CLK Kitchens & Joinery Pty Ltd v Commissioner of Taxation
[2019] FCA 1086
•12 July 2019
FEDERAL COURT OF AUSTRALIA
CLK Kitchens & Joinery Pty Ltd v Commissioner of Taxation [2019] FCA 1086
File numbers: QUD 369 of 2017
QUD 241 of 2018Judge: DERRINGTON J Date of judgment: 12 July 2019 Catchwords: TAXATION – PAYG liability – whether estimates by Commissioner of PAYG amounts valid – whether PAYG withholder gave a statutory declaration which had the effect of reducing or revoking estimate – whether DPNs issued on basis of PAYG estimates valid – whether reduction in estimate required withdrawal of DPNs
PRACTICE – summary judgment in complex cases – where substantial material and numerous jurisdictional errors alleged – where Court asked to assess large amounts of evidence – where evaluation discloses no real prospect of success by applicant – where most evidence irrelevant
Legislation: Administrative Decisions (Judicial Review) Act 1977 (Cth)
Federal Court of Australia Act 1976 (Cth)
Income Tax Assessment Act 1936 (Cth)
Income Tax Assessment Act 1997 (Cth)
Judiciary Act 1903 (Cth)
Statutory Declarations Act 1959 (Cth)
Taxation Administration Act 1953 (Cth), Sch 1, s 12-35, s 16-70, Div 268, Div 269
Tax Laws Amendment (Transfer of Provisions) Act 2010 (Cth)
Federal Court Rules 2011 (Cth)
Cases cited: Australian Broadcasting Tribunal v Bond (1990) 170 CLR 321
Bank of New South Wales v Murphett [1983] 1 VR 489
Barclays Bank Ltd v W J Simms Son & Cooke (Southern) Ltd [1980] QB 677
Bernstrom v National Australia Bank Ltd [2003] 1 Qd R 469
Bibby Financial Services Australia Pty Ltd v Sharma [2014] NSWCA 37
Brinsmead v Harrison (1871) LR 7 CP 547
Cassaniti v Federal Commissioner of Taxation (2010) 186 FCR 480
Commercial Bank of Australia v Younis [1979] 1 NSWLR 444
Commissioner of Taxation v Craddock (2006) 204 FLR 274
Commonwealth Bank of Australia v ZYX Learning Centres Ltd (2014) 103 ACSR 476
Commonwealth of Australia v Verwayen (1990) 170 CLR 394
Deputy Commissioner of Taxation v Applied Design Development Pty Ltd (in liq) (2002) 117 FCR 336
Deputy Commissioner of Taxation v Armstrong Scalisi Holdings Pty Ltd [2019] NSWSC 129
Filgate v Thompson (1874) 5 AJR 124
Foodco Management Pty Ltd v Go My Travel Pty Ltd [2002] 2 Qd R 249
Guss v Commissioner of Taxation (2006) 152 FCR 88
Jessup v Lawyers Private Mortgages Ltd [2006] QSC 3
K J Davies (1976) Ltd v Bank of New South Wales [1981] 1 NZLR 262
Perdikaris v Deputy Commissioner of Taxation (2008) 172 FCR 412
Price v Commissioner of Taxation [2019] FCA 543
Queensland University of Technology v Project Constructions (Aust) Pty Ltd (in liq) [2003] 1 Qd R 259
Re Plutus Payroll Pty Ltd [2017] NSWSC 1360
Roche v Deputy Commissioner of Taxation (2014) 290 FLR 268
Sargent v ASL Developments Ltd (1974) 131 CLR 634
Seventeenth Canute Pty Ltd v Bradley Air-Conditioning Pty Ltd [1987] 1 Qd R 111
SK Foods LP v SK Foods Australia Pty Limited (in liq) (No 3) (2013) 214 FCR 543
Spencer v Commonwealth of Australia (2010) 241 CLR 118
Theseus Exploration NL v Foyster (1972) 126 CLR 507
Transtar Linehaul Pty Ltd v Deputy Commissioner of Taxation (2011) 196 FCR 271
Zippo Manufacturing Co v Jaxlawn Pty Ltd [2011] FCA 1125
Zippo Manufacturing Co v Jaxlawn Pty Ltd [2011] FCA 1125
Date of hearing: 13 December 2018 Registry: Queensland Division: General Division National Practice Area: Taxation Category: Catchwords Number of paragraphs: 268 Counsel for the Applicants: Mr D Marks QC with Mr C Craig Solicitor for the Applicants: Morgan Conley Counsel for the Respondent: Dr R Schulte Solicitor for the Respondent: Australian Taxation Office ORDERS
QUD 241 of 2018 BETWEEN: CLK KITCHENS & JOINERY PTY LTD ACN 110 815 828
First Applicant
CLINT LUCKY KARANANOS
Second Applicant
AND: COMMISSIONER OF TAXATION
Respondent
QUD 369 of 2017 BETWEEN: ACN 110 815 828 PTY LTD
First Applicant
CLINT LUCKY KARANANOS
Second Applicant
AND: COMMISSIONER OF TAXATION
Respondent
JUDGE:
DERRINGTON J
DATE OF ORDER:
12 JULY 2019
THE COURT ORDERS THAT:
1.In proceeding QUD 369 of 2017:
(a)the proceeding is dismissed;
(b)the applicants pay the respondent’s costs of the proceeding.
2.In proceeding QUD 241 of 2018:
(a)the proceeding is dismissed;
(b)the applicants pay the respondent’s costs of the proceeding.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
DERRINGTON J:
INTRODUCTION
The Commissioner of Taxation seeks summary judgment in two proceedings brought against him. The applicants in each proceeding are CLK Kitchens & Joinery Pty Ltd (CLK Kitchens) and its sole director, Clint Lucky Karananos. The proceedings seek judicial review of decisions and conduct of the Commissioner. The decisions and conduct relate to enforceable estimates of the liability of CLK Kitchens to remit amounts withheld under the Pay As You Go Withholding scheme (PAYGW amounts) to the Commissioner, and Director Penalty Notices (DPNs) issued to Mr Karananos in respect of the estimated amounts.
In the first proceeding, QUD 369 of 2017, the applicants impugn the Estimate Notice and DPNs issued by the Commissioner in July 2017. The second further amended originating application (2FAOA) seeks review of an array of “decisions” and related “conduct”. Despite the needlessly over-complicated approach adopted, the real complaints concern: the validity of the Commissioner’s decision to estimate CLK Kitchens’ liability to remit PAYGW amounts; whether a statutory declaration by Mr Karananos was effective (or required the Commissioner) to reduce or revoke the estimate; and whether the Commissioner was required to withdraw the DPNs.
The second proceeding, QUD 241 of 2018, seeks review of “decisions” and related “conduct” in March 2018, in relation to a reduction to the estimate the subject of the first proceeding. The further amended originating application (FAOA) in the second proceeding is also over-complicated, but turns on many of the same fundamental questions of the operation of Schedule 1 to the Taxation Administration Act 1953 (Cth) (TAA).
CLK Kitchens and Mr Karananos will be referred to in these reason as the applicants, even though they are the respondents to the summary judgment applications.
It is not an unfair criticism that many of the matters raised by the applicants were ultimately irrelevant to the real issues in dispute. Although they submitted there were many instances of disputed fact, none of those alleged disputes affected the essential issues on which the matter turns. That did not hinder the applicants spending a substantial portion of the hearing picking through the affidavits and attempting to find statements with which they disagreed or which they said were inaccurate. Through this process they submitted that cross-examination was needed so that the true facts could be ascertained. In any event, as the following discussion discloses, the manufactured disputes were not relevant to the essential issues concerning the validity of the Commissioner’s decisions or conduct. On occasion, the applicants’ submissions involved a confusing use of nomenclatures, particularly in relation to the word “estimate”. On occasion it was used to refer to the estimate actually made by the Commissioner and in respect of which notice was given. On other occasions, it was said by the applicants that no estimate was, in fact, made and, in relation to these latter occasions, the word “estimate” was apparently being used to mean something like “an estimate made in accordance with the requirements of Div 268”.
Although the Estimate Notice initially concerned monthly PAYGW amounts owing since 1 July 2011, after the commencement of each proceeding the applicants limited the relief sought to the estimates which relate to months after 1 January 2016.
Whilst in these reasons the two proceedings will be dealt with separately, the fate of the second is somewhat derivative on the first, in that many of the fundamental issues on which the second proceeding is based are necessarily or conveniently dealt with in the consideration of the first.
The Commissioner’s position is that there is no substance to the grounds of review advanced in either proceeding, and he seeks orders dismissing both. The applications for summary judgment in each are brought at a stage in the proceedings where the interlocutory steps have been completed and the evidence for the trial has been filed. In this respect the Commissioner submits that no further evidence relevant to the issues is likely to be produced and that, taken at its highest, the applicants’ evidence cannot support the claims they advance. The relief sought by the Commissioner is for judgment in the proceedings or with respect to some or all of the individual grounds on which the originating applications are pursued.
THE FACTS
Despite the applicants’ submission to the contrary, there is no real relevant controversy in the circumstances which led to the Commissioner issuing the Estimate Notice in respect of the PAYGW amounts and, subsequently, the DPNs to Mr Karananos. Although the applicants sought to raise doubts and allege controversies about the facts, on examination the essential facts on which the issues turn are sufficiently clear and uncontentious.
The affidavits filed in support of the proceedings provide significant background as to the Australian Taxation Office’s discovery that, over a number of years, CLK Kitchens had sequentially utilised the services of several associated labour hire companies to provide workers to it and that nearly all of those companies had become insolvent with substantial obligations relating to those workers remaining owing to the Commissioner. Although not relevantly disputed on this application, it is not necessary to reach any conclusion about those broader background facts. As the discussion which follows shows, it is only the bare essential facts concerning the operation of CLK Kitchens and CLK Services which are relevant to this determination. That said, those background facts give context to the subsequent investigation by the ATO and the issuing of an Estimate Notice to CLK Kitchens in a substantial amount even though the company had not reported any, or any significant, PAYGW liabilities.
The operations of the companies
Mr Karananos was, relevantly, the sole director and shareholder of the two relevant companies. The first was CLK Kitchens, which operated a kitchen joinery business (Stat Dec [44]-[45]). In its business it undertook all of the tasks required for the carrying out of the kitchen joinery operations, including the manufacturing and installation of kitchen joinery. It was previously called “Mayneline Kitchens & Joinery Pty Ltd”. The second company was CLK Services Pty Ltd (CLK Services) (previously called Mayneline Services Pty Ltd) which, so it was said by the applicants, was a labour hire entity which provided labour hire services (ie workers) to CLK Kitchens.
