FEDERAL COURT OF AUSTRALIA

Better Mortgage and Financial Services Pty Ltd v Deputy Commissioner of Taxation, in the matter of Better Mortgage and Financial Services Pty Ltd [2020] FCA 675

ORDERS

THE COURT ORDERS THAT:

1.    The originating process lodged 31 October 2019 is dismissed.

2.    The plaintiff pay the defendant’s costs as agreed or assessed.

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

REASONS FOR JUDGMENT

FARRELL J:

1    These are reasons for orders made on 15 May 2020 dismissing an originating process dated 31 October 2019, lodged with the Court on that date by Better Mortgage and Financial Services Pty Ltd (Better Mortgage). Better Mortgage applied under s 459G(1) of the Corporations Act 2001 (Cth) to set aside a statutory demand issued by the Deputy Commissioner of Taxation (DCT) dated 4 October 2019. The statutory demand claimed the amount of $1,092,442.95.

2    The schedule to the statutory demand set out the debts claimed by the DCT as follows:

3    In the originating process, Better Mortgage said that the statutory demand should be set aside because:

(1)    There is a genuine dispute as to the existence of the debt pursuant to s 459H(1)(a) of the Corporations Act; and

(2)    There are ongoing proceedings relating to a separate entity which will affect the determination of the debt pursuant to s 459J(1)(b) of the Corporations Act.

It sought orders under ss 459G(1) and 459J(1)(b) of the Corporations Act.

4    The applicant relied on affidavits affirmed by Patrizia Hubbard (Ms Hubbard) on 31 October 2019 and 15 November 2015.

5    In her affidavit dated 31 October 2019, Ms Hubbard deposed as follows:

1.    I am the director of Better Mortgage and Financial Services Pty Ltd (BMFS) and I am authorised to make this affidavit on the Applicant's behalf.

2.    Alex Hubbard (Alex) is my husband, with who I have been separated from since September 2018.

 3.    Alex and I were both employed by BMFS.

4.    I am the director of a second company, Milo Projects Pty Ltd ACN 144 882 575 (Milo Projects).

5.    I note that Milo Projects is the subject of separate proceedings (second proceedings) before the Federal Court.

6.    On 12 August 2019, Milo Projects was served with a statutory demand issued 9 August 2019 in the sum of $81,103.21.

7.    A copy of the statutory demand dated 9 August 2019 is enclosed and marked PH1.

8    On 30 August 2019, I instructed my solicitors to commence proceedings and lodge an application to set aside the statutory demand issued against Milo Projects.

9.    A copy of the signed Originating Process to set aside the statutory demand and affidavit is enclosed and marked PH2.

10.    The statutory demand against Milo Projects is being objected to on the grounds that it is not a trading company, and therefore there is a dispute in relation to any debt owed to the ATO.

11.    The second proceedings are listed for hearing on 20 December 2019.

12.    In addition to issues relating to the second proceedings, Alex and I have had family law and criminal law proceedings (the proceedings) on foot for almost 12 months.

13.    As a result of the proceedings, neither Alex and I have been able to spend significant time work for BMFS or attending to outstanding legal or business-related issues.

14.     BMFS Has now been served a statutory demand by the Deputy Commissioner of Taxation.

15.    A copy of the statutory demand dated 9 August 2019 is enclosed and marked PH3.

6    The 31 October 2019 affidavit concluded as follows:

GROUNDS TO SET ASIDE

16.    The Applicant wishes to set aside the statutory demand as there is a genuine dispute with the Respondent.

17.    The Applicant has engaged both legal representation and accountants to prepare and finalise an objection to the Respondent's demand in relation to both these proceedings and the second proceedings.

18.    A copy of the email from the account in relation to the objection is enclosed and marked PH4.

19.    The Applicant further seeks to set aside the statutory demand pending the outcome of the second proceedings, which the Applicant asserts will have a direct affect on the determination of these proceedings.

7    From Ms Hubbard’s affidavit filed on 31 October 2019 it is clear that the “separate entity” to which she refers in Better Mortgage’s originating process was Milo Projects Pty Ltd (Milo Projects) and the “second proceeding” referred to in the affidavit is Milo Projects’ application to set aside a statutory demand issued by the DCT and dated 9 August 2019 in which the DCT sought payment of $81,103.21 (NSD1414/2019). The Court notes that, on 24 March 2020, the Court made orders by consent setting aside the statutory demand issued to Milo Projects by the DCT and ordering that the DCT pay Milo Projects’ costs in a specified lump sum amount. In the course of the hearing of Better Mortgage’s application, its legal representative conceded that there was no evidence that the finalisation of Milo Projects’ application had had or would have any bearing on the amount of the debt claimed in the DCT’s statutory demand served on Better Mortgage.

