FEDERAL COURT OF AUSTRALIA

Deputy Commissioner of Taxation v Rhodium Australia Pty Ltd [2011] FCA 988

THE COURT ORDERS THAT:

1.    The defendant pay the costs incurred by the plaintiff up to and including 8 August 2011 together with any costs later incurred in considering the affidavits of Joanne Margaret McCall made on 5 August 2011.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011

REASONS FOR JUDGMENT

introduction

1    On 22 February 2011, the plaintiff (“DCOT”) applied for an order that the defendant (“Rhodium”) be wound up in insolvency pursuant to s 459P of the Corporations Act 2001 (Cth) (“the Corporations Act”). After the making of various interlocutory orders, the proceeding was listed for hearing on 15 and 16 August 2011. At the outset of the hearing, the DCOT sought leave to discontinue the application. Leave to discontinue was unopposed and was granted.

2    The only matter that remains for the Court to determine is the question of costs. The issue for determination is whether there is good reason for departing from the ordinary course that the successful party should have its costs. For the reasons that follow, I have determined that there is and that Rhodium should pay the costs of the DCOT, but not to the full extent claimed by the DCOT.

relevant principles

3    The Court has a wide discretion as to costs. The discretion must be exercised judicially. Ordinarily, a successful party will be entitled to its costs. There must be some sound positive ground or good reason for departing from the ordinary course: Australiawide Airlines Ltd v Aspirion Pty Ltd [2006] NSWCA 365 at [54] (Bryson JA, with whom Basten and McColl JA agreed). McHugh J observed in Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622 at 624 that:

In most jurisdictions today, the power to order costs is a discretionary power. Ordinarily, the power is exercised after a hearing on the merits and as a general rule the successful party is entitled to his or her costs. Success in the action or on particular issues is the fact that usually controls the exercise of the discretion. A successful party is prima facie entitled to a costs order. When there has been no hearing on the merits, however, a court is necessarily deprived of the factor that usually determines whether or how it will make a costs order.

In an appropriate case, a court will make an order for costs even when there has been no hearing on the merits and the moving party no longer wishes to proceed with the action. The court cannot try a hypothetical action between the parties. To do so would burden the parties with the costs of a litigated action which by settlement or extra-curial action they had avoided. In some cases, however, the court may be able to conclude that one of the parties has acted so unreasonably that the other party should obtain the costs of the action. [footnotes omitted]

4    Those observations were relied upon by Barrett J in Lavercombe v Auscott Limited (2006) 58 ACSR 586 at [43]. The judge observed at [44] that the expectation that costs should lie where they fall may be displaced where one party has acted unreasonably and the other should be compensated by costs. In that case, involving an application by a petitioning creditor to wind up a company which was dismissed by consent, Barrett J took into account that the petitioning creditor had initiated and pursued the application “with complete propriety” (at [47]) and that the petitioning creditor “should never have been put to the trouble and expense of bringing the proceedings” (at [48]). The judge ordered that the petitioning creditor should have the benefit of an order for costs: [45]-[48]. Lavercombe was followed in Cockatoo Ridge Wines Limited v Naked Wines Direct Pty Ltd [2006] NSWSC 1074 at [15] (Barrett J).

5    The principles to which I have referred have application in this case. There has been no hearing on the merits but Rhodium can claim to be the successful party as the application against it was withdrawn. For Rhodium to be denied its costs I will need to be satisfied that there is good reason for departing from the ordinary rule. In my view there is good reason as this is a case in which the reasonableness of the conduct of the parties provides the controlling basis for the exercise of the Court’s discretion.

the Facts

6    To address the competing contentions about costs, I need to turn to the facts. A number of affidavits have been filed in the proceeding, including three from Ms McCall who is the sole director of Rhodium. Other affidavits are relied upon by the DCOT. I need not descend to the detail of those affidavits. The affidavits provide a basis upon which the DCOT was justifiably cautious in its dealings with Rhodium. Since at least 1 July 2007, the financial affairs of Rhodium have been irregular. Income tax returns for the years ending 30 June 2008 to 30 June 2010 were not filed until 30 May 2011. Business Activity Statements for each of the quarterly periods ending 31 December 2008 to 31 March 2011 (“the Business Activity Statements”), were not lodged until 30 June 2011. Loss of records and personal issues of “the principal financier” of Rhodium, Mr de Saram, are provided by Rhodium as explanations for its difficulties. There are a range of somewhat unusual justifications provided for administrative practices, including in relation to Rhodium’s asserted failure to receive documents served on its registered office. There are also unusual facts pertaining to the personal income tax returns lodged by Rhodium’s sole director Ms McCall and by Mr de Saram. I will say more about those matters shortly. Whilst these difficulties may be explicable, they are sufficiently unusual to have heightened the reasonable suspicions of the DCOT. It is in that context that the reasonableness of the DCOT’s pursuance of this proceeding needs to be evaluated.

