OZONE MANUFACTURING P/L v DEPUTY COMMISSIONER OF TAXATION [2006] SASC 91 (31 March 2006)

Last Updated: 31 March 2006

SUPREME COURT OF SOUTH AUSTRALIA
(Full Court: Civil)

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment. The onus remains on any person using material in the judgment to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court in which it was generated.

OZONE MANUFACTURING P/L v DEPUTY COMMISSIONER OF TAXATION

Judgment of The Full Court
(The Honourable Justice Debelle, The Honourable Justice Besanko and The Honourable Justice Layton)

31 March 2006

INCOME TAX - DEDUCTIONS AND REBATES IN CALCULATING TAXABLE INCOME - PARTICULAR DEDUCTIONS - EXPENDITURE ON SCIENTIFIC RESEARCH

CORPORATIONS - WINDING UP - WINDING UP BY COURT - GROUNDS FOR WINDING UP - INSOLVENCY - STATUTORY DEMAND

Application to set aside statutory demand under s 459G – respondent provided running balance account ("RBA") to appellant in respect of tax debts – whether genuine dispute as to existence of debt – whether offsetting claim extant – whether research and development tax offsets ("R & D tax offsets") may be applied against RBA – whether claim for R & D tax offsets constitutes offsetting claim – whether appellant’s claim for R & D tax offsets reasonably arguable – whether RBA debt must be paid notwithstanding dispute – held, claim for R & D tax offsets constitutes reasonably arguable offsetting claim – RBA debt no bar to offsetting claim – appeal allowed.

PROCEDURE - JUDGMENTS AND ORDERS - AMENDING, VARYING AND SETTING ASIDE - EFFECT OF ENTERING OR RECORDING JUDGMENT OR ORDER

Application to dismiss appeal as incompetent – order extending time for compliance with statutory demand either conditional or subject to undertaking – delayed compliance with conditions or undertaking – whether order self-executing – whether order should be set aside on basis that appellant had no reasonable case – held, delay in compliance inadvertent – order not self-executing – application dismissed.
A New Tax System (Goods and Services Tax) Act 1999 (Cth) s 31, s 33, s 162, Div 9; Corporations Act 2001 (Cth) s 459E, s 459F, s 459G, s 459H, s 459M; Income Tax Assessment Act 1997 (Cth) s 4-10, s 13, s 67-25, s 67-30, s 67-35, s 950, s 995-1, Div 67, Sch 1; Income Tax Assessment Act 1936 (Cth) s 73B, s 73I, s 74H, s 177, s 204, s 207, s 208; Taxation Administration Act 1953 (Cth) s 8AAZA, s 8AAZC, s 8AAZD, s 8AAZF, s 8AAZH, s8AAZL, s 8AAZLA, s 8AAZLB, s 8AAZLF, s 14ZZM, s 14ZZR, s 14ZQ, Sch 1 (s 16, s 250, s 255, Part 4-15, Div 255), referred to.
John Shearer Ltd & Arrowcrest Group Pty Ltd v Gehl Company [1995] FCA 1789; (1995) 60 FCR 136, applied.
Chippendale Printing Co Pty Ltd v Deputy Commissioner of Taxation (1995) 55 FCR 562; Hoare Bros Pty Ltd v Commissioner of Taxation (1996) 62 FCR 302, distinguished.
Australian Beverage Distributors Pty Ltd v Cranswick Premium Wines Pty Ltd (2004) 50 ACSR 544; Cardura Investments v Rototek Pty Ltd [2004] WASC 249; (2004) 51 ACSR 390; Chadwick Industries (South Coast) Pty Ltd v Condensing Vaporisers Pty Ltd (1994) 13 ACSR 37; Chase Manhattan Bank Australia Ltd v Octsy Pty Ltd [1995] FCA 1208; (1995) 17 ACSR 128; Chun Wang v Minister for Immigration & Multicultural Affairs [1997] FCA 70; (1997) 71 FCR 386; Classic Ceramic Importers Pty Ltd v Ceramica Antiga SA (1994) 13 ACSR 263; Cooloola Dairies Pty Ltd v National Foods Milk Ltd [2004] QSC 308; [2005] 1 Qd R 12; Deputy Commissioner of Taxation v Cumins [2003] WASC 3; (2003) 51 ATR 620; Deputy Commisioner of Taxation v Ho (1996) 131 FLR 188; Edge Technology Pty Ltd v Lite-on Technology Corporation [2000] NSWSC 471; (2000) 156 FLR 181; Eumina Investments Pty Ltd v Westpac Banking Corporation [1998] FCA 824; (1998) 84 FCR 454; Fortuna Holdings Pty Ltd v Deputy Commissioner of Taxation [1978] VicRp 9; [1978] VR 83; Jesseron Holdings Pty Ltd v Middle East Trading Consultants Pty Ltd (No 2) (1994) 13 ACSR 787; JJMMR Pty Ltd v LG International Corporation [2003] QCA 519; Macleay Nominees Pty Ltd v Belle Property East Pty Ltd [2001] NSWSC 743; Platypus Leasing Inc v Federal Commissioner of Taxation (No 3) [2005] NSWSC 388; (2005) 59 ATR 84; Posner v Collector for Interstate Destitute Persons (Vict) [1946] HCA 50; (1946) 74 CLR 461; Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355; R v Garner [1994] VicRp 27; [1994] 1 VR 400; Re Brink; Ex parte Commercial Banking Co of Sydney Ltd [1980] FCA 78; (1980) 30 ALR 433; Re Jocumsen (1929) 1 ABC 82; Scanhill Pty Ltd v Century 21 Australasia Pty Ltd [1993] FCA 618; (1993) 12 ACSR 341; Tasker v Fullwood [1978] 1 NSWLR 20; Uysal v Deputy Commissioner of Taxation (2003) 54 ATR 215; Vogwell v Vogwell (1939) 11 ABC 83, considered.

WORDS AND PHRASES CONSIDERED/DEFINED

"offsetting claim"

OZONE MANUFACTURING P/L v DEPUTY COMMISSIONER OF TAXATION
[2006] SASC 91



Full Court: Debelle, Besanko and Layton JJ

1

DEBELLE J. This is an appeal from the decision of a Master of this Court refusing to set aside a statutory demand made pursuant to s 459E of the Corporations Act 2001 (Cth).

2

The appellant Ozone Manufacturing Pty Ltd ("Ozone") carries on business designing and manufacturing what it calls "pollution technology". Presumably, it is technology designed to prevent pollution. Ozone is liable to pay the Commissioner of Taxation ("the Commissioner") goods and services tax in respect of goods and services sold and supplied by it. It is also liable to pay the Commissioner amounts withheld from employees’ salaries and wages under the Pay As You Go System. Payments withheld are called withholding payments in Division 6 of Schedule 1 of the Taxation Administration Act 1953 (Cth) ("the Administration Act") and it is convenient to call them "PAYG withholding payments". Both goods and services tax ("GST") and PAYG withholding payments are monies due to the Commonwealth under taxation laws.

A Liability on an RBA

3

Ozone is required to submit quarterly returns in respect of its liability for GST and monthly returns in respect of its liabilities for withholding payments under the PAYG system. Pursuant to the provisions of the Administration Act, the Commissioner may establish a Running Balance Account for individual taxpayers and may debit against that account amounts due under tax legislation. I will refer to the detailed provisions of the Administration Act in a moment. The Commissioner has established a Running Balance Account ("RBA") for Ozone. The amounts due by Ozone for GST and PAYG withholding payments have been debited to Ozone’s RBA as well as penalties and interest. As at 22 March 2005 the balance of that account was $1,019,801.80.

Application to Set Aside Statutory Demand

4

By a statutory demand dated 22 March 2005 and made under s 459E of the Corporations Act, the Commissioner demanded payment of $1,019,801.80 being the balance of the RBA at that date. The statutory demand was served on 24 March 2005. On 13 April 2005 Ozone applied to this Court pursuant to s 459G of the Corporations Act for an order setting aside the statutory demand. The grounds of its application were

(i) that there was a genuine dispute between Ozone and the Commissioner about the existence or amount of debt to which the Commissioner’s statutory demand related, and

(ii) that Ozone had an offsetting claim.

Ozone did not dispute the amount of the balance in its RBA (other than an amount of about $84,000 discussed below) but contended that it was entitled to tax offsets for research and development expenditure for the tax years ending 30 June 2002, 2003 and 2004. Ozone contended that the total of the offsets exceeded the balance in the RBA so that a refund was due to it. The legislation by which these tax offsets are available and the grounds on which Ozone asserts its entitlement to them will be noted a little later in these reasons.

The Application is Dismissed

5

A Master of this Court dismissed the application on the ground that there was no genuine dispute. He held that the claims for tax offsets made in the returns for 2002, 2003 and 2004 were not assessments and so could not create a genuine dispute. He did not examine the question whether Ozone had an offsetting claim.

