Canty v Deputy Commissioner of Taxation

[2005] NSWCA 84

Reported Decision: 63 NSWLR 152

Court of Appeal

CITATION:	Canty v Deputy Commissioner of Taxation [2005] NSWCA 84
HEARING DATE(S):	2 February 2005
JUDGMENT DATE:	3 May 2005
JUDGMENT OF:	Handley JA at 1; Beazley JA at 81; Santow JA at 82
DECISION:	Appeal dismissed with costs.

CATCHWORDS:	COMPANY - directors - liability for unremitted group tax - CONSTITUTIONAL LAW - inconsistency of State and Federal laws - pre-judgment interest - general interest charge - INCOME TAX - group tax - company failing to remit group tax instalments - liability of company director - INTEREST - pre-judgment interest under State law recoverable from director liable for unremitted group tax - D
LEGISLATION CITED:	Acts Interpretation Act (Cth) District Court Act 1973 Income Tax Assessment Act 1936 Taxation Administration Act 1953
CASES CITED:	D C of T v George (2002) 55 NSWLR 511 D C of T v Pejkovic (2000) 2000 ATC 4825 D C of T v Saunig (2002) 55 NSWLR 722 D C of T v Solomon (2003) 199 ALR 325 D C of T v Woodhams (2000) 199 CLR 370 Fitzgerald v D C of T (1995) 95 ATC 4587 General Tire Co v Firestone Tire Co Ltd [1975] 1 WLR 819 Houssein v Under Secretary of Industrial Relations (1982) 148 CLR 88 Miller v D C of T (1997) 98 ATC 4059 Quinn v Leathem [1901] AC 495 R v Iannelli (2003) 56 NSWLR 247 R v Walters [2002] NSWCCA 291 Re Bolton ex parte Beane (1987) 162 CLR 514
PARTIES:	Paul Brian Canty (Appellant) Deputy Commissioner of Taxation (Respondent)
FILE NUMBER(S):	CA 40512/04
COUNSEL:	C J Bevan/P E Cullen (Appellant) M Aldridge SC/P D Rodionoff (Respondent)
SOLICITORS:	Evangelos Patakas & Associates (Appellant) Australian Government Solicitor (Respondent)

LOWER COURT JURISDICTION:	District Court
LOWER COURT FILE NUMBER(S):	DC 480/01
LOWER COURT JUDICIAL OFFICER:	Gibson DCJ

CA 40512/04
DC 480/01

HANDLEY JA
BEAZLEY JA
SANTOW JA

3 MAY 2005

PAUL BRIAN CANTY v DEPUTY COMMISSIONER OF TAXATION

CATCHWORDS

COMPANY – directors – liability for unremitted group tax

CONSTITUTIONAL LAW – inconsistency of State and Federal laws – pre-judgment interest – general interest charge

INCOME TAX – group tax – company failing to remit group tax instalments – liability of company director

INTEREST – pre-judgment interest under State law recoverable from director liable for unremitted group tax

FACTS

The Deputy Commissioner of Taxation sued a former director of a company under Subdivision B of Division 9 of Part VI of the Income Tax Assessment Act 1936 to recover group tax instalments the company had failed to remit. The due dates for payment were between 10 December 1998 and 19 August 1999. The Deputy Commissioner gave notice to the defendant under s 222AOE after he ceased to be a director following his resignation on 31 August 1999. The District Court judge found for the Commissioner. The defendant appealed contending that a former director was not liable for unremitted group tax unless he received the notice under s 222AOE while still in office, and that the defences under s 222AOJ had been established. HELD: Dismissing the appeal (1) The fact that the appellant had ceased to be a director before he was served with a notice under s 222AOE was not a defence; (2) When considering whether the defences under s 222AOJ had been made out the relevant period was from the first deduction day to the end of the 14 day period specified in the notice under s 222AOE; (3) The appellant had failed to establish the s 222AOJ defences for the whole of this period and (4) Liabilities under Subdivision B can attract an award of pre-judgment interest under s 83A of the District Court Act 1973. That section is not inconsistent with s 8AAB of the Taxation Administration Act 1953 which imposes a general interest charge on non-payment of taxation liabilities under the Income Tax Assessment Act, but does not impose such a liability on a director who becomes liable for group tax not remitted by the company. Accordingly the section was not partially invalid pursuant to s 109 of The Commonwealth Constitution.

ORDERS

Appeal dismissed with costs.

CA 40512/04
DC 480/01

HANDLEY JA
BEAZLEY JA
SANTOW JA

3 MAY 2005

PAUL BRIAN CANTY v DEPUTY COMMISSIONER OF TAXATION

Judgment

1 HANDLEY JA: This is yet another appeal arising from Subdivision B of Division 9 of Part VI (Subdivision B) of the Income Tax Assessment Act 1936 (ITAA) which penalises directors of a company that fails to pay the Commissioner of Taxation group tax instalments it has deducted from the wages and salaries of its employees.