7    The facts necessary for a proper understanding of the matters relevant to my determination begin with the lodgement by both Mr de Saram and Ms McCall of taxation returns during the course of 2009. In Ms McCall’s case, a tax return for the year ending 30 June 2009 was lodged. In Mr de Saram’s case, tax returns for the years ending 30 June 2008 and 30 June 2009 were lodged. Those tax returns recorded that, as an employer, Rhodium had withheld income tax of $571,516 in relation to income earned from Rhodium by Mr de Saram and Ms McCall. Rhodium was registered for Pay As You Go Withholding (“PAYGW”) but has not, in relation to the periods in question, accounted to the DCOT for any PAYG income tax withheld for Ms McCall or Mr de Saram.

8    On 11 March 2010, the DCOT commenced an audit of Rhodium in respect of PAYGW and Rhodium’s superannuation guarantee obligations. On 10 September 2010, the DCOT made estimates pursuant to s 268-10 of Schedule 1 of the Taxation Administration Act 1953 (Cth) (“the Taxation Administration Act”). A Notice of Estimate (“the Notice of Estimate”) was served upon Rhodium by the DCOT for the amount of $571,516 relating to PAYGW estimated to be owed by Rhodium. The estimate was obviously based on the information provided by the tax returns of Mr de Saram and Ms McCall.

9    Section 268-10 of Schedule 1 of the Taxation Administration Act empowers the Commissioner of Taxation (“the Commissioner”) to estimate the unpaid and overdue amount of a liability of a tax payer. This is referred to as “the underlying liability”. The amount of the estimate is what the Commissioner thinks is reasonable: s 268-10(2). Section 268-35 empowers the Commissioner to reduce or revoke the estimate, but the Commissioner is not obliged to do so. Section 268-20 provides that the amount of the estimate notified to the taxpayer becomes due and payable on the Notice of the Estimate being provided to the taxpayer. Importantly, s 268-20(2) provides that the taxpayer’s liability to pay the amount of the estimate is “separate and distinct” from the underlying liability for all purposes.

10    Section 268-40 sets out how an estimate may be reduced or revoked. In essence it provides a process for the estimate to be either reduced or revoked where the taxpayer provides a statutory declaration or an affidavit which verifies facts sufficient to prove that either the underlying liability never existed or that a specified lesser amount is the unpaid amount of the underlying liability.

11    For Rhodium to have had the Notice of Estimate revoked, all it needed to have done was to provide the DCOT a statutory declaration verifying facts sufficient to prove that the underlying liability never existed or alternatively have provided an affidavit in this proceeding to that effect. Despite a letter which accompanied the service of the Notice of Estimate making it abundantly clear to Rhodium that a statutory declaration could be completed by it for the purpose of seeking to reduce or revoke the estimate, Rhodium did not take any action in response to that information.

12    The amount due under the Notice of Estimate was then included on the running balance account for Rhodium with the DCOT. On 8 November 2010 the DCOT served a statutory demand upon Rhodium which demanded payment of the amount outstanding in Rhodium’s running balance account. As at the time of the service of the statutory demand, the amount the DCOT claimed was owed by Rhodium totalled $724,111.35, which comprised the estimate together with related interest and superannuation guarantee charges. In the absence of the payment of the outstanding amount or an application to set aside the statutory demand, the proceeding for winding up Rhodium was instituted by the DCOT on 22 February 2011.

13    In response to the application for the winding up of Rhodium, Ms McCall’s first affidavit was filed on 30 May 2011. The affidavit sought to explain why Rhodium had failed to lodge income tax returns and had been unable to prepare profit and loss and balance sheets for the years ending 30 June 2008 to 30 June 2010. The affidavit asserted that Rhodium was solvent and provided copies of financial reports for periods between 1 July 2007 and on 26 May 2011 (“the financial reports”). Although the affidavit denied that Rhodium owed any tax, it did not directly address the Notice of Estimate nor detail or verify facts upon which Rhodium asserted that no tax was due.

