Commissioner of Taxation v Macquarie Health Corp Ltd [1999] FCA 240

FEDERAL COURT OF AUSTRALIA

Commissioner of Taxation v Macquarie Health Corp Ltd [1999] FCA 240

COMMISSIONER OF TAXATION v MACQUARIE HEALTH

CORPORATION LIMITED & Ors NG 118 OF 1996 EMMETT J 8 MARCH 1999

SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY NG 118 OF 1996

BETWEEN: COMMISSIONER OF TAXATION

Applicant

AND: MACQUARIE HEALTH CORPORATION LIMITED

First Respondent

BUSINESS AND PROFESSIONAL LEASING PTY LTD

Second Respondent

RYNDALE PTY LTD

Third Respondent

SARZANA HOLDINGS PTY LTD

Fourth Respondent

RICHARD WALTER PTY LIMITED (IN LIQUIDATION)

Fifth Respondent

AT HOLDINGS PTY LTD

Sixth Respondent

MORLEA PROFESSIONAL SERVICES PTY LTD

Seventh Respondent

JUDGE: EMMETT J

DATE: 8 MARCH 1999

PLACE: SYDNEY

EX TEMPORE REASONS FOR JUDGMENT 1 On 29 October 1998 I delivered my reasons for my findings and provisional conclusions which I then made in relation to the various issues raised in the three proceedings and the cross-claims. I indicated then that I did not propose to make orders at that stage but would give the parties the opportunity of further argument in relation to the matters that I had left undecided. I indicated that I would direct the parties to bring in short minutes reflecting the conclusions that I had reached and any further conclusions which I might reach following further argument. 2 The parties came before me again and directions were given for exchange of written submissions and draft short minutes of order. For various reasons concerned with commitments of counsel, it was not possible to fix a date for the further argument before today. Interest under s51A 3 The question has arisen, in relation to the principal proceedings, as to whether there should be included, in any judgment in favour of the Commissioner of Taxation ("the Commissioner"), interest under section 51A of the Federal Court of Australia Act 1976 on any amount which the Commissioner might be entitled to recover against the first four respondents (together "the Debtors"). 4 Section 51A relevantly provides as follows: " (1) In any proceedings for the recovery of any money… in respect of a cause of action that arises after the commencement of this section, the Court or a Judge shall, upon application, unless good cause is shown to the contrary, either: (a) order that there be included in the sum for which judgment is given interest at such rate as the Court or the Judge, as the case may be, thinks fit on the whole or any part of the money for the whole or any part of the period between the date when the cause of action arose and the date as of which judgment is entered; or (b) without proceeding to calculate interest in accordance with paragraph (a), order that there be included in the sum for which judgment is given a lump sum in lieu of any such interest. (2) Subsection (1) does not: (a) authorize the giving of interest upon interest or of a sum in lieu of such interest; (b) apply in relation to any debt upon which interest is payable as of right whether by virtue of an agreement or otherwise; (c) affect the damages recoverable of the dishonour of a bill of exchange; (d) limit the operation of any enactment or rule of law which, apart from this section, provides for the award of interest; or (e) authorize the giving of interest, or a sum in lieu of interest, otherwise than by consent, upon any sum for which judgment is given by consent. (3) Where the sum for which judgment is given (in this subsection referred to as "the relevant sum") includes, or where the Court in its absolute discretion, or a Judge in that Judge's absolute discretion, determines that the relevant sum includes any amount for: (a) compensation in respect of liabilities incurred which do not carry interest…; (b) compensation for loss or damage to be incurred or suffered after the date on which judgment is given; or (c) exemplary or punitive damages; interest, or sum in lieu of interest, shall not be given under sub-section (1) in respect of any such amount or in respect of so much of the relevant sum as in the opinion of the Court or the Judge represents any such amount. (4) Subsection (3) shall not be taken to preclude interest or a sum in lieu of interest being given, pursuant to this section, upon compensation in respect of a liability of the kind referred to in paragraph (3)(a) where that liability has been met by the applicant, as from the date upon which that liability was so met." 5 The Commissioner has brought in proposed short minutes which contain a calculation of interest on the amount of the Debts due by the relevant Debtors to Richard Walker Pty Ltd (in liquidation) ("the Taxpayer") as at the date of service of the section 218 notices. Interest is calculated at the rates prescribed from time to time for the purposes of section 94 of the Supreme Court Act 1970 (NSW). 6 However, after the time of the service of the section 218 notices, interest continued to accrue, as a matter of contract between the Debtors and the Taxpayer, on the indebtedness of the Debtors to the Taxpayer. The amount of the section 218 notices represented the amount of tax and penalty tax and interest that was owing by the Taxpayer to the Commissioner at the time of service of the respective 218 notices. Interest continued to accrue on the amount of unpaid tax pursuant to section 207A of the Income Tax Assessment Act 1936. Section 207A(1) provides as follows: "If any tax remains unpaid after it became due and payable or would, but for section 206, have become due and payable, the person liable to pay the tax is liable to pay, by way of penalty, interest to the Commissioner, at such annual rate or rates as are provided for by section 214A, on the amount unpaid, computed from the time or date from which additional tax on the amount is computed for the purposes of section 207." 7 Thus, interest continues to accrue on the amount of the original assessment as between the Taxpayer and the Commissioner. Indeed, that fact is recognised by the service of the subsequent section 218 notices by the Commissioner, to take account of interest which had accrued in respect of the original indebtedness to the Commissioner of the Taxpayer after the service of the first section 218 notices. However, if I were to order interest under section 51A, as claimed by the Commissioner, the effect would be that the Debtors would be required to pay, not only the contractual interest payable by them to the Taxpayer in respect of the loans and advances which I identified in my earlier reasons, but also interest under section 51A. 8 As I have indicated in my reasons of 29 October 1998, I consider that the effect of Clyne v Deputy Commissioner of Taxation (1981) 150 CLR 1 and Deputy Commissioner of Taxation v Donnelly (1989) 25 FCR 432 is that service of a section 218 notice gives rise to a statutory charge carrying with it a right for the Commissioner to sue for recovery of the amounts owing by the Debtors to the Taxpayer. One way of analysing the matter is that, upon service of the section 218 notices, there was an assignment to the Commissioner, by way of security, of the indebtedness of the Taxpayer to the Debtors. 