Relevant to this matter, in the period from 1 March 2016 to 31 January 2017, Mr Karananos caused CLK Services to provide workers to CLK Kitchens such that the latter could carry on its joinery business. During this time, CLK Kitchens paid amounts to each of the workers who performed the services. Those amounts were equal to the wages that they were due to be paid by CLK Services, net of PAYGW amounts. The payments were made at the direction of CLK Services. It may have been that CLK Kitchens also paid amounts to other persons who were employed by CLK Services but whom did not provide services for CLK Kitchens, although that is not relevant for present purposes.
Neither CLK Kitchens nor CLK Services remitted PAYGW amounts in respect of the wages paid to the workers. At no time did CLK Kitchens file any Business Activity Statement (BAS) or end of year return indicating that it withheld PAYGW amounts in respect of those workers. The Commissioner has estimated that for the period from 1 March 2016 to 31 January 2017, the amount which was withheld by CLK Kitchens and not remitted to him was $587,354.00.
It is apparent that in late January 2017, prior to the issue of the Estimate Notice and DPNs, the business of CLK Kitchens was sold to an entity called Mayneline Kitchens & Joinery (NSW) Pty Ltd. That latter company also seems to have some association with Mr Karananos. CLK Kitchens has apparently ceased to trade.
How CLK Kitchens paid money to the employees of CLK Services
Mr Karananos, in his capacity as director of each company, arranged for CLK Kitchens to advance the payments and distribute them to the workers as their wages on behalf of CLK Services using what was called a “batch payment facility”. In his affidavit of 15 June 2018, Mr Karananos describes the process of these payments as follows:
(a)CLK Kitchens reported to CLK Services the hours worked by each relevant worker.
(b)CLK Services calculated the wages payable to each worker and provided that information to CLK Kitchens.
(c)CLK Kitchens utilised its “batch payment facility” with the National Australia Bank (NAB) to pay each of the workers the amount of money directed by CLK Services. That amount equalled their wages net of the PAYGW amounts. The funds used for paying the workers belonged to CLK Kitchens.
(d)As between CLK Services and CLK Kitchens, it is apparent that the amounts so paid by CLK Kitchens to the workers were treated as an advance to CLK Services.
In its bank records, CLK Kitchens described the amounts it paid to the workers as “wages”.
The workers were issued with payment summaries in respect of their wages and, for the period in question, the payment summaries were issued by CLK Services.
Mr Karananos has also deposed that the liability of CLK Services arising on the payments made to its employees by CLK Kitchens was set-off against CLK Kitchens’ liability to CLK Services in respect of the labour hire services.
CLK Services reported, but failed to pay to the Commissioner, the quantum of the PAYGW amount which totalled $670,613 for the period from 1 March 2016 to 31 December 2016. It is not in contention that it did not report any PAYGW amounts for the month of January 2017.
CLK Kitchens did not report any relevant PAYGW amounts to the Commissioner.
Administration of CLK Services
Subsequently, an administrator was appointed to CLK Services. A deed of company arrangement (DOCA) was offered to the creditors, who voted to accept it. The Commissioner proved in the administration for the PAYGW amounts and superannuation guarantee charges which had been reported by CLK Services. He also voted in relation to the DOCA. No dividend was paid to the Commissioner in respect of the outstanding PAYGW amounts, as a consequence of the DOCA. Some money was received in relation to outstanding superannuation guarantee charges.
Issue of the Estimate Notice
On 11 July 2017 and under cover of a letter of the same date, the Commissioner issued to CLK Kitchens an estimate of the PAYGW amounts which he asserted had been withheld by CLK Kitchens as the payer of the wages to the employees of CLK Services and which had not been remitted to him under s 16-70. The notice, which is referred to in these reasons as the Estimate Notice, was addressed to CLK Kitchens, referenced s 268-15 of Schedule 1 to the TAA and was headed “Notice of Estimate of Liability Payable to the Commissioner of Taxation — PAYG Withholding Amounts”. It identified that the delegate had estimated the unpaid and overdue PAYGW amounts which CLK Kitchens was liable to pay to the Commissioner. Those amounts were specified in a table which set out monthly periods from 1 July 2011 to 31 May 2017. The total of the amount payable was not stated but was apparently $19,475,997.
Issue of the Director Penalty Notices
On the basis of the Estimate Notice given to CLK Kitchens, pursuant to s 268-20(1) the amount identified in the estimates was due and payable by CLK Kitchens on 11 July 2017, being the date when the estimate notice was given. As a result, pursuant to ss 268-20(1), 269-10(1), 269-15(1) and 269-20(1), (2) and (5), Mr Karananos was required to cause CLK Kitchens to comply with its obligations by the end of the day on 11 July 2017, after which he became subject to a penalty which was equal to the unpaid PAYGW amount.
By reason of s 269-25, the Commissioner would be unable to commence proceedings against Mr Karananos for the outstanding penalty unless a penalty notice was given and, after the lapse of 21 days, the penalty was not remitted by action taken by Mr Karananos pursuant to s 269-15 to cause CLK Kitchens to pay the PAYGW amount, enter administration or begin the process of winding up.
On 12 July 2017, the Commissioner issued two DPNs to Mr Karananos under s 269-25 in respect of the PAYGW amounts identified in the Estimate Notice which had been given to CLK Kitchens. The first notice was given in respect of the monthly liabilities of CLK Kitchens for the period from 1 July 2011 to 28 February 2017. The second was given for the period 1 March 2017 to 31 May 2017.
On 18 July 2017, Mr Karananos provided to the Commissioner what he said was a statutory declaration pursuant to ss 268-40(2), 268-40(4) and 268-90(2). The content of that document is pivotal in this matter and is considered below.
On 20 July 2017, Mr Logan, the solicitor for the applicants, sent an email to the Commissioner seeking to have the DPNs withdrawn pending the consideration by the Commissioner of Mr Karananos’ statutory declaration.
The following day, 21 July 2017, the Commissioner wrote to Mr Logan advising that the notices would not be withdrawn. It was noted that the majority of the monthly liabilities for PAYGW amounts of CLK Kitchens had not been reported, so were subject to the “lockdown provisions” such that the director’s penalty could only be remitted by the payment of the outstanding amount. It was further stated that the Commissioner undertook not to take any action against CLK Kitchens or Mr Karananos until a review had been completed.
The Commissioner concluded that the statutory declaration did not comply with the requirements of the identified sections in that it did not “verify” the required facts with the consequence that the estimates were not reduced. (See paragraphs 14ff of the affidavit of Ms Nicholson of 29 September 2017.) It should be observed that it is the effect of the statutory declaration itself that determines whether it is effective under s 268-40, and not any determination of the Commissioner.
On 18 August 2017, the audit section of the ATO issued a shortfall penalty notice to CLK Kitchens for its failure to remit the PAYGW amounts.
On 12 January 2018, Morgan Conley Solicitors were provided with a letter prepared by Ms Anita Owens of Worrells Solvency and Forensic Accountants. In that letter, Ms Owens purported to calculate the PAYGW amounts for which CLK Kitchens would be liable based on certain identified assumptions. Ms Owens attached a schedule which set out the PAYGW amounts which she asserted should have been withheld by the company had the identified assumptions existed. Importantly, the material provided by Ms Owens was able to show the actual amounts of all wages paid which produced a different result to that reached by the application of benchmark figures which had formed the basis of the Commissioner’s estimate. On 1 February 2018, Morgan Conley provided that letter to the Commissioner.
Between 1 and 9 February 2018, the applicants provided further supporting bank statements to the Commissioner as well as a submission as to the correct calculation of the PAYGW amount in relation to the services provided by the workers. The bank statements of CLK Kitchens disclosed the payment of various amounts to the numerous workers were made with the reference “wages”.
As a consequence of the receipt of further material, the Commissioner determined to reduce the estimate of the PAYGW amounts for the months between 1 July 2011 and 31 January 2017. Further, the Commissioner accepted that CLK Kitchens sold its business and ceased trading from 31 January 2017. On that basis, the Commissioner took the view that it did not have any further PAYGW liability from after that date.
On 14 March 2018, the Commissioner sent to CLK Kitchens a document entitled “Notice of Reduction of Estimate of Liability Payable to the Commissioner of Taxation — PAYG Withholding Amounts”. It identified reductions in the monthly liabilities stated in the Estimate Notice for the period from 1 July 2011 to 31 January 2017. Also sent on that day was a notice revoking the estimates made in relation to the monthly PAYGW amount liabilities for the period from 1 February 2017 to 31 March 2017. The reductions and revocations had the consequence that the estimate total was reduced to $4,485,450.00.
On 21 March 2018, a further statutory declaration was given by Mr Karananos and CLK Kitchens to the Commissioner. The applicants claim they were entitled to give this declaration because a new estimate had been made. The Commissioner did not reduce or revoke any estimates as a consequence of receiving that declaration.
Subsequently, the Commissioner accepted that CLK Services paid the PAYGW amount in respect of employed workers for the periods from 1 April 2016 to 31 August 2016. As a result, on 9 November 2018, the Commissioner issued revocation notices for the estimates in relation to those periods.
The consequence of the above is that the estimates which remain in contention in these proceedings are in respect of the monthly PAYGW amounts for the months from 1 March 2016 to 31 January 2017, save for those periods referred to in the previous paragraph. The total of the estimates still in dispute is $587,354.00.
SUMMARY JUDGMENT PRINCIPLES
Section 31A of the Federal Court of Australia Act 1976 (Cth) makes provisions for the granting of summary judgment in favour of a respondent. Relevantly, subs (2) and subs (3) provide:
(2)The Court may give judgment for one party against another in relation to the whole or any part of a proceeding if:
(a)the first party is defending the proceeding or that part of the proceeding; and
(b)the Court is satisfied that the other party has no reasonable prospect of successfully prosecuting the proceeding or that part of the proceeding.
(3) For the purposes of this section, a defence or a proceeding or part of a proceeding need not be:
(a) hopeless; or
(b) bound to fail;
for it to have no reasonable prospect of success.
