HOARE BROS PTY LTD (NO 2) v FC of T

Judges:
Ryan J

Court:
Federal Court of Australia

Judgment date: 17 September 1996

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Ryan J

On 22 March 1995 the respondent, the Deputy Commissioner of Taxation (``the Commissioner'') served a statutory demand for payment of debt in the amount of $164,314.65 being the total of debts described in the schedule. The demand claimed penalties imposed for late payment of group tax and an estimate made under s. 222AGA of the Income Tax Assessment Act 1936 (``the ITAA'') in the amount of $73,845.35 which was paid late but before the issue of the statutory demand.

The applicant disputed the penalties described as follows in items d. and g. of the schedule:

``d.  Relevant penalty amount, equal to twenty
      per centum of the tax instalment deductions
      shown in paragraph a (ii) due and payable by
      the company pursuant to section 221F(12)(b)(ii)(A)
      of the said Act.                                     $61,851.60

  ...

  g.  Additional amount for which the company is
      liable by way of penalty under subparagraph
      222AJA(3)(b)(i) of the Income Tax Assessment Act
      1936, calculated at twenty per cent of the
      estimate shown in paragraph e.                       $14,769.05''
      

It is submitted by the applicant that the Commissioner improperly exercised his discretion not to remit or reduce these penalties and consequently a genuine dispute has arisen as to the applicant's liability to pay it.

The applicant's challenge to the exercise of the Commissioner's discretion in the way just indicated is based on an alleged failure to take into account relevant considerations including the fact that the applicant's inability to pay group tax deductions was due to circumstances beyond the applicant's control. It is also contended that the Commissioner arbitrarily treated the applicant differently from other taxpayers in similar cases for whom the penalties were reduced to 4% almost as of course. As well, it is suggested that the Commissioner determined in advance not to remit or reduce penalties which might be attracted by future late payments by the applicant irrespective of any extenuating circumstances which might reasonably be regarded as palliating or excusing the default. It is not clear whether this ground of attack is available in respect of the penalties claimed in the statutory demand.

Complaint is made about the insufficiency of the Commissioner's reasons for declining to remit the penalty and proceedings were instituted in this Court on behalf of the applicant to challenge the Commissioner's decision not to remit the penalties. Those proceedings (VG 154 of 1995) it appears were subsequently discontinued by consent on 9 February 1996.

Counsel for the applicant referred to the judgment of von Doussa J in
Cempro Pty Ltd v Dennis M. Brown Pty Ltd (1994) 12 ACLC 501 in support of the proposition that once the conclusion is reached that there is a genuine dispute as to amount, it is impossible, without resolving the dispute, to determine whether any amount remains due to the respondent. It was also pointed out that even where the nature of the dispute is such as to suggest a high probability, taking the best view of the case for the applicant, that some amount will be found due to the respondent, the Court will not engage in an ``exercise of guesswork'' in order to fix on an amount which can be regarded as not in dispute; see
Godfrey Hirst Australia Pty Ltd v Floyd Industries Pty Ltd (unreported Sundberg J 24 July 1995). In Cempro Pty Ltd v Dennis M. Brown Pty Ltd (supra), a genuine dispute was found to be raised by allegations of over- servicing and over-charging against the respondent accountants who were claiming a lump sum in respect of professional fees.

However, it has to be borne in mind that s. 459H of the Corporations Law requires the Court to find a genuine dispute about the existence or the amount of the debt. In the present case, the dispute is not as to the entitlement of the Commissioner to the amount of the penalty imposed. It is as to a collateral matter, namely whether the Commissioner had wrongly exercised a discretion in declining to reduce or remit the penalties. The debt came into existence as soon as the delay occurred in payment of the tax estimated by the Commissioner; see s. 222AJA of the Income Tax Assessment Act which provides:

``(1) This section applies if a liability to pay an estimate remains undischarged at the end of 7 days after the Commissioner sends notice of the estimate to the person liable or to the person's trustee, unless the person liable is the Commonwealth.

(2) The unpaid amount of the estimate, as at the end of the 7 days, continues to be payable and is called the principal amount .

(3) In addition, the person is liable to pay to the Commissioner, by way of penalty:

• (a) if the person is a government body or the estimate relates to a liability under subsection 221YN(1) - an amount at the rate of 16% per annum on so much of the principal amount as remains unpaid, computed from the due date of the underlying liability; and
• (b) otherwise:
  • (i) an amount equal to 20% of the principal amount; and

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    ATC 4990

  • (ii) an amount at the rate of 16% per annum on the total of:
    • (A) so much of the principal amount as remains unpaid; and
    • (B) so much of the amount referred to in subparagraph (i) as remains unpaid;

    computed from the due date of the underlying liability.

