FEDERAL COURT OF AUSTRALIA

Commissioner of Taxation v Edgewater Estates Limited [2009] FCA 611

Federal Court Rules, O 25 r 5(4), O 25A r 2, O 25A r 5

Income Tax Assessment Act 1936 (Cth), s 6-5(1), s 6-5(3), s 175, s 177, s 177(1), s 204

Judiciary Act 1903 (Cth), s 39B(1A)(c)

Taxation Administration Act 1953 (Cth), Pt IVC, s 255-1(1) of Sch 1, s 255-5 of Sch 1, s 255‑5(1) of Sch 1, s 298-30(3) of Sch 1

Clyne v Deputy Commissioner of Taxation (1981) 150 CLR 1

Commissioner of Taxation v Futuris Corporation Ltd  (2008) 247 ALR 605

Deputy Commissioner of Taxation v Sharp (1988) 91 FLR 70

FJ Bloeman Pty Ltd v Commissioner of Taxation (1981) 147 CLR 360

KGL Health Pty Ltd v Mechtler [2007] FCA 1410

COMMISSIONER OF TAXATION v EDGEWATER ESTATES LIMITED, AVERON HOLDINGS LIMITED, MARBLE HILL INVESTMENTS LIMITED, MERDOLINO LIMITED, SEYDOR LIMITED, MARKBY HOLDINGS LIMITED, ROCK SECURITIES LIMITED and PARAMOUNT ADVISORS LIMITED

WAD 91 of 2009

BARKER J

4 JUNE 2009

PERTH

REASONS FOR JUDGMENT

ex parte application for freezing orders

1                     By application filed by the Commissioner of Taxation (Commissioner) on 4 June 2009, the Commissioner seeks declarations that:

•          specified amounts of money are debts due and owing by each respondent respectively to the Commissioner in respect of  income tax for specified years of income and (save in the case of the third respondent) administrative penalties;

•          a specified amount is a debt due and payable by each respondent respectively in respect of income tax plus general interest charge as accrued up to 1 June 2009 for specified years on income.

2                     The Commissioner also seeks freezing orders in respect of each of respondent, pursuant to O 25A, r 5(4) of the Federal Court Rules restraining each respondent from removing assets located in Australia or from disposing of, or dealing with, or diminishing the value of those assets.

3                     Finally, the Commissioner seeks judgment against each respondent in respect of their liability for income tax and administrative penalties, plus general interest charges.

4                     The Commissioner also, by the application, seeks interlocutory relief as follows:

•           Until further order of the Court a freezing order be made against each respondent in the terms specified in the relevant annexure.

5                     The application for interlocutory relief was made ex parte, without notice to the respective respondents and heard on 4 June 2009.  The Court made freezing orders, as described below, for the following reasons.

6                     The application for interlocutory relief was supported by an affidavit of Aris Zafiriou sworn 4 June 2009. 

7                     It is not necessary, in the present circumstances, to set out in any great detail the materials disclosed in the supporting affidavit and annexures.  It suffices to say that it is alleged each of the respondents:

•          was incorporated outside of Australia;

•          derived income from share trading activities conducted in Australia;

•          has not declared any income derived from those activities;

•          has not registered for a tax file number;

•          has assets located in Australia in the form of shares listed on the Australian Stock Exchange (ASX) and registered in Australia;

•          is associated through common directors and signatories, with an entity known as Weighbridge Trust Limited (Weighbridge) which carries on business in Guernsey as a licensed fiduciary providing trustee, corporate, investment and consultancy services and which describes on its website the use of offshore trusts as a means of "mitigation or avoidance of income, capital gains and inheritance tax";

•          has transferred funds from Guernsey to Australia to fund the acquisition of shares listed on the ASX by Australian stockbrokers and, save in the case of the seventh respondent, has caused funds to be remitted from Australia to Guernsey.

court's power to make freezing order

8                     This Court has the power under O 25A of the Federal Court Rules to issue a freezing order.

9                     Order 25A, r 2 provides:

2(1)      The Court may make an order (a freezing order), upon or without notice to a respondent, for the purpose of preventing the frustration or inhibition of the Court’s process by seeking to meet a danger that a judgment or prospective judgment of the Court will be wholly or partly unsatisfied.

2(2)      A freezing order may be an order restraining a respondent from removing any assets located in or outside Australia or from disposing of, dealing with, or diminishing the value of, those assets.