Similar provisions are found in r 26.01(1)(a) of the Federal Court Rules 2011 (Cth) although the tests to be applied are identical in the relevant respect: Zippo Manufacturing Co v Jaxlawn Pty Ltd [2011] FCA 1125, [20] per Gordon J. In the Commissioner’s written submissions, Dr Schulte of Counsel summarised the principles on which s 31A (and the concomitant rule) operate in the following manner:
a)the moving party bears the onus of persuading the Court of its entitlement to have the proceeding determined summarily: Australian Securities and Investments Commission v Cassimatis (2013) 220 FCR 256 (Cassimatis) at 271 per Reeves J;
b)the intention behind the enactment of s 31A is to lower the bar for obtaining summary judgment below the level of an application or defence being “manifestly groundless” or “hopeless” – the inquiry required is whether there is a “reasonable” prospect of prosecuting or defending the proceeding, not an inquiry directed to whether a certain and concluded determination could be made that the proceeding would necessarily fail: White Industries Aust Ltd v Commissioner of Taxation (2007) 160 FCR 298; Spencer v The Commonwealth of Australia [2010] HCA 28; (2010) 241 CLR 118 (Spencer) at 139 per Hayne, Crennan, Kiefel and Bell JJ;
c)the assessment required by 31A of whether a proceeding has no reasonable prospects of success necessitates the making of value judgments in the absence of a full and complete factual matrix and argument, with the result that the provision vests a discretion in the Court. That discretion includes whether to deal with the motion at once or at some later stage in the proceedings when the legal and factual issues have been more clearly defined: Kowalski v MMAL Staff Superannuation Fund Pty Ltd (2009) 178 FCR 401 at 408-409; Butorac v WIN Corporation Pty Ltd [2009] FCA 1503 at [19] per Buchanan J; Cassimatis at [50];
d)despite the threshold for summary dismissal having been lowered, the discretion must still be exercised with caution: Spencer at [24] per French CJ and Gummow J and [60] per Hayne, Crennan, Kiefel and Bell JJ;
e) Reeves J in Cassimatis further explained at [46] that:
…the determination of a summary dismissal application therefore does not require a mini-trial based upon incomplete evidence to decide whether the proceedings are likely to succeed or fail at trial. Instead, it requires a critical examination of the available materials to determine whether there is a real question of law or fact that should be decided at trial. Each application for summary judgment or summary dismissal has to be determined according to its particular circumstances. What is required is a practical judgment of the case at hand. The relevant circumstances will partly depend upon the stage which the proceedings have reached. Among other things, this will affect the materials available to the Court considering the application, for example, whether pleadings have been exchanged, or discovery of documents has occurred.
The applicants did not relevantly assert any disagreement with the principles there identified and it is convenient to accept them for the purposes of the hearing. That said, it must be acknowledged that that Commissioner’s application for judgment is not without some complexity or length. That is reflective of the applicants’ challenge in each proceeding to what it says are, at least, six relevant decisions and four relevant acts which they say constitute “conduct”.
At first blush one might question the appropriateness of bringing a multi-faceted application for summary judgment in the way in which it has been. For most matters the nature of summary dismissal hearings differs vastly from that of a trial and it is often doubtful in complex cases that the full relevance of the factual matrix can be appreciated in the adumbrated process. Although, from the amount of the material filed and the length of the submissions, this case might be thought to fall within these observations, on closer examination that is not so. It was submitted on behalf of the applicants that the Court cannot engage in an evaluative exercise when it is not properly taken through the relevant material. However, whilst that may enliven the Court’s discretion not to deal with the matter at all, if the relevant material has been made available and the issues identified, it is not inappropriate to consider whether judgment should be given. Mr Marks QC for the applicants urged the Court to exercise the discretion in the manner implied by Barwick CJ in Theseus Exploration NL v Foyster (1972) 126 CLR 507 (Theseus Exploration) at 515, where his Honour said:
Although I have reached a clear conclusion as to the lack of validity in the respondent’s submission that the appellant was unable to recover the amount claimed, I would not be prepared to hold that the judge erred in the course he took. Equally, however, I would not have thought him in error if he had granted the appellant’s application for summary judgment. The case was one which, in my opinion, could have been disposed of upon legal argument upon the application. But it was for the judge to be satisfied that there was a matter to be tried. Whilst there were no facts to be decided, it was open to the judge, in my opinion, to take the view that the extent and complexity of the matters of law and of argument thereon warranted a hearing.
Mr Marks QC submitted that in the present case it was necessary for there to be determinations of questions of fact although specific ones were not identified. However, the reference to facts being decided in Theseus Exploration was a reference to contentious facts. The position is entirely different where the evidence relating to the relevant facts is not contentious and those facts emerge from the evidence adduced. If the facts which are contentious are irrelevant to the matters on which the proceeding can be decided, it would seem futile to have a trial to resolve them.
In this matter it is true that a large amount of material was adduced in evidence. However, much of it was not directly relevant to the resolution of issues on which the proceeding can be determined. Whilst Mr Marks identified a number of facts which he claimed his clients did not agree with, those matters were either not relevant to the final determination or were not truly matters of contention. Moreover, as is the nature of applications for judicial review of administrative action, the factual matrix of relevant events is not usually the subject of much disputation. Here, the central issues turn on the efficacy of the statutory declarations of Mr Karananos. In relation to those, Mr Marks QC submitted that they could not be satisfactorily considered on a summary judgment application because each included hundreds of pages of attachments. He also said the Commissioner had not taken the Court through them to demonstrate that they were not to the effect of s 268-40(2) or (4). However, despite the volume of the attachments, they were simply evidentiary of the statements sworn to by Mr Karananos. A perusal of them discloses that, of themselves, they did not add to the matters to be considered in determining whether the declarations had the requisite effect.
When considering an application such as the present, care must be taken before ordering summary judgment to ensure that no unfairness arises by depriving a party of the benefit of a trial where the resolution of contentious facts might determine the outcome of the proceedings: Foodco Management Pty Ltd v Go My Travel Pty Ltd [2002] 2 Qd R 249; Queensland University of Technology v Project Constructions (Aust) Pty Ltd (in liq) [2003] 1 Qd R 259 and Bernstrom v National Australia Bank Ltd [2003] 1 Qd R 469. However, where the relevant facts are settled and the respective rights of the parties turn on a question or questions of law, the approach in Spencer v Commonwealth of Australia (2010) 241 CLR 118 requires the Court to give judgment in advance of a trial regardless of the fact that the question so raised is attended with some difficulty: Jessup v Lawyers Private Mortgages Ltd [2006] QSC 3, [22]; Commonwealth Bank of Australia v ZYX Learning Centres Ltd (2014) 103 ACSR 476, [71], see also [57]-[69]; SK Foods LP v SK Foods Australia Pty Limited (in liq) (No 3) (2013) 214 FCR 543, [115]-[117]. That said, were the question of law to be one of great complexity summary judgment could be refused in favour of the determination of the matter at trial after a full hearing.
Whilst all of the above principles are appropriate and should be accepted, it must be kept in mind that many of them evolved in a practice where summary judgment applications were heard in Chambers along with other interlocutory applications. It was often considered that if the matter was not able to be fully argued within a period of two hours it was not appropriate for summary determination. Indeed, that appeared to be part of the applicants’ submissions (Transcript p 52 L25-26). There was good sense in such a rule of thumb which dove-tailed with the high degree of confidence which had to be reached before judgment was granted. However, in the context of modern case management principles and the retention of matters on a single judge’s docket, the above principles might not apply with their full rigour. Here, the application for summary judgment was set down for hearing over a full day and there is nothing which suggests that the parties were limited in the manner or extent to which they were able to make submissions as to the factual or legal issues which arose. Written submissions were filed before the hearing comprehensively dealing with the issues in dispute. No party submitted that longer time was required to ventilate the issues. Further, as Dr Schulte for the Commissioner submitted, the directions given in this matter have had the consequence that the evidence which the parties intend to adduce at trial has been filed and served. The facts as they exist on the material now will remain the same at any trial subject to the question of cross-examination (if any).
Although from time-to-time the applicants said that matters needed to be explored by cross-examination, the relevance of the allegedly necessary cross-examination was not made clear.
THE LEGISLATIVE REGIME
An overview of the PAYG scheme
An overview of the PAYG system was given by the Full Court in Perdikaris v Deputy Commissioner of Taxation (2008) 172 FCR 412 at [3] as follows:
As from 1 July 2000 a new tax system, known as Pay‐As‐You‐Go or PAYG, was introduced. Under this system a payer is required to withhold amounts from salaries and wages paid to a payee, which are then to be remitted by the payer to the Commissioner. The payee then becomes entitled to a credit against his or her tax debts for the amounts collected. In lieu of a Group Certificate, a PAYG Payment Summary is issued by the payer to the payee at the end of the financial year. The Summary records, amongst other things, the total tax withheld in respect of the payee. The Summary is returned to the Commissioner together with the employee’s tax return to enable a credit to be made for the amount withheld and remitted by the employer to the Commissioner.
See also Cassaniti v Federal Commissioner of Taxation (2010) 186 FCR 480 (Cassaniti) at [12]-[29].
The ability of the Commissioner to recover the amounts withheld is enhanced by the operation of Divs 268 and 269. The progenitor of Div 268 was Pt VI Div 8 of the Income Tax Assessment Act 1936 (Cth) (ITAA36), which had been introduced in 1993. The purpose of that division was to promote the timely and efficient recovery of amounts that had not been remitted to the Commissioner despite a liability to do so. That regime implemented a process whereby the Commissioner was entitled to estimate the PAYGW amounts owing by an entity and the entity was required to pay that amount unless it took particular steps to reduce it.
The old regime was repealed effective 1 July 2010 by operation of the Tax Laws Amendment (Transfer of Provisions) Act 2010 (Cth). That legislation introduced the new estimate provisions in Div 268. The object of that new regime is identified by s 268-5 in the following manner:
268-5 Object of Division
The object of this Division is to enable the Commissioner to take prompt and effective action to recover:
(a) amounts not paid as required by Part 2-5 (Pay as you go (PAYG) withholding); or
(b) unpaid superannuation guarantee charge that has not been assessed.
The operation of Div 268 was recently assayed by Ward CJ in Eq in Deputy Commissioner of Taxation v Armstrong Scalisi Holdings Pty Ltd [2019] NSWSC 129 at [59]-[73] (Armstrong Scalisi Holdings), and that analysis is adopted for the purposes of these reasons. In general terms, the Division operates by allowing the Commissioner to estimate the PAYGW amounts owing by an entity and obliging the entity to pay the estimated amount regardless of whether the underlying liability is in fact owing, subject to the entitlement of the entity receiving the estimate to take steps to verify that the amount is not owing. An important aspect of the new regime is that it establishes two liabilities: the underlying liability to pay the withheld amounts; and the liability which arises when an estimate is made. Although a payment in respect of one will cause a reduction in both: s 268-20(3), they are, for all purposes, separate and distinct. Despite the Chief Justice’s comprehensive analysis, for the purpose of the present matter some more needs to the said of the withholding regime and the concomitant estimate regime.
The relevant statutory provisions
The statutory provisions applicable to this matter are, generally, those set out in Divisions 268 and 269 of Schedule 1 to the Taxation Administration Act 1953 (Cth). That said, the primary obligation to withhold PAYGW is imposed by s 12-35 of Sch 1 to the TAA, which provides:
An entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that or another entity).
That provision makes it pellucid that the obligation to withhold is imposed upon the person or entity which makes the payment of the salary, wages, commission, bonuses or allowances to the employee, even if not the employer: Cassaniti at [31]. The entity obliged to withhold the amount is then required to remit the amount to the Commissioner: s 16-70. That section provides:
When and how to pay amounts to the Commissioner
16-70 Entity to pay amounts to Commissioner
(1) An entity that withholds an amount under Division 12 must pay the amount to the Commissioner in accordance with this Subdivision.
