FEDERAL COURT OF AUSTRALIA Bazzo v Commissioner of Taxation [2017] FCA 412 Appeal from: Bazzo v Commissioner of Taxation [2017] FCA 71 Caratti v Commissioner of Taxation [2017] FCA 70 File number(s): NSD 306 of 2017 NSD 307 of 2017 Judge(s): PERRAM J Date of judgment: 21 April 2017 Catchwords: TAXATION – application for interlocutory injunctive relief – Notices of Amended Assessment and Notices of Amended Assessment of shortfall penalty – construction of Deeds of Agreement – construction of term in Deeds 'Taxation Debt' – where 'Taxation Debt' defined by reference to a sum 'comprised of Tax-Related Liability and applicable GIC due and payable by the Taxpayer as at 7 August 2015, subject to an adjustment to those amounts by virtue of the Determination of the Objection Process' – whether Commissioner entitled to claim from taxpayers general interest charge accrued since date of entry into Deed Legislation: Taxation Administration Act 1953 (Cth) Cases cited: Australian Broadcasting Corporation v O'Neill [2006] HCA 46; (2006) 227 CLR 57 Bazzo v Commissioner of Taxation [2017] FCA 71 Caratti v Commissioner of Taxation [2017] FCA 70 Date of hearing: 20 April 2017 Registry: New South Wales Division: General Division National Practice Area: Taxation Category: Catchwords Number of paragraphs: 19 NSD 306 of 2017 and NSD 307 of 2017 Counsel for the Appellants: Mr G Antipas Solicitor for the Appellants: Zafra Legal Counsel for the Respondent: Mr S White SC Solicitor for the Respondent: Australian Government Solicitor ORDERS NSD 306 of 2017 BETWEEN: TINA MICHELLE BAZZO First Appellant MOONSPARK NOMINEES PTY LTD (ACN 114 932 651) Second Appellant AND: COMMONWEALTH OF AUSTRALIA AS REPRESENTED BY THE COMMISSIONER OF TAXATION Respondent JUDGE: PERRAM J DATE OF ORDER: 21 APRIL 2017 THE COURT ORDERS THAT: 1. The claims for interim relief sought in Prayers 1 and 2 of the Appellants' Notice of Appeal be dismissed. 2. The Appellants pay the Respondent's costs of the application for interim relief as taxed or agreed. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. ORDERS NSD 307 of 2017 BETWEEN: ALLEN BRUCE CARATTI First Appellant APPLEY HOLDINGS PTY LTD (ACN 160 806 673) AS TRUSTEE FOR THE BYFORD TRUST Second Appellant PLATINUM SKY PTY LTD (CAN 126 519 935) Third Appellant AND: COMMONWEALTH OF AUSTRALIA AS REPRESENTED BY THE COMMISSIONER OF TAXATION Respondent JUDGE: PERRAM J DATE OF ORDER: 21 APRIL 2017 THE COURT ORDERS THAT: 1. The claim for interim relief sought in Prayer 1 of the Appellants' Notice of Appeal be dismissed. 2. The Appellants pay the Respondent's costs of the application for interim relief as taxed or agreed. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT PERRAM J: 1 These are applications for injunctions pending the determination of two appeals. The injunctions, if granted, would have the effect of restraining the Commissioner of Taxation from pursuing enforcement of amounts for the general interest charge said by him to be due to him and payable by the Appellants. That was the short issue which was determined at trial by Robertson J: see Bazzo v Commissioner of Taxation [2017] FCA 71; Caratti v Commissioner of Taxation [2017] FCA 70. There were two proceedings before his Honour raising, essentially, the same question. That question turns, or turned, on the proper construction of two standstill agreements which had been entered into between the Commonwealth, as represented by the Commissioner of Taxation, Ms Bazzo and a company called Moonspark Nominees Proprietary Limited; and the Commissioner of Taxation and Mr Caratti along with two related companies. 2 These two standstill agreements ('the Deeds') reflected two different sets of tax demands. The Deeds were identical in substance save for the identity of the parties to them and the quantum of the respective amounts of 'Taxation Debt' purported to be owed to the Commissioner. Each Deed provided, in a broad sense, for the Commissioner to hold his hand in relation to the enforcement of the taxation debt to which it related, until such time as the final determination of each taxpayer's respective objection had occurred. The Deeds in both cases placed limits on the ability of the Commissioner to recover what was referred to in the Deed as the 'Taxation Debt'. By way of example, 'Taxation Debt' was defined in clause 1.1 of the Deed in the Bazzo matter in the following terms: 'Taxation Debt means the amount of $13,828,790.35, which is comprised of Tax-Related Liability and applicable GIC due and payable by the Taxpayer as at 7 August 2015, subject to any adjustment to those amounts by virtue of the Determination of the Objection Process.' 3 Both Deeds defined the expression 'Tax-Related Liability' in the following way: 'Tax-Related Liability has the meaning of that term as described in subdivision 255-A in Schedule 1 to the TAA 1953.' 4 It was not in dispute before me that a quantity of GIC would be within the meaning of the expression 'Tax-Related Liability'. The dispute between the parties both at trial before Robertson J, and on the hearing of the present application, may be shortly stated. The question is whether the term 'Taxation Debt' means the amount of $13,828,790.35 (or the amount of $10,948,507.45 in the Caratti matter), as at 7 August 2015, or whether instead it means whatever that amount is at any particular time after 7 August 2015. The immediate point of difference between the parties is that under the taxpayers' construction of the definition, amounts of GIC which become due after 7 August 2015 will be included within the concept of the 'Taxation Debt' so as to temporarily restrain the Commissioner from recovering such amounts, whereas, under the Commissioner's view, amounts of GIC which become due after 7 August 2015 will not