Commonwealth of Australia, Represented by the Department of Employment and Workplace Relations v Resilient Investment Group Pty Ltd ACN 128 547 580 & Ors [2023] HCATrans 173 (21 November 2023)

Last Updated: 22 November 2023

[2023] HCATrans 173

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Sydney No S75 of 2023

B e t w e e n -

COMMONWEALTH OF AUSTRALIA, REPRESENTED BY THE DEPARTMENT OF EMPLOYMENT AND WORKPLACE RELATIONS

Applicant

and

RESILIENT INVESTMENT GROUP PTY LTD ACN 128 547 580

First Respondent

KATHERINE ELIZABETH BARNET AND DAMIEN MARK HODGKINSON IN THEIR CAPACITY AS JOINT AND SEVERAL LIQUIDATORS OF SPITFIRE CORPORATION LTD (IN LIQ.) AND ASPIRIO PTY LTD (IN LIQ.)

Second Respondent

SPITFIRE CORPORATION LIMITED (IN LIQUIDATION)

Third Respondent

ASPIRIO PTY LTD (IN LIQUIDATION)

Fourth Respondent

Application for special leave to appeal

GORDON J
BEECH‑JONES J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA AND BY VIDEO CONNECTION

ON TUESDAY, 21 NOVEMBER 2023, AT 2.33 PM

Copyright in the High Court of Australia

____________________

GORDON J: In accordance with the protocol for remote hearings, I will announce the appearances of the parties.

MR M.A. IZZO, SC appears with MS C. ERNST for the applicant. (instructed by Clayton Utz)

MR M.R. HODGE, KC appears with MR J.S. BURNETT for the first respondent. (instructed by Marque Lawyers Pty Ltd)

GORDON J: I note there is a submitting appearance for the second, third and fourth respondents. Mr Izzo.

MR IZZO: May it please the Court. Your Honours, the ultimate issue between the parties was, relevantly, whether a company’s right to receive a tax refund is a circulating asset so as to be available to meet the priority claims of employees in an insolvency. The resolution of that issue turns on two subsidiary issues: first, whether the right existed at the critical date – which was the appointment date; and secondly, whether it arises from providing services in the ordinary course of business. It is the Court of Appeal’s resolution of those two subsidiary issues which has generated the two special leave questions which we have identified. Can I explain why each of those questions warrants the attention of this Court?

GORDON J: Can I ask one question, just before you take us to them. Is it the position that you need to get up on the contention that the R&D refunds were a monetary obligation in order to succeed?

MR IZZO: Yes. Yes, it is.

GORDON J: Thank you.

MR IZZO: That, in effect, your Honour, is the first question. The way we have posed it is this: whether the right to a tax offset refund exists as a chose in action as at the end of the income year, or whether it exists only upon the making of an assessment.

GORDON J: For my part, I would be very grateful if you could identify for me what is the error in the reasoning of his Honour Justice Gleeson when he deals with that question and, in particular, the intersection between the definition of tax offset refund in Division 995 and then the intersection between the effect of sections 67‑30 and the like, which really, I think, starts at application book 114, paragraph 50 and following.

MR IZZO: Yes, of course. Your Honours, the – if your Honour still has page 114 of the application book, the ultimate right which we say gives rise to the money obligation is the right set out at paragraph 50 in the table. That is, the words in item 40:

You can get a refund of the remaining amount –

It is that entitlement to get a refund if, relevantly, your tax offset is subject to the refundable tax offset rules, that, in our contention, gives rise to the relevant right in the hands of the taxpayer as at the end of the income year.

BEECH-JONES J: Mr Izzo, that is a refund of tax paid; is that right?

MR IZZO: No, it is really an amount. The way it works is, if your Honour goes to subsection (1) above the table, it says, what you do is, if you have got these offsets:

you apply them against your basic income tax liability –

and to the extent that the offset exceeds the liability – sorry, to the extent that having done that, you end up with a positive, you get what is called a “refund”, but “refund” is really, in a sense, misleading because actually what happens is you just get the excess of the offset over the underlying tax liability.