It is also necessary to consider the definitions relevant to withholding and “withholding payment”. For the purposes of the TAA, s 995-1 of the Income Tax Assessment Act 1997 (Cth) (ITAA97) defines the expressions “amount withheld” and “withholding payment” as follows:
amount withheld by an entity from a withholding payment means:
(a)an amount that the entity withheld from the payment under Division 12 in Schedule 1 to the Taxation Administration Act 1953; …
withholding payment means:
(a)a payment from which an amount must be withheld under Division 12 in Schedule 1 to the Taxation Administration Act 1953 (even if the amount is not withheld); …
withholding payment covered by a particular provision in Schedule 1 to the Taxation Administration Act 1953 means a *withholding payment consisting of:
(a)a payment from which an amount must be withheld under that provision (even if the amount is not withheld); …
In Price v Commissioner of Taxation [2019] FCA 543 (Price), Thawley J summarised the detailed consideration of Edmonds J in Cassaniti from [161] to [173] as to what relevantly constituted a withholding. His Honour’s summary was as follows:
(1) The word “withhold” is not defined in the Act. In this legislative context, it connotes “deprivation, the holding back of something due to the employee, resulting in the reduction of a gross amount to a net amount which is paid to the employee”. The process by which a withholding takes place might be revealed or evidenced by:
(a) actual funds held by the payer on behalf of the employee pending payment to the Commissioner;
(b) but, more usually, only in the wage records and books of account of the payer as an accounting entry: at [161] to [163].
(2) Where an amount has been set aside by the payer and is quarantined in a bank account pending its remission to the Commissioner, clearly the presence of the funds so designated will demonstrate that a withholding has been made. The remission of the amounts withheld will invariably lead to the same conclusion: at [164].
(3) In the usual case, where the withholding is reflected in accounting entries, the question whether a legitimate process of withholding has occurred will depend upon a close examination of the books and records and the surrounding circumstances. A mere journal entry in the absence of other evidence may not be sufficient evidence, having regard to the surrounding circumstances, that there has been a payment of salary and wages and a withholding from that payment: at [165].
(4) Documents demonstrating compliance with reporting requirements of the statutory regime will constitute contemporaneous documentary evidence from which it may be inferred that a withholding has occurred: at [169] and [172]. Relevant reporting requirements include:
Ÿpursuant to s 16-150 of Schedule 1, the payer is required to give notification to the Commissioner of the amounts it was required to pay to the Commissioner under s 16-70(1) on or before the day on which the amount is due to be paid (regardless of whether it is paid);
Ÿpursuant to s 16-153(2) of Schedule 1, the payer is required to give an annual report to the Commissioner in the “approved form” being a summary of payments withheld not later than 14 August after the end of the financial year.
(5) Conversely, a lack of compliance with such provisions is a matter from which an inference may be drawn, depending on the entirety of the circumstances, that a withholding was not made: at [169] and [172].
It is, perhaps, useful to refer to that part of the decision of Edmonds J where his Honour said:
The expression “withhold” is relevantly defined by the Oxford English Dictionary to mean:
To keep back; to keep in one’s possession (what belongs to, is due to, or is desired by another); to refrain from giving, granting, or allowing. Formerly with dat. of person. (The current sense.)
It is clear that the prevailing sense is one of deprivation, the holding back of something due to the employee, resulting in the reduction of a gross amount to a net amount which is paid to the employee. Accordingly, no credit will be available to the payee if they have received a gross amount. There must be a process by which this withholding takes place. It may be reflected in actual funds held by the payer on behalf of the employee pending payment to the Commissioner; on the other hand, and more usually, it may only be reflected in the wage records and books of account of the payer as an accounting entry.
Withholding and remitting obligations
The withholding regime and the remitting regime impose complementary but separate obligations and it is appropriate to consider how they work in a series of stages.
The obligation to pay
The withholding regime provides an exemption to the obligation of an employer (or other person obliged to pay an employee’s wages) to pay the employee the full amount of their wages entitlement: s 16-20. The employee’s entitlement, whether it be contractual or otherwise (at general law or statute), is to have their employer pay their salary or wages or procure some other person to pay it.
The obligation to withhold
However, for the purposes of facilitating the collection of tax, the PAYG system requires those who pay wages or salary (or the other things identified in s 12-35 and elsewhere in Div 12) to withhold certain amounts in respect of the employee’s taxation liabilities: s 12-35. Presently the amount to be withheld is not material.
To “withhold” means to keep back. In this context, it must mean to pay some amount of the contractual obligation (ie gross wages or salary) to the employee, but not all of it. The amount not paid is the withheld amount (see s 16-5 for a statutory indication to the effect that withholding occurs at the time of payment). The withholding of the amount or the paying of it to the Commissioner discharges the entity paying the wages or salary from all liability to pay the amount to any other entity: s 16-20 and, perhaps, s 11-5.
If the entity which is required to withhold amounts fails to do so, they are liable to the payment of a penalty on conviction (s 16-25(1)) and to an administrative penalty of the amount which they failed to withhold (s 16-30).
There are, at least, five relevantly possible scenarios which might arise in relation to the obligation to withhold and/or to remit.
Scenario 1
If a worker is paid none of his contractual entitlement, it could not be said that any amount has been “withheld”: the employer or person who was supposed to pay has simply failed to pay the worker. The Commissioner has no remedy, which ultimately reflects the fact that if the workers do not get paid, they do not have income on which tax is payable. (If the worker later sues or proves in a winding up and gets paid, the liquidator who pays the amount in respect of the wages is liable to withhold: Deputy Commissioner of Taxation v Applied Design Development Pty Ltd (in liq) (2002) 117 FCR 336 (Applied Design Development).)
Scenario 2
If a worker is paid all of his contractual entitlement, then, again, none has been withheld. The employee might have to declare and pay tax on their wages or salary, but that matters not to the payer. The payer who has not withheld in accordance with s 12-35 has however committed an offence, and is liable to penalties for the failure to withhold (including an administrative penalty in the amount which was not withheld): ss 16-25(1) and 16-30(1).
Scenario 3
If a worker is paid part of his contractual entitlement, being the complement of the amount required to be withheld under s 12-35, then the correct amount has been withheld. The employee has received the net amount of their wages and, as the payer has complied with s 12-35, the employee is unable to sue the payer for the remainder: s 16-20(1).
Scenario 4
If a worker is paid part of his contractual entitlement, but more than the complement of the amount required to be withheld under s 12-35, then an amount less than the correct amount has been withheld. The employee may be obliged to pay additional tax in the future when lodging a return. The payer has, however, not withheld enough to comply with s 12-35 and so has committed an offence, and is liable to penalties for the failure to withhold: ss 16-25(1) and 16-30(1). The liability under s 16-30(1) is only to the extent of the failure to withhold.
Scenario 5
If a worker is paid part of his contractual entitlement, but less than the complement of the amount required to be withheld under s 12-35, then an amount more than the correct amount has been withheld. The employee can sue for the rest he was entitled to be paid, as s 16-20(1) will only protect the payer for what they were “required” to withhold. However, the payer has still complied with s 12-35 in relation to the amounts which were required to be withheld.
The obligation to remit
Those who withhold amounts “under Division 12” must pay them to the Commissioner: s 16-70(1).
In scenarios 1 and 2, no obligation arises under s 16-70, as no amount has been withheld.
In scenarios 3 and 4, the payer must pay all of the amount they withheld to the Commissioner under s 16-70.
In scenario 5, it seems that the payer must only pay the amount they were required to withhold (and not all of the amount they actually did withhold) to the Commissioner. (However the possibility of a requirement to pay even the excess amount actually withheld in light of the different language in s 16-70 (“under”) vis-à-vis s 16-20 (“required by”) is an interesting question that is unnecessary here to resolve. It might be that the intention is that the excess to which the employee is entitled should go to the Commissioner so that it may later be refunded to the employee, in case of administrative errors by employers otherwise jeopardising their wages or salary.)
Enforcement of the obligations
In considering the ability of the Commissioner to enforce, the distinction between the obligation to withhold and the obligation to remit must be kept in mind. The obligation to withhold is enforced by ss 16-25 and 16-30. The second obligation, being that to remit (ie to pay any withheld amount to the Commissioner) is enforced by a different procedure including the estimate regime.
Section 268-10(1) relevantly provides:
The Commissioner may estimate the unpaid and overdue amount of a liability (the underlying liability) of yours:
(a)under section 16-70 in this Schedule (requirement to pay the Commissioner amounts you have withheld under the Pay as you go withholding rules); …
The underlying liability is the liability to pay the Commissioner under s 16-70. If the payer did not withhold ((as in scenarios 1 and 2) whether or not they were obliged to and are otherwise liable under ss 16-25 and 16-30), there will be no liability to the Commissioner under s 16-70.
But the mere fact of a payer having no underlying liability to withhold does not mean the Commissioner may not make an estimate under s 268-10: see eg s 268-25(a) where it expressly contemplates that no underlying liability might exist but the obligation to pay the estimate remains. The Commissioner is entitled to make estimates that are inaccurate or imperfect, subject to s 268-10(2) and (3).
However, if, for example, the payer receives an estimate and responds by providing a statutory declaration to the effect (the sufficiency of which is discussed elsewhere) that they had paid the workers all of their contractual entitlements (ie their gross salary) and failed to withhold anything as required by s 12-35, then the estimate would be revoked by operation of s 268-40(4). Such a declaration would amount to an admission on oath of the commission of an offence in s 16-25. If false, it would amount to an offence under s 11 of the Statutory Declarations Act 1959 (Cth) for which the maximum penalty is 4 years’ imprisonment.
If such a statutory declaration were made, the Commissioner would be left without recourse to the PAYGW amount which was not withheld, but nevertheless entitled to pursue the payer for the offence under s 16-25 and for the administrative penalty under s 16-30 (which is equal the amount not retained).
The Estimate Notice provisions do not exist to enforce the obligation to withhold. They operate where there has been a withholding (being the payment of any part the employee’s full entitlements) and are there to enforce the obligation to pay withheld amounts to the Commissioner.
The practical reality is that the Commissioner will not always know in advance whether there has been a non-compliance with s 12-35 or s 16-70. That is why he is entitled to issue an erroneous Estimate Notice which, despite the error, gives rise to an immediate liability. It also underscores the reason the recipient of the notice must provide a sufficient factual basis in their statutory declaration to reveal the real facts (rather than assertions as to legal conclusions) so that the Commissioner has the factual basis on which to proceed. If those facts reveal the failing is under s 12-35, although the Estimate Notice might be revoked by operation of s 268-40(4), the Commissioner is then informed appropriately to pursue his remedies under s 16-30.
So, through the Estimate Notice regime, the Commissioner is either paid, is informed of the fact he needs to be paid in another way, or obtains the information which shows that there has been no non-compliance at all. And he gets that payment or information promptly.
In understanding the above, the means of achieving the purpose of prompt and effective action to protect the revenue can be seen.
