MNWA Pty Ltd V Deputy Commissioner Of Taxation - December 2016
No error in failing to set aside statutory demand for tax debts as no global deal
A company seeking to set aside a statutory demand that relates to a tax debt will rarely, if ever, be able to establish that there is a genuine dispute about the existence or amount of the tax debt: Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd (2008) 237 CLR 473 at 495-496 ,  HCA 41; Hoare Bros Pty Ltd v Commissioner of Taxation (1996) 62 FCR 302 at 311,  FCA 1234.
It will need to show “some other reason” why the demand should be set aside. Despite the apparent breadth of those words, the circumstances in which a demand will be set aside for some other reason are limited by the material considerations (As to which see Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd (2008) 237 CLR 473 at 497 ) that must be taken into account. The taxpayer companies in the recent Full Federal Court case of MNWA Pty Ltd v Deputy Commissioner of Taxation, ( FCAFC 154) despite novel arguments, were unable to pass the threshold.
In September 2014, MNWA Pty Ltd (MNWA) was issued a statutory demand under s 459E of the Corporations Act 2001 for payment of GST totalling $5,462, 889. Another company, Gucce Holdings Pty Ltd (Gucce), was also issued a statutory demand for income tax, SIC and GIC totalling $3,796,160.01.
MNWA and Gucce (the companies) (The companies were related only in the sense that Mr Caratti, the owner and controller of MNWA, is the de facto partner of Ms Bazzo, the owner and controller of Gucce) unsuccessfully applied (Pursuant to s 459G(1) of the Corporations Act 2001 (Cth)) to set aside the statutory demands under s 459J(1)(b) (MNWA Pty Ltd v Deputy Commissioner of Taxation (No 2)  FCA 1128). The “other reason” relied upon by the companies was that the issuing of the demands was unconscionable, an abuse of process and in breach of, and an unconscionable departure from, an agreement made with the Commissioner at a meeting in April 2014. The agreement was that the Commissioner would not, subject to appropriate security being provided, pursue recovery of the companies’ tax and GST liabilities, while they pursued objection and appeal rights under Part IVC of the Taxation Administration Act 1953. The Commissioner and the companies entered into deeds of agreement under which the Commissioner agreed not to recover certain tax liabilities provided the companies provided certain security, which they did. The tax liabilities covered by the deeds of agreement were different to the tax debts sought to be recovered pursuant to the statutory demands.
First instance decision
At first instance, relying on NT Resorts Pty Ltd v Deputy Commissioner of Taxation, ( FCA 255) the companies argued that the demands should be set aside under s 459J(1)(b) if the Court was satisfied that there was a genuine dispute about whether the agreement covered the tax debts to which the statutory demand related. The companies argued that a genuine dispute would exist if it was reasonable and arguable or plausible that the Commissioner had agreed to defer recovery action of the tax debts the subject of the statutory demands. It was not necessary, in the companies’ submission, for the Court to decide whether there was in fact such an agreement.
The primary judge found that the evidence did not establish on the balance of probabilities that a global agreement had been made covering the tax debts the subject of the statutory demands. Griffiths J also rejected the companies’ claim that the Commissioner had served the demands for an improper purpose or that he had engaged in unconscionable conduct by serving the demands.
On appeal to a Full Court, (Rares, Farrell and Davies JJ) the companies raised a number of grounds of appeal. In summary, they were:
- Wrong findings of fact: the trial judge erred in finding that there was no binding oral global deal that the Commissioner would not take recovery action; and
- Improper application of s 459J(1)(b): the trial judge applied the wrong test for determining whether there was some other reason; having found there was a genuine dispute about the existence of a global deal, the trial judge should have found there was a genuine dispute as to whether the debt was immediately payable.
Full Court decision
Based on these grounds, a majority (Farrell and Davies JJ) of the Court distilled the following issues to be decided:
- Whether the alleged “global deal” had to be established on the balance of probabilities (as Griffiths J held), or whether, as the companies submitted, it was enough to show a genuine dispute about the existence of such a deal warranting the demand being set aside for some other reason; and
- Whether the trial judge made wrong findings of fact in deciding that the companies had not established the existence of a global deal.
Issue A: standard of proof
The majority rejected a preliminary submission made by the companies that the primary judge failed to deal with an argument that the companies’ debts were not immediately due and payable when the demands were served because of the global deal that existed. The Court found that the primary judge had dealt with the argument and dismissed it. The onus was more than establishing an arguable case: where abuse of power of collateral purpose (in issuing the demand) is raised, that has to be established on the balance of probabilities. The majority noted in any event that the companies were prevented from arguing that the debts were not immediately due and payable when the demands were served based on Broadbeach.
Next, a submission that the primary judge erred in embarking on a trial of the “significant dispute” about whether a global deal existed was rejected. The majority held that no such finding was made, rather that his Honour merely stated the Commissioner’s rejection of such a global deal and in any event, there was no reasonable basis for finding that a global deal had been made. Importantly, the majority said ( FCAFC 154 at ):
Given the statutory scheme for collection and recovery of tax, an arguable basis for disputing the Commissioner’s right to take recovery action is insufficient to constitute “some other reason” within the terms of s 459J(1)(b) and does not support an exercise of power to set aside the statutory demands under that section.
Issue B: factual findings
The companies submitted that the primary judge erred in finding that there was no global deal covering the debts the subject of the demand due to defects in consideration of the evidence, the creditworthiness of the Commissioner’s witnesses and contrary evidence suggesting those witnesses were not telling the truth.
The majority considered that the finding as to the non-existence of a global deal was not based solely on the evidence of the Commissioner’s officers which was preferred over the companies’ witnesses. The objective contemporaneous documentary evidence of the meeting (including detailed meeting notes) at which the global deal was alleged to have been made was critical. An allegation that the ATO witnesses had colluded in giving their evidence was rejected.
The key take-away for both taxpayers and the revenue is that contemporaneous objective documentary evidence of “deals” relating to the payment of tax will be critical in any subsequent dispute. There will rarely, if ever, be a genuine dispute about the existence or amount of a tax debt or whether it was due and payable. A company seeking to set aside a demand relating to tax will need to rely on some other reason which must be established on the balance of probabilities.
By Mark Mathews, Legal Practitioner Director, December 2016
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