In what appears to be an extraordinary example of the steps willing to be taken by the Deputy Commissioner of Taxation (Commissioner) to protect the Commonwealth revenue; the recent decision of Deputy Commissioner of Taxation v State Grid International Australia Development Company Limited  FCA 139 shows a taxpayer’s assets may be frozen even in the absence of any notice of assessment being issued by the Deputy Commissioner at the time he applied to the Court to obtain the freezing orders.
In this case, at the time of filing the application – the Commissioner had not issued a notice of assessment to State Grid (the taxpayer). In fact, the event that was argued by the Commissioner to give rise to tax becoming payable was not occurring until the day after the application for the freezing order was being heard.
Notwithstanding this, the Commissioner was found to have a good arguable case in the form of a prospective cause of action and for that reason qualified to apply for freezing orders.
The critical facts preceding the freezing order application are:
- In late 2021, Australian Energy Holdings No 4 Pty Ltd (a company controlled by Brookfield Asset Management, Inc. (Brookfield)) proposed to acquire all of the shares in AusNet (the Scheme for the purposes of the Corporations Act 2001). AusNet’s majority shareholder at the time was State Grid (a Singapore based entity).
- Following its approval by the shareholders of AusNet; on 16 February 2022 State Grid was to dispose of all of its 762,162,932 shares in AusNet (the State Grid Shares) to Brookfield for a total consideration of $1,983,529,032 pursuant to the Scheme.
- The Commissioner believed that this would give rise to a capital gains tax (CGT) event. The Commissioner computed State Grid’s capital gain to be $736,509,652.00 and would have a tax payable amount of $220,952,895.69.
- Accordingly, at 4.15pm the day before the Scheme was to be given effect to (ie the share sale occurred) and hence before the actual CGT event that gave rise to the purported tax liability; the Commissioner urgently applied for freezing orders over bank accounts belonging to State Grid and AusNet.
- The Commissioner informed the Court that he would issue a ‘Special Assessment’ the next day. Indeed, the Commissioner could not do so beforehand – since there was no actual tax payable. Importantly, upon service of the Special Assessment on 16 February 2022, the debt stated in the Special Assessment would only become due and payable by State Grid on 1 December 2022.
- There was evidence before the Court that the Commissioner’s staff were aware of the transaction – since December 2021. They had in fact approached the taxpayer and requested that State Grid hold an amount on account of the anticipated CGT liability in a telephone conversation with them. The request was refused as the taxpayer believed that the event was not taxable.
- The Commissioner argued that there was a risk if the electronic transfer of funds to the existing shareholders occurred at 8.30am on 16 February 2022 (as planned under the Scheme), that the monies could be dissipated from Australia.
Freezing order applications
In order to obtain the freezing orders, the Commissioner was required to show there was a good arguable case as well as a danger that the prospective judgment would 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”.
Importantly, the Federal Court Rules provide that the Court may make a freezing order against a judgment debtor or prospective judgment debtor if the Court is satisfied, having regard to all the circumstances, that there is a danger that a judgment or prospective judgment will be wholly or partly unsatisfied by reason of the disposal or otherwise adverse dealings with assets (as outlined above).
Critically – and what seems to be remarkable in this case – is that the reference to a ‘prospective judgment debtor’ has extended to a case where the transaction purportedly giving rise to the debt has not yet occurred (ie there is no debt) and therefore proceedings to recover the debt are not yet on foot.
Applications for freezing orders are often remarked in judgments to be ‘no light matter’ and approached by Court’s with caution – for the very reason that it deprives parties of their assets. This case appears to test the boundaries of the freezing order process by seeking an order – even in the absence of any proof of debt (the notice of assessment).
Anyone experienced in proceedings commenced under Part IVC of the Taxation Administration Act 1953 (TAA 1953) would be well versed in the operation of the conclusive evidence provisions.
Specifically, section 350-10, Item 2 of Schedule 1 to the TAA 1953 provides the production of a notice of assessment is conclusive evidence that the assessment was properly made and that the amounts and particulars stated in that assessment are correct.
This section is a powerful tool in the Commissioner’s arsenal – it gives the production of a notice of assessment the status of being conclusive evidence of a debt owing to the Commonwealth. Judgment may then be granted by a Court to enable the Commissioner to commence recovery action for the debt. This can happen in spite of any desire by the taxpayer to contest the underlying basis for the assessment.
At the time of this application, the Commissioner had not issued an actual assessment to the taxpayer – and hence no basis upon which the Commissioner could be said to have a debt owing to him in order to pursue recovery action.
The conundrum in this case – is that the Commissioner believed that the funds would be removed the next day – when the Scheme crystallised. He was confident that the crystallisation would render CGT payable. However, until it crystallised – there was no basis upon which the Commissioner could raise an assessment – since the CGT event had not yet occurred.
