Federal Court of Australia

Commissioner of Taxation v Balasubramaniyan [2022] FCA 374

ORDERS

THE COURT ORDERS THAT:

1.    The respondent pay a pecuniary penalty in total of $250,000 to the Commonwealth of Australia, with such amount constituting separate penalties as to $30,000 for each of the four contraventions of s 94 of the Foreign Acquisitions and Takeovers Act 1975 (Cth) and as to $65,000 for each of the two contraventions of s 95 of that Act.

2.    The respondent pay the applicant’s costs of and incidental to this proceeding.

3.    There be a stay of orders 1 and 2 for a period of 14 days from the date of these orders.

4.    Liberty to apply.

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

REASONS FOR JUDGMENT

BEACH J:

1    The contested matter before me concerns the fixing of a pecuniary penalty.

2    The respondent has admitted four contraventions of s 94 and two contraventions of s 95 of the Foreign Acquisitions and Takeovers Act 1975 (Cth) which establishes a regime to control investment by foreign persons in certain Australian assets.

3    The Commissioner seeks a pecuniary penalty in the aggregate of $425,000. Contrastingly, the respondent says that a pecuniary penalty, if it is to be imposed, should be $34,200. For the following reasons I have determined to impose an aggregate penalty of $250,000.

4    The respondent, a temporary resident but relevantly a foreign person, acquired interests in various Victorian properties, being 2/60 Warringa Crescent, Hoppers Crossing on 19 July 2016, 6 Oriole Drive, Werribee on 9 November 2016, 20 Argyle Crescent, Werribee on 14 August 2017, and 89 Fields Street, Aintree (vacant land) on 26 February 2018, without giving notice to the Treasurer as required under s 81 of the Act. I will refer to these contravening acquisitions as contraventions 1 to 4 respectively.

5    By his contravening conduct, the respondent made gross capital gains amounting to $710,300, although the net and ultimate gains to him were much less as I will explain later.

6    Section 94(1) provided at the relevant time:

A foreign person who proposes to take a notifiable action that is a residential land acquisition must not take the action if the foreign person has not given a notice relating to the action under section 81.

7    Generally speaking, the requirement on foreign persons to give a notice to the Treasurer before taking certain investment action is central to the regulatory regime established by the Act. Notification is the gateway through which all notifiable actions must pass, which then facilitates a decision whether to allow the action, impose conditions on the action, prohibit the action or, where the action has already been taken, to require the action to be undone. The Treasurer is also authorised to take action in the absence of such a notice.

8    The Act distinguishes between the concepts of “significant action” (ss 40 to 45) and “notifiable action” (ss 46 to 49). Moreover, such concepts bring within them conditions dealing with threshold tests such as s 52 concerning land.

9    A foreign person is not obliged to inform the Treasurer that they are proposing to take a significant action unless the action is also a notifiable action; only certain significant actions are also notifiable actions. However, a foreign person may choose to notify the Treasurer before taking a significant action for the certainty offered by a no objection notification. If a foreign person is given a no objection notification in relation to the significant action, and provided the person does not take any action which is not authorised by the Act, the Treasurer is not able to make a disposal order.

10    In broad terms, a notifiable action is a proposed action:

(a)    to acquire a direct interest in an agribusiness;

(b)    to acquire substantial interests in Australian entities; or

(c)    to acquire an interest in Australian land.

11    Generally, the action is only notifiable if the entity, business or land meets the threshold test.

12    I do not need to linger on the detail of the statutory framework in this respect as the contraventions in the present case have been admitted concerning s 94 dealing with the failure to give notice of notifiable actions, and s 95 which addresses a separate albeit related subject matter.

13    Section 95(1) provided at the relevant time:

A foreign person who is a temporary resident must not hold an interest in more than one established dwelling at the same time.

14    The respondent also contravened s 95(1) in several respects. He held an interest in the established dwellings on the Warringa Crescent property and the Oriole Drive property at the same time (contravention 5). This contravention began on 9 November 2016, when the applicant became bound under the contract of sale of the Oriole Drive property and ended on 30 April 2021 upon the transfer of the Warringa Crescent property to a third party purchaser. And for a period when he also held the interests the subject of contravention 5, the respondent held an interest in a third established dwelling, namely, the dwelling on the Argyle Crescent property (contravention 6). He acquired his interest in the Argyle Crescent property on 14 August 2017 and ceased to hold an interest in the Argyle Crescent property on 22 October 2019.

15    Now the Act was substantially modified in 2015 to facilitate the Commissioner’s role in administering aspects of the Act, particularly in relation to residential land. Further, at that time enforcement options were enhanced including the potential imposition of pecuniary penalties.

16    The maximum pecuniary penalties at the relevant time were:

17    Now at the time of contraventions 1 to 4, s 94(4) provided the maximum penalty for a contravention of s 94(1) as follows:

The maximum penalty for the contravention is the greatest of the following:

(a)    10% of the consideration for the residential land acquisition;

(b)    10% of the market value of the interest in the relevant residential land.

18    Section 94(4) was amended with effect from 1 January 2021 by increasing the maximum penalties from 10% to 25% of the relevant amounts and by adding as an alternative maximum penalty “the amount of the capital gain that was made or would be made on the disposal of the interest in the relevant residential land”.

19    Now the market value referred to in s 94(4) is to be tested at the time of the respondent’s disposal of the interest or the time of fixing the penalty if the interest has not been disposed of. This is apparent from the following matters.

20    First, the prohibited conduct is conduct directed at making profits or gains which are realised by holding the investment.

21    Second, the “greatest of the following” drafting device establishes maximum penalties capable of achieving deterrence in high value transactions. So, in relation to ss 94 and 95, the penalty is fixed to the value of the interest so that it will have the same impact on any gain made regardless of the value of the interest.

