I allow an additional amount for interest calculated at the same rate for the period from 1 December 1981 until today. That amount is $8248. In arriving at this figure I excluded from the judgment amounts on which I calculated interest the sum of $616,473.18 claimed for additional tax under s 207 of the Income Tax Assessment Act. This is in accordance with s 60(2)(a) of the Supreme Court Act 1986. Additional tax under s 207 is in the nature of interest and s 60(2)(a) prohibits the granting of interest on interest. It was on the same basis that the parties calculated the interest to 1 December 1987. I determine the matter of the financial hardship to the defendant on the basis of a total liability (exclusive of costs) of $2,389,455.16.
My approach to the exercise of the discretion is, that although securing satisfaction of the judgment would necessitate the selling of a taxpayer's assets, possibly with the consequence that the size of those assets is drastically reduced, the taxpayer does not sustain extreme financial hardship in the relevant sense if assets remain that are sufficient to provide the taxpayer, and any dependents, with shelter, food, clothing and reasonable amenities of a decent standard, and that enables the taxpayer to earn income in accordance with his or her usual business or occupation.
My conclusions from the evidence before me, directed to the matter of the personal hardship of the defendant, represent what was submitted in argument by Mr McEwan for the plaintiff. The factor of financial hardship raised two questions. The first was the net value of the personal assets of the defendant, including the assets of trusts under which he is beneficiary, and also of the assets of companies in which the defendant has an interest. In respect of assets within both categories, the evidence for the plaintiff showed a higher value than the evidence for the defendant. On any view of the evidence, however, the personal assets of the defendant are not sufficient to satisfy the judgment. Nor for that matter are the assets of the companies. But when combined, the defendant's assets and the companies' assets are more than sufficient, which leads to the second question. It is whether I can take the company assets into account in determining the question of extreme financial hardship to the defendant.
If the company position must be ignored, execution of the judgment restricted to assets of the defendant would inflict hardship on the defendant of such severity it would not be proper to refuse a stay. On the other hand, if the assets of the companies can be treated as those of the defendant for the purpose of this exercise, the justification must be found in the control which the defendant has of the companies. That is an approach which rests upon two assumptions. The first is that the defendant, as member of each company, has control of the company to the extent that he could cause the company assets to be sold and applied in payment of the judgment, and that in the case of any company in respect of which the defendant was in a minority position, and thus would need the support of another member in order to get the company to take that course, then, it may be presumed that the defendant could obtain that support. The plaintiff argues that whenever the defendant is not the majority shareholder it is certain that the other shareholders would vote with him for what he wanted, they being either closely related to him or retained by him as accountant or solicitor. The shareholder, whether relative or agent, would vote as the defendant requested. Indeed, in the latter case, the defendant could virtually require the shareholder to act as he wished. The other assumption that must be made, before company assets can be treated as available to satisfy the judgment so as to warrant a finding that refusing a stay would not cause the defendant extreme financial hardship, is that the defendant would sell company assets rather than face bankruptcy, it being almost inevitable that the plaintiff would have the defendant made bankrupt once it was apparent that his personal assets would not be sufficient to meet the judgment.
I will return to these considerations after I have stated my findings as to the value of the assets, after allowing for liabilities of the defendant and of the companies with which he is associated.
Property of defendant
The assets of the defendant include the following amounts due to him:
| 1 | Leopold Investment Trust | ||
|---|---|---|---|
| (trustee Fourth Lendale Pty Ltd) | |||
| Beneficiary account | $32,054.33 | ||
| 2 | Hoare Service Trust | ||
| (trustee Ardama Nominees Pty Ltd) | |||
| Loan account | $10,139.84 | ||
| 3 | Peter Hoare Family Trust | ||
| (trustee Galaxie Investments Pty Ltd) | |||
| (a) Loan account | $570,666.10 | ||
| (b) Beneficiary account | $257,473.95 | $828,140.05 | |
| 4 | MKA Investments Pty Ltd | ||
| Loan account | $8,350.72 | ||
| 5 | Hoare Bros Pty Ltd | ||
| Loan account | $77,611.23 | ||
| 6 | Geelong Civil Constructions Pty Ltd | ||
| Loan account | $11,085.00 | ||
| $967,381.17 | |||
The defendant did not really question that these amounts were due to him. Indeed, he could hardly do so, as the books of account of the various trusts and companies showed that the debts existed. In contest in each case was the capacity of the creditor to discharge the debt. I will examine that question later.
