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Deputy Federal Commissioner of Taxation v. Trower.

Judges:
McGarvie J

Court:
Supreme Court of Victoria

Judgment date: Judgment handed down 27 February 1986.

McGarvie J.

This appeal from the order of a Master arises from an action in which the Deputy Commissioner of Taxation sues the defendant taxpayer for $353,594.93 in respect of income tax. On 29 November 1985 the Master ordered that the plaintiff have leave to enter judgment for that sum with interest and that execution on the judgment be stayed until the hearing and determination of proceedings before a Taxation Board of Review upon the reference of objections by the taxpayer to assessments. The Deputy Commissioner of Taxation appeals against the order for a stay. The taxpayer was granted an extension of time to appeal and appeals against the grant of leave to enter final judgment.

The plaintiff claims primary tax for the years ended 30 June in 1977, 1979, 1980 and 1981 and additional tax under sec. 207 of the Income Tax Assessment Act 1936 for the non-payment of those amounts of tax. The notices of assessment of tax payable for the relevant years bear the following dates: 

      Year ended 30 June 1977                             13 June 1978
                         1979                             12 May 1980
                         1980    original assessment      14 May 1981
                                 amended assessment       2 October 1981
                         1981                             21 January 1982

Notices of objection were lodged for the taxpayer in respect of each assessment. By notices which were all dated 30 April 1984 the taxpayer was given notice of decisions to disallow all the objections. During May 1984 requests were made on behalf of the taxpayer that the decisions of disallowance be referred to a Board of Review for review.

The action was commenced on 5 December 1984; the plaintiff issued a summons for final judgment on 11 February 1985 returnable before a Master on 21 March 1985. The order of the Master which is the subject of appeal was made on 29 November 1985, and judgment was entered on 13 January 1986. The taxpayer's notice of appeal, which was out of time, is dated 4 February 1986.

The decisions of disallowance were not referred by the plaintiff to a Board of Review until 27 August 1985, some 13 months after requests for references were made. They were not referred until after the taxpayer had stated in his affidavit of 11 August 1985 in opposition to the summons for final judgment that he was unsure whether they had been referred.

Under O. 54 r. 16(6) each appeal is a rehearing anew of each application. Accordingly, it is not for me to scrutinise the exercises of discretion of the learned Master as in the ordinary appeal against an exercise of discretion. I am to make an original exercise of the discretions.

As Mr Burnside for the plaintiff conceded for the purpose of the appeals that the taxpayer's prospects of success in the proceedings before the Board of Review were neither frivolous nor hopeless, the parties did not go into the issues involved in those proceedings. I assume that the taxpayer has genuine and substantial grounds for the objections.

Primary tax

Final judgment

I deal first with the issues which arise in respect of the claim for primary tax.

Mr Reicher for the taxpayer argues that there should be leave to defend, while Mr Burnside submits there should be leave to enter final judgment.

Mr Reicher commenced his argument by referring to a passage in my judgment in
Fortuna Holdings Pty. Ltd. & Ors. v. D.F.C. of T. 76 ATC 4312 at p. 4325; (1978) V.R. 83 at pp. 99-100 where, after discussing the decision of the High Court in
D.C. of T. (W.A.) v. Australian Machinery & Investment Co. Pty. Ltd. (1945) 3 A.I.T.R. 236, I said:

``The decision in that case supports the interpretation that the words of sec. 201

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mean that a pending appeal or reference does not of itself affect the rights which the Commissioner would otherwise have to obtain payment of the assessed tax. It follows that when a court is asked to exercise a discretion to delay recovery by the Commissioner of assessed tax, it would not be a proper exercise of the discretion, to delay the recovery solely because an appeal or reference is pending, but, while the policy stated in sec. 201 is a consideration to which great weight should be attached, other considerations, including the extent of the taxpayer's prospect of success in an appeal or reference, can justify the exercise of discretion in a way which delays the Commissioner's recovery.''