22    Third, the market value at the time of acquisition of residential land is already taken up in s 94(4) in the extended meaning of “consideration for the residential land acquisition” (ie, s 94(4)(b)). As the note to s 94(4) explains, “consideration” has a meaning defined in the Foreign Acquisitions and Takeovers Regulation 2015 (the Regulation). Regulation 14(3) contains a substitution rule which deems the value of consideration to be market value if the parties to the agreement are not arm’s length parties. I note that the Regulation was made on 26 November 2015. The date of assent of the Foreign Acquisitions and Takeovers Legislation Amendment Act 2015 (Cth) (the Amending Act) was 25 November 2015. The Amending Act repealed the former provisions of the Act in their entirety and replaced them with a re-written Act. So, if, under s 94(4), market value was tested at the time of contravention, the result would be no difference between 10% of the consideration and 10% of the market value.

23    Fourth, what is valued is the respondent’s interest in the relevant residential land. That interest exists for so long as the respondent holds it, but no longer.

24    Fifth, further confirmation is found in other civil penalty provisions that the time to test for market value is the time of disposal of the property or the time of fixing penalty. Section 98 also employs the phrase “the market value of the interest”, and in that context it is plain that if the respondent no longer holds the interest, the phrase “the market value of the interest” refers to a value to be determined at the time the respondent disposed of the interest.

25    Let me turn to the other two contraventions.

26    At the time of contraventions 5 and 6, ss 95(7) and (8) provided the maximum penalty for a contravention of s 95(1) as follows:

(7)    The maximum penalty for a contravention of subsection (1) or (4) is the greatest of the following:

(a)    the amount of the capital gain that was made or would be made on the disposal of the interest mentioned in subsection (8);

(b)    25% of the consideration for the acquisition of that interest;

(c)    25% of the market value of that interest.

(8)    The interest is:

(a)    if at the time of determining the maximum penalty the foreign person still holds an interest in more than one established dwelling—the interest relating to the established dwelling or dwellings that were most recently acquired by the person; and

(b)    otherwise—the interest relating to the established dwelling or dwellings that were most recently disposed of by the person.

27    Further, s 98, which applies to the calculation relevant here, provided:

Working out capital gains

For the purposes of this Subdivision, the amount of the capital gain that was made or would be made on the disposal by a person (the offender) of an interest to another person (the third party) is the higher of the following amounts:

(a)    if an agreement has been entered into in relation to disposing of the interest to the third party—the difference between:

(i)    the consideration for the acquisition by the third party; and

(ii)    the amount for which the offender purchased the interest;

(b)    in any case—the difference between:

(i)    the market value of the interest; and

(ii)    the amount for which the offender purchased the interest.

28    Two further observations may be made.

29    First, s 95(8) refers to “the interest relating to the established dwelling”. Plainly enough it means the proprietary estate held by the respondent in real property to which the dwelling is affixed.

30    Second, the words “or dwellings” in s 95(8)(a) and (b) indicate that where the respondent holds multiple established dwellings, say, three or more, the interests in each established dwelling exceeding the first are counted in the penalty calculation.

31    For contravention 5, the interest measured is the respondent’s interest in the Oriole Drive property, being the interest relating to the established dwelling that was most recently disposed of by the respondent.

32    For contravention 6, the interests measured are the respondent’s interests in both the Oriole Drive property and the Warringa Crescent property, being the interests relating to the established dwellings that were most recently disposed of by the respondent.

33    Contravention 5 commenced when the Oriole Drive property was purchased; at that time the Warringa Crescent property was held. I should note that contraventions 5 and 6 are a little tricky in the sense that when contravention 6 started, being the purchase of the Argyle Crescent property, contravention 5 in one sense “finished”. But when the Argyle Crescent property was disposed of, contravention 5 resumed and then ultimately ceased when the Warringa Crescent property was sold.

34    Before proceeding further, let me say something about infringement notices.

35    The Commissioner chose not to proceed in this case by way of infringement notices under the Regulatory Powers (Standard Provisions) Act 2014 (Cth) (the RP Act). The respondent would have been liable to a tier 2 infringement notice in respect of each contravention of the Act. For breaches of ss 94 and 95, the Act prescribes these as provisions subject to an infringement notice under Part 5 of the RP Act. Had the Commissioner proceeded by way of infringement notices, the applicable penalty amount would have been 60 penalty units or $10,800 for offences on or before 30 June 2017 and $12,600 for offences on and after 1 July 2017. Contraventions 1 and 2 happened before 30 June 2017, and contravention 5 commenced before 30 June 2017 and ended on 30 April 2021.

36    The maximum penalty notices that could have been issued to the respondent in respect of the contraventions total $68,400. Before me, the respondent contended that having regard to the totality of circumstances, I should consider this penalty appropriate with a discount of 50% to be applied, being $34,200. I should say now that I have rejected such a contention although I have taken this aspect into account.

37    Let me make one other point relevant to the statutory framework before descending into the facts.

38    Regulation 38(3) in the context of Division 3 of Part 3 of the Regulation permits a foreign person or temporary resident to acquire Australian residential land with an Australian citizen as joint tenants. Regulations 38(1) and (3) provide:

(1)    The excluded provisions do not apply in relation to an acquisition of an interest in residential land by a foreign person if a subsection of this section applies in relation to the acquisition.