To the amount of $967,381.17 owing to the defendant there is to be added $22,779.66, the amount of a loan by the Peter Hoare Family Trust (trustee Galaxie Investments Pty Ltd) to the Leopold Investment Trust (trustee Fourth Lendale Pty Ltd). Taking this amount into account requires that I should find that the Leopold Investment Trust is able to repay the loan and that, if it does, the amount repaid should be allocated to the defendant rather than to any other beneficiary whether together with, or to the exclusion of, the defendant. The analysis of the capacity of the companies and trusts to repay debts, which I make, subsequently shows that the Leopold Investment Trust can repay the loan. In another part of my reasons I deal with the allocation of the repayment to the defendant.
The property of the defendant consists also of plant and equipment and shares. I value the former at $900,000. This represents the value of drilling rigs and attachments. I have not ascribed any value to certain other plant belonging to the defendant. This plant is described in the defendant's affidavit, sworn in support of the application for a stay, but no evidence was adduced as to its value from which I could draw any conclusion. Before the events on the stock market on 19 October last, the value of the shares held by the defendant was $23,840. For the purpose of this application I take the value to be $15,000.
Defendant's liabilities
The defendant has personal liabilities which must be taken into account. There is a great difference between what the plaintiff claims and what the defendant claims is the correct amount. The plaintiff says that the debts total only $59,928, and the defendant says that the total is $502,366.60. I accept the plaintiff's contention. On 3 September 1987 the defendant made a statutory declaration in the prescribed form by way of application to the plaintiff for release from liability to pay tax pursuant to s 265 of the Income Tax Assessment Act. In that application the defendant stated that his liabilities totalled $1,158,807.30. Subsequently, in an affidavit sworn by Ms Davies in support of the application to stay execution, it was disclosed that as to two items which totalled $656,440.70 the information in the application was not correct. The items were debts shown in the application to be $268,940.70 and $387,500 due to John Stewart Heavy Haulage and A Graham Pty Ltd respectively. Ms Davies deposed that from information given by the defendant's accountant she believed that the two liabilities were contingent only, being in the nature of guarantees given by the defendant, presumably, of the liability of one of his companies. Finally, in cross-examination of the defendant it was disclosed that the company was Hoare Bros Pty Ltd. If the defendant had guaranteed payment of the debts, no evidence of that guarantee was given before me.
Mr McEwan for the plaintiff submitted that I should treat four other amounts for which the defendant claims to be indebted as the debts of one of his companies, not his own debts. They total $414,123.60. The identity of the creditor, it was argued, indicated that the debts in question were business debts, and since the defendant had arranged that his businesses were carried not personally but by companies in his control, it was likely that the debts were company debts. The creditors were listed as R Best Plant Hire & Sales, Kirk Tractors Pty Ltd, Shaw Constructions and Plant Hire, and BP Australia. I accept this submission. The conclusion that the debts in the total sum of $414,123,60 are not those of the defendant is supported by the concession of the defendant, referred to above, that debts amounting to $656,440.70 were not due by the defendant, as claimed originally, but due by Hoare Bros Pty Ltd. To the extent that the conclusion rests on the way the defendant has arranged his business affairs, it is supported by the existence of the Hoare Services Trust, the entity which co-ordinates the activities of the companies, all controlled by the defendant, which comprise what the defendant calls the Hoare Bros Group.
