FEDERAL COURT OF AUSTRALIA

Commissioner of Taxation v Ornelas [2016] FCA 457

ORDERS

THE COURT ORDERS THAT:

1.    Judgment be entered against the first respondent in the sum of $1,319,172.91.

2.    The first respondent pay the applicant’s costs of the application for summary judgment as taxed or agreed.

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

REASONS FOR JUDGMENT

BROMWICH J:

1    The applicant, the Commissioner of Taxation, moved the Court today on an interlocutory application for summary judgment against the first respondent, Mr Jose Ornelas, under r 26.01(1)(a) of the Federal Court of Australia Rules 2011 (the Rules), also relying on s 31A(1) of the Federal Court of Australia Act 1976 (Cth) (the FCA Act). Judgment is sought for an amount of $1,319,172.91, based on a certificate under s 255-45 of Schedule 1 of the Taxation Administration Act 1953 (Cth) (the TAA), a copy of which was tendered and admitted without objection.

Background

2    On 2 March 2016, the Commissioner commenced proceedings against Mr Ornelas and nine other respondents by way of an originating application. Paragraph 1 of that application sought judgment against Mr Ornelas upon certain tax-related liabilities becoming due and payable. Those liabilities related to income tax and shortfall interest charges, and administrative penalties, plus accrued general interest charges, arising out of notices of default assessment for the financial years ended 30 June 2012, 2013 and 2014.

3    The application for summary judgment relates only to paragraph 1 of the originating application. The remaining paragraphs remain part of the ongoing proceedings, and concern the seeking of relief in relation to various share transfers and share issues by way of declarations (including as to resulting trusts) and share transfer orders.

4    Also on 2 March 2016, the Commissioner filed and moved ex parte upon an interlocutory application for freezing orders. That application was granted the same day by Wigney J until 7 March 2016.

5    On 7 March 2016, the matter, having been allocated to my docket, came before me for any further interlocutory hearing and for directions. I extended the freezing order until further order of the Court without objection. I also made orders for service of process on various of the other nine respondents. The matter was subsequently listed for hearing today for a foreshadowed interlocutory application for summary judgment.

Application and legislative framework

6    As the application proceeded today with counsel for both parties, it was common ground that I would be able to be satisfied that the jurisdictional threshold for summary judgment was met, by reason of the structure of the taxation legislation applicable. It is therefore agreed that in the application of the law, both statute and case law, Mr Ornelas has no reasonable prospect of successfully defending against the relief sought in paragraph 1 of the originating application. In short form, the reason for that sensible concession on behalf of Mr Ornelas is as follows:

(a)    all that is required for summary judgment to be available under both r 26.01(1)(a) of the Rules and s 31A(1) of the FCA Act is that Mr Ornelas has no reasonable prospect of successfully defending the part of the proceedings for which judgment is sought by the Commissioner;

(b)    a defence need not be hopeless or bound to fail for it to have no reasonable prospect of success: see s 31A(3) of the FCA Act;

(c)    while the power to summarily terminate proceedings, or a part of proceedings, must always be attended with caution and not decided lightly, where the success of proceedings is critically dependent upon a proposition of law which would contradict a binding decision of the High Court, the Court hearing the application under s 31A could justifiably conclude that the proceedings had no reasonable prospect of success: Spencer v The Commonwealth [2010] HCA 28; (2010) 241 CLR 118 at 131-2 [24]-[25] and 141 [60]; and

(d)    full weight must be given to the expression “no reasonable prospect” in s 31A(1), such that this Court may exercise the power under that provision if, and only if, satisfied that test is met, and it should not be read as confined to cases of a kind which fell within earlier, different procedural regimes: Spencer at 141 [60].

