FEDERAL COURT OF AUSTRALIA

Deputy Commissioner of Taxation v Huang [2019] FCA 2122

ORDERS

THE COURT ORDERS THAT:

1.    Judgment be entered in favour of the applicant against the first respondent in the sum of $140,607,780.88 together with general interest charges to the date of judgment.

2.    The first respondent is to pay the applicant’s costs of the proceeding, as agreed or taxed.

3.    The first respondent’s interlocutory application filed on 15 November 2019 be dismissed, with costs.

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

REASONS FOR JUDGMENT

JAGOT J:

1    There are two applications before me. The first is the Deputy Commissioner of Taxation’s application for judgment against the first respondent, Mr Huang, in the sum of $140,607,780.88, together with general interest charges to the date of judgment and an order for costs of the proceeding. The second is Mr Huang’s application for a stay of execution of the judgment.

The Deputy Commissioner’s application

2    As the Deputy Commissioner submitted, the evidence establishes that the sum of $140,607,780.88 is due and payable by Mr Huang to the Commonwealth as a tax debt, comprised as follows:

3    Mr Huang acknowledged that he had no defence to the Deputy Commissioner’s application, the tax debt being due and payable on the basis of the conclusive evidence of the notices of amended assessment issued against Mr Huang on 11 September 2019 for the tax years ended 30 June 2013, 30 June 2014 and 30 June 2015.

4    It follows that judgment should be entered in the Deputy Commissioner’s favour as sought.

Mr Huang’s application

Mr Huang’s submissions

5    Mr Huang seeks a stay of the execution of the judgment.

6    Mr Huang accepted that the principles identified in Southgate Investment Funds Limited v Deputy Commissioner of Taxation [2013] FCAFC 10; (2013) 211 FCR 274 at [77] were applicable. At [77] the Full Court said:

It is appropriate if we say something further regarding the criteria which may apply in determining whether or not execution of a judgment debt should be stayed. We agree with the observations of Hutley JA in Mackey at 289 [Deputy Commissioner of Taxation (NSW) v Mackey (1982) 45 ALR 284] that the discretion to grant a stay of the execution of a judgment debt based upon a taxation assessment involves “an open-ended discretion” and that it “is not possible to work out in advance all possible bases for the exercise of such a discretion and it would not be proper even to attempt to do so”. Bearing in mind those salutary words and without wishing to be prescriptive or exhaustive, we consider that it is possible, however, to extract from the caselaw the following general principles which guide the exercise of that discretion:

(a)    the power to grant a stay should be exercised sparingly and the taxpayer bears the onus of persuading the Court that a stay ought to be granted in the particular circumstances;

(b)    great weight must be given to the clear legislative policy manifested in provisions such as ss 14ZZM and 14ZZR of the TAA which give priority to the recovery of taxation revenue notwithstanding that a taxpayer has a Part IVC proceeding on foot. The Commissioner is placed by the legislation in a position of special advantage and is generally free to pursue recovery proceedings despite the pendency of Part IVC proceedings;

(c)    the merits of pending Part IVC proceedings may be a relevant consideration to be taken into account in the exercise of the discretion, but the court should not attempt to determine the merits unless it has sufficient material before it to do so and it should avoid speculation;

(d)    in cases where a judge is unable to form even a tentative view of the strength of Part IVC proceedings, it is unlikely that the judge’s discretion in refusing a stay will miscarry by reason only of the judge being unable on the material before him or her to reach a view as to the taxpayer’s prospects of success in having the assessment overturned;

(e)    it is too narrow a view of the discretion to grant a stay of proceedings or execution merely because Part IVC proceedings are pending, or because on review of those proceedings there appears to be an arguable case or complex questions to be determined by the AAT or the Court;

(f)    that is not to say, however, that the outcome of Part IVC proceedings has to be certain in the sense that they are bound to succeed or fail. That puts the bar too high;

(g)    in cases where the Court considers that it is in a position to assess the merits of pending Part IVC proceedings and that it is appropriate to do so, the weight to be attached to those merits will vary according to the relative strength of the merits. But the taxpayer needs to have more than merely an arguable case;

(h)    similarly, more weight would be given to the merits factor if the case is one where the Commissioner has abused his position or it is clear that the Commissioner is endeavouring to collect tax in defiance of a decision of the High Court or other superior court which is precisely in point;