I made that statement in a case where the issue was whether the Deputy Commissioner should be restrained from presenting a petition to wind up several taxpayer companies whose debts for tax were the subject of references to a Board of Review. Later cases confirm the discretion in a court to delay the Commissioner's recovery of assessed tax by restraining, adjourning, staying or even dismissing proceedings in appropriate cases. See for example:
Re Norper Investments Pty. Limited & the Companies Act 77 ATC 4212; (1977) 33 F.L.R. 87;
Clyne v. D.F.C. of T. 82 ATC 4510 and
D.F.C. of T. v. Mackey 82 ATC 4571; (1982) 45 A.L.R. 284.

Mr Reicher submitted that if those discretions existed there was no reason why the same principle should not apply to the discretion to refuse an application for leave to enter final judgment. Mr Burnside relied on the fact that no case could be pointed to where that discretion had been exercised in that way. Mr Reicher responded that there was no authority that the discretion could not be exercised in that way. I think the comment of James L.J is apt:

``The clearer a thing is, the more difficult it is to find any express authority or any dictum exactly to the point.''

  • (Quoted by Lord Macnaghten in
    Keighley Maxsted & Co. v. Durant (1901) A.C. 240 at p. 245.)

In this case the fact that the taxpayer has genuine and substantial objections in pending reviews before a Board of Review would be a relevant consideration if he sought an adjournment of the application for final judgment, or a stay of execution of judgment. However, it is not in this case a relevant consideration in the exercise of discretion upon the application for leave to enter final judgment.

The nature of the issue on such an application appears from O. 14 r. 1(a). The plaintiff is to apply upon affidavit verifying the cause of action and stating a belief that there is no defence to it.

``The Judge thereupon, unless the defendant shall satisfy him that he has a good defence to the action on the merits or shall disclose such facts as may be deemed sufficient to entitle him to defend the action generally, may make an order empowering the plaintiff to enter such judgment whether final or interlocutory as may be just, having regard to the remedy or relief claimed.''

It follows from the nature of the application, and is confirmed by a comparison of r. 1 with rr. 6 and 8 of the Order, that the alternatives open to the judge are to grant the plaintiff leave to enter judgment or grant the defendant leave to defend.

The position on the hearing of an application for judgment under the rule is stated in Williams, Supreme Court Practice, vol. 1, p. 1196, para. (14.3.7):

``If the defendant appears at the hearing of the application and does not either show that the claim is not within Order 3 Rule 4, or that the plaintiff's proceedings are irregular, or does not by affidavit or otherwise satisfy the judge that he has a good defence to the action on the merits or disclose such facts as may be deemed sufficient to entitle him to defend, an order should, as a general rule, be made empowering the plaintiff to sign judgment.''

A convenient test appears from the judgment of the Full Court in
Australian Can Co. Pty. Ltd. v. Levin & Co. Pty. Ltd. (1947) V.L.R. 332 at p. 335, where it was said:

``... the substance of the criterion to be applied is that after the matter involved has been explained to the Judge there must be a real uncertainty without full argument or further investigation of the facts as to the plaintiff's right to judgment.''

  • Earlier it was said at p. 334 that:

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``Where there is a real case to be investigated either in fact or in law, leave to defend should be given.''

While I do not go so far as to say that there could never be circumstances in which the existence of a pending reference to a Board of Review would be relevant to the exercise of discretion on an application for final judgment for a debt for income tax, I find them difficult to envisage. The pending reference is of no relevance here because it does not raise any doubt as to the plaintiff's right to judgment. This view was recently taken by the Full Court of this Court in
Koadlow v. D.F.C. of T. 85 ATC 4147 at p. 4151.

Section 201 of the Income Tax Assessment Act 1936 provides:

``201(1) 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.

201(2) In sub-section (1) `income tax' includes additional tax under section 207 or Part VII.''

Subsection (2) of that section was added by amendment after the dates upon which the debts for tax which are sued upon in this action came into existence.

Although initially he raised technical objections to the sufficiency of the affidavits and exhibits verifying the plaintiff's cause of action, Mr Reicher eventually abandoned them. The cause of action is verified. See F.J.
Bloemen Pty. Ltd. v. F.C. of T. 81 ATC 4280; (1981) 147 C.L.R. 360.

There is no doubt as to the plaintiff's right to judgment. The proper exercise of discretion is to give leave to enter final judgment for the amount of primary tax claimed.

