FEDERAL COURT OF AUSTRALIA Deputy Commissioner of Taxation v Whiteman [2017] FCA 951 File number(s): VID 326 of 2017 Judge(s): DAVIES J Date of judgment: 18 August 2017 Catchwords: TAXATION – Application for summary judgment in relation to tax debts – application for stay of proceedings whilst Part IVC proceedings afoot challenging tax debt – application for stay of execution of judgment whilst Part IVC proceedings afoot challenging tax debt PRACTICE AND PROCEDURE – Application for summary judgment in relation to tax debts – application for stay of proceedings whilst Part IVC proceedings afoot challenging tax debt – application for stay of execution of judgment whilst Part IVC proceedings afoot challenging tax debt Legislation: Federal Court of Australia Act 1976 (Cth) Income Tax Assessment Act 1997 (Cth) Tax Administration Act 1953 (Cth) Federal Court Rules 2011 (Cth) Cases cited: Southgate Investment Funds Limited v Deputy Commissioner of Taxation [2013] FCAFC 10; 211 FCR 274 Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd [2008] HCA 41; 237 CLR 473 Deputy Commissioner of Taxation v Australian Machinery and Investment Co. Pty. Ltd (1945) 20 ALJR 326; 47 WALR 9; 8 ATD 133 Deputy Commissioner of Taxation v Denlay [2010] QCA 217; 80 ATR 109 Deputy Commissioner of Taxation v Mackey (1982) 45 ALR 284; 64 FLR 432; 13 ATR 547 Snow v Deputy Commissioner of Taxation (1987) 14 FCR 199 Trade World Enterprises Pty Ltd [2006] VSCA 191; 64 ATR 316 Date of hearing: 11 August 2017 Registry: Victoria Division: General Division National Practice Area: Taxation Category: Catchwords Number of paragraphs: 19 Counsel for the Applicant: Mr PD Crutchfield QC and Mr SA Linden Solicitor for the Applicant: Minter Ellison Counsel for the Respondents: Mr DJ Williams QC Solicitor for the Respondents: Boris Pogoriller Solicitor ORDERS VID 326 of 2017 BETWEEN: DEPUTY COMMISSIONER OF TAXATION Applicant AND: PHILIP WHITEMAN First Respondent WYNDHAM LOCK PTY LTD Second Respondent MT DANDENONG INVESTMENTS PTY LTD (and another named in the Schedule) Third Respondent JUDGE: DAVIES J DATE OF ORDER: 18 AUGUST 2017 THE COURT ORDERS THAT: 1. Judgment be entered against the First Respondent in the sum of $8,453,699.99. 2. The interlocutory application of the First Respondent filed on 10 August 2017 be dismissed. 3. The First Respondent pay the Applicant's costs of the proceeding, including the Applicant's costs in relation to the First Respondent's interlocutory application filed 10 August 2017 and all reserved costs. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT DAVIES J: 1 The Deputy Commissioner of Taxation ("the DCT") has applied for summary judgment against the respondent ("Mr Whiteman") pursuant to r 26.01 of the Federal Court Rules in respect of unpaid tax related liabilities totalling $8,453,699.99. The Court may grant summary judgment against a party pursuant to r 26.01 where the party has no reasonable prospects of successfully defending a proceeding. Pursuant to s 31A(3) of the Federal Court of Australia Act 1976 a defence need not be hopeless or bound to fail for it to have no reasonable prospect of success. 2 Mr Whiteman has not filed a defence to the claim or contended that he has a defence to the claim, but seeks a stay of the proceedings, or alternatively a stay of execution of the judgment should judgment be entered. 3 For the reasons that follow the DCT is entitled to judgment on his claim against Mr Whiteman and the application for a stay dismissed. Application for summary judgment 4 The DCT has sued Mr Whiteman for recovery of unpaid tax-related liabilities. Pursuant to s 255-5 of Schedule 1 of the Taxation Administration Act 1953 (Cth) ("TAA") an amount of a "tax related liability" that is due and payable is a debt due to the Commonwealth and payable to the Commissioner. Section 255-1 identifies a tax related liability as a pecuniary liability to the Commonwealth arising directly under a taxation law. Section 250-10 contains a table of tax related liabilities which, relevantly, includes liabilities for income tax (Item 37), general interest charge (Item 70), shortfall interest charge on income tax (Item 37AA) and administrative penalties (Item 140). 