8    By the affidavit affirmed on 15 November 2019, Ms Hubbard deposed that Better Mortgage wishes to set aside the statutory demand as there is a genuine dispute with the DCT and that it had hired both legal representation and accountants to prepare and finalise objections. Attached to that affidavit were an email and engagement letters from Kelly + Partners (Tax Consulting) Pty Ltd addressed to Ms and Mr Hubbard which are discussed further at [19] below.

9    The Court notes that the DCT originally raised objections to [4] to [13] of Ms Hubbard’s affidavit of 31 October 2020 on the basis that the issues addressed in them were not relevant to this application. Better Mortgage pressed those paragraphs “as it is evidence directly related and relevant to matters between the parties which are of similar nature”. At the hearing, Better Mortgage’s legal representative explained that it did not seek to rely on similar evidence related to Milo Projects, but rather its relevance was to explain that Ms Hubbard, Better Mortgage’s sole director, had been delayed in dealing with Better Mortgage’s affairs due to addressing the issues with respect to Milo Projects, family law matters arising out of the Hubbards’ separation and certain criminal matters. Better Mortgage’s legal representative confirmed that Better Mortgage had not yet filed any objections to the taxation assessments referred to in the statutory demand. He submitted that there was a genuine dispute in relation to the assessments with which Better Mortgage had not yet been able to deal, although it had appointed taxation consultants. Following this explanation, the DCT’s legal representative indicated that it would not press its objections.

10    The DCT relied on the affidavit of Noeline Parker affirmed on 18 December 2019.

11    The parties relied on their written submissions.

12    In the DCT’s written submissions, the DCT submitted that the following debts were due and payable by Better Mortgage as at 4 October 2019:

(1)    Liabilities for income tax for which Better Mortgage was assessed pursuant to provisions of the Income Tax Assessment Act 1936 (Cth) in the amount of $133,859.07 (inclusive of general interest charges (GIC));

(2)    A Running Balance Account (RBA) deficit debt in the amount of $958,583.88 comprising:

(a)    liabilities for a “net amount” within the meaning of ss 195-1 and 17-5 of the A New Tax System (Goods and Services) Tax Act 1999 (Cth) (GST Act);

(b)    liabilities for administrative penalties imposed pursuant to Div 298 of Sch 1 of the Taxation Administration Act 1953 (Cth) for which Better Mortgage is liable under s 16-30 of that Schedule (the Failure to Withhold Administrative Penalties); and

(c)    GIC imposed on the balance of the RBA deficit debt at the end of each day where there is an RBA deficit debt pursuant to s 8AAZF(1) of the Taxation Administration Act.

13    Better Mortgage’s written submissions made no reference to the High Court’s decision in Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd [2008] HCA 41; (2008) 237 CLR 473 (DCT v Broadbeach). However, as observed by the DCT in written submissions, Better Mortgage’s written submissions do not appear to contend that there is a genuine dispute in respect of liabilities for income tax referred to above at [12(1)] or the “net amount” referred to above at [12(2)(a)]. The Court accepts that, whether or not that was intentional on Better Mortgage’s part (the query arises from the fact that Better Mortgage’s submissions do not suggest that these amounts should be treated as an “admitted amount” for the purposes of the application), Better Mortgage’s liability for those assessments is unimpeachable in proceedings to set aside a statutory demand having regard to DCT v Broadbeach at [57] and the statutory scheme for recovery of assessed liabilities (see s 350-10 of Sch 1 to the Taxation Administration Act).

14    In relation to the Failure to Withhold Administrative Penalties and GIC referred to at [12(2)(b) and (c)] above, the DCT submitted as follows:

10.    Pursuant to section 8AAZC of the [Taxation Administration Act], the Commissioner established and maintained a RBA in respect of the Company’s primary tax debts (the Company’s RBA). The Company’s liability for the Failure to Withhold Administrative Penalties are “primary tax debts” within the meaning of section 8AAZA of the [Taxation Administration Act].

11.    The Company’s liability for the Failure to Withhold Administrative Penalties were allocated to the Company’s RBA pursuant to section 8AAZD of the [Taxation Administration Act].