In determining what are the debts of the defendant one other item must be considered. It consists of debts said to be due by the defendant to PLH Haulage Pty Ltd and Hoare Bros Pty Ltd. A debt is due to each company, and the total is $28,315. I disregard this sum, however, as the defendant controls each company and it can be assumed that neither company would enforce payment of what is due. I arrive at the figure of $59,928 for the debts of the defendant in this way:
| Debts as alleged by defendant | $1,158,807.30 | |
|---|---|---|
| deduct | ||
| Amount acknowledged as due | ||
| by Hoare Bros Pty Ltd | $656,440.70 | |
| Other company debts | $414,123.60 | |
| Company loans | $ 28,315.00 | $1,098,879.30 |
| $ 59,928.00 | ||
Real estate
I examine now the value of real estate. The title to each piece of real estate is held by one or other of three companies, Galaxie Investments Pty Ltd, Hoare Bros Pty Ltd and MKA Investments Pty Ltd. No real estate is held in the name of the defendant. The parties do not agree as to the value. In the case of each property the defendant relies upon the value ascribed in the balance sheet of the company by which the property is held. Except for the properties at Lot 3 Dalton Street and Lot 4 Dalton/Wood Street, Geelong and at Port Arlington Road, Leopold the plaintiff relies upon a sworn valuation by Philip John Harris, a valuer Grade I employed by the Department of Administrative Services. The plaintiff adduced no evidence as to the value of those three properties. In the case of another property, the defendant gave no evidence of the value but it had been valued by the plaintiff. That is the property at 4 Fenwick Street, Geelong. It is owned jointly by Galaxie Investments Pty Ltd with Lia Leeta Services Pty Ltd, a company owned equally by Kenneth Edward Hampson, the defendant's solicitor, and one Phillip Edward Boston.
In the case of any property in respect of which there is both a value entered in a company or trust balance sheet and a valuation of Mr Harris, I accept the latter. I do so notwithstanding that each valuation by Mr Harris is stated with the qualification that it is made on the basis of discreet enquiry and without full inspection of the property, and that consequently the valuation figure is at best an approximate only of current market value. This was perhaps not the most accurate way to make a valuation but in the circumstances it was the best practicable. The valuation is certainly more recent than any from which the company or trust figures are derived.
If Mr Harris has overstated the values to an extent, it needs to be noted that in respect of the three properties which Mr Harris did not value, I accept the company valuation. They are the properties at Lot 3 Dalton and Lot 4 Dalton/Wood Street, Geelong and at Port Arlington Road, Leopold. Overall, in respect of properties for which there was a value from both parties, the value given by Mr Harris was approximately 50 per cent more than those in the company balance sheets. If Mr Harris' valuations are slightly high, it is likely that the excess is offset by the amount of the undervalue of the two Dalton Street properties and that at Leopold.
I find the following to be the value of the properties held by Galaxie Investments Pty Ltd, Hoare Bros Pty Ltd and MKA Investments Pty Ltd.
| A Galaxie Investments Pty Ltd | |
|---|---|
| 1 97 and 99 Barwon Terrace, Geelong | $340,000.00 |
| 2 Lot 3 Dalton Street, Geelong | 33,893.06 |
| 3 109 Yarra Street, Geelong | 350,000.00 |
| 4 69 Esplanade, Geelong | 220,000.00 |
| 5 101 Barwon Terrace, Geelong | 300,000.00 |
| 6 Lot 4 Dalton/Wood Street, Geelong | 39,853.98 |
| 7 34 Fenwick Street, Geelong-one half of valuation at $150,000 | 75,000.00 |
| $1,358,747.04 | |
| B Hoare Bros Pty Ltd | |
| 1 Barwon Terrace/Yarra Street, Geelong | $60,000.00 |
| 2 Boundary Road near Geelong- Port Arlington Road, Geelong | $360,000.00 |
| $420,000.00 | |
| C MKA Investments Pty Ltd | |
| 1 Grand Scenic Drive, Leopold | $220,000.00 |
| 2 Land at Port Arlington Road, Leopold | $64,712.00 |
| $284,712.00 | |
| The total value of real estate is $2,063,459. |
I have dealt with the personal assets of the defendant, which include debts owed by companies of which he is a member, and amounts shown in trust balance sheets as money lent by the defendant to the trust, or as held by the trust for the defendant as beneficiary. I have also dealt with companies associated with the defendant the assets of which consist of real estate. I now examine the companies and trusts from the perspective of a realisation of assets. The purpose is to determine to what extent it is reasonable to anticipate that company and trust assets could be realised, in order to meet the judgment so far as the personal assets of the defendant are insufficient. In the case of one company at least, a winding up would be appropriate. Each entity is examined separately to determine what are disposable assets. In making a notional realisation of property, any asset required for the defendant's business is excluded from consideration. Equally, no notional winding up is made of any company by which that business is carried on.