6

Ozone has appealed on the ground that there is both a genuine dispute and an offsetting claim and on the further ground that the Master had confused the two concepts. However, the emphasis in the notice of appeal was upon an offsetting claim and, as the argument on behalf of Ozone on this appeal unfolded, it became apparent that the primary ground on which it relied was that it had an offsetting claim within the meaning of s 459H of the Corporations Act. For the reasons which follow Ozone does have an offsetting claim. That is sufficient to decide this appeal.

An Application to Strike Out the Appeal

7	After the appeal had been listed for hearing but before it had been heard, the Commissioner applied for an order dismissing the appeal as incompetent. The application was made on the ground that Ozone had not complied with the terms on which it had been granted an extension of time within which to comply with the statutory demand. The Court ordered that the application be heard by the Full Court which was to hear the appeal. After hearing argument, the Full Court dismissed the application for reasons to be published. These are the reasons for the decision. The Court also extended the time to comply with the statutory demand until the date when these reasons are published.
8	As already noted, the Master had dismissed Ozone’s application to set aside the statutory demand on 7 July 2005. On 8 July Ozone applied for an extension of time within which to comply with the statutory demand until the appeal had been heard and determined. On 12 July 2005 the Master adjourned the application for argument until 9 August and extended the time in which Ozone should comply with the statutory demand until 10 August. At the hearing on 9 August, the Master made orders as to the filing of affidavits and extended the time for compliance until 16 August. He adjourned Ozone’s application until 15 August.
9	On 15 August the parties informed the Master that they had agreed the terms on which Ozone should be granted an extension of time to comply with the statutory demand. The Master therefore extended the time to comply with the statutory demand until 30 September. The order of the Master does not record the terms agreed by the parties. The fiat simply reads:

1 I note that the parties have negotiated an agreed position with regard to the extension of time for compliance with the statutory demand and for the prosecution of the appeal. The parties will submit minutes of order as soon as possible.
2. For the purpose of inclusion in the minutes of order I extend the time within which the plaintiff shall comply with the statutory demand to 30 September 2005.

The Master also adjourned the matter for hearing on 30 September.

10	Although the parties had reached some level of agreement, they had not agreed the precise terms upon which the extension would be ordered. As will be seen, the difference between them concerned whether the order was subject to conditions or whether it had been made on undertakings given by Ozone.
11	On 16 August the Australian Government Solicitor sent draft minutes of order to Thomson Playford, the solicitors for Ozone. Thomson Playford did not accept the terms of the draft. There were telephone conversations between the Australian Government Solicitor and Thomson Playford. On 17 August Thomson Playford sent the Australian Government Solicitors its draft of the minutes of order. In the event, the order granting the extension was not reduced to writing and sealed as an order of the Court.
12	There was no material difference between the parties as to the terms of the order. They differed only as to the basis on which the order had been made. The terms of the order prepared by Australian Government Solicitor on behalf of the Commissioner were:

BY CONSENT OF THE PARTIES, upon the undertaking of the Appellant to this Honourable Court:

1. to lodge all Business Activity Statements that fall due for lodgement from the date of these Orders until the hearing of the Appeal on or before the due date for lodgement of the Statements; and upon the conditions that the Appellant;
2. pay all liabilities that accrue on the lodgement of the said Statements that fall due for payment from the date of these Orders until the hearing of the Appeal on or before the due date for payment;
3. file an application for an expedited hearing of the Appeal filed on 19 July 2005 within 10 days of these Orders;
4. file the Appeal Books by 17 September 2005 or within any time provided for the filing of the Appeal Books on the hearing of the application for an expedited hearing of the Appeal as this Honourable Court may require;
THE COURT ORDERS:
1. that the time for compliance with the statutory demand made by the Respondent dated 22 March 2005 be extended to 5.00 pm on 30 September 2005.
2. that the application be adjourned for further hearing to 30 September 2005 at 9.00 am.
3. that the parties be granted liberty to apply on short but reasonable notice.
4. that the costs of this application be reserved.

5. that the attendance on 15 August 2005 be certified for Counsel.

Given that there was no dispute as to paras 1 - 5, the operative terms of the order, it is necessary only to set out the terms of the undertaking as proposed by Thomson Playford. It was in these terms:

BY CONSENT OF THE PARTIES, upon the undertaking of the Plaintiff to this Honourable Court:

1. to lodge all Business Activity Statements that fall due for lodgement from the date of these Orders until the hearing of the Appeal on or before the due date for lodgement of the Statements;
2. to pay all liabilities that accrue on the lodgement of the said Statements that fall due for payment from the date of these Orders until the hearing of the Appeal on or before the due date for payment;
3. to file an application for an expedited hearing of the Appeal filed on 19 July 2005 within 10 days of these Orders;
4. to file the Appeal Books by 19 September 2005 or within any time ordered by this Honourable Court upon the hearing of the application for an expedited hearing of the Appeal.

The essential difference between the parties was that in the Commissioner’s draft paras 2, 3 and 4 of the preamble to the order were expressed as conditions whereas in the Ozone draft they were expressed as part of the undertaking. When viewed as a whole, the two drafts substantially express identical obligations on the part of Ozone. However, the different manner in which the obligations are expressed has important consequences should Ozone be in default.

13	Ozone complied with paras 3 and 4 of the undertaking or conditions and the appeal had been listed for hearing on 12 September. The Commissioner’s complaint was that Ozone had not complied with paras 1 and 2 of the undertaking or conditions.
14	The Commissioner asserted that Ozone was in breach of paras 1 and 2 of the undertaking or conditions by failing to lodge a Business Activity Statement on the due date and failing to pay any liability set out in the Business Activity Statement. Ozone was due to lodge a Business Activity Statement on 22 August 2005 and on the same day pay any liabilities identified in that statement. Ozone did not lodge its Business Activity Statement until 25 August. That statement noted that Ozone was required to pay a withholding payment of $14,721. Ozone did not pay that sum until 29 August. As Ozone was three days late in lodging the Business Activity Statement and one week late in paying the withholding payment, the Commissioner contended that Ozone was in breach of a condition of the order. The consequence of the breach, the Commissioner submitted, was that the order ceased to have any operation, that the extension ceased to be effective, and that the Commissioner was entitled to proceed on the footing of a failure to comply with the statutory demand. The Commissioner’s argument was, in effect, that the order was self-executing. In the alternative, the Commissioner contended that the Court should set aside the order in the exercise of its discretion. In support of that argument, the Commissioner submitted that Ozone did not have a reasonably arguable case. Before examining these contentions, it is convenient to note Mr Oke's explanation for the delay by Ozone.
15	Mr Oke’s affidavit evidence is that he believed that the Business Activity Statement was to be lodged on 29 August. On 25 August he was informed by Ozone’s solicitors that Ozone was in breach of its undertaking. He checked the position and ascertained that the Business Activity Statement was due on 22 August. He immediately went to the office of the ATO in Sydney and lodged the Business Activity Statement and other statements. At the Sydney office of the ATO, Mr Oke asked if he could pay the monies due but was informed by an employee of the ATO that the payments had to be made by sending a cheque to a locked bag address in Albury. The same day he sent cheques to that address payable to the Commissioner of Taxation. On 26 August Mr Oke was informed by Ozone’s solicitors that the cheque should have been payable to the ATO. On 26 August Mr Oke caused to be sent to the Albury address cheques payable to the ATO. They were received by the ATO on 29 August.
16	There is some support for Mr Oke’s belief that Ozone did not need to lodge its Business Activity Statement and pay the money due by 22 August. Mr Oke deposed in his affidavit that he understood that he had to comply with the terms of a letter from the Australian Government Solicitor to Thomson Playford dated 12 August 2005. In that letter it was said that the Commissioner would agree to an extension of time on the following terms:

1. the company will, within 10 days, file an application for an expedited hearing of its Appeal;
2. the company will file Books of Appeal within the time required by Rule 95 or Court Order upon the above application being heard;
3. the company will give an undertaking to the Court that it will lodge all BAS’ that fall due for lodgement prior to the hearing of the Appeal on the due dates for lodgement;
4. the company makes payment of any amounts that it becomes liable to pay for GST and PAYGITW on lodgement of the above BAS’ prior to the hearing of the Appeal;
5. the company undertake to make payment of the further debt advised in the Business Activity Statements lodged by Mr Oke on 8 August 2005 by close of business 31 August 2005.

Mr Oke in fact paid all amounts due to the Commissioner on 29 August, that is to say, well before the hearing of the appeal. In so far as there was any liability under the Business Activity Statement he paid it before 31 August as nominated in condition 5. Mr Oke appears to have misunderstood the position but this explanation indicates that Ozone was not acting in deliberate defiance of what had been agreed.

