The Federal Court has granted freezing orders sought by a Deputy Commissioner of Taxation (DCT) in relation to recovery proceedings for accrued taxation liabilities owed, by the taxpayers, to the NZ Commissioner of Inland Revenue.

The matter related to “significant” debts owed, to the NZ Commissioner, by husband and wife taxpayers amounting to AUD$2m as well as the debts owed by their son amounting to around AUD$14m.

Under Article 27 of the Double Taxation Agreement between Australia and NZ [2010] ATS 10, the contracting states will lend assistance to each other in collection of revenue claims. There is a special Division in the TAA1, devoted to this: Div 263: Mutual Assistance in collection of foreign tax debts. Subdiv 263-A is headed ‘Foreign Revenue Claims’. In this instance, upon registration of the foreign revenue claims, amounts owed become a pecuniary liability to Australia under s 263-30 of the TAA, which is why the DCT is involved in the matter.

The Court addressed its power to grant freezing orders, as follows.

7.   I am satisfied that this Court has jurisdiction in this proceeding on the basis set out in para 9 of the Deputy Commissioner’s submissions. The applicable principles to the exercise of the Court’s discretion to make a freezing order under Div 7.4 of the Federal Court Rules 2011 (Cth) are well-established and they are set out in para 4 of the Deputy Commissioner’s submissions. Aside from jurisdiction, I must be satisfied of three matters: first, that the applicant has a reasonably arguable case, both on the law and the facts; second, that there is a danger that a prospective judgment will be wholly or partially unsatisfied because the assets of the prospective judgment debtor or another person are removed from Australia or from a place inside or outside Australia or that the assets may be disposed of, dealt with or diminished in value; and third, the balance of convenience favours the granting of the freezing orders.

The DCT raised 4 factors as to why the freezing order was appropriate. They are set out in full below.

A consideration of the 4 factors, lead the Court to conclude as follows.

18.   I accept that each of those four categories of conduct relied on by the Deputy Commissioner on the evidence disclosed behaviour, either directly connected to the debts the Deputy Commissioner seeks to enforce or, more generally, which reveals elements of dishonesty or avoidance of liability in the behaviour of each of the respondents. In turn, this gives rise to an inference that there is a real and not fanciful risk that each of the three respondents may seek to dissipate or dispose of assets if these orders are not made. As to the balance of convenience, I am satisfied the balance favours the making of freezing orders, taking into account the undertakings that are proffered by the Deputy Commissioner.

As a result, the Court accepted that all three requirements for an exercise of the Court’s power to freeze assets were made out and it granted the Deputy Commissioners sought.

(DCT v Ma [2017] FCA 1317, Federal Court, Mortimer J, 3 November 2017.)

[FJM; LTN 219, 15/11/17; Tax Month Nov 2017]

Extract from the reasons for judgement

13.   First, there is evidence of the use by the first respondent of a bank account in Australia through which substantial transactions have occurred since 2006, but which is in the name of a Chinese national who arrived in Australia in May 2006, established the bank account and then left in August 2006 and has not returned. The first respondent was authorised by this person to operate the bank account, but the Deputy Commissioner contends, and I accept, that the evidence discloses the first respondent has treated the account as his own and, in that sense, has dishonestly pretended it was his own account where, in fact, it was the account of another. The first respondent, on the evidence, has deposited moneys into this account from the sale of assets he controlled.

14.   The garnishee notice issued in relation to the first respondent’s liabilities was not treated as effective by the ANZ Bank in relation to this bank account because the bank saw the account as belonging to the other Chinese national. However the Deputy Commissioner contends the evidence is wholly to the effect that the first respondent uses this bank account for his own purposes. I am satisfied on the evidence at least at this stage of the proceeding that the first respondent appears to be concealing his financial activities behind the façade of another person through the use of this bank account.

15.   Secondly, only a few weeks after the New Zealand Commissioner of Inland Revenue Service notified the first and second respondents of the New Zealand taxation debts, the first and second respondents proceeded sequentially over the subsequent months to put their Australian properties, either owned personally by them or through a corporation they control, on the market for sale and have concluded sales for some of those properties.

16.   Thirdly, after the Deputy Commissioner notified the first and second respondents of the foreign revenue claims and consequent garnishee notices, each of them transferred substantial funds from Australia to China or otherwise removed from the bank account used by the first respondent (but in someone else’s name) almost all of the funds standing to the credit of that bank account. Those transfers occurred, on the evidence before me, within days of the notifications and the amounts transferred totalled at least $450,000, approximately, possibly more.

17.   Fourthly, there is evidence of other dishonest behaviour by the first and third respondents. The evidence is that the first and third respondents have been directors of companies that have claimed and been paid large amounts of goods and services tax credits to which they were not entitled. In relation to the first respondent, the evidence is that the company controlled by him received approximately $1,158,577 over almost four years to which it was not entitled; and in relation to the third respondent, the credits received total approximately $1,429,748 over almost four years.