Information as to the assets and liabilities of each company or trust is taken from the balance sheet for the year ended 30 June 1986.
A Hoare Bros Pty Ltd
The financial position of the company is healthy. Net assets are $539,819.17 and the projected profit for 1986-87 is $650,000 before tax. The two items of real estate belonging to the company can be sold without impairment to the capacity of the company to trade successfully.
| Assets | ||
|---|---|---|
| (1) Other debtors | $ 7,311.24 | |
| (2) Deposits | $16,202.34 | |
| (3) Loan to J Brickett | $18,162.25 | |
| (4) Investments-Capital BS | $44,756.14 | |
| -other companies | $ 1,000.00 | |
| (5) Loan to Hoaredow Unit Trust | $ 4,477.50 | |
| $ 91,909.47 | ||
| add real estate sale proceeds | $420,000.00 | |
| $511,909.47 | ||
| deduct loan by defendant | $ 77,611.23 | |
| $434,298.24 | ||
I assume throughout this exercise that the Hoaredow Unit Trust is able to repay any amount which is shown in the balance sheet of a company as a debt due by the trust to that company. An amount of $1,452,500 was paid on behalf of the defendant to Hoaredow Contractors Pty Ltd as trustee of the Hoaredow Unit Trust on 3 June 1981. The defendant failed to give any satisfactory account of how the amount was later disbursed and no balance sheet of the trust assets and liabilities was produced. I believe that in the absence of any evidence to the contrary the assumption on which I proceed is warranted.
| B Geelong Civil Constructions Pty Ltd | ||
|---|---|---|
| Assets | ||
| (1) Short term deposit | $20,000.00 | |
| (2) Loan to P J MacMillan | $ 8,031.36 | |
| $28,031.36 | ||
| deduct loan by defendant | $11,085.00 | |
| $16,946.36 | ||
C PLH Haulage Pty Ltd
This company has virtually ceased to carry on business since 1982 or 1983. It could be wound up voluntarily without prejudicing the defendant's business operations. It has net assets of $47,884.54. The liabilities include $18,582.42 as provision for payroll tax and income tax. These liabilities might be avoided if the company were wound up. Then, the net assets would be approximately $65,000.
D Galaxie Investments Pty Ltd
The main activity of the company (trustee of the Peter Hoare Family Trust) is real estate rental and investment. The company has no role in the conduct of the defendant's contracting business and a sale of the real estate that constitutes the company's principal asset would not endanger that business.
| Assets | ||
|---|---|---|
| (1) Cash at bank | $28,985.41 | |
| (2) Investment loan account- | ||
| Hoaredow Unit Trust | $35,000.00 | |
| Barwon View Development | $ 4,701.00 | |
| $ 68,686.41 | ||
| add real estate sale proceeds | $1,338,747.04 | |
| $1,427,433.45 | ||
| deduct loan by defendant | $ 828,140.05 | |
| $ 599,293.40 | ||
E MKA Investments Pty Ltd
This company is engaged in the business of purchasing and renting real estate. Its assets include the house at Grand Scenic Drive, Leopold and the land at Port Arlington Road, Leopold. The net assets of the company are $2870. To this should be added the amount by which the value given to the Grand Scenic Drive property by the valuer Harris exceeds the book value of the property. The excess is $97,440, thus making total net assets of $100,310. Deduction of the debt of $8350.72 due to the defendant leaves a surplus of $91,959.28.
F Fourth Lendale Pty Ltd
The net assets of the company (trustee of the Leopold Investment Trust) are $26,265.82. Realisable assets comprise a building society deposit of $15,706.93 and a debt of $93,890.16 due by the Hoaredow Unit Trust, a total of $109,597.09. Liabilities include a beneficiary loan account of $118,764.09. Of that amount, $32,054.33 is due to the defendant, and $22,779.76 to the Peter Hoare Family Trust. The balance of $63,930 is owed to members of the defendant's family. If it be assumed that these beneficiaries would forego payment by the trust, $63,930 could be added to the net assets, producing a sum of $90,195.82. However, I do not make that assumption. I take the net assets of the company, after allowing for repayment of the loan by the defendant and the Peter Hoare Family Trust, to be $26,265.82.