GORDON J: And that is made clear by the – for present purposes, it is sufficient to look at 67‑10?

MR IZZO: Yes, quite. The other place that is useful to look, your Honours, is paragraph 61 because it tells you, from a different point of view, what your income tax liability is. So, in 61, fifth line, it says that your income tax payable is:

“Income tax equals (Taxable Income x Rate) – Tax offsets”.

So, obviously, that can get you to zero – then “Step 4” makes that plain. But then there is a note at paragraph 62, and that sends you back to Division 63, which is what we have just been looking at. So, in other words – and this very much conceptually underlay the way we looked at the matter below – the amount that you have to pay by way of – I withdraw that. The amount you are entitled to as a refund – to use the language of 63‑10, item 40 – is really a corollary of the underlying obligation to pay tax.

You may have to pay an amount of tax or, alternatively, there is an amount due to you because your tax offsets exceed your basic income tax liability. That is the obligation that we are looking at – or, we would say, the right – the right to get a refund, set out in the provisions we have identified at paragraph 50, which exists, we say, as a corollary of the obligation to pay tax or a corollary of the underlying tax liability, which is quantified in the provisions at paragraphs 61 and 62.

GORDON J: So, in the ordinary course – absent the intersection of the insolvency date – there would be no entitlement or calculation of what the offset is and then the offset against the taxable income until the filing of the return – either by self‑assessment or otherwise.

MR IZZO: Yes, that is right. Even in the case of an insolvency, of course, in the real world, you are likely only to undertake this calculation when you sit down and do your returns, but it leaves the underlying question of when the right comes into existence, which, as your Honours understand, we say, is different to the time at which you do the sums.

GORDON J: I must say, for my own part, I find it an interesting submission to be made on behalf of, in a sense, the Commonwealth, because you would expect that they would rather wait until both the assessment and calculation process had been undertaken in order to determine whether or not they had an obligation to refund the amount.

MR IZZO: Well, your Honour, in a sense, the submission is not actually all that revolutionary because we say that your Honours can really deal with the matter in this way: that the obligation is no different to the obligation to pay tax. That obligation, it is recognised on the authorities, arises as at the end of the income year, notwithstanding that it is only enforceable at a later point – that is, upon the making of an assessment. And, in a sense, we are perfectly content to deal with the matter on the basis that the right to the tax offset refund was enforceable as at the same point.

We say the error lies in the findings of the Court of Appeal, and I will give your Honours the paragraphs. They are, relevantly, 99, 101, 107 – I will come back to them – 99, 101, 107 and 118. The gist of what their Honours find there, is that because the right is only enforceable upon the making of an assessment, it does not exist as a chose in action before that point. And we say that is in error because you can have a chose in action that is not presently enforceable, and that was precisely the reasoning of Justice White, which your Honours find at application book, page 154, paragraph 199.

So, his Honour, in the first five lines of 199, is dealing with the matter on the basis that the right is not enforceable until the assessment at issue – he deals with it on the basis of the returns being lodged – it does not really matter which it is, because they are the same. He accepts that it is only enforceable at that point, but he nevertheless accepted the terms of our argument that the right, just like the underlying liability to pay tax, comes into existence at the end of the income year, albeit it is contingent because it is only enforceable upon the making of an assessment.

We say the error in the paragraphs that I have identified in the majority’s judgment at 99, which talks about, at the third line from the bottom, the action can only be brought on the “issue of an assessment”, and again, at 101, the last two lines, the Commissioner cannot recover income tax until “an assessment is issued”. We say the error is this: that you can have a chose in action which is present property but is not presently enforceable. The best example of that is a contingent debt like a guarantee. The authorities recognise that that is exactly the case with the underlying obligation to pay tax.