The possible responses to the receipt of an estimate
Where an entity receives an estimate from the Commissioner under s 268-15, depending on the circumstances there are a number of possible avenues for revoking it on the basis that the recipient is not liable to remit any amount under s 16-70. First, a statutory declaration (or affidavit: s 268-40(1), table items 2 and 3) might verify facts to the effect that the entity was not obliged to withhold amounts under s 12-35 (in that it did not pay any amounts referable in any way to wages or salary). If that were established, any amount withheld by the entity could not have been withheld “under Division 12” such that there would be no non-compliance with s 16-70 by failing to remit. Secondly, the entity, whilst accepting that it was obliged to withhold PAYGW amounts, may verify facts to the effect that no amounts were withheld. While that may expose the entity to penalties under ss 16-25 and 16-30, it would nevertheless cause the estimate to be revoked.
The first avenue identified is not to suggest that the estimate is a process for enforcing the obligation to withhold, it is merely to acknowledge that the performance of that obligation is an antecedent step to the obligation to remit.
In the challenges mounted by the applicants in this case, the alleged lack of legality was directed to the issue of whether CLK Kitchens was obliged to withhold PAYGW amounts. No allegation was made that the Commissioner’s decisions or conduct were invalidated because CLK Kitchens did not withhold any amount.
CONSIDERATION
In his written submissions, Dr Schulte identified five separate and distinct issues or groups of issues which were said to arise in this matter. Although the applicants asserted the existence of others, the five identified are a convenient context in which to discuss most questions requiring determination.
Issue 1: Was the Commissioner entitled to make the estimates?
The issues between the parties under this heading can be approached as three subordinate questions:
(1)Does s 12-35 oblige CLK Kitchens to withhold PAYGW amounts, so that it is capable of having an underlying liability under s 16-70 such that the Commissioner is entitled (and it is not unreasonable for him) to estimate liability for those amounts under s 268-10?
(2)Was the amount calculated by the Commissioner an “estimate” he is entitled to make for the purposes of s 268-10?
(3)Has the Commissioner made a binding election to pursue CLK Services for some underlying liability such that he is not entitled to estimate CLK Kitchens’ liability for PAYGW amounts?
Does s 12-35 oblige CLK Kitchens to withhold PAYGW amounts, so that it is capable of having an underlying liability under s 16-70 such that the Commissioner is entitled (and it is not unreasonable for him) to estimate liability for those amounts under s 268-10?
The jurisdictional error alleged in ground 2(a) of the 2FAOA in the first proceeding was that the Commissioner’s estimate was not reasonable as required by s 268-10(2), in essence (as appears from the submissions) because: (a) CLK Kitchens was not the actual employer of the workers so it was not liable to withhold PAYGW amounts; (b) that it did not pay the workers directly; and, albeit somewhat inconsistently, (c) that it only paid them on behalf of CLK Services.
The Commissioner relies upon s 12-35, set out above, which provides that the obligation to withhold PAYGW amounts falls upon the entity which actually pays the wages or other amounts to a person “as an employee”, regardless of whether or not that entity is the employer. He further relies upon s 16-70, which requires an entity who withholds under Div 12 to pay the amount withheld to the Commissioner.
Relying on these provisions, the Commissioner submits that there are three relevant questions to be considered, being:
(a)Did CLK Kitchens pay wages to the workers as employees (whether of itself or another entity)?
(b)Were those wages paid net of tax withheld?
(c)Did CLK Kitchens report and remit its PAYGW liabilities to the Commissioner?
The Commissioner submits that the applicants have admitted that CLK Kitchens was the entity which paid the wages of the employees. The following evidence supports that:
(a)In a statutory declaration given under the Statutory Declarations Act 1959 (Cth), Mr Karananos stated that CLK Services employed all of the employees but that Mayneline Kitchens & Joinery (NSW) Pty Ltd (MKJNSW) undertook the bulk of the operation of the joinery business. (As the facts identified above show, it is the evidence of Mr Karananos that CLK Kitchens transferred its business to MKJNSW and ceased trading from 31 January 2017.)
(b)In his statutory declaration, Mr Karananos did acknowledge that CLK Kitchens had previously operated a similar kitchen joinery business. He said:
44.The Taxpayer [CLK Kitchens] previously owned and traded a business called Mayneline Kitchens & Joinery (the business). The Taxpayer was part of a larger group trading using the Mayneline name.
45.Mayneline Kitchens & Joinery (NSW) Pty Ltd (MKJNSW) (of which I am also a director) conducted the bulk of the group’s work, including but not limited to contract negotiations, product development, shop drawings, working drawings, site check measurements, submission of samples, finalising details, development and manufacturing approval of componentry, quality control and assurance, assembly, and site control and installation of componentry and all coordination meetings/management and logistics control.
46.MKJNSW, in trading its previous business, called upon the services of three labour hire companies (Five Star Labour Hire Pty Ltd ACN 153 967 527 (Five Star), Marsden Services Pty Ltd ACN 606 872 511 (Marsden) and CLK Services Pty Ltd ACN 111 780 897 (formerly known as Mayneline Services Pty Ltd) (CLK Services) who supplied the labour of their staff to the Taxpayer.
47.CLK Services employed employees to provide labour hire services.
48.The Taxpayer, MKJNSW and CLK Services had access to a batch payment facility with the NAB which enabled the Taxpayer to process payments as a batch entry, which had been used by the Taxpayer to pay creditors and subcontractors of the group. Inter-group accounts would deal with any liabilities as between entities.
49.As such, the Taxpayer would process as an advance, amounts directed by CLK Services.
50.The advance would be repayable upon the issuing of a tax invoice from the Taxpayer to CLK Services.
51.The Taxpayer invoiced CLK Services on a monthly basis for the amounts advanced by the Taxpayer to CLK Services. CLK Services would invoice MKJNSW for the labour hire, so that MKJNSW could provide its services as set out above.
52.The invoices reference “reimbursement” as that is what the invoice was for – a reimbursement for monies advanced by the Taxpayer for and on behalf of CLK Services.
53.The Taxpayer was no more paying an individual salary or wages than NAB who provided the batching facility.
54.The Taxpayer looked to the labour hire company for reimbursement for the funds advanced and released to the labour hire company’s workers. Neither the Taxpayer nor the bank were liable to pay an employee salary or wages.
(c)The above matters were also deposed to in an affidavit of Mr Karananos filed 26 July 2017.
(d)The bank account statements of CLK Kitchens reveal that when it paid amounts of money to the employees of CLK Services it recorded those amounts as “wages”. The amounts in question, which were paid weekly, were the amount of each worker’s wage entitlement less the PAYGW amounts.
(e)In an affidavit of 15 June 2018, Mr Karananos:
(i)identified at paragraph 13.8(c) the process by which the labour hire companies would pay the wages of the workers:
The labour hire companies’ staff would then calculate the wages payable to each employee and provide the Taxpayer with the amounts to be paid by them to each of the labour hire companies’ employees.
(ii)stated at paragraph 13.12:
The labour hire company invoiced the Taxpayer for the net wages weekly and this was set off against the labour hire company’s liability to the taxpayer so far as funds had been drawn on the Taxpayer’s account by the Bank processing the labour hire company’s payroll.
(f)In an affidavit of Mr Tim Logan, a solicitor in the employ of Morgan Conley Solicitors, who act for the applicants, it was stated that:
On 12 January 2018, Anita Owens of Worrells Solvency + Forensic Accountants, provided a letter to MCS which calculated the potential PAYG withholding tax due on wages paid to employees working for labour hire companies engaged by the Taxpayer.
(g)The letter and analysis of Ms Owens identified the wages paid to numerous employees over the period including 1 July 2016 to 31 January 2017. The names of the employees identified by Ms Owens as being the employees of the labour hire company match the names of the persons to whom CLK Kitchens paid money from its bank account with NAB over the same period.
The evidence before the Court demonstrates in relation to the period under consideration that:
(a)The persons who undertook work for the purposes of operating CLK Kitchens’ joinery business were employees of CLK Services, the labour hire firm.
(b)CLK Services provided the services of the workers to CLK Kitchens (and perhaps other companies in the group, such as MKJNSW).
(c)The labour hire company would calculate and advise CLK Kitchens of the amount of wages payable to each of the workers.
(d)On a weekly basis, the workers were paid money by CLK Kitchens for their services.
(e)In its bank statements, CLK Kitchens recorded the amounts paid to each of the workers as “wages”.
(f)The funds used to pay the wages emanated from an NAB account maintained by CLK Kitchens from which batch payments were made and, in the words of the applicants’ solicitor, the batch payments were “made by” CLK Kitchens on behalf of CLK Services. Mr Marks QC for the applicants very properly acknowledged that the funds came from the bank account of CLK Kitchens and were deposited in the accounts of the workers (Transcript p 12 L15-18).
(g)The payments were treated as an advance by CLK Kitchens to CLK Services and each month an invoice would be given by CLK Kitchens to CLK Services in respect of the amount so advanced.
(h)The amounts invoiced were the amount of the workers’ net weekly wages. Again, Mr Marks was candid in acknowledging that he was not in a position to dispute that the amount paid was the amount owing to the employees as wages less the PAYGW amount (Transcript p 12 L32-33).
(i)The invoice would refer to a “reimbursement” being of the amount advanced to CLK Services’ workers made on behalf of it by CLK Kitchens.
The above facts, which were derived almost exclusively from the applicants’ material, appeared clearly following the hearing. However, the matter before the Court is for judicial review of the impugned decisions and conduct such that the evidence concerning the actual facts is far less important than the legality of the Commissioner’s decisions and conduct or the efficacy of the applicants’ responses to the receipt of the estimate. For instance, the actual facts concerning the operations of CLK Kitchens and CLK Services are irrelevant when ascertaining whether Mr Karananos’ statutory declaration complied with the statutory requirements. The distinction must be kept in mind, particularly when considering the applicants’ submissions concerning alleged factual disputes.
The Commissioner’s submissions
The Commissioner submitted that he was entitled to make an estimate of the unpaid withholding liability of CLK Kitchens under s 268-10. He submitted that, pursuant to s 12-35, CLK Kitchens was liable to withhold the PAYGW amounts and, under s 16-70, pay the amounts to him. He submitted that CLK Kitchens was paying salary or wages to the workers as employees and, because of the words “whether of that or another entity” in s 12-35, it was irrelevant that they were employed by CLK Services.
The Commissioner submitted the fact that the workers who were paid wages by CLK Kitchens were not its employees or that CLK Services provided the payment summaries to the employees did not alter the liability of CLK Kitchens. He submitted that the obligation to withhold simply falls upon the entity which pays any amount of salary or wages. This issue was considered by Brereton J in Re Plutus Payroll Pty Ltd [2017] NSWSC 1360 (Plutus) at [28]-[29] where his Honour said:
[28] That objection [being an objection to a GST assessment] asserts that after about January 2017, the first defendant entered into an arrangement with some of the other defendants, whereby the first defendant paid directly to employees, superannuation accounts and a solicitors’ trust account, amounts said to be owing by it to the other defendants. This amounts to the first defendant paying wages and superannuation on behalf of some of the other defendants. The first defendant contends that it was not liable to pay PAYGW in relation to those payments, because it was providing the payments as a service to the other defendants.
