In the recent decision of Deputy Commissioner of Taxation v Ausmart Services Pty Ltd [2018] FCA 1912, the Australian Taxation Office (ATO) has been successful in their application to have provisional liquidators appointed for eight labour hire businesses after they entered liquidation or were deregistered without paying their outstanding tax liabilities.
Scott Shi was the head of a large labour hire business which supplied the majority of workers to a number of abattoirs through 8 associated companies. In 2015, an ATO taskforce began an audit of the companies in this group, and of all persons associated with it. In doing so, it was revealed that although Mr Shi was not listed as the Director on ASIC’s register, he assumed control of each of the companies.
Following the investigation, it was determined that the companies had incurred a number of unpaid primary tax liabilities, estimated to exceed $121 million. The taskforce revealed that the companies treated many workers as contractors rather than employees in order to reap the consequential tax implications. Ultimately, the ATO concluded that the companies’ liabilities included:
- Failure to remit PAYG withholding amounts to the ATO, despite withholding PAYG withholding amounts;
- Failure to comply with their obligation as employers pursuant to the Superannuation Guarantee (Administration) Act 1992 (Cth) and failure to pay the subsequent superannuation guarantee charge shortfalls;
- The lodgement of Business Activity Statements (BAS) in which they claimed GST input credits equivalent to 1/11 of the wages they paid to the employees, despite none of the employees being registered for GST and no GST being invoiced to the companies by the employees or paid by the employees to the ATO, resulting in the companies receiving refunds for the GST they never paid.
- Underpaying, or failing to pay GST on all of the fees they received from abattoirs, meaning that the money entering many of the companies’ bank accounts far exceeded any income declared in tax returns, even after deductions were allowed for expenses such as wages;
- Failure to lodge tax returns for any or all income years;
- Failure to appropriately lodge BAS; and
- Understating the income and GST payable on tax returns and activity statements, while over-claiming GST input credits.
Furthermore, the ATO investigations revealed that a number of companies in Mr Shi’s control had already been wound up and deregistered. Relevantly, these companies had all had their assets stripped prior to liquidation or deregistration, with the funds not used for business expenses either transferred to other companies in the group or transferred offshore for the benefit of Mr Shi, his relatives and associates. It was estimated that in the six years from 30 June 2010, more than $43.1 million had been remitted overseas by companies at Mr Shi’s direction.
The matter was heard before the Federal Court last November, where the ATO sought an order that the eight companies be wound up. In doing so, the Commissioner asserted that the companies fraud, phoenix activity and tax evasion enlivened the court’s discretion to wind up the company under section 461(1)(k) of the Corporations Act 2001.
Accordingly, Yates J was required to consider whether there was a reasonable prospect that a winding up order would be made and if so, whether pursuant to section 472, there was a valid reason for placing the affairs of the company under external control prior to the hearing of the winding up application.
Given the flow of the companies’ liquid assets to Mr Shi and associated parties, the court concluded that the conduct and management of the companies’ affairs was inconsistent with lawful and proper compliance with their taxation responsibilities and obligations.
Ultimately, Yates J was satisfied that the companies had engaged in ‘systemic and deliberate non-compliance with their taxation obligations to the tune of many millions of dollars’, and that the flow of funds through the companies was ‘haphazard and ad hoc’. His Honour was satisfied that there was a real and substantial likelihood that winding up orders would be made against the companies as final relief.
Accordingly, Justice Yates was persuaded that provisional liquidators should be appointed to preserve the companies’ assets and to protect them from fraudulent dissipation to the detriment of the Commonwealth and other creditors. His Honour concluded that ex parte relief was warranted given the risk that giving notice of the application may have defeated the purpose for which the provisional liquidators were to be appointed.