Taylor’s Case at paragraph 104 of the judgment, page 129, is a very good example of that, in a situation analogous to the present, because there you had a bankruptcy that intervened after the end of the income year but before the assessment was made, and it was held that as at the end of the income year, there was a liability to pay tax contingent on assessment and that liability was provable in the bankruptcy.

The question that we have in the present case is really the same question, except it applies to the correlative liability or obligation, that is, the right to the refund. We say that the Court of Appeal has erred because it has found – let us accept, for present purposes, correctly – that the right to the refund is only enforceable on the making of an assessment. We say that does not preclude the obligation to make the refund coming into existence at the end of the income year, just like the liability to pay tax comes into existence at the end of the income year. So that ‑ ‑ ‑

GORDON J: Is that what you want to say about ground 1? Do you want to move to ground 2?

MR IZZO: Yes, if I may. Your Honours, with respect to ground 2, the special leave point is this. Can I just first show your Honours the text of the provision from which it arises. That is at judgment 28, and it is at page 107 of the application book. It is the definition of “current assets” in subsection (5)(a), and what is required, relevantly, is:

an account that arises from granting a right, or providing services, in the ordinary course of a business –

Now, we say the special leave point is this. The Court of Appeal has, in effect, confined that provision to book debts. That is, it has confined its operation to debts owed by customers for goods or services supplied. That construction is contrary both to other intermediate appellate court authority and, we would say, to the terms of the section. It also narrows the class of assets available to employees in an insolvency. The reason, we say, that that confinement appears from the Court of Appeal’s reasons, is that what the Court of Appeal has done is construe the relational phrase:

an account that arises from . . . providing services –

as requiring an equivalence between the activities which generate the account and the services provided by the company.

GORDON J: Can we just take that in steps? The account, on your analysis, is the monetary obligation being this – what you describe as the right to receive the refund.

MR IZZO: Correct.

GORDON J: And you say that what is put against you, at least at paragraphs 141 to 145, is that that right to that refund does not arise in the ordinary course of business of your client providing services of that kind.

MR IZZO: No, with respect, your Honour, because at paragraph 131 Justice Gleeson made the point, which is critical, that it is not the account that must arise in the ordinary course of business.

GORDON J: No, it is the refunds themselves though, is it not?

MR IZZO: No, it is the services which must be provided in the ordinary course of business. And his Honour recorded this at paragraph 131, and, we say with respect, that what his Honour said at 131 is correct. So really what you are construing is the phrase “arises from” the provision of services; it is the services, as his Honour says at 131, fourth line, which must be provided “in the ordinary course of business”.

GORDON J: Well, how does that sit with what his Honour says at 141?

MR IZZO: Well, in my submission, the last sentence of 141 is incorrect for the reason that it does not sit at all with 131.

GORDON J: Well, the way I had read it, it was a cascading set of reasons as to why it did not fall within the statutory provision.

MR IZZO: Well, we read 141 as making two separate points. The point in the first sentence seems to be that if it arises from incurring deductible expenses it does not arise from providing services. We just say that is a non sequitur. You have to ask the ultimate question; does it arise from providing services? Just because it is X does not mean it cannot also be Y. We accept that the last sentence seems to be another reason, but we just say that that is wrong. It is wrong because it is inconsistent with 131, and it is inconsistent with the language of the section, which requires not the account but the service to arise in the ordinary course of business.

BEECH‑JONES J: What we are debating, then, is the language – as you say, the words “arises from” – and how direct the connection between the refund and the provision of services is, is that right?

MR IZZO: That is right, your Honour, with this additional point that we would make. So, I embrace exactly what your Honour has said, but I would add this: that the Court of Appeal has added – relevantly, at 144 – a requirement for an equivalence between the activities that give rise to the account and the activities that comprise the provision of services. That is found in the second and third sentences of 144. It is also reflected in the last two sentences of 140.

