Deputy Federal Commissioner of Taxation v. Mackey.

Judges:
Yeldham J

Court:
Supreme Court of New South Wales

Judgment date: Judgment handed down 2 November 1982.

---

Yeldham J.

By a statement of claim issued on 1st June, 1982, the plaintiff, the Deputy Commissioner of Taxation, sought to recover from the defendant, a medical practitioner residing in Scone, the sum of $35,994.71 together with interest ``until payment or judgment''. Particulars of the amount claimed are as follows:

      ``Year ended 30
      June 1978
      Income Tax as per
      notice of
      assessment dated                $
      29 June 1979                35,479.72
      Additional Tax for
      late payment
      computed to 12                                    $
      May 1982                                       9,866.28
      Year ended 30
      June 1978
      Income Tax as per
      notice of
      assessment dated
      8 May 1981                     514.99
      Additional Tax for
      late payment
      computed to
      12 May 1982                                       47.54
                                 ----------         ---------
                                 $35,994.71         $9,913.82.
                                 ----------         ---------''
          

---

ATC 4541

An objection to the assessment which the defendant had lodged pursuant to sec. 185 of the Income Tax Assessment Act 1936 on 22nd August, 1979, was not disallowed until 20th April, 1982, an amended assessment having in the meantime been issued on 8th September, 1981. Thereafter the defendant requested the Commissioner to refer his decision to a Board of Review (sec. 187) and this was done on 17th September, 1982. An extension of time for payment of the income tax and other amounts claimed was refused by the plaintiff who expressly declined to give his reasons for such a decision. That refusal is presently the subject of proceedings taken in the Federal Court of Australia.

The defendant now seeks a stay of proceedings consequent upon the issue of the statement of claim until the final determination of his objection. That application is opposed by the plaintiff, save in respect of penalty tax amounting to approximately $7,230 (no doubt as a result of the decision of Smith J. in
Cyprus Mines Corporation v. F.C. of T., 78 ATC 4468 at pp. 4485-4486). The defendant deposed in an affidavit as follows:

``2. I have examined my affairs and the assets available to me and unless I suffer some unanticipated business reversal, I will be in a position to pay the tax and penalty tax claimed by the Plaintiff in these proceedings if such tax is ultimately found to be payable by me at any time.

3. However, if I were obliged to make immediate payment of the amount claimed by the Plaintiff, I have no cash funds immediately available from which to make such payment and to raise the necessary funds I would need to either sell real estate in the current depressed market or to raise second mortgage finance on the security of that real estate at the high rates of interest which presently prevail.''

He was not cross-examined at all and I accept what he has said. It appears from the affidavit also that the plaintiff claims that there is due to him in all (including the amount claimed in the present action) the sum of $115,395.97, this being in relation to various years. The defendant disputes his liability for the whole of this amount, which relates to his individual interest in a partnership called the Davey Management Services Pty. Limited Investment Partnership No. 4. He has paid such other tax as has been assessed as payable by him personally and which is not the subject of dispute.

Section 201 of the Act provides:

``The fact that an appeal or reference is pending shall not in the meantime interfere with or affect the assessment the subject of the appeal or reference; and income tax may be recovered on the assessment as if no appeal or reference were pending.''

Notwithstanding this section, however, it is clear (although not here conceded by the plaintiff) that the Court has jurisdiction in an appropriate case to grant a stay, whether before or after judgment, to enable an objection or appeal to be dealt with before payment is made. See
F.C. of T. v. Trautwein (1936) 56 C.L.R. 211 at p. 213;
D.F.C. of T. v. Australian Machinery & Investment Co. Ltd. (1945) 8 A.T.D. 133 at p. 135. As recently as 14th October, 1982, Mason A.C.J. in
Clyne v. D.F.C. of T. 82 ATC 4510 said (at pp. 4511-4512):

``I was informed that it is a somewhat unusual course for the Deputy Commissioner to commence proceedings for recovery in a Court relying on a notice of assessment which is under challenge in proceedings under Pt. V of the Assessment Act. It is to be hoped that this is so. The institution of proceedings for recovery on a notice of assessment which is challenged in proceedings under Pt. V may operate oppressively and unfairly to a taxpayer. Fortunately, and this is conceded by Mr. Priestley, Q.C., for the Deputy Commissioner, the Courts in which recovery is sought have a jurisdiction to stay or adjourn recovery proceedings when the notice of assessment is under challenge in Pt. V proceedings, insisting, if it be appropriate, on the taxpayer giving suitable security or a suitable undertaking to meet the exigencies of the situation.

In the ultimate analysis the Deputy Commissioner's charter to commence recovery proceedings, notwithstanding a challenge in Pt. V to the correctness of the assessment, is to be found in sec. 201 of the Assessment Act. It provides:

---

ATC 4542

• `The fact that an appeal or reference is pending shall not in the meantime interfere with or affect the assessment the subject of the appeal or reference; and income tax may be recovered on the assessment as if no appeal or reference were pending.'