2 At all material times until 31 August 1999 the appellant was one of two directors of Quality Images Australia Pty Ltd (the company), his co-director and the company secretary being Mr Lindsay Aitken. The appellant was introduced to Mr Aitken early in 1990 as an accountant specialising in finance and dealing with insolvency and the restructuring of companies. The appellant then retained Mr Aitken to deal with the financial difficulties of an earlier company and the financial affairs of himself and his family. In 1996 he and Mr Aitken established the company their families would own to take over the business of the earlier company. At that time Mr Aitken told him that he had earlier been made a bankrupt (blue 1/171).

3 The company conducted a printing business from premises at Rhodes until the appellant resigned as a director on 31 August 1999. He managed production and sales and worked at its place of business at Rhodes. Mr Aitken was responsible for accounting matters and finance.

4 The due dates for payment of the group tax deductions the subject of these proceedings (the relevant deductions) were between 10 December 1998 and 19 August 1999. However the history over that period was not one of unremitting default. The company failed to remit the instalment due on 10 December 1998 but then complied with its weekly obligations until 18 March 1999. It failed to pay the instalment due that day and the next six weekly instalments but then made its current payments until it defaulted on 22 July. The weekly defaults continued until 19 August.

5 The appellant resigned as a director on 31 August. The total amount not remitted was $402,917.05 and Gibson DCJ found that the appellant was liable to pay this amount less a credit and judgment was entered for $388,689.74 together with $193,518.50 for pre-judgment interest.

6 Subdivision B, which came into force on 30 June 1993, made directors responsible for any failure by their company to remit group tax instalment deductions to the Commissioner on or before the due date for payment. Section 222AOB(1) requires directors to cause the company to do at least one of the following on or before the due date:

“(a) comply with Division 1AAA … in relation to each deduction:
(i) that the company has made for the purposes of Division 1AAA …;
(ii) …
(b) make an agreement with the Commissioner under section 222ALA in relation to the company’s liability under a remittance provision in respect of such deductions;
(c) appoint an administrator of the company under section 436A of the Corporations Law;
(d) begin to be wound up within the meaning of that Law.” (the four steps)

7 The appellant was in breach of this duty on each of the relevant due dates. Section 222AOC relevantly provides:

“If section 222AOB is not complied with on or before the due date, each person who was a director of the company at any time during the period beginning on the first deduction day and ending on the due date is liable to pay to the Commissioner, by way of penalty, an amount equal to the unpaid amount of the company’s liability …”

8 The Commissioner is not entitled to recover a penalty imposed by s 222AOC from “a person” until 14 days after he gives “to that person” a notice which complies with s 222AOE. There is no longer any dispute that notices which were valid in form were duly given to the appellant on 3 and 17 September 1999 respectively, after he ceased to be a director. The appellant submitted that he was not liable for the penalties because he had ceased to be a director before the notices were served.

9 Section 222AOG provides that if s 222AOB is complied with on or before a notice under s 222AOE is given or within 14 days thereafter the penalty is remitted. The notices stated, as required by s 222AOE, that the penalties would be remitted if one of the four steps was taken within 14 days. None of those steps were taken within that period.

10 Section 222AOJ provides persons sued for a penalty under s 222AOC with two defences. Only the second, under sub-section (3) is directly relevant. This, and sub-section (4) provide:

“(3) It is also a defence if it is proved that:
(a) the person took all reasonable steps to ensure that the directors complied with subsection 222AOB(1); or
(b) there were no such steps that the person could have taken.

(4) In subsection (3):
‘reasonable’ means reasonable having regard to:
(a) when, and for how long, the person was a director and took part in the management of the company; and
(b) all other relevant circumstances.”

11 The Judge rejected this defence and the second issue was whether she erred in law or in fact in doing so.

12 The third issue related to the award of pre-judgment interest under s 83A of the District Court Act. The appellant submitted that this power was not available because Division 1 of Part IIA (Division 1) of the Taxation Administration Act 1953 (TAA), which imposed a general interest charge for failing to meet taxation obligations, did not apply to penalties under Subdivision B. Part IIA was said to be an exhaustive statement of the circumstances in which pre-judgment interest could be recovered in respect of obligations imposed by the ITAA and as such it was said to exclude State law in the form of s 83A.

The effect of the appellant’s resignation

13 Section 222AOB(1) imposed a duty on “persons” who were “directors” at the relevant time and sub-s (3) imposed a continuing duty on them and on those who later become directors until s 222AOB(1) is complied with. Section 222AOC imposed the penalty for breach on the persons who were directors during the relevant period before the due date and s 222AOD imposed the penalty on persons who become directors when s 222AOB(1) has still not been complied with. It was common ground that Subdivision 8 made the appellant liable for these penalties. The question was whether the Commissioner was entitled to recover them from someone who ceased to be a director before he was given the notice.