…

(3)    Both of the following apply:

(a)    the person is the spouse or de facto partner (within the meaning of the Acts Interpretation Act 1901) of:

(i)    a person who is, at the time of acquisition, an Australian citizen; or

(ii)    a person who is, at the time of acquisition, the holder of a permanent visa (within the meaning of the Migration Act 1958); or

(iii)    a person who is, at the time of acquisition, the holder of a special category visa (within the meaning of that Act); or

(iv)    a person who, if the person had entered Australia lawfully immediately before the acquisition, would have been entitled to the grant, on presentation of a passport, of a special category visa (within the meaning of that Act);

(b)    the interest is held by the person and his or her spouse or partner as joint tenants.

39    The respondent is a “temporary resident” (s 4 of the Act) who for some of the relevant time was married to an Australian citizen. He says that he together with his wife beneficially acquired the four properties. As a temporary resident, he says that he was permitted under the Act to acquire one established dwelling to reside in subject to proper notification. A foreign resident is also permitted to acquire vacant land to develop subject to any conditionality imposed. He says that had appropriate notification occurred, two of the six contraventions would not have transpired. He also says that had proper registration of title occurred to reflect beneficial ownership, none of the contraventions would have arisen. He says that it is through this lens that a penalty must be set and deterrence considered. I will return to these matters later, but for the moment let me set out some of the facts and also the factual assertions made by the respondent which have problematic aspects.

Background facts

40    In February 2015, the respondent, a non-citizen, moved to Australia on a temporary visa. He claims to have a Masters degree in finance. He first visited Australia in February 2012. He returned to Australia in February 2015 and applied for a regional employer nomination visa on 19 February 2016. In his visa application, the respondent nominated “real estate representative” as his sponsored position. The visa application was refused and the respondent sought review of the decision in the Administrative Appeals Tribunal (Cth), and later sought judicial review.

41    In early June 2016, the respondent apparently met his future wife and commenced a relationship. Apparently they were subsequently engaged on 5 August 2016 and married on 9 October 2017. His wife is an Australian citizen.

42    On 5 July 2016, the respondent made an offer of $350,000 to acquire the Warringa Crescent property. The contract of sale was conditional on obtaining a loan by 19 July 2016. In or about late July 2016, the respondent applied for a mortgage for the Warringa Crescent property. He says that he applied on behalf of his future wife and in their joint name. On 24 August 2016, Westpac declined the mortgage application.

43    He asserts that subsequently he was advised to not apply for a mortgage in their joint names as his future wife was a casual worker on a low income. He was advised that the best prospects of approval for a mortgage lay with him alone. As a consequence, he says that the mortgage was applied for and registered in his name, as was the title to the property, notwithstanding what he says was the joint financial contribution to the property.

44    On 5 September 2016, the Warringa Crescent property settled. Whilst the property was tenanted at the time, he says that he had arranged for the tenants to be given notice to vacate as soon as possible after settlement.

45    He says that his future wife contributed approximately $30,000 of the $75,000 of equity required to purchase and settle the Warringa Crescent property.

46    On 3 October 2016, he says that he and his future wife commenced residing in the Warringa Crescent property as their primary residence. He says that they immediately set about improving and renovating the unit. He estimates $35,000 was spent on improvements.

47    On 9 November 2016, he purchased the Oriole Drive property for $300,000. He says that the property was acquired with joint funds and mortgage payments were paid from pooled resources of himself and his wife.

48    At this time, apparently both he and his wife were earning well and they were keen to obtain their first investment property. He says that they decided that they would complete works on the Warringa Crescent property and lease that property out.

49    He says that they also spent considerable joint moneys renovating the Oriole Drive property and jointly contributed labour. He asserts that $155,000 was spent on improvements which he says are supported by photographs of the extensive works completed and in part by bills and receipts. I must say that on the evidence this all appears to be somewhat exaggerated.

50    He says that they moved into the Oriole Drive property as their primary residence in February 2017, and it remained the primary residence of the couple through to when the property was later disposed of.

51    On 14 August 2017, he purchased the Argyle Crescent property as an investment property. He says that at that time he and his wife were continuing to earn well, had a tenanted property, and were keen to continue to build their investment portfolio.

52    On 26 February 2018, he purchased the Fields Street property, which was vacant land, as an investment property.

53    The various acquisitions and dispositions gave rise to capital gains. The following table sets out each of the properties to which the contraventions relate and calculations as to the gross capital gains and the net gains, the latter being in contest:

54    I accept that an adjustment to gross capital gains is appropriate when considering a civil penalty. The respondent accepts a notional transaction cost of 5% as proposed by the Commissioner but says that this should be applied to the disposal price rather than to the gain, having regard to the fact that both duty and sales commission are calculated by reference to gross sales and not to realised gain. The respondent says that an appropriate adjustment for transaction costs is therefore $107,250. The respondent also accepts a notional capital gains tax contribution of 37% as proposed by the Commissioner, and so an appropriate adjustment for capital gains tax is therefore $270,211. Further, the respondent says that the gains achieved on the sales of the Warringa Crescent property and the Oriole Drive property were in part a result of significant renovation works undertaken by the respondent and his wife. As I have noted, he says that those works were approximately $35,000 in respect of the Warringa Crescent property, and $155,000 in respect of the Oriole Drive property. The respondent also says that it is also appropriate to consider that many other costs were borne by the respondent and his wife, including interest, rates and land tax. No adjustments for these amounts are reflected in the figures set out above. I will return to the question of gross and net gains later.

55    Let me pause here and deal with some general matters.

56    The respondent has asserted that each of the properties were acquired from joint resources, mortgages were serviced from pooled finances and the properties were considered to be jointly owned by the couple. Now originally the respondent filed affidavit evidence to support such assertions. But he did not attend for cross-examination and accordingly those affidavits were not admitted. Now if those assertions were accurate, the circumstance that the respondent held interests in residential land as a joint tenant with an Australian citizen may have relieved him from the obligation to give notice in respect of the acquisitions. But the assertions in my view were not made good. The respondent acquired all properties as sole proprietor.

