Reported Decision : (2001) ATC 4049 (2001) 47 ATR 310 New South Wales Supreme Court CITATION : DCT v Awad [2001] NSWSC 37 CURRENT JURISDICTION: Common Law FILE NUMBER(S) : SC 13105/1998 HEARING DATE(S) : 5 February 2000 JUDGMENT DATE : 12 February 2001 Deputy Commissioner of Taxation (Plaintiff) PARTIES : Tawfik Awad (Defendant) JUDGMENT OF : Master Harrison COUNSEL : N/A Mr D Morris Australian Government Solicitor SOLICITORS : (Plaintiff) Mr C Blinisky (Defendant) CATCHWORDS : Set aside default judgment Supreme Court Rules - Part 40 r 9(2) Listening Devices Act 1984 LEGISLATION CITED : Income Tax Assessment Act 1936 Taxation Administration Act 1963 (Cth) Taxation Administration Act 1953 Evans v Bartlam (1937) AC 473 Vacuum Oil Pty Limited v Stockdale (1942) 42 SR 239 Cuttle v Brand (1947) 64 WN 96 Adams v Kennick Trading (International) Ltd & Ors (1986) 4 NSWLR 503 CASES CITED : Cohen v McWilliam (1995) 39 NSWLR 476 McAndrews v FCT (1956) 98 CLR 263 FJ Bloeman Pty Ltd v FCT (1981) 147 CLR 360] DCT v Jonrich Pty Ltd (1986) 17 ATR 880 Awad v FC of T [1999] AATA 733 DCT v HO 32 ATR 269 DECISION : (1) The defendant's notice of motion filed 15 November 2000 is dimissed; (2) The defendant is to pay the plaintiff's costs. 7 THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION MASTER HARRISON MONDAY, 12 FEBRUARY 2001 13105/98 - DEPUTY COMMISSIONER OF TAXATION v TAWFIK AWAD JUDGMENT (Set aside default judgment) 1 MASTER: By notice of motion filed 15 November 2000 the defendant seeks firstly, an order setting aside judgment against him on 23 October 2000; secondly, directions be made for the further conduct of these proceedings; and thirdly, execution of all proceedings under the judgment entered on 23 October 2000 be stayed pending the hearing of this motion. The defendant relied on the affidavit of his solicitor Claudius Bilinsky sworn 24 November 2000. The plaintiff relied on the affidavits of Fiona Andrew sworn 2 August 2000 and David Morris sworn 28 November 2000. 2 On 23 October 2000 when this matter came before me there was no appearance by the defendant. I made the following orders. "1. Order in accordance with para (1) of the notice of motion filed 3 August 2000. 2. Enter judgment that the defendant pay to the plaintiff the sum of $4,774,266.66. 3. Defendant to pay the plaintiff's costs of the proceedings including this motion." 3 The plaintiff by way of statement of claim sought to recover moneys due on assessments for the years ended 30 June 1995 and 30 June 1996. The Law 4 Part 40 r 9(2) of the SCR provides: "(2) The Court may set aside or vary a judgment - … (b) where the judgment has been entered after judgment has been given in the absence of a party, whether or not the absent party had notice of trial or of any motion for the judgment." 5 The orders of 23 October 2000 were made in the absence of the defendant. Thus s 40 r 9(2) is applicable. 6 From the cases of Evans v Bartlam (1937) AC 473, Vacuum Oil Pty Limited v Stockdale (1942) 42 SR 239, Cuttle v Brand (1947) 64 WN 96, Adams v Kennick Trading (International) Ltd & Ors (1986) 4 NSWLR 503 clear principles emerge: Bona fide defence on the merits, an adequate explanation of delay as matters relevant to, but the latter not finally determinant of, the exercise of the discretion which is conferred upon a court in determining whether or not to set aside a judgment. 7 In addition a further consideration to be taken into account when determining whether default judgment should be set aside was expressed by Priestley JA in Cohen v McWilliam (1995) 39 NSWLR 476 at 481: "It is, however, another question whether concern about the extent of delays, either in a particular case or generally, should, in the absence of prejudice in the particular case, be taken into account in exercising a discretion to set aside default judgment. The fundamental duty of the court is to do justice between the parties. It is, in turn, fundamental to that duty that the parties should each be allowed a proper opportunity to put their cases upon the merits of the matter. Any limitation upon that opportunity will generally be justified only on the necessity to avoid prejudice to the interests of some other party, occasioned by misconduct." 