            [emphasis in original]

10                  Order 25A r 5 deals in detail with an order against a judgment debtor or prospective judgment debtor third party.  Rule 5 relevantly provides as follow:

5(4)      The Court may make a freezing order or an ancillary order or both against a judgment debtor or prospective judgment debtor if the Court is satisfied, having regard to all the circumstances, that there is a danger that a judgment or prospective judgment will be wholly or partly unsatisfied because any of the following might occur:

(a)        the judgment debtor, prospective judgment debtor or another person absconds; or

(b)        the assets of the judgment debtor, prospective judgment debtor or another person are:

(i)         removed from Australia or from a place inside or outside Australia; or

(ii)        disposed of, dealt with or diminished in value.

…

5(6)      Nothing in this rule affects the power of the Court to make a freezing order or ancillary order if the Court considers it is in the interests of justice to do so.

11                  Practice Note 23 of this Court also deals with freezing orders (also known as "Mareva  orders" or "asset preservation orders" ).

12                  In KGL Health Pty Ltd v Mechtler [2007] FCA 1410 at [12], Tamberlin J noted:

The protection afforded by a preservation order to an applicant is a substantial encroachment on the basic right and freedom of the respondent to deal with his or her property.  Practice Note 23 emphasises this point when it states that the purpose of the order is to prevent abuse of process and not to provide security in respect of the judgment.  The restraint must be regarded as an extraordinary remedy because it restricts the right to deal with property even before judgment.  This level of interference confirms the necessity of the person seeking the freezing order to provide sufficient oral or documentary evidence of his or her prima facie case.  The mere making of allegations in correspondence or the assertion of a case in a Statement of Claim is not of itself … sufficient to make out a good arguable case.

[emphasis in original]

whether a good arguable case or an accrued or prospective cause of action

13                  As noted, the Commissioner's application claims declaratory relief in respect of assessments of income tax and penalties issued to each respondent, as well as judgment for certain issues.

14                  The assessments were issued on 2 June 2009 against each respondent.  Notices have apparently been sent by ordinary pre paid post to each of them on the same day together with advices of the outcome of audits undertaken by the Australian Taxation Office (ATO).

15                  The assessments create a statutory debt when the liabilities assessed become "due and payable": see s 255–1(1) and s 255-5(1) of Sch 1 to the Taxation Administration Act 1953 (Cth) (TAA 1953) and s 204 (1) of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936).

16                  Once the time for payments set out in the notices has passed – which it has not yet ­­– the Commissioner will be entitled to judgment against the entities for the amount of the tax assessed if they remain unpaid.

17                  However, the Commissioner contends that the income tax is "due" and is a debt presently in existence when it is assessed and notice is issued of its assessment, although it is not payable before the date fixed by legislation: see Clyne v Deputy Commissioner of Taxation (1981) 150 CLR 1.  Clyne indeed supports the view that upon issue of the notice of assessment the tax is "due and owing", though not "due and payable": see Mason J (with whom Aickin and Wilson JJ agreed), at 16–17.

18                  Further, the Commissioner points to s 177(1), ITAA 1936, and subs 298-30(3) of Sch 1, TAA 1953, which provides that the production of a notice of assessment or a copy of it, is conclusive evidence of the due making of the assessment and (except in proceedings under Pt IVC of the TAA 1953) that the amount and all particular of the assessment are correct: see FJ Bloeman Pty Ltd v Commissioner of Taxation (1981) 147 CLR 360 at 376; Commissioner of Taxation v Futuris Corporation Ltd (2008) 247 ALR 605.

19                  The Commissioner also contends that authority supports the view that a freezing order may be obtained when there is no primary proceeding before the court, because the period allowed for payment of the assessment has not lapsed.  Thus in Deputy Commissioner of Taxation v Sharp (1988) 91 FLR 70, Kelly J stated at 74:

It seems to me that special circumstances obtain when the Commissioner of Taxation seeks a Mareva injunction in respect of an assessment which has issued but is not immediately payable because the time which must be allowed for the payment of the assessment has not elapsed. Such a debt has peculiar characteristics attaching to it because of the legislation which gives rise to it.

…

All that the Commissioner need do to establish conclusively the existence of the debt is to produce the appropriate notice of or copy of the notice of assessment.

…

In these circumstances it seems to me that the Commissioner is entitled to pray in aid the injunctive power of the Court when he establishes that prima facie there is a real risk that the taxpayer will so deal with his assets to render useless in whole or in part the judgment to which the Commissioner would be conclusively entitled upon the mere passage of time.

