The Federal Court has dismissed an application, by a company, for review of a winding up order made against it concerning a $124.8 million tax debt (mainly administrative penalties), in respect of the 2012 to 2015 financial years.

The statutory demand had its origins in claims made by the company for large R&D tax offsets which the ATO denied, despite the company not being registered as an R&D entity at any material time. Other general deductions and other credits were also disallowed.

The Court also dismissed a second application for review under the Administrative Decisions (Judicial Review) Act 1977 (ADJR Act) on the basis that the ATO decisions in question were not capable of review under the ADJR Act.

The Court was satisfied that the statutory demand was properly served on the company and that it failed to comply with that demand.

The Court said it was satisfied there was no evidence which suggested there was a serious question to be tried on any of the director’s grounds. Therefore, the Court confirmed the winding up order.

(DCT v Club Culture Pty Ltd [2017] FCA 338, Federal Court, White J, 31 March 2017.)

[FJM; LTN 69, 12/4/17]

Extract from Federal Court’s judgement

The basis for the statutory demand

  1. Before turning to Club Culture’s objections, it is convenient to set out the background to the issuance of the statutory demand. The demand had its origins in claims made by Club Culture to be entitled to Research and Development offsets (R&D offsets) pursuant to the Industry Research and Development Act 1986 (Cth) (the IRD Act). That Act establishes a scheme by which eligible companies, which engage in research approved by Austrade can receive concessional tax treatment by way of credits which reduce the income tax payable by that company. In order to be an eligible company, a company must register with Austrade as a “R&D entity” (s27A). Once a company is so registered and has expended monies on research and development, it may be entitled to an “R&D offset” pursuant to Div 355 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997).
  2. Despite not having been registered as an R&D entity at any material time, Club Culture made claims for R&D offsets in the tax returns it lodged for the 2011 to 2015 financial years. Those returns had been prepared by Dr Larsen. Audits carried out by the ATO revealed Club Culture’s lack of entitlement to the claimed R&D offsets and to other credits, to the disallowance of those claims, and to the imposition of substantial penalties on Club Culture in respect of the 2012 to 2015 financial years. These amounts have not been paid.
  3. In relation to the 2011 financial year, following a review of Club Culture’s income tax return, the ATO disallowed the claimed R&D tax offsets because the company was not registered as an R&D entity conducting R&D activities under s 27A of the IRD Act for that year. Club Culture was found, in any event, to have failed to substantiate its claimed R&D expenditure. The DCT gave notice to Club Culture of the decision and of the basis for it. Although disallowing Club Culture’s claim to the offsets, the Commissioner did not impose, pursuant to s 28475 of Sch 1 of the Taxation Administration Act 1953 (Cth) (the TAA) (which relates to the making of false and misleading statements to the Commissioner), an administrative penalty for that period.
  4. Undeterred, Club Culture claimed substantial R&D offsets in its tax returns for the 2012 and 2013 financial years. On reviews of those returns, the ATO again determined that Club Culture was not entitled to the offsets and general deductions which it had claimed. On 27 March 2015, the Commissioner issued a notice of amended assessment for these two financial years, increasing the company’s tax liability by $2,630,063.40 for the 2012 year and by $1,184,753.40 for the 2013 year and, effectively, reversing the credit Club Culture had claimed in each year. The DCT then made assessments of administrative penalties under Sch 1 s 28475 of the TAA. The Commissioner imposed, pursuant to Sch 1 s 29830(1) of the TAA, administrative penalties for the 2012 and 2013 years of $2,367,057.05 and $1,066,278.05 respectively. These amounts were 75% of the assessment shortfall. Notices were issued to Club Culture.
  5. Club Culture objected to the ATO’s decision to disallow the refundable R&D tax offsets and general deductions and the administrative penalty decisions. Subsequently, on 14 May 2015, the Commissioner reduced the administrative penalty to reflect a base penalty amount of 50% of the shortfall in each year, being the amount by which the tax credit was more than it would have been had a false or misleading statement not been made (TAA Sch 1 s 28480). Club Culture did not make any application to review the decision to reduce the penalty.
  6. A similar course of events occurred with respect to the 2014 and 2015 financial years. The ATO conducted an audit of the Company’s income tax returns and determined again that it was not entitled to the even more substantial R&D offsets, general deductions and other credits it had claimed. The DCT issued notices of amended assessment for those years on 30 March 2016 and determined to impose administrative penalties in the amount of $111,536,007.90 for the 2014 year and $8,234,503.55 for the 2015 year. These penalties were determined in accordance with the formula contained in Sch 1 s 28490 of the TAA.
  7. Additionally, Club Culture became liable to pay General Interest Charges for failing to pay outstanding income tax and shortfall interest amounts as specified in the notices of amended assessment in relation to the 2012 and 2013 years (ITAA 1997 s 515 and TAA Pt IIA) and for failing to pay the penalties imposed with respect to the 2012 to 2015 financial years (TAA Sch 1 s 29825 and Pt IIA).
  8. While Club Culture objected to the Commissioner’s decision to disallow the R&D tax offsets and general deductions and the assessment of penalty for the 2012 and 2013 years, it did not apply to the Administrative Appeals Tribunal (AAT) or to this Court to review the Commissioner’s decision on those objections under Pt IVC s 14ZZ of the TAA. Nor is there evidence that it sought to challenge the Commissioner’s decision to disallow the R&D tax offsets claimed in the 2014 and 2015 financial years or that it exercised the right to object against the Commissioner’s assessment of the administrative penalties imposed for those years (under Sch 1 s 29830(2) of the TAA) or the imposition of general interest charges.
  9. The amounts of the penalties for a company of Club Culture’s size, astronomical. They are a consequence, however, of the very high amounts of R&D offsets claimed by Club Culture to which, on the ATO findings, it was not entitled. On their face, those claims appear to have been fanciful given the improbability of a company of Club Culture’s size having incurred expenditure on research and development of the amounts claimed.