14 Section 222AOE, the notice provision, provides that “the Commissioner is not entitled to recover [the penalty] from a person until …”. The related provisions in s 222AOG (remission of penalty), s 222AOH (effect of a payment on parallel liabilities), s 222AOI (rights of indemnity and contribution), and s 222AOJ (defences) refer in their operative provisions to a “person” and not a “director”. Moreover s 222AOF(1) (service of notice) authorises service, by the method stated, on a person within seven days after he or she ceased to be a director. The defence under s 222AOJ(3)(c) is that “the person took all reasonable steps to ensure that the directors complied” (emphasis supplied). These provisions indicate that a director liable to the penalty under s 222AOC need not be in office when the notice is given.

15 Division 9 of Part VI of the ITAA is headed “Penalties for directors of non-remitting companies”. Under s 13(1) of the Acts Interpretation Act (Cth) this heading is part of the Act. The word “director” and not “person” also appears in the headings to ss 222AOH and 222AOI which are not part of the Act. The Explanatory Memorandum relevantly stated:

“… before the Commissioner can recover an unremitted amount … by way of penalty from directors , the Commissioner must notify the directors of the liability for the penalty. The directors will then have a further 14 days after being notified to have the penalty remitted.” (emphasis supplied)

16 References to directors were repeated in the Minister’s second reading speech where he said:

“Another feature of the arrangement will be the requirement on the Commissioner to notify directors who become liable for any unremitted amounts. He will be required to allow those directors a further period of 14 days, during which time the liability can be avoided if one of the options available is exercised.” (emphasis supplied)

17 Mr Bevan, for the appellant, relied strongly on the Explanatory Memorandum and Second Reading speech as support for his submission that a notice could not validly be given to someone who was no longer a director.

18 Section 13(3) of the Acts Interpretation Act (Cth) provides that the headings to sections of an Act are not part of the Act but under s 15AB(2)(a) they can be considered, along with other extrinsic material such as the Explanatory Statement and the Second Reading speech, when construing an Act. Under s 15AB(1)(b) this can be done where the meaning of a provision is ambiguous or obscure.

19 The task of the Court is to construe the statute and not the Explanatory Statement or Second Reading speech, and resort to extrinsic material is only permissible if the statutory text is ambiguous or obscure. An inconsistency between the text and the Minister’s Second Reading speech and the Explanatory Statement does not establish ambiguity or obscurity. The principles were stated in Re Bolton ex parte Beane (1987) 162 CLR 514, 518 in the joint judgment of Mason CJ, Wilson and Dawson JJ:

“The words of a Minister must not be substituted for the text of the law … It is always possible that through oversight or inadvertence the clear intention of the Parliament fails to be translated into the text of the law. However unfortunate it may be when that happens, the task of the court remains clear. The function of the court is to give effect to the will of Parliament as expressed in the law.”

20 Mr Bevan also relied on dicta in D C of T v Woodhams (2000) 199 CLR 370 and D C of T v Saunig (2002) 55 NSWLR 722. In its judgment in the former case the High Court said at 384:

“The notice in question is addressed to a director of the company. Such a person will ordinarily have access to information concerning the company’s liabilities.”

21 The respondent in the Woodhams case was still a director when served with the notices (see pp 380, 381), and in these circumstances the passage is not even a dictum on the present question. Indeed the High Court later described the person receiving the notice as “the recipient” (p 384 paras 36, 38).

22 Mr Bevan relied on the statement by Heydon JA (p 729 para 23) in the Saunig case that the only course open to a director who cannot secure the cooperation of his fellow directors “was to resign and thus escape any continuing liability”. This is ambiguous because the company was still making instalment deductions and failing to remit them to the Commissioner, and the directors were incurring further liabilities.

23 Mr Bevan also relied upon the later statement by Heydon JA (p 731 para 29):

“The harshness is to some extent ameliorated by the fact that the directors cannot be sued until a s 222AOE notice is served, and by the time it has been served and a further fourteen days had passed, the director will have had a period sufficient to procure the company to take one of the four steps referred in s 222AOB(1). If one of the steps is taken the director ceases to be liable. Harsh or not, however, the legislative scheme is in this respect clear.” (emphasis supplied)

24 These references to directors, where the facts were different and the present question was not in issue, are not persuasive. As Lord Halsbury LC said in Quinn v Leathem [1901] AC 495, 506:

“… every judgment must be read as applicable to the particular facts proved, or assumed to be proved, since the generality of the expressions which may be found there are not intended to be expositions of the whole law, but governed and qualified by the particular facts of the case in which such expressions are to be found.”

