‘Wilful blindness’: Court slams ATO’s debt collection from misappropriated funds

On 9 December, the Supreme Court of NSW found the Commission of Taxation liable to pay mining company Kupang Resources up to $1.1 million after the ATO pursued debts on misappropriated income in what the courts described as a “tax now, ask questions later” approach.

Back in 2004, chartered accountant and de facto director Phillip Grimaldi misappropriated funds from Kupang Resources to complete a transaction with Murchison Metals, which gave Murchison an interest in valuable iron ore mining tenements in WA.

Grimaldi was a director and significant shareholder of Murchison Metals, and obtained “significant financial benefits” from that transaction in the form of new shares and options received as a “spotter’s fee.”

From this, he realised profits of some $36 million and lived “a life of some luxury,” including multiple properties in Sydney for his family, rent in a harbourside residence, expensive items such as a Bentley and a boat, and opulent overseas trips, court documents read.

His sudden influx of wealth caught the attention of the Commissioner of Taxation, who pursued Grimaldi for unpaid tax assessments from 2008 to 2010. Ultimately, the tax dispute was settled and he paid close to $20 million to the NSW Treasury under a proceeds assessment order, which was subsequently passed on to the ATO.

In 2010, Kupang Resources succeeded in its court claim that Grimaldi had breached his fiduciary duties and was due to repay the company an amount to be determined in a subsequent inquiry.

The NSW Supreme Court said this victory was rendered “strikingly hollow” after it became apparent that Grimaldi’s tax payments had bankrupted him, and thus halted the inquiry and prevented Kupang Resources from recouping its losses.

Kupang Resources launched a claim against the Commonwealth of Australia for “knowing receipt,” essentially claiming that the ATO had taken Grimaldi’s money without waiting for the outcome of his trial, with reasonable knowledge that the money had come from fiduciary breaches.

The court determined that the Commonwealth was liable for the claim under the first limb of Barnes v Addy, which imposed personal liability on a third party that received trust property for their own benefit, with knowledge that it was transferred in breach of fiduciary duty.

It found that the tax debts recovered by the ATO from Grimaldi were trust property and traceable proceeds of a sale obtained in breach of fiduciary duty. Second, it found that it had the requisite knowledge when it received the trust property for it to be personally liable as a knowing recipient.

“Despite everything the ATO knew about the [Kupang] Proceedings, it had adopted a policy of not awaiting the outcome of them but instead following an exclusive focus to recover a tax debt from Mr Grimaldi,” court documents read.

“In effect, the ATO had instituted a policy of wilful blindness in relation to the claims in the [Kupang] Proceedings akin to a “tax now, ask questions later” approach. Although in this case, it did not even bother to ask any questions later.”

The court determined that Kupang had comprehensively succeeded against the Commonwealth, and the government was liable to pay Kupang to the extent of the trust property it received.

In total, the court said Kupang could recover $1,120,065 from payments received by the ATO in 2012 and 2013. It also ordered the Commonwealth to pay Kupang’s costs.