ATO obtains $220 million dollar freezing order for potential capital gains tax liability

An important decision was handed down in the Federal Court recently in Deputy Commissioner of Taxation v State Grid International Australia Development Company Limited [2022] FCA 139 (Perry J). It was held that a taxpayer’s assets may be frozen despite no notice of assessment being issued by the ATO at the time freezing orders were applied for.


On 28 January 2022, AusNet shareholders voted in favour of a scheme for a consortium led by Brookfield, a global asset manager, to purchase all the shares in AusNet from existing shareholders. The date of implementation was set as 16 February 2022. State Grid was incorporated in Hong Kong and a majority shareholder who owned 19.9 per cent of the company.

State Grid stood to make $736.5 million from the takeover and, according to the Australian Taxation Office (ATO), would subsequently owe $220 million in capital gains tax (CGT) from the deal. However, the ATO could not action an assessment until the date of implementation.

The ATO was aware of the transaction and had a phone conversation with State Grid’s lawyers where they requested that State Grid hold an amount on account of the anticipated CGT liability. This request was refused as State Grid had disputed that any CGT liability would arise.

Due to concerns that State Grid would remove the proceeds of sale from Australia and deprive the ATO of the opportunity to recover the CGT from State Grid, the Deputy Commissioner applied to the Federal Court for a freezing order on 15 February 2022, one day before the date of the takeover.

Should a freezing order be granted?

A freezing order is an order restraining a respondent from removing any assets located in or outside Australia. Under Rule 7.32 of the Federal Court Rules, the Federal Court has power to make a freezing order to prevent its processes from being frustrated by a prospective judgment being unsatisfied. An important note in this case was that there was no judgment, just a prospective judgment – in that the transaction had not yet occurred so there was no tax assessment.

The Court will grant an order when the following three elements are satisfied:

(a) A good arguable case

The Court held that the Deputy Commissioner had a good arguable case on the basis that the Commissioner would be issuing the Special Assessment as soon as the transaction completed on 16 February 2022.

(b) Danger that a prospective judgment will be wholly or partially unsatisfied

There were ten different reasons why the Court held that there was a danger that the proceeds of sale would be removed from Australia. The most significant ones were that it was a substantial sum of money, State Grid had no assets in Australia and State Grid has never lodged an income tax return or Business Activity statement with the ATO.

(c) Balance of convenience

The Court then undertook a weighing of factors to determine whether the balance of convenience favoured the making of the order. State Grid submitted that there was no evidence that they had proposed to do anything unlawful, the fact that no special assessment had been made and the effect that the order could have on the takeover.

The Deputy Commissioner submitted that fact that this was a substantial sum, that after the takeover by Brookfield, State Grid would not have any residual business in Australia and that there would be difficulties in enforcing a prospective judgment obtained against State Grid in respect of assets held in China or in Hong Kong.

The Court held that the balance of convenience favoured the order being made.


The Court made the freezing orders against both State Grid and AusNet on the basis that:

• State Grid could not diminish the value of two specific bank accounts below approximately AUD$220 million; and

• AusNet must continue to hold $220 million of the amount payable to State Grid.

Applications for freezing orders are common but rarely granted where a debt is yet to be owing. This case has tested the Court’s willingness to issue a freezing order, despite no judgment and no notice of assessment.