57    I should also note that there are inconsistencies in the material before me that I otherwise admitted concerning the role of the respondent’s partner and later wife in terms of her involvement and cohabitation (or otherwise) with the respondent and at what points in time. It is also unclear whether the respondent ever had the genuine intention of making his partner a joint proprietor in relation to even the Warringa Crescent property, although there is some material to suggest that a joint finance application may have been made at one point. More generally, the material before me is murky to say the least in relation to any intention of joint ownership with respect to any of the properties.

58    Let me deal with three other matters before turning to the assessment of penalty directly.

59    First, the respondent asserts that he currently finds himself in financial hardship. But the material does not establish a complete picture of the respondent’s financial position. The evidence as to the net asset position of the respondent and his wife is unclear. But there is material before me to suggest that they have limited means. Further, the respondent and his wife may suffer health conditions that impact upon their ability to work and derive income.

60    Second, on the current material I am unable to conclude that the respondent was unaware of the existence of the foreign investment rules with respect to investment by foreign persons in residential real property.

61    Third, following the mediation conducted in this proceeding, the respondent admitted each of the matters alleged in the Commissioner’s concise statement and consented to the making of declarations of contravention. By doing so, the respondent has saved time and expense. But in my view the inferences as to contrition and assistance that might ordinarily be drawn from the respondent’s consent to declarations are somewhat diminished by the respondent’s various misstatements to the Commissioner’s compliance officers, including the respondent’s statements that he and his wife bought the properties jointly.

Relevant statutory provisions and principles

62    The determination and imposition of a pecuniary penalty for a contravention of the Act is dealt with by the RP Act.

63    In particular, ss 82 to 85 of that latter Act provide:

82    Civil penalty orders

Application for order

(1)    An authorised applicant may apply to a relevant court for an order that a person, who is alleged to have contravened a civil penalty provision, pay the Commonwealth a pecuniary penalty.

(2)    The authorised applicant must make the application within 6 years of the alleged contravention.

Court may order person to pay pecuniary penalty

(3)    If the relevant court is satisfied that the person has contravened the civil penalty provision, the court may order the person to pay to the Commonwealth such pecuniary penalty for the contravention as the court determines to be appropriate.

  (4)    An order under subsection (3) is a civil penalty order.

Determining pecuniary penalty

  (5)    The pecuniary penalty must not be more than:

(a)    if the person is a body corporate—5 times the pecuniary penalty specified for the civil penalty provision; and

(b)    otherwise—the pecuniary penalty specified for the civil penalty provision.

(6)    In determining the pecuniary penalty, the court must take into account all relevant matters, including:

(a)    the nature and extent of the contravention; and

(b)    the nature and extent of any loss or damage suffered because of the contravention; and

(c)    the circumstances in which the contravention took place; and

(d)    whether the person has previously been found by a court (including a court in a foreign country) to have engaged in any similar conduct.

83    Civil enforcement of penalty

(1)    A pecuniary penalty is a debt payable to the Commonwealth.

(2)    The Commonwealth may enforce a civil penalty order as if it were an order made in civil proceedings against the person to recover a debt due by the person. The debt arising from the order is taken to be a judgement debt.

84    Conduct contravening more than one civil penalty provision

(1)    If conduct constitutes a contravention of 2 or more civil penalty provisions, proceedings may be instituted under this Part against a person in relation to the contravention of any one or more of those provisions.

(2)    However, the person is not liable to more than one pecuniary penalty under this Part in relation to the same conduct.

85    Multiple contraventions

(1)    A relevant court may make a single civil penalty order against a person for multiple contraventions of a civil penalty provision if proceedings for the contraventions are founded on the same facts, or if the contraventions form, or are part of, a series of contraventions of the same or a similar character.

(2)    However, the penalty must not exceed the sum of the maximum penalties that could be ordered if a separate penalty were ordered for each of the contraventions.

64    The Commissioner is an “authorised applicant”; see s 80 of the RP Act and s 99(2) of the Act in its current form, as distinct from its form at the time of the contraventions. There is little doubt that the current form applies on standing and procedural questions.

65    Before proceeding further I should note that the paramount objective of a pecuniary penalty is deterrence, which has the two dimensions of general deterrence and specific deterrence. As I said in Australian Securities and Investments Commission v Westpac Banking Corporation (No 3) (2018) 131 ACSR 585; [2018] FCA 1701 at [117] to [119]:

It is well established that deterrence is the primary objective for the imposition of civil penalties (Australian Competition and Consumer Commission v Cement Australia Pty Ltd [2017] FCAFC 159 at [385] per Middleton, Beach and Moshinsky JJ; see also Australian Securities and Investments Commission v Commonwealth Bank of Australia (2018) 128 ACSR 289 at [62]). In Commonwealth v Director, Fair Work Building Industry Inspectorate (2015) 258 CLR 482; 326 ALR 476; [2015] HCA 46 at [55], the High Court approved of French J’s observation in Trade Practices Commission v CSR Ltd [1991] ATPR 41-076 at 52,152:

The principal, and I think probably the only, object of the penalties imposed by s 76 is to attempt to put a price on contravention that is sufficiently high to deter repetition by the contravenor and by others who might be tempted to contravene the Act.

In ASIC v CBA, I observed (at [62]) that the penalty:

must be fixed to ensure that the penalty is not to be regarded as an acceptable cost of doing business. As I have said, both specific and general deterrence are important. The need for specific deterrence is informed by the attitude of the contravener to the contraventions, both during the course of the contravening conduct and in the course of the proceedings. And the need for general deterrence is particularly important when imposing a penalty for a contravention which is difficult to detect.