(i)    due acknowledgment should be given to the asperity with which provisions such as ss 14ZZM and 14ZZR may operate, but in appropriate circumstances a court might consider that a stay is warranted in cases of extreme hardship to a taxpayer, noting however that:

(i)    the mere obligation to pay income tax of itself does not impose extreme hardship; and

(ii)    the possibility that the taxpayer may be bankrupted is generally not of itself an extreme hardship, however, different considerations may arise if, for example, it is demonstrated that the execution of a judgment debt would deprive the taxpayer of the financial resources needed to prosecute extant Part IVC proceedings;

(j)    irrespective of the merits of pending Part IVC proceedings, a stay will not usually be granted where the taxpayer is party to a contrivance to avoid liability to pay the tax; and

(k)    other considerations may need to be taken into account in determining whether to exercise the discretion in a particular case, such as any conduct on the part of the taxpayer or the Commissioner which impacts upon the efficient and expeditious conduct of Part IVC proceedings.

7    Mr Huang noted that although Southgate concerned the exercise of the discretion to grant a stay given extant proceedings under Pt IVC of the TAA 53 appealing against an objection decision, it has been held that the same principles apply to tax disputes in the objection phase: Deputy Commissioner of Taxation v Songa Offshore Pte Ltd [2013] FCA 839; (2013) 95 ATR 779 at [44]-[45].

8    Mr Huang submitted that three considerations took the case out of the ordinary course and justified the grant of a stay of execution of judgment. First, the strength of Mr Huang’s objections to the amended assessments. Second, the significance of the security that the Deputy Commissioner has over Mr Huang’s assets in Australia by reason of the freezing orders made on 21 October 2019, Mr Huang’s Australian assets being those against which the Deputy Commissioner can enforce the judgment: Deputy Commissioner of Taxation v Huang [2019] FCA 1728. Third, the prejudice which Mr Huang will suffer as a result of the fact that his Australian assets constitute properties in Chatswood which, if sold, would be worth less at the time of sale than they would be worth at the time Mr Huang’s foreshadowed Pt IVC proceedings when, in the event those proceedings are successful, Mr Huang will be entitled to reimbursement with interest calculated at the sum of 0.98 per cent per annum only: s 8I of the Taxation (Interest on Overpayments and Early Payments) Act 1983 (Cth) and s 8AAD of the TAA 53.

9    As to the first of these considerations, Mr Huang submitted that it was apparent that his objections to the amended assessments, lodged on 6 November 2019, were cogent and well-founded.

10    The amended 2014 assessment, which includes an amount of $105,303,942, depends on the Commissioner’s assumption, which was admittedly fostered by Mr Huang’s tax advisors, that a company he controlled (Jinhong Xicheng Investment Development Co Ltd or JHXC) was a controlled foreign company or CFC, so that income made by that company was attributable to Mr Huang for the 2014 tax year: Pt X of the ITAA 36. Mr Huang submitted that the Commissioner’s assumption was unsound. According to Mr Huang, in light of the law as identified by the High Court in Bywater Investments Limited v Commissioner of Taxation [2016] HCA 45; (216) 260 CLR 169, JHXC is not a CFC because it was at the relevant time a PT X Australian Resident, with the consequence that the income earned by JHXC is not attributable to Mr Huang. As the submissions for Mr Huang identified:

A company is only a CFC within Part X of the ITAA 1936 if it was a resident of a listed or unlisted country at the relevant time: s 340 ITAA 1936. The People’s Republic of China is an unlisted country.

Notwithstanding the taxation laws of any other country, a company will not be a resident of a listed or unlisted country for the purposes of Part X of the ITAA 1936 if it is a “Part X Australian Resident”: s 332(2), s 333(1)(b), s 333(2)(a).

A company is a Part X Australian Resident if it is a resident as defined by s 6 of the ITAA 1936, unless there is a double tax agreement in force in respect of the relevant foreign country and a tiebreaker provision of that double tax agreement deems the company to be a resident of the foreign country: s 317. There is a double tax agreement between Australia and the People’s Republic of China.

By s 6 of the ITAA 1936, a corporation is a resident of Australia (a) if it is incorporated in Australia; or (b) if not incorporated in Australia, carries on business in Australia, and has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia. These concepts are explained in Bywater at [39]-[41] and [77] per French CJ, Kiefel, Bell and Nettle JJ.

As explained in Bywater, a company which has its central management and control in Australia carries on business in Australia: Bywater at [57] per French CJ, Kiefel, Bell and Nettle JJ. Consequently, the critical question is whether the central management and control of JHXC was located in Australia in the 2014 year.