be included and will thereby become immediately recoverable. Put another way, if the amounts of GIC which fall due after 7 August 2015 are included within the definition of the 'Taxation Debt' then the effect of the remaining provisions of the Deed, which I do not need to set out for present purposes, will be to restrain the Commissioner from recovering those additional amounts of GIC. 5 The task at hand, therefore, both for the trial judge and, to a lesser extent, on this application for me, is the proper construction of that definition. At trial, Robertson J gave extensive reasons for concluding that the Commissioner's construction of the definition was the correct one and rejected the taxpayers' contentions. Part of Robertson J's reasons included reference to clause 6.4 of the Deeds, which provided: 'The Taxation Debt will continue to accrue GIC daily from the due date for payment in accordance with and at the rate as may be applied from time to time under the TAA 1953.' 6 His Honour thought that assisted the Commissioner's position and that is, with respect, a view with which I agree. The taxpayers' argument, in substance, is that the expression Tax-Related Liability is apt to pick up whatever amounts of GIC are due. That argument may ultimately prove to be correct. From my perspective, there are difficulties with it which seem to be reasonably serious. For example, and this is not a matter dealt with by Robertson J, but the taxpayers' contention seems to me to leave the words in the definition of Taxation Debt 'subject to any adjustment to those amounts by virtue of the determination of the objection process' in clause 1.1 of the Deeds with little work to do and it also seems to have, at least on one view, the effect of meaning that cl 6.4, to which I have already referred, is rendered otiose. 7 The Commissioner submitted that the taxpayers had been unable to demonstrate they had any arguable case at all for an injunction. I do not agree with that submission. The taxpayers are able to formulate a construction argument and it can be stated in a reasonably coherent form. Further, standing back from the entire debate, there is a certain surprising element in the effect of a Deed which nevertheless allows the Commissioner to recover GIC as it falls due. That said, my assessment of the strength of the taxpayers' argument is that it is at the weaker end, but I am not prepared to say, as the Commissioner submitted that I should, that there is no arguable case at all. I conclude that there is an arguable case, but that it is a case which is at the weaker end of the spectrum. 8 I turn then to the question of balance of convenience. The taxpayers, in both matters, read evidence, the critical part of which was subject to objection and I will set out paragraphs 16 and 17 of Ms Bazzo's affidavit of 19 April 2017. There is an equivalent statement in the affidavit of Mr Caratti of 19 April 2017 in the related appeal as well at paragraphs 12 and 13. Paragraphs 16 and 17 of Ms Bazzo's affidavit say: '16. In the event that the order restraining the Respondent from recovering the GIC amount until after the hearing of the Appeal is not granted, the Respondent will continue to take steps to recover the GIC amount. I do not have cash funds to pay the GIC amount and if the Respondent continues to pursue recovery of this amount, then I will be forced to procure entities that I am associated with to liquidate real property assets to pay the GIC Amount. There are costs involves in procuring those entities to liquidate assets. There are possible tax consequences on me if those entities were to provide me with the financial accommodation to pay the GIC amount to the Respondent. 17. If I am successful on the appeal then the steps that I will need to take to pay the GIC Amount now, will be irreversible. Furthermore, the costs that I will be exposed to will be irreversible. I believe that if the orders restraining the Respondent from taking steps to recover the GIC Amount are not granted, the outcome of a successful appeal will be rendered nugatory.' 9 Objection was taken to most of these two paragraphs by Mr White of Senior Counsel for the Commissioner upon the affidavit being read. The objection was that the affidavit had only been provided very late on the afternoon of the day before the hearing; that is to say, at around 5 pm on 19 April 2017. The lateness of the service of this material therefore prevented the Commissioner from making the ordinary inquiries he might have made in order to test these assertions. In particular, he had been denied the opportunity to issue subpoenas and notices to produce to ascertain whether it was truly the case that the taxpayers did not have the cash funds to pay the GIC; and also to discover what the tax consequences referred to in paragraph 16 of the affidavit of Ms Bazzo might be. 10 I ultimately concluded that I would receive the evidence but would take into account, in assessing its value, the fact that it had been served very late, which had denied the Commissioner a reasonable opportunity to expose it to scrutiny. A consequence of that approach to the matter is that I propose to view the evidence on this matter with a certain degree of scepticism. What I can take from paragraphs 16 and 17 of Ms Bazzo's affidavit however, and the equivalent paragraphs of Mr Caratti's affidavit, is that the taxpayers do not say that they cannot pay the GIC. Rather, the complaint is that the steps they will need to take in order to pay the GIC will involve them realising real property assets held by third party entities which are in some way associated with the taxpayers. It is then said that there are costs involved or associated with the liquidation of those assets and that there could be possible tax consequences in so realising them. 11 I am prepared to accept that there could be costs involved in liquidating the assets, but I can make no estimate of what those costs are, nor am I necessarily satisfied that liquidation is the only course which would bring about a position whereunder the taxpayers could pay the GIC; for example, as indeed I think paragraph 16 of the affidavit of Ms Bazzo in principle accepted, it is possible that the real property assets could be mortgaged for the purpose of providing financial accommodation. It was indeed in respect of that proposed seeking of financial accommodation that it was said that there were potential taxation consequences. 