Setting Aside Statutory Demands issued by the Commissioner of Taxation – an Update

For good policy reasons the Commissioner of Taxation enjoys a privileged position as a creditor.  Australian taxation laws provide that certain administrative acts by the Commissioner are conclusive evidence of the existence of a debt by the taxpayer.1 If served with a statutory demand issued by the Commissioner, in all but the rarest of cases, it is unlikely that a taxpayer will be able to establish that there is a “genuine dispute”.  This means that applications to set aside statutory demands2 served by the Commissioner relying on section 459H(1) Corporations Act 2001 are of little utility to the corporate debtor.  Nevertheless, section 459J(1)(b) Corporations Act 2001 attempts to mitigate the strict application of the Commissioner’s evidentiary advantage by permitting a Court to set aside a statutory demand in circumstances where “there is some other reason why the demand should be set aside”. A number of recent cases have developed the jurisprudence on the exercise of the Court’s discretion in the context of section 459J(1)(b).  Before looking at those developments, I will briefly touch on two earlier decisions that have dealt with the issue.

Though the statutory demand was not set aside, in Hoare Bros Pty Ltd v DCT3 the Full Federal Court began the development of the scope of section 459J(1)(b). After referring to the explanatory memorandum accompanying the Corporate Law Reform Bill 1992, which introduced the statutory demand provisions, the Full Court considered that section 459J(1)(b) was a general power for which it would be unwise to attempt to mark out the limits of the discretion.4  The subsection enabled the Court to take account of matters such as improper or invalid service and mistakes or misstatements in the notice of demand, in circumstances where this would significantly prejudice any party. After referring to the General Insolvency Inquiry discussion paper,5 the Full Court considered that the subsection would also be available where a creditor unreasonably refuses the company’s offer to meet the debt. The Full Court also apparently endorsed the proposition that the discretion might be exercised in the company’s favour, had it been shown that the Commissioner’s conduct was unconscionable, or an abuse of process, or that it had given rise to substantial injustice.6

In Moutere v Deputy Commissioner of Taxation,7 after agreeing with the approach of the Full Court in Hoare Bros, Austin J observed:

Having considered the basic premises upon which the discretion is exercised, it is appropriate to consider the recent cases.

In Softex Industries Pty Ltd v Federal Commissioner of Taxation,8 relevantly, the Commissioner had served a statutory demand on Softex in the sum of $15,302,967.42. The demand related to unpaid sales tax, income tax, fringe benefits tax, tax instalment deductions and amounts owing under a business activity statement. The applicant disputed payment of the sales tax and income tax, for which the respondent had demanded $10,337,091.09 and $4,066,819.70 respectively. Relevantly, Softex applied for an order setting aside the statutory demand relying on 459J(1)(b).

Part of the income tax itemised in the statutory demand related to payments which the applicant had received between 1993 and 1996 under a Federal Government scheme. The Commissioner had provided a private ruling in respect of payments made under the scheme that the payments were assessable as income or as capital gains.  Softex lodged an objection which was subsequently disallowed by the Commissioner. Softex applied to the AAT for a review of the objection decision and, at the time of the hearing in relation to the statutory demand, the AAT had not delivered its decision.

After referring to Moutere, the Court considered that it was oppressive for the Commissioner to serve a statutory demand that incorporated an amount that was the subject of an objection and a reserved decision by the AAT.9 In such circumstances the exercise of the discretion to set aside the statutory demand for “some other reason” was justified.

As an aside, the court also held that there was no provision for a variation of the statutory demand under section 459J(1)(b).  In other words, if the statutory demand comprises claims for amounts that are not able to be challenged under section 459(1)(b) the Court must set aside the demand and cannot vary the demand.

In Willemse Family Company Pty Ltd v Deputy Commissioner of Taxation,10 the Deputy Commissioner issued an amended notice of assessment that disallowed a deduction claimed by Willemse.  Willemse objected to the assessment. That objection in turn was disallowed.  Willemse then appealed against the objection decision.  Not long after that the Deputy Commissioner filed and served its claim and statement of claim seeking the amount of the applicant’s income tax liability the subject of the objection process.  Shortly after that the Deputy Commissioner obtained judgement in default against Willemse.  Based on the default judgement, the Deputy Commissioner served its statutory demand under s459E.