The High Court considered civil penalty provisions in Australian Building and Construction Commissioner v Construction, Forestry, Mining and Energy Union (2018) 351 ALR 190; [2018] HCA 3. Kiefel CJ referred to “the deterrent effect which is the very point of the penalty” and “the purpose for which the power is given” (at [44]). Keane, Nettle and Gordon JJ reiterated (at [87]) that:

the principal consideration in the imposition of penalties for contravention of civil remedy provisions is deterrence, both specific and general; more particularly, the objective is to put a price on contravention that is sufficiently high to deter repetition by the contravener and by others who might be tempted to contravene.

66    Now where regulation of economic activity is involved, it is deterrence with a view to putting a price on the contravention(s) that is sufficiently high to deter repetition by the contravener and by others who might be tempted to contravene the Act that is the guiding theme. Moreover, the overarching requirement for a penalty which achieves general deterrence will frequently limit the weight that can properly be given to a contravener’s financial position.

67    Now I accept that the requirement to secure deterrence must not result in a penalty that is so high as to be oppressive, but this requires only that the penalty be no higher than that required to achieve general deterrence. It does not require that the proper amount necessary to achieve general deterrence be unduly mitigated by reference to notions of financial hardship by the contravener in question.

68    But I do of course accept that the contravener’s financial position is a relevant consideration in determining whether a penalty will achieve specific deterrence (Australian Competition and Consumer Commission v Leahy Petroleum Pty Ltd (No 3) (2005) 215 ALR 301 at [39] per Goldberg J).

69    Let me say something about the statutory maximum.

70    In Markarian v The Queen (2005) 228 CLR 357, when determining the appropriate criminal sentence to be imposed, the High Court (at [31]) held that:

careful attention to maximum penalties will almost always be required, first because the legislature has legislated for them; secondly, because they invite comparison between the worst possible case and the case before the court at the time; and thirdly, because in that regard they do provide, taken and balanced with all of the other relevant factors, a yardstick.

71    The same considerations apply in relation to civil penalties. In Australian Securities and Investments Commission v Commonwealth Bank of Australia [2020] FCA 790 I observed (at [65]):

Now the process to be used in setting a civil penalty for contravention of statutory provisions is similar to that used in criminal sentencing. The maximum penalty must be given due attention because it has been legislated for, it invites comparison between the worst possible case and the case before the Court at the relevant time, and it provides a form of yardstick. But it may be an arid exercise in cases such as the present to engage in a mere arithmetical calculation multiplying the maximum penalty by the number of contraventions to get a theoretical maximum for all offending even if one could theoretically quantify that latter number (see Australian Competition and Consumer Commission v Coles Supermarkets Australia Pty Ltd (2015) 327 ALR 540 at [17], [18], [84] and [85] per Allsop CJ). But I do accept that some estimate of the number of contraventions is to be taken into account in getting some sense of the overall maximum.

72    But a formula for setting a maximum penalty which increases commensurate with the value of an economic transaction at the centre of the proscribed conduct can be seen as having a slightly different dimension. It is intended to enable the court to fix penalties at levels sufficient to create a genuine commercial disincentive to contravening conduct. Its function in fixing penalty may be seen more as giving the court headroom, and less as a yardstick.

73    The maximum penalty formulae here take the greatest of alternative amounts, calculated in specified ways. The amounts so calculated may render a maximum less directly linked to notions of gravity of the contravening conduct. The formulae reflect the fact that economic considerations inform both the contraventions and the way they are to be deterred. They signal that general deterrence is to be achieved by ensuring that contravening conduct is not profitable.

74    I should also note that in setting a penalty, it is relevant to have regard to the purpose of the Act and any underlying policy considerations that its provisions were intended to reflect and promote. In this respect, in 2015 the Act was largely modified by the Amending Act. It would seem from the extrinsic material published in relation to the associated Bill that when considering an application to acquire an interest in residential land, it was contemplated that an important consideration for the Treasurer was whether the proposed acquisition would add to Australia‘s housing stock. It was contemplated that the most significant impact of the framework on foreign persons who were individuals was that they would generally not be permitted to purchase existing residential real estate, although they could purchase real estate off-the-plan or a newly constructed residential dwelling. This reflected the policy that any foreign investment in residential real estate was intended to be directed to increasing Australia‘s housing stock. However, it was anticipated that the effect of this restriction could be ameliorated by the practice that permitted temporary residents to buy one established dwelling for use as their residence in Australia.

75    Let me now turn to the mandatory and non-mandatory considerations relevant to setting a penalty.

76    In setting a civil penalty, s 82(6) of the RP Act sets out the following mandatory considerations:

In determining the pecuniary penalty, the court must take into account all relevant matters, including:

(a)    the nature and extent of the contravention; and

(b)    the nature and extent of any loss or damage suffered because of the contravention; and

(c)    the circumstances in which the contravention took place; and

(d)    whether the person has previously been found by a court (including a court in a foreign country) to have engaged in any similar conduct.

77    Let me go through each of these mandatory considerations before turning to some other questions.

The nature and extent of the contraventions – s 82(6)(a)

78    The respondent, who was the holder of bridging visas whilst applying for two permanent visas, purchased four residential properties in four transactions over a period of 19 months. He purchased three properties with established dwellings and one block of newly subdivided residential land. Now the respondent resided at the Oriole Drive property. But each of the other purchases bears the hallmark of a passive speculative property investment.