Stay of execution

Mr Reicher submitted that I should stay execution on any judgment until the hearing and determination of the proceedings before the Board of Review, as the Master had done. The submissions were based on the assumption, which I make, that the taxpayer has genuine and substantial grounds for the objection.

Mr Reicher relied on the delay by the Deputy Commissioner in referring the decisions of disallowance to a Board of Review.

In an affidavit filed by special leave on the appeal, Linda Mary Skinner, an advising officer of the Australian Taxation Office said:

``5

  • (a) During the later half of the 1970s and early 1980s, there was a huge increase in the volume of tax returns which included claims for deductions based on widely marketed tax avoidance schemes. By that expression I mean, in this context, claims for deductions in circumstances where the amount claimed did not reflect an equivalent reduction in the taxpayer's resources, and where the scheme had been marketed to large numbers of taxpayers.
  • (b) When the Australian Taxation Office detected a claim based on such a tax avoidance scheme, it would consider whether the claim should be allowed or rejected. In cases where the claim was rejected, the taxpayer would generally lodge an objection. The objection would generally result in the Australian Tax Office requesting further information from the taxpayer concerning the details and circumstances of the claim. In circumstances where the objection was disallowed, the taxpayer concerned would generally request a reference to a Board of Review.
  • (c) The objections and replies to requests for information were generally very lengthy documents prepared for the individual taxpayer by or on behalf of the promoter of the scheme. The material provided by each taxpayer involved in a particular scheme was generally in a standard form, and generally revealed little useful information about the scheme.
  • (d) The consequence of the matter set out in sub-paragraphs (b) and (c) above, was a massive increase in the work load at the Australian Taxation Office. Australia wide the number of disputed assessments rose from approximately 91,000 in 1977 to approximately 201,000 in 1981. The number of requests for reference increased from approximately 10,000 in 1978 to approximately 58,000 in 1985.

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  • (e) The resources of the Australian Taxation Office remained almost unchanged between 1976 and 1982 and the Office was unable to keep up with the increased work load. Despite some increase in 1983 and 1984, the Office still had difficulty in keeping up with the increased work load. The problem was further compounded by the accumulating backlog of work.
  • (f) The Melbourne Branch of the Australian Taxation Office experienced a greater increase in work load than any other branch.

6. The practical result of the matters set out in paragraph 5 hereof was that the investigation and disposition of tax returns and objections was drastically impeded during the later half of the 1970s and early 1980s. This was particularly so in the case of returns involving claims based on widely-marketed tax avoidance schemes.

7. In an attempt to optimise the use of available resources, the Australian Taxation Office decided to select representative scheme cases to be heard by Boards of Review. The purpose of this was to enable all similar scheme cases to be disposed of in accordance with the finding in a representative case. This process was hampered in many instances both by the difficulty encountered by the Australian Taxation Office in obtaining information concerning the details of the relevant schemes and in many instances by the withdrawal at the last minute of the request for reference which had been selected as a representative test case.

8. Each of the tax returns the subject of the assessments referred to in the Statement of Claim herein include claims for widely-marketed tax avoidance schemes.

  • (a) The claim in the 1977 return involved an alleged gift to the Ezroh Relief Fund. The scheme involved making an ostensible gift to the Ezroh Relief Fund, but indirectly obtaining a benefit of an amount just less than the amount of the ostensible gift. The investigation of claims based on this scheme was slowed by the lack of co-operation of those from whom information was sought.
  • (b) The claim in the 1979 return involved a series of predetermined transactions by which the taxpayer enters a partnership, the partnership acquires an item of depreciable plant at an inflated value, the plant is leased out by the partnership for a short time and it is then sold at a substantial loss. The partners all claim a share of the loss. In the case of the partnership in which the Defendant was allegedly involved, the item of plant was a calculator (originally purchased from Sanyo Office Machines for $92.00) which was ostensibly acquired by the partnership for $201,000.00 and sold shortly thereafter for $1,000.00, and subsequently sold again on the same day for $50.00.
  • (c) The 1980 and 1981 returns both involve a so-called interest differential scheme. By that scheme, the Defendant ostensibly joined a partnership (the `Point Piper Investment partnership No. 1') which borrowed $2,610,000.00 for thirty years from Frandette Pty. Ltd., a company associated with the promoters of the scheme. The same day, the partnership ostensibly lent the money to another company (Astralan Pty. Ltd.) also associated with the promoters, at a slightly higher interest rate. The Point Piper Investment partnership No. 1 made two interest payments during the year of income, but Astralan made only one payment of interest to the partnership. Point Piper borrowed further money from Bintara Pty. Ltd. (another company associated with the promoters) to enable it to pay the interest due on its loan from Frandette Pty. Ltd. The net effect in the year of income is that the participants, including the taxpayer, did not outlay any money other than a promoter's fee, and claimed their proportionate share of the amounts ostensibly paid as interest by the partnership.''

