Central to the Australian taxation system is the concept of self-assessment. Voluntary compliance for the payment of tax related liabilities is strong with Australian Tax Office (ATO) data indicating that approximately 90% of tax liabilities are paid by the due date.
Despite this, there are high numbers of collectable tax debt ($34.1 billion in FY 20), that the ATO is under some pressure to collect. COVID-19 saw a pause in ATO debt recovery activity; however, based on recent cases, it is apparent that the ATO has resumed its focus on recovery with increased vigour. Recovery actions have now been extended to both existing and future tax liabilities.
In remarkable circumstances, the Commissioner of Taxation (Commissioner) has successfully obtained a freezing order for approximately A$220m against a non-resident taxpayer in the recent decision of Deputy Commissioner of Taxation v State Grid International Australia Development Company Limited  FCA 139 (State Grid Case). This is the largest freezing order application sought and obtained by the Commissioner against a corporate in the last 10 years. It is generally the case that income tax related liabilities are due and payable within 21 days from the lodgement due date or date of the notice of assessment. The Commissioner has an administrative practice of not commencing debt recovery action in circumstances where there is a dispute about the substantive taxation liability and certain conditions have been met. The Commissioner will, however, displace the administrative arrangements if there is a concern that there is a risk to the revenue. The Commissioner’s approach to risk management of tax debts is set out in Practice Statement Law Administration PS LA 2011/6. The evaluation of risk by the Commissioner is often a culmination of several factors including the taxpayer attributes (compliance history, behaviour and circumstances), the likelihood of payment and the size of the exposure. The Commissioner has a range of mechanisms that can be deployed in order to recover the tax debt, such as accepting securities (bank guarantees), payment arrangements, garnishee notices and freezing orders.
Perhaps the only limitation on the ATO’s ability to recover tax debts is when it is oppressive to do so. The 22 March 2022 decision of the Federal Court in Hyder v Commissioner of Taxation  FCA 264 (Hyder) reveals that the ATO wanted to recover twice the taxation liability arising from the same source in the same year. The case of Hyder involved a trust, with distributions to Screaming Eagle Pty Ltd (SEPL) and Mr Hyder. SEPL had paid the amount of tax in relation to its distribution to the ATO (approximately $5.3m).
The ATO sought to include that same distribution recorded by SEPL as Mr Hyder’s income. The tax liability (to Mr Hyder, or alternatively to the trustee) in relation to the distribution recognised by the ATO was not reduced to reflect the tax already paid by SEPL. The ATO’s position was that Mr Hyder had entered into a contrived arrangement through a purported partnership with a private company (SEPL) as a partner, and then utilised the company’s profits for private purposes or retained the profits for working capital purposes.
The Federal Court found that the ATO had acted oppressively in Hyder by seeking to enforce the payment of total debt from the taxpayers in the period from May 2020 to July 2021.
On 22 March 2022 the ATO sought and obtained, on an ex parte basis, freezing orders against two individuals (Deputy Commissioner of Taxation v Williams  FCA 263). Assessments had issued on 21 March 2022 for $7.7m and $3.9m. Both cases involved UK citizens having migrated to Australia with poor compliance history. In granting the freezing and ancillary orders the Court found that there was a risk of dissipation of the assets and non-payment of the taxation debt.
Corporate taxpayers may be interested in the background circumstances to, and the reasons for, the Court granting the freezing orders. We set these out below, together with some considerations for buyers and sellers contemplating similar transactions.
The key facts of the case are as follows:
The Federal Court granted the freezing order against State Grid and AusNet on the basis that the Commissioner established that:
The matters the Court took into account in evaluating the second and third elements included that:
Residents and non-residents alike will need to consider whether they are liable to CGT where a CGT event happens in relation to taxable Australian property. A capital gain realised by a non-resident on exit from its investments (such as a sale of shares in a company) may be disregarded under Division 855 of the ITAA 1997 if the asset disposed of is not Taxable Australian property (TAP). TAP is a defined term, and broadly includes both direct and indirect interests in Australian real property. The test in Division 855 requires both a categorisation of assets within the relevant categories, and an evaluation of how the market values the assets with a view to ascertaining whether 50% of the value is attributable to Australian real property.