17	I am satisfied that the delay was inadvertent, not deliberate. In addition, Ozone was not unduly late. Ozone was only three days late with the Business Activity Statement and seven days late with the payment. There is a satisfactory explanation for the delay in payment. While it is in breach of its undertaking, the delay is not sufficient to warrant striking out the appeal. The Commissioner contended that Ozone had been dilatory in discharging other aspects of its obligations as a taxpayer. Any delay in that respect is not relevant to this application. The only question is what was agreed, whether Ozone acted in breach, and what is the explanation for the breach.
18	An examination of the transcript of the hearing before the Master on 15 August indicates that counsel used the words "undertaking" and "condition" indiscriminately. Those words were not used carefully or with due regard to their meaning. Certainly, it is not clear which of the terms of the preamble to the order constituted an undertaking and which constituted a condition. In those circumstances, it is clearly not possible to find either that the order was made on conditions or that the order was to be self-executing upon any default by Ozone. Courts are notoriously reluctant to make self-executing orders. If such an order was made, it would have to be spelled out in clear and unambiguous terms. There is nothing in the fiat made by the Master which suggests a self-executing order. The parties had not reached a clear and unambiguous agreement. For these reasons, the order was not self-executing.
19	There is no basis for the Court in the exercise of its discretion to set aside the order made on 15 August. There is no clear agreement. The delay by Ozone was minimal. Ozone did, in fact, pay all that was due, albeit a week late, a delay which is explained by Mr Oke’s reliance on the letter from the Australian Government Solicitor of 12 August. In addition, as is apparent from the reasons which follow, Ozone not only has an arguable case but it is entitled to succeed on this appeal.

Taxation Liabilities of Ozone

20	It is convenient first to examine the several statutes which establish the régime for GST and PAYG withholding payments, for charging of the amounts due for those liabilities to the RBA, and the entitlement to refunds for tax offsets for research and development expenditure. That will provide the background by which it will be possible to determine whether there is, in fact, a genuine dispute or an offsetting claim.
21	Ozone is liable to pay GST in respect of goods and services sold or supplied to its customers. That liability is created by Division 9 of A New Tax System (Goods and Services Tax) Act 1999 ("the GST Act"). The tax is payable quarterly and is payable upon the lodging of a GST return which is called a Business Activity Statement: see ss 31, 33 and 162 of the GST Act.
22	Ozone is also liable to pay the Commissioner PAYG withholding payments. The obligations of a taxpayer in respect of PAYG withholding payments are prescribed in s 16 of Schedule 1 of the Administration Act. It is common ground that Ozone is what the Administration Act calls a "medium withholder": see s 16-100 of Schedule 1. As a medium withholder, Ozone was required to lodge a monthly return and to pay to the Commissioner the amount withheld by the 21st day of the next month following the month in which the amount was withheld: s 16-70 and s 16-75(2A). A general interest charge (which is defined in s 995-1 of the Income Tax Assessment Act 1997 (Cth)) is payable in respect of any amount unpaid: s 16-80 of Schedule 1.
23	Thus, Ozone had and continues to have a liability to pay the Commissioner GST (as well as any penalties and interest on outstanding GST) and PAYG withholding payments (as well as any interest and penalties on outstanding payments).

The Running Balance Account

24	Section 8AAZC of the Administration Act authorises the Commissioner to establish an RBA for primary tax debts payable by any entity. The expression "primary tax debt" is defined by s 8AAZA of the Administration Act to mean

any amount due to the Commonwealth directly under a taxation law (other than, except in Division 4, the Product Grants and Benefits Administration Act 2000), including any such amount that is not yet payable.

The exception in respect of the Product Grants and Benefits Administration Act 2000 has no application in this case. Section 8AAZD authorises the Commissioner to allocate a primary tax debt to an RBA that has been established for that type of tax debt. As the amounts due by Ozone for GST and PAYG withholding payments are due directly under a taxation law, they are primary tax debts which may be allocated to its RBA. The Commissioner has allocated the GST and PAYG withholding payments to Ozone’s RBA account.

25

Primary tax debts that have been allocated to an RBA and are currently payable are called an RBA deficit debt: s 8AAZA. An RBA deficit debt is a debt due and payable by the taxpayer to the Commonwealth: s 8AAZH of the Administration Act. A general interest charge is payable on a daily basis in respect of the RBA deficit debt: s 8AAZF. The Commissioner is authorised by Part 4-15 of Schedule 1 to the Administration Act to recover tax-related liabilities which are defined by Item 85 of s 250-10 of Schedule 1 of the Administration Act to include an RBA deficit debt. Thus, the Commissioner may sue to recover Ozone’s RBA deficit debt, that is to say, the amount due on the RBA by Ozone to the Commissioner. That debt will include the primary tax debt and any penalties and interest thereon.

Credits to an RBA

26

Section 8AAZL of the Administration Act prescribes a régime for treatment of payments and credits to RBAs and for the treatment of the surplus in any RBA. The Commissioner is required by s 8AAZLF to refund any surplus in the RBA or any credit which is not allocated to the RBA. Ozone claims that it is entitled to tax offsets for expenditure by it on research and development and that it is entitled to have those tax offsets credited to its RBA. The statutory provisions on which it bases that claim are as follows.

R and D Tax Offsets

27

Section 73B of the Income Tax Assessment Act 1936 (Cth) ("the 1936 Assessment Act") provides for deductions for certain expenditure by eligible companies on research and development activities. The expressions "research and development activities" and "research and development expenditure" are defined in s 73B(1) but it is not necessary to stay with those definitions. It is common ground that Ozone is an eligible company.

28

Section 73I of the 1936 Assessment Act enables an eligible company to choose a tax offset instead of a deduction in any year of income. It provides

(1) An eligible company can choose a tax offset instead of a deduction under section 73B, 73BA, 73BH or 73Y for a year of income (the tax offset year) if it is eligible to make that choice (see section 73J).
(2) The choice must be made in the company’s return of income for the tax offset year.
(3) The eligible company’s tax offset for the tax offset year is 30 cents for each dollar that the company could, apart from subsection (4), deduct for that year under section 73B, 73BA, 73BH or 73Y.
(4) An eligible company cannot deduct any amount under section 73B, 73BA, 73BH or 73Y for the tax offset year if it chooses the tax offset for that year.
Note: The tax offset is subject to the refundable tax offset rules: see section 67-25 of the Income Tax Assessment Act 1997.

As an eligible company, Ozone was at liberty to make the choice referred to in s 73I. The choice had to be made in Ozone’s income tax return for the year in which the expenditure was incurred: s 73I(2). The alternative of a tax offset is plainly of greater benefit than a deduction for eligible companies which are not earning profits and thereby not earning taxable income. It enables an immediate benefit from claiming the tax offset instead of carrying forward the deduction to later years.

29

Section 74H of the 1936 Assessment Act defines the expression "tax offset" to have the meaning given by s 995-1 of the Income Tax Assessment Act 1997 (Cth) ("the 1997 Assessment Act"). Section 995-1 provides that "tax offset has the meaning given by section 4-10". Section 4-10 of the 1997 Assessment Act is part of a provision which prescribes how a taxpayer should calculate the income tax payable on taxable income. It describes a tax offset in these terms:

A tax offset reduces the amount of income tax you have to pay.

It is necessary, therefore, to ascertain what constitutes a tax offset. Tax offsets are listed in s 13 of the 1997 Assessment Act and include offsets for research and development as provided in s 73I of the 1936 Assessment Act.

30

To state the position shortly, Ozone is entitled by reason of s 73I to choose a tax offset for its research and development expenditure instead of a deduction. Ozone is entitled to apply any tax offset to which it is entitled for other purposes which include the purposes noted in the following paragraphs.

Offsets Against Tax Other Than Income Tax

31	An eligible company may apply tax offsets to reduce taxes other than income tax. The relevant provisions are set out in Division 67 of the 1997 Assessment Act.
32	The Australian Taxation Office has, in conjunction with AusIndustry, prepared a substantial publication of 141 pages called Guide to the R&D Tax Concession 2004. Among other things, the guide describes the benefits to eligible companies of deductions and tax offsets for research and development expenditure. At page 47 the guide states:

A refund will be offset against any other Commonwealth tax liabilities owed by the company, including GST, FBT and withholding taxes.

A statement to a similar effect appears at page 53. It reads:

The R&D Tax Offset is subject to the refundable tax offset rules. The offset directly reduces tax payable by a company. This includes income taxes, GST, FBT and withholding taxes. Where the amount of the offset exceeds the amount of tax that the company would otherwise have had to pay, then the excess is refundable.
ITAA 1997 Division 67

The footnote is a reference to Division 67 of the 1997 Assessment Act. The guide cannot of course govern or qualify the provisions of the tax legislation. It is referred to only for the purpose of providing a convenient introduction to that which follows. It is not a guide within the meaning of s 950 of the 1997 Assessment Act.