G Hoare Services Trust
The trust (trustee-Ardama Nominees Pty Ltd) is able to repay the loan of $10,139.86 made by the defendant. It has cash at the bank of $8016.82 and an investment with General Credits of $7500. I disregard loan amounts to Fourth Lendale Pty Ltd and A M Hoare which total $39,502.49 either on the basis that the lenders would not insist upon repayment, or on the basis that the amounts are cancelled out by the amount shown for debtors, $45,931.
I am now able to summarise my conclusions as to the total sum that would be available to satisfy the judgment if the property of the defendant and company and trust property were sold and proper liabilities met.
| 1 Debts due to defendant | $ 967,381.17 | |
|---|---|---|
| 2 Plant and equipment | $ 900,000.00 | |
| 3 Shares | $ 15,000.00 | |
| 4 Leopold Investment Trust loan to | ||
| Peter Hoare Family Trust | $ 22,779.66 | |
| $ 1,905,160.83 | ||
| deduct liabilities of defendant | $59,929,998.00 | |
| $ 1,845,232.83 | ||
| add real estate sale proceeds | $ 2,063,459.00 | |
| $ 3,908,691.83 |
| Galaxie Investments Pty Ltd | $828,140.05 | |
|---|---|---|
| MKA Investments Pty Ltd | $ 8,350.72 | |
| Hoare Bros Pty Ltd | $ 77,611.23 | |
| $ 914,102.00 | ||
| $2,994,589.83 | ||
| add net proceeds of company | ||
| liquidation or sale of company | ||
| or trust assets | ||
| PLH Haulage Pty Ltd | $47,854.54 | |
| Galaxie Investments Pty Ltd | $68,686.41 | |
| Fourth Lendale Pty Ltd | $26,265.82 | |
| $ 142,806.77 | ||
| $3,137,396.10 | ||
In making the above calculation I have not drawn any distinction between the defendant and the companies and trusts. Regardless of the strict legal position, I consider it legitimate to treat company and trust assets, after providing for proper liabilities, as assets of the defendant. The defendant and his business activities are the reason for existence of the other entities. The companies are controlled by the defendant; where the defendant is not in a majority position, shareholders sympathetic to his interests can be counted to join with him to secure what he wants. In the case of the trusts, one trust, the Peter Hoare Family Trust, holds most of the real estate in which the defendant has an interest. Galaxie Investments Pty Ltd is trustee of the trust. The defendant holds only one of three shares in Galaxie. But the defendant could control the trust even in the unlikely event that he could not persuade another member to vote with him. As appointor under the trust deed the defendant has the power to replace Galaxie as trustee with another of his choice.
In relation to the loan of $22,779.66 by the Leopold Investment Trust from the Peter Hoare Family Trust, I have already found that the Leopold Investment Trust has sufficient assets to repay the loan. No trust deed for the Leopold Investment Trust was adduced in evidence nor was there evidence of the terms of the trust. Having regard to the situation of the defendant in relation to the companies and the other trust, the Peter Hoare Family Trust, in the absence of evidence to the contrary, I am prepared to conclude that the defendant is a beneficiary under the Leopold Investment Trust and also that he has such control of the trust that if the loan amount were repaid he could ensure that it was applied to himself to the exclusion of any other beneficiary.
By this judgment the defendant has become indebted to the plaintiff in the sum of $2,389,455.16. It is certain that the plaintiff will enforce the judgment soon if, the judgment sum is not paid, or an arrangement not made for payment. Equally, it is certain that if enforcement of the judgment becomes necessary, the personal assets of the defendant will prove inadequate. I am satisfied that then the plaintiff would seek to have the defendant made bankrupt. In bankruptcy proceedings the plaintiff might even challenge the validity of two transactions by which the defendant purported to divest himself of the beneficial ownership of property. I refer to the declaration of trust dated 1 July 1983 in respect of the shares held by the defendant in Hoare Bros Pty Ltd and the sale by the defendant of the property at Lot 13 Grand Scenic Drive, Leopold to MKA Investments Pty Ltd.
Whatever the position the plaintiff might take with respect to those transactions in bankruptcy proceedings, I am also satisfied that to avoid bankruptcy the defendant would appropriate company and trust assets sufficient to meet the judgment. By virtue of his position in relation to the companies and the trust, the defendant either has, or he can without difficulty obtain, the authority necessary to achieve that appropriation. I consider that not to take the company and trust assets into account on the question of financial hardship to the defendant would be to ignore what in a commercial sense is the reality of the situation.