8 For the defendants to succeed in their application to set aside default judgment they must give an adequate explanation for the delay in filing their defence and show that they have a defence on its merits, or as often expressed a bona fide defence. However, as Priestley JA said in Cohen it is a fundamental duty of the court to do justice between the parties. Explanation for delay 9 The defendant's solicitor Claudius Bilinsky in his affidavit states that it was due to his poor writing that his office entered into his diary that the matter was before the court on 27 October 2000. The correct date was 23 October 2000. However, the defendant's solicitor received a letter dated 15 September 2000 from the plaintiff referring to the court listing on 23 October 2000 and also a fax from the plaintiff dated 5 October 2000 referring to the same court listing. Nevertheless, I am prepared to accept that the solicitor believed he had caused the matter to be correctly noted in his diary and that is why he did not attend court on 23 October 2000. Bona fide defence 10 The defendant submitted that he had a valid defence namely that in making the assessments the defendant took into account records disseminated to the plaintiff's offices by the New South Wales Crime Commission of private conversation obtained by use of listening device warrants pursuant to a purported warrant issued under the Listening Devices Act 1984 which warrants were subsequently held to have been invalidly issued. ("tainted documents"). The warrants were found to be void ab initio. 11 The defendant alleges that once a non-party to a telephone conversation has knowledge of a private conversation and that it has been obtained as a result directly or indirectly of the use of a listening devise in contravention of s 5 of that Act it is an offence to communicate the information further and it is also an offence to possess a record of the conversation. The defendant's main argument is that a court would not assist illegal conduct and by the defendant's continuing to use the information it is involved in continuing offences. 12 The plaintiff submitted that the defendant has already unsuccessfully challenged both notices of assessment the subject of these proceedings in proceedings before the Administrative Appeal Tribunal and the Federal Court. 13 The plaintiff further submitted that the assessment in relation to the 1996 year of income has also been the subject of proceedings firstly, seeking to have declaration made that it was "void and of no effect"; secondly, seeking a declaration and that it was not an assessment for the purposes of the Income Tax Assessment Act 1936 (ITAA). The plaintiff submitted that it is an abuse of process to commence proceedings in this court through cross claim seeking identical relief which has already been sought and denied in the Federal Court, and there is no reason why full force and effect should not be given to the provisions of s 177 of the ITAA. Taxation regime 14 Firstly, it is necessary to briefly examine the statutory taxation regime. Upon the basis of a person's income tax return, the Commissioner may make an assessment of the amount of taxable income of that person and of the tax payable thereon - s 166 ITAA. Where, however, a person defaults in furnishing a tax return or alternatively the Commissioner is not satisfied with the return furnished by any person or has reason to believe that any person who has not furnished a return has derived taxable income, the Commissioner may make an assessment of the amount upon which, in his judgment, income tax ought to be levied and the amount of tax payable thereon. - see s 167(a), (b), (c). 15 Such tax as assessed becomes due and payable on the date specified in the notice of assessment (s 204(1)), as a debt due to the Commonwealth (s 208(1)), and where unpaid may immediately be sued for and recovered by the Commissioner in any court of competent jurisdiction (ss 207(2), 209(1)). 16 Section 177(1) of the Income Tax Assessment Act 1936 provides: "The production of a notice of assessment, or of a document under the hand of the Commissioner, a Second Commissioner, or a Deputy Commissioner, purporting to be a copy of a notice of assessment, shall be conclusive evidence of the due making of the assessment and, except in proceedings under Part IVC of the Taxation Administration Act 1953 on a review or appeal relating to the assessment, that the amount and all the particulars of assessment are correct." 17 By virtue of s 177(1) of the ITAA the production of a notice of assessment by the Deputy Commissioner is, except in proceedings on appeal against the assessment, conclusive evidence of the due making of the assessment and that the amount and all the particulars of the assessment are correct. Upon production of the notices of assessment in recovery proceedings, s 177(1) operates to preclude the tax payer from impugning their veracity in those proceedings - see McAndrews v FCT (1956) 98 CLR 263 at 281; FJ Bloeman Pty Ltd v FCT (1981) 147 CLR 360 at 375; 11 ATR 91; DCT v Jonrich Pty Ltd (1986) 17 ATR 880 at 883, 899-900. The veracity of the assessments can only be impugned in proceedings by way of appeal under Part IVC Divs 4 and 5 of the Taxation Administration Act 1963 (Cth). 