Basis of Club Culture’s objection

  1. As I have already indicated, it has not been easy to identify the objections made by Club Culture as expressed by Dr Larsen. My review of the material and of Dr Larsen’s submissions indicates that Dr Larsen asserts the following matters:

(a)      rather than Club Culture being a debtor to the ATO, the ATO is a debtor to Club Culture. This situation had occurred because the ATO had recorded in its assessments as liabilities to it matters which were in fact to the credit of Club Culture. Dr Larsen asserted on more than one occasion that a transposition error had occurred in the ATO documents with the effect that entries had been recorded as “DR” (for “debit”) rather than “CR” (for “credit”). This was said to have occurred in particular with the ATO’s treatment of “statutory royalties”. Dr Larsen asserted that, in not correcting this mistake, the ATO has acted fraudulently;

(b)     Dr Larsen also presented a copy of an invoice prepared by her for Club Culture which she had presented to the ATO for $124,768,179.91 (which, remarkably, is almost the exactly the same sum as claimed by the ATO from Club Culture). This sum was said to constitute “royalties from budget DHADefence as AU law tax”;

(c)      ATO staff had “wrongly and unlawfully physically extorted in 201120142016 all physical property inclusive TOPSECRET OWN DataBases and IT, and paper documents inclusive for IT platforms R&DImplemented and Medical, Fundamental Sciences, etc, personal Copyrights Act 1968 (Cth) protected property that is only physical property of Dr Larsen … surrendered under duress within Australian Taxation Law used in the negotiations – review desks of ATO SA”. (I mention that during the course of the hearing, I declined for a number of reasons, to grant Dr Larsen’s request that Club Culture have leave to issue a subpoena to the ATO requiring it to produce this material. One of the reasons was that it seemed that Dr Larsen intended that the subpoena should be a means of recovering the claimed material rather than ensuring the production of evidence relevant to the proceedings);

(d)     ATO staff had acted contrary to “statutory law” cited in documents which Club Culture had made available to it;

(e)      the ATO should recover GST incurred by other entities which have used Club Culture and Dr Larsen;

(f)      instead of the ATO adhering to the correct code of conduct and its own processes of review, document examination and internal investigation, its staff had committed perjury, duress, treason and crimes against Australian copyright law, intellectual property law, national security laws, defence laws and record keeping rules and, in addition had acted without “due diligence”;

(g)     Club Culture had accrued a credit of $3 million in its ATO account. At one stage, Dr Larsen submitted that this had accrued by way of an offset but could not identify a proper basis for that offset;

(h)     Club Culture is not a trading entity and had not incurred large taxation liabilities. It has only received a $5,000 grant from the Government (Austrade) in 2011 “for R&D-I Copyrights Statutory Royalties”;

(i)      the ATO did not present any evidence that Club Culture had any trade operations or profits from trade or investment at any time since its incorporation.

  1. On my assessment, Dr Larsen did not present any evidence, nor point to any other matters, capable of supporting, in a rational way, these assertions. It is improbable, to the point of being fanciful, that the ATO is indebted to Club Culture in the amount of $124,768,179.91 or for any like amount. The suggestion that the company’s debt has arisen by the transposition error for which Dr Larsen contends is also fanciful. Further still, the notion that a small proprietary company like Club Culture could have incurred substantial expenditure on research and development in a single year (of the kind necessary to support the administrative penalties) is not credible. In short, Dr Larsen’s claims did not seem to be based in reality.