Good arguable case
The facts suggest that the question of whether the CGT liability arose in this case was essentially binary ie it would either arise or not arise based on the application of the law to the facts of the case. This is in contrast to a situation where there is no doubt that a tax liability will arise but it is a question of the amount of tax which will be assessed. This is significant because in the Scheme Booklet, there was a copy of a letter dated 25 November 2021 to AusNet from the lawyers for AusNet which opined that shares in AusNet “should not give rise to an indirect Australian real property interest”.
Conversely, the Commissioner’s view of the application of the law was that Division 855 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) did not apply to disregard any capital gain made by State Grid from the disposal of the State Grid Shares. Division 855 of the ITAA 1997 operates in relation to a capital gain made by a foreign resident. It provides that a capital gain can be disregarded where the asset is not “taxable Australian property” within the meaning of s855-10 of the ITAA 1997.
It followed that the Commissioner and taxpayer were in disagreement regarding the tax outcome and it appears there existed a possibility (based on AusNet’s legal advice) that there may be no liability at all. Interestingly, in the absence of an assessment (and hence the ability to rely on the conclusive evidence provisions) it is perhaps surprising that the divergent views of the parties (including the publicly shared view of AusNet’s legal advisors) did not receive more consideration in weighing up the question of whether there was an arguable case (particularly in circumstances where the debt had not yet arisen).
Relevantly, it was revealed during cross-examination, that the Commissioner had not furnished State Grid with a Position Paper or even calculations in respect of the CGT. State Grid was only provided with CGT calculations within the Affidavit of the Commissioner’s officer that was prepared for the purposes of the freezing order application (and executed on 15 February 2022).
The Court held at  (our emphasis):
I agree for the reasons given by the Commissioner that the Commissioner has established a good arguable case in the form of a prospective cause of action accruing once State Grid has disposed of its shares in AusNet to AEH4 and the notice of the Special Assessment has been issued to State Grid.
This paragraph is difficult to reconcile with the actual outcome in this case because neither the disposal or issuing of the assessment had occurred when the interim freezing order was granted.
A further interesting aspect is that whilst it is unclear if there is a deliberate hierarchy in the reasons given in respect of the ‘good arguable case’, the Court set out three bases in order first, second and third.
The first reason again looks to the conclusive evidence provisions. In this regard, the writers note as there was no assessment at the time of the hearing the ‘conclusive evidence’ provisions were not yet enlivened.
The second looks to the ability of the Commissioner to recover a tax debt. In this regard, the writers note that a debt was not yet in existence and would not in any event be due and payable until 1 December 2022 (for completeness, it is noted that the fact that a debt is not yet payable will not necessarily avoid a freezing order).
The third was that evidence had been given that the Commissioner would issue a Special Assessment as soon as the transaction was complete.
The third reason presents an interesting outcome in circumstances where the taxing event had not yet occurred, it was contingent on a significant transaction taking place (albeit there was nothing in the judgment to indicate that it would not take place) and as a result the tax liability had not yet arisen.
Balance of convenience
At paragraph 55, the Court sets out the “essential considerations” which were taken into account in determining the balance of convenience about the making of the freezing orders. In this regard, it would appear that the considerations which, in the Court’s view, weighed in favour of the orders largely focused on protecting the Commissioner’s ability to recover.
Conversely the “essential considerations” which weighed against the granting of the order were put by the Court in the following terms:
(a) there was no evidence that State Grid had done anything unlawful or proposed to do anything unlawful or that it would not comply with the Special Assessment (although the evidence suggests that it may seek review of the Special Assessment under Part IVC of the TAA, as it is entitled to do);
(b) the seriousness of the orders sought, given in particular the substantial amount of money which the Commissioner sought to freeze and the fact that the monies would not fall due under the notice of Special Assessment until 1 December 2022;
(c) the fact that the Commissioner had sought the freezing orders on the eve of the Implementation Date;
(d) the fact that, as a consequence of the Commissioner’s late application for interlocutory relief, the implementation of the transaction would be impeded and delayed if orders were made so as to prevent the relevant amount being distributed, as the orders originally proposed by the Commissioner would necessitate the rewriting of payment instructions for distributing the funds electronically from the ANZ account operated by AusNet (the ANZ Account) to all of the shareholders, which was estimated by Mr Holland to require a delay of half a day to a full day;
(e) the fact that third party interests may be affected in unknown and potentially unknowable ways by a delay of up to a full day in payment of the monies to them if the payment instructions for distribution of the monies had to be rewritten so as to retain the relevant amount in the ANZ Account while distributing the remainder;
(f) the potentially large number of third parties whose interests may be affected, including individuals, if the funds were not transferred to them on the Implementation Date; and
(g) if there was a delay of a full day, the consequence would be that the consideration owed to Scheme Shareholders under the Scheme would not have been distributed in full on the Implementation Date, which in turn would potentially raise a question as to whether AusNet was in breach of its obligations under the Scheme.
