On 3 September 2008 the High Court of Australia brought down a decision that confirms the enforceability of statutory demands issued by the Australian Taxation Office, where the debt is the subject of a review in the Administrative Appeals Tribunal (AAT). It just happens that Ivor Worrell and Michael Peldan of the Brisbane office were appointed liquidators of one of the companies a few days before the decision was handed down.
The background facts can be reduced to (i) the companies entered into sales that they say did not give rise to GST liabilities, (ii) the ATO issued assessments for GST on those sales and some income tax and other interest and penalties, (iii) the ATO issued statutory demands for recovery of those amounts from the companies, and (iv) the companies objected to the assessments (the objections were rejected), and (v) the companies applied to the AAT for review of the decision to reject to the objections.
The companies applied to have the statutory demands set aside because there was a ‘genuine dispute’ about existence or amount of taxation debt. The court had to determine whether pending AAT proceedings constituted a “genuine dispute … about the existence or amount of a debt” within meaning of section 459H(1)(a) – the provision of the Corporations Act that provides for applications to set aside statutory demands.
The Court set aside the statutory demands and the ATO appealed that decision. The Court of Appeal dismissed the appeals by the Commissioner and the matter eventually ended up in the High Court.
The ATO’s position was that “the taxation legislation has the effect that the amounts and all the particulars of the assessments or declarations leading to the debts stated in those demands are correct” [wording from the High Court Judgment].
Section 459H(1) of the Corporations Act says:
“This section applies where, on an application under section 459G, the Court is satisfied of either or both of the following:
(a) that there is a genuine dispute between the company and the respondent about the existence or amount of a debt to which the demand relates;
Was the application to the AAT evidence of a genuine dispute under the taxation legislation? There is undoubtedly a dispute as to the amount or existence of the tax debt, or there would have not been an AAT review. But tax debts are in a special class.
The ATO submitted that the existence of a review by the AAT does not give rise to a ‘genuine dispute’ where a notice attracting the conclusive evidence provisions of the taxation legislation is tendered by the Commissioner, and the statutory demand cannot be set aside on that basis. The Income Tax Assessment Act says in section 177:
(1) The production of a notice of assessment, or of a document under the hand of the Commissioner, a Second Commissioner, or a Deputy Commissioner, purporting to be a copy of a notice of assessment, shall be conclusive evidence of the due making of the assessment and, except in proceedings under Part IVC of the Taxation Administration Act 1953 on a review or appeal relating to the assessment, that the amount and all the particulars of the assessment are correct.
Couple this with section 14ZZM of the Taxation Administration Act 1953:
“The fact that a review 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 High Court determined that the Statutory Demands could not be set aside on that basis.
The position can be summarized as:
(i) assessments by the ATO can be subject to objections and reviews by the AAT; but
(ii) objections and reviews do not create the genuine disputes required by section 459H of the Corporations Act to set aside statutory demands.
The position of directors is precarious. Even if a tax debt is disputed, once a statutory demand is issued by the ATO, the director will have to take some action – if possible paying the tax. If the company is wound up on that demand, every debt incurred after the expiry of the statutory demand could be subject to an insolvent trading claim and there would be limited or no defense to those claims. But once an appointment is made, it is quite likely that an external administrator will not proceed with any objection or review (for cost reasons) and the business of the company will be compromised. Directors are left with little option but to pay the tax debt and dispute it afterwards, or appoint someone to the company. If they do not do either, they run the risk of insolvent trading claims being made against them.