[29] However, TAA, Sch 1, s 12-35, provides that an entity must withhold an amount from salary, wages, etc it pays to an individual as an employee whether of that or another entity; thus, the obligation to withhold falls upon the entity making the payment to the employee, regardless of whether or not it is the employer. Accordingly, Mr Thomasen’s statutory declaration does not disclose facts upon which the underlying liability to pay PAYGW never existed; and as a matter of substance, is not “to the effect” that Plutus Payroll’s PAYGW liability never existed.
The construction preferred by Brereton J accords with the natural meaning of the words used in s 12-35 and it has been followed in subsequent cases. However, as is discussed below, the real question is not whether CLK Kitchens failed to withhold PAYGW amounts from the wages of employees. It is whether the statutory declaration verified facts which negated or reduced CLK Kitchens’ “underlying liability”, being the liability of the estimate recipient to remit amounts which it has withheld as PAYGW amounts.
The applicants’ submissions
The applicants submitted that the above construction of the words of s 12-35 was too wide. In paragraph 38 of their written submissions they said:
The respondent does not explain how an amount may be “wages” or “salary”, rather than simply an amount of money provided by a financier, where the Company had no contractual relationship with a worker justifying characterising amounts as “wages” or “salary”.
That submission fails to confront the fact the periodic amounts paid by CLK Kitchens to the workers were, unquestionably, payments of their wages. Indeed, as identified above, Mr Karananos admitted that the labour hire companies informed CLK Kitchens of the amount of each worker’s wages and CLK Kitchens would then pay them that amount. The amount so paid was obviously the net amount as, once the amounts were paid to the workers by CLK Kitchens, it invoiced CLK Services for “reimbursement” of the net amount of the weekly wages. That was the foundation of the estimate made by the Commissioner and it was verified by Mr Karananos in his statutory declaration.
There can be no serious argument against the proposition that the money paid to the workers by CLK Kitchens was paid as wages to them as employees. There was no question that the payments discharged the liability of CLK Services to the workers for the work performed by them, save in respect of the PAYGW amounts. That is the effect of the evidence identified above and there was no suggestion that the entitlement of the workers to their wages was discharged in any other manner. The internal arrangement between the companies was that the wages obligation of CLK Services would be discharged by CLK Kitchens paying its money to the workers or using its credit to pay them, and then seeking reimbursement.
The submission that the scope of the above interpretation of the section may have the result that a bank, which causes money to be used to meet the wage or salary liability of employees, is also liable to withhold PAYGW amounts is misconceived. In support of this argument the applicants relied upon Deputy Commissioner of Taxation v Applied Design Development Pty Ltd (in liq) (2002) 117 FCR 336. That case concerned whether a liquidator who pays amounts owing to employees by a company being wound up is required to withhold PAYGW amounts under s 12-35. After considering the statutory scheme, Mansfield J identified the issue as one of the characterisation of the payment in question and whether it was the payment of “wages” to the person “as an employee”. His Honour held that the payment was of that character regardless of whether it was paid by the company or the liquidator under the latter’s statutory obligations. He said (at 340 [12]):
That is because s 12-35 does not impose the obligation to withhold the prescribed amount by reference to the identity or character of the entity that in fact pays the employee. Indeed, it specifically provides for the possibility that one entity may make a payment of salary, wages, commission, bonuses or allowances to an individual, being an employee of another entity. So much can be concluded from the text of the provision, and support for that conclusion can be found in the contrast between s 12-35 and its immediate predecessor, s 22lC(lA) of the ITAA: see Beckwith v The Queen (1976) 135 CLR 569 at 578-583; 12 ALR 333 at 340-344 per Mason J. It relevantly provided:
“Where an employer pays to an employee salary or wages, ... the employer shall, at the time of paying the salary or wages, make a deduction from the salary or wages ...”
That provision only imposed an obligation to withhold a taxation amount in circumstances where a payment was made by an employer to an employee. The authorities cited by both parties in the present application were determined in relation to that section or its ancestors, and are therefore largely concerned with the question whether the entity making the payment for salary or wages could be properly characterised as an employer. That is an issue that is not directly relevant to the present application, which turns on the question of whether the payment made on 10 July 2000 could be properly characterised as a payment in the nature of wages made to M in his capacity as an employee.
In relation to the characterisation of a payment as being of wages to an employee, his Honour identified (at 342-343 [25]) that even if the debt, comprised of wages owing which were enforceable pursuant to contractual rights, has been transformed into a statutory right upon the liquidation of the employer, the nature of the payment as a payment in respect of the services rendered by an individual may be unaltered by the effect of insolvency legislation. It followed that nothing turned on the fact that the payment in that case was made by way of dividend and pursuant to the employee’s statutory right to receive it. The consideration given for the payment was the rendering of services as an employee and that gave rise to the employee’s entitlement to prove for the debt. That led to the conclusion that the payment was in the nature of wages or salary.
There is nothing in the reasons of Mansfield J which supports the argument advanced by the applicant. The contrary is true. As his Honour said, the question is one of the characterisation of the payment made. In the present case the payments by CLK Kitchens to the employees effected a discharge of the wages or salary obligation which had arisen by reason of the employees providing consideration by undertaking work. The manner in which the discharge of liability arose was by the authorised transfer of money or credit from CLK Kitchens’ account to the employees’ accounts as is demonstrated by the bank statements. As the employees were credited with a sum of money a similar amount was debited in CLK Kitchens’ account. None of that is contentious. It should be kept in mind that the effect of this in discharging the wages liability arose only because CLK Kitchens was authorised by CLK Services to do so. The mere transfer of money was not enough. It was only the intercompany arrangement giving CLK Kitchens the authority to discharge the wages debts which caused the transfers of funds to have that effect.
The mere fact that the payments were made by CLK Kitchens on behalf of CLK Services and that, as a result, the credit balance between those two entities was altered, makes no difference as far as s 12-35 is concerned. The payment by CLK Kitchens discharged the wages obligation owed to the employees of CLK Services and was a payment of the wages. Indeed, the fact that CLK Kitchens was using its credit or financial facilities to discharge the debt supports the conclusion that it was paying the wages. It was not merely authorising the use of CLK Services’ money to discharge the debt, but was actually discharging the debt itself by use of its credit. (It might be said that even if a person uses the funds of another person to discharge a wages obligation, they are still paying wages to an employee under s 12-35. But that question does not need to be answered.)
The suggestion that the bank which caused the transfers to take place paid the wages of the CLK Services employees within s 12-35 is unreal and contrary to the ordinary meaning of the words used in the section. Many transactions are undertaken through the medium of a bank or other financial institution, but to suggest that it is the financial institution which has discharged a liability is misunderstand the role of the financial institution. Banks and financial institutions merely operate credit facilities whereby debtors are able to discharge their financial obligations to creditors through the medium of money or credit transfers. The transfer by the financial institution does not, of itself, discharge anything. It is the mere mechanical transfer of money or credit. The ability to discharge an obligation arises from the authority of the payer to do so. Whilst the bank requires a mandate from its customer to transfer funds from an account, it is the customer’s authority to discharge a debt which is crucial to the efficacy of the transaction. In the ordinary course, the transferring bank has no authority to discharge a debt; in this case a wages debt. Its authority is to transfer money. It is only the customer with the relevant authority (in this case CLK Kitchens) which, through the medium of its bank, discharges the wages debt and can be said to have “paid the wages”.
The well-established concept of a payment is “a gift or loan of money or any act offered and accepted in performance of an obligation”: Goode on Payment Obligations in Commercial and Financial Transactions, Sweet & Maxwell (3rd ed) 2016, [2-01]. However, a debt can only be discharged by payment with authority. Only the payer who has authority to discharge a debt can mandate a bank to pay money in its discharge: Goff & Jones on the Law of Restitution, Sweet & Maxwell (7th ed) 2007, [1-018]. The bank, of itself, merely transfers the money and it is the entitlement of the payer to discharge the debt obligation which is essential to the efficacy of the transaction. So much is well established: Barclays Bank Ltd v W J Simms Son & Cooke (Southern) Ltd [1980] QB 677; Commercial Bank of Australia v Younis [1979] 1 NSWLR 444; K J Davies (1976) Ltd v Bank of New South Wales [1981] 1 NZLR 262 and Bank of New South Wales v Murphett [1983] 1 VR 489.
In other words, as Mansfield J said in Applied Design Development, the question is one of the characterisation of the transaction as the payment of “wages” to the person “as an employee”. The concept of the “payment of wages” necessitates the conclusion that the duly authorised payer intends that the transfer of money will discharge the wages debt, the intention of the payer being critical to the efficacy of the payment: Filgate v Thompson (1874) 5 AJR 124. The bank or financial institution has no intention to discharge the wages debt. It has no authority to do so. All it does is transfer its customer’s money (or credit) for its customer. Here it cannot be said that NAB had any intention to discharge the wages debt of the workers who had earned that entitlement as employees. The relevant intention was that of CLK Kitchens which had the intention of discharging the wages debt, it being authorised to do so.
Moreover, the discharge of the wages debts did not occur with the bank’s money or credit. It occurred as a result of CLK Kitchens’ money or credit being used to pay the amount to the employees. Its funds or credit diminished to the extent that the employees’ funds were enhanced. In that sense the only characterisation of the transactions was that CLK Kitchens paid the wages to the individuals as employees.
The applicants submitted that the Commissioner’s reliance on Plutus was erroneous. It was said that in that case there was an admission by Plutus that it was paying the wages of employees as a service to other companies in the group and that it was paying them directly. It was further said that this was not similar to the present case but the relevant difference is difficult to ascertain. Here, Mr Karananos’ statutory declaration identified that the inter-company arrangements were to the effect that CLK Kitchens would, using its money and funds, discharge the wages debts of CLK Services to the employees, although not including the PAYGW amounts. Whether that amounts to a “service” or an “intercompany arrangement” is a distinction without difference. The applicants also focused attention on the reference in Plutus to the payments being direct. Again, the relevance of that in the context of the argument is not clear. Here the payments were direct into the accounts of the employees. There is nothing in paragraph [28] of the reasons of Brereton J in Plutus to suggest that the payments were made otherwise than through the medium of a financial institution.
It was also said that the decision in Plutus did not deal with the obligation of the Commissioner where a statutory declaration had been provided by the recipient of an Estimate Notice. Although a statutory declaration was made in that case, it did not disclose facts upon which the underlying liability to pay withheld amounts never existed or that the relevant sum was a lesser amount and for that reason did not revoke or reduce the amount of the estimate. The part of Brereton J’s reasons dealing with that matter is not relevant for the purposes of considering the operation of s 12-35 although it assumes importance later in these reasons. In the recent decision in Armstrong Scalisi Holdings, Ward CJ in Eq reached a substantially similar conclusion on this point. That case is discussed further below.