12.    From time to time the balance on the Company’s RBA was in favour of the Commissioner, and was accordingly an “RBA deficit debt” within the meaning of section 8AAZA of the [Taxation Administration Act].

13.    Pursuant to section 8AAZF(1) of the [Taxation Administration Act] GIC was imposed on the balance of the Company’s RBA at the end of each day where there is an RBA deficit debt. In this way the balance of the Company’s RBA was altered in the plaintiff’s favour by the addition of the daily GIC payable under section 8AAZF(1) of the [Taxation Administration Act].

14.    In these proceedings, the Commissioner has produced, insofar as is relevant to the Failure to Withhold Administrative Penalties:

(a)    an RBA statement dated 18 December 2019 which, pursuant to section 8AAZI of the [Taxation Administration Act], operates as prima facie evidence that the RBA was duly kept, and that the amounts and particulars of the statement are correct (Parker Affidavit at [24]); and

(b)    a certificate given under section 255-45 of Schedule 1 of the [Taxation Administration Act] stating that the Company is liable to the Commonwealth in the amount $1,110,440.24 as 18 December 2019, which certificate stands as prima facie evidence of the matters contained in it (Parker Affidavit at [31]).

15    Better Mortgage did not take issue with this technical analysis in its written or oral submissions. In its written submissions, Better Mortgage submitted that:

10.    The Applicant submits that the statutory demand should be set aside pursuant to s 459G of the Act on the basis that there is a genuine dispute as to the existence and amount of the debt.

11.    On or around 7 September 2019 the Applicant engaged Kelly + Partners Tax Consulting for making submissions and preparing objections to the Assessment for income tax, penalties and interest in respect of the amount assessed to the Applicant. [Footnote to Annexure PH4 of the First Affidavit and Annexure PH1 of the Second Affidavit]

12.    The genuine dispute between the Plaintiff and the Respondent included a review of transactions that have erroneously been included as income and includes analysis of industry benchmark to show that the assessments made by the Respondent is excessive. [Footnote to Page 84 and 85 of the First Affidavit, which is annexure PH4]

13.    It is submitted by the Applicant the debt is not payable as the debt related to the Running balance account deficit under the BAS provisions and general interest charge payable under section 8AAZF of the Taxation Administration Act 1953 is currently in dispute in part if not in the whole.

14.    It is submitted by the Applicant the debt is not payable as the returns taken to be notices of assessment are in dispute.

15.    It is submitted by the Applicant the debt is not payable as the General interest charge for late payment is irrelevant as the debts claimed by the creditor are in dispute.

16.    The debts allegedly owed by the Applicant to the Respondent are subject to a review.

17.    The Applicant says that the review arises out of an alleged tax debt with a related entity; namely Milo Projects Pty Ltd ACN 144 882 575.

18.    In early 2020 the Director received notice that the alleged tax debt owing by Milo Projects Pty Ltd was withdrawn on the basis of objections that were submitted.

19.    The Applicant submits it is currently working with its accountant in relation to objections as to the debt in the statutory demand dated 4 October 2019.

20.    On these grounds, the Applicant contends to set aside the statutory demand on the grounds that there is a genuine dispute on the existence of the debt.

21.    The Applicant accepts that s 459H of the Act recognises that some part of the debt may be the subject of a genuine dispute, while another part is not. Accordingly, in such circumstances, s 459H requires the Court to calculate a substantial amount for which the demand may remain valid by applying the formula in s 459H(2).

22.    The Applicant submits that s 459H(5)(a) defines ‘admitted amount’ as follows:

(a)    if the Court is satisfied that there is a genuine dispute between the company and the respondent about the existence of the debt--a nil amount; or

(b)    if the Court is satisfied that there is a genuine dispute between the company and the respondent about the amount of the debt--so much of that amount as the Court is satisfied is not the subject of such a dispute; or

  (c)    otherwise--the amount of the debt.

23.    Accordingly, in circumstances where the Court is satisfied that there is a genuine dispute as to the existence of the debt, then pursuant to s 459H(5), the Court is required to value the admitted amount as ‘nil’, and it follows that the Court must set the demand aside pursuant to s 459H(3).

