Federal Court of Australia

ASZ21 v Commissioner of Taxation [2021] FCA 1304

ORDERS

THE COURT ORDERS THAT:

1.    The respondent’s interlocutory application filed on 19 February 2021 be dismissed.

2.    Subject to further order, the proceeding be listed for a case management hearing on a date to be fixed, not before 1 July 2022.

3.    The costs of the respondent’s interlocutory application be reserved.

4.    Subject to further order, the Court’s reasons for judgment of the date of these orders be and remain confidential to the parties for a period of seven days.

5.    There be liberty to apply.

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

REASONS FOR JUDGMENT

MOSHINSKY J:

Introduction

1    By his originating application dated 23 December 2020, the applicant seeks declaratory relief in relation to two capital gains tax issues relating to the year of income ended 30 June 2021.

2    On 19 February 2021, the respondent (the Commissioner) filed an interlocutory application seeking summary dismissal of the proceeding pursuant to s 31A(2) of the Federal Court of Australia Act 1976 (Cth) on the basis that: (a) the applicant has no reasonable prospect of successfully obtaining the declaratory relief sought; and/or (b) the proceeding is an abuse of the process of the Court. Among other things, the Commissioner contends that a proceeding under Pt IVC of the Taxation Administration Act 1953 (Cth) is a more appropriate vehicle to determine the issues raised by the proceeding.

3    For the reasons that follow, I have concluded that the Commissioner’s interlocutory application should be dismissed. However, as a matter of case management, I consider it appropriate to give the Commissioner time to investigate potentially relevant tax issues. Accordingly, I will order that the proceeding be listed for a case management hearing on a date to be fixed, not before 1 July 2022.

Overview of the proceeding

4    By his originating application, the applicant seeks declarations pursuant to s 39B of the Judiciary Act 1903 (Cth) or s 21 of the Federal Court of Australia Act. The applicant has filed a statement of contentions, which sets out his contentions and identifies two issues to be determined in the proceeding.

5    The issues relate to the blockchain network known as the Ethereum blockchain. The applicant contends that in 2014 he entered into a crowdfunding agreement known as Ether Product Purchase Agreement and was issued with a certain number of cryptographic tokens known as Ether or ETH (the Genesis ETH).

6    The applicant contends that the DAO (an acronym standing for decentralised autonomous organisation) was an Ethereum-based investor-directed venture capital fund announced in April 2016 where investors subscribed for and received DAO tokens proportionate to the ETH they deposited into a smart contract address in May 2016.

7    The applicant contends that in June 2016, a malicious actor or actors exploited a vulnerability in the DAO’s smart contract code to siphon off one-third of the ETH raised to a subsidiary account (the DAO Hack) and, due to the manner in which the DAO Hack was implemented, there was a 28-day period before which the stolen ETH could be transferred to a digital wallet address owned by the malicious actor or actors.

8    The applicant contends that, in response to the DAO Hack, by software update on 20 July 2016, the Ethereum blockchain split into two separate blockchains (the DAO Hard Fork) in respect of which:

(a)    one blockchain sought not to include the effect of the DAO Hack; and

(b)    one blockchain did include the effect of the DAO Hack.

9    The applicant contends that operators of computers supporting the Ethereum blockchain were able to choose to support one blockchain or the other, by choosing between different software updates. He contends that at the time of the DAO Hard Fork, he installed the default software update (which sought to restore all DAO participants to the position before the DAO Hack) and continued to use the Ethereum blockchain.

10    The applicant contends that he made two disposals of Genesis ETH (or alternatively, if the ETH held by the applicant before and after the DAO Hard Fork is not the same property, the post-DAO Hard Fork ETH) during the 2021 financial year, namely (omitting confidential details):

(a)    a disposal of a certain number of ETH in order to deploy a “non-fungible token” on the Ethereum blockchain linking to a copy of a certain thing, which is part of a virtual collection that sits in the applicant’s virtual house (the First Disposal); and

(b)    a disposal of a certain number of ETH via an online marketplace to third parties for a certain amount of Australian dollars (the Second Disposal),

(together, the Disposals).

11    The two issues raised by the proceeding can be stated as follows:

(a)    Whether the ETH held by the applicant before and after the DAO Hard Fork was the same property (the Property Issue). Another way of putting this issue is: whether the ETH disposed of by the applicant in the Disposals was acquired by him in 2014 under the crowdfunding agreement or, rather, in 2016 following the DAO Hack.

