Supreme Court New South Wales Medium Neutral Citation: In the matter of Candy-Vend Pty Ltd [2020] NSWSC 1885 Hearing dates: 18 – 20 November 2020 Decision date: 21 December 2020 Jurisdiction: Equity - Corporations List Before: Black J Decision: No order as to costs of proceedings. Catchwords: TAXES AND DUTIES — Whether to direct parties to provide copy of judgment to Deputy Commissioner of Taxation — Where shareholder dispute involved evidence at trial of transaction that may affect parties' tax obligations. Legislation Cited: Income Tax Assessment Act 1997 (Cth), Div 7A Cases Cited: - Re Marriage of Malpass and Mayson (2000) 27 Fam LR 288 Category: Costs Parties: Joseph Essey (First Plaintiff) Johnnie Essey (Second Plaintiff/Cross-Defendant) Candy-Vend Pty Ltd (First Defendant/Cross-Claimant) Paul Essey (Second Defendant) Representation: Counsel: Mr J Hassett (Solicitor) (Plaintiffs/Cross-Defendant) Mr D Neggo (Defendants/Cross-Claimant) Solicitors: Hassett & Co (Plaintiffs/Cross-Defendant) Stanton & Stanton (Defendants/Cross-Claimant) File Number(s): 2019/307621 Judgment 1. In my judgment delivered on 3 December 2020 ([2020] NSWSC 1735) ("Principal Judgment"), I dismissed the Plaintiffs' Originating Process by which they sought an order that Candy-Vend Pty Ltd ("Company") be wound up. I also dismissed a Cross-Claim brought by the Company against the Second Plaintiff, Mr Johnnie Essey (to whom I will refer, without any disrespect, as "Johnnie") by which the Company sought an order that Johnnie pay it the amount of $523,412 as a debt and interest calculated in accordance with the benchmark interest rate under Div 7A of the Income Tax Assessment Act 1997 (Cth) ("ITAA"). 2. I there noted (at [63]) my preliminary view that there should be no order as to the costs of the proceedings, and indicated that I would allow the parties 7 days in which to make written submissions to the extent they contended for any contrary result as to costs. The parties advised that they did not do so and I will make that order. I also there observed (at [64]) that: "For completeness, I note that Johnnie has, in these proceedings, resolutely resisted the attempts to treat the payment of $780,000 made by the Company to him as a loan, and claims to have previously also rejected Mr Hanna's suggestion of that approach, made to assist him in avoiding a tax liability under Div 7A of the Income Tax Assessment Act in respect of that payment. The evidence suggests that Johnnie has not considered it necessary to act consistently with that position in managing his tax affairs. He may or may not have self-reported the receipt of that payment to the Deputy Commissioner of Taxation after I raised this matter at the conclusion of submissions in the hearing. Unless he has done so, my preliminary view is that the parties should be ordered to provide a copy of this judgment to the Deputy Commissioner of Taxation, so that it has the opportunity to pursue any unpaid tax and any penalties which arise from the matters addressed in this judgment. I will allow Johnnie an opportunity to make submissions, within 7 days, as to why the Court should not make such an order." 1. Mr Hassett, who appears for Johnnie, made submissions opposing an order that the parties refer the judgment to the Deputy Commissioner of Taxation ("DCT"). First, Mr Hassett submitted that there was "insufficient certainty" that any tax was avoided to warrant ordering the parties to provide a copy of the judgment to the DCT. Mr Hassett also submits that there is a threshold question as to whether there was unlawful or improper conduct. It seems to me that that submission does not apply an appropriate test, and the Court might direct that a copy of its judgment be referred to the DCT without first finding that any conduct was either "unlawful" or "improper", to allow the DCT to investigate the possibilities of issuing amended tax assessments or taking recovery or other actions. 2. I note that the facts set out in the Principal Judgment indicated that the payment of a substantial sum could have been characterised as a loan made by the Company to DCT, but Johnnie steadfastly contended to the contrary, and that loan would likely not have complied with Div 7A of the ITAA; a payment of unfranked dividends by the Company to Johnnie, which it appears has not been recognised in his tax returns; or, as Johnnie contended, a gift by his father (to whom I will refer, without disrespect, as "Fred") to him, which was funded by an unfranked dividend paid by the Company to Fred or, possibly, from an amount otherwise appropriated by Fred from the Company's assets. Each of those characterisations raises a significant possibility that the transaction has not been properly been treated for tax purposes. As I have noted above, it does not seem to me to be necessary, in order to warrant the provision a copy of the judgment to the DCT, that it be "certain" that tax was avoided or that the avoidance involve unlawful or improper conduct. 