33	Section 67-25(3) of the 1997 Assessment Act provides that a tax offset for research and development expenditure under s 73I is subject to the refundable tax offset rules. The actual terms of s 67-25(3) are:

The tax offset available under section 73I of the Income Tax Assessment Act 1936 (research and development) is subject to the refundable tax offset rules.

The refundable tax offset rules are set out in Division 67 of the 1997 Assessment Act and s 67-25(3) is part of Division 67. The refundable tax offset rules which prescribe the entitlement of Ozone to a refund are s 67-30 and s 67-35 which provide:

67-30 When you can get a refund of a tax offset

You can get a refund of tax offsets that are subject to the refundable tax offset rules if the total of those offsets exceeds the amount of income tax that you would have to pay if you had not got those tax offsets and any tax offset under section 205-70 (but had got all your other tax offsets).

67-35 Amount of refund

The amount of the refund of tax offsets is the amount of the excess referred to in section 67-30.

The effect of s 67-30 is that Ozone is entitled to a refund of its tax offsets if the total of those offsets exceeds the amount of income tax payable if Ozone had not received the offsets. Ozone did not have any liability to pay income tax in 2002. Thus, by reason of s 67-30 and s 67-35, if Ozone is entitled to a refund of tax offsets for its research and development expenditure in the years 2002, 2003 and 2004 and can satisfy s 67-30, it is entitled to a refund payable by the Commissioner. A taxpayer may have the refund credited to its RBA as an offset against its liability, among other things, for GST and PAYG withholding payments. The statutory provisions creating that entitlement are noted in the following paragraphs.

Crediting Refunds to an RBA

34	The Administration Act prescribes a régime by which refunds may be credited to an RBA. Section 8AAZA of the Administration Act defines a credit for the purposes of an RBA in these terms:

Credit includes an amount that the Commissioner must pay to a taxpayer under a taxation law (other than the Product Grants And Benefits Administration Act 2000), whether or not described as a credit.

(The Product Grants and Benefits Administration Act 2000 is not relevant for present purposes.) A refund of tax offsets to Ozone is an amount payable by the Commissioner to Ozone as a taxpayer and the amount is payable under a taxation law, namely, s 67-30 and s 67-35 of the 1997 Assessment Act. The only question is whether the Commissioner must pay the taxpayer an amount equal to the refund.

35	The word "must" is, generally speaking, a word of obligation. It has been described as "a word of absolute obligation" in Posner v Collector for Interstate Destitute Persons (Vict) [1946] HCA 50; (1946) 74 CLR 461 per Williams J at 490; Chun Wang v Minister for Immigration & Multicultural Affairs [1997] FCA 70; (1997) 71 FCR 386 at 391. It was called "a word of imperative obligation" in R v Garner [1994] VicRp 27; [1994] 1 VR 400 at 402. In certain contexts, it might have a directory as distinct from a mandatory operation, a distinction which has been criticised as elusive: Tasker v Fullwood [1978] 1 NSWLR 20 at 23 - 24, affirmed in Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 at [93]. Plainly, the question whether "must" is a word of obligation and, if it is, the force of the obligation will depend on the statutory context and the nature of the obligation in the context in which the obligation is to be performed. In this context, the word "must" can only be reasonably understood to mean that it imposes an obligation upon the Commissioner to pay to a taxpayer any amount due to the taxpayer under a taxation law.
36	For these reasons, if Ozone is entitled to a refund of tax offsets, the amount of that refund is, by reason of s 8AAZA, a credit for purposes of its RBA.
37	Division 3 of Part IIB of the Administration Act, which is constituted by ss 8AAZL - 8AAZLE, prescribes how a credit is to be treated by the Commissioner. These provisions impose an imperative obligation upon the Commissioner to credit a tax offset to an RBA. That is apparent from the use of the word "must" on two occasions in s 8AAZL which provides:

8AAZL Amounts covered by this Division

(1) This Division sets out how the Commissioner must treat the following kinds of amount:
(a) a payment the Commissioner receives in respect of a current or anticipated tax debt or tax debts of an entity;
(b) a credit (including an excess non-RBA credit) that an entity is entitled to under a taxation law;
(c) an RBA surplus of an entity.
(2) The Commissioner must treat each such amount using the method set out in section 8AAZLA or 8AAZLB (but not both).
Note: In either case, section 8AAZLC has some additional rules that apply to RBA surpluses and to certain excess non-RBA credits.
(3) However, the Commissioner does not have to treat an amount using either of those methods if doing so would require the Commissioner to apply the amount against a tax debt:
(a) that is:
(i) not a BAS amount (as defined in subsection 995-1(1) of the Income Tax Assessment Act 1997); and
(ii) due but not yet payable; or
(b) in respect of which the taxpayer has complied with an arrangement under section 255-15 to pay the debt by instalments; or
(c) in respect of which the Commissioner has agreed to defer recovery under section 255-5.

The word "must" appears in both sub-s (1) and sub-s (2). The effect of sub-s (2) is that, while the Commissioner has a discretion to use either the method in s 8AAZLA or the method in s 8AAZLB, the Commissioner must use one of those methods. The exceptions contained in s 8AAZL(3) have no application to the issues in this appeal. It is unnecessary to set out the terms of s 8AAZLA or s 8AAZLB. It is sufficient to note that under either provision the Commissioner is obliged to apply the credit for the tax offset to the RBA against any primary tax debt allocated to an RBA and any general interest charge on that tax debt. If Ozone is entitled to tax offsets for its research and development expenditure, the Commissioner is, therefore, obliged to apply the credit Ozone has for those tax offsets to the RBA of Ozone. If, after the application of that credit, there is a surplus, the Commissioner must refund that surplus to the taxpayer: s 8AAZLF.

Ozone’s Claim for Tax Offsets

38

Ozone claims that it is entitled for tax offsets for expenditure by it on research and development in the years ending 30 June 2002, 2003 and 2004. The manner in which it made that claim is set out later in these reasons when the question whether Ozone has an offsetting claim is examined. At this stage it is sufficient to note the amount claimed by Ozone for tax offsets:

Year ending 30 June 2002 $388,601
Year ending 30 June 2003 $378,658
Year ending 30 June 2004 $325,812
Total $1,093,071

As will be noted in more detail later in these reasons, the Commissioner has not allowed Ozone’s claim for tax offsets for the year ending 30 June 2002. The Commissioner has not yet determined the claims for tax offsets for the 2003 and 2004. As will be seen, there is a clear indication that he will not allow the claim for tax offsets for 2003.

A Summary of the Taxation Position

39	It is convenient shortly to state the position which has been set out above.

1. Ozone is liable to pay GST and PAYG withholding payments.

2. GST is payable quarterly upon the lodging of a BAS.

3. Amounts withheld for PAYG withholding payments must be paid monthly by the 21st day of the month following the month in which the payment was withheld.

4. The Commissioner had established an RBA to which the liability of Ozone respectively for GST and PAYG withholding payments has been debited as a primary tax debt in each case.

5. The amount of any primary tax debt charged to a RBA which is currently payable constitutes an RBA deficit debt. Interest is payable on an RBA deficit debt.

6. The Commissioner is entitled to recover RBA deficit debts and interest thereon.

7. The RBA deficit debt of Ozone and interest thereon as at 22 March 2005, the date of the statutory demand, was $1,019,801.80.

8. Ozone is eligible for deductions from income tax for expenditure on research and development and, if it establishes that it qualifies for that deduction, it is entitled to claim a tax offset instead of a deduction for that expenditure.

9. If Ozone is entitled to tax offsets for its research and development expenditure, it is at liberty to apply those tax offsets against taxes other than income tax.

10. Ozone has claimed tax offsets for the years ending 30 June 2002, 2003 and 2004. The amount claimed for those three years totals $1,093,071.

11. If Ozone is entitled to the tax offsets, it is entitled to apply those tax offsets against its indebtedness on its RBA.

12. The Commissioner has rejected Ozone’s claim for tax offsets for the years ending 30 June 2002. The Commissioner has not yet formally determined the claims made for 2003 and 2004.

With that background, I turn to examine whether there is a genuine dispute or an offsetting claim within the meaning of s 459H of the Corporations Act.

An Offsetting Claim

40

Ozone claims that the Commissioner has debited to its RBA an amount of $84,619.15 in breach of an undertaking not to do so. Ozone claims that that amount represents penalties and interest in respect of the late lodgement of its income tax return for 2002 which by letter dated 14 March 2005 the Commissioner agreed not to impose. It claims that there is a genuine dispute in respect of that sum. Save for that item, Ozone does not challenge the amount claimed in the statutory demand other than to state that it has an offsetting claim which exceeds the amount of the claim stated in the statutory demand.