 

Extract from Subdiv 263-A

263-10   Meaning of foreign revenue claim

                   A foreign revenue claim is a claim made to the Commissioner:

                     (a)  in accordance with an agreement (the international agreement ) between Australia and:

                              (i)  a foreign country or a constituent part of a foreign country; or

                             (ii)  an overseas territory;

                            (the overseas entity ); and

                     (b)  for one or both of these purposes:

                              (i)  the recovery by the Commissioner of an amount from an entity (the debtor ) in respect of taxes imposed otherwise than by an * Australian law (including any associated amounts);

                             (ii)  the conserving of assets for the purposes of a recovery of that kind.

263-15   Requirements for foreign revenue claims

                   A * foreign revenue claim must:

                     (a)  be made by or on behalf of an entity that is, under the relevant international agreement, the competent authority; and

                     (b)  be consistent with the provisions of that agreement; and

                     (c)  be made in the * approved form; and

                     (d)  specify the amount owed by the debtor in Australian currency (calculated as at the day the claim is made); and

                     (e)  be accompanied by a declaration by the competent authority stating that the claim fulfils the requirements of that agreement.

263-20   Foreign Revenue Claims Register

             (1)  The Commissioner must keep a register called the Foreign Revenue Claims Register (the Register ).

             (2)  The regulations may make provision in relation to the form in which the Register may be kept.

             (3)  The register is not a legislative instrument.

263-25   Registering claims

                   If the Commissioner is satisfied that a * foreign revenue claim has been made in accordance with section 263-15, the Commissioner must register the claim by entering particulars of it in the Register within 90 days after receiving the claim.

263-30   When amount is due and payable

             (1)  When particulars of a * foreign revenue claim are entered in the Register, the amount owed by the debtor becomes a pecuniary liability to the Commonwealth by the debtor.

Note 1:       The amount to be recovered from the debtor will be a primary tax debt for the purposes of Part IIB and the Commissioner may allocate the debt to a running balance account under that Part.

Note 2:       For provisions about collection and recovery of the debt, see Part 4-15.

          (1A)  To avoid doubt, the amount owed by the debtor may not be the same as the amount (if any) entered in the Register.

             (2)  The amount owed by the debtor becomes due and payable 30 days after notice of the particulars of the * foreign revenue claim is given to the debtor or on a later day specified in the notice.

             (3)  If that amount remains unpaid after it is due and payable, the debtor is liable to pay * general interest charge on the unpaid amount for each day in the period that:

                     (a)  started at the beginning of the day by which the amount was due to be paid; and

                     (b)  finishes at the end of the last day at the end of which either of the following remains unpaid:

                              (i)  the amount;

                             (ii)  general interest charge on any of the amount.

263-35   Amending the Register etc.

             (1)  The Commissioner may, with the agreement of the relevant competent authority, amend the Register to correct an error.

             (2)  The Commissioner may, with the agreement of the relevant competent authority:

                     (a)  remove from the Register the particulars of a * foreign revenue claim; or

                     (b)  reduce an amount to be recovered from a debtor under the claim.

          (2A)  To avoid doubt, the Commissioner may reduce an amount to be recovered from a debtor under paragraph (2)(b) without amending the Register.

             (3)  A debtor may, after receiving a copy of the particulars of a * foreign revenue claim entered in the Register, apply to the Commissioner in the * approved form to have those particulars removed from the Register.

             (4)  The Commissioner may, after considering the application, remove those particulars from the Register.

             (5)  If the Commissioner removes particulars of a * foreign revenue claim relating to the recovery of an amount from the Register under paragraph (2)(a) or subsection (4), the debtor is entitled to a credit for the purposes of Part IIB equal to the sum of:

                     (a)  the amount (as reduced by any previous application of subsection (6)); and

                     (b)  any * general interest charge for which the debtor is liable as a result of the foreign revenue claim.

Note:          How the credit is applied is set out in Part IIB.

             (6)  If the Commissioner reduces the amount to be recovered from a debtor under a * foreign revenue claim under paragraph (2)(b), the debtor is entitled to a credit for the purposes of Part IIB equal to the amount of the reduction.

Note:          How the credit is applied is set out in Part IIB.

263-40   Payment to competent authority

             (1)  The Commissioner must, if the Commissioner recovers all or part of an amount to be recovered from a debtor under a registered * foreign revenue claim, pay that amount to the competent authority concerned or to another entity on behalf of that competent authority.

             (2)  The Commissioner may also pay to the competent authority all or part of an amount that the Commissioner has received and that is attributable to * general interest charge in relation to the claim.

             (3)  The Commissioner may also pay to the competent authority all or part of an amount that the Commissioner has received and that is attributable to any of the following in relation to the claim:

                     (a)  judgment interest;

                     (b)  costs that:

                              (i)  have been recovered in the course of legal proceedings; and

                             (ii)  represent an amount that has previously been paid by the competent authority to the Commonwealth in relation to the recovery of the claim.

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