25 It is an essential condition of a director’s liability that he or she should be in office for at least some of the period before the due date when the company became liable to make a payment of group tax to the Commissioner. However it is not necessary that the director should still be in office on the due date because s 222AOC imposes a penalty on “each person who was a director of the company at any time during the period beginning on the first deduction day and ending on the due date”. A director who resigned between the first deduction day and the due date would not avoid liability to pay the penalty.

26 Section 222AOF(1) also provides that a director who has ceased to hold office can be served under that section for a further seven days.

27 Section 222AOE only requires a notice to be given to “a person” from whom the penalty is to be recovered and the later ss 222AOG (remission of penalty), 222AOH (effect of payment), 222AOI (rights of indemnity and contribution) and 222AOJ (defences) refer in their text to a “person” and not to a “director”.

28 There is therefore no support in the text for the appellant’s construction. Mr Bevan relied on the difficulties a non-director would face in causing the company to take any of the four steps during the 14 day period provided by the notice but the argument based on hardship is entitled to little weight given the plain meaning of the text. The director must have been in office when or about the time the primary default under s 222AOB occurred. Even if later out of office he or she will have the period until service of the notice to secure compliance and is then given a further 14 days.

29 The 14 day period cannot properly be considered in isolation and in any event the hardship is not compelling. In many cases the former director as a shareholder or creditor could make an urgent application to the Court for a winding up. In any event the former director will be a contingent or future creditor because of the right of indemnity against the company for the penalty the Commissioner is seeking to recover. In that capacity he or she is entitled to make an urgent application for a winding up order (See now Corporations Act s 462(1)(b), (4)). A company which cannot pay its group tax over many weeks is prima facie insolvent.

30 It follows therefore that Fitzgerald v D C of T (1995) 95 ATC 4587 (French DCJ) was correctly decided, and the first argument for the appellant fails.

Defence of reasonable steps

31 The appellant’s defence under s 222AOJ(3) [para 10] as pleaded was that he had taken all reasonable steps to ensure that the directors had complied with s 222AOB(1), or there were no such steps that could have been taken. The trial judge held that the defence failed because there was no evidence that the appellant had taken any steps to cause the company to comply with s 222AOB(1)(b) by making an agreement with the Commissioner under s 222ALA. This is factually correct but the appellant argued that it was legally incorrect.

32 The point was considered in Miller v D C of T (1997) 98 ATC 4059 but not decided because the defence there was that no reasonable steps could have been taken to secure compliance. Proof of this negative required the defendant to address each of the steps. See Mason P (pp 4063-4), and Priestley JA (p 4067).

33 However there are dicta in Miller which appear to address the present issue. Mason P, with the concurrence of Beazley JA, said (pp 4063-4):

“According to the DCT, the appellant could not make out ‘a defence’ under s 222API(3) [the equivalent of the defence under s 222AOJ(3)] unless the appellant showed what I shall loosely call the reasonableness of his conduct in relation to all four of the options offered to the directors … The appellant submits that a director need only address one of the four options … and that it suffices if he or she proves that, in relation to that option, all reasonable steps were taken by that person to ensure that the directors caused the company to do one of the four options, or that there were no such steps that the person could have taken … I would reject this submission. What the directors have to do to comply with s [222AOB(1)] is cause the company to do at least one of the four matters. If none of the four matters occurs there has been non-compliance by the directors … The taking by a director of ‘all reasonable steps to ensure’ compliance by the directors obviously requires that each option be addressed, either in the sense of taking reasonable steps to bring it about or declining to do anything on the basis that there were no such steps that the director could have taken.”

34 However Priestley JA said (p 4067):

“In my opinion the way in which subs (3) works is that by virtue of para (a) it would be a defence for a director to prove that he had taken all reasonable steps to ensure that the directors caused the company to do at least one of the four things … but a person seeking to rely on the defence under para (b) would have to show that there were no steps that person could have taken to cause the company to do any of the four things.”

35 The critical passage in the judgment of Mason P (“a director need only address one of the four options”) summarises the argument for the appellant. This was that it was open to the recipient of a notice, acting reasonably, to select one of the four steps and in relation to that step prove the para (a) defence or the para (b) defence without having to prove the para (b) defence in relation to the other steps. Mason P rejected that submission and was clearly correct to do so.

36 In this passage the President did not say that a person who takes all reasonable steps to ensure that the directors complied with s 222AOB(1) in only one of the four ways could never establish the defence under s 222AOJ(3)(a). This will depend on the time available to the director or former director to achieve compliance before a notice is served.

37 The defence under para (a) is that the person “took all reasonable steps to ensure that the directors complied with subs 222AOB(1)”. Compliance would be achieved if any one of those events were to occur. Thus if payment was made there is no need for an agreement, an administrator, or a liquidator. If payment was being pursued the other courses would for the time being be unnecessary and counterproductive. If payment is out of the question or cannot be achieved the person bound must address the other steps. If winding up then becomes the preferred option there will be no need for the time being to seek the appointment of an administrator.

