The Full Federal Court has dismissed a taxpayer company’s appeal (from [2015] FCA 1381) and held that the Commissioner’s notice to the company to give security for an unpaid GST liability was constitutional and valid.
In September 2014, the Commissioner gave a notice under s255-105 of Sch 1 to the TAA to the taxpayer requiring it to give a security deposit of $355,000 “for the due payment of a tax-related liability” that hadn’t yet crystallised (as the subject real properties had not been sold). The Notice required the taxpayer “to give security to the Commissioner” by means of a “mortgage over its real estate assets”. The company, as trustee, owned land it intended to subdivide. The Notice said that ATO auditors, guided by PS LA 2011/14, had estimated that the sale of the subdivided properties would see the company incur GST liabilities of approximately $373,886, after taking into account development costs.
The company sought to have the Notice set aside on 2 grounds.
- The first was that, upon a proper construction of s 255-100, the power conferred upon the Commissioner was not engaged because a ‘future’ tax liability didn’t extend to an estimate based on speculation and assumption (for instance, assuming that the subdivision would go ahead, that all units would be sold and that the ‘margin scheme’ would not be selected by the parties). The Applicant contended that ‘future’ tax liabilities were those where the ‘taxable facts’ had occurred and the formalities of assessment (such as to create the tax liability) had not yet happened. The Applicant contended that the fact that non-compliance with the notice created criminal liability, added weight to these submissions, because the consequences of non-compliance were grave. (See generally, paras [47] and following, relating to the ‘essential contentions of the appellant’.)
- The appellant also argued that, if s255-100 were engaged, it, nonetheless, was not a law with regard to taxation (under s51(ii) of the Constitution) or one that was relevantly incidental thereto (under s51(xxxi) of the Constitution), because the amount of the security sought was so tenuously connected to what the amount of the tax might be – there being no ‘taxable facts’ yet and the amount being based on supposition and assumption. In the absence of being relevantly connected to taxation, the Appellant argued it was expropriation of property, on unjust terms, and was, thus, unconsitutional.
The Full Federal Court disagreed (see paras [62] and following headed ‘Consideration’). It concluded a law which purports to give the Commissioner power to demand security for payment of a an “existing or future *tax-related liability” means what it says, and the term ‘future’ tax liability can extend to estimates based on supposition and assumption, and as such, it was ‘relevantly ‘incidental’ to a law relating to taxation, because it was a means of ensuring that this ‘future’ tax would be collected (should it ultimately materialise).
This decision bears further reading than this summary fairly covers. Having said that, and with great respect to their Honours, my instinct is that there is more to the Applicant’s argument about the amount being too tenuously connected with any amount of tax that might become payable and, thus, it does not truly engage the s255-100 power, because there is no certainty that this ‘future’ tax will ever be payable. And, in the alternative, and for similar reasons, such a description of ‘future’ tax could well be too remote, from the subject matter of taxation, to be constitutionally valid. Some might say that, in rejecting these arguments, the Court reached a ‘common sense’ decision that is correct. Maybe, but I am not sure that this deals with the force of the Appellant’s submissions – particularly as it depends on the subdivision going ahead, all the units being sold and the parties not choosing to apply the margin scheme.
The reasons do not say (as best I can tell) what affect the Commissioner’s demand for security, had on the development (for instance, by making finance for the development untenable). But it appears that the exercise of this discretionary power, to demand security over development land, could, in some circumstances, ‘cruel’ a development and propel an appeal of this nature.
Knowing some of the Commissioner’s collection officers, they would think that a person, to whom they issued such a notice, had done sufficient to warrant this kind of treatment and, in colloquial terms ‘had it coming’. And their judgement about this may or may be correct. But, I am not sure that, relying on these kind of value judgements, is exactly what we should take Parliament to have intended, when construing the scope of these considerable powers.
Indeed, the Government has announced other changes, to the law, that will more effectively protect the GST revenue, on the sale of property by developers. The idea is that the purchaser would be required to pay 1/11th of the purchase price to the Commissioner (instead of to the vendor, on account of the vendor’s GST liability). So, in the ‘future’ (with such a law in place), there might not be the need to stretch the word: ‘future’ so far.
(Keris Pty Ltd (Trustee) v DCT [2017] FCAFC 164, Full Federal Court, Greenwood, McKerracher and Moshinsky JJ, 13 October 2017.)
[FJM; LTN 198, 17/10/17; TM Oct 2017]