41

The two answers available to a statutory demand serve different purposes. A genuine dispute is a dispute about the existence or amount of a debt to which the demand relates: s 459H(1). A genuine dispute puts the existence of the debt or part of the debt in issue. It is in effect stating that the company has a defence so that it is not liable for either the whole or part of the debt, the subject of the statutory demand. By contrast, an offsetting claim is a liquidated or unliquidated counterclaim, setoff or cross-demand available to be offset against the debt claimed in the statutory demand. In some instances, the company on whom the statutory demand has been served may have a defence to part of the amount, the subject of the statutory demand, and an offsetting claim in respect of the balance or even the whole of the amount claimed in the statutory demand. In this appeal, Ozone asserts that it has an offsetting claim which exceeds the amount of the demand. It is convenient, therefore, first to consider whether it has such a claim. If it has, it will be unnecessary to examine what is meant by a "genuine dispute" except to the extent that consideration of that question might inform the meaning of an "offsetting claim".

Meaning of "Offsetting Claim"

42	The expression "an offsetting claim" is defined in s 459H(5) to mean:

A genuine claim that the company has against the respondent by way of counterclaim, setoff or cross-demand (even if it does not arise out of the same transaction or circumstances as a debt to which the demand relates).

Thus, although the epithet "offsetting" is used, the definition extends beyond a setoff to include a counterclaim and a cross-demand.

43

The meaning of counterclaim and setoff are well settled. In this context a counterclaim is a cross-action or a cross-claim against the party who has made the statutory demand. A setoff is a sum of money due and payable by the person who has made the statutory demand to the person against whom the demand was made, and which will diminish or extinguish the amount claimed by the person who has made the demand. Generally speaking, a counterclaim is for an unliquidated amount but a setoff is for a liquidated amount.

44

The expression "cross-demand" is an expression of considerable width. Its meaning was examined by Lockhart J in Re Brink, Ex parte Commercial Banking Co of Sydney Ltd [1980] FCA 78; (1980) 30 ALR 433 at 436 – 439 and by the Full Court of the Federal Court in John Shearer Ltd & Arrowcrest Group Pty Ltd v Gehl Company [1995] FCA 1789; (1995) 60 FCR 136. It is sufficient to refer to the latter decision at 142:

The word "cross-demand" is a word of considerable width. While the words "counter-claim" and "set-off" are technical words, the meanings of which are confined, the same is not true of the word "cross-demand". That is not a technical term. Thus in Re a Bankruptcy Notice [1934] 1 Ch 431, Lord Hanworth MR, after discussing the technical meaning of the words "counter-claim" and "set-off" in the context of bankruptcy legislation, said (at 438):

"I turn, therefore, to what to my mind is the wider word, "cross-demand". If a cross-demand is only to be interpreted as meaning something which could have been introduced into the action by way of counter-claim, it adds nothing to the word "counter-claim". "Cross-demand" seems to me to be a word introduced in order to give a wider ambit to the meaning of these claims. Something that would not be described, certainly, as a set-off, something that could not have been brought in the action, something that still lies outside a counter-claim, but is of a nature which can be specified and which is of such a nature that it equals or exceeds the amount of the judgment debt. I do not desire to say what "cross-demand" may include, but it is not difficult to say that it does not include a claim of such uncertain nature as appears in these Chancery proceedings."

The Full Court of this court took a similar view in Re Brink; Ex parte Commercial Banking Co of Sydney Ltd [1980] FCA 78; (1980) 30 ALR 433; 44 FLR 135 at 138-9, emphasising that an unrestricted meaning should be given to the word "cross-demand", and see too Re Smith; Ex parte Chesson [1992] FCA 64; (1992) 106 ALR 359 at 364 (affirmed on appeal, sub nom Chesson v Smith (1992) 35 FCR 594).

The Court went on to define a cross-demand in these terms:

A cross-demand will include any claim for damages which exists at the time the application to set aside the statutory demand is made, which is for a monetary amount capable of quantification whether or not it arises out of the same transaction or circumstances as the debt to which the statutory demand relates.

See also Classic Ceramic Importers Pty Ltd v Ceramica Antiga SA (1994) 13 ACSR 263 at 269. As Lindgren J noted in Chase Manhattan Bank Australia Ltd v Oscty Pty Ltd [1995] FCA 1208; (1995) 17 ACSR 128 at 135, the definition of the expression "offsetting claim" is expressed in words of the widest import and is not limited to a claim of a kind which would afford a defence to an action by the person who served the statutory demand to recover the amount referred to in it.

45	The counterclaim, setoff or cross-demand must sound in money, that is to say, it must be for a liquidated or unliquidated money demand: Re Jocumsen (1929) 1 ABC 82 at 85; Vogwell v Vogwell (1939) 11 ABC 83 per Latham CJ at 85; Chase Manhattan at 135.
46	The meaning of the expression "offsetting claim", like the meaning of "genuine dispute" has been illuminated by analogies found in applications for injunctions to restrain the commencement, advertisement and prosecution of winding-up proceedings pre-dating the enactment of s 459G and in the opposing of a notional application by the person who has served the statutory demand for summary judgment against the company for the debt the subject of the demand: Chase Manhattan at 136. Thus, when deciding whether an offsetting claim exists, the test is whether the court is satisfied that there is a serious question to be tried that the person on whom the demand has been served has an offsetting claim: Scanhill Pty Ltd v Century 21 Australasia Pty Ltd [1993] FCA 618; (1993) 12 ACSR 341 at 357, or that the claim is not frivolous or vexatious: Chadwick Industries (South Coast) Pty Ltd v Condensing Vaporisers Pty Ltd (1994) 13 ACSR 37, or that it is not fictitious or merely colourable: Edge Technology Pty Ltd v Lite-on Technology Corporation [2000] NSWSC 471; (2000) 156 FLR 181 at 184-5, citing Jesseron Holdings Pty Ltd v Middle East Trading Consultants Pty Ltd (No 2) (1994) 13 ACSR 787.
47	The test whether an offsetting claim exists is the same as for a genuine dispute, that is to say, the claim must be bona fide and truly exist in fact and that the grounds for alleging the existence of the dispute are real and not spurious, hypothetical, illusory or misconceived. The issue is whether the offsetting claim is bona fide, real and not spurious: Edge Technology per Santow J at [25].
48	I do not think that the test identified by Santow J imposes a more onerous task on the party disputing the statutory demand than the serious question test. The expression "good faith" means arguable on the basis of facts asserted with a sufficient particularity to enable the court to determine that the claim is not fanciful: Macleay Nominees Pty Ltd v Belle Property East Pty Ltd [2001] NSWSC 743 per Palmer J. McPherson JA expressed the same concept in these terms in JJMMR Pty Ltd v LG International Corporation [2003] QCA 519 at [18]:

Anyone can make a claim to a right of setoff against a creditor. What the definition in s 459H(5) requires, however, is that it be "genuine". The same word in s 459H(1) has already elicited so many synonyms and shades of meaning that it will not help to add more. Its antithesis is to be seen in the word "artificial". The claim to set off against the debt demanded must not have been manufactured or got up simply for the purpose of defeating the demand made against the company. It must have an existence that is objectively demonstrable independently of the exigencies of the demand that evoked it.

The observations of Palmer J and McPherson JA were applied by Chesterman J in Cooloola Dairies Pty Ltd v National Foods Milk Ltd [2004] QSC 308; [2005] 1 Qd R 12.

49	The task for the court, therefore, is not to decide the issue on its merits but examine whether there is a genuine offsetting claim. If there is a genuine claim sufficiently quantified to give rise to an offsetting amount the demand must be offset: see s 459H(4) and Edge Technology at [55].

Does Ozone Have An Offsetting Claim?

50

As already mentioned, the statutory provisions enabling tax offsets for expenditure on research and development first operated in the financial year ending 30 June 2002 and applied in subsequent years. Ozone made a claim for tax offsets for its research and development expenditure for the years ending 30 June 2002 and 2003. The claim was not made in conjunction with the lodgement by Ozone of its income tax return for those two years. Instead, it was made by some other means which were not fully explained. Later, when Ozone lodged its income tax return for those two years, it lodged the claim with the tax return. The claim for tax offsets for 2004 was made when Ozone lodged its income tax return for that year.