9 By service of a notice, an obligation to pay the Commissioner was substituted for the obligation to pay the Taxpayer. That, of course, is not a totally accurate analysis because the obligation to pay the Taxpayer remains until such time as the Debtor makes a payment in accordance with a section 218 notice. The effect of the payment would be to discharge pro tanto a Debtor's obligation to the Taxpayer. 10 On the other hand, whereas any payment made by the Debtors pursuant to the section 218 notices is a pro tanto satisfaction of the obligations of the Taxpayer, a payment by the Debtors of interest pursuant to an order made under section 51A would not be a payment pursuant to the section 218 notice. Payment of any obligation imposed pursuant to section 51A would not be a pro tanto satisfaction of any obligation of the Taxpayer to pay penalty interest accruing under section 207. 11 The Commissioner claims to recover, under the section 218 notices, the contractual interest which continues to accrue on the amount of the indebtedness owing as at the date of service of the notices. On the other hand, the Commissioner cannot recover any more under a section 218 notice than the amount specified in it. Accordingly, the Commissioner has served subsequent notices in respect of interest that has accrued under section 207A(1) of the Income Tax Assessment Act by way of penalty after the date of service of the original section 218 notices. 12 Nevertheless, ordering interest under section 51A on the amount of the indebtedness accrued as between Debtors and Taxpayer would enable recovery of amounts in excess of the section 218 notices. Putting aside any question of insolvency, if I were to order interest under section 51A, the effect would be that the Debtors would be paying interest twice on the same amounts. I consider, therefore, that there is good cause for not allowing interest under section 51A. 13 The Commissioner has pointed out that, in the present circumstances, because of the insolvency of the Taxpayer, the Commissioner may not be able to recover the penalty interest which has accrued over and above the amounts of the section 218 notices. The Commissioner contended that that is a matter which should be taken into account in the exercise of discretion under section 51A. However, section 51A(2)(b) provides that section 51A(1) does not apply in relation to any debt upon which interest is payable as of right, whether by virtue of an agreement or otherwise. I consider interest under section 207A(1) is payable as of right. 14 Certainly, interest under s207A(1) is not payable by the Debtors. However, having regard to the effect of service of a section 218 notice, namely, creation of a security coupled with an obligation to pay, I consider that the policy and scheme of section 51A is such that, notwithstanding the insolvency of the Taxpayer, due cause has been shown as to why, in the exercise of the discretion permitted under section 51A(1), I should not order the payment of interest under section 51A. Property which is potentially subject to a constructive trust 15 In the course of argument on the second cross-claim, counsel for the Liquidator referred to observations I made in my earlier reasons as follows at page 63: "The onus was on the Taxpayer to demonstrate the extent to which its present property has been acquired independently of the money which were the subject of the payments in question. The Taxpayer has made no attempt to do so. Specifically it made no attempt, for example, to demonstrate that the premises which generated rental income from the Debtors were acquired independently of such moneys." 16 Counsel for the Liquidator indicated that the reasons are correct in saying that the Taxpayer had made no attempt to demonstrate the extent to which the present property of the taxpayer had been acquired independently of the money which is the subject of the payments. However, he is now instructed to draw my attention to some evidence in the proceedings which it is contended may demonstrate that the Taxpayer did in fact have property acquired independently of the payments in question. 17 Specifically I have been referred to the balance sheet of the Taxpayer as at 30 June 1981, which records two assets, being freehold property situated at 50 Springdale Road, Killara, and 2,700 $2 shares in North Shore Medical Centre Limited. However, the balance sheet also discloses that both assets were the subject of securities in favour of banks to secure overdrafts. There was no evidence in the balance sheet, and it was not suggested that there was other evidence before me, that indicates the extent of the overdraft secured by those securities. 18 Counsel for the Liquidator said that his instructions are that those assets are presently unencumbered in the hands of the Liquidator, but that he would need to adduce further evidence, by leave, to demonstrate the extent of the securities as at 30 June 1981. No explanation was offered as to why the evidence was not adduced at the first hearing. In the circumstances, I do not propose to give leave to adduce further evidence as to those matters. I am not satisfied that it is now open to the Taxpayer to invite the Court to conclude that the assets in question had been acquired independently of the money which was the subject of the payments in question. Admissibility of facsimile and letter purporting to be from April Street Investments 19 Counsel for the Trustees tendered a copy of what purports to be a facsimile communication from April Street Investments BV to Mr John Morrison, Morlea Professional Services Pty Ltd. There is attached to that communication a letter which purports to be from April Street Investments BV to the Manager, Morlea Professional Services Pty Ltd. 20 The document is a photocopy. Objection is taken that it is a photocopy and there is no other evidence as to the origin or source of the document. In the circumstances I am not prepared to admit it at this stage. There has already been considerable argument as to whether, assuming the original facsimile communication or the original letter itself can be produced, I would admit the letter. I have not yet ruled on that and I will reserve the question of whether it is admissible. However, I reject the tender of the document at this stage. I certify that the preceding twenty (20) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett.