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ATO obtains a $220 million freezing order in takeover deal with energy giants

09 March 2022

9 min read

#Dispute Resolution & Litigation, #Taxation

Published by:

Tom Goodwin

ATO obtains a $220 million freezing order in takeover deal with energy giants

An important decision was handed down recently highlighting the powers available to the Commissioner and Deputy Commissioner of Taxation when dealing with large corporate entities.

In the decision of Deputy Commissioner of Taxation v State Grid International Australia Development Company Limited [2022] FCA 139, the Federal Court made a $220.9 million freezing order against energy giants AusNet Services and Chinese-state controlled company, State Grid International (State Grid).


In late January, AusNet shareholders voted in favour of an $18 billion offer from a Brookfield-led consortium. A vast majority of shareholders voted in favour of the scheme of arrangement, including State Grid which owns 19.9 per cent of the company (which is worth around $1.9 billion).

State Grid stood to make profits of approximately $736.5 million from the takeover and, according to the Australian Taxation Office (ATO), would subsequently owe $220.9 million in capital gains tax (CGT) from the deal. However, the ATO could not issue its notice to pay until State Grid had transferred its shares to Brookfield’s subsidiary, Australian Energy Holdings No 4 (AEH4).

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 what’s known as a “freezing order” (which have previously been known as a “Mareva Order”). 

What is a freezing order?

Under Rule 7.32 of the Federal Court Rules, the Federal Court may make a freezing order “with or without notice to a respondent, for the purpose of preventing the frustration or inhibition of the Court's process by seeking to meet a danger that a judgment or prospective judgment of the Court will be wholly or partly unsatisfied”. 

In other words, the purpose of the order is to stop assets being shifted away from Australia so that they remain available to pay a judgment debt that may be obtained in future.

What did the ATO argue?

In seeking a freezing order for the claimed future tax debt, the Deputy Commissioner for Taxation submitted there was a good arguable case and a proper basis to infer there was a “real risk” that State Grid may transfer the proceeds of the share disposal abroad. The Deputy Commission gave five reasons:

  1. the Deputy Commissioner argued that State Grid had denied it was liable to pay CGT on the disposal. In particular, State Grid made an “Entity Declaration” which represented to AEH4 that it would not have a CGT liability because the State Grid shares were not an indirect Australian real property interest
  2. the Deputy Commissioner said that State Grid maintained that view notwithstanding the contrary view reached by the ATO
  3. State Grid had never lodged an income tax return or Business Activity Statement (BAS) with the ATO, and it had not been identified in the ATO’s system as an entity from which tax had been withheld by a financial institution
  4. the Deputy Commissioner argued that State Grid did not have a Tax File Number (TFN) until the Commissioner issued one on her own volition
  5. in a letter sent to the ATO on 14 February 2022, State Grid’s solicitors advised that State Grid “does not hold other significant assets in Australia” (although it was part of a group that owned assets in Australia and had a “global reputation to maintain”).

For these reasons, the Commissioner argued an inference could be drawn that State Grid would have no residual business or substantial assets in Australia following the disposal of its shares in AusNet, making it difficult to satisfy a prospective judgment if the CGT was not paid.

In putting forward that there was a good arguable case, the Commissioner posited an intention to raise a special assessment – that is an ATO initiated assessment – under section 168 of the Income Tax Assessment Act 1936 on 16 February 2022. That date was the earliest such assessment could be raised as an assessment for a CGT liability cannot be issued until the CGT event to which it relates, in this case the transfer of shares, has occurred.

Further, even though the assessment could be issued on 16 February, the amount would not become due and payable until 1 December 2022, leaving a period of time in respect of which the Commissioner would be at risk if assets were transferred offshore. Even though State Grid and the Commissioner disagreed as to the tax outcomes of the transaction, the raising of the special assessment supported there being a good arguable case as there is provision in the Taxation Administration Act 1953 that deems an assessment to be conclusive evidence of the amount owing in all proceedings other than those directly challenging the assessment. This is a common hurdle taxpayers encounter in defending ATO recovery proceedings initiated in advance of proceedings determining the validity of an assessment having been concluded.

The decision

Justice Perry of the Federal Court found in favour of the Deputy Commissioner and granted the freezing order on an interlocutory basis (meaning it would stay in place until a trial or other order of the Court).  In doing so, her Honour accepted that there was a good arguable case and a “real danger” that any future CGT debt could be wholly or partially unsatisfied because the proceeds of State Grid’s sale of shares may be removed from Australia.

In coming to this conclusion, Justice Perry noted:

  1. the alleged CGT liability was a substantial sum
  2. State Grid was incorporated and had its registered office in Hong Kong
  3. State Grid was the subsidiary of a Chinese-state owned entity
  4. State Grid had never lodged an income tax statement or BAS with the ATO and did not have a TFN until the Commissioner issued one
  5. the ATO had not received any withholding payments made in respect of bank interest payable to State Grid, which could indicate that State Grid had no day-to-day Australian bank account
  6. State Grid was aware that the ATO had formed the view that there would be a CGT event when the shares were disposed of, but disputed the liability that the ATO said would arise
  7. the ATO’s investigations indicated that State Grid had no assets in Australia and following the share disposal, State Grid would have no residual business in Australia
  8. State Grid’s solicitors had advised the ATO that State Grid would have no substantial assets in Australia following the disposal of its shares in AusNet
  9. While State Grid had related entities in Australia which may hold assets, the Commissioner was unaware of any legal entitlement to require related entities to pay any outstanding tax debts of State Grid
  10. a future judgment in respect of the tax liability would not likely be enforceable, or may otherwise be difficult to enforce, against assets held by State Grid in either the People’s Republic of China (PRC) or Hong Kong.

With respect to the last point, it was relevant that whilst PRC is a party to the Convention on Mutual Administrative Assistance and Tax Matters (Convention), China and Hong Kong have stated they will not provide assistance in the recovery of tax owed in other jurisdictions. Had China and Hong Kong agreed to provide assistance under that Convention (as many countries have), it would render it more enforceable against assets held in that other country. In that circumstance, the Commissioner would have had a weaker argument for a freezing order.   

Requirements for a freezing order

Freezing or ‘Mareva’ orders (named after Mareva Compania Naviera SA v International Bulkcarriers SA (The Mareva) [1975] 2 Lloyd's Rep 509) are difficult orders to obtain, but are a useful tool when seeking to preserve assets in a jurisdiction and to prevent abuse of a court process.

Division 7.4 of the Federal Court Rules 2011 (Cth) contains the key test to satisfy in seeking these orders. Each State and Territory Supreme Court have similar provisions in their respective rules.

Relevantly, an applicant must demonstrate, by admissible evidence, that:

  1. it has a judgment in its favour, or there are sufficient prospects a judgment will be given in its favour and registered by a court
  2. it has a good arguable case
  3. there is a danger that the judgment debt (either partly or wholly) will be unsatisfied because the respondent might abscond or remove, dispose of or diminish their assets in the jurisdiction.

A supporting affidavit must accompany an application for a freezing order, which includes the following:

  • information about the judgment that has been obtained, or, if no judgment has been obtained, the following information about the cause of action:
    • the basis of the claim for substantive relief
    • the amount of the claim
    • if the application is made without notice to the respondent, the applicant's knowledge of any possible defences.
  • the nature and value of the respondent's assets within and outside Australia, as they are known to the applicant
  • the matters referred to in rule 7.35 of the Federal Court Rules
  • the identity of any person, other than the respondent, who the applicant believes may be affected by the order and the details of how that person may be affected.

Orders should exclude the respondent dealing with their assets for legitimate purposes, such as paying reasonable living expenses.

Key takeaways

Overseas entities need to be aware of potential Australian tax implications arising from transactions they enter into. Such transactions can come to the attention of the Commissioner through a Foreign Investment Review Board enquiry required for the investment, voluntary engagement with the Commissioner to understand the tax implications, by the Commissioner independently identifying that the transaction is occurring from publicly available data or through audit or review activity undertaken after the event.

In all cases, reliance on an opinion from a tax advisor that Australian tax should not arise has limited utility as the Commissioner has powers to pursue recovery of the tax debt on the Commissioner’s own interpretation of the tax law even if it is different to the taxpayers’ view.

Freezing orders are just one of the Commissioner’s powers to enforce tax debts against overseas parties. Other powers that the Commissioner has include:

  • issue of garnishee notices to third parties to pay amounts owing from that third party to the overseas entity to the Commissioner instead of the overseas entity
  • requiring an overseas entity to give security for the payment of an existing or future tax-related liability if the overseas entity is establishing or carrying on, or intends to establish or carry on, an enterprise in Australia
  • issuing departure prohibition orders to individuals preventing them from leaving Australia until tax debts are satisfied
  • retention of refunds owed to the entity whilst verifying the information provided
  • eliciting the support of a foreign revenue authority in another country to recover the tax debt (where the other country has ratified the Convention and agreed to provide support in the recovery of tax debts).

If you have any questions or need assistance with any tax disputes, please contact us or send us your enquiry here.

Authors: Toby Boys, Megan Bishop & Tom Goodwin

The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.

Published by:

Tom Goodwin

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