20                  I consider that the Commissioner has raised a good arguable case to the effect that by virtue of the issued assessments of income tax the causes of action in respect of the declarations, if not accrued, arguably are prospective.  The first set of declarations are in respect of tax claimed to be "due and owing"; the second set are in respect of tax claimed to be "due and payable".  Judgment is moved for in certain sums.

21                  Further, the cause of action is justiciable in the Court.  The claimed tax liabilities arise under ss 175, 177 and 204 of the ITAA 1936 and s 255-5 of Sch 1 to the TAA 1953.  The claim is accordingly within the original jurisdiction of the Court by virtue of s 39B(1A)(c) of the Judiciary Act 1903 (Cth) in that it relates to a matter arising under a law of the Commonwealth (not being a criminal matter). 

whether the assets might be disposed of, dealt with or diminished in value leaving a prospective judgment unsatisfied

22                  I accept that, for the purposes of this application, and assuming that each of the respondents is a non Australian resident (something not conceded by the Commissioner), that each may arguably be considered liable to pay income tax because:

•          the evidence contained in the supporting affidavit arguably discloses a pattern of share trading activity organised in a manner that impresses the proceeds generated from that activity with the character of income according to ordinary concepts;

•          the income apparently was derived from an Australian source – from trading through Australian stockbrokers shares listed on the ASX and registered in Australia.

See ss 6-5(1), (3) of the ITAA 1997.

23                  The listing and registration of the shares in Australia also seems to establish that the shares are assets located in Australia: see Dicey and Morris, The Conflict of Laws, Vol 2, 22 ‑ 044 (13^th ed, 2000).

24                  I am satisfied that the information currently before the Court in the supporting affidavit demonstrates a real risk that the respondents will deal with or dispose of the shares they hold in Australia so that a potential judgment in favour of the Commissioner might be unsatisfied.  The following factors in particular support this view at this point:

•          The highly liquid nature of the assets – being shares traded on the ASX.

•          Evidence concerning the connection of each respondent with Weighbridge, including the fact that Weighbridge and each of the respondents have the same directors or signatories, that instructions have apparently been provided by Weighbridge to remit or deal with funds from the sale of shares by these respondents to Weighbridge, and that the respondents have the same contact details as Weighbridge.

•          All the respondents have previously sold assets in Australia from which they have derived an income that has not been declared and which arguably comprises assessable income.

•          The proceeds from the sale of the assets have in each and every instance been transferred outside Australia, save it seems in the case of the seventh respondent.

•          The proceeds from the sale of the assets can be sent offshore without notification to the Commissioner.

•          Without knowledge of the Australian broker being used or the bank accounts to which the proceeds from the sale of assets will be deposited, the Commissioner has no ability to collect the tax liability that is owed.

•          The respondents were incorporated in either the British Virgin Islands, Guernsey and Great Britain and all operate from Guernsey.

•          Guernsey does not have a bilateral collection policy or process with Australia.

•          Guernsey is not a member of the UNCITRAL laws which facilitate the recognition of foreign revenue debts.

•          Guernsey laws do not recognise foreign revenue debts.

25                  In my view, given the share trading practices disclosed by the supporting affidavit, there is a real risk that, unless a freezing order goes to the assets that are currently held in Australia by the respective respondents, they could be dissipated and proceeds of sale sent offshore.

26                  Although it appears the seventh respondent has not had any outgoing transfers of funds between Australia and Guernsey during the period August 2004 to March 2009, the seventh respondent on materials mentioned in the supporting affidavit has allegedly engaged in share trading activities for a considerable period of time.  Having regard to the evidence overall, there is an appreciable risk that the share assets of that respondent might also be dissipated by the sale of the share asset and the transfer offshore of funds received.

27                  The Commissioner also points to urgency in relation to this particular application because it appears that, in error, the Commissioner sent out notices of general interest charge to six of the respondents on 28 May 2009. 

balance of convenience/interest of justice

28                  So far as balance of convenience and interests of justice are concerned, I note the Commissioner has provided an undertaking as to damages.

29                  In general terms, on the information currently before me I do not see that the assets are likely to be prejudiced by the making of the freezing orders.

30                  Moreover, the orders made provide for the early return of the application for directions and the parties are at liberty to seek to set aside the freezing orders on short notice.

conclusion and order

31                  For these reasons, freezing orders against the respondents, on the terms applied for by the respondents were made on 4 June 2009 for a limited time until 5pm (WST) Wednesday 10 June 2009 and the application listed for an early directions hearing at 10am (WST) Wednesday 10 June 2009.

Associate:

Dated:         8 June 2009