(4) The due date of the underlying liability is the due date referred to in paragraph 222AGA(1)(b).

(5) If paragraph (3)(b) applies, the amount referred to in subparagraph (3)(b)(i) is not taken for the purposes of subparagraph (3)(b)(ii) to have ceased to be payable merely because a judgment has been given by, or entered in, a court.''

In
Kalis Nominees Pty Ltd v DFC of T 95 ATC 4519 his Honour held that under the scheme of the Income Tax Assessment Act there could be no genuine dispute about the existence or amount of a debt made payable and quantified by the legislation itself. He observed, at p. 4523-4524:

``... By operation of s 177(1) and (4) there is conclusive evidence before the Court in this proceeding of the due making of the assessments and that the amounts and all the particulars of the assessment are correct. The fact that a review of the Commissioner's decision to disallow the applicant's objections to the assessments is pending in the AAT does not in the meantime interfere with, or affect, the Commissioner's decisions and any tax, and additional tax remains recoverable as if no review were pending (Taxation Administration Act 1953, s 14ZZM).''

In the course of his reasons for judgment in Kalis Nominees, Olney J referred to an earlier judgment of his own in proceedings in which the parties were identical to those in the present application;
Hoare Bros Pty Ltd v DFC of T 95 ATC 4156; (1995) 13 ACLC 358 where his Honour observed, at ATC 4164-4165; ACLC 367:

``The scheme of the ITAA is not to render a taxpayer liable for tax unless and until three events have occurred: first, the Commissioner must have assessed the amount of the taxable income and the tax payable thereon; second, notice of the Commissioner's assessment must have been served on the taxpayer; and third, the prescribed period after service of the notice of assessment must have expired. Once these events have occurred the tax as assessed becomes a debt due to the Commonwealth by the taxpayer. This conclusion is dictated by the ordinary meaning of the words used in the ITAA and is supported by dicta of Kitto J in
Batagol v FC of T (1963) 13 ATD 202 at 203-204; (1963) 109 CLR 243 at p 251, 252 and of Mason and Wilson JJ in Bloemen at p 4286.

A genuine dispute as to whether or not any one or more of the three events mentioned above has occurred would in my view be a ground upon which the power to set aside a statutory demand under s 459H could be exercised. Such a dispute would clearly go to the question of the existence of the debt. In a case in which a notice of assessment has not been produced so as to invoke provisions [of] s 177(1) it may be open to dispute that an assessment has been duly made, but that case is not this case. Furthermore, there may also be scope for there to be a genuine dispute as to the service of notice of the assessment or as to the expiration of the required period after service. But once all three elements have been established namely, the making of the assessment, the service of notice of the assessment and the expiration of the required period after service, there is created a statutory liability which is capable of being sued for and recovered in a court of competent jurisdiction and this is so notwithstanding that the taxpayer may have lodged an objection against the assessment or has sought review of, or has appealed against, the Commissioner's decision in response to the objection.

In the present case the objection which the company has lodged in respect of the 1991 amended assessment and which the Commissioner presently has under consideration raises an issue as to whether the Commissioner should have disallowed certain losses which the company claimed as deductions against its gross income. The objection which the company wishes to make against the 1990 assessment is based upon an assertion that certain previously

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ATC 4991

unclaimed deductions ought to be allowed. There is no reason to doubt that the dispute between the company and the Commissioner as to the deductibility of the amounts in question is a genuine dispute, nor that if the company is successful in its objections, either by persuading the Commissioner or if it fails to do that, upon review or appeal, the amounts of tax payable for the relevant years, and possibly the penalty tax are likely to be reduced. But the structure of the taxation legislation is such that the debt created after the service of an assessment remains recoverable as a debt unless and until it is replaced following objection, review or appeal by some other liability. A genuine dispute as to the process of assessment is not a dispute as to the existence or amount of the debt.

In a case such as this in which the issuing and service of the assessments are not in issue and in which there is no question that the respective dates for payment of the assessments have passed there can be no genuine dispute as to the existence or amount of the debt claimed in the statutory demand which would justify the Court exercising its powers pursuant to s 459H of the Corporations Law to set aside or vary the statutory demand. In the absence of a genuine dispute as to the existence or amount of the debt claimed in the statutory demand no question as to any `offsetting claim' arises.''