It follows that there is no merit in any of the applicants’ submissions in this respect.
Commissioner’s entitlement to issue estimates
On the undoubted facts of this matter, which are derived from the evidence of the applicants and the statutory declaration of Mr Karananos, there is no doubt that s 12-35 applied to the payments by CLK Kitchens to the employees of CLK Services with the consequence that when CLK Kitchens paid the employees’ wages it was obliged to retain the PAYGW amounts. That is the correct characterisation of the transactions and it is in accordance with the manner in which the section was construed by Brereton J in Plutus and by Mansfield J in Applied Design Development.
It follows from the above that CLK Kitchens was subject to the withholding obligation and liable to report and remit the withheld PAYGW amounts under ss 16-70 and 16-150 of Schedule 1 to the TAA. Again, there is no doubt that it did not do this. Indeed, in paragraph [43] of his statutory declaration dated 18 July 2017, Mr Karananos admitted that the company did not report or remit any amounts. That failure enlivened the Commissioner’s power under s 268-10 to make an estimate of the unpaid withholding liability.
More importantly, the Commissioner made and gave the estimate to CLK Kitchens relying on the above construction as to the operation of ss 12-35 and 16-70. There was clearly no error in him doing so and his decisions based upon that premise are not vitiated for that reason.
Was the amount calculated by the Commissioner an “estimate” he is entitled to make for the purposes of s 268-10?
The applicants submitted that the Estimate Notice was invalid because it was not based on any actual estimate by the Commissioner, however, the basis of that submission was not clearly identified. It was further submitted that this “feature demands cross-examination”, but again, there was no indication of the topics which required elucidation by cross-examination.
It is important to observe that the power of the Commissioner to make an estimate is granted in unconfined terms. Unlike other remedial action which he is empowered to pursue by Part 4-15 of the TAA, the power is not conditioned on the formation of a “reasonable belief” or otherwise of an identified state of facts. The only requirement is that the amount estimated is, in the Commissioner’s view, reasonable. Although such a power may be thought to produce injustice in some cases, that possibility is negated by the ability of the recipient of the estimate to reduce or revoke any liability by immediately taking steps under s 268-40.
In this case CLK Kitchens had not reported the vast bulk of the wages it paid to the workers as wages. It is apparent that it considered the labour hires as the employees of CLK Services and it did not claim to have retained any PAYGW amounts. It appears that it considered that it had no employees. The Commissioner necessarily had little information on which to make an estimate and it follows that the process of estimation would have involved a “broad brush” approach.
The applicants submitted that the evidence which demonstrated that no estimate had been made was an email of 28 June 2017 exhibited to the affidavit of Mr Mason (an ATO officer) sworn on 28 September 2017. In it, a Mr Condon of the Employer Obligations, Small Business team of the ATO advised two other officers that his team had calculated the withheld PAYGW amounts of CLK Kitchens (formerly called Mayneline Kitchens & Joinery) at 49.5% of the combined total of benchmark wages for cabinet makers and the actual contractor expenses claimed by CLK Kitchens for each year. A spreadsheet was attached explaining the calculations and the months to which they related. It was also observed that, as there were neither sales nor contractor expense figures available for 2017, Mr Condon had used the 2016 figures for both years.
It follows that none of the grounds advanced by the applicants in relation to this issue have any merit and they have no reasonable prospects of successfully challenging the actions of the Commissioner to cause the entries to be made to the RBA.
Other issues
The applicants also raised a number of other issues which did not fit within the scope of the Commissioner’s five main points.
Second statutory declaration
On 21 March 2018, Mr Karananos gave a further statutory declaration to the Commissioner in relation to the estimates which had been issued on 11 July 2017 and reduced by a notice given on 14 March 2018. The applicants’ position appears to be that if the Commissioner reduces a previously given estimate, the time for giving a statutory declaration is restarted. No statutory provision was referred to which might support that contention. As the operation of Div 268 discussed above shows, the effect of a reduction is that the original estimate is taken to always have been the reduced amount: s 268-55. The estimate remains intact even if its amount is reduced. The scheme of Div 268, like its progenitor, provides for only one estimate: Craddock at 285-286 [38]-[39].
There is nothing in the provisions to suggest that the effect of a reduction is to issue a new notice of estimate under s 268-15. Indeed, the opposite is true. The right to give a statutory declaration under s 268-40 is upon the receipt of a notice of the estimate, being that estimate made under s 268-10 of which notice is provided for in s 268-15, not upon the receipt of a written notice of the reduced amount of the estimate. The scheme of Div 268 reveals the establishment of an estimate which may vary in amount but, by the deeming provisions, is taken to always have been the varied amount. That being so, the second statutory declaration was not provided within the time permitted by s 268-40(1), being within seven days from the date of the giving of the Estimate Notice. No extension of time was given by the Commissioner to provide a second statutory declaration such that it could not have been of any effect.
The consequence is that the applicants have no reasonable prospects of seeking review of the alleged failure to consider the second statutory declaration.
In any event, it is apparent that Mr Morelande of the ATO did consider the second statutory declaration when it was received. In his affidavit he noted that it contained only minor differences to the first statutory declaration and did not make any substantial difference in relation to the issues to be considered. He said there was therefore no utility in allowing any extension of time for the giving of a statutory declaration.
Although the Commissioner submitted that the affidavit of Mr Morelande forecloses the issue about whether the affidavit was considered, it is not necessary to determine the issue on that basis. In different circumstances, had that been a pivotal issue, the applicants may have been entitled to cross-examine on the document. The essential difficulty is that the second statutory declaration was, in fact, substantially the same as the first. Any additions or variations did not go to the substance of whether it met the requirements of s 268-40(2) or (4). For the reasons identified previously in these reasons, it too was not to the requisite effect, with the consequence that it could not and did not cause a reduction in the amount of the estimate. Moreover, again for the previously expressed reasons, the Commissioner had no obligation to consider it.
The applicants drew attention to the notice of reduction in the estimate which was sent to CLK Kitchens on 14 March 2018. It was attached to the affidavit of Ms Felu and dated 14 March 2018. The title of the document was, “Notice of Reduction of Estimate of Liability Payable to the Commissioner of Taxation”. After referring to the original “Notice of Estimate of Liability”, the letter contained the following statement:
This notice is to advise that in exercise of the powers and functions conferred on me as a Deputy Commissioner of Taxation by delegation from the Commissioner of Taxation under the provisions of the TAA, I give notice that I have reduced the amount of the estimates shown in column 2 of the table below, in accordance with section 268-35 in Schedule 1 to the TAA, to the amount shown in column 3 of the table below...
Thereafter, the letter set out the numerous periods to which the reduction of estimate related and identified the original estimate and the “Reduced amount of estimate”. At the end of the letter there appeared the statement, “The reduction in the amount of the estimates takes effect when this notice is sent to you.”
The applicants submitted that the letter represented a new Estimate Notice which gave rise to a new entitlement in CLK Kitchens to give a new statutory declaration. However, the document which referred to itself as a “Notice of Reduction” and which identified that it was a purported exercise of power under s 268-35 to reduce the estimate, was self-evidently a reduction of the estimate and not a new estimate. The reasons the applicants claimed that it was a new estimate and not a notice of reduction were somewhat obscure.
It may be that the argument being advanced was that any reduction in the original estimate must necessarily be a new estimate and that will activate the right of the recipient of the estimate to give a statutory declaration under s 268-40. However, that argument has been dealt with above and the short answer to that pure question of construction is that section is triggered by the giving of a notice of estimate and not a notice of reduction.
It also seemed to be argued that the statement in the Notice of Reduction that the reduction took effect when the notice is sent, was a statement which could only mean that it was a new estimate because, if it was a notice of reduction the estimate would always have been that amount. That submission is also obviously in error. The statement in the letter was to the effect that the “reduction” took effect from the date. That is an accurate statement of the effect of the notice of reduction. Prior to that point in time CLK Kitchens was bound by and was required to comply with the terms of the Estimate Notice. It was only released from that obligation once a reduction was made. Whilst it may have been that the effect of the reduction was that the estimate in the Estimate Notice was to be taken to always be in the reduced amount, it had nothing to say about when the reduction effected by the notice took effect.
The Notice of Reduction was what it unquestionably purported to be. On no view of the facts could it be said that it was a new estimate under s 268-10 or notice under s 268-15. The applicants have no reasonable prospects of succeeding in the contrary argument.
Material for the reduction of estimate
The applicants also assert that, at the time of the making of the original estimate, the Commissioner had before him all of the material on which the external accountant, Worrells, had when it subsequently analysed the actual amount of PAYGW payable in respect of labour hires. It is said that the Commissioner subsequently relied upon the analysis in the Worrells report for the purposes of reducing the amount of the estimate and that, in those circumstances, the original estimate could not have been reasonable. Again, the applicants assert that they should be entitled to cross-examine the ATO officers on the manner in which the estimate was made. Mr Logan, the solicitor for CLK Kitchens, deposes that he obtained a letter from a Ms Anita Owens of Worrells Solvency and Forensic Accountants calculating the PAYGW amounts which CLK Services might owe to the Commissioner. The letter was provided to the Commissioner on 1 February 2018. In it, Ms Owens made a calculation on the PAYGW amounts based on the actual rates of tax which the workers would pay. The amount identified is $4,407,851.70. So the argument went, it is said that the Commissioner had the same information on which these calculations were made and, for that reason, the estimate of $19,475,997.00 was necessarily unreasonable.
Apart from the fact this ground of unreasonableness is not raised in the originating application, the immediately obvious difficulty with it is that Ms Owens made her calculations on the basis of five identified assumptions, one of which was that each of the employees had provided their tax file number to CLK Kitchens. That latter assumption is, of course, the converse of the assumption in the estimate made by the Commissioner’s officers, in particular, Mr Condon who identified that the TFNs had not been provided. Similarly, Ms Owens assumed that each of the employees were entitled to the tax free threshold, but given the effect of scale 4 of the Withholding Schedules, that was not applicable in assessing the PAYGW liability where the TFN has not been provided by an employee. In other words, Ms Owens did not purport to calculate the PAYGW amount CLK Kitchens ought to have remitted in accordance with the taxation legislation on the facts as they existed. Her calculations are based on assumptions which did not exist but which were subsequently assumed in favour of CLK Kitchens. For this reason this ground of alleged lack of reasonableness has no reasonable prospects of success. It is based upon a misapprehension of the manner in which Ms Owens made her calculations; that is, other than in accordance with the relevant obligations of CLK Kitchens to withhold and remit PAYGW amounts at the highest tax rate.