It is a provision which has been stringently criticized. However, it appears to be impervious to criticism for Parliament has not seen fit to amend it.''

I was referred to a number of cases (to most of which I need not here refer) which dealt with whether or not, in the particular circumstances under consideration, a stay would be granted and in which, not always in similar terms, the tests which should be applied are discussed. All the cases recognize that the Court, in considering whether to grant or refuse a stay, should give due weight to the policy of the legislature as revealed in sec. 201. The fact that an appeal or reference is pending is not of itself sufficient. One relevant matter is whether the taxpayer will probably have assets available to meet payment of the assessment if a stay is granted (see, for example, per Hoare J. in
Marina Estates Pty. Limited v. D.F.C. of T. 74 ATC 4166 at p. 4168). In the present case that question is plainly to be answered in favour of the defendant. Perhaps the most important consideration, and that which was principally argued before me, is whether the objection is ``genuinely based on substantial grounds'' (
Fortuna Holdings Pty. Limited & Ors. v. D.F.C. of T. 76 ATC 4312 at pp. 4324-4326) or whether the possibility of succeeding on the objection ``is judged to be remote'' (
D.F.C. of T. v. Bevz 81 ATC 4185 at p. 4186). The former test was agreed by senior counsel for the plaintiff to be that which should be applied, although he formally maintained that the Court had no power to grant a stay.

There was tendered (as Ex. 2) a statement of facts and much supporting material to explain the operation of the Davey Management Services Pty. Limited Investment Partnership No. 4, the defendant's involvement in which has given rise to the present dispute between the parties. The plaintiff submitted that he was entitled to assess the defendant for income tax in accordance with his notice of assessment dated 29th June, 1979, by virtue of the decision of the Federal Court of Australia in
F.C. of T. v. Ilbery 81 ATC 4661. Mr. Bennett, senior counsel for the defendant, submitted that the scheme here under consideration differs from that in Ilbery's case in two important respects to which Toohey J., with whom Northrop and Sheppard JJ. agreed, expressly referred. Whereas in Ilbery there was a voluntary prepayment of interest, it is asserted that in this case interest was paid by the partnership of which the defendant was a member following the making of a demand by the lender which was provided for in the relevant loan agreement. To this the plaintiff answered that in both cases the avowed object was to obtain a deduction for prepaid interest and that it was immaterial whether such interest was paid pursuant to a legal obligation or only pursuant to an option to pay.

The second ground upon which Mr. Bennett sought to distinguish Ilbery's case was that there (as Toohey J. emphasized at p. 4668):

``At the time of the prepayment of interest the taxpayer had not acquired any property from which he hoped to derive income.''

In the present case it is plain that the partnership used the borrowed funds to pay the balance due on property (i.e. units in a unit trust) which it had acquired even before the loan was made. On behalf of the plaintiff it was argued that the documents disclosed that the only investment of any consequence was that of $6,011 which was (according to the balance sheet of the partnership as at 30th June, 1978) on deposit with a building society. Hence, it was submitted, any investment was ``de minimis'' and there was not, in this respect, any real distinction from Ilbery's case.

I do not think it is necessary nor is it desirable, on an application such as the present, to go into any detail in determining whether or not the objection is genuinely based on substantial grounds. Certainly I do not think that the two points relied upon by the defendant can be summarily dismissed as

---

ATC 4543

the plaintiff suggested. It seems to me that, whether or not they are ultimately successful, they raise questions of complexity and of some substance. I have considered the arguments of counsel and the general nature of the scheme, as well as what was said in Ilbery's case, and have come to the conclusion that the relevant question should be answered favourably to the defendant. Whether or not he will ultimately succeed in distinguishing Ilbery's case on either or both of the grounds to which I have referred and whether or not, in that event, his appeal will in fact be upheld I do not know, nor is that the matter with which I am presently concerned.

All the other considerations relevant to the question of whether or not a stay should be granted - especially prejudice to either party, delay, the likelihood of the defendant being ultimately able to pay if he should fail - I resolve in favour of the defendant. In coming to this conclusion I do not overlook the policy considerations inherent in sec. 201.

In my opinion the defendant has made out his case for a stay of proceedings, subject to his undertaking to the Court in terms which I will set out.

I order that these proceedings be stayed until the final determination of the objection lodged by the defendant against his income tax assessment for the year ended 30th June, 1978, or until further order of the Court, subject to his undertaking to the Court that during the period of the stay he will not dispose of or otherwise deal with any of the first eight assets listed on annexure A to his affidavit sworn 7th October, 1982, without the consent of the plaintiff or the leave of the Court.

The costs of this application will be costs in the cause.