Focus: High bar to restraining collection of tax
16 July 2012
In brief: A recent Supreme Court of New South Wales decision, dismissing an application to restrain the Office of State Revenue from recovering assessed taxes while the time to challenge the assessments was still running, confirms the courts' reluctance to interfere with the recovery of taxes. Partner Michael Quinlan and Lawyer Yu Zhang report.
How does it affect you?
- The general position is that the Office of State Revenue (the OSR) is free to pursue recovery proceedings, notwithstanding the unfairness and hardship that might cause. The fact that an objection or an application to review an adverse determination of an objection is pending does not, in the meantime, affect the validity of the assessment to which the objection relates. Regarding many types of NSW state taxes, this power of the OSR is provided for under the Taxation Administration Act 1996 (NSW).
- As we noted in our recent Focus on the decision in Deputy Commissioner of Taxation v Bayconnection Property Developments Pty Limited,1 the Australian Taxation Office (the ATO) is in a similarly privileged position regarding certain federal taxes. In that case, the Federal Court, unusually, agreed to stay a winding up application pending the hearing of an appeal by the taxpayer challenging the assessment.
- In the recent decision of Print National Australia Pty Ltd v Chief Commissioner of State Revenue,2 the taxpayer sought to restrain the OSR from recovering the assessed payroll tax. The NSW Supreme Court held that courts do have power to restrain the institution of any proceedings that would be an abuse of process, unconscionable conduct or an unconscientious exercise of rights. However, substantial hardship alone is insufficient to invoke this jurisdiction.
- In this case, the court refused to restrain the OSR from taking steps to recover the unpaid tax. It held that there was insufficient evidence to show that the plaintiff companies would not have any other means to meet the debts imposed by the assessment.
The OSR assessed a group of 12 companies for an amount of $4.29 million in payroll tax, interest and penalty tax. While the time to challenge the assessments was still running, eight of those companies applied to the NSW Supreme Court for orders restraining the OSR from recovering the assessed amount; at least, not until two weeks had elapsed from the OSR's determination of any objections that the plaintiffs lodged against the assessments.
The plaintiffs argued that they would suffer extreme hardship if the OSR instituted recovery or winding up proceedings against them.
Justice White considered whether the court had jurisdiction to issue an injunction, as opposed to merely a stay of proceedings, in these circumstances.
His Honour noted that the Taxation Administration Act 1996 (NSW) applies to payroll taxes and that section 94 of that Act provides:
Recovery of tax pending objection
The fact that an objection is pending does not in the meantime affect the assessment or decision to which the objection relates and tax may be recovered as if no objection were pending.
However, his Honour held that the court has inherent power:
- to regulate its own processes, do what is necessary for the administration of justice and restrain the institution of any proceedings that would be an abuse of process; and
- to restrain unconscionable conduct or the unconscientious exercise of legal rights.
Therefore, if the mere institution of recovery proceedings would preclude the exercise of a taxpayer's right to seek review of an adverse determination of objections, the court would have jurisdiction to restrain the institution of such recovery proceedings. The exercise of the taxpayer's right is not precluded by substantial hardship alone.
In this case, the court held that there was insufficient evidence to show that the plaintiff companies would not have any other means to meet the debts imposed by the assessment; for example, by borrowing against their assets. Therefore, the hardship did not amount to a preclusion of the taxpayers' rights to seek review.
Finally, the court also held that even if the principles applicable to applications for a stay of recovery proceedings should be applied, the plaintiffs would not succeed because courts have consistently recognised Parliament's intention to place the OSR in a special place of advantage, and so would generally allow the OSR to pursue recovery proceedings, notwithstanding the unfairness and hardship that that might entail.
This case confirms the courts' usual view that the statutory regime places the OSR in a special position of advantage to pursue recovery of tax assessments. However, the case also recognises that there are limits to this right, so that if the institution of recovery proceedings precludes the right of the taxpayer to seek review of an adverse assessment, the courts may restrain the proceedings. This is, though, a high standard, which was not met in this case.
This decision may be contrasted with that in Deputy Commissioner of Taxation v Bayconnection Property Developments Pty Limited. The unusual circumstances of that case meant that the Federal Court was willing to go further than the usual position and consider whether the ATO would be prejudiced by an adjournment of its winding up application; and, in the end, order an adjournment until the resolution of proceedings challenging the tax assessment that were already on foot.
-  FCA 363.
-  NSWSC 297.
- Larry MagidConsultant,
Ph: +61 2 9230 4918
- Geoff RankinPartner,
Ph: +61 7 3334 3235
- Philip BlaxillPartner,
Ph: +61 8 9488 3739
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