The evidence indicated that the defendant himself identified with the various entities which he had created. For instance, in the letter of the defendant's accountants, Davidson, England & McNaughton, to the plaintiff dated 26 March 1986, the defendant's duties in relation to the six companies comprising the Hoare Bros Group were described as "the provision of management services including administration, engineering, operations and marketing". Next, in his affidavit in the proceeding the defendant described Hoare Bros Pty Ltd as a family company set up by his father which "has been primarily run by myself since 1966". Again, the defendant refrained from enforcing payment of the residue of purchase money due under the contract for the sale of Grand Scenic Drive, Leopold by himself to MKA Investments Pty Ltd. The residue, although due on 1 September 1978, was not paid until 20 May 1987. Finally, twice under examination, when asked in substance whether he was wealthy, the defendant answered, "Myself, I am not". By this answer I take the defendant to have acknowledged that there is wealth close to him, that is, in the companies and trusts that are in his control.
Discretion - Lack of candour
I come now to consider the last of the four matters that I find to be relevant to the exercise of the discretion to grant a stay on grounds of extreme financial hardship, that of full and frank disclosure of all relevant aspects of the applicant's financial situation. The judgment of Olney J in DCT (WA) v Briggs (1986) 17 ATR 369; 86 ATC 4137, is authority for the relevance of lack of frankness to the exercise of discretion. His Honour, at 4141 said:
Quite apart from anything else, the defendant's lack of frankness to which I have referred earlier in failing to make a full disclosure of his financial position is sufficient to defeat any case based upon a claim of extreme financial hardship.
I find that the defendant has failed to make disclosure of his financial position with the degree of candour required. In so finding I take into account also his application to the plaintiff for release from liability to pay tax made under s 265 of the Income Tax Assessment Act. I enumerate below the particular instances of failure by the defendant to make full and frank disclosure which I consider significant:
- (a) The defendant relied upon the document identified as a declaration of trust made on 1 July 1983 which document I find not to be genuine.
- (b) In relation to the document listing drilling rigs, diesel motors and machinery and spare parts as assets of the defendant exhibited to the defendant's affidavit, he failed to state either in the document or the affidavit the value of the assets. In the application to the plaintiff, the defendant had given $562,000 as the value of "business plant". The evidence before me showed that the drilling rigs alone were worth $600,000 at least.
- (c) In the application to the plaintiff the defendant claims that his current income is approximately $45,000. This does not seem consistent with other evidence. In proceedings in the Federal Court the defendant has deposed that in November 1985 he was deriving income at the annual rate of $110,000. If that was the case, it is difficult to accept that his income is now only $45,000 when, according to his own evidence, Hoare Bros Pty Ltd, the source of his income, will make a profit of $200,000 for the year ended 30 June 1987.
- (d) The defendant did not produce, and gave no explanation for not producing, the balance sheet of the Hoaredow Unit Trust or other documents relating to its financial position. All that was in evidence was the balance sheet and profit and loss account of Hoaredow Contractors Pty Ltd, the trustee of the trust, for the year ended 30 June 1986. In particular, there was no evidence showing the receipt and manner of disposal of the amount of $1,452,500 paid by 10th Wakool Pty Ltd in June 1981. The evidence of the defendant as to what he had done with the money was vague indeed. Beyond saying that he bought some shares and "some driller rigs and machinery" the defendant failed totally to account for the money.
- (e) The defendant produced the balance sheet of Galaxie Investments Pty Ltd, trustee of the Peter Hoare Family Trust. However, it was left to the plaintiff to produce the balance sheet of the latter. The omission of the trust balance sheet reflects seriously on the credibility of the defendant. Major assets in which the defendant has an interest, consisting of real estate, are held by the trust and are not disclosed in the company balance sheet. Production restricted to the company balance sheet gave an incomplete account of the defendant's true worth.