79    If the respondent had applied under s 81 for a no objection notification in respect of proposals to acquire and hold properties with established dwellings for the purpose of passive investment, it is likely that his applications would have been refused. If the respondent had applied to purchase the vacant land being the Fields Street property, it is likely that any approval to purchase would have been given on conditions that he develop the land within specific timeframes.

80    Now as to the relevant conduct, the respondent has made the following points.

81    First, he says that each of the contraventions arose as a consequence of the registration of titles failing to correctly reflect the beneficial ownership of the properties as jointly owned by the respondent and his wife. He says that no contravention would have arisen if the titles correctly reflected their ownership as joint tenants. He says that the titles were registered in the respondent’s name only as the respondent did not realise that there were obligations under the Act and because of the difficulty of obtaining a mortgage in their joint names. In the circumstances, he says that he and his wife chose, erroneously, to register the titles in his name alone to assist with expeditious approval of the mortgages. He says that this factor weighs in favour of the lowest range of potential penalties being appropriate. It should be apparent from what I have said that I am not able to accept this submission as it lacks a probative evidentiary foundation.

82    Second, he says that even if he did not register title to the properties jointly, he was entitled in his own right to purchase one existing dwelling to reside in, and entitled to acquire vacant land for development, subject to appropriate notification and compliance with any conditions. In those circumstances, he says that he could have acquired the Warringa Crescent property or the Oriole Drive property in his own right. Furthermore, he was entitled to acquire vacant residential land for development subject to appropriate notification and approval and so could have acquired the Fields Street property. I have taken such matters into account and aspects of them are not totally without merit; but of course he did not give the requisite notice(s).

83    Third, he says that the breaches were inadvertent and that he was not aware of any relevant obligations arising under the Act. He says that given that he would have been permitted to acquire the Warringa Crescent property or the Oriole Drive property in his own name with the submitting of a notification and payment of only a nominal fee, as with the Fields Street property, it is implausible that he would have chosen to assume such a risk if he knew that he was in breach of the foreign investment rules. I should say now that I am unable to say that the respondent did not know of the substance of aspects of what the Act required.

Nature and extent of any loss or damage suffered because of the contravention – s 82(6)(b)

84    There was no “loss or damage”, in the sense in which that phrase is properly to be understood, suffered because of the contravention. But let me broaden the scope of that inquiry as it is convenient to do so at this point.

85    As I have indicated, one aspect of the policy with respect to foreign investment in Australian residential real estate appears to have been that such investment should increase Australia’s housing stock. That policy sought to ensure that foreign investment in residential real estate increases the supply of dwellings and is not speculative in nature. The policy seeks to channel foreign investment in the housing sector into activity that directly increases the supply of new housing.

86    Consistent with this theme, four points can be made from the extrinsic material. First, foreign persons have generally been permitted to purchase newly constructed dwellings without conditions. Second, foreign persons have generally been approved to buy vacant land for residential development, subject to conditions, such as requiring that construction occur within defined timeframes. Third, non-resident foreign persons have not been permitted to buy established dwellings as investment properties or as homes. Fourth, foreign persons who are temporary residents in Australia have been permitted to purchase one established dwelling on conditions that they use it as their principal place of residence whilst in Australia and that they sell the property when it ceases to be their principal place of residence.

87    Upon the rewriting of the Act in 2015, the then long-standing policy that temporary residents were permitted to buy an established dwelling to use as their principal place of residence whilst in Australia was enshrined in the Act, and a prohibition on the holding of more than one interest in an established dwelling was introduced.

88    Now the respondent says that had the contraventions not taken place, the alternative is that each of the properties would still have been acquired by the respondent and his wife but in their joint names and used for the purposes that they were in fact put to. He says that this supports that no “loss or damage” was caused or suffered at all as a consequence of the contraventions and no adverse impact upon Australian housing stock resulted. But I should say now that I am not satisfied that the respondent had or would have had such an intention.

89    Further, the respondent says that even if some of the purchases bear the hallmark of passive, speculative property investment, such matters do not go to any relevant consideration in setting a penalty. He says that the policy of the Act is directed at increasing housing stock. He says that the properties that the respondent acquired in his name were either resided in by himself and his wife, or leased out. And he says that that outcome would have been the same had the properties been acquired in joint names. And as to the vacant land, this was acquired to develop, consistent with the intent and purpose of the Act. He says that there was no detriment caused to the availability of Australian housing stock as a consequence of the contraventions. Now these points are not totally without merit, but they cannot carry the day.

The circumstances in which the contravention took place – s 82(6)(c)

90    The contraventions took place in the context of a generally rising market for residential real property in Victoria. The acquisition and holding of property in this case is explicable by an objective of seeking to make a profit on passive, speculative investments in property in that market.

91    Further, despite the respondent being made aware on 13 August 2018 that the Commissioner regarded him as likely to be in contravention of the Act, the respondent continued to hold interests in two established dwellings, and made no retrospective applications under s 81.

Whether the person has previously been found by a court (including a court in a foreign country) to have engaged in any similar conduct – s 82(6)(d)

92    It would seem that the respondent has not previously engaged in conduct similar to the contravening conduct established in this case. Certainly he has not been found to have so engaged.