(b)    Whether the applicant’s ETH is a “personal use asset” within the meaning of s 108-20(2) of the Income Tax Assessment Act 1997 (Cth) (the ITAA 1997) such that any capital gain made by the applicant on the Disposals is disregarded pursuant to s 118-10(3) of the ITAA 1997 (the Personal Use Asset Issue).

12    Both issues are premised on the Disposals being on capital account rather than on revenue account.

13    In his originating application, the applicant seeks declarations to the following effect (omitting confidential details):

(a)    The ETH acquired by the applicant under the Ether Product Purchase Agreement is a “personal use asset” within the meaning of s 108-20(2) of the ITAA 1997.

(b)    The capital gain made by the applicant on the First Disposal is disregarded pursuant to s 118-10(3) of the ITAA 1997.

(c)    The capital gain made by the applicant on the Second Disposal is disregarded pursuant to s 118-10(3) of the ITAA 1997.

14    While none of these proposed declarations refers in terms to the Property Issue, the present application was conducted on both sides on the basis that the Property Issue is raised by the proceeding.

The interlocutory application

15    By his interlocutory application filed on 19 February 2021, the Commissioner seeks summary dismissal of the proceeding on the bases described in [2] above.

16    It is necessary to outline the procedural history of the interlocutory application.

17    The interlocutory application was the subject of a hearing on 15 April 2021. In the course of that hearing, and in the context of submissions by the applicant that his primary objective was to have the issues determined expeditiously and submissions by the Commissioner that the issues were more appropriately dealt with in a proceeding under Pt IVC of the Taxation Administration Act, I raised with the parties whether they might be able to reach agreement to “fast-track” the assessment and objection processes in relation to the 2021 income year with a view to the applicant commencing a proceeding under Pt IVC of the Taxation Administration Act that would “catch up” to this proceeding. It seemed to me that this could enable the applicant to achieve his objective of having the issues determined quickly, while also addressing the Commissioner’s concern that the issues be determined within the framework of a Pt IVC proceeding.

18    Following the hearing, the parties conferred in relation to the proposal and agreed on proposed consent orders. Those orders were made on 25 May 2021. In a note at the commencement of the orders, a timetable of steps relating to the assessment and objection processes was set out and it was stated that the parties had agreed to use “reasonable endeavours” to comply with the timetable. It was ordered that the further hearing of the Commissioner’s interlocutory application seeking summary dismissal be adjourned to a date to be fixed, and that the proceeding be listed for hearing on 24 January 2022 on an estimate of three to four days.

19    After the applicant filed his income tax return for the 2021 income year, the Commissioner took the view that it was not possible to comply with the timetable. In the Commissioner’s view, the applicant’s income tax return for the 2021 income year, as well as his income tax returns for the 2016-2020 income years, which were only filed recently, raised issues that required review or investigation.

20    In light of this, the matter was listed for a case management hearing on 10 August 2021. Following discussion with the parties, I made orders for the filing and service of further affidavit material and further submissions in relation to the Commissioner’s interlocutory application, and indicated that I would proceed to determine the interlocutory application.

21    The Commissioner relies on the following affidavits in support of the interlocutory application:

(a)    two affidavits of Bernard Andary, a lawyer employed by the Australian Government Solicitor, dated 19 February 2021 and 12 March 2021; and

(b)    an affidavit of David Chew, a lawyer employed by the Australian Government Solicitor, dated 9 August 2021. The affidavit was initially filed in unaffirmed form in circumstances where restrictions were in place due to the COVID-19 pandemic. It has now been filed in affirmed form.

22    The Commissioner relies on written submissions dated 12 March 2021, 9 April 2021, 17 August 2021 and 3 September 2021 and the oral submissions made at the hearings on 15 April 2021 and 10 August 2021.

23    The applicant relies on the following affidavits in opposition to the interlocutory application:

(a)    four affidavits of Joni Pirovich, a solicitor employed by Mills Oakley, dated 23 December 2020, 9 February 2021, 25 March 2021 and 2 August 2021; and

(b)    an affidavit of Ross Higgins, a partner of Mills Oakley, dated 26 August 2021.

24    The applicant relies on written submissions dated 26 March 2021 and 27 August 2021 and the oral submissions made at the hearings.