7    On this application for summary judgment, I am able to be satisfied that Mr Ornelas has no reasonable prospect of successfully defending the claim at paragraph 1 of the originating application, for the following reasons:

(a)    section 175 of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) and s 350-10(1) of Schedule 1 to the TAA (which is in substantially similar terms to the former s 177 of the ITAA 1936) and related provisions have the effect that production of a notice of assessment is conclusive evidence of the due making of the assessment and that the amounts and particulars in the notices of assessment are correct other than in proceedings under Part IVC of the TAA on a review or appeal relating to the assessment, which is not these proceedings;

(b)    the production of a notice of assessment gives rise to a present debt, not one that arises in future if payment is not made by the date specified in the notice: Deputy Commissioner of Taxation (ACT) v Sharp (1988) 91 FLR 70; (1988) 19 ATR 1515 at 1519;

(c)    in any event, the certificate under s 255-45 of the TAA establishes that each of the three notices of assessment, plus a notice of assessment of shortfall penalty for the financial years ended 30 June 2012 and 30 June 2013, plus a notice of assessment of penalty for failing to provide a document for the financial year ended 30 June 2014, all notices having been issued on 2 March 2016, were, as at 24 March 2016, debts due and payable to the Commonwealth by Mr Ornelas;

(d)    none of the three jurisdictional error limitations on the various assessments taking effect according to their terms are applicable, in that it is not contended, and there is no basis for me to conclude, that any of them are tentative, provisional or the product of maladministration: Commissioner of Taxation v Futuris Corporation Limited [2008] HCA 32; (2008) 237 CLR 146 at 157 [24]-[25]; Roberts v Deputy Commissioner of Taxation [2013] FCA 1108; (2013) 228 FCR 280 at 285 [19]; see also Pratten v Commissioner of Taxation [2015] FCA 1357 at [24]-[26];

(e)    the matters excluded from the challenge to the correctness of an assessment by way of objection, appeal to the Administrative Appeals Tribunal or this Court are not narrowly confined, this being in accordance with legislative policy to give a full opportunity to object by contesting liability in every respect;

(f)    as this is not a Part IVC appeal, the presumptive effect of the provisions referred to above must be given full force and effect: see Federal Commissioner of Taxation v Dalco (1990) 168 CLR 614 at 621-622;

(g)    no defence has been filed in these proceedings to the relief claimed in paragraph 1 of the originating application by Mr Ornelas and none has been foreshadowed, with it being conceded that he has no defence in this forum;

(h)    the manifest and historical policy of tax legislation in Australia has been to give a taxpayer a full opportunity to object to an assessment and to contest liability, while at the same time to require that in proceedings for the recovery of the tax, the taxpayer will be bound by the assessment and will not be able to go behind it: McAndrew v Federal Commissioner of Taxation (1956) 98 CLR 263 at 270;

(i)    the overall legislative regime continues to be: “a clear policy in favour of the revenue against the taxpayer”: Trade World Enterprises Pty Ltd v Deputy Commissioner of Taxation [2006] VSCA 191; (2006) 64 ATR 316 at 322 [19];

(j)    the legislation places the Commissioner in a “position of special advantage”: Clyne v Deputy Commissioner of Taxation (1983) 57 ALJR 673 at 674-675; and

(k)    the Commissioner is generally free to pursue recovery proceedings despite the pendency of Part IVC proceedings: Southgate Investment Funds Ltd v Deputy Commissioner of Taxation [2013] FCAFC 10; (2013) 211 FCR 274 at 293-295 [77].

8    Mr Ornelas has not commenced proceedings under Part IVC of the TAA but rather at this stage is only addressing the assessments by way of objection. But even if he had, or was foreshadowing, bringing proceedings under Part IVC, s 14ZZR of the TAA provides that:

The fact that an appeal is pending in relation to a taxation decision does not in the meantime interfere with, or affect, the decision and any tax, additional tax or other amount may be recovered as if no appeal were pending.