38 The defences under para (a) and para (b) are cumulative not mutually exclusive. A defendant may establish that there was nothing that could reasonably be done to achieve payment. He or she may also establish that there was no point in attempting to negotiate an agreement with the Commissioner. In such a case the defence under para (b) would succeed pro tanto leaving the defence under para (a) to address the remaining options.

39 In other cases the defence under para (b) may succeed in relation to all options, so that the defence under para (a) need not be considered. If the only feasible options are the appointment of an administrator or a liquidator a person under the duty, acting reasonably, may decide to seek a winding up. If so, he or she will not be acting unreasonably by doing nothing to secure the appointment of an administrator at that stage. The converse will also be true.

40 Thus a person under the duty, who acted reasonably in choosing one of the possible events and took all reasonable steps to bring it about would, to that extent, make out the para (a) defence although no attempt was made at that stage to achieve compliance in any other way. A person who acted reasonably in choosing between the alternatives but failed to take all reasonable steps to bring about the selected event would fail, as would a person who acted unreasonably in choosing the option to be pursued.

41 If reasonable steps taken in pursuit of one option fail, non-compliance and the obligation of the director or former director will continue. The director or former director will therefore have to take reasonable steps to achieve compliance in another way. If non-compliance continues long enough before a notice is served each of the four options will eventually have to be addressed and the subs (3) defences will have to cover all options. Compare D C of T v Solomon (2003) 199 ALR 325 CA, 335-7.

42 It is necessary to consider whether these defences must be established for the whole of the period between the due dates and the expiry of the notice.

43 The duty of achieving compliance with s 222AOB(1) was relevantly imposed on the directors in office on the due dates. When default occurred s 222AOB(3) imposed a continuing obligation on them until compliance is achieved. Service of a notice under s 222AOE gives the recipient a final chance of achieving compliance within 14 days. If compliance is achieved the penalties are remitted and the defences under s 222AOJ(2) and (3) become irrelevant.

44 Although compliance can be achieved within the 14 day period, if this does not occur the recipient of a valid notice will be liable to the penalties for failing to secure compliance at any earlier time. Both the obligation and the breach will have continued until the notice expired.

45 Under s 222AOJ(3) it is a defence if the defendant proves that he or she “took all reasonable steps to ensure that the directors complied with” the obligation, or that “there were no such steps that the person could have taken”. The natural meaning is that the combined defences must cover the whole of the period between the breach of the obligation on the due date and the expiry of the notice.

46 Proof that nothing could have been done at various times during this period would not establish that nothing could have been done at other times. Proof that the person took all reasonable steps at various times would not establish that he or she took all reasonable steps.

47 Subsection (2), which creates another defence, provides:

“It is a defence if it is proved that, because of illness or for some other good reason, the person did not take part in the management of the company at any time when:
(a) the person was a director; and
(b) the directors were under the obligation to comply with subsection 222AOB(1).” (emphasis supplied)

48 This defence can only succeed if the illness or other good reason continued for the whole of the time the director was in office and the obligation to comply with s 222AOB(1) continued. This Court acted on that view in D C of T v George (2002) 55 NSWLR 511, 517-8 paras 21, 26.

49 The penalties are imposed for failure to comply with the continuing obligation at any time before a valid notice expires. It would not be surprising if a successful defence (including cumulative defences) had to excuse the breach for the whole time the obligation continued. This is clearly the case with the defences under subs (2) and (3)(b) and the context reinforces the natural meaning of subs (3)(a) with its requirement that “all reasonable steps” be taken. Although the point does not appear to have been argued this Court in D C of T v Saunig (2002) 55 NSWLR 722 considered a defence under subs (3)(a) in respect of the whole period between the due dates and the expiry of the notice. Similarly in D C of T v Pejkovic (2000) 2000 ATC 4825 Whealy J held that the defences under subs (3) failed unless they could be established as at the due dates.

50 The appellant’s evidence was that he did not receive the notices served on or about 3 and 17 September 1999 (blue 1/180-1, 2/476-7). Unsurprisingly he did nothing during the relevant 14 day periods to achieve compliance. The operation of the subs (3) defences during the 14 day period provided by notice gives rise to considerable difficulties where the person does not know he has been served. However these need not be resolved in this case because the defences fail in respect of the prior period.

51 At the trial the appellant made no attempt to establish the defence under subs (3)(b) but only that under subs (3)(a). His defence in substance was that he had arranged with Mr Aitken for the sale of the company’s real estate and that Mr Aitken would pay the arrears of group tax and current payments out of the net proceeds of sale or the company’s cash flow. Thereafter he regularly sought and obtained verbal assurances from Mr Aitken that the arrears and current obligations were being paid.