18 The defendant commenced proceedings by way of application in the Federal Court in relation to the financial years ending 30 June 1996 and 30 June 1997 (NG 722/97) and sought declarations that those determinations were void and of no effect. On 24 August 1996 the Federal Court ordered, by consent, that the application be dismissed with each party to pay its own costs. 19 In relation to the 1995 and 1996 assessment, the defendant challenged the decision of the Deputy Commissioner of Taxation in the Administrative Appeals Tribunal. In Awad v FC of T [1999] AATA 733, the defendant sought to challenge the disallowance by the respondent of objections by the applicant dated 4 August 1997 against amended assessments issued by the respondent, in respect of the applicant, for the years ending 30 June 1995 and 30 June 1996. He sought to challenge the decision on a number of grounds one of which was that the Commissioner had acted in bad faith. In the proceedings before senior member J Block in the AAT, the "tainted" documents were excluded and his decision was made without reference to them. The senior member stated that the applicant had failed to satisfy his onus under 14ZZK of the Taxation Administration Act 1953 and commented that it could hardly be said that he had made any serious attempt to do so. In those circumstances the objection decisions under review were affirmed. 20 The defendant was the applicant in proceedings before the Federal Court N 1250/99 and the plaintiff was the respondent. A decision was given by Lindgren J on 13 September 2000 in relation to the 1995 assessment. The defendant was unsuccessful and lodged an appeal to the Full Federal Court which is listed for directions in March 2001. The Deputy Commissioner has raised a constitutional issue and has served the required s 78B notices on the Attorneys General of all the States and Territories of Australia. 21 In these Federal Court proceedings before Lindgren J the defendant relied upon the ground that in making the assessment, the Commissioner took into account records disseminated to the Commissioner's officers by the New South Wales Crime Commission (the Commission) of private conversations obtained by the use of listening devises pursuant to a purported warrant issued under the Listening Devices Act 1984 (NSW) which was subsequently held to have been invalid. This is identical to the issue raised in the proceedings in this court. 22 There were agreed facts namely: "1. On 2 April 1996, a warrant was issued to certain police under the LD Act for the purposes of an investigation of an alleged offence of conspiracy to defraud in the form of an agreement to avoid payment of tobacco licence fees under the Business Franchise Licences (Tobacco) Act 1987 (NSW). 2. Private conversations were recorded by the use of listening devices pursuant to the warrant mentioned and records of those conversations ("the Records") were disseminated by the Commission to officers of the Australian Taxation Office pursuant to the New South Wales Crime Commission Act 1985 (NSW). 3. On 31 July 1997 the Commissioner issued notice of the Assessment to Mr Awad. The Assessment was made by the Commissioner in reliance on ss 166 and 167 of the ITAA 36 (the Amended Statement of Agreed Facts said "168" rather than "167" but nothing turns on this). (A certified copy of the notice of the Assessment is in evidence.) 4. In making the Assessment, the Commissioner or his delegates took into account the Records as being relevant to the making of the Assessment. 5. On 4 August 1997 Mr Awad objected to the Assessment. 6. On 11 September 1997, Mr Awad commenced proceeding NG734/97 in this Court seeking, inter alia, declarations that purported assessments in respect of the years of income ended 30 June 1996 and 30 June 1997 (not the income year the subject of the Assessment) were not assessments under, or for the purposes of, the ITAA 36, and that they did not notify assessments of income tax within the meaning of the ITAA 36. Mr Awad did not seek relief in that proceeding in respect of the Assessment. 7. On 14 May 1998 the Commissioner disallowed Mr Awad's objection ("the Objection Decision"). 