The Federal Court dismissed an application to review the validity of, and stay the operation of the Commissioner’s decision requiring Fastbet to give mortgage security, over its real estate, under s255-100 of the TAA1.
Section 255-100(1)(b) gives the Commissioner power to require a person to give security for the payment of ‘existing and future *tax-related liabilit[ies]‘ if ‘(b) the Commissioner reasonably believes that the requirement is otherwise appropriate, having regard to all the relevant circumstances‘. The Commissioner does not have to go to court to get this security. Rather, his decision creates the requirement with prosecution for an offence, the inducement for compliance.
An indication of why the Commissioner took this step, can be seen from the following portion of para 6 of the reasons.
In particular, the Commissioner relied upon circumstances pertaining to the sole director of Fastbet, Ms Tina Bazzo. In the notice and in the reasons, he identified that Ms Bazzo has, in the past neglected to meet her own taxation liabilities and, importantly, has been a director of other companies which have neglected their taxation liabilities.
There follow some examples that sound horrible, and they may be, but I’ve had experience with the ATO (and the same officer as here) which shows things are not always as bad as they seem.
In any event, Fastbet bought on an urgent challenge, to the decision, the bases for which appeared to be the following.
- That Fastbet could not comply with the notice (requiring certain mortgage security), in that it had disposed of two of the properties named, since the notice was issued. The Court noted, however, that the decision to require security, by way of mortgage, over those properties (including the 2 subsequently disposed of) was correct at the time it was made and there was no administrative law requirement that the decision go on being correctly based after it is made. In this respect Derrington J distinguished the case the Fastbet relied on: Comptroller-General of Customs and Anor v Kawasaki Motors Pty Ltd (No 1)  FCA 519, where “where a decision-maker becomes aware that the factual substratum, on which the decision, was made was wrong, when the decision was made.” [see para 13 of the reasons]
- That the decision was unreasonable, in the circumstances, as it required Fastbet to give security over all its property (or at least, all its real property) and would effectively shut down the applicant’s business of selling subdivided lots of land. [para 16] But in assessing reasonableness of the demand for security (viz: ‘appropriateness in all the circumstances’) the Court took into account the risk that substantial tax amounts could be lost to the revenue. [para 18] The Court also noted that these mortgages would not stop the business of selling developed land, any more than it would a mortgage to a bank – the mortgagee would need to be consulted before the sale and an amount negotiated for the amount that would need to be paid to the Mortgagee, for the release of the mortgage (and if a bank had a prior mortgage, Fastbet would have 2 mortgagees to deal with and the bank would have priority). [para 21]
There is a respect, in which the Commissioner’s demand, for this mortgage security, might destroy what appears to be a land development business, that is not mentioned in the reasons. If there was already a (bank) mortgagee, granting a subsequent mortgage is likely to be an event of default – entitling the bank to call up the loan, exercising its first mortgage security to take all of Fastbet’s fledgling equity in the partly developed property, and perhaps leave the company in liquidation and the bank short as well. The Commissioner might have been warned that demanding this security could leave him with nothing but the ruins of a business ended prematurely. This might be the sort of ‘uncommercial’ behaviour a taxpayer could challenge, but it appears from the reasons that nothing of this sort was articulated or pressed. The Court said:
Whilst it is true that a security of that nature may hinder a building company from raising capital or equity, nothing was pointed to in the evidence to suggest that had occurred in this case. Ultimately, the grounds sought to be agitated by the applicant in that respect were unsupported by the evidence. [para 21]
(Fastbet Investments Pty Ltd v DCT  FCA 1406, Federal Court, Derrington J, 24 October 2017).
[FJM; LTN 229, 29/11/17; Tax Month Nov 2017]