We say that it is the requirement of that equivalence that has had the effect of consigning this provision to book debt, because it is saying, well, if the money that you are due as a company has come – is money for the provision of services – then the things that gives rise to the money, to the account, are the same as the services you provided. It is confining it to that. The difficulty is that it does not allow for other things – that is, monetary obligations that you obtain in the course of providing the services and because you are providing the services.

That is critical here because the only reason the company was spending money on R&D is because they had promised an innovative and developing product, and so they were spending money on making sure that it continued to have that character. The other significance is this, that it then creates an inconsistency with – so there are two further points I wish to make. The first is the inconsistency with intermediate appellate court decisions; the other is that it is against the words of the section.

As to the inconsistency, perhaps the most strikingly similar case is the Amerind decision of five judges of the Victorian Court of Appeal, which was the case that came to your Honours in Carter Holt, but not on this issue. In that case, the Court of Appeal found that a tax refund, which arose in that case because of an overpayment of tax – an overpayment that occurred and a right that accrued before the appointment of administrators – but that refund was an account within the meaning of section 340(5)(a).

We say the inconsistencies start because the services provided by the company in that case were architectural finishes. The obtaining of a tax refund because of an overpayment of tax has nothing to do with the provision of those services at all, we would say, other than the fact that the company had to lodge tax returns because it was engaged in business.

The other decision that we say is inconsistent with this approach is the decision of the Western Australian Full Court in Forge, which is dealt in the judgment at some length from about paragraph 147 on page 140 of the application book. In short, the point there was that the proceeds of a wrongful call on a bank guarantee were held to be in account in a case where the services the company provided were construction services. The activity that gave rise to the account – the wrongful call – is simply not the same thing as the provision of construction services. We say the equivalence which the Court of Appeal is requiring was not there in that case.

GORDON J: Yes, I notice the time, Mr Izzo; do you have much left?

MR IZZO: No, I was only going to make the final point about the words of the section – which your Honours find again at paragraph 28 – which, if your Honours look at the words in parentheses, acknowledges the possibility that the obligation is owed by someone else which, we say, is this case precisely. That possibility seems to us inconsistent with the limitation of equivalence that the Court appears to have imposed at paragraphs 140 and 144 of the judgment.

GORDON J: Yes, I think that is enough. Thank you very much.

MR IZZO: If your Honour pleases.

GORDON J: Mr Hodge.

MR HODGE: May it please the Court. Can I say, firstly, the general position of the respondent is this: the first question is interesting, but there is no error in what the approach of Justice Gleeson was; the second question is one that is an entirely conventional application of the law to the facts of this case. So, can I take each of them in turn.

As to the first question, if your Honours go to page 163 of the application book, our friends at paragraph 11 set out what is uncontroversially the essence of their argument and that is, that there a right that arose for Spitfire from section 63-10. You will see the way in which they build it up, which is based on the principle in Shepherd v Hills, and so that it works through in order to say, there is a statutory right that arises from section 63-10, which gives rise to a debt, which is therefore a chose in action, which is therefore a monetary obligation for the purposes of that definition to which our friend has already taken you.

If your Honours then go to page 174 of the application book – beginning at the bottom of that page and continuing over to page 175 – this is the whole of section 63-10. So can we just pause, then, on that to identify the way in which this section works, which is, it is setting out the priority rules in relation to a variety of kinds of refunds that are provided for. The section provides that the order in which those different kinds of tax offsets are to be applied, and the way in which the ultimate income tax liability will be determined is to apply those offsets – if there are any – in that order. Then, in respect of any unused part of that offset, there is then a provision as to what will happen in relation to that offset.