The CFC component of the 2014 Assessment can only stand if JHXC was not a Part X Australian Resident. JHXC would be a Part X Australian resident if it were both an Australian resident:

   a.    by reason of s 6 of the ITAA 1936; and

b.    by reason of the tiebreaker provision in the Agreement between the Government of Australia and the Government of the People's Republic of China for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (Australia-China Treaty) (which is given effect by s 5 of the International Tax Agreements Act 1953 (Cth)).

11    According to Mr Huang all indicia point to JHXC being an Australian resident. In particular, Mr Huang pointed out that the evidence establishes that:

a.    the First Respondent was the ultimate beneficial owner of 97.55% of JHXC: RFD Appendix A YD-1 [Exhibit YD-1] at 128;

b.    from the period 1 February 2013 when the First Respondent became an Australian tax resident to 30 June 2013, the First Respondent spent only 19 out of 138 days outside Australia: YD-1 at 54;

c.    from the period 1 July 2013 to 30 June 2014, the First Respondent spent only 58 out of 365 days outside Australia: YD-1 at 53-54;

d.    from the period 1 July 2013 to 30 June 2015, the First Respondent spent only 58 out of 365 days outside Australia: YD-1 at 52-53;

e.    the First Respondent was employed or otherwise engaged in the economically productive activities of the Yuhu Group in Australia: Deng [affidavit of Yi Deng sworn 16 September 2019] [68];

f.    JHXC was not a trading company and entered into a limited number of financing and (abortive) property development arrangements: RFD [86]-[92], [103]-[105] YD-1 at 90, 92-93.

12    Mr Huang would have it that the irresistible inference from these circumstances is that Mr Huang controlled the affairs of JHXC from Australia, which was his residence at the relevant time. As Mr Huang put it, the amended assessment for the 2014 year was based on the inherently improbable factual predicate that Mr Huang did not have central control of and manage JHXC in Australia, his place of habitual residence.

13    As to the tiebreaker provisions under the Australia China double tax treaty, Mr Huang said it may be assumed for present purposes that JHXC is a resident of China under its domestic law, albeit that there was no evidence about the domestic laws of China. The Australia-China Treaty provides for a corporate residency tiebreaker rule in Art 4 in these terms:

Where by reason of the provisions of paragraph (1) a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident solely of the Contracting State in which its place of effective management or head office is situated. However, where such a person has its place of effective management in a Contracting State and its head office in the other Contracting State, the person shall be deemed to be a resident solely of that other State.

14    The place of effective management of a company “may ‘ordinarily’ be the place where the board of directors makes its decisions, but ‘all relevant facts and circumstances must be examined to determine [where] the place of effective management’ of a company is located”: Bywater at [169]. Accordingly, in the present case, the place of effective management is the same as the place of central management and control of the company, which would be Australia for the reasons already advanced for Mr Huang. Mr Huang also said that the “head office” tiebreaker provision in the Australia-China treaty would also be resolved in favour of his contention. Mr Huang submitted that the expression contemplated a functional concept rather than a registered office or headquarters. As a special purpose vehicle JHXC does not have a head office so that test does not resolve its residency any differently from the place of effective management test.

15    For these reasons, Mr Hung said that his objection on the basis that JHXC is a Pt X Australian Resident and not a CFC was well-founded so that the increase in his assessable income for the 2014 tax year by some $105 million must be excessive within the meaning of ss 14ZZK and 14ZZO of the TAA 53. Mr Huang also noted that his objection disputed the Commissioner’s valuations and that he would be contending that even if JHXC is a CFC there was no taxable capital gain of the company in the 2014 tax year.

16    Mr Huang also objected to his 2013 amended assessment, the balance of his 2014 amended assessment, and his amended 2015 assessment in which the Commissioner had included in his assessable income so-called unexplained deposits which, according to Mr Huang’s objections, were in fact the repayment of loans.

17    Mr Huang submitted that in circumstances where it was common ground that he was a person of very considerable wealth in Hong Kong and China, before he became resident in Australia, it was not an unlikely inference that he would be in this position. According to Mr Huang, the burden of proof imposed on him by ss 14ZZK and 14ZZO of the TAA 53 did not demand that he disclose the identity of the borrowers but rather required an explanation for the receipt of those amounts which had been given in the objections. The explanation given is cogent and as long as Mr Huang’s credit was not impugned he will have shown the assessment to be excessive: Hua-Aus Pty Ltd v Commissioner of Taxation [2010] FCA 341; (2010) 184 FCR 430 at [45]; Ma v Commissioner of Taxation [1992] FCA 359; (1992) 37 FCR 225 at 230. Accordingly, there was a real prospect of success of the foreshadowed Pt IVC proceedings on this basis.

