FCT v Chen – Asset freezing order granted over Australian and international debts to protect expected judgement for $7.5m tax debts

The Federal Court has granted the Commissioner a freezing order of the assets of a taxpayer concerning a $7.5 million tax debt.

The Commissioner had sought freezing orders against the taxpayer under Division 7.4 of the Federal Court Rules 2011 (Cth).  After hearing counsel for the Commission, Colvin J made orders substantially in the terms sought.

The Commissioner relied upon a claim based upon the statutory debt that arises when an assessment is made under the ITAA 1997.  Assessments for a total amount of more than $7.5 million were served on the taxpayer prior to the hearing on 17 July 2018.

A freezing order may be made to meet a danger that a prospective judgment of the Court will not be satisfied.  The Commissioner was required to demonstrate a good arguable case, a danger that the judgment will be unsatisfied and that the balance of convenience favoured the grant of relief.

The Court found that the requirements above were met on the basis of matters stated in the affidavit of an ATO officer eg:

1. the taxpayer is an Indian citizen who travels on an Indian passport. He is married;
2. the taxpayer has lodged income tax returns in Australia since 2006, the last of which was for the 2015-16 financial year;
3. since 2012, the returns have been lodged on the basis that he is a non-resident for Australian taxation;
4. the taxpayer is a director of Sandalwood Passion Pty Ltd.  The other directors are the taxpayer’s wife and one of their children.  The shareholders are the taxpayer and his wife;
5. the taxpayer and his wife have interests in a company incorporated in India and another company incorporated in Hong Kong;
6. the taxpayer’s business interests concern trading in sandalwood;
7. an ATO audit of the affairs of the taxpayer determined that he derived income in each of the income years between 2008 and 2016 that he failed to disclose (assessments have issued for more than $7.5 million based on matters revealed by the audit);
8. the income disclosed by the taxpayer is about 6% of the assessed income;
9. the taxpayer and his wife jointly own a number of properties in Australia and there is information to the effect that their equity in those properties is about $4 million;
10. the taxpayer and his wife have a number of bank accounts in Australia and a number of overseas bank accounts in Vanuatu, Fiji, Hong Kong and India;
11. large amounts have been moved between certain bank accounts (although the Commissioner does not claim that this demonstrates impropriety, it does demonstrate the propensity for monies to be moved readily overseas or to other accounts);
12. there has been international movement of funds between the identified bank accounts in the past 11 years involving approximately 80 transactions in a total amount of over $14.5 million;
13. the taxpayer travels in and out of Australia on a frequent basis.

The Court said:

• “the evidence is sufficient to demonstrate a proper basis for a concern as to the honesty of [the taxpayer]”.
• The assessed taxation liability is large.
• From the evidence as to the taxpayer’s past behaviour, the Court said he has taken steps to evade his taxation liabilities.
• He has moved considerable funds through international bank accounts.

In all the circumstances, the Court was of the view there is “a real risk of dissipation or steps being taken by [the taxpayer] that may seriously compromise the ability of [him] to meet a prospective judgment based on the assessments”.

Also, the Court considered there was a proper basis for the orders to extend to foreign held assets.  The Court granted the freezing orders sought by the Commissioner.

(FCT v Chen [2018] FCA 1087, Federal Court, Colvin J, 20 July 2018.)

[LTN 144, 30/7/18; Tax Month – July 2018]

Comprehension questions (answers available)

1. Did the Court grant the Commissioner the freezing orders?
2. Were the freezing orders only over Australian assets?
3. Is the test for a freezing order a good arguable case that a judgement will be unsatisfied (through dissipation of assets) and the balance of convenience favours the relief?
4. Did the Commissioner allege that the taxpayer had omitted significant amounts of income from his return returns over 9 years from 2008 to 2016 (about 94% of the total assessed)?
5. Was the taxpayer’s honesty put in doubt as a result?
6. Is the taxpayer an Indian national, with companies in India and Hong Kong, who travels in and out of Australia and lodges tax returns in Australia as a non-resident?
7. Was the taxpayer’s equity in properties more than the tax liability raised?