3. Mr Hassett also draws attention to advice provided by the Australian Institute of Judicial Administration in its Third Edition of its Guide to Judicial Conduct as to how a judge could address "unlawful or improper conduct" arising in connection with the discharge of the judge's judicial duties. That document is, of course, a useful resource as to appropriate judicial conduct. Having said that, it seems to me that I should be guided by the case law, which Mr Hassett did not address, rather than by the views of a non-curial body in determining this question. I have had regard to the detailed review of the authorities in Re Marriage of Malpass and Mayson (2000) 27 Fam LR 288, which has subsequently been cited in several cases. I also bear in mind that the question here is not only whether Johnnie's (or any other person's) conduct is "unlawful or improper", in any sense requiring anything more than non-compliance with tax obligations, but whether the matters that arose in the Principal Judgment have disclosed a significant underpayment of tax. If that is so, the community has a significant interest in that tax being paid, even if a failure to pay it was merely negligent or self-interested and did not warrant a characterisation as "improper." 4. Mr Hassett notes that, in any future proceedings involving the DCT, Johnnie will likely give evidence that the payment was a "gift" from Fred not a loan. That proposition has the immediate difficulty that, if Fred rather than the Company made a gift from the Company's funds, then the consequence may be that Fred rather than Johnnie received those funds on a basis that may be taxable as an unfranked dividend, a matter which may still warrant inquiry by the DCT. In any event, it seems to me that there is no reason for me to seek to predict the outcome of future proceedings which may never be brought, where the DCT may accept that (as Johnnie contends) the payment was a gift from Fred to Johnnie (notwithstanding the money was paid to Johnnie by the Company not by Fred) and any tax consequences may be addressed as between Fred and the DCT, or matters may be resolved between Johnnie and the DCT without the necessity for any proceedings. If they are not, the position the DCT and Johnnie take in any further proceedings will be a matter for them and the result of those further proceedings will be a matter for the Court determining them and not for me. 5. Mr Hassett also submits that: "the balance of probabilities strongly favours a conclusion of gift vs dividend, and any examination of the facts by the Deputy Commissioner of Taxation will likely lead to that result. As such, and in that knowledge, the Court should conclude any investigation and/or subsequent litigation is more likely than not to be of a speculative nature and a waste of public resources". It seems to me that the preferable course might well be that the DCT had the opportunity to assess that question, having regard to the issues which have arisen before me, and I do not consider that I need to predict the outcome of any such investigation or litigation. 1. Mr Hassett also submits, with some force, that there is little basis for referring the advance to Johnnie, and not an advance made by another company to Mr Paul Essey, to which reference is also made in the Principal Judgment, to the DCT. The order as to which I sought submissions was that the parties provide a copy of the Principal Judgment to the DCT, which would have allowed it to assess whether any aspect of that judgment warranted further inquiry in respect of any person. 2. In the event, I have concluded that it is not necessary for me to direct the parties to provide a copy of the Principal Judgment to the DCT. The judgment has already been published on NSW Caselaw; it sets out the relevant facts and the issues which arise from them, since they were necessary to decide the matter and no application was made by the parties for any suppression order in respect of the Principal Judgment; this further judgment will also be published on NSW Caselaw; and it seems to me that it is likely that the Principal Judgment and the relevant facts and issues will come to the DCT's attention without the need for any further order of the Court or action by the parties, allowing the DCT to take such steps as it may wish in respect of the matters addressed in it. 3. The only further order that I make is therefore that there be no order as to the costs of the proceedings. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 29 December 2020