- (f) The defendant produced no documents to show the financial position of the companies and of the trusts for the year ended 30 June 1987. While it is likely that there was not sufficient time to prepare a formal profit and loss account and balance sheet, it is quite reasonable to expect the defendant to have produced some information in writing, albeit provisional, as to the current situation. As Mr McEwan for the plaintiff submitted, it is proper to infer that such a document would have been forthcoming had the defendant's financial position deteriorated since 30 June 1986.
- (g) The defendant did not call any accountant to give evidence of his financial position. Ms Davies in her final address for the defendant submitted that she had sought leave at the conclusion of the examination of her client to adduce such evidence but that I had refused her leave. The defendant was in the witness box for two days, and at the end of the second day I did refuse Ms Davies leave to call the defendant's present accountant, who is not Mr Boyd. My recollection is that Ms Davies sought to call evidence not on the matter of the defendant's finances generally, but as to encumbrances on real estate owned by the defendant's companies. I refused leave to give the evidence on the ground that much earlier in the proceedings the defendant had signalled its intention to rely upon the company ownership of real estate in opposing the defendant's claim of extreme personal financial hardship, and that it was too late in the proceedings for the defendant to introduce new evidence to meet the point.
Refusal of a stay of execution would no doubt greatly inconvenience the defendant. It would also cause him financial hardship. However, that hardship would not be so extreme as to warrant the order which the defendant seeks. The defendant has assets at his disposal that are sufficient to meet the judgment and also leave him with a substantial surplus. The assets could be sold without harming the business which provides the defendant with his income. My conclusion is that, in all the circumstances, a stay ought to be refused.
There will be judgment that the defendant pay to the plaintiff $2,248,207.16 together with $141,248 for interest. I order that the defendant pay the plaintiff's costs of the proceeding, including the cost of transcript.
Postscript
In considering the merits of the defendant's objection to the assessment to tax as a factor relevant to the exercise of the discretion to stay the judgment. I concluded that the defendant's prospects of succeeding on the objection before the Administrative Appeals Tribunal were not good. In arriving at that view I attached much importance to the matter of the defendant's knowledge of the fact that the money he received giving control of Hoare Bros (Quarries) Pty Ltd to Rumpf was drawn from the profits of the company so as to leave the company unable to pay tax. I considered that if the defendant did not know the fact, Boyd, his accountant knew, and that Boyd's knowledge must be imputed to the defendant. Authority as to the significance of that knowledge was the decision of Lee J of the Supreme Court of New South Wales in its Administrative Law Division in Gregrhon Investments Pty Ltd v FCT (1986) 18 ATR 50; 8 ATC 4906. His Honour held that s 260 of the Income Tax Assessment Act 1936 did not operate to strike down the transaction there in question. After I had prepared that part of my reasons that relate to the merits of the objection to the assessment to tax I was informed by Ms Davies for the defendant that on 26 November 1987 the decision of Lee J had been reversed on appeal by the Full Court of the Federal Court of Australia: (1987) 19 ATR 457. The court consisted of Fisher, Lockhart and Spender JJ. I have read the judgments of the members of the court. Unfortunately, there has not been time for me to revise my own reasons in light of the appeal decision. My conclusion, however, is that what the Federal Court decided does not affect my assessment of the merits of the defendant's objection. The critical point on which Lee J had found in favour of the taxpayer was that the taxpayer did not have knowledge of the final part of the subject transaction, namely, the payment of the price for the sale of shares in the company from the profile of the company. I considered that the instant case was distinguishable as the defendant could be taken to have that knowledge. The appeal court in Gregrhon held that whether an arrangement would be set aside under s 260 was not a question to be decided by reference to knowledge either actual or imputed on the part of the taxpayer as to the essential character of the arrangement or of its constituent parts. The matter was for objective assessment. What determined the issue was the "purpose or effect of the arrangement", and not the motives and intentions of the taxpayer. The Federal Court concluded that the transaction in question was not an ordinary business transaction, and viewed objectively had all the features of tax avoidance. The steps involved formed a single transaction and there was no warrant for distinguishing the prior steps of which the taxpayer had knowledge from the concluding ones of which the trial judge found the taxpayer was ignorant.
In my opinion, this reasoning can afford the defendant small comfort in the pending proceedings before the Administrative Appeals Tribunal, as the crucial features of the arrangement in Gregrhon held to attract the operation of s 260 exist also in his own case.
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