8. On 29 March 1999, in R v Eid (1999) 46 NSWLR 116, the New South Wales Court of Criminal Appeal held that the warrant was invalid. …" 23 In paras 21 to 23 of his judgment Lindgren J stated: "The Commissioner would have been caught by the terms of subs 8(1) only if he possessed the Records, knowing that they had been obtained by the use of a listening device in contravention of subs 5(1). But the evidence does not establish that when he made and notified the Assessment, the Commissioner had that knowledge. The hearing before me proceeded on the basis that so far as the Commissioner knew at that time and, indeed, until the decision of the New South Wales Court of Criminal Appeal on 29 March 1999 in R v Eid (1999) 46 NSWLR 116, the warrant was valid. (Mere knowledge that a challenge to the validity of the warrant was pending would not constitute knowledge that it was invalid.) I am not aware of any legal principle that would prevent the Commissioner, as an "innocent" third party recipient of "information in his possession" to be found in the Records, from using that information to carry out his statutory function merely because someone else may have initially obtained the information or the Records unlawfully. If a person stole a document and provided it to the Commissioner in circumstances in which the Commissioner understood that the document was the property of the supplier which the supplier was entitled to give to him, the Commissioner would not be disentitled to use the information contained in the document to make an assessment of the taxable income of another person and of the tax payable thereon. It is not to the point that in that hypothetical case (or in the present actual case), an obligation to surrender the document (or the Records) might arise if once a surrender was demanded or once it was established that the Commissioner had no right to retain the document (or Records). In my opinion, neither subs 13(1) nor s 22 of the LD Act affects this conclusion. Subject to any question of constitutional invalidity (see below), subs 13(1) would prevent the Commissioner and his officers from giving evidence of the private conversations in respect of which the Records were made. But this prohibition does not prevent the Commissioner from taking into account the conversations in making assessments under s 166 of the ITAA 36 in the circumstances in which he did so here, and may or may not have any operative effect in a particular case." 24 Further the written submission that both of the parties relied upon before Lindgren J have been handed up. Thus, it is my view that Lindgren J has already dealt with these issues raised under the Listening Devices Act. 25 In relation to whether taxation proceedings should be stayed pending an appeal, in DCT v HO 32 ATR 269 Ireland J stated: "This power to grant a stay of proceedings is discretionary and should be exercised with great caution and only in special or exceptional circumstances: Mackey at ALR 287, 289; Held v DCT (Vic) (1988) 19 ATR 1213. In exercising this discretion, however, great weight must be given to the terms of an intention and policy embodied by ss 14ZZM and 14ZZR of the Taxation Administration Act (formerly s 201 Income Tax Assessment Act . Whilst the body of case law concerns s 201 of the substantive effect of ss 14ZZM and 14ZZR is the same); Australian Machinery and Investment Co Pty Ltd at ALJR 327; Mackey at ALR 287. … The effect of these sections is to give primacy to the general right the Commissioner has to have tax paid irrespective of the pendency of an appeal and its merits: Mackey at ALR 287. See also DCT v Trower (1986) 17 ATR 473 at 480; DCT v Hell's Angels Ltd [No 2] (1984) 69 FLR 72; 15 ATR 815 at 817. But for ss 14ZZM and 14ZZR special or exceptional circumstances are normally required for the granting of a stay whilst an appeal is pending; Alexander v Cambridge Credit Corporation Ltd (1985) 2 NSWLR 685 at 693-694. The result of this statutory and policy framework is that the history of stays of proceedings in the face of the old s 201 (now ss 14ZZM and 14ZZR) has not been great. Further, in my opinion, the effect of ss 14ZZM and 14ZZR must also be to preclude this court from considering the prospects of success of any review or appeal by the applicant, to either the AAT or the Federal Court. Any speculation as to the prospects of the taxpayer on review or appeal is entirely inappropriate in these proceedings. …" 26 Having regard to s 14ZZ and the above decision, this court is precluded from considering the prospects of success in the appeal to the Full Court of the Federal Court, it is my view that the default judgment should not be set aside. Accordingly, I dismiss the notice of motion filed 15 November 2000. Costs are discretionary. Costs should follow the event. The defendant is to pay the plaintiff's costs. 27 The orders I make are: (1) The defendant's notice of motion filed 15 November 2000 is dismissed. (2) The defendant is to pay the plaintiff's costs. ********** Last Modified: 02/13/2001 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.