Creditor’s Statutory Demands & the ATO

We aim to deliver Just, Redemptive Outcomes®

 I recently wrote a short paper explaining the Creditor’s Statutory Demand régime set out in the Corporations Act 2001 (Cth).  If you haven’t read that paper, I recommend you do so before reading this paper. 

 

The recent High Court decision of Deputy Commissioner of Taxation -v- Broadbeach Properties Pty Ltd [2008] HCA 41 is a sobering account of how the statutory demand regime can be wielded by the Australian Tax Office.

 

Facts of the Case

 

Deputy Commissioner of Taxation -v- Broadbeach Properties Pty Ltd involved three related companies within the “Howard Group”.  The Deputy Commissioner for Taxation had issued several of the Howard Group companies with declarations regarding liability for unremitted GST (totaling more than $14.5 million).  The deputy commissioner had also issued another of the Howard Group companies with an income tax default assessment (over $1.6 million). 

 

The deputy commissioner then delivered a creditor’s statutory demand in respect of the outstanding taxation debts to each of the Howard Group companies.  The Howard Group had 21 days to either pay the alleged outstanding tax or bring an application to set aside the statutory demand otherwise it would be deemed insolvent and face the risk of being wound up.

 

The Howard Group denied that it had any outstanding taxation liabilities and they lodged appeals with the Administrative Appeals Tribunal (“AAT”) under Part IVC of the Taxation Administration Act 1953 (Cth) (“TAA”)  seeking a review of the deputy commissioner’s GST declarations and default assessment. [Note: The TAA provides that the only way to review the a tax office decision is to appeal to the AAT].

 

Having lodged an appeal with the AAT, the Howard Group then filed an application with the Supreme Court of Queensland to have the deputy commissioner’s statutory demands set aside on the basis that there was a genuine dispute as to the existence of the taxation debts.  The Howard Group argued (successfully) that it could demonstrate there was a genuine dispute as to the alleged taxation debt because it had appealed to the AAT to review the decision of the deputy commissioner.  Importantly, the deputy commissioner even admitted that the Howard Group had advanced a reasonably arguable case at the AAT that the taxation debt was not owing.

 

The deputy commissioner, having lost an appeal to the Queensland Court of Appeal, appealed to the High Court.

 

The High Court’s decision

 

According to deputy commissioner there could be no genuine dispute as to the existence of the taxation debts because the taxation legislation provided that the production of a GST declaration or income tax notice of assessment was “conclusive evidence” that the amount and all particulars of the declaration or assessment were correct (See s 177(1) of the Income Tax Assessment Act 1936 (Cth) and s 105-100 (Sch 1) of theTaxation Administration Act 1953 (Cth)).

 

The deputy commissioner also pointed to s 14ZZM of the Taxation Administration Act 1953 (Cth) which provided that:

 

“The fact that a review [by the AAT] is pending in relation to a taxation decision does not in the meantime interfere with, or affect, the decision and any tax, additional tax or other amount may be recovered as if no review were pending”.

 

The deputy commissioner argued that the existence of the AAT proceeding and the admission that the taxpayer had a reasonably arguable case was immaterial to the question of whether of not there was a “genuine dispute” as to the existence or amount of a debt because the taxation legislation clearly held that the mere act of issuing the GST declarations or default assessments was conclusive evidence that the tax debts were due and owing. 

 

The High Court agreed with the deputy commissioner and reversed the decision of the Supreme Court of Queensland (which had been upheld by the Court of Appeal) to set aside the statutory demands.

 

By failing to have complied with the statutory demands, the Howard Group was presumed, pursuant to s 459C(2)(a) of the Corporations Act 2001 (Cth), to be insolvent.  The Howard Group was consequently susceptible to being wound up by the deputy commissioner.

 

Lessons to be learnt

 

The result of this case appears manifestly harsh and unfair.  Even though the Howard Group had taken the legal avenues open to it to dispute the taxation liabilities (ie. through the AAT), the companies could not avoid the risk of being wound up by the ATO due to presumed insolvency for failure to comply with a statutory demand.

 

This case is a salutary reminder that the Australian Tax Office has an array of powers at its disposal in order to collect Commonwealth revenue it maintains is owing.  Given the “conclusive evidence” provisions of the taxation law, the statutory demand regime is potentially one of the ATO’s most effective (and draconian?) debt collection tools.

 

Somewhat interestingly, the deputy commissioner admitted that, even though the taxpayer could not rely there being a ‘genuine dispute’ in order to set aside a statutory demand, a court in any winding up application could have regard to whether the taxpayer had a reasonably arguable case before the AAT.

 

[Note: a failure to comply with a statutory demand only gives rise to a presumption of insolvency.  Subject to certain requirements, a company subject to a winding up application based on a failure to comply with a statutory demand, may avoid winding up if it can adduce evidence that it is in fact  solvent.]

 

Whilst this may be some comfort to a company that it might eventually “escape” being wound up by the ATO, by that stage much damage would already have been done.  By that time:

 

  1. the company will be faced with funding a very costly disputed winding up proceeding;
  2. directors will need to consider their personal liability for trading whilst the company is (presumed) insolvent;
  3. the presumed insolvency will likely constitute an “act of default” under the company’s loan arrangements (meaning the lenders may have rights to call in the loans); and
  4. the company’s creditors may receive notice of the winding up application (eg. public notices of intention to wind up are placed in national newspapers) which may result in their reluctance to extend credit.

At Corney & Lind we always recommend that our clients pursue prudent taxation strategies.  Having regard to the powers of the ATO to recover taxation, we also recommend that your taxation strategies be reviewed regularly to ensure compliance. 

 

Our not-for-profit clients need to be particularly aware that your taxation concession charity endorsement is specifically conditional on you undertaking annual self-review to ensure you continue to comply with the specific charitable rules.  Conceivably, if you fail to undertake that annual review your endorsement may be revoked and you would be subject to income tax liability.