Your Honours can see that, in some cases, what will happen in relation to the excess is that it will be transferred in accordance with the regulation. In some cases, it will simply disappear altogether; in some cases, it can be carried forward to a subsequent income year; and in other cases – well, at least in the case of the R&D activities – there can be a refund of any remaining amount, so, that is, once you have ‑ ‑ ‑

GORDON J: Mr Hodge, just so I understand that – I put it to Mr Izzo that, in a sense, one does not know whether one has a refund or what is to happen to the amount until you have made a calculation, and then, ultimately, possibly an assessment. Is that, in a sense, the substance of that submission?

MR HODGE: Yes. And so, opposed to what our friends say, which is that the consequence of – in that table – item 40 saying that if there is any offset that is unused, you can get a refund – they say those words:

you can get a refund of the remaining amount –

which your Honours see on page 176, about three‑quarters of the way down the page – those are the words that do all of the work in order to mean that, in fact, there is a chose in action that arises at the end of the relevant income year – a chose in action in order to recover whatever that amount is of the refundable tax offset.

In our submission, the words of that section are just not capable of doing the job that they are being asked to do, and then that springs off into two points about the authorities which I will deal with very briefly. One is that Shepherd v Hills had no application here; the premise of the rule in Shepherd v Hills is that where the statute creates an obligation or imposes a duty on the government or the Commonwealth, or whatever the relevant institution is, to make a payment, then it follows that there is an implied debt that arises that can be sued upon. But, in our submission, nothing in 63‑10 imposes that obligation, and therefore Shepherd v Hills has no application, which is the point – as we understand it – that Justice Gleeson made.

The second point is that our friends seek to rely upon the cases concerned with what is termed “inchoate liability” and draw an analogy with that. The difficulty, in our submission, is that in order to go down that path you are taking other decisions dealing with other kinds of statutes concerned with whether or not there is any kind of liability that arises for a taxpayer in certain circumstances, and in a situation where it is accepted that there is no liability that is due and payable and instead it is described as “inchoate”, and then seeking to reason from that in order to say that there is some obligation that has been imposed upon the Commonwealth to make a payment such that it can give rise to a chose in action as at the end of the income tax year. In our submission, Justice Gleeson was right to say, there is just no assistance that can be derived from those cases.

I was then going to move to the second question, your Honours, unless there is anything further you wanted to ask about the first question.

GORDON J: No. Question 2 is useful, thank you.

MR HODGE: Thank you. Then in relation to question 2, can we ask your Honours, first, to go to application book page 107. You will see there this is the definition of what is the account. You see that about three‑quarters of the way down the page, subsection (5):

an account that arises from granting a right, or providing services, in the ordinary course of a business of granted rights or providing services of that kind –

There is no dispute between us, as we understand it, that those words “arises from” connote a causal connection. In our submission, the approach that Justice Gleeson took was entirely conventional to the facts of this case. If your Honours go then to page 137 of the application book, you will see at paragraph 136, his Honour sets out there an accurate summary of what are the kinds of R&D activities that are required, ultimately, to trigger the entitlement to an R&D offset. So, fundamentally, what is required is the expenditure of money on – and for present purposes we are concerned with “core R&D activities” which are:

experimental activities whose outcomes cannot be known or determined in advance –

and then there are some further parts of the definition. The critical point is this: whether those experiments or experimental activities do or do not lead to the provision of services to customers had no bearing on whether there is an entitlement to an offset and therefore an entitlement to a refund.

The only thing that the entitlement to the refund, or the refund itself, can arise from, is the conduct of the activities that are defined in the statute as giving rise to the ability to obtain that offset. And that is the reason why the refund cannot arise from the provision of services, because whether you provide the services or not, you are still entitled to the refund if you undertake the research activities, and if you do not undertake the research activities but you do provide the services, you are not entitled to the refund.

Tested in that conventional way, in relation to causation, in our submission, it cannot be said that the refund arises from the provision of services. Then Justice Gleeson developed other reasons, but that critical reason, in our submission, means there is no error. In relation to the two other judgments that are referred to, can I start with Amerind and the decision of the Victorian Court of Appeal. The reasoning in relation to that, insofar as it is concerned with a refund, is very brief; it is no more than three or four paragraphs of the judgment, beginning at about [412] or [413] of the judgment.