18    As to the second of these considerations, Mr Huang submitted that the only practical avenue for execution of the judgment was against Mr Huang’s assets in Australia consisting of two properties in Chatswood. The Deputy Commissioner, however, already had the freezing orders in place which prevented Mr Huang from dealing with those properties. Accordingly, to the extent practicable, the Deputy Commissioner has in place the security afforded by the freezing orders. By analogy to the position of a judgment creditor who has offered security for the judgment debt, this is a relevant factor in the exercise of the Court’s discretion: Kalifair Pty Limited v Digi-Tech (Aust) Limited; McLean Tenic Pty Ltd v Digi-Tech (Aust) Ltd [2002] NSWCA 383; (2002) 55 NSWLR 737 at [28]. There will be no prejudice to the Deputy Commissioner if the Court grants a stay of the execution of judgment. Further, Mr Huang has offered a second registered mortgage over his real property in Australia. The Deputy Commissioner rejected this genuine offer of security and should not be able to rely on this rejection as a reason for refusing the grant of the stay.

19    This leads to the third consideration, the prejudice to Mr Huang. The execution of judgment against the Chatswood properties would occur in a rising market. In circumstances where, if Mr Huang is ultimately successful in his Pt IVC appeals, the Deputy Commissioner has not undertaken to compensate Mr Huang for any appreciation in value between the time of sale and the determination of the Pt IVC proceedings, Mr Huang will be left with the statutory rate of interest, currently at 0.98%. The comparative prejudice to Mr Huang is another significant discretionary factor, which together with the merits of the objections and the proposed PT IVC proceedings are sufficient to outweigh the special position of the Deputy Commissioner, with the consequence that the Court should exercise its discretion to order a stay of execution of judgment.

Consideration

20    I am not persuaded by the submissions for Mr Huang. Rather, I find the submissions for the Deputy Commissioner compelling in the circumstances of this case.

21    As for the first consideration, the merits of Mr Huang’s objections and proposed Pt IVC proceedings, I consider that the Deputy Commissioner is correct to identify that the ultimate merits of the relevant issues will be heavily fact dependent. In circumstances where Mr Huang bears the onus of proof Mr Huang’s evidence will be of paramount importance, in particular his evidence about what he did, particularly when it is recognised that while resident in Australia Mr Huang also spent not insignificant amounts of time outside of Australia. Mr Huang gave no evidence for the purpose of the application for the stay. The evidence was left at the level of generalities (Mr Huang owns most of the shares in JHXC and spent substantial periods of time in Australia) and proposed inferences from those generalities (Mr Huang should be inferred to have been controlling JHXC in Australia so that JHXC is a Pt X Australian Resident). As the Deputy Commissioner submitted, however:

The question of the location of JHXC’s “central management and control” will turn upon a scrutiny of the course of business and trading by JHXC throughout the 2014 income year, including such matters as where meetings of its board (if held) were conducted; how, when and by whom, in practice, decisions were made with respect to the policy, direction, operations and transactions of the business; whether relevant decisions were made by Mr Huang, alone or in conjunction with others, at times during that year when he was physically present in Australia or when physically present in the People’s Republic of China (“PRC”); whether, in fact, the other directors of JHXC, who were located in the PRC, merely acquiesced in or implemented decisions already made by Mr Huang while located in Australia; and whether there was any absence of substantive decision-making by the other directors of JHXC, such that they operated as a mere puppet or cypher of Mr Huang.

22    Little, if any, of the evidence of this kind is before the Court. Instead, Mr Huang relies on a sparse number of confined facts and seeks inferences to be drawn in his favour from those facts, without having gone into evidence. This leaves the Court in the position which the Deputy Commissioner identified – namely, that there is an insufficient evidentiary basis upon which even a tentative view of the merits of Mr Huang’s objection about the status of JHXC may be reached. It is not possible to draw any conclusion about the strength of Mr Huang’s contentions as to the status of JHXC as a Pt X Australian Resident or not.