52 It is not necessary to consider whether a defence of delegation coupled with the receipt of verbal assurances from a trusted fellow director could be a good defence where a company appears to be trading profitably and paying creditors regularly and the directors, other than the one to whom performance of the duty has been delegated, have no reason to suspect that there are any problems. This company was not in that position and the appellant knew it. The history is set out in Mr Aitken’s letter to the Australian Taxation Office (ATO) of 21 September 1998 (Blue 1/39-40) and is referred to in the appellant’s first affidavit (1/182-192).

53 The appellant himself made a proposal to the ATO on 20 July 1998 for payment of overdue taxes (2/329) which was accepted the following day (2/330). The overdue amounts at that time included $224,843.48 for group tax. The company was unable to maintain payments under this arrangement (1/184). By August the company’s total liability to the ATO was $800,000 (1/184) which included $343,805.83 for group tax (1/36-8). On 28 September the ATO accepted the company’s proposal through Mr Aitken to pay the amount of $800,000 by instalments by 30 April 1999 (1/42-3). The appellant had made a similar proposal shortly before (2/276).

54 These later proposals for payment by instalments were prompted by a statutory demand served by the ATO on the company (1/180 (42), 184).

55 The appellant and Mr Aitken agreed during 1998 that the company should sell its factory premises and that the net proceeds of sale should be used as working capital and for payment of the existing and accruing debts due to the ATO (1/184-192).

56 Thus prior to the first relevant due date in December 1998 the appellant knew that the company was in a difficult financial position, and that up to July that year Mr Aitken had allowed it to accumulate arrears of unremitted group tax totalling $224,843.48. It is not clear whether the appellant knew that by mid-September the arrears of group tax had increased to $343,805.83 but nothing turns on the difference in these figures. He was also aware that as a director he was responsible for ensuring that the group tax was paid and could be personally liable if it was not.

57 The appellant’s “conduct must be judged not only by reference to what he knew but also by reference to what he ought to have known. He ought to have known … that the … deduction payments … were not being passed on to the Taxation Office” (D C of T v Saunig (2002) 55 NSWLR 722, 731 para 28 per Heydon JA; D C of T v Solomon (2003) 199 ALR 325, 335 per Gzell J).

58 In the light of his knowledge of the financial difficulties, the arrears, and past defaults, the appellant did not act reasonably in accepting Mr Aitken’s verbal assurances that all was well. The company employed an accountant Debbie Daley at the Rhodes office (black 47, blue 1/196). The appellant could easily have asked Debbie Daley to confirm that payments of current group tax were being made and to produce proof of such payment. He did not do so (black 52). He could also have asked Mr Aitken for such proof.

59 The appellant received quarterly management accounts from Mr Aitken (black 49-50, blue 1/192-3 (68)), but there is no evidence that they contained any information about the amounts payable and paid to the ATO for current group tax or in reduction of the arrears. The information in these accounts were said to be “similar” to that provided in the annual accounts (1/193). These did not disclose amounts paid for group tax or the group tax debt owing at the balance date (2/311-320) and one can infer that the quarterly accounts did not contain this information. There is no evidence that Mr Aitken was asked to include such information in the quarterly accounts.

60 In these circumstances the defence under s 222AOJ(3)(a) must fail. The appellant did not establish that he took “all reasonable steps” to ensure compliance by simply delegating performance to Mr Aitken following the sale of the company’s property and relying on his verbal assurances that the current group tax liabilities were being paid on time. The appeal from the judgment for the amount of the penalties less the credit must therefore fail.

Interest under s 83A of the District Court Act

61 The general interest charge under Division 1 of the TAA is imposed on taxpayers who fail by the due date to discharge a liability to pay tax under the statutory provisions referred to in that Division. The table in s 8AAB lists 31 sections of the ITAA and another group of sections which impose obligations to pay tax on taxpayers. These include the sections that make an employer liable to pay group tax deductions to the ATO. The sections in Subdivision B are not included.

62 Subdivision B does not impose a primary obligation to pay group tax on directors. If the company complies with its obligations its directors never come under any obligation to pay the tax. When a company pays that tax on time it is not discharging any monetary obligation of its directors. A director or former director is only made liable for a penalty equal to the tax because of his or her responsibility for the default or continuing default of the taxpayer. Thus the consequential liability of a director or former director under Subdivision B is different from the primary liability of taxpayers under the sections listed in s 8AAB of the TAA.

63 The TAA imposes the general interest charge automatically on default, although it can be remitted by the Commissioner in whole or in part. The TAA fixes both the date on which the charge commences to accrue and the rate. The latter, fixed by s 8AAD(1) as the Treasury note yield plus 8 percentage points, is penal.

64 Section 83A of the District Court Act confers a judicial discretion as to the award of interest, the date from which it accrues and the rate. Pre-judgment interest awarded under the section is wholly compensatory and has been awarded at rates substantially lower than those fixed for the general interest charge.