Other relevant factors

93    Given the prefatory wording of s 82(6), let me now say something about other relevant but non-mandatory factors, which have been identified and applied in analogous civil penalty contexts. As to such non-mandatory factors, I set out a list of augmented French factors in ASIC v Westpac (No 3) at [49] and [50]:

The fixing of a pecuniary penalty involves the identification and balancing of all the factors relevant to the contravention and the circumstances of the defendant, and the making of a value judgment as to what is the appropriate penalty in light of the purposes and objects of a pecuniary penalty that I have just explained. Relevant factors include the following:

(a)    the extent to which the contravention was the result of deliberate or reckless conduct by the corporation, as opposed to negligence or carelessness;

(b)    the number of contraventions, the length of the period over which the contraventions occurred, and whether the contraventions comprised isolated conduct or were systematic;

(c)    the seniority of officers responsible for the contravention;

(d)    the capacity of the defendant to pay, but only in the sense that whilst the size of a corporation does not of itself justify a higher penalty than might otherwise be imposed, it may be relevant in determining the size of the pecuniary penalty that would operate as an effective specific deterrent;

(e)    the existence within the corporation of compliance systems, including provisions for and evidence of education and internal enforcement of such systems;

(f)    remedial and disciplinary steps taken after the contravention and directed to putting in place a compliance system or improving existing systems and disciplining officers responsible for the contravention;

(g)    whether the directors of the corporation were aware of the relevant facts and, if not, what processes were in place at the time or put in place after the contravention to ensure their awareness of such facts in the future;

(h)    any change in the composition of the board or senior managers since the contravention;

(i)    the degree of the corporation’s cooperation with the regulator, including any admission of an actual or attempted contravention;

(j)    the impact or consequences of the contravention on the market or innocent third parties;

(k)    the extent of any profit or benefit derived as a result of the contravention; and

(l)    whether the corporation has been found to have engaged in similar conduct in the past.

Moreover and importantly, attention must be given to the maximum penalty for the contravention. But if contravening conduct is not so grave as to warrant the imposition of the maximum penalty, I am bound to consider where the facts of the particular conduct lie on the spectrum that extends from the least serious instances of the offence to the worst category.

94    Of course, the augmented French factors are non-mandatory factors, and whether individual factors constitute relevant matters will depend upon the circumstances. I have taken into account factors (a), (b), (d), (i) and (k) as set out in ASIC v Westpac (No 3) with appropriate modification to the circumstances of the present case.

95    Further, in considering and weighing all relevant factors I need to engage in intuitive synthesis, which requires a weighing together of all relevant factors, rather than an arithmetical algorithmic process that starts from some pre-determined figure and then makes incremental additions or subtractions for each factor according to a set of predetermined rules. And it is also important to note that intuitive synthesis conducted in criminal sentencing does not have the same boundaries and content as intuitive synthesis in the context that I am considering. In criminal sentencing, the synthesis involves not only the facts and circumstances of the offending, but also conflicting sentencing considerations such as retribution and rehabilitation, and differing sentencing options along a broader spectrum than the civil context from a donation to the poor box through to imprisonment.

Multiple contraventions

96    Let me say something about multiple contraventions. The assessment of appropriate penalties requires consideration of three principles associated with the treatment of multiple contraventions.

97    First, separate penalties should not be imposed for the same wrongful conduct. As I have already set out, s 84 of the RP Act provides:

Conduct contravening more than one civil penalty provision

(1)    If conduct constitutes a contravention of 2 or more civil penalty provisions, proceedings may be instituted under this Part against a person in relation to the contravention of any one or more of those provisions.

(2)    However, the person is not liable to more than one pecuniary penalty under this Part in relation to the same conduct.

98    “Conduct” means “(a) an act; or (b) a failure to act” (s 4); in other words, it denotes the physical elements of a contravention.

99    Second, one has the course of conduct principle, which focuses on similar or related conduct rather than the same conduct. The principle is a discretionary tool of analysis that the court is not compelled to use. The course of conduct principle is broader in scope than s 84(2), which is concerned with the same acts or omissions constituting an element of more than one contravention.

100    Now separate contraventions arising from separate acts should ordinarily attract separate penalties. But the course of conduct principle means that consideration can be given to whether the contraventions arise out of a single course of conduct in order to determine whether it may be appropriate that a single penalty should be imposed for the contraventions. Where there is an interrelationship between the legal and factual elements of two or more contraventions, care must be taken to ensure that the contravener is not punished twice for what is essentially the same contravening conduct (Australian Competition and Consumer Commission v Cement Australia Pty Ltd (2017) 258 FCR 312 at [421] to [424] per Middleton, Beach and Moshinsky JJ).

101    The question of whether certain contraventions should be treated as being a single course of conduct is a factual enquiry to be made having regard to all of the circumstances of the case. It is a tool of analysis which requires an evaluative judgment in respect of the relevant circumstances. In Australian Competition and Consumer Commission v Hillside (Australia New Media) Pty Ltd t/a Bet365 (No 2) [2016] FCA 698 at [25], I observed in the context of a statutory analogue:

… the “course of conduct” principle does not have paramountcy in the process of assessing an appropriate penalty. It cannot of itself operate as a de facto limit on the penalty to be imposed for contraventions of the ACL. Further, its application and utility must be tailored to the circumstances. In some cases, the contravening conduct may involve many acts of contravention that affect a very large number of consumers and a large monetary value of commerce, but the conduct might be characterised as involving a single course of conduct.

Contrastingly, in other cases, there may be a small number of contraventions, affecting few consumers and having small commercial significance, but the conduct might be characterised as involving several separate courses of conduct. It might be anomalous to apply the concept to the former scenario, yet be precluded from applying it to the latter scenario. The “course of conduct” principle cannot unduly fetter the proper application of s 224.

102    Now the principle does not restrict my discretion as to the amount of the penalty to be imposed for the course of conduct. More specifically, the maximum penalty for the course of conduct is not restricted to the prescribed statutory maximum penalty for each contravening act or omission. Relatedly, a form of course of conduct principle may be considered to have been in part enshrined in s 85 which I have already set out, although there are differences that I do not need to explore.

103    Now here, each of contraventions 1 to 4 are founded on a notifiable action that is a residential land acquisition taken without notice having been given under s 81. The notifiable actions do not relevantly share common factual or legal elements. In those circumstances, neither the course of conduct principle nor s 85 is appropriate to invoke.