That reasoning was approved on appeal by a Full Court of this Court (Black CJ, Einfeld and Sackville JJ) in
Hoare Bros Pty Ltd v DFC of T 96 ATC 4163 where it was observed at p. 4172 of the joint judgment:

``In our view, it is clear from the scheme of the ITAA that the Company in the present case became indebted to the Commissioner in the amounts specified in the notices of assessment once they were served and the time referred to in s. 204 had expired. There were a number of grounds that, if the supporting facts were available, might have been relied upon by the Company to challenge the validity of the notices. None of these grounds was invoked. Had they been, depending upon the circumstances, there may have been a genuine dispute between the Company and the Commissioner as to the existence or amount of the debt to which the demand related. But the mere fact that the Company had objected to the assessments, or sought review of the Commissioner's decision before the Administrative Appeals Tribunal, did not establish that there was a genuine dispute as to the existence or amount of the relevant debt. That debt was not the subject of a genuine dispute.''

The conclusion reached by the Full Court reinforces my view that the applicant, in the circumstances of the present case, has not shown a genuine dispute as to the existence or amount of the debt claimed by the Commissioner. This is a case where the debt arose by force of the statute upon the requisite seven day delay having occurred in making the payment. That is not to say that the Commissioner's discretion whether or not to remit a penalty is not reviewable (as to which see e.g.
Temples Wholesale Flower Supplies Pty Ltd v Commissioner of Taxation (1991) 29 FCR 93) but that question, as I have already indicated, is collateral to the existence and amount of the debt pending review. Nor does s. 222AJA in terms require the Commissioner to exercise a discretion one way or another before a liability to the penalty can arise as was held to have been the effect of s. 99A considered by the High Court in
Giris Pty Ltd v FC of T 69 ATC 4015; (1968-1969) 119 CLR 365 (see esp. per Barwick CJ at ATC 4016; CLR 371).

For the reasons explained by the Full Court in Hoare Bros Pty Ltd v DFC of T (supra)
Re Norper Investments Pty Limited & the Companies Act 77 ATC 4212; (1977) 33 FLR 87 which was also relied on by Mr Searle, cannot avail the applicant in the present case. Of Norper, the Full Court said at 4172:

``In Norper, Needham J. dismissed a winding up petition brought against a company by the Commissioner. His Honour did not decide that there was a genuine dispute about the debt created by the notice of assessment issued by the Commissioner. Rather, Needham J. (at ATC 4215-4216; FLR 92) relied on the principle that the trial judge had a discretion to grant or refuse a stay of the winding up proceedings where an appeal by the taxpayer was pending. His Honour held (at ATC 4215-4216; FLR 92) that, despite s. 201 of the ITAA (now ss. 14ZZM and 14ZZR of the ITAA), the Court had a discretion to grant a stay of the

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ATC 4992

winding up proceedings, if the company had a substantial argument that the assessment should be set aside entirely. In Norper itself, no appeal was under way, but this was because the Commissioner had `omitted to obey the clear direction of the statute which he administers', by failing to forward the company's objection to the Court. Moreover, the then current state of the Law, as applied by the Board of Review, meant that the assessment was `misconceived' and that the company was not liable to tax. For these reasons, Needham J. exercised his discretion in favour of the company. The case was a special one, such as to lead Needham J. to conclude that the petition was oppressive and the proceedings an abuse of process.''

For these reasons, the application to set aside the statutory demand must be dismissed. It is common ground between the applicant and the Commissioner that the amount claimed should be reduced by $73,845.35 to take account of a payment made after issue but before service of the demand. I shall order accordingly and extend time for compliance with the demand as so varied to 1 October 1996. The application will be otherwise dismissed and the applicant must pay the Commissioner's costs unless the statutory demand forms the basis for a winding up order on the application of the Commissioner, in which event the Commissioner's costs of this application should form part of his costs in that winding up application.

THE COURT ORDERS:

1. That the amount of the debt claimed in the statutory demand made by the respondent on the applicant and dated 22 March 1995 be reduced by $73,845.35 to $90,569.30.

2. It is declared that the said demand as so varied had effect as from the date of service of it upon the applicant.

3. That the period for compliance with the demand as so varied be extended to 1 October 1996.

4. That the application be otherwise dismissed.

5. That in the event that the applicant be wound up in an application relying on the said demand as so varied, the respondent's costs of the application form part of his costs in that winding up application but that otherwise the applicant pay the respondent's costs to be taxed or agreed.