51

As is apparent from a letter from the Australian Taxation Office ("the ATO") dated 22 November 2004, the ATO conducted an audit of the claims for tax offsets for 2002 and 2003. It conducted the audit in 2003 and 2004. The ATO sought certain documents from Ozone. According to the ATO, the documents were not promptly supplied. The ATO says that some documents have yet to be supplied. The ATO’s version of the history of the matter is set out in its letter dated 22 November 2004. It alleges

• a failure to lodge documents which Ozone was obliged to lodge, including Business Activity Statements;
• a failure to respond to various requests for information;
• a failure to supply documents notwithstanding promises to do so and repeated requests from the ATO for the documents; and
• that the ATO made an audit visit to the premises of Ozone and inspected documents.

By that letter the ATO gave notice that based on the documents it had examined in the audit visit, it intended to disallow the claim for research and development expenditure for both 2002 and 2003.

52	By a long letter dated 30 November 2004 Ozone asked the ATO to reconsider its intention in respect of the claims for both 2002 and 2003. It explained that its failure to respond to the requests for information and documents was caused by changes in key employees, one of whom had left Ozone with confidential information and was competing with it. Ozone said that it did not have the staff to handle the ATO’s requests. The letter stated that Ozone’s staffing resources had been stretched because it had been involved in two other audits for AusIndustry in the 2003 financial year. The letter also contested the ATO’s claims as to delay and refusal to provide documents, spelling out at length details of the documents which had been provided. The letter also denied assertions in the ATO’s letter concerning items claiming to be research and development expenditure.
53	The ATO responded by letter dated 3 December 2004 seeking further documents in order that it could answer the assertions of Ozone in its letter dated 30 November. The ATO stated in that letter that, if the requested documents were not supplied by 23 January 2005, it might disallow the claims. Ozone did not provide the documents by 23 January 2005. On 31 January Mr Oke, the Chief Executive Officer and Secretary of Ozone, had a telephone conversation with Mr Olivari, the officer in the ATO who was examining Ozone’s claim for tax offsets for research and development expenditure. The conversation concerned two documents which Mr Olivari said were the two documents on which he mainly relied for the purpose of dismissing Ozone’s claim.
54	On 14 February Mr Oke asked Mr Robinson, another officer in the ATO, to supply the two documents. Mr Oke confirmed this request by email. On 1 March 2005 Mr Oke sent Mr Robinson another request by email for the documents. It seems the documents were financial statements of Ozone which the ATO alleged showed a different income and net profit from what had been set out in Ozone’s income tax return for the year ending 30 June 2002. Mr Oke confirmed his request by letter dated 2 March. The ATO has not supplied the documents. Mr Oke denies that there is any difference as to the income and net profit. He believes that the documents on which the ATO relies are not profit and loss statements but management accounts prepared for a purpose unrelated to determining profit.
55	On 3 March, Mr Oke sent Mr Robinson thirteen documents. On 3 March 2005 Mr Oke sent a letter to Mr Robinson with further information.
56	On 3 March 2005, the same date as Mr Oke had sent his letter, the ATO sent a letter to Ozone over the hand of Mr Olivari disallowing Ozone’s claim for tax offsets for research and development expenditure for the year ending 30 June 2002. The claim was disallowed on the ground that Ozone had not substantiated that the claimed expenditure was in fact for research and development. The letter was received by Ozone on 7 March. By letter dated 7 March the ATO wrote referring to the documents sent by Mr Oke on 3 March and stating that the ATO still required production of the Ozone’s stock matrix and other documents which would substantiate the expenses incurred by Ozone for research and development expenditure. The letter re-stated that the tax offsets had not been allowed because Ozone could not substantiate what part of its expenditure was for research and development. Ozone does not agree with the disallowance of its claim for tax offsets and intends to challenge the decision of the ATO.
57	On 24 March the ATO served the statutory demand which was dated 22 March 2005.
58	On 13 April 2005 Ozone lodged its income tax return for the year ending 30 June 2004. In that return it claimed a tax offset for research and development expenditure of $325,812. An assessment has not yet been issued.
59	On 13 April Ozone also issued this application to set aside the statutory demand.
60	On 6 June 2005 Ozone lodged its income tax return for the year ending 30 June 2004 and claimed a tax offset for research and development expenditure of $325,812. An assessment has not yet been issued.
61	As already noted, the amount of the debt claimed by the statutory demand is $1,019,801.80. Ozone has claimed tax offsets for research and development expenditure totalling $1,093,071. Ozone’s claim for tax offsets exceeds the amount claimed in the statutory demand by more than $73,000.
62	The following factors suggest that the claim for tax offsets is genuine. Ozone has claimed deductions for research and development expenditure since 1995 and those claims have been allowed. Although the scheme allowing tax offsets was not introduced until 2002, the claim for tax offsets is consistent with the previous conduct of Ozone.
63	The claim for tax offsets for 2002 and 2003 had been made in 2003. Although the claim was not made in conjunction with the lodgement of an income tax return, the claims were examined by the ATO and made the subject of an audit. The claim for the tax offsets has, therefore, been on foot for some two years before the statutory demand was issued. It is not of recent origin. Ozone intends to challenge the decision of the Commissioner disallowing its claim for tax offsets in 2002. The claim for tax offsets for 2004 is for an amount which is consistent with research and development expenditure claimed in the two previous years.
64	These facts demonstrate that the claim is not artificial. It has not been created or got up simply for the purpose of attempting to defeat the statutory demand. Ozone has been claiming deductions and has been allowed deductions for its research and development expenditure from 1995 to 2001. Since 2002 it has been claiming tax offsets for that expenditure. The claims for tax offsets are long-standing.
65	There is obviously a dispute whether Ozone can establish what part of its expenditure was for research and development. However, this Court is concerned only with the question whether there is a genuine offsetting claim. The question whether Ozone is able to establish its claim is a question to be determined in other proceedings.
66	The claims by Ozone for tax offsets for the financial years 2003 and 2004 have yet to be assessed. It is not yet known whether the Commissioner will allow the claims in whole or in part. Although the ATO audit indicates that the Commissioner might reject the claim for 2003, Ozone may be able to substantiate its claim. It is apparent from the exchange of correspondence between Ozone and the ATO that one of the grounds on which the ATO dismissed the claim was the lack of documentation to substantiate the claim. Ozone has repeatedly stated that it has documents to substantiate the claim. The dispute might be resolved in favour of Ozone if satisfactory documents are proved. At this stage, there is nothing to indicate whether or not the Commissioner will allow the claim for tax offsets for 2004.
67	In short, Ozone’s claim has been on foot since at least 2003. It is a long-standing claim. There is no question that Ozone has incurred the expenditure. The issue is whether Ozone is able to establish that its claimed expenditure for research and development was in fact expended in that way, an issue which of necessity must be determined in other proceedings. In addition, there remains the question whether the Commissioner will allow the claim for tax offsets for 2003 and 2004.
68	All of these factors are to be weighed with the fact that Ozone has not promptly complied with requests by the ATO to produce documents to substantiate its claim that the expenditure was for research and development. The ATO has been calling for documents since August 2003. Ozone has supplied documents in the course of an audit and in March 2005 it supplied further documents. It also supplied other information. Ozone says that its failure to supply documents promptly was caused by staff shortages and the pressure of other aspects of its business, including two AusIndustry audits.
69	The delay by Ozone in supplying the documents and other information to the ATO raises questions as to whether Ozone does in fact have a genuine offsetting claim. However, Ozone has now supplied a large number of documents. Mr Oke asserts that a stock matrix, a particular document which the ATO has especially requested, does not exist and that there is no requirement to keep such a document. Notwithstanding the supply by Ozone of documents and other information, the ATO maintains its view that Ozone has not substantiated its claim for expenditure on research and development. Ozone maintains that it has established its claim. The position has now reached the stage where Ozone believes that it has substantiated its claim for tax offsets and the ATO believes it has not. There is, therefore, a real question whether Ozone is entitled to its tax offsets. The dispute has long existed. The offsetting claim is a bona fide claim which is in no sense spurious or fictitious.
70	Another compelling factor pointing to the conclusion that Ozone’s claim is a genuine offsetting claim is the fact that since 1995 it has been allowed deductions for research and development expenditure and that the present claim has been on foot since 2003. In addition, the fact that the Commissioner has not made a formal determination of the claims for the tax offsets for the 2003 and 2004 financial years means that Ozone has on foot a claim for tax offsets in those years which at this stage is uncontested.
71	The question whether Ozone is able to establish that its expenditure was for research and development purposes is a question to be determined in other proceedings. It is in those proceedings that the Court will determine the adequacy of Ozone’s documents to establish whether the expenditure was for research and development purposes.
72	The review of the tax legislation earlier in these reasons shows that, if Ozone is able to establish the fact that it has expended monies on research and expenditure, it will be entitled to a tax offset and hence to a credit on its RBA which will offset its liability on the RBA. Even if Ozone was not entitled to compel the Commissioner to credit the tax offsets against its RBA, Ozone would nevertheless have an offsetting claim against its liability under its RBA.
73	The amount of the offsetting claim has been sufficiently established for present purposes. It is the total amount claimed by Ozone for tax offsets for research and development expenditure, namely $1,093,071. That amount exceeds the amount of the debt claimed in the statutory demand. These reasons point to the conclusion that the statutory demand should be set aside.