5 The unpaid tax-related liabilities claimed by the DCT are for: (a) income tax for the years ended 30 June 2010 to 30 June 2016 inclusive plus general interest charges calculated upon the tax payable under the assessments and amended assessments of income tax for those years; (b) administrative penalties imposed pursuant to s 284-75 of Schedule 1 to the TAA in relation to Mr Whiteman's income tax liabilities for the years ended 30 June 2010 to 30 June 2016 plus general interest charges; and (c) shortfall interest charges in respect of additional amounts of income tax Mr Whiteman is liable to pay as a result of amended assessments issued for the years of income ended 30 June 2010, 30 June 2011 and 30 June 2012 plus general interest charges. 6 The DCT has produced copies of the notices of assessment of income tax and of assessment of administrative penalties liability. By virtue of s 350-10 of Schedule 1 to the TAA the production of the copies of the assessments is conclusive evidence in the proceedings that the assessments were properly made and the amounts and particulars of the assessments are correct. The effect of s 350-10 is that Mr Whiteman cannot, in these recovery proceedings, contest his liability to pay the tax as assessed. 7 The DCT has also produced evidentiary certificates pursuant to s 255- 45 of Schedule 1 to the TAA, and those certificates are prima facie evidence that the sum of $8,453,699.99 is a debt due and payable by Mr Whiteman to the Commonwealth of Australia. 8 I am accordingly satisfied that the DCT is entitled to summary judgment against Mr Whiteman in the sum of $8,453,699.99. Application for a stay 9 The principles guiding the exercise of the Court's power to grant a stay of execution of judgment in tax recovery proceedings were extracted from authorities by the Full Federal Court in Southgate Investment Funds Limited v Deputy Commissioner of Taxation (2013) 211 FCR 274 at 293-295 [77]; FCAFC 10 as follows: It is appropriate if we say something further regarding the criteria which may apply in determining whether or not execution of a judgment debt should be stayed. We agree with the observations of Hutley JA in Mackey at 289 that the discretion to grant a stay of the execution of a judgment debt based upon a taxation assessment involves "an open-ended discretion" and that it "is not possible to work out in advance all possible bases for the exercise of such a discretion and it would not be proper even to attempt to do so". Bearing in mind those salutary words and without wishing to be prescriptive or exhaustive, we consider that it is possible, however, to extract from the caselaw the following general principles which guide the exercise of that discretion: (a) the power to grant a stay should be exercised sparingly and the taxpayer bears the onus of persuading the Court that a stay ought to be granted in the particular circumstances; (b) great weight must be given to the clear legislative policy manifested in provisions such as ss 14ZZM and 14ZZR of the TAA which give priority to the recovery of taxation revenue notwithstanding that a taxpayer has a Part IVC proceeding on foot. The Commissioner is placed by the legislation in a position of special advantage and is generally free to pursue recovery proceedings despite the pendency of Part IVC proceedings; (c) the merits of pending Part IVC proceedings may be a relevant consideration to be taken into account in the exercise of the discretion, but the court should not attempt to determine the merits unless it has sufficient material before it to do so and it should avoid speculation; (d) in cases where a judge is unable to form even a tentative view of the strength of Part IVC proceedings, it is unlikely that the judge's discretion in refusing a stay will miscarry by reason only of the judge being unable on the material before him or her to reach a view as to the taxpayer's prospects of success in having the assessment overturned; (e) it is too narrow a view of the discretion to grant a stay of proceedings or execution merely because Part IVC proceedings are pending, or because on review of those proceedings there appears to be an arguable case or complex questions to be determined by the AAT or the Court; (f) that is not to say, however, that the outcome of Part IVC proceedings has to be certain in the sense that they are bound to succeed or fail. That puts the bar too high; (g) in cases where the Court considers that it is in a position to assess the merits of pending Part IVC proceedings and that it is appropriate to do so, the weight to be attached to those merits will vary according to the