104    Further, as to contraventions 5 and 6 concerning s 95(1) it is appropriate to characterise the contravening conduct as constituted by two periods of holding, that is, the contravention constituted by holding interests in two established dwellings and the contravention constituted by holding interests in three established dwellings. But these periods are capable of being dealt with separately and I have so treated them.

105    Third, the other relevant theme concerns the totality principle. Where multiple separate penalties are to be imposed, the totality principle requires me to make a final check of the penalties to be imposed, considered as a whole. It will not necessarily result in a reduction. But in cases where the cumulative total of the penalties to be imposed would be too low or too high, one can alter the final penalties to ensure that they are just and appropriate (Australian Competition and Consumer Commission v Australian Safeway Stores Pty Ltd (1997) 145 ALR 36 at 53 per Goldberg J).

Appropriate penalties

106    By his contravening conduct, the respondent has made capital gains amounting to $710,300 in gross terms. This is a significant fact for penalty purposes. General deterrence will only be achieved by a penalty that puts a price on any contravention sufficient to deter others who might be tempted to contravene the Act.

107    Making various deductions, the Commissioner says that the respondent’s net gain may be calculated at approximately $425,000. I do not need to go into the detail of the Commissioner’s calculations, which are very approximate. I accept such calculations to some extent but I would further discount them due to several matters raised by the respondent.

108    I do not propose to linger on the arithmetic, save to say that I am satisfied that a figure of around $250,000 represents no less than the respondent’s net gain. I propose to wipe this out by the total penalty that I will impose. It is necessary to do so in order to achieve the principal objective of general deterrence. Indeed, the sum of $250,000 is considerably more than the respondent’s own calculation of the net gain.

109    Further, I have taken into account the fact that the respondent has disposed of the properties, denying himself income from rent and further capital appreciation, and suffering transaction costs in the process. These economic losses are a direct result of the contraventions. And I accept that to some extent any proposed penalty should take into account, as I have done, any financial loss already borne as a consequence of the divestment of the properties.

110    Further, I have taken into account that the respondent has to a significant extent been cooperative with the Commissioner in the Commissioner’s investigations. Further, the respondent has admitted the contraventions and disposed of each of the properties.

111    Further, I am prepared to accept that the respondent does not have the capacity to meet a very substantial penalty. But of course such a matter can only carry the respondent so far. It cannot dictate the penalty that I consider appropriate to address general deterrence.

112    Now the respondent says that I should impose a penalty only at the lowest end of the potential penalty range. As I have discussed, he says that the maximum penalty notices that could have been issued to him total $68,400. And having regard to the circumstances, he says that I should consider this penalty appropriate with a discount of 50% applied, given his incapacity to pay. So, he contends for a proposed penalty of $34,200.

113    In this regard the respondent drew my attention to the FIRB Annual Report for the 2019-20 year which states the following (at 49):

Incidents of residential real estate non-compliance are largely the result of investors being unaware of their obligations to obtain foreign investment approval. The ATO generally finds that had the investor sought approval, they would have been found eligible to hold the property. Educating investors and their intermediaries is ongoing to ensure awareness of their foreign investment obligations if they are investing in Australian residential real estate.

Outcomes of investigations which identified breaches included divestments, retrospective approvals, variations of conditions and raising a vacancy fee liability. These outcomes are reported in Table 4.2. In some circumstances an infringement notice may have also been applied. Infringement notice data is reported in Table 4.5.

As outlined in Table 4.2, divestment (27.0 per cent), retrospective approval during government consideration (23.9 per cent) and change of conditions (22.0 per cent) are the most frequent outcomes. Compliance outcomes are influenced by the ATO’s compliance strategy and case selection methodologies, which apply a risk-based approach to encourage foreign investors to comply with the rules where their investment is in the national interest. In most circumstances an infringement notice, which imposes a financial penalty on a foreign person, was applied to breaches even if the application was subsequently given approval or conditions of approval changed.

114    It is not necessary to set out Table 4.2. But what is apparent is that there have been 1,459 compliance outcomes, including 1,120 penalty notices issued, in respect of residential real estate contraventions in the 36 months to 30 June 2020. The respondent says that on no occasion has a penalty higher than an infringement notice been imposed. I have taken this into account in determining an appropriate penalty, but I reject the respondent’s submission that I should err at the lower end of potential penalties that may be applied so as to impose a penalty consistent with the level of penalty that might be imposed by one or more infringement notices.

115    In summary, and having regard to all the circumstances that I have discussed, the following penalties are appropriate:

116    These penalties have principally been set with general deterrence being given paramountcy. I should also note that the contraventions of s 95, given their type, are worthy of higher penalties than the contraventions of s 94.

117    Further, the penalties that I propose to impose take appropriate account of the totality principle. They are not so great as to impose an aggregate penalty which is excessive, but they do what is required to achieve the object of general deterrence in the present case. I should say for completeness that specific deterrence is not such a significant matter in the present case given the respondent’s present circumstances and the unlikelihood of any future repetition of the conduct in question.

Conclusion

118    I will order that the respondent pay in total a pecuniary penalty of $250,000, with the allocation of that amount to particular contraventions as set out in the above table so that formally individual penalties are imposed; I will not make an order under s 85(1).

119    For completeness I note that prior to the contested hearing on penalty I made necessary declarations identifying the relevant contraventions. No further declarations need be made.

120    Finally, there is no good reason why the respondent should not pay the Commissioner’s costs of this proceeding, particularly as I have fixed a penalty substantially above what he contended for.

Associate:

Dated:    8 April 2022