The applicants made no submissions as to why it was that the Withholding Schedules did not apply in the circumstances. There was not the slightest suggestion that the employees had provided their tax file numbers to CLK Kitchens. On the applicants case there was no reason why that would have occurred. They regarded the workers as being employees of the now insolvent CLK Services and, consequently, CLK Kitchens had no reason to receive their tax file numbers. Whilst it may be that the Commissioner was subsequently prepared to reduce the PAYGW liability on the assumed basis that the workers had provided their tax file numbers, such that the withholdings by CLK Kitchens would have been referable to the actual amount of tax payable by the workers, the applicants did not and cannot identify any error in the making of the estimate by application of the rate in the Withholding Schedule applicable to the circumstances. Again, the applicants have no reasonable prospects of successfully challenging the estimate on this basis.
An order compelling the making of a further estimate or reduced estimate
In paragraph 5 of the orders sought in the originating application the applicants seek an order that the Commissioner make an estimate as against the first applicant. The applicants now accept that the reduction previously made by the Commissioner satisfies the relief sought here. That being so, it is no longer in issue.
Entries made in the RBA which were reversed.
The applicants also seek review of the alleged allocation of amounts to the RBA on 7 July 2017, but which was reversed on 10 July 2017, being prior to the commencement of proceedings. In his affidavit, Mr Mason, an employee of the ATO in Significant Debt Management, identified that part of his duties is to key estimates of liability for unreported PAYGW amounts onto the liable entity’s Running Balance Account (RBA) and issue notices of estimates. He explained that if the ATO’s Employment Obligation audit team identified evidence of a failure to remit withheld PAYGW amounts it can refer the estimated liabilities to Mr Mason’s team, who key in those liabilities onto the entity’s RBA and issue the estimate notice. After the issuing of the estimate notice the Significant Debt Management team will follow up with issuing DPNs or taking debt recovery action, if required.
On 28 June 2017, Mr Mason attended a meeting in relation to CLK Kitchens where he was informed and he believed that CLK Kitchens were liable for certain PAYGW amounts. Mr Condon of the Employment Obligation audit team asked the Significant Debt Management team to key into the RBA of CLK Kitchens the relevant PAYGW amounts to issue estimates notices and DPNs. Mr Mason was sent a spreadsheet on Friday 7 July 2017 and he commenced keying in the amounts. However, due to the large amount of PAYGW estimate periods he ran out of time on that day and had not completed the task. He was instructed to delete the amounts which had been keyed in and to then insert all of the amounts on a day when he had the ability to key in amounts in respect of all the periods and issue the notices. He deleted the amounts already keyed in on Monday 10 July 2017, and on 11 July 2017 he keyed in all of the PAYGW amounts for each of the relevant periods. On that same day he issued the relevant Estimate Notice. On the following day he issued the DPNs to Mr Karananos.
The only submission made by the applicants in relation to this matter was:
whether the operative RBA entry was 7 or 10 July, both precede the alleged “estimate” (11 July). The precise order of events must be explored by cross-examination.
No elucidation for this proposition was advanced and it is not possible to identify any jurisdictional error in the process of the ATO to which the argument might support. No ground of review can be detected in the originating application which might support review of the act of keying in information into a computer. The applicants did assert that the estimates were not made in accordance with the law but why there needed to be cross-examination on this point was not explained.
As the Commissioner submitted, the allocation of amounts to the RBA on 7 July 2017 were of no effect or significance to the applicants. They were a mere internal procedure involving preliminary work in relation to the issuing of estimates. The entry of the information into a computer had no impact upon the rights, entitlements or obligations of the applicants and was not, in any way, a substantive determination or decision which might be subject to review under the Administrative Decisions (Judicial Review) Act 1977 (Cth): Australian Broadcasting Tribunal v Bond (1990) 170 CLR 321, 337. Similarly, the Commissioner is correct in his submission that, as the alleged conduct had no substantive effect and the entries were reversed prior to the commencement of the proceedings, there is nothing in respect of which a Constitutional writ under s 39B(1A) of the Judiciary Act 1903 (Cth) might be directed.
There is no reasonable prospect of the applicants succeeding in relation to the claimed review of the conduct of entering the data concerning the PAYGW amount into the computers at the ATO.
Conclusion with respect to the “other grounds”
It follows that the applicants have no reasonable prospects of succeeding in challenging the decisions or conduct of the Commissioner on the basis of the grounds referred to under the heading of “other grounds”.
CONCLUSION IN PROCEEDING QUD 369 OF 2017
Despite the myriad issues and arguments raised by the applicants, none of them have any substance. None of them support a conclusion that the applicants have any reasonable prospects of successfully challenging the impugned decisions or conduct of the Commissioner. The application for summary judgment should be allowed and the 2FAOA should be dismissed. Necessarily, the applicants must pay the Commissioner’s costs of the proceedings.
The applicants claimed that they were entitled to their costs relating to the relief they sought that the Commissioner make a new estimate. They submitted that the relief was no longer required because a reduction in the estimate was subsequently made. However, the relief sought was not available and the reduction by the Commissioner occurred as the result of receiving additional information. There is no basis for suggesting that the applicants succeeded on this issue.
THE SECOND PROCEEDING: QUD 241 OF 2018
The FAOA in the second proceeding is partially repetitious of and partially founded upon the claims in the first proceeding, QUD 369 of 2017. At its centre is the proposition that the reduction of the estimate by the Commissioner on about 14 March 2018 had the consequence that a new estimate was made and that entitled the applicants to give to the Commissioner a further statutory declaration. That argument has been rejected above as having no reasonable prospects of success. It follows that the Commissioner’s claim for summary judgment and the applicants’ arguments in opposition to it can be quickly considered.
Alleged decision on 14 March 2018 to allocate a new amount to the RBA of CLK Kitchens
The applicant’s complaint in this respect is that the Commissioner allocated a reduced amount to the RBA on 14 March 2018 prior to giving CLK Kitchens time to respond. Underlying this complaint is the assertion that the notice of reduction constituted a further estimate and, on that basis, the applicants were entitled to deliver a further statutory declaration pursuant to s 268-40. It is said that a further declaration was, in fact, delivered but, by that time, the reduced amount had been allocated.
There are a number of answers to this proposition. First, as is identified above, no new estimate was made. The original estimate remained efficacious albeit at a reduced amount. Therefore no further right to give a statutory declaration arose. Secondly, it is doubtful that the alleged “decision” constitutes a relevant decision in respect of which relief can be obtained. Of itself, the allocation to the RBA does nothing, and it is the primary liability arising under Div 268 which generates the applicants’ obligations. Thirdly, as is identified above, the Commissioner was not required to elect between inconsistent rights when proving for a debt in the administration of CLK Services.
Alleged new estimate decision
The applicants complain that the decision by the Commissioner on 14 March 2018 to make a new estimate ought be quashed. It is first submitted that no liability arose because CLK Kitchens was not obliged to withhold any PAYGW amounts. That submission seems to be founded upon the assertion that CLK Kitchens was not the employer liable to withhold under s 12-35. Any argument to that effect has been dealt with above. Secondly, it was asserted that the decision was unreasonable. However, there was no new estimate decision but merely a reduction in the estimate. In any event the grounds of unreasonableness are those which are relied upon in relation to the original estimate decision and they have no substance either as has been indicated above. Again they proceed under the mistaken view that CLK Kitchens was not liable to withhold PAYGW amounts. Thirdly, the applicants submitted that CLK Kitchens was not liable in circumstances where the labour hire companies had issued withholding summaries. Again, as has been considered above, that argument is misconceived. Fourthly, the argument that the Commissioner elected between inconsistent rights when proving in the administration of CLK Services is an argument which cannot be sustained.
Alleged decision to issue new estimate notice
Again, this argument is founded on the false premise that a new estimate decision was made, when that did not occur.
Alleged failure to consider the second statutory declaration
This argument has been dealt with in the reasons in relation to the first proceeding. The applicants had no right to deliver a further statutory declaration and no extension of time was granted to allow that to occur.
Alleged failure to revoke the new estimate decision
As there was no new estimate decision, there can have been no failure to revoke it. Further, it was submitted that the revocation should occur because the applicants had given to the Commissioner a statutory declaration which complied with s 268-40(2). As has been explained above, the applicants had no entitlement to deliver any such further statutory declaration. In any event, it was not to the effect of s 268-40(2) or (4) and, therefore, did not cause a reduction or revocation of the estimate.
One issue which does arise in relation to this question concerns the scope of the material on which the Commissioner may rely when considering his position on receipt of a statutory declaration or affidavit. The applicants’ originating application alleges that the Commissioner, by his officers, wrongly took into account material other than that which appeared in the statutory declaration given by Mr Karananos on 21 March 2018. To some extent that ground is inconsistent with their submissions made in the course of argument to the effect that if a statutory declaration is delivered in accordance with s 268-40(2) or (4), the Commissioner is obliged to consider it. As has been indicated above, a complying statutory declaration has the effect, itself, reducing or revoking the estimate. The conclusion by the Commissioner that a statutory declaration has that effect or otherwise does not alter the consequences of its delivery. However, pursuant to s 268-35 the Commissioner may, at any time, reduce the amount of the estimate. Even if it is the case that a statutory declaration does not, of itself, have the effect required by s 268-40, the information in it, along with other information acquired by the Commissioner, may cause the Commissioner to reassess his estimate. That is a perfectly proper approach to take. Even though the Commissioner is not obliged to exercise the power under s 268-35(1), it is apparent from the facts of this case that the ATO officers prudently assessed the state of known circumstances as further information came to hand. There was no error in them doing so.
It follows that the applicants’ complaint that the Commissioner failed to exercise some, as yet unidentified, power under s 268-40(2) or s 268-40(4) has no reasonable prospects of success. It follows that there was no failure by the Commissioner to revoke the estimate notice as claimed. There are no reasonable prospects of the applicants establishing otherwise.
Alleged failure to withdraw the director penalty notices
This ground is based upon the claimed efficacy of the second statutory declaration. As identified above, the purported statutory declaration was inutile and of no effect. Necessarily, there was no obligation on the Commissioner to withdraw the DPNs even if he had a power to do that. The applicants have no reasonable prospects of succeeding on this ground.
Alleged conduct concerning the above decisions
In the second proceeding, as in QUD 369 of 2017, the applicants also seek to review various “conduct” of the Commissioner relating to the alleged decisions referred to above including allocating amounts to the RBA, issuing the alleged new estimate notice, failing to revoke the new estimate notice and failing to withdraw the DPNs. Necessarily any review of that conduct is doomed to fail because the decisions (where there was in fact a decision as alleged), were valid and there is no reasonable prospect of the applicants establishing otherwise. In the result, the applicants have no reasonable prospects of successfully challenging the purported conduct.
Conclusion in the second proceeding QUD 241 of 2018
Again, it follows that despite the plethora of issues and arguments agitated by the applicants, none of them have any reasonable prospects of success. They were all without substance. The Commissioner’s application for summary judgment should be allowed and the FAOA in QUD 241 of 2018 should be dismissed. Again, the applicants must pay the Commissioner’s costs of these proceedings.
I certify that the preceding two hundred and sixty-eight (268) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Derrington. Associate:
Dated: 12 July 2019
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