relative strength of the merits. But the taxpayer needs to have more than merely an arguable case; (h) similarly, more weight would be given to the merits factor if the case is one where the Commissioner has abused his position or it is clear that the Commissioner is endeavouring to collect tax in defiance of a decision of the High Court or other superior court which is precisely in point; (i) due acknowledgment should be given to the asperity with which provisions such as ss 14ZZM and 14ZZR may operate, but in appropriate circumstances a court might consider that a stay is warranted in cases of extreme hardship to a taxpayer, noting however that: (i) the mere obligation to pay income tax of itself does not impose extreme hardship; and (ii) the possibility that the taxpayer may be bankrupted is generally not of itself an extreme hardship, however, different considerations may arise if, for example, it is demonstrated that the execution of a judgment debt would deprive the taxpayer of the financial resources needed to prosecute extant Part IVC proceedings; (j) irrespective of the merits of pending Part IVC proceedings, a stay will not usually be granted where the taxpayer is party to a contrivance to avoid liability to pay the tax; and (k) other considerations may need to be taken into account in determining whether to exercise the discretion in a particular case, such as any conduct on the part of the taxpayer or the Commissioner which impacts upon the efficient and expeditious conduct of Part IVC proceedings. 10 These principles are equally applicable to Mr Whiteman's application for a stay of the proceeding. The principles reflect and give weight to the scheme of the taxation legislation under which tax liabilities may be sued for, and recovered by the DCT, as debts due to the Commonwealth and payable to the Commissioner of Taxation, notwithstanding that the imposition of the tax liabilities may be contested by the taxpayer in Part IVC proceedings in the Administrative Appeals Tribunal or Federal Court. The pendency of Part IVC proceedings in either the Administrative Appeals Tribunal or Federal Court does not, in the meantime, interfere with, or affect, the tax decision under challenge in such proceedings and the tax imposed may be recovered as if no review or appeal were pending: s 255-5 of schedule 1 to the TAA; ss 14ZZM and 14ZZR of the TAA. As the High Court observed in Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd [2008] HCA 41 at [44], harsh though the operation of these provisions may be, the provisions implement a long-standing legislative policy to protect the interests of the revenue: see also Deputy Commissioner of Taxation v Australian Machinery and Investment Co. Pty. Ltd (1945) 20 ALJR 326; 47 WALR 9; 8 ATD 133. 11 An affidavit was sworn by Mr Whiteman's solicitor, Boris Pogoriller in support of Mr Whiteman's application for the stay. Mr Pogoriller relevantly deposed to the following prejudice that it was said would flow from entering, or execution of, the judgment: 50. I am instructed by Mr Whiteman and believe that the applicant is aware that Mr Whiteman is unable to pay the full amount of the alleged tax debt and thereafter lodge and prosecute objections against the applicant's default assessments, as he is entitled to do. 51. If judgment is entered against Mr Whiteman for the amounts claimed in the AMSOC, I reasonably expect the applicant will enforce the judgment, will serve a bankruptcy petition on Mr Whiteman and will apply for a sequestration order. 52. Upon the making of a sequestration order the Trustee of Mr Whiteman's estate would not likely adopt and prosecute Mr Whiteman's objections to the applicant's default assessments under Part IVC of the TTA 1953, without funding and approval of creditors. The applicant would be the largest creditor of the bankrupt estate. 53. If Mr Whiteman's Trustee fails to adopt the objection 'action' within 28 days of notice being served (in this case, by the applicant), the Trustee shall be deemed to have abandoned the action and Mr Whiteman's objections to the default tax and penalty assessments would be permanently barred. 54. I further believe that Mr Whiteman would not be eligible for a grant of funding form [sic.] Victoria Legal Aid to defend the anticipated proceedings by the CDPP. If Mr Whiteman were made bankrupt upon the applicant's judgment order he would not be able to fund his defence against the criminal charges. 