Section 188(1) of the Income Tax Assessment Act provides that if a taxpayer requests reference to a Board of Review of a decision of disallowance of an objection, the Commissioner shall refer the decision in accordance with the request. Section 189 provides that if the Commissioner does not refer the decision within 60 days of receiving

ATC 4162

the request, the taxpayer may at any time thereafter give him notice in writing to do so and the Commissioner shall refer the decision within 60 days of the notice. There is no evidence of any such notice being given here, and, as earlier mentioned, the taxpayer on 11 August 1985 was unsure whether the decisions had been referred.

Although it does not appear to what extent the delay in reference of the decisions has delayed the date on which the taxpayer's proceedings would be heard by a Board of Review, the delay is a factor which tells in favour of the taxpayer upon the exercise of this discretion. On the other hand I am entitled to take into account the situation of the Taxation Office which I infer led to the delay in reference. In
D.F.C. of T. v. Mackey 82 ATC 4571; (1982) 45 A.L.R. 284 at ATC pp. 4574-4575; A.L.R. p. 288 Moffitt P. of the Court of Appeal of New South Wales, with whose judgment both the other members of the Court agreed, took account of the reality of the Commissioner's situation.

For the taxpayer it was put that a consequence of the Commissioner's delay in referring the decisions to the Board of Review was that additional tax continued to accrue. This submission carries less force now than it would have in earlier times: see Income Tax Assessment Act sec. 202 and the Taxation (Interest on Overpayments) Act 1983.

Mr Burnside relied on the policy of sec. 201 as a consideration of great weight in the plaintiff's opposition to a stay. In
D.C. of T. (W.A.) v. Australian Machinery & Investment Co. Pty. Ltd. (1945) 3 A.I.T.R. 236 at p. 241 Latham C.J. said:

``My brothers, Rich, Dixon and Williams and myself are of the opinion that the contention that there is no jurisdiction to grant a stay in these proceedings by reason of the provisions of the Income Tax Assessment Act, sec. 201 and the associated sections should not be accepted. 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.''

In D.F.C. of T. v. Mackey 82 ATC 4571; (1982) 45 A.L.R. 284 all members of the Court emphasised that an application for a stay in a case to which sec. 201 applied was not to be considered on the ordinary balance of convenience applicable to an application for an interlocutory injunction in ordinary circumstances. Moffitt P. said:

``... 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.''

(ATC p. 4573; A.L.R. p. 287.)

In this case there is nothing to show that the taxpayer will suffer particular and substantial prejudice if the policy of the Act as stated in sec. 201 leads to there being no stay of execution. Mr Trower is a medical practitioner. There is evidence from his accountant that as at 30 June 1984 he had a net excess of assets over liabilities of $54,163.95 and that on 18 December 1984 the Deputy Commissioner of Taxation obtained leave to enter final judgment for $58,427.59 for the primary tax for the year ended 30 June 1978. The accountant states that by reason of this he believes Mr Trower's present liabilities far exceed his assets. However, as there is also evidence before me that in cross-examination before the Master, Mr Trower admitted that in the financial years ended on 30 June from 1981 to 1985 the medical partnership of his wife and himself assigned 98 or 99 per cent of the partnership income to various companies associated with his family, I am unable to regard the above figures as representing the reality of his financial situation and potential. There is no statement before me that says that Mr Trower will be unable to pay the amount or will suffer other identified hardship if judgment is entered in this action without a stay.

