Urgent freezing orders a part of the ATO Deputy Commissioner's armoury against foreign entities – and courts will make them

By Angela Wood, Andy Bubb
03 Mar 2022
A failure to reach agreement with the ATO on acceptable security arrangements for an imminent or actual tax liability may give rise to the Commissioner urgently seeking freezing orders.

It is not common for freezing orders to be sought in relation to taxpayers in the ATO's Public Groups and Internationals division. The Deputy Commissioner of Taxation's success in February in obtaining urgent, temporary freezing orders from the Federal Court over an alleged $220 million tax liability is a clear example of the means available to the Australian Taxation Office (ATO) to protect its ability to recover tax liabilities in advance of a substantive dispute arising, and its willingness to use them, to ensure a foreign entity's tax debt will ultimately be paid if the substantive arguments are made out (Deputy Commissioner of Taxation v State Grid International Australia Development Company Limited [2022] FCA 139).

The transaction, the alleged tax liability, and the ATO's position

The substantive dispute is whether the underlying shares in AusNet Services Ltd which State Grid disposed of are taxable Australian real property (TARP). TARP disputes can be inherently difficult to resolve because if the statutory conditions are met then the entire capital gain is disregarded. The Deputy Commissioner had formed a preliminary view on the tax consequences of the relevant transaction before it had occurred. The parties are currently $220 million apart.

AusNet has a diversified energy network business in Victoria. It was listed on the ASX, and its major shareholders were Singapore Power (31.1%) and State Grid (19.9%).

In November 2021, AusNet accepted a bid from a consortium led by Brookfield to acquire all of its shares via a Scheme of Arrangement. After that:

  • 19 December 2021: the NSW Supreme Court of New South Wales made orders for convening the Scheme meeting and approving a Scheme booklet for provision to AusNet's shareholders. The Scheme was to involve all of AusNet's shares being acquired by an Australian company controlled by the Brookfield consortium, Australian Energy Holdings No 4 Pty Ltd (AEH4), for $2.6025 per share. State Grid stood to receive approximately $1.98 billion.
  • 19 January 2022: the Deputy Commissioner advised AusNet of a likely view that Division 855 would not apply to disregard State Grid's capital gain. It is not clear from the judgment whether the Deputy Commissioner became aware of the issue from the events in connection with the Scheme, including AusNet publishing the Scheme booklet and making ASX announcements, or from some other process (eg. any application for approval by Foreign Investment Review Board, FIRB, by the Brookfield consortium).
  • 28 January 2022: the Scheme was approved by AusNet shareholders, and AusNet notified the ASX that the Implementation Date would be 16 February 2022.
  • The Deputy Commissioner then sought protection by requesting that State Grid hold an amount in Australia on account of the anticipated liability or provide security, neither of which was agreed to.
  • 15 February 2022: ahead of the Scheme being implemented the following day commencing at 8:30am, the Deputy Commissioner applied to the Federal Court for freezing orders against by State Grid and AusNet. The application was heard by the duty judge urgently, with the hearing concluding after midnight. Part of the Deputy Commissioner's evidence was that a special assessment under section 168 of the Income Tax Assessment Act 1936 was to be issued on the day of the transaction once it had occurred. In addition, as a separate debt security / recovery measure, the Deputy Commissioner issued a notice requiring State Grid to provide security for half of the tax in dispute by way of an unconditional bank guarantee.

Obtaining freezing orders in a tax context – what the Deputy Commissioner showed

Broadly, freezing orders may be made by the Federal Court to prevent its processes from being frustrated by a prospective judgment being unsatisfied.

For the Court to grant such an order, the Deputy Commissioner needed to establish three matters, all of which were accepted by the duty judge, Justice Perry.

  • A good arguable case – The Deputy Commissioner had a good arguable case on the basis of the proposal to issue a special assessment to State Grid under section 168 of the Income Tax Assessment Act 1936 upon completion of the transaction the next day. This position was also supported by the conclusive evidence provisions, which provide that an assessment is valid irrespective of whether the Commissioner's substantive arguments are correct.
  • A danger that a prospective judgment will be at least partially unsatisfied – This was accepted for the 10 reasons set out by the Court, most critically that State Grid had no tax lodgement history in Australia, would have no assets or business in Australia following the transaction and any prospective judgment is unlikely to be enforceable (or at least not without difficulty) in China or Hong Kong.
  • The balance of convenience supported the freezing order being granted – The Court determined that, on balance, the order should be made. Relevant factors for making the order included the significant amount of the proposed tax liability ($220 million), the danger of the money being transferred out of Australia, the absence of any substantial assets being held by State Grid in Australia, and the difficulties in enforcing a judgment in China or Hong Kong.

Accordingly, the Court made the freezing orders against both State Grid and AusNet:

  • State Grid cannot diminish the value of two specific bank accounts below approximately AUD$220 million.
  • AusNet must continue to hold $220 million of the amount payable to State Grid, or pay it into a State Grid account to which the State Grid freezing order applied.

As is commonly the case, some exceptions to the freezing orders include movement of funds to make payment to the Commissioner or to pay business expenses that are bona fide and properly incurred.

The freezing orders were effective until the next directions hearing in the proceedings.  On 22 February both freezing orders were further extended, but from the hearing on 2 March it appears likely that only the State Grid freezing order will continue to be extended, with the AusNet freezing order being allowed to lapse.  State Grid and the Deputy Commissioner remain in dispute as to the necessity for security to be provided in addition to the freezing order. 

In support of the application, the Deputy Commissioner gave various undertakings, many of which are customary in urgent applications. These included to comply with any future Court order about compensation resulting from the freezing order, to pay the costs of any third parties that are impacted by the order (eg. financial institutions), and to serve relevant documents as soon as possible.

Freezing orders as part of a tax dispute

  • An inability to reach agreement with the ATO regarding acceptable security arrangements for an imminent or actual tax liability may give rise to the Commissioner urgently seeking freezing orders. Relief was granted despite in these proceedings even though the tax liability had not yet arisen.
  • The ATO will actively seek to secure tax liabilities by any means available, but prefers to agree a method by which security is provided without recourse to the courts. If an urgent court application to seek freezing orders is warranted, it is a process far more familiar to the Commissioner than taxpayers.
  • Such proceedings tend to divert significant resources on both sides from the substantive tax issue.
  • The Commissioner's power to issue a special assessment, as well the ATO's ability to obtain freezing orders in advance of issuing it, is broad.
  • Freezing orders are not commonly sought by the Commissioner, but do arise more frequently for individuals than for companies. There were six published judgments in 2021 where a Deputy Commissioner sought freezing orders in the Federal Court for an individual, compared to only one for a company.
  • Careful management of both substantive tax and debt recovery issues is required at all times, particularly where a large amount of tax is in dispute and the Commissioner will be more willing to take significant legal steps to ensure that any potential liability is recoverable in due course.

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