65 The appellant’s submission is that Part IIA of the TAA is inconsistent with s 83A which is invalid under s 109 of the Commonwealth Constitution to the extent of that inconsistency. There is no direct inconsistency as Part IIA does not prohibit claims under State law for pre-judgment interest in respect of these penalties. The inconsistency relied on is that the Commonwealth legislation has covered the relevant field leaving no room within that field for the valid operation of State law.

66 When this form of inconsistency is established the Court has discerned, as a matter of construction, that the Commonwealth legislation is intended to be the exhaustive and exclusive source of law on the topic. This is an application of the ordinary rule of construction in the Latin maxim “expressio unius est exclusio alterius” (an express provision implies the exclusion of others). As the High Court said in Houssein v Under Secretary of Industrial Relations (1982) 148 CLR 88, 94 “the maxim must be applied with care … and only applies when the intention it expresses is discoverable on the face of the instrument”.

67 Penalties imposed under Subdivision B are not imposed on taxpayers, and arise on default by the taxpayer. They differ in character from the primary obligations to pay tax under the sections listed, and the rate is penal. In my judgment the field covered by Part IIA does not include interest on penalties recoverable under Subdivision B and that Part is not inconsistent with s 83A.

68 The appellant’s third argument therefore fails and the appeal must be dismissed with costs.

69 The amount of interest was agreed in the District Court, subject to the Constitutional challenge, and was not in dispute in the appeal. The trial judge was not asked, in the exercise of her discretion, to refuse an award of interest for the whole or some part of the period.

70 Section 83A permits an award of pre-judgment interest from “the date when the cause of action arose”. It is not clear when a cause of action for the penalties arises given the necessity for service of a valid notice under s 222AOE but the point does not arise. Compare General Tire Co v Firestone Tire Co Ltd [1975] 1 WLR 819 HL, 836.

71 This is another case where there has been unexplained delay by the Commissioner in the enforcement of his rights to recover penalties under Subdivision B. The default on 10 December 1998 relating to $31,980.97 was an isolated one at that stage but further weekly defaults commenced on 18 March 1999 and continued until 29 April when the total amount outstanding was $263,341.10.

72 The Commissioner may not have been aware of the amounts owing for these weeks but should have promptly known of the weekly defaults. In such a situation he can exercise his powers under Division 8 of Part VI of the ITAA, which commenced on 1 July 1998, to make estimates of the amounts not remitted and enforce payment by the company by serving a statutory demand. Section 222AFA(1) states that the purpose of Division 8 is “to enable the Commissioner to take prompt and effective action to recover amounts not remitted as required by Division 1AAA, 3B and 4”.

73 If the Commissioner proceeds under Division 8 the directors have a duty to cause the company to comply with its obligations under that Division in accordance with s 222APB(1) in one of the four ways which correspond with those specified in s 222AOB(1). On breach the directors become subject to penalties which are recoverable under Subdivision C which corresponds with Subdivision B.

74 The Commissioner should have known that the company failed to remedy these defaults. The amounts involved were substantial. It may be inferred that Mr Aitken was well aware of the defaults. The appellant was not and on his evidence he was relying on Mr Aitken to ensure that the company complied with its group tax obligations and on his repeated assurances that it was doing so.

75 The Commissioner’s failure to take steps under Division 8 in and after March 1999 to establish the company’s liability and then serve a statutory demand on the company or a notice under s 222APE on the directors enabled the company to continue trading at a loss and incur a further debt of $139,575.95 for unremitted group tax. The company was then allowed to remain under the management of its directors, effectively Mr Aitken, until April 2001. The appellant remained unaware of the company’s unpaid group tax until he received a further notice under s 222AOE dated 26 March 2001 which led to the appointment of an administrator within 14 days.

76 The appellant has been prejudiced by the Commissioner’s failure to take prompt action against the company or the directors or both. This would have stopped further defaults and the escalation of the debt and brought about compliance with s 222AOB(1) in one way or another. The appointment of an administrator was achieved within 14 days when further notices under s 222AOE were served in March 2001. As a result of the Commissioner’s delays the appellant has lost a real chance of having these penalties remitted in whole or in part, and has also lost any chance of recovering full contribution from his former co-director Mr Aitken who is once again bankrupt.

77 This is not the first case of gross delay by the Commissioner in enforcing these liabilities. In D C of T v George (2002) 55 NSWLR 511, 520 Gzell J said:

“It is incumbent upon the Commissioner to exercise his powers under Division 9 expeditiously for otherwise their exercise after the escalation of debts can have Draconian consequences. An early sign of problems in a company is its living on the false reserves of non-remitted PAYG withholdings. The Commissioner is in the position that he will have notice of a failure to remit. He should act then, when PAYG withholdings are relatively low and the directors' liabilities are correspondingly so.”