The situation of Mr Trower is far removed from that of taxpayers in cases such as
Re Norper Investments Pty. Limited & the Companies Act 77 ATC 4212; (1977) 33 F.L.R. 87, where if the petition for winding up proceeds the taxpayer would be eliminated.

It is relevant to the exercise of my discretion that Mr Trower's success before the Board of

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Review depends substantially on success in tax avoidance schemes where claims for deductions do not reflect an equivalent reduction in his resources.

Mr Burnside submitted that taxpayers relying on artificial tax avoidance schemes should not get the assistance of the court to delay payment of tax. He relied on the decision of the Court of Appeal of New South Wales in D.F.C. of T. v. Mackey 82 ATC 4571; (1982) 45 A.L.R. 284. That was also a case where liability for tax depended on the success of what was called a contrived scheme to avoid tax for which the taxpayer would otherwise be liable. In deciding that the proper exercise of discretion was to refuse a stay, the Court gave substantial weight to the circumstance that liability for the tax depended on such a contrived scheme.

I consider it to be important to the exercise of my discretion that Mr Trower's objections to the assessments depend substantially on the efficacy of artificially contrived schemes. In exercising this discretion I need not shut my eyes to the fact that the schemes relied on, although lawful, are of a distinctly anti-social nature. The nature of the schemes is not altered by the fact that they were entered into upon the advice and with the assistance of senior counsel, solicitors and accountants.

If the schemes ultimately succeed in the purpose for which he outlaid money upon them, the taxpayer will, by shifting his tax burden to the general body of taxpayers, have received the financial advantage for which his money was outlaid.

In the meantime, the overall strength of his case in support of the exercise of the discretion to grant a stay is diminished by the fact that the pending proceedings on which he relies are based substantially on contrived tax avoidance schemes.

The considerations relevant to the exercise of discretion on an application for a stay are different from those on the determination of whether a taxpayer is liable for income tax. On the latter issue, if the use of an artificial contrivance results in law in a taxpayer being not liable for tax, it makes no difference that this result was reached by the artificial contrivance.

Taking into account the various considerations, I regard the policy of sec. 201 as outweighing the fact that the taxpayer has genuine and substantial grounds of objection, and that the Commissioner delayed in referring the decisions to a Board of Review. In reaching this conclusion I bear in mind that the objections are based on artificial contrivances of tax avoidance and the taxpayer has demonstrated little hardship that would result from the refusal of a stay. I exercise my discretion against ordering a stay.

Additional tax

Mr Reicher submits that it is arguable that the words ``income tax'' in sec. 201, as it was before the addition of subsec. (2), do not include the additional tax which under sec. 207 accrues at a percentage rate on the amount of tax unpaid. He relies on decisions which characterise such exactions as penalties, not taxes. See.
Re Dymond (1958-1959) 101 C.L.R. 11, and
D.F.C. of T. v. Carpenter (1959) V.R. 470.

It follows, he submits, that while sec. 201 allows primary income tax to be recovered although a reference is pending, it does not allow additional tax under sec. 207 to be recovered.

A somewhat similar argument that the word ``tax'' in sec. 207 does not include additional tax under sec. 226 of the Act was raised in Koadlow v. D.F.C. of T. 85 ATC 4147. There was no authority directly in point and the Full Court regarded the contention as raising a question of law fit to be investigated, and gave the defendant leave to defend.

In this Court, later last year, in D.F.C. of T. v. Manners and Terrule Pty. Ltd. 27 November 1985 [86 ATC 4001], Murphy J. decided that point adversely to a taxpayer at a trial.

The point raised in the present case as to the meaning of income tax in sec. 201 was not decided in Koadlow's case and there seems to be no authority directly in point.

Mr Burnside put a number of opposing submissions, including a submission which relied on subsec. (2) of sec. 201 which was added by the Taxation Laws Amendment Act 1984. He argued that this subsection deals with procedural rights rather than substantive rights and therefore applies in this case.

In my opinion there is a sufficient degree of uncertainty to entitle the defendant to leave to

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defend in respect of the claim for additional tax.