14    On 20 June 2011, a Directions Hearing was heard and dealt with by a Registrar of this Court. Consent orders were made, including that Rhodium file and serve “any affidavit in relation to bonuses/debt matters by 1 July 2011”. In explanation of what was intended by that order, Counsel for the DCOT (without demur from Counsel for Rhodium), explained that at the directions hearing Rhodium suggested that the PAYGW credit as disclosed by Ms McCall and Mr de Saram in their personal tax returns was related to intended bonuses which may not have been actually paid by Rhodium. The order that affidavits be filed dealing with “bonuses” was made to allow Rhodium to deal with that matter. The reference in the order of 20 June 2011 to Rhodium filing and serving affidavits dealing with “debt matters” was made to provide Rhodium with an opportunity to clarify a matter raised by the DCOT on 20 June 2011 in relation to a particular item in the financial statements produced by the affidavit of Ms McCall of 30 May 2011. The DCOT had observed the financial statements identified Rhodium’s major asset as “proprietary IP/R&D”. The DCOT had observed that in each of the financial statements, the amounts shown for “proprietary IP/R&D” is the same amount shown as “trade creditors – USD”. Thus in the balance for the most current balance sheet provided (as at 26 May 2011), the asset “proprietary IP/R&D” was shown as $33,065,147 which was the exact figure included as the liability for “trade creditors – USD”.

15    Despite the order made on 20 June 2011 that any affidavits be filed and served by Rhodium by 1 July 2011, no affidavit was filed on behalf of Rhodium.

16    On 30 June 2011, Rhodium lodged with the DCOT the overdue Business Activity Statements. Those statements recorded that no PAYG income tax had been withheld by Rhodium in relation to Ms McCall and Mr de Saram or at all.

17    On 1 August 2011 the proceeding was listed for hearing on 15 and 16 August 2011. On 5 August 2011 Rhodium filed an application pursuant to s 459S of the Corporations Act. Two affidavits of Ms McCall sworn on 5 August 2011 were also filed.

18    The first of those affidavits stated that its purpose was to revoke or reduce the Notice of Estimate as well as to support Rhodium’s Interlocutory Process made pursuant to s 459S of the Corporations Act. In this affidavit, Rhodium challenged the accuracy of the Notice of Estimate. Ms McCall deposed that for the years ended 30 June 2008 and 30 June 2009, Rhodium had considered paying a bonus to her and Mr de Saram. That bonus was predicated upon Rhodium achieving certain profit outcomes which were not in fact achieved during those financial years. Ms McCall deposed that she had included the expected bonus in her tax return for 30 June 2009 on the basis of advice that she could include future payments that might be made to her by Rhodium for that financial year but which she had not yet received. Ms McCall deposed that her tax return included a credit for tax withheld by Rhodium which was incorrect. She deposed that both she and Mr de Saram had lodged amended personal tax returns reflecting that no bonuses were paid to them by Rhodium for the year ending 30 June 2009 (in Ms McCall’s case) and for the years ending 30 June 2008 and 30 June 2009 (in Mr de Saram’s case).

19    The affidavits of Ms McCall of 5 August 2011 were not received by the DCOT until 8 August 2011. The DCOT took the view that the affidavits of 5 August 2011 purported to be affidavits made to revoke an estimate pursuant to s 268-40 of Schedule 1 of the Taxation Administration Act. On the basis of those affidavits, the DCOT made a decision to revoke the liability in the Notice of Estimate. For that reason, the DCOT sought leave to discontinue the winding up application.

consideration

20    The DCOT’s application for the winding up of Rhodium was grounded on Rhodium’s failure to comply with the statutory demand. The statutory demand was neither satisfied nor was any application made by Rhodium to have it set aside. In those circumstances, the DCOT was justified in making and pursuing the application for winding up as there is no basis for suggesting that the application was not initiated and pursued (at least initially) “with complete propriety”: Lavercombe at [47] and [48] (Barrett J).