16    There are several difficulties with Better Mortgage’s submissions.

17    First, annexure PH4 to Ms Hubbard’s 31 October 2019 affidavit and annexure PH1 to Ms Hubbard’s 15 November 2019 do not establish the proposition set out at [11] and [12] of Better Mortgage’s submissions. At annexure PH4 to the 31 October 2019 affidavit was a copy of an email from Mr Cohilj of Kelly + Partners to Ms Hubbard’s solicitors dated 31 October 2019 in which he said (emphasis added):

We provide below an update on where we are at with the objections for Milo Investments Pty Ltd (“Milo”) and Better Mortgage & Financial Services Pty Limited (“BMFS”).

We confirm that Kelly Partners Tax Consulting Pty Ltd are currently working with the Australian Taxation Office (“ATO”) on an objection for penalties for failure to withhold amounts allegedly paid by Milo.

The objection was lodged on 13 September 2019. The ATO officer assigned to the matter has conducted an initial review and has requested further information on the transactions involved. A subsequent submission was lodged on 28 October 2019. This submission contained additional contemporaneous documentation that confirms that the penalties applied are excessive.

In addition to the above submissions, we are now working through original bank records for Milo which were obtained last week from the ANZ bank. It is hoped that these records will provide further evidence that the penalties are excessive. In light of the submissions provided to the ATO, the ATO review officer is providing us with additional time to review the bank records recently obtained, so that further submissions can be made if necessary.

Based on the submissions made to date, and the additional information recently obtained, we are of the view that the objection lodged on behalf of Milo has a good chance of being allowed in full. As the assessments for BMFS are comprised of penalties for failure to withhold amounts, we have recommended to the director of BMFS that a similar analysis be undertaken for this company, so that the quantum and validity of the penalties imposed on BMFS can be considered. We are in the process of advising BMFS in relation to an objection and expect to be in a position to obtain instructions to file an objection in due course.

18    As can be seen from annexure PH4, although it may be said that the dispute between Milo Projects and the DCT included the matters set out in Better Mortgage’s submission at [11], Mr Cohilj’s email indicates that, as at 31 October 2019, he had not received instructions to perform the proposed analysis with respect to Better Mortgage.

19    Annexure PH1 contains the following documents:

(1)    An engagement letter from Kelly + Partners dated 7 September 2018. The scope of the engagement required Kelly + Partners to liaise with the Australian Taxation Office (ATO) concerning the Hubbards’ affairs in connection with an information request made by the ATO. The information request is not in evidence. The existence of this engagement letter is not evidence of a dispute with the ATO over the amounts claimed in the statutory demand;

(2)    An email dated 11 March 2019. In it, Mr Cohilj of Kelly + Partners sought confirmation of instructions given at a meeting with Ms and Mr Hubbard in relation to submissions to the ATO about Better Mortgage’s 2017 accounts, review of property transaction figures especially in relation to a project at West Pennant Hills, liaison with an officer of the ATO concerning when he intended to make assessments and some related matters. That email is not evidence of a dispute with the ATO. It appears to be preliminary to any assessment having been made; and

(3)    An engagement letter addressed to the Hubbards by Kelly + Partners dated 15 November 2019. The scope of engagement was:

Scope of engagement

Pursuant to our engagement letter of 7 September 2018, we set out below the specific scope of services that is proposed with respect to BMFS:

i)    Preparation of objection to assessments for income tax, penalties and interest in respect of the amounts assessed to BMFS. In the objection we will make submissions based on the 2017 BMFS accounts that were provided to the ATO with the view of reducing the overall tax liability.

ii)    The submission will include analysis of industry benchmarks to show that the assessments are excessive;

iii)    Review of bank statements to show transactions that have erroneously been included as income

Although there is provision for the client to “accept the above understanding of our business arrangements”, the acknowledgement is not signed.

20    At the hearing, the legal representative for Better Mortgage said that, due to the constraints on its sole director arising from Ms and Mr Hubbard’s separation and family law and criminal proceedings (the nature of which are undisclosed) and attending to the issues between the DCT and Milo Projects, it had not been possible for Ms Hubbard to attend to the work necessary to submit an objection with the ATO in relation to Better Mortgage. The legal representative conceded that no objection had been lodged with the ATO. There is no evidence before the Court that any of the possible objections referred to in the scope of the 15 November 2019 engagement letter have any substance or the extent to which that may affect any of the amounts claimed in the statutory demand if objections (when they are formulated) were successful.