Whilst it seems the terms of the original orders were amended to alleviate the impact noted at (e), (f) and (g), the considerations at (a) to (d) were, in the writers’ views, compelling reasons weighing against the granting of the orders.
Change in approach?
The Commissioner’s published approach historically, and indeed our experience, has been that the Commissioner would seek to issue an assessment before initiating freezing order proceedings. That is not to say that there would be a great deal of time between issuing an assessment and commencing recovery action (including seeking a freezing order). It is not unheard of for the Commissioner to almost simultaneously issue an assessment and freezing order; but the assessment typically arrives first, or almost simultaneously, with an urgent ex parte application seeking a freezing order.
In this regard it is useful to consider the Commissioner’s published guidance in Practice Statement Law Administration 2011/18 wherein the Commissioner sets out the considerations in undertaking her risk assessment process in respect of the decision to seek a freezing order (our emphasis):
185. The risk assessment process requires due regard to be given to the requisite elements for a freezing order as prescribed by the relevant court rules and as settled by the court. In Third Chandris Shipping Corp. v. Unimarine S.A. (1979) QB. 645 at 668, Lord Denning outlined the requisite elements that the plaintiff must address in an application for a Mareva injunction. In the case of the Commissioner as an applicant for a freezing order, the following are considered relevant:
Prima-facie cause of action
(i) In the first instance, the Commissioner must establish a prima-facie cause of action against the tax debtor. A prima-facie case is one that has a real possibility of ultimate success as opposed to a speculative case. Therefore, the Commissioner must demonstrate a good arguable case against the tax debtor. The cause of action is the non-payment of the debt by the date that it was due to be paid.
(ii)Although it is an advantage to have commenced legal recovery proceedings before embarking on an application for a freezing order, it is not an essential prerequisite. It will not always be possible to commence legal action because the assessed amounts due to the Commissioner may not be payable at the point in time when action to obtain a freezing order is commenced (that is, the amounts are payable at a future date).
(iii) If legal action has not commenced, the plaintiff must establish a claim against the tax debtor. The courts would appear to be satisfied that the Commissioner has a sufficiently strong case where notices of assessment have been issued. Production in court of notices of assessment, by virtue of subsection 177(1) of the ITAA 1936, is deemed to be conclusive evidence of the making of the assessments. (See DFC of T v. Rosenthal (1984) 85 ATC 4031; (1984)16 ATR 159, DFC of T v. Sharp & Anor, Ex parte DFC of T 88 ATC 4572, C of T v. Futuris Corporation Ltd  HCA 32, DFC of T v. Broadbeach Properties Pty Ltd  HCA 41.) Where legal action has not commenced, it is to be expected that the court will require an undertaking that proceedings for recovery be commenced within a fixed time.
It follows that the approach in this case signifies an expansion in the way the Commissioner is seeking to utilize his recovery powers; the Commissioner is intervening much earlier to secure recovery of tax debts (in this case before the taxing event even occurred).
We will need to wait to see whether the Commissioner issues any statement or updates to public guidance, including to PS LA 2011/18. This is particularly relevant in light of Deputy Commissioner of Taxation v Huang  HCA 43. In that case, the Commissioner successfully tested the boundaries in respect of seeking worldwide freezing orders. The High Court, finding in favour of the Commissioner, found that the relevant question was not whether there was a realistic possibility that the prospective judgment could be enforced against the defendant’s assets in any relevant foreign jurisdiction. Rather, in determining whether the Federal Court had power to make the Worldwide Freezing Order, the question was whether the order would seek to meet a danger that the prospective judgment will be wholly or partly unsatisfied.
There appears to be a key issue at stake – with very real impacts for taxpayers. As such, this case should be the subject of much more attention – for the reasons set out above. Whilst we understand (from the Federal Court’s website) that the matter has been referred for mediation, it will be interesting to observe whether any appeal eventuates. Particularly because there appears to be some tension in the way the orders were made under rule 7.35 when having regard to the gateway provision in rule 7.32.
In any event, the case should be a warning for anyone involved in major transactions such as the one presented in this case. The Commissioner may, in those circumstances, intervene at the 11th hour to ensure any prospective debt is secured. Accordingly, if a major transaction is on the horizon which results in value or assets being disposed, particularly for assets leaving the jurisdiction, taxpayers would be well advised to consider how they can manage the Commissioner’s expectations in regards to satisfaction of any resulting tax liability.
This article was written by Kristie Schubert, Partner and Jacqueline McGrath, Special Counsel.