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This case is a reminder of the breadth of the debt recovery methods open to the commissioner, as discussed by KPMG’s Jacqueline McGrath and Kristie Schubert.
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‘Freezing orders’ — commissioner’s recent win
15 May 2021
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The Federal Court recently granted an application, brought by the Commissioner of Taxation, for interlocutory orders (“freezing orders”) restraining a taxpayer from certain dealings with real property owned by him.
Prior to the lodgement of the application in the Federal Court, the taxpayer was issued with a notice (a “security bond notice”) requiring him to give security in favour of the commissioner for (then) future tax liabilities.
The notice required the taxpayer to grant the commissioner a first-ranking mortgage over certain real property in Victoria.
The taxpayer did not respond to the notice and there was evidence that a mortgage was not granted within the time specified in the commissioner’s notice.
The commissioner then lodged an application ex parte (in the absence of the taxpayer) in the Federal Court seeking a declaration that the notice had not been complied with and also an interlocutory order (freezing order) ensuring that no encumbrance, mortgage, charge, disposal could occur with respect to the property nor any steps be taken to diminish the value of the property until such time as the commissioner was able to obtain judgment for the claimed tax liability.
In order to obtain a freezing order, the commissioner was required to show that he has a good arguable case and that there is a danger that the prospective judgment will be unsatisfied because a taxpayer might “abscond, remove assets, dispose of assets or deal with the assets in a way that would diminish them in value”.
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The court was satisfied there was a proper basis for concern of risk of dissipation of the taxpayer’s Australian real property and the orders were granted with immediate effect.
In making these orders, the court found the following factors persuasive:
- While the initial security notice was only issued on anticipated future tax liabilities, the commissioner had, by the time it commenced the proceedings, issued notices of assessments totalling approximately $24.7 million. As notices of assessments are prima facie evidence of debts payable to the Commonwealth, the commissioner was able to satisfy the court that there was a “good arguable case” that he would obtain judgment.
- The taxpayer had large amounts of undisclosed income that gave rise to the inference that he had grossly understated his taxable income for a number of financial years. The court also noted that he had been unco-operative with the commissioner in failing to respond to numerous requests for information and documents from the Australian Taxation Office and demonstrated a lack of willingness to comply with his obligations.
- Further, the significant amount of the tax liability, the taxpayer’s failure to comply with the preceding security notice together with the fact that the taxpayer had the ability and motive to sell the unencumbered Australian real property (which was the only property of the taxpayer in Australia) and move funds offshore, or encumber the property, satisfied the court of the risk that the property would be dealt with adversely to the commissioner’s interest, thereby compromising the commissioner’s ability to enforce the security notice.
The case is a reminder of the breadth of the debt recovery methods open to the commissioner and the importance of engaging early and often with the Australian Taxation Office (ATO) to negotiate the payment of tax-related liabilities.
The case may be accessed here: Commissioner of Taxation v Zou [2021] FCA 433.
Jacqueline McGrath, director, tax dispute resolution and controversy services, KPMG Australia; Kristie Schubert, director, tax dispute resolution and controversy services, KPMG Australia
This article was first published on “KPMG Tax Now”.
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