55. In light of the above matters I humbly seek that this Honourable Court makes the orders sought in the first respondent's interlocutory application filed herein. 12 At the commencement of his submissions in support of the stay application, senior counsel for Mr Whiteman also handed up an affidavit sworn by Mr Whiteman on 11 August 2017 in which Mr Whiteman deposed that save for a 2003 Ford Falcon motor vehicle with an estimated market value of $3,000, he does not have any assets in Australia. 13 It was argued for Mr Whiteman that a stay of the proceeding, or alternatively of execution of judgment should be granted in this case for the following reasons: (a) the sum in respect of which judgment is sought exceeds $8,000,000 and as Mr Whiteman has no capacity to pay such a sum, he faces virtually inevitable bankruptcy in the very near future if the DCT obtains judgment for the amount claimed and is immediately free to enforce that judgment; (b) the effect of the foregoing is that, absent a stay, the DCT would be able to bring about the bankruptcy of Mr Whiteman on the basis of what are at present untested propositions or theories of the DCT as to Mr Whiteman's income in the relevant periods. In particular, those positions or theories relate to income which the DCT says should be imputed to Mr Whiteman for directorial services in respect of the number of companies where they are not companies of which Mr Whiteman was recorded as having been a director and of which he denies having been a director. Thus, it was said, the assessments also depend on untested propositions to the effect that Mr Whiteman was a de facto director of those companies during the periods covered by the assessments; (c) as a bankrupt, Mr Whiteman would be materially constrained in contesting the assessment; (d) Mr Whiteman's bankruptcy would also constrain his ability to defend likely criminal proceedings arising out of the same factual substratum as underlies the assessments and it was contended that such proceedings were plainly "on the cards"; (e) the DCT has already obtained wide-ranging freezing orders in this proceeding which afford the DCT significant protection against the possibility of dissipation of assets either before or following judgment, minimising the prejudice which the DCT might otherwise suffer from the granting of a stay. 14 Heavy reliance was placed on Deputy Commissioner of Taxation v Denlay [2010] QCA 217; 80 ATR 109. In that case, the Court of Appeal dismissed an appeal from the grant of a stay of execution in a tax recovery case pending the hearing of the taxpayers' Part IVC appeal in the Federal Court challenging their substantive liability to the tax imposed on which the DCT had sued for recovery. One of the considerations given weight by the trial judge was the taxpayers' likelihood of bankruptcy if the judgment was enforced because the taxpayers did not have sufficient resources to satisfy the judgment debt and, if made bankrupt, they would not be capable of prosecuting their appeal. The Court of Appeal held that the exercise of discretion had not miscarried. 15 The exercise of discretion must, in each case, be dependent upon the factual situation of the particular case. In Deputy Commissioner of Taxation v Denlay, the DCT had sought summary judgment a year after proceedings against the taxpayers were commenced and at a time when the taxpayers' appeals in the Federal Court were progressing to a hearing and a hearing date had been given. There was evidence from the taxpayers supporting their claim that they did not have the capacity or resources to satisfy the judgment if enforced against them. The trial judge accepted that the bankruptcy of the taxpayers was "highly likely" if the DCT enforced judgment and accepted that the "fact of bankruptcy [had] the potential to defeat a meritorious appeal". 