Deputy Federal Commissioner of Taxation v. Mackey.
Judges:Moffitt P
Hutley JA
Glass JA
Court:
Supreme Court of New South Wales - Court of Appeal
Moffitt P.
The claimant, the Deputy Commissioner of Taxation, seeks from this Court leave to appeal against an order of
Yeldham
J. [
D.F.C. of T.
v.
Mackey
82 ATC 4540
] staying proceedings against the opponent in the Common Law Division of this Court.
The relevant action is for a sum which included $35,479.72 for tax assessed in respect of the year ended 30th June, 1978 and interest. There was also included in the claim a small additional sum which constituted a penalty and it is conceded that there should be a stay of proceedings in any event in respect of it. The application for the stay of proceedings was made after the statement of claim had been issued and before judgment.
At the request of the taxpayer, the Deputy Commissioner referred his decision upon the assessment to the Board of Review. The proceedings before the Board are still pending.
Section 201 of the Income Tax Assessment 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.''
In this Court, the Deputy Commissioner does not argue that sec. 201 deprives the Court of an appropriate discretion to grant a stay of proceedings or of execution. I proceed on that basis
(D.C. of T. (W.A.)
v.
Australian Machinery
&
Investment Co. Ltd.
(1945) 8 A.T.D. 133
;
3 A.I.T.R. 236
and
Marina Estates Pty. Ltd.
v.
D.F.C. of T.
74 ATC 4166)
.
Liability for tax in dispute in the present case depends upon the success of a contrived scheme to avoid tax for which the taxpayer would otherwise be liable. The taxpayer is a country medical practitioner. The scheme involved his entering into one of a number of partnerships organised by a firm of accountants and the setting up of a series of what have been termed unit trusts. Essential to a section of the scheme, so far as it relates to this taxpayer, was that the subject partnership had a large number of members and that there was a loan to that partnership from Quassia Finance Corporation Limited of $1,000,000 for a long term with provision for the almost immediate prepayment of a very large sum for interest. In the result, within a few days of the advance of the $1,000,000 to the partnership, $747,500 was paid by the borrower partnership to the lender. The partnership could come to no harm from its liability for the capital sum of $1,000,000 because this with its other liabilities was assigned to a unit trust part of another group engaged in a similar scheme. Similarly, the liability of another group to Quassia for $1,000,000 or other equivalent loan to that group was assigned to the subject partnership or to the unit trust which it owned, so if one such liability were to be called up, another entitlement to balance it could be called up. The business or activity of the partnership or venture in question was lending money, but what it earned in the subject year (being some $18,608) from lending, was balanced out by what it owed by similar borrowing (some $18,675) from another partnership. Subject to a minimal investment, the prepayment of interest of $747,500 became substantially the loss, which was of $748,671, of the partnership in the year of the venture. This loss, or this expenditure, was shared in accordance with the agreement of the partners who seem to have had no community of interest except in the scheme referred to. This share of the loss or expenditure was set against the net earnings otherwise of the taxpayer.
When the application for leave to appeal had been outlined, this Court indicated to counsel that the application for leave appeared to involve the same or similar considerations to those which would arise on an appeal, if leave was granted. Accordingly the Court required the parties to put submissions, both in respect of the application for leave and the appeal, if leave was granted.
The scheme involved was very similar to that found adversely to the taxpayer in
F.C. of T.
v.
Ilbery
81 ATC 4661
. It was submitted to
Yeldham
J. on behalf of the taxpayer that there were two factual differences in the present case from
Ilbery's case.
I quote from a part of the reasons of
Yeldham
J. as follows (82 ATC 4540 at pp. 4542-4543):
ATC 4573
``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 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 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.''
The presence of sec. 201 has been criticised by
Mason
A.C.J. in
Clyne
v.
D.F.C. of T.
82 ATC 4510
. However, as has been often observed, the section must be given effect to as disclosing a legislature policy. In
D.C. of T. (W.A.) v. Australian Machinery
&
Investment Co. Ltd. (supra)
at A.T.D. p. 135; A.I.T.R. p. 241 the High Court (
Latham
C.J.,
Rich, Dixon
and
Williams
JJ.) said:
``We are of the opinion that there is jurisdiction to grant a stay in such proceedings but that in considering any application for a stay the policy of the Act as stated in sec. 201 is a matter to which great weight should be attached.''
The hardship upon the taxpayer in the present case is that if he is now to meet the tax assessed, he will have to realise some assets or borrow money and that the present is an unfavourable time to do so. He concedes he has means to pay the tax in question and it is not claimed that it will adversely affect him in the earning of his livelihood.
Accepting that there is an overall discretion to grant a stay of proceedings and that great weight should be given to sec. 201, and the policy of the legislation implicit in it, I would say two things. The first is that there should not be substituted for the discretion of the Court to grant a stay some general formula dictating the decision to be come to, the formula being extracted from judicial pronouncements in other cases, often cases involving quite different considerations or, for example, a stay of a different remedy, such as a winding-up order
(Re Roma Industries Pty. Ltd.