23    As the Deputy Commissioner also put it, it is simply not possible to reach any firm view as to whether the Australia-China Treaty would deem JHXC to be a resident of China or of Australia. JHXC’s place of effective management will depend on evidence of the same kind necessary to identify its place of central management and control. No evidence has been adduced about JHXC’s head office or its location, nor as to the content of Chinese law about the place of residence of companies incorporated in China or as to the identification or location of a registered office or head office. On this basis also, I agree with the Deputy Commissioner that insofar as the operation of the Australia-China Treaty is in issue the strength of Mr Huang’s contentions cannot be assessed in any meaningful way. All that could be done would be to embark on impermissible speculation.

24    Similar difficulties confound the submissions for Mr Huang about the unexplained deposits. There is insufficient evidence to enable any view to be reached about the merits of Mr Huang’s contentions. He has put forward an explanation in his objections and there is evidence he has considerable wealth in Hong Kong and China – but these matters alone do not inexorably lead to some kind of inference that the deposited funds involved loan repayments as claimed. Whether or not Mr Huang will need to disclose the identity of the borrowers need not now be determined. The relevant point for present purposes is that the merits of his contentions simply cannot be assessed in any meaningful way. I accept the submission for the Deputy Commissioner to the effect that the evidence, such as it is at this time, “fall[s] well short of establishing any degree of merit or strength in a contention that Mr Huang will be able to discharge his burden of proving under ss 14ZZK or 14ZZO of the TAA 53 that the amended assessments for the 2013, 2014 and 2015 income years are excessive and what the amended assessments should have been”.

25    For these reasons I agree with the Deputy Commissioners that what Mr Huang has put forward in support of his proposed PT IVC proceedings does not exhibit sufficient cogency to be a weighty matter in the discretionary exercise with respect to the grant of a stay of execution of judgment. Mr Huang may have an arguable case but even making that judgment would depend on the existence of evidence, which is not apparent in the present application. As it is, I agree with the Deputy Commissioner that Mr Huang has not shown that the merit or the strength of the objections are such as to be entitled to material, much less dispositive, weight in the exercise of the Court’s discretion to grant or withhold a stay.

26    Otherwise I also accept the Deputy Commissioner’s submissions as follows:

(1)    There is no suggestion that execution of judgment would deprive Mr Huang of the financial resources necessary to prosecute the proposed Pt IVC proceedings based on Mr Huang’s objections to the amended assessments.

(2)    The only prejudice identified to Mr Huang is the potential loss of the appreciation in value of the Chatswood properties if the Commissioner were to execute judgment against them. Prejudice of this kind is an issue in every case where the judgment debtor owns real estate. The prejudice is ameliorated to some extent by the right of interest should Mr Huang succeed in the Pt IVC proceedings. Otherwise it is for the judgment debtor, by evidence, to prove the extent of the alleged prejudice, which Mr Huang has not done. Further, the prejudice is contingent on Mr Huang succeeding in the Pt IVC proceeding and, for the reasons given, Mr Huang has not adduced sufficient material to enable any view to be reached as to the merit of his proposed Pt IVC proceedings.

(3)    The offer of security by Mr Huang should be given little weight as it was not on terms acceptable to the Deputy Commissioner.

(4)    The Deputy’s Commissioner’s refusal to undertake to make up any shortfall from the increased value of the Chatswood properties should judgment be executed against them and Mr Huang succeed in the Pt IVC proceedings is not a weighty factor as Mr Huang has not proven by evidence the extent of loss to which he may be subject.

(5)    On balance. the prejudice to Mr Huang is outweighed by the clear legislative policy which gives priority to the recovery of taxation revenue notwithstanding that a taxpayer has a Part IVC proceeding on foot: Southgate at [77].

27    I am not persuaded that Mr Huang has discharged his onus to obtain the grant of a stay of execution of judgment. Mr Huang has not established that he has anything more than a merely arguable case on the proposed Pt IVC proceedings. Otherwise the prejudice to him through the potential loss he might suffer if judgment is executed against the Chatswood properties and he ultimately succeeds in the PT IVC proceedings is not sufficiently material to deny the Deputy Commissioner the fruits of the judgment. This is particularly so having regard to the legislative policy manifested through the statutory provisions to the effect that priority is given to the recovery of taxation revenue notwithstanding that a taxpayer has a Part IVC proceeding on foot (or proposes to do so as in the present case).

28    Accordingly, orders as sought by the Deputy Commissioner should be made.

Associate:

Dated:    19 December 2019