Willemse applied to the Court, relevantly, to have the statutory demand set aside relying on s459J(1)(b).  After referring to Hoare Bros, Moutere, and Softex, Holmes J took a somewhat wider approach to the exercise of the discretion in saying:

In KW & KM Quinn Investments Pty Ltd v Deputy Commissioner of Taxation12 the Deputy Commissioner issued a statutory demand for unpaid tax and interest.  Quinn Investments applied to set the demand aside under section 459J(1)(b). The company had done little to challenge the assessments. The solicitor for the company gave unimpeached evidence of the company’s intention to challenge the assessments by applications for review to the Administrative Appeals Tribunal.  There was also evidence of other taxpayers in a similar position having applied in “test cases” for review that were awaiting a decision.  In respect of the exercise of the discretion under 459J(1)(b) McMurdo J, at first instance, said:

Whilst the evidence of objecting to the assessment was not more than an intention to appeal to the Administrative Appeals Tribunal, Quinn Investments had at the core of its reasons the potential for the company’s tax assessments to be revealed as incorrect by virtue of the out come of the test cases.  His Honour went on:

The appeal against the decision of McMurdo J was dismissed.15 On the appeal,16 the Court of Appeal found that it was open to McMurdo J to be satisfied that it was unjust to permit the statutory demand procedure to be used in circumstances where there was no evidence that the applicant was unable to pay its debts as they fell due and there was some likelihood that the decision of the AAT in respect of other taxpayers would also resolve the liability of the applicant.  Importantly, the Court of Appeal also approved the wide approach to the exercise of the discretion as formulated by Holmes J in Willemse.17

The general proposition to be extracted from the above is that, the Court, through the medium of section 459J(1)(b) will not permit the Commissioner to use the statutory demand procedure to apply pressure to a taxpayer who genuinely objects to the Commissioner’s decision.  The challenge18 for those seeking to set aside a statutory demand issued by the Commissioner is to first, show that there are genuine steps being taken by the company to object to the assessments upon which the demand is based; second, show that there are good prospects that the objections or appeals will actually determine the question of liability under the income tax assessments; and third; in that context, show that the Commissioner’s conduct in issuing a statutory demand can be described as unconscionable, an abuse of process or result in the production of substantial injustice.

Richard Schulte  

Footnotes 

1. See, for example, in the context of notices of assessment FJ Bloemen Pty Ltd v FCT (1981) 147 CLR 360; at 375; Hoare Bros Pty Ltd v DCT (1996)  62 FCR 302; at 314.
2. See Corporations Act 2001, s 459G.
3. (1996) 62 FCR 302.
4. (1996) 62 FCR 302 at p 317.
5. ALRC, General Insolvency Inquiry (DP 32, 1987, para 114).
6. (1996) 62 FCR 302 at p 317.
7. (2000) 34 ACSR 533 at p 538.
8. (2001) 187 ALR 448.
9. (2001) 187 ALR 448 at p 461.
10. [2003] 2 Qd R 334.
11. [2003] 2 Qd R 334 at p 345.
12. (2003) 202 ALR 335
13. (2003) 202 ALR 335 at 337.
14. (2003) 202 ALR 335 at 339.
15. KW & KM Quinn Investments Pty Ltd v Deputy Commissioner of Taxation [2004] QCA 091.
16. Per Davies JA (with whom Fryberg and Philippides JJ agreed).
17. See [2003] 2 Qd R 334 at p 345.
18. See for example, Rocket Transport Services Pty Ltd v Deputy Commissioner of Taxation of the Commonwealth of Australia [2006] WASC 234; Vitalia Pty Ltd v the Deputy Commissioner of Taxation of the Commonwealth of Australia [2005] WASC 179.