25    Having received the recent affidavits and submissions, I formed the view that irrespective of the outcome of the interlocutory application, the matter would not be ready for final hearing on 24 January 2022. Accordingly, in late September 2021 my chambers informed the parties that the hearing date would be vacated, and an order was made to that effect.

Applicable principles

26    I discussed the principles relating to summary dismissal in Tresize v National Australia Bank Limited [2020] FCA 902 at [75]-[79]. I set out the substance of those paragraphs in the following paragraphs.

27    Section 31A of the Federal Court of Australia Act provides in part:

(2)    The Court may give judgment for one party against another in relation to the whole or any part of a proceeding if:

(a)    the first party is defending the proceeding or that part of the proceeding; and

(b)    the Court is satisfied that the other party has no reasonable prospect of successfully prosecuting the proceeding or that part of the proceeding.

(3)    For the purposes of this section, a defence or a proceeding or part of a proceeding need not be:

(a)    hopeless; or

(b)    bound to fail;

for it to have no reasonable prospect of success.

(4)    This section does not limit any powers that the Court has apart from this section.

28    Rule 26.01 of the Federal Court Rules 2011 provides in part:

26.01    Summary judgment

(1)    A party may apply to the Court for an order that judgment be given against another party because:

(a)    the applicant has no reasonable prospect of successfully prosecuting the proceeding or part of the proceeding; or

(b)    the proceeding is frivolous or vexatious; or

(c)    no reasonable cause of action is disclosed; or

(d)    the proceeding is an abuse of the process of the Court; or

…

(4)    If an order is made under subrule (1) dismissing part of the proceeding, the proceeding may be continued for that part of the proceeding not disposed of by the order.

29    Section 31A was discussed by the High Court in Spencer v Commonwealth (2010) 241 CLR 118 (Spencer). In that case, Hayne, Crennan, Kiefel and Bell JJ stated at [53]:

… s 31A departs radically from the basis upon which earlier forms of provision permitting the entry of summary judgment have been understood and administered. Those earlier provisions were understood as requiring formation of a certain and concluded determination that a proceeding would necessarily fail. That this was the basis of earlier decisions may be illustrated by reference to two decisions of this Court often cited in connection with questions of summary judgment: Dey v Victorian Railways Commissioners and General Steel Industries Inc v Commissioner for Railways (NSW).

(Footnotes omitted.)

30    Their Honours continued at [56] and [58]-[60]:

56    Because s 31A(3) provides that certainty of failure (“hopeless” or “bound to fail”) need not be demonstrated in order to show that a plaintiff has no reasonable prospect of prosecuting an action, it is evident that s 31A is to be understood as requiring a different inquiry from that which had to be made under earlier procedural regimes. It follows, of course, that it is dangerous to seek to elucidate the meaning of the statutory expression “no reasonable prospect of successfully prosecuting the proceeding” by reference to what is said in those earlier cases.

…

58    How then should the expression “no reasonable prospect” be understood? No paraphrase of the expression can be adopted as a sufficient explanation of its operation, let alone definition of its content. Nor can the expression usefully be understood by the creation of some antinomy intended to capture most or all of the cases in which it cannot be said that there is “no reasonable prospect”. The judicial creation of a lexicon of words or phrases intended to capture the operation of a particular statutory phrase like “no reasonable prospect” is to be avoided. Consideration of the difficulties that bedevilled the proviso to common form criminal appeal statutes, as a result of judicial glossing of the relevant statutory expression, provides the clearest example of the dangers that attend any such attempt.

59    In many cases where a plaintiff has no reasonable prospect of prosecuting a proceeding, the proceeding could be described (with or without the addition of intensifying epithets like “clearly”, “manifestly” or “obviously”) as “frivolous”, “untenable”, “groundless” or “faulty”. But none of those expressions (alone or in combination) should be understood as providing a sufficient chart of the metes and bounds of the power given by s 31A. Nor can the content of the word “reasonable”, in the phrase “no reasonable prospect”, be sufficiently, let alone completely, illuminated by drawing some contrast with what would be a “frivolous”, “untenable”, “groundless” or “faulty” claim.

60    Rather, full weight must be given to the expression as a whole. The Federal Court may exercise power under s 31A if, and only if, satisfied that there is “no reasonable prospect” of success. Of course, it may readily be accepted that the power to dismiss an action summarily is not to be exercised lightly. But the elucidation of what amounts to “no reasonable prospect” can best proceed in the same way as content has been given, through a succession of decided cases, to other generally expressed statutory phrases, such as the phrase “just and equitable” when it is used to identify a ground for winding up a company. At this point in the development of the understanding of the expression and its application, it is sufficient, but important, to emphasise that the evident legislative purpose revealed by the text of the provision will be defeated if its application is read as confined to cases of a kind which fell within earlier, different, procedural regimes.