78 Comments to similar effect were made in D C of T v Saunig (2002) 55 NSWLR 722, 735-6 by Heydon JA (defaults between November 1996 and March 1998); R v Walters [2002] NSWCCA 291 (defaults between January 1989 and May 1998); and R v Iannelli (2003) 56 NSWLR 247, 252, 256 by Handley JA (defaults between May 1995 and June 1998).

79 Hopefully these problems within the ATO have now been solved. However its lack of diligence in the present case in and after March 1999 which has been so prejudicial to the appellant may have been a proper reason for refusing to award some or perhaps all of the pre-judgment interest of $193,578.50 awarded in this case. This matter was not argued in the District Court and if it had been further evidence would have been admissible which might have presented a different picture.

80 The appeal should be dismissed with costs.

81 BEAZLEY JA: I agree with Handley JA.

82 SANTOW JA: I agree with the reasons and orders proposed by Handley JA.

83 The one matter where I would wish to add to what is said by Handley JA concerns the defence of reasonable steps under s222AOJ(3) of the Income Tax Assessment Act 1936 (“ITAA”).

84 It is important to bear in mind that s222AOJ allows a defence in relation to the taking of all reasonable steps “to ensure” compliance with subs222AOB(1). The latter is divided into four sub-paragraphs (a) through (d). Sub-paragraph (a) is primarily relevant though not to the exclusion of sub-paras (b), (c) and (d). Sub-para (a) is expressed to be “complied with” when “the company complies as mentioned in paragraph (1)(a)”; that is to say, when the company has made the relevant remittances of group tax on their due dates. Thus, the combination of s222AOJ(3) and s222AOB(1)(a) requires that “the person” took “all reasonable steps to ensure” that the directors cause the company to comply with the relevant provisions of ITAA by causing the company to make the relevant remittances of group tax on their due dates.

85 If all reasonable steps have been taken directed to ensuring that specific end or outcome, should it nonetheless turn out that current group tax was not paid, this suffices so far as the first of the sub-paragraphs of subs222AOB is concerned. What is entailed by taking all reasonable steps is not directed to the conventional supervisory obligation of care and diligence of a company director with regard to the company’s affairs, with its statutory provisions regulating that duty and the power of delegation. Rather it is directed to ensuring that a specific outcome is brought about, so far as taking all reasonable steps is capable of doing so. Because those reasonable steps are directed to ensuring that specific outcome, rather than, more broadly and less directively, to a director’s duties with respect to the supervisory control of the affairs of the company, recourse to the latter with its corporate law obligations would be apt to mislead when explaining what are “all reasonable steps” in the circumstances.

86 Subsection (4) of s222AOJ, defining “reasonable”, provides little guidance as to what is “reasonable” in the present case. However, insofar as the definition requires that regard be had to “all other relevant circumstances”, these would certainly include the matters set out by Handley JA at [58] and [59]. Important amongst these was the failure of the appellant, knowing of the company’s financially precarious position, to take steps to verify that the payments were being made on the due dates, beyond seeking assurances to that effect from Mr Aitken, the finance director and insolvency expert. The appellant did not suspect Mr Aitken of wrongdoing nor on the evidence has it been shown that he had reason to do so. Still the appellant made no enquiry beyond Mr Aitken. He did not call for proof from Mr Aitken or anyone else that the group tax had been received by the Tax Department. Given that achieving that outcome fell on each director, the appellant was not excused from going further, especially knowing the parlous state of the company and the criticality that the group tax be paid on its due date. Moreover, the combination of s222AOJ(3) and s222AOB(1)(a) required that the appellant ensure the directors, therefore Mr Aitken as well as himself, take all reasonable steps to bring about the outcome in s222AOB(1)(a), not merely seek assurances from Mr Aitken in that regard. This he failed to do.

87 Had a check been made of the accountant, Ms Debbie Daley, it might or might not have revealed that some of the payments had not been made. One must bear in mind that the defaults were sporadic though not infrequent. Default in fact took place some 11 weeks out of the 35, being about one-third of the weekly payments. But the fact that the direct enquiry may not have revealed the true position does not obviate it constituting a reasonable step in the circumstances. This is more especially when over 35 weeks had passed, well beyond the period of any half yearly accounts. During that extended period, the appellant made no independent verification that payment had been received by the Tax Office nor did he seek any specific record of payment. Taking all reasonable steps would at least entail checking more directly that payment had actually taken place, whether or not that checking would have revealed the default.

88 Had the management accounts been more informative, that might have excused checking with the accountant. But this is only if those accounts were prepared in a form as would have revealed the amounts payable and actually paid to the ATO for current group tax, and in reduction of the arrears, if not whether paid on their due date. But this the accounts did not do.

89 Thus I agree with the conclusion that the defence is not made out.

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