76 ATC 4113
;
Fortuna Holdings Pty. Ltd.
&
Ors.
v.
D.F.C. of T.
76 ATC 4312
). The second is that if great weight is to be given to the operation of sec. 201, this will not be done if the case is determined merely on considerations which would be applied in any case not within the terms, and hence the strictures, of sec. 201. An exercise of this discretion which heavily or merely depends on whether the taxpayer has an arguable case and where the balance of convenience lies may point to sec. 201 not really being given the force warranted.
There appears to be some difficulty involved in this Court entering or appearing to enter upon the very question which the Board of Review or perhaps the Federal Court will have to determine and make some pronouncement on the very questions raised. The case admittedly is very close to Ilbery's case and close to the principles there stated. On one view it may be a clearer case against the taxpayer than Ilbery's case. There are some factual differences. Unless absolutely necessary, it seems to me not appropriate that this Court make pronouncements on whether the taxpayer's case is slender or otherwise or which indicate this Court's view on the matter to be determined by the Board or a Federal Court.
I think the question whether the stay should be granted in a case such as the present should be considered on a broader basis and that the learned judge at first instance, not having adverted to this basis, but rather to the arguability of the points of
ATC 4574
difference between the present case and Ilbery's case, this Court should grant leave to appeal and then consider the case itself on this broader basis. It would be too narrow a view to grant a stay of proceedings or execution merely because an appeal is pending or merely because on examination of the pending appeal there appears to be an arguable case, or perhaps there are complex questions involved which the Board of Review or Federal Court can best determine. The policy of sec. 201 is that when an assessment has been made, the Deputy Commissioner has a right to have the tax paid, despite the pendency of an appeal. While hardship to the taxpayer and the merits of the appeal are relevant matters, other considerations are involved, including the Commissioner's right to have the tax assessed paid. The exercise of discretion may involve, and in my opinion in the present case it requires, some examination of the nature and basis of the liability on which the disputed tax has been assessed and the nature of the dispute.Sufficient has already been said to make it quite clear that the liability, the subject of the appeal, relates to a contrived scheme to avoid the payment of tax. But for this scheme, the taxpayer would have had to pay tax on his net earnings from his medical practice. Having regard to the policy of the Act indicated by sec. 201, the payment of tax should not be deferred pending resolution of appeals. I do not think that, except in quite exceptional circumstances, the Court in exercise of its overriding discretion should intervene to stay proceedings or execution to prevent sec. 201 operating where a taxpayer has been a party to a contrivance to avoid his liability otherwise for tax. The question which so arises upon an application for a stay is quite different to that to be decided upon the determination of the question whether the contrivance has been successful, on the basis that what has been done is no more than an ordering of the taxpayer's affairs in a way which has not attracted a liability for tax (see
Cridland
v.
F.C. of T.
77 ATC 4538
;
(1977) 140 C.L.R. 330
).
Thus, if a taxpayer embarks on a scheme such as that involved in the present case, I do not think that the Court should aid him by setting sec. 201 at naught while the Board or a Court considers whether he has been successful in avoiding the tax by the scheme. A case such as the present is different from that where in the ordinary course of his business a situation has arisen which gives rise to a dispute concerning the liability of the taxpayer for tax.
In the present case, in my view, there are not other overriding circumstances which warrant the order made. There is no prejudice to the taxpayer of an extraordinary type, such as that his business is endangered if he has to meet the tax. It is true there has been some delay so far as the Commissioner is concerned. However, cases such as the present come to depend on other cases in contest where avoidance schemes become the subject of high level litigation involving those who promote them or receive benefit from them. Time is involved in the process of litigating such matters. Ilbery was obviously such a case. During the delay the taxpayer in the present case had a current assessment covering the present liability and did not pay it and had the benefit of not paying it while the Ilbery litigation was current. The present taxpayer is just one of a very large number of taxpayers who participated in the same or similar agreements and schemes with Quassia Finance Corp. Pty. Ltd. at its apex and involving some millions of dollars in reduction of earnings so as to avoid tax.
These circumstances to which I have referred, namely the question of prejudice and of delay, do not in my opinion warrant the operation of sec. 201 being overridden. Therefore, although the learned trial judge acknowledged the importance of sec. 201, in my view the terms of his judgment and the orders made establish that he did not give sufficient weight to the operation of sec. 201, and in particular to the circumstance that the liability for tax depended on a contrived scheme to avoid tax.
I propose the following orders:
- 1. That leave to appeal be granted;
- 2. that the appeal be allowed and the order staying the proceedings be set aside except so far as the proceedings relate to a claim for the penalty;
- 3. that the opponent taxpayer pay the costs at first instance, of the application for leave and of the appeal.
ATC 4575
I also propose that by the consent of the parties there be a stay of proceedings for seven days from today.
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