Conclusion

The result is that the order of the Master made on 29 November 1985, and the judgment entered pursuant to it on 13 January 1986 will be set aside. The plaintiff will have leave to enter final judgment for the amount of the primary tax with interest. The defendant will have leave to defend in respect of the claim for additional tax, and the application for a stay of execution will be dismissed.

I would ask the parties to calculate the total amount of primary tax and later inform my associate of that amount so it can be included in an order.

The fact that I consider that there is sufficient uncertainty to entitle the defendant to leave to defend in respect of additional tax should not distract me from the policy of O. 14, which is designed to prevent plaintiffs from being delayed in recovery for more time than is necessary, and to enable the real issues in the action to be determined.

Order 14 rr. 6 and 8 provide:

``6. Leave to defend may be given unconditionally or subject to such terms as to giving security or time or mode of trial or otherwise as the Judge may think fit.''

``8. Where leave, whether conditional or unconditional, is given to defend, the Judge may give all such directions as to the further conduct of the action as might be given on a summons for directions under Order 30 and may direct that the affidavit filed by the defendant under this Order shall serve in lieu of defence, and may order the action to be forthwith set down for trial, and may define the issues that are to be tried.''

The only real issue which justifies the grant of leave to defend is the issue of whether the plaintiff is precluded from recovery in respect of additional tax payable under sec. 207 by the fact that references to a Taxation Board of Review are pending in respect of the primary tax on which the additional tax accrues. Subject to hearing from the parties, I have in mind to order that the action forthwith be set down for trial without pleadings and without a certificate of readiness, be tried only on that issue and be referred to the causes list for fixation of a date for hearing: compare
Bolton v. Thorne-George (1894) S.J. 683.

Gentlemen, I invite your submissions on that aspect which I just raised and other matters arising from the reasons I have just delivered.

(Discussion ensued.)

Mr Reicher has applied for a stay for a short period to enable the defendant to consider whether to appeal against my judgment.

The general approach which is adopted in the exercise of such a discretion in this Court is that in the ordinary course a stay is not granted because there is an appeal; there needs to be some particular reason shown.

Having carefully considered the aspect of Mr Trower's entitlement to a stay of proceedings generally, if I bear in mind the assumed addition that a decision may be made to appeal, it seems to me that no case is made for a departure from the usual approach in granting a stay and the application for a stay is refused.

(Discussion ensued re costs.)

Having decided to award costs on a percentage apportionment basis, and both counsel being in agreement with that approach, the decision I make is one of impression, and I do not suggest it is a result of precise mathematical calculation. My impression is that the Deputy Commissioner has succeeded to the extent of about 75 per cent in these proceedings and that the taxpayer should be ordered to pay 75 per cent of the Deputy Commissioner's costs both before the Master and of the appeal.

  • Mr Reicher: Would your Honour certify for counsel?
  • His Honour: Certainly.

(Discussion ensued.)

I will now pronounce my order but it will be understood that para. 2 will be incomplete and will depend on the parties' agreement as to amounts of judgment and interest.

ORDER

I order that:

  • 1. The order made by Master Evans on 29 November 1985 and the judgment entered on 13 January 1986 pursuant to that order each be set aside.

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  • 2. The plaintiff be at liberty to enter final judgment for (such amount and such interest as the parties agree).
  • 3. The defendant be at liberty to defend this action as to the residue of the plaintiff's claim.
  • 4. There be no pleadings, interrogatories or discovery in the action.
  • 5. The action forthwith be set down for trial without a certificate of readiness.
  • 6. The issue that is to be tried at the trial is whether the plaintiff is precluded from recovering in this action additional tax payable under sec. 207 of the Income Tax Assessment Act 1936 by the existence of references to a Taxation Board of Review of decisions upon objections to the assessments of income tax upon which the additional tax is claimed to accrue.
  • 7. The action be referred to the causes list for hearing.
  • 8. That the costs of the plaintiff in respect of the application to the Master and this appeal, including all reserve costs, be taxed and when taxed an amount equal to 75 per cent of those taxed costs to be paid by the defendant to the plaintiff.
  • 9. Certify for counsel.


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