21    Rhodium was unable to point to any facts or circumstances suggesting that the application for Rhodium to be wound up was not reasonably instituted. Rhodium however does contend that there came a point in time when it was no longer reasonable for the DCOT to pursue the application. To understand that contention, it is necessary to observe that in essence there were two matters in dispute as between Rhodium and the DCOT. The first is that Rhodium disputed the taxation debt claimed by the statutory demand. The second is that Rhodium also dispute that it was insolvent. Rhodium’s contention is that the Commissioner should have recognised that Rhodium was not insolvent and that it did not owe the taxation debt (or at lease that there was a genuine dispute as to that matter) and should have sought leave to discontinue its application at an earlier time that it did. Rhodium contends that the Commissioner should have been satisfied that it was solvent at least by 30 May 2011 when Rhodium’s financial statements were filed. Further, Rhodium contends that the DCOT should have recognised that the taxation debt did not exist (or at least was validly disputed) when on 30 June 2011 Rhodium lodged with the DCOT the Business Activity Statements.

22    The DCOT contends that in accordance with s 459C(2) of the Corporations Act, a presumption operated that Rhodium was insolvent by reason of its failure to comply with the statutory demand. The DCOT rejects the proposition that the provision of financial statements by Rhodium on 30 May 2011 made it unreasonable for the DCOT to continue to rely on the presumption of insolvency created by Rhodium’s failure to comply with the statutory demand. On that basis, the Commissioner contends that it was reasonable for it to maintain the proceeding despite the provision of that information. Secondly, the DCOT contends that despite Rhodium’s reliance on the lodgement of the Business Activity Statements, it was reasonable for the DCOT to continue to pursue the proceedings until Rhodium’s basis for disputing the taxation debt was verified by affidavit. That did not occur until Ms McCall’s affidavit of 5 August 2011 was received by the DCOT on 8 August 2011. The DCOT’s position is that having received and considered Rhodium’s verification on oath, DCOT properly moved to seek leave to withdraw its application, having pursued its application to that point with complete propriety.

23    In my view, the position of the DCOT should be preferred. It was not unreasonable for the DCOT to not recognise Rhodium to be solvent on the provision of Rhodium’s financial statements. I have already observed that the DCOT had good grounds to be cautious. Additionally, the financial statements were unaudited. Nearly 95% of the total assets shown in the most current balance sheet provided related to the item “proprietary IP/R&D”. The worth of that apparently intangible asset was not supported by any valuation. Despite the item being queried at the direction hearing held on 20 June 2011 and an opportunity given for that query to be answered on affidavit, no answering affidavit was provided. In those circumstances, the DCOT was entitled to think that on the hearing of the winding up application, a judge would require better evidence from Rhodium than that which was provided on 30 May 2011, for Rhodium to rebut the presumption of insolvency: Deputy Commissioner of Taxation v De Simone Consulting Pty Ltd [2007] FCA 548 at [14] (Finkelstein J).

24    Nor do I think it unreasonable of the DCOT to have awaited the provision of sworn verification that no PAYG income tax had been withheld by Rhodium. As I have said, the DCOT was entitled to be cautious and it was also entitled to expect that the process provided by the Taxation Administration Act for reducing or revoking an estimate be followed. As I have explained, the process required verification on oath of facts sufficient to prove that the underlying liability never existed. In that respect, it is to be recalled that the debt the statutory demand claimed was (for the most part) the “separate and distinct” debt created by the Notice of Estimate and not the underlying liability which the lodgement of the Business Activity Statements addressed: see s 268-20(2) of the Taxation Assessment Act.

25    The DCOT claims the entirety of the costs of the proceeding, but it appears to me that claim goes too far. Having considered Ms McCall’s affidavits of 5 August 2011 and having come to the view that the effect of those affidavits required the Notice of Estimate to be revoked, the DCOT should have immediately moved for this proceeding to be discontinued. Notice of that intended application was not given until 12 August 2011 and the DCOT sought the entirety of its costs including the costs of preparation for the trial incurred after 8 August 2011. The DCOT has not convinced me that all of its costs should be paid by Rhodium. I am however persuaded that Rhodium should pay the costs incurred by the DCOT up to and including 8 August 2011, together with any further costs later incurred in considering the affidavits made by Ms McCall on 5 August 2011. The parties should bear their own costs in relation to the application for leave to withdraw and for the contest as to costs. I will make orders accordingly.

Associate:

Dated:    29 August 2011