A Bar to an Offsetting Claim?

74

Counsel for the Commissioner contended that the scheme of the relevant tax legislation precluded Ozone in the particular circumstances of this case from seeking to establish either that a genuine dispute existed in relation to the debt or that Ozone had an offsetting claim. It was further contended that, in order to establish that it had an offsetting claim, Ozone had to satisfy the court that it had more than a claim to be entitled to tax offsets. These arguments relied on the decisions in Chippendale Printing Co Pty Ltd v Deputy Commissioner of Taxation (1995) 55 FCR 562, Hoare Bros Pty Ltd v Commissioner of Taxation (1996) 62 FCR 302 and Fortuna Holdings Pty Ltd v Deputy Commissioner of Taxation [1978] VicRp 9; [1978] VR 83. For the reasons which follow, both arguments must fail.

75

The decision in Hoare Bros Pty Ltd v Commissioner of Taxation concerned a statutory demand for payment of income tax and penalties. Assessments had been issued in respect of several tax years. Hoare Bros Pty Ltd ("Hoare Bros") disputed its liability in respect of two assessments for income tax for the years ending 30 June 1990 and 1991. It had lodged objections to both assessments. Both objections were lodged out of time. The Commissioner had agreed to an extension of time for the 1991 year but not for the 1990 year. Hoare Bros applied to the Administrative Appeals Tribunal to review the decisions not to accept the objections. Hoare Bros contended that a genuine dispute, therefore, existed as to part of its liability to the Commissioner. The Full Federal Court held that a genuine dispute did not exist. It held that the fact that a review or an appeal was pending in relation to a taxation decision did not prevent the Commissioner from recovering any tax, additional tax, or other amounts payable that may be recovered as if no review or appeal were pending: see s 177(1), s 204(1), s 207 and s 208 of the 1936 Assessment Act and s 14ZZM and s 14ZZR of the Administration Act. The Court therefore concluded at 311:

The structure of the ITAA strongly suggests a legislative intent that the issue and service of a notice of assessment (after expiry of the appropriate period) creates a debt that is immediately due and payable, and that the assessment can be challenged only in the manner provided for by the TAA, Pt IVC. Thus, unless there is some genuine dispute about the validity of a notice which has been duly served, there can be no genuine dispute about the existence or amount of the debt specified in the notice (assuming the requisite period has elapsed since service of the notice). A company, or other taxpayer, served with a notice of assessment, is entitled to challenge the assessment through the procedures laid down in the TAA, Pt IVC. In the meantime, however, the tax must be paid. This, indeed, has been the approach taken by the High Court to the construction of the taxation legislation.

The Court, however, did state (at 311) that there can be circumstances in which it would be open to a taxpayer to challenge an assessment, for example, on the ground that the notice does not in truth constitute an assessment and that would give rise to a genuine dispute. However, that was not the position in that case.

76	Two aspects of that decision must be noted. The first is that the decision did not in any respect address the question whether a taxpayer who has an offsetting claim is able to set aside a statutory demand. There are circumstances in which a taxpayer who is liable to pay income tax on the issue of a notice of assessment and who has been served with a statutory demand may establish an offsetting claim. Assume, for example, that the Commissioner had purchased goods from Hoare Bros for an amount equal to its tax liability and that the Commissioner had not paid Hoare Bros for those goods, it cannot be said that it would not be open to Hoare Bros to set aside the statutory demand on the ground that it had an offsetting claim. An examination of the reasons of McGarvie J in Fortuna Holdings Pty Ltd v Deputy Commissioner of Taxation at 96 - 104 provides support for that conclusion. In that case McGarvie J recognised that a genuine cross-claim may provide grounds to stay a petition to wind-up a company but refused to stay the petition in that case on other grounds.
77	The second aspect to notice about the decision in Hoare Bros Pty Ltd v Commissioner of Taxation is that the decision rests on the provisions in the 1936 Assessment Act which give primacy to tax payable on an assessment and require that it be paid notwithstanding any review or appeal. These provisions were central to the reasoning of the Court. The régime by which the Commissioner recovers RBA deficit debts differs from the provisions relating to recovery of income tax payable after an assessment. There is no provision requiring the taxpayer to pay the RBA deficit debt notwithstanding that the taxpayer disputes part or whole of that debt.
78	The provisions relating to recovery of the amount due on an RBA are set out in Division 255 of Schedule 1 of the Administration Act. The amount of a tax-related liability that is due and payable is a debt due to the Commonwealth and is payable to the Commissioner: s 255-5(1) of the Administration Act. The Commissioner may sue to recover a tax-related liability: s 255(5)(2). A tax-related liability is defined by s 255-1 to mean:

A tax-related liability is a pecuniary liability to the Commonwealth arising directly under a taxation law (including a liability the amount of which is not yet due and payable).

A taxation law is an Act of which the Commissioner has general administration or regulations under such an Act: s 995-1 of the 1997 Assessment Act. The Commissioner has general administration of the GST Act and the PAYG instalment system under the Administration Act. Tax-related liabilities are listed in s 250-10 of Schedule 1 of the Administration Act and item 85 of s 250-10 includes RBA deficit debts. The RBA deficit debt of Ozone is, therefore, a tax-related liability.

79

The Administration Act contains provisions which aid the proof of claims to recover an RBA deficit debt. Section 255-45 makes a certificate of the Commissioner conclusive evidence of the debt and s 255-50 provides that averments are prima facie evidence of the facts stated. Although the Commissioner might rely on s 255-45, the conclusiveness of the fact of the RBA deficit debt does not deny the taxpayer the capacity to rely on an offsetting claim or to assert a genuine dispute as to liability for the debt. Cadura Investments v Rototek Pty Ltd [2004] WASC 249; (2004) 51 ACSR 390 is an example where a genuine dispute existed.

80

Section 14ZZM and s 14ZZR do not apply to the recovery of an RBA deficit debt. Section 14ZZM provides:

The fact that a review is pending in relation to a taxation decision (other than a registration-type sales tax decision) does not in the meantime interfere with, or affect, the decision and any tax, additional tax or other amount may be recovered as if no review were pending.

If the word "appeal" is substituted for "review", s 14ZZR is in the same terms as s 14ZZM. Both provisions apply when a taxation decision has been made. A taxation decision is defined by s 14ZQ of the Administration Act to mean:

The assessment, determination, notice or decision against which a taxation objection may be, or has been, made.

It is not possible to lodge a taxation objection in respect of the amount of a deficit in an RBA. It is apparent from the terms of the definition that a taxation decision is quite unrelated to an RBA deficit debt. There are, therefore, important differences between the régime for recovering income tax payable on an assessment and the recovery of an RBA deficit debt.

81	In short, the Commissioner may sue to recover an RBA deficit debt and a certificate from the Commissioner will conclusively establish the existence of that debt. However, nothing in the Administration Act prevents a taxpayer from having an offsetting claim. For these reasons, there is no ground for applying the decision in Hoare Bros Pty Ltd v Commissioner of Taxation to the recovery of an RBA deficit debt. The Commissioner’s reliance on that decision is misplaced. There is no bar to an offsetting claim.
82	Counsel for the Commissioner also called in aid the decisions in Uysal v Deputy Commissioner of Taxation [2003] FCA 1156; (2003) 54 ATR 214, Deputy Commissioner of Taxation v Cumins [2003] WASC 3; (2003) 51 ATR 620 and Deputy Commissioner of Taxation v Ho (1996) 131 FLR 188 and Platypus Leasing Inc v Federal Commissioner of Taxation (No 3) [2005] NSWSC 388; (2005) 59 ATR 84 Those decisions do not assist as they concern recovery of taxation payable after an assessment. They do not deal with tax-related liabilities allocated to an RBA. The issues are quite different.
83	Counsel for the Commissioner also relied on the decision in Chippendale Printing Co Pty Ltd v Deputy Commissioner of Taxation. For the reasons which follow the decision has no application in the present circumstances. In that case a taxpayer sought an order setting aside a statutory demand for payment of sales tax, additional tax and penalty. The taxpayer claimed that it had made overpayments of sales tax and applied for a refund of the overpaid sales tax. The taxpayer had passed on the sales tax to its customers but had not yet refunded it to them. The Commissioner contended that, until it refunded the sales tax to its customers, the taxpayer was not entitled to a refund. The Commissioner submitted that there could be no offsetting claim. The taxpayer had also instituted proceedings under the Administrative Decisions (Judicial Review) Act 1977 (Cth) seeking a review of the Commissioner’s decision not to remit the additional tax. Lindgren J held that the terms of the sales tax legislation precluded the taxpayer from recovering the overpaid tax so that there could be no offsetting claim. In that respect the decision turned on the provisions of the sales tax legislation. However, he held that a genuine dispute existed in respect of the additional tax and penalties. Lindgren J also held that the application for judicial review under the Administrative Decisions (Judicial Review) Act had the consequence that there was not a genuine dispute or an offsetting claim. His reason was that the court hearing the application for judicial review could do no more than decide that the exercise by the Commissioner of his discretion had miscarried and remit the matter to the Commissioner, so that it was implicit that there was no genuine dispute or an offsetting claim. Counsel for the Commissioner relied on this aspect of the decision. I respectfully disagree with the last conclusion. It fails to have regard to the fact that, if the court set aside the decision of the Commissioner, its reasons may show that the taxpayer was not liable for the additional tax or, if liable, was in matter of law liable for a lesser sum than had been determined by the Commissioner. Even if the decision is correct, it applies only where the taxpayer institutes proceedings under the Administrative Decisions (Judicial Review) Act. Although Ozone has expressed an intention that it may make an application under the Administrative Decisions (Judicial Review) Act, it does not limit its remedies to such an application. There are other means by which to challenge the Commissioner’s decision to disallow the claims. As Ozone is at liberty to pursue other remedies, the decision in Chippendale is not a bar to Ozone.