As his Honour Justice Gleeson noted, the actual nature of the refund did not identify specifically in the judgment, because the refund is dealt with as part of a bundle of miscellaneous receipts, and the fundamental operative sentences of the judgment I can read out to your Honours because there are only two, and this is at paragraph [415]:

The unchallenged evidence of Mr Byrnes was that the other receipts were all derived from circumstances and transactions that arose before the appointment date. As such, they were accounts arising from providing services in the ordinary course of business, within s 340(5)(a) of the PPSA and therefore circulating assets.

And there is nothing more to it than that. Amerind, in our submission, does not tell us anything about the factual circumstances of this case. In relation to Forge, that, in our submission, is dealing with a different factual scenario. Of course, it is the case that if you are engaged in providing construction services you will often have to – as part of being able to provide construction services – provide some form of guarantee. That is part and parcel of being able to undertake the provision of those services.

You provide the guarantee because you are providing the services, and therefore the drawing of the causal connection from the providing of services to the guarantee to then obtaining the refund of the wrongly called upon guarantee, is again a conventional application of causation to the words “arising from”. For that reason, in our submission, there is no apparent error in relation to Justice Gleeson’s conclusion, or the Court of Appeal’s conclusion, in relation to the second question. It is, in our submission, really just – it is legal in the sense that it is concerned with the taxation statutes, but, ultimately, it is simply a factual question of looking at the facts and connecting them to the services. Unless our friends succeed on both questions, there will be no consequence for the outcome below.

Those are our submissions.

GORDON J: Thank you, Mr Hodge. Mr Izzo, anything in reply?

MR IZZO: Yes, briefly, your Honours. A point on each question. On the first question, my learned friend raised two arguments, to which we make the same response. The first argument was that the words in item 40 of section 63‑10 – “you can get a refund” – do not do the job to give us a right, and the second point my learned friend made was that the principle in Shepherd v Hills does not give us a right. The difficulty of that submission is that – with respect to my friend – it is not relevant, for this simple reason.

The parties below were completely ad idem that there was a right in the hands of the taxpayer to receive a tax offset refund, and the only question of controversy was whether that right came into existence at the end of the income year or whether it came into existence on the making of an assessment. The right must come from one of those two sources that my learned friend mentioned, but it does not really matter, because our argument does not depend on showing it comes from any one of those
sources. Our argument depends from starting on the accepted basis that there is such a right and saying that, if it exists, it must come into existence at the same time as the correlative liability – that is, at the end of the income year.

On the second question, my learned friend said that Justice Gleeson’s resolution of the issue was purely factual and turned on the fact that you can spend money on R&D activities without providing services. There are two difficulties with that. First, it overlooks a crucial link that the trial judge emphasised – and we emphasised in this case – that the activities were undertaken precisely because the company was providing services of a particular kind – that is, a piece of software which it had marketed as being innovative and under development. Secondly, it overlooks the fact that the Court of Appeal’s resolution of this issue turned on a question of construction identified in the paragraphs – specifically 140 and 144 – that I took your Honours to earlier.

Only one last point I wish to make in relation to Forge: it was said that there was an account there because a company was providing bank guarantees in the course of providing construction services. We say that is this case because the company is investing in R&D precisely because it is providing a service which it has marketed as being constantly under development. We say there is no difference in the relevant facts underpinning the two cases. They are our submissions.

GORDON J: Thank you, Mr Izzo. In this application, we see insufficient reason to doubt the correctness of the decision of the Court of Appeal of the Supreme Court of New South Wales to warrant the grant of special leave. Special leave to appeal should be refused with costs.

Adjourn the Court, please, until 3.30 pm.

AT 3.09 PM THE MATTER WAS CONCLUDED