12 I had thought, during the course of the hearing, that the taxation consequences were said to attach to the process of liquidation itself, from which it might perhaps be inferred that what was involved was a capital gains tax liability. However, a closer reading of the affidavit suggests that the tax consequences are associated with the obtaining of financial accommodation. There is simply not any detail in relation to that assertion which allows me to engage with what kind of prejudice is involved. I am prepared to accept that there could be costs associated with financing and perhaps some costs associated with disposal or liquidation, but I am unable to form any substantial view as to what kind of prejudice is involved if those steps are taken. 13 The evidence, therefore, of prejudice to the taxpayers if they are required to pay the GIC is at the weaker end of the spectrum as well. Another form of prejudice which I think was developed by Mr Antipas, counsel for the Appellants, during his submissions, relied upon certain provisions of the Deeds. Under cl 11, the Deeds set out events of default, and cl 11.1(e) in the Bazzo Deed (cl 11.1(c) in the Caratti Deed) makes it an event of default where 'the taxpayer fails to comply with any requirement of a Taxation Law while this Deed is in operation'. The argument as I apprehended it was that if the taxpayers failed to pay the GIC, then this would be a failure to comply with a requirement of the taxation law and, accordingly, would constitute an event of default under each Deed. 14 This mattered because, cutting out quite a bit of the detail, clauses 11.2 and 11.3 of both Deeds entitled the Commissioner, after the issue of a notice, then to enforce the whole of the amount of the taxation debt. As I understood the submission, the point was that not only were the taxpayers exposed to the potential prejudice of having to liquidate assets or arrange for third parties to liquidate assets or provide financial accommodation and, with it, their full concomitant irrecoverable expenses; but there was also, and perhaps more importantly, the real risk that the whole of the taxation debts currently the subject of the Deeds would themselves become payable. That, of course, would remove the entire point of the Deeds. 15 The answer to that argument is, I think, twofold. First, although there is evidence that the Commissioner has begun steps to enforce the GIC liability in the Supreme Court of Western Australia, there is no evidence before me that it has issued a notice requiring the event of default to be cured; much more importantly, however, the taxpayers' own evidence is that they will be able to pay the GIC because they are able to procure entities associated with them to liquidate real property assets or, alternatively, to arrange financial accommodation with respect to those assets. 16 As I have said, the principal complaint is the cost and expense that will be caused to them, but, if it is the case, as they say, that they will be able to pay the GIC, then the circumstances which would enliven the event of default under clause 11 will not occur; or, to put the matter another way, if the Commissioner does eventually issue a notice under cl 11.2, the taxpayers will be able to cure the event of default because, as they have indicated, they will be able to pay the GIC through other means. In that circumstance, I do not think that that constitutes an additional species of prejudice. 17 The circumstances in which an injunction may be granted pending the determination of an appeal, are not relevantly different to the ordinary principles upon which an injunction is granted: see Australian Broadcasting Corporation v O'Neill [2006] HCA 46; (2006) 227 CLR 57. I ask myself whether the taxpayers have an arguable case that their construction of the Deeds is correct; and then whether the balance of convenience favours the granting of an injunction in the terms sought by the applicant. I have concluded that the Appellants here have an arguable case for relief - albeit a weak one - and I have also concluded that the evidence about balance of convenience does not strongly indicate the presence of very much prejudice. In those circumstances, it seems to me that it is inappropriate to grant the injunctions sought pending determination of the appeal. 18 In the matter of Bazzo v The Commissioner of Taxation, being NSD 306 of 2017, I make the following orders: (1) The claims for interim relief sought in Prayers 1 and 2 of the Appellants' Notice of Appeal be dismissed. (2) The Appellants pay the Respondent's costs of the application for interim relief as taxed or agreed. 19 In the matter of Caratti v The Commissioner of Taxation, being NSD 307 of 2017, I make the following orders: (1) The claim for interim relief sought in Prayer 1 of the Appellants' Notice of Appeal be dismissed. (2) The Appellants pay the Respondent's costs of the application for interim relief as taxed or agreed. I certify that the preceding nineteen (19) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Perram. Associate: Dated: 26 April 2017