Conclusion

84

For all of these reasons, I would allow the appeal on the ground that Ozone has an offsetting claim. It is unnecessary, therefore, to consider whether there is a genuine dispute. I would set aside the statutory demand. As Ozone has been dilatory in prosecuting its entitlement to tax offsets for research and development expenditure claimed for the years 2002, 2003 and 2004, it is appropriate to impose a condition on the order pursuant to s 459M of the Corporations Act requiring Ozone to commence proceedings within a specified time. The order will not be a self-executing order. If there is any breach, the Commissioner will have to make an application to a judge of this Court. I would hear the parties on the terms of the order.

85	BESANKO J. I have had the advantage of reading the draft reasons for judgment of Debelle J. I agree with the orders which he proposes. Subject to four matters, I agree with his Honour’s reasons for judgment.
86	The first matter relates to the application by the respondent for an order dismissing the appeal. I agree with Debelle J that the orders made by the Master on 15 August 2005 were not self-executing, nor, insofar as it may be relevant, was it established that there was an agreement between the parties which contained conditions which were self-executing. In the alternative, the respondent asked this Court to revoke the order of the Master extending the period for compliance with the statutory demand. Debelle J has identified the relevant matters on the application. I disagree with him in one respect. I think it is appropriate to take into account, should it be established, the past conduct of the appellant. I do not think the Court is restricted to what was agreed, whether the appellant acted in breach and what is the explanation for the breach. As I understand it, the Master heard some argument on the merits of the application to extend the period for compliance with the statutory demand. However, he did not hear full argument, nor did he rule on the application. In those circumstances, the matter is at large when the Court is first asked to rule on the issue.
87	The considerations which are relevant on an application to extend the period for compliance with a statutory demand pending an appeal (Corporations Act 2001, s 459F(2)(I)) are similar to those which are relevant on an application for a stay of execution pending an appeal: Australian Beverage Distributors Pty Ltd v Cranswick Premium Wines Pty Ltd (2004) 50 ACSR 544. In addition to the matters identified by Debelle J, the respondent submitted that the appellant had a history of failing to comply with Commonwealth taxation legislation and it put forward a chronology in support of that contention. The respondent submitted that the chronology simply reflected evidence already before the Court. The Court also admitted in evidence on the respondent’s application a settlement deed between the appellant and the respondent, apparently entered into on 4 May 2003.
88	As far as the chronology is concerned, it might be taken to suggest that, despite an adequate opportunity to do so, the appellant did not provide sufficient documentation in support of its claim for a research and development ("R & D") tax offset for the 2002 financial year. However, this Court would need more evidence about the nature of the claim before it could make a precise finding about the adequacy of the material provided by the appellant, and I note that the respondent has in fact allowed an R & D tax deduction for the 2002 financial year. The other matter suggested by the chronology is that the appellant failed to comply with its obligations to lodge in a timely fashion Business Activity Statements and Instalment Activity Statements between July 2004 and July 2005. That is a material matter to the question whether the period for compliance should be extended, particularly if (as would be appropriate) the Court is considering extending the period for compliance on condition that all future obligations be met as and when they arise. A history of past failures to comply is a matter to be weighed in the balance. On the other hand, there is no evidence before the Court which suggests that the appellant is unable to meet its financial obligations as and when they fall due. In the circumstances, the respondent is adequately protected by its ability to come back to the Court asking it to revoke the order extending time should there be a failure to comply with conditions. The appellant’s past failures are not sufficient to outweigh the other factors in favour of granting an extension of time which are identified in the reasons for judgment of Debelle J. I should add that I do not think the settlement deed advances the matter. It deals with obligations on the appellant up to and including June 2002, and the settlement of an action instituted in this Court in 2003 by the appellant against the respondent.
89	The second, third and fourth matters relate to the appeal itself.
90	The second matter is an observation rather than a qualification. For a time during the hearing of the appeal, I had doubts as to whether the appellant had put forward sufficient evidence to establish that its claim for R & D tax offsets for the 2002, 2003 and 2004 financial years was a genuine claim by way of a counterclaim, set-off or cross-demand. Even accepting that the test in relation to what is and what is not a genuine claim is somewhat undemanding (Eumina Investments Pty Ltd v Westpac Banking Corporation [1998] FCA 824; (1998) 84 FCR 454; Macleay Nominees Pty Ltd v Belle Property East Pty Ltd [2001] NSWSC 743; Chadwick Industries (South Coast) Pty Ltd v Condensing Vaporisers Pty Ltd (1994) 13 ACSR 37; Edge Technology Pty Ltd v Lite-On Technology Corporation [2000] NSWSC 471; (2000) 156 FLR 181, I had doubts about the sufficiency of the evidence put forward by the appellant, particularly in relation to the 2003 and 2004 financial years. However, I am persuaded by the matters identified by Debelle J in [62]-[70] of his reasons that the appellant has discharged the onus of showing a genuine claim by way of counterclaim, set-off or cross-demand.
91	The third matter relates to the operation of Part IIB Division 3 of the Taxation Administration Act 1953 (Cth). I prefer to leave for another day the proper interpretation of what I might call the allocation sections in that Division, namely, ss 8AAZLA, 8AAZLB and 8AAZLF. I prefer to express no view on how an R & D tax offset (which is a credit under s 8AAZA), is to be dealt with under those sections because I do not think the construction of those sections is straightforward. I do not need to deal with that issue because, assuming all other things are established, the appellant is at the very least entitled to a refund in relation to the tax offset and that is sufficient for the purposes of the present application.
92	The fourth matter relates to the decision in Chippendale Printing Co Pty Ltd v Deputy Commissioner of Taxation (1995) 55 FCR 562. Debelle J has set out the facts of that case in [83]. In the course of his reasons, Lindgren J commented on the significance of the fact that the applicant had instituted proceedings under the Administrative Decisions (Judicial Review) Act 1977 (Cth). He said:

The Commissioner submitted that the Court hearing the AD(JR) proceedings could do no more than decide that the Commissioner’s exercise of his discretion had miscarried and remit the matter to the Commissioner, and implicitly submitted that the granting of this form of relief and any present prospect of its being granted do not establish a genuine dispute as to the existence of the debts or an offsetting claim.
In my opinion the Commissioner’s submission should be accepted. A possibility or even a likelihood that the Court will remit Chippendale’s application to the Commissioner to be determined by him in accordance with law does not establish an independent basis for saying that there is a genuine dispute about the existence or amounts of the debts or an offsetting claim for the purposes of sub-s 459H(1) of the Law. On the contrary, the statutory discretions to remit predicate that liability for the additional tax and penalties, as the case may be, has arisen.

93

The appellant did not submit that these observations were wrong, but rather, it submitted that the case was distinguishable. I do not think it necessary to decide whether the observations are correct and I refrain from doing so. They were made in the context of the particular legislative provisions under consideration and the facts of the case. In this case, the Court was given very little information about how the appellant would frame proceedings under the Administrative Decisions (Judicial Review) Act 1977 (Cth) and there are clearly a number of possibilities in terms of what decision is challenged and on what basis. It is not necessary for me to pursue this any further because the critical fact is that I am satisfied that the appellant is able to challenge a decision by the respondent to disallow the claims.

94

LAYTON J. In this case I have had the considerable advantage of reading the draft reasons for decision of Debelle J. I agree that the appeal should be allowed. I agree with the orders which Debelle J proposes and also his reasons.