16 In the present case, the evidence about Mr Whiteman's financial position falls far short of what is required to satisfy the Court that Mr Whiteman does not have the capacity to satisfy the judgment, if enforced against him, and "faces virtually inevitable bankruptcy in the very near future" as claimed. The assertion by his solicitor that the DCT is aware that Mr Whiteman is unable to pay the full amount of the tax debt has no probative weight and little weight, if any, can be given to the affidavit of Mr Whiteman sworn on 11 August 2017 about his assets in Australia. That affidavit was sworn in purported compliance with an order made by the Court on 3 April 2017 as part of freezing orders made against Mr Whiteman and others in this and related proceedings, requiring Mr Whiteman to swear and serve on the DCT within 10 working days after being served with the order, an affidavit setting out all his assets in Australia. The time for compliance with that order was extended on 13 April 2017 to 4 May 2017 but despite the extension of time, no affidavit was furnished in compliance with the order and Mr Whiteman has been in default of the order since 5 May 2017, notwithstanding that, according to his affidavit, the only Australian asset he has is a car valued at around $3000. Moreover, despite the lengthy period of non-compliance, Mr Whiteman has not provided any explanation for his failure to comply with the order and in the absence of any explanation, it may be inferred that the non-compliance was deliberate, raising serious questions about the reliability and sufficiency of the evidence he has given in that affidavit. In any case, the affidavit is only about assets that Mr Whiteman holds in Australia. It is not an affidavit deposing to Mr Whiteman's financial position and there is no evidence before the Court of the kind that would be needed to satisfy the Court that Mr Whiteman truly does not have the capacity to satisfy the judgment debt, and that bankruptcy would be a highly likely outcome if the DCT took steps to enforce the judgment. Furthermore, there is no evidence before the Court of the kind that would be needed to satisfy the Court that it is highly likely that Mr Whiteman would suffer significant financial hardship from the payment of the tax, impeding his ability to pursue his statutory rights under Part IVC of the TAA to challenge his substantive liability to the tax assessed. As the authorities make plain, the mere imposition of the obligation to pay tax does not constitute hardship: FCT v Mackey (1982) 64 FLR 432; 45 ALR 284; 13 ATR 547; Snow v Deputy Commissioner of Taxation (1987) 14 FCR 199; Trade World Enterprises Pty Ltd [2006] VSCA 191; 64 ATR 316; Southgate Investment Funds Limited v Deputy Commissioner of Taxation [2013] FCAFC 10; 211 FCR 274 at 293-295 [77]. The lack of relevant financial information supporting the claim that bankruptcy is virtually inevitable in the very near future if the DCT obtains judgment for the amount claimed is sufficient reason to dismiss the application for a grant of stay. Given that the evidence does not support a finding that bankruptcy is likely absent a stay whether Mr Whiteman's bankruptcy would also constrain his ability to defend likely criminal proceedings arising out of the same factual substratum that underlies the assessments does not arise for consideration as a factor bearing on whether a stay should be granted. 17 In the circumstances, it is not a weighty consideration in favour of granting a stay that Mr Whiteman intends to contest his tax liability through the Part IVC process, given that the absence of relevant evidence to support a finding that Mr Whiteman's capacity to challenge the tax liabilities through the Part IVC process would be likely to be significantly impeded if the DCT enforced judgment. Under the legislative scheme the tax is payable and recoverable by the DCT notwithstanding that Mr Whiteman may dispute the tax liability through the Part IVC process and even if Mr Whiteman may have, or might genuinely believe that he has, a good case on the merits that the tax assessed is excessive, the authorities make it plain that this is not of itself sufficient reason to justify a grant of stay, having regard to the clear legislative policy manifested in ss 14ZZM and 14ZZR of the TAA: Southgate Investment Funds Limited v DCT (2013) 211 FCR 274 at 293-295 [77]; FCAFC 10; Trade World Enterprises Pty Ltd [2006] VSCA 191; Snow v Deputy Commissioner of Taxation (1987) 14 FCR 199. 18 Nor, in the circumstances, is the fact that the DCT has obtained freezing orders in this proceeding against Mr Whiteman and others a consideration in favour of granting a stay. 19 Accordingly, the application for a stay is refused. I certify that the preceding nineteen (19) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Davies. Associate: Dated: 18 August 2017 SCHEDULE OF PARTIES VID 326 of 2017 Fourth Respondent: KENNETT STREET INVESTMENTS PTY LTD