(Footnotes omitted.)

31    See also Spencer at [24] per French CJ and Gummow J and Trkulja v Google LLC (2018) 263 CLR 149 at [22] per Kiefel CJ, Bell, Keane, Nettle and Gordon JJ.

32    Turning to the principles relating to abuse of process, in Tomlinson v Ramsey Food Processing Pty Ltd (2015) 256 CLR 507, French CJ, Bell, Gageler and Keane JJ stated at [25] that “abuse of process is capable of application in any circumstances in which the use of a court’s procedures would be unjustifiably oppressive to a party or would bring the administration of justice into disrepute”.

33    In Victoria International Container Terminal Ltd v Lunt (2021) 388 ALR 376, Kiefel CJ, Gageler, Keane and Gordon JJ (with whom Edelman J agreed) stated at [18]:

The fundamental responsibility of a court is to do justice between the parties to the matters that come before it. In the performance of that function, the doing of justice may require the court to protect the due administration of justice by protecting itself from abuse of its processes. The power to stay, or summarily dismiss, proceedings because one party has abused the processes of the court is concerned to prevent injustice, and that power is properly exercised where the conduct of the moving party is such that the abuse of process on its part may prevent or stultify the fair and just determination of a matter.

(Footnotes omitted.)

Consideration

34    The Commissioner’s primary submission is that the applicant has no reasonable prospect of successfully prosecuting the proceeding (or the proceeding is an abuse of process) because there is no reasonable prospect of the Court granting the declarations sought.

35    In making this submission, the Commissioner accepts that the Court should proceed on the assumption that the applicant could succeed in relation to both the Property Issue and the Personal Use Asset Issue. The Commissioner submits that summary dismissal is nevertheless appropriate in circumstances where the applicant has not made use of the appeal/review mechanisms provided for in Pt IVC of the Taxation Administration Act. The Commissioner submits that the failure to use those mechanisms, and the potential consequences of that failure, mean that the proceeding has no reasonable prospect of success, because even if the applicant proved the factual matters for which he contends, the Court would exercise its discretion to decline to grant any declaratory relief.

36    I accept that the existence of the appeal and review mechanisms in Pt IVC of the Taxation Administration Act may well be a strong discretionary consideration against granting the declaratory relief sought by the applicant in this proceeding. However, in my view, the very nature of the consideration – that is, a discretionary consideration – makes it insusceptible to summary resolution on the present interlocutory application. At this stage, I am not satisfied that the applicant’s application for declaratory relief has no reasonable prospect of success because the Court would, in the exercise of its discretion, decline to grant declaratory relief. The question whether the Court would, in the exercise of its discretion, decline to grant the declaratory relief is a matter that needs to be considered at a final hearing in the context of a full consideration of the facts and circumstances of the matter.

37    Further, I do not consider the proceeding to constitute an abuse of process. In oral submissions, senior counsel for the Commissioner submitted that the proceeding was an abuse of process in the sense that the wrong process was being used (that is, a declaratory proceeding, rather than a proceeding under Pt IVC of the Taxation Administration Act). However, the Commissioner accepts that the existence of Pt IVC is not an absolute bar to declaratory proceedings: see paragraph 48 of the Commissioner’s written submissions dated 12 March 2021. It is therefore necessary for the Commissioner to establish that there is something about the facts of this case that makes it an abuse of process to use a declaratory proceeding. The applicant has put forward an explanation as to why he has adopted the procedural course of commencing this proceeding for declaratory relief (primarily to obtain an early determination of the Property Issue and the Personal Use Asset Issue). While I tend to think that a Pt IVC proceeding would be a more appropriate procedural vehicle to determine these issues, I am not satisfied that the proceeding is an abuse of process on this basis.

38    I note for completeness that it is not suggested by the Commissioner that the Court would not have jurisdiction to grant the declarations sought by the applicant. The Commissioner accepts that the Court would have jurisdiction to grant the declarations: see the Commissioner’s written submissions dated 12 March 2021 at paragraph 45.