21    Second, the Court notes the matters set out at [7] above.

22    Third, because it appears from Better Mortgage’s written submissions that it does not seek to impeach the DCT’s claims with respect to the items set out at [12(1)] and [12(2)(a)], and on the basis of DCT v Broadbeach at [57] any attempt to impeach those assessments could not be successful in these proceedings, it is difficult to understand the basis of Better Mortgage’s submission that the Court should value the “admitted amount” for the purposes of s 459H(5) at “nil”. Further, it is clear from the scope of the Kelly + Partners’ engagement letter dated 15 November 2019 that Better Mortgage is not in a position now to say how much, if any, of the amounts claimed in the statutory demand might ultimately be disputed or the basis on which the objection might be made.

23    In Better Mortgage’s written submissions it suggested that the relevant test for a “genuine dispute” was whether or not the dispute was “plainly vexatious or frivolous” or whether it involves a “plausible contention requiring investigation” and that the Court must be satisfied that the claim has “some substance”, relying on Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 at 787; Re UGL Process Solutions Pty Ltd [2012] NSWSC 1256 at [6] and Chadwick Industries (South Coast) Pty Ltd v Condensing Vaporisers Pty Ltd (1994) 13 ACSR 37 at 39. So much must be accepted.

24    In oral submissions, Better Mortgage’s legal representative submitted that it meets those tests. He submitted that, due to the constraints on its sole director referred to above, it had not been possible to advance the work of formulating objections on Better Mortgage’s behalf but an accountant had been engaged to investigate and dispute the debt claimed. He said that should be taken into account both for the purposes of establishing that there is a “genuine dispute” and for the purposes of establishing that there is “some other reason” for setting aside the statutory demand pursuant to s 459J because people must be given a fair opportunity to address the dispute. Better Mortgage’s legal representative acknowledged that he could not say that it would amount to “substantial injustice” if the statutory demand were not set aside.

25    The Court is not satisfied that Better Mortgage has established that there is a genuine dispute with respect to any of the matters set out at [12] above. While it is true that the task faced by a company challenging a statutory demand on the “genuine dispute” ground is by no means a difficult or demanding one and that all that is required is that the company show even one issue that has a sufficient degree of cogency to be arguable (see Panel Tech Industries v Australian Skyreach (No 2) [2003] NSWSC 896 at [18]), that has not been done in this case.

26    The Court accepts the DCT’s submission that the certificate attached to Ms Parker’s affidavit is prima facie evidence of a debt due to the Commonwealth: see Deputy Commissioner of Taxation v Epov [2008] NSWSC 1085 at [32]; Deputy Commissioner of Taxation v Vasiliades [2015] FCA 412 at [6]. To establish that there is a genuine dispute, the plaintiff must have deposed to facts which give rise to a conclusion that there is a genuine dispute about those debts.

27    The fact that Ms Hubbard was also the sole director of Milo Projects which did lodge an objection with the ATO and Mr Cohilj suggested “that a similar analysis be undertaken for this company, so that the quantum and validity of the penalties imposed on BMFS can be considered” says nothing about the objection that might properly be made by Better Mortgage. The fact that Mr Cohilj issued an engagement letter dated 15 November 2019 under which he is engaged to prepare objections does not take the matter any further; it is clear that the objections have not been formulated and he must do further investigation into the matters which might give substance to the suggested bases of dispute. The fact that the sole director of Better Mortgage has not been in a position to assist in progressing the objections does not lend substance to its claims. Accordingly, Better Mortgage has not met the generally low standard for establishing that there is a “genuine dispute”.

28    Nor does the Court accept that difficulties faced by the sole director preventing her from doing the work necessary to assist Better Mortgage’s professional advisors to formulate objections amounts to “some other reason” why the Court should set aside the statutory demand under s 459J. Even the legal representative for Better Mortgage could not say that substantial injustice would be caused if the statutory demand was not set aside.

29    It would be inconsistent with the evident purposes of Pt 5.4 of the Corporations Act (see Aussie Vic Plant Hire Pty Ltd v Esanda Finance Corp Ltd [2008] HCA 9; (2008) 232 CLR 314 at [14]) to accept that the difficulties which Ms Hubbard says she faces in having time to assist the accountant she has engaged to establish the basis for objections to the ATO is a sufficient basis to set the statutory demand aside.

30    The necessary conclusion is that Better Mortgage had not satisfied the Court that there is a genuine dispute with respect to the amount claimed in the statutory demand or that there was some other reason why the statutory demand should be set aside for the purposes of ss 459G and 459J. Accordingly the originating process was dismissed and the plaintiff required to pay the respondent’s costs as agreed or assessed.

Associate:     

Dated:    20 May 2020