Court extends freezing order against SMSF trustee

One of HPack’s directors, Mrs Cordina, commenced a farming business with a third party in the 1990s and established a unit trust, called the B&C Unit Trust, and the SMSF.

Arrangements were made to buy out the third party from the business in about 2009, by purchasing the units held by the third party in the B&C Unit Trust.

CSF commenced making pension payments to Mr Cordina from 1 July 2009, about the same time as the units held by the third party in the B&C Unit Trust were redeemed, leaving Mr and Mrs Cordina in control of that trust.

Mr and Mrs Cordina also set up a second SMSF, the C Cordina Superannuation Fund (CCSF) in January 2015. CKJJJJ Investments Pty Ltd (CKJJJJ) was appointed as the corporate trustee of the fund.

The court noted that there was evidence of very substantial amounts paid by Mr and Mrs Cordina and later HPack as trustee for CSF to Mr and Mrs Cordina over several years.

Mr and Mrs Cordina as trustees for CSF paid benefits totalling $337,000 to Mr Cordina and CCSF paid member benefits totalling $45,000 to Mrs Cordina in the financial year ended 30 June 2013.

Payments were also made to Mr Cordina exceeding $2 million in the financial year to 30 June 2014.

Both the couple and HPack as trustee for CSF then made payments exceeding $5 million in the 12 months to 30 June 2015.

From 1 2015 to 30 June 2017, a further $11 million was paid to Mr Cordina by HPack.

After CKJJJJ was incorporated and appointed as trustee of the CCSF in January 2015, substantial funds continued to be transferred by Mr and Mrs Cordina as trustee for CSF to Mr and Mrs Cordina and large payments were also made, on a regular basis, by Mr and Mrs Cordina as trustee for CSF to CKJJJJ as trustee for CCSF.

HPack as trustee for CSF paid an amount of nearly $18 million to CKJJJJ in the period to 30 June 2017.

Those payments continued regularly and in very large amounts to the point at which the ATO commenced a review into the affairs of HPack in March 2019.

By a letter dated 15 March 2019, the Deputy Commissioner of Taxation (DCT) started a review of HPack as trustee for CSF’s income tax affairs for the 2015, 2016 and 2017 years and requested a substantial number of documents for the purposes of that review.

Several weeks later, the respondent’s solicitor wrote to the DCT and made a voluntary disclosure.

The disclosure stated that the document provided to the commissioner had been reviewed and that it was “open to the commissioner to conclude that distributions from the B&C Trust to the CSF for the years under review were non-arm’s length income (NALI) of CSF, for the purposes of s 295-550 of the Income Tax Assessment Act 1997”.

“If so, the tax returns for the CSF would be incorrect and a shortfall amount would exist for the years under review.”

The disclosure summarised that the unpaid tax amounts for the years were $3,784,861 for the year ended 30 June 2015, $4,385,301 for the year ended 30 June 2016 and $3,441,093 for the year ended 30 June 2017.

The letter noted that Mr and Mrs Cordina were not versed in taxation matters and always relied on professional advisers to assist in managing in understanding their tax affairs and those of CSF.

“The taxation principles discussed above are inherently complex and [Mr and Mrs Cordina] have no awareness of NALI, its operation and consequences,” it stated.

On 26 March 2020, the DCT issued notices of assessment of income tax to HPack for the years ended 30 June 2015 to 30 June 2017, resulting in an additional liability of tax of approximately $11.95 million payable by HPack.

The respondents relied on a letter dated 10 September 2020 from the DCT to their solicitors, which referred to a proposal received on 20 February 2020 to compromise the tax debt owed by HPack and advised that proposal had been refused.

That letter recognised a delay by the DCT in responding to that proposal, and remitted general interest charges from 17 February 2020 to 10 September 2020, noting that HPack’s outstanding tax liability was then $19,664,953.51.

The solicitors for the Deputy Commissioner submitted that a freezing order would be appropriate as to ensure that the court’s processes were not inhibited and so that CKJJJJ and Mr and Mrs Cordina would be the subject of a claim by a liquidator appointed to HPack which would result in each of them being obliged to disgorge assets or contribute towards satisfying HPack’s debts.

The DCT submitted that a good arguable case to support a freezing order exists because HPack owed a debt to the DCT in the amount of $19,644,953.

It noted that HPack did not have the resources from which it could meet that debt so that it would be wound up in insolvency; and that a liquidator of HPack would be entitled to seek to recover money paid to CKJJJJ and Mr and Mrs Cordina by a claim under s 588FDA of the Corporations Act in respect of unreasonable director-related transactions, or by proceedings against Mr and Mrs Cordina for breach of directors’ duties.

Justice Ashley Black noted a liquidator appointed to HPack would also have a good arguable case against Mr and Mrs Cordina for breach of directors’ duties, including at least a breach of section 180 of the Corporations Act, on the basis of an arguable failure by HPack’s directors to take adequate steps to establish tax compliance mechanisms within HPack or adequately attend to its tax affairs.

“This exposes HPack to the risk that it would be wound up on the basis of unpaid tax liabilities,” Justice Black stated.

She also stated that the pattern of HPack and Mr and Mrs Cordina’s conduct over a significant period indicates a “propensity for transactions between related parties and for payments out of HPack without regard to public liabilities such as income tax”.

“That raises a real risk that they would not act differently in respect of a potential future liability to a judgment in favour of a liquidator of HPack. It seems to me that that is sufficient to support the making of a freezing order, in respect of claims that have good arguable prospects and are of significant size, in these circumstances,” she said.

The court determined that the freezing order should be made.