9    Section 14ZZR is an important part of the ongoing legislative commitment to maintain the long-standing advantage of the Commissioner whereby the underlying basis for an assessment may be challenged, but in the meantime its enforcement ordinarily may not. If the taxpayer ultimately succeeds, then the remedy lies in reimbursement, and any other remedies that might arise, not in preventing recovery pending that outcome.

10    The overall effect of the legislation and case law is that Mr Ornelas does not have any means in these proceedings, legal or factual, to resist judgment. If this matter had been listed for trial rather than summary judgment, there is no room to doubt that the Commissioner would have succeeded because of the effect of the legislative provisions I have already referred to.

Discretion to order summary judgment

11    I turn now to the question of whether or not I should exercise the discretion to order summary judgment that the Commissioner is entitled to. In that regard, it was common ground that Mr Ornelas was advancing a serious challenge to the assessments by way of objection. I was not encouraged by either party to consider the merits of the objections beyond that characterisation.

12    The primary reason why the Commissioner submitted that I should, in the exercise of discretion, order summary judgment, was the legislative regime I have already referred to, as supported by numerous cases, including Southgate, Deputy Commissioner of Taxation v Chemical Trustee [2010] FCA 1297; (2010) 81 ATR 237 and Snow v Deputy Commissioner of Taxation (1987) 14 FCR 119 at 139.

13    In Snow, French J, in considering the question of a stay, summarised the authorities to seven propositions, contemplating its exercise only in relatively extreme circumstances, such as abuse of office by the Commissioner or extreme personal hardship. Those principles in relation to a stay helpfully inform the exercise of discretion in this case.

14    The Full Court in Southgate at 287 [49]-[50] endorsed Snow. Their Honours at 294 [77] extracted a number of principles concerning stays from the case law, including that even bankruptcy is generally not of itself an extreme hardship. It was not suggested that Mr Ornelas faced any particular hardship, let alone hardship greater than bankruptcy.

15    It was submitted on behalf of Mr Ornelas that I should exercise the discretion and not order summary judgment either at all, or alternatively, at this stage (which was effectively an application for a stay in the alternative). The additional reasons advanced for Mr Ornelas seeking that outcome and the Commissioner’s response are as follows:

(a)    Mr Ornelas disclosed an asset position of just under $2.14 million

The Commissioner said that this was neither here nor there in light of the legislative regime. I agree.

(b)    The nature of the substantive relief sought in the rest of the originating application

The Commissioner said this was either neutral or favoured him. Rather than form a view on either of those points, in my view this has little or no bearing on the exercise of the discretion and, even if it does, carries little or no weight.

(c)    The existence of the freezing orders

The Commissioner said that this was not the same as, nor a substitute for, judgment. I agree, not least because freezing orders go no further and, of course, cannot be enforced in satisfaction of a debt, yet enforcement is the very basis for the differential regime represented in the legislation and in the case law.

(d)    The fact of outstanding notices of objection

The Commissioner said this was not any reason to stay judgment. I agree. Again, that is the deliberate essence of the legislative regime.

16    It was also suggested that Mr Ornelas would or might suffer prejudice by reason of the application of the principle that a cause of action merges in judgment. Mr Ornelas said that this might end up giving him no basis for the objections. I agree with the Commissioner’s submission that there is no substance to that concern for the reasons identified in Chemical Trustee at 254 [64].

17    Finally, it was suggested that Mr Ornelas would be left in a position of substantial inequality and that there was a risk of bankruptcy. As noted above, bankruptcy is not considered of itself to be extreme hardship. In any event, evidence of Mr Ornelas’ asset position of just under $2.l4 million is comfortably in excess of the amount sought which I have already identified of just over $1.3 million. I consider the reference to an amorphous inequality to be even less compelling.

18    It follows that I consider that the Commissioner has made good his application for summary judgment. It should be granted. I order judgment to the Commissioner against Mr Ornelas in the sum sought of $1,319,172.91. Mr Ornelas must pay the Commissioner’s costs.

Associate:

Dated:    29 April 2016

SCHEDULE OF PARTIES