39    The Commissioner also submits that the proceeding will have no utility following the issue of a taxation assessment. The Commissioner refers to s 350-10(1) of Sch 1 to the Taxation Administration Act (a conclusive evidence provision). The Commissioner submits that the practical effect of the provision is that if the Commissioner makes an assessment and issues a notice of assessment to the applicant, the assessment can only be challenged in Pt IVC proceedings. The Commissioner accepts that if declaratory relief were granted before an assessment was made, those declarations (unless set aside on appeal) would be binding on the Commissioner. However, the Commissioner states that he can provide no commitment that he will refrain from making an assessment and issuing a notice of assessment to the applicant for the 2021 income year until the resolution of the proceeding. The Commissioner submits that, upon an assessment being issued, there would be no utility in this proceeding – the Commissioner could tender the notice of assessment in this proceeding and it would be conclusive evidence of the capital gains tax implications of the Disposals.

40    The difficulty with the Commissioner’s submissions, in the context of the present interlocutory application, is that as matters stand the Commissioner has not made an assessment and issued a notice of assessment to the applicant for the 2021 income year. It therefore cannot be said, at this stage, that the proceeding lacks utility on this basis.

41    In his outline of submissions dated 12 March 2021, the Commissioner submitted that the declarations sought may lack utility as the applicant’s income may in any event be below the tax-free threshold. This submission has been overtaken by further information that has come to light regarding the applicant’s income for the 2021 income year.

42    I now turn to consider the further submissions made by the Commissioner following the case management hearing on 10 August 2021, that is, in the Commissioner’s written submissions dated 17 August 2021 and 3 September 2021. The main point raised by those submissions is that, in light of the information contained in the applicant’s income tax returns for the 2016 to 2021 income years, the Commissioner now considers that there is an open question whether the gains the applicant made from cryptocurrency transactions should be assessed on revenue account instead of capital account. The Commissioner notes that the premise of both the Property Issue and the Personal Use Asset Issue is that the gains made by the applicant by the Disposals should be taxed on capital account. The Commissioner submits that, if gains from the applicant’s cryptocurrency transactions should be assessed on revenue account, there will be no utility in resolving either issue.

43    Accepting for present purposes that if the transactions were on revenue account the proceeding would lack utility, the difficulty is that the Commissioner has not yet had an opportunity to fully investigate this issue, and therefore does not have a concluded position. Further and in any event, even if the Commissioner had reached a concluded position that the transactions were on revenue account, it could not be said at this stage that the proceeding lacked utility on the basis that the transactions were on revenue account. The question whether the Disposals were on capital or revenue account would need to be determined at the final hearing.

44    For these reasons, the existence of a potential issue as to whether the Disposals were on capital account (as has been assumed) or on revenue account (as the Commissioner may wish to contend), does not provide a basis to summarily dismiss the proceeding. That is, I am not satisfied that the existence of this potential issue means that there is no reasonable prospect that the Court would grant the declaratory relief sought or that the proceeding is an abuse of process.

45    Accordingly, I dismiss the Commissioner’s interlocutory application seeking summary dismissal of the proceeding.

46    I now make some additional observations concerning the case management of the proceeding.

47    It is apparent from the affidavit of Mr Chew that the Commissioner needs time (estimated to be nine months from the commencement of a review) to investigate the capital account vs revenue account issue. This is a potentially relevant issue in connection with this proceeding because, as discussed above, if the transactions were on revenue account it would provide a reason not to grant the declaratory relief sought by the applicant. In these circumstances, I consider it appropriate to give the Commissioner that period of time to investigate before requiring the parties to take further steps in this proceeding. Accordingly, I will order that, subject to further order, the proceeding be listed for a case management hearing on a date to be fixed, not before 1 July 2022. I will reserve liberty to apply so that, if circumstances change, the parties can seek to have the matter listed for case management before then.

48    It may be that, before or shortly after that nine month period concludes, the Commissioner will be in a position to make an assessment for the 2021 income year, enabling the processes of objection and objection decision to take place and a proceeding under Pt IVC to be commenced. If that were to occur, it would supplant this proceeding. This would seem to offer a number of advantages, including that all of the taxation issues relating to the applicant’s liability to tax for the 2021 income year would be determined in a single proceeding.

Conclusion

49    For the above reasons, the Commissioner’s interlocutory application is to be dismissed. I will also make the case management order indicated above. I consider it appropriate at this stage to reserve the costs of the interlocutory application.

Associate:

Dated:    26 October 2021