In terms of the circumstances in State Grid, there were two ways in which the tax liability contended for by the Commissioner could arise:
The cases of FCT v Resource Capital Fund III LP  FCA 1247 (RCF) and FCT v Regent Pacific Group  FCA 36 (Regent Pacific) show that the Commissioner is prepared to use freezing orders to secure payment for a tax liability. Both cases involved taxpayers based in the Cayman Islands, tax assessments already in existence and applications put on by the Commissioner for freezing orders even though the time for the payment of the tax debt had not yet occurred. Aspects of the RCF case also involved a CGT event, and whether Division 855 of the ITAA 1997 applied.
This case illustrates the extent to which the Commissioner will go to protect the Australian tax base and ensure recoverability of tax debts, including seeking enforcement of a last minute freezing order a day before a major transaction is expected to occur. As emphasised in the case and extracted from Deputy Commissioner of Taxation v Wang  FCA 1711, “a freezing order is a ‘drastic remedy’ which should not be lightly granted”. Despite this, the case also illustrates the readiness of the Court to find in favour of the Commissioner in relation to risks concerning the recoverability of tax debts. The Courts recognise that there is a separate mechanism by which a taxpayer can contest the substantive tax question (via Part IVC).
Of note, in relation to the first requirement (that there must be a ‘good arguable case’):
Interestingly, this case is one of two cases in the last 10 years that involved a freezing order being granted in relation to a prospective tax liability. On the other occasion, in 2013, a freezing order in relation to a prospective tax liability was granted in the context of the Binetter litigation, against an individual for approximately $1.2m. Based on a search of Federal Court judgements from the past 10 years, it is clear that the ATO does not shy away from seeking freezing orders as a means of securing its tax debts, having sought and successfully obtained freezing orders on 20 occasions. However, in most of those cases, subsequent litigation revealed the cause for the Commissioner’s concern, in that there were subsequent findings of fraudulent or evasive behaviour on the part of the taxpayer (eg Binetter v Federal Commissioner of Taxation  FCAFC 163). Based on the information available about the State Grid case the freezing order appears to have been sought in very different circumstances to those granted to the Commissioner over the last 10 years.
While this case provides an example of the ATO exercising its powers as against the taxpayer with the primary tax liability, it is important not to forget a buyer’s obligations in the context of share disposals and the potential alternate routes available to the ATO.
It seems that a purchaser of shares would be required to withhold and remit to the ATO an amount under the foreign resident CGT withholding (FRCGTWT) regime, usually 12.5% of the purchase price (unless a valid clearance certificate or declaration is provided) on or before the day the buyer provides the ‘financial benefit’ (i.e. purchase price). The purpose of FRCGTWT is to remedy the low level of compliance with the foreign resident CGT regime. It is intended to be a non-final withholding tax, and operates by compelling the non-resident to file an income tax return for the year in which the CGT event occurred, disclosing the capital gain and claiming the 12.5% as a tax credit. The difference between the 30% tax on the capital gain and the 12.5% already paid would need to be paid by the non-resident following lodgement of the tax return.
Buyers may also wish to consider the pros and cons of relying upon another’s assessment of whether or not the sale will give rise to an indirect Australian real property interest, as well as the utility of obtaining an independent assessment of risk. Opinions regarding classification as between TARP and non-TARP and valuation will have important consequences in determining any taxation liability, and are matters that continue to be contentious.
Additionally, the terms of any withholding and gross-up clause will need to be considered carefully from the buyer’s perspective to ensure that it operates in the manner that the parties anticipate. It would be prudent to have regard to the range of possible approaches to enforcement that the ATO might take.
Taxpayers should be aware that Australia has a highly proactive revenue authority. These cases, and others like the DPT case (see our insight from February), are prime examples of the breadth of the Commissioner’s powers and the persistent approach which the Commissioner takes to collecting taxation revenue. It would be prudent for taxpayers to keep in mind the ATO’s perspective on the risk to the revenue, and the potential consequences that could occur if the ATO is not comfortable with the level of perceived risk.
In both the State Grid and Hyder cases, the ATO approached the respective taxpayers with offers to enter into a 50/50 arrangement. Under a 50/50 arrangement, the taxpayer pays at least 50% of the disputed primary tax amount plus any other outstanding undisputed tax debts. The taxpayer agrees to provide information that is needed to resolve the dispute in a timely way. In exchange, the ATO agrees to defer recovery action on the debt until the conclusion of the substantive dispute. A concessionary general interest charge remission is also provided over the term of the dispute.
Given the significant implications of recovery action, taxpayers may want to consider a proactive ATO engagement strategy designed to provide the Commissioner with a degree of assurance regarding the tax technical position and risk to the revenue. Such assurance measures could include:
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