Deputy Commissioner of Taxation for the Commonwealth of Australia v Rossi - [2001] WADC 102

JURISDICTION : DISTRICT COURT OF WESTERN AUSTRALIA
IN CHAMBERS

LOCATION: PERTH

CITATION: DEPUTY COMMISSIONER OF TAXATION FOR THE COMMONWEALTH OF AUSTRALIA -v- ROSSI & ANOR [2001] WADC 102

CORAM: COMMISSIONER REYNOLDS

HEARD: 30 MARCH 2001

DELIVERED : 8 MAY 2001

FILE NO/S: CIV 4535 of 1999

BETWEEN: DEPUTY COMMISSIONER OF TAXATION FOR THE COMMONWEALTH OF AUSTRALIA
Plaintiff
AND
VINCENT LEONARD ROSSI
KEVIN SYDNEY LLOYD
Defendants

Catchwords:

Appeal - Summary judgment - Director's liability for company's failure to comply with an agreement under s 222ALA of the Income Tax Assessment Act 1936 and to remit tax instalment deductions and prescribed payments system deductions - Whether director took reasonable steps to ensure company complied - Whether compliance by Commissioner with s 222AOE a condition precedent

Legislation:

Income Tax Assessment Act 1936

Result:

Appeal dismissed

Representation:

Counsel:

Plaintiff: Mr M T McCoy
Defendants: Mr B P Wheatley

Solicitors:

Plaintiff: Australian Taxation Office
Defendants: Murfett & Co

Case(s) referred to in judgment(s):

Deputy Commissioner of Taxation v Dunn & Ors, unreported; County Court of Victoria; No. 9607664; delivered 1997
Deputy Commissioner of Taxation v Thai (1993) 26 ATR 108
Fancourt v Mercantile Credits Pty Ltd (1983) 154 CLR 87
Re Scobie & Anor; ex parte Deputy Federal Commissioner of Taxation (1995) 95 ATC 4525

Case(s) also cited:

BCSP No - 4303 v Albion Insurance Company Limited [1982] VR 699
Coburn v Colladge [1897] 1 QB 702
Commissioner of Taxation v Winters (1997) 97 ATC 4967
Commonwealth Bank of Australia v Friedrich (1991) 9 ACLC 946
Daniels v Anderson (1995) 16 ACSR 607
Deputy Commissioner of Taxation v Pejkovic [2000] NSWSC 881
Fitzgerald v DFC of Taxation [1995] ATC 4587
Gates v WA & R J Jacobs Limited [1920] 1 Ch 567
Group Four Industries Pty Ltd v Brosnan (1992) 59 SASR 22
Harding v Lithgow Corporation (1937) 57 CLR 186
In re City Equitable Fire Insurance Company Ltd [1925] 1 Ch 407
Insurance Commissioner of State Motor Car Insurance Office v Moss [1969] VR 650
Middlesex County Council v Nathan (1937) 3 All ER 283
Permanent Building Society (In Liq) v Wheeler (1994) 11 WAR
Simpson v Deputy Federal Commissioner of Taxation (1996) 96 ATC 4661
Strauss v Rothfield [1945] VLR 263
Vines v Djordjevitch (1955) 91 CLR 512
Westpac Banking Corporation v Thorpe, unreported; SCt of WA; Library No 970465; 18 September 1997
Zuk v Miller [1957] SASR 25

COMMISSIONER REYNOLDS:

Introduction

This is an appeal by the first named defendant/appellant ("the first defendant") against the decision made by Deputy Registrar Harman on 26 September 2000 that summary judgment be entered for the plaintiff/respondent ("the plaintiff") against him in the sum of $105,334.05 together with interest thereon at the rate of 6 per cent per annum from 14 December 1999 to 26 September 2000. The Deputy Registrar also made an order that the first defendant pay costs fixed in the sum of $337.20. On appeal an order is sought that these orders be set aside and in lieu thereof the first defendant be given unconditional leave to defend with costs in the cause.
By a writ and statement of claim dated 7 December 1999 and filed on 14 December 1999 the plaintiff claimed to recover from the first defendant and Kevin Sydney Lloyd the second named defendant monies alleged to be owed pursuant to the Income Tax Assessment Act 1936 ("the Act"). The plaintiff alleges in the statement of claim that each of the defendants owe the sum of $173,838.17 together with interest thereon because each was a director of Citystone Nominees Pty Ltd ("Citystone") at all material times when Citystone failed to comply with an agreement made with the Commissioner pursuant to s 222ALA of the Act and when it also failed to remit tax instalment deductions ("TID deductions") and prescribed payments system deductions ("PPS deductions") to the Commissioner. At all material times Citystone was the trustee for the Hermross Family Trust ("the Trust"). Division 9, Part VI of the Act imposes penalties for directors of companies which fail to remit such deductions to the Commissioner, or which fail to comply with such an agreement made with the Commissioner.
One of the stated purposes of Div 9, Part VI of the Act is to ensure that a company either meets its obligations under certain provisions of the Act or goes promptly into voluntary administration under Part 5.3A of the Corporations Law or into liquidation (see s 222ANA(1) of the Act). Subsection 222ANA(2) of the Act provides that Div 9, Part VI of the Act imposes a duty on the directors to cause the company to do one of the things mentioned. The duty is enforced by penalties. A penalty recovered under Div 9, Part VI of the Act is applied toward meeting the company's obligations under the Act and amounts paid by the company will reduce the amount of the penalty. See s 222ANA(3) of the Act.
The sum of $173,838.17 claimed by the plaintiff is made up by the sum of $102,956.46 being the balance of the liability of each of the defendants as directors of Citystone under s 222AQA(2) of the Act in relation to an agreement made by and between Citystone and the Commissioner on 18 December 1998 ("the Agreement") whereby Citystone agreed to pay to the Commissioner certain amounts on certain days as specified in the Agreement for the purposes of discharging certain specified liabilities of Citystone under s 221F(5), s 221YHDC(2) and s 220AAM of the Act and the sum of $70,881.71 being the total unpaid amount of Citystone's liability under s220AAM of the Act in respect of TID deductions for December 1998 and January, February and March 1999 and PPS deductions for the same months. Such deductions were required to be remitted not later than the seventh day after the end of the month in which the deductions were made. See s 220AAM(1) of the Act. The plaintiff claimed from each of the defendants the sum of $35,303.77 in respect of the TID deductions and the sum of $35,577.94 in respect of the PPS deductions together totalling the sum of $70,881.71.
In the affidavit material filed on behalf of the plaintiff it is stated that on 18 April 2000 prescribed payments system credits together with interest thereon were allowed to Citystone for the year ending 30 June 1999 in the sum of $41,015.32 and that on 14 August 2000 the further sum of $27,488.79 was allowed for the year ending 30 June 1998 which together total the sum of $68,504.11. The prescribed payments system credits of $37,540 claimed by Citystone for the year ending 30 June 1997 have been or will be allowed to the beneficiaries of the Trust rather than Citystone. Subsequent to the writ and statement of claim being issued the plaintiff has credited each of the defendants with the amount of $68,504.11 against the amount owing under the Agreement as claimed in the writ and statement of claim of $102,956.46 and now only claims an outstanding balance of $34,452.35 from each of them in relation to the Agreement.
The plaintiff's claim against each of the defendants when he applied for summary judgment against them and now consists of two parts. The first part relates to the liability of each of them as directors of Citystone pursuant to the Agreement under s 222ALA of the Act in the sum of $34,452.35. The second part relates to the liability of each of them pursuant to the Act for deductions in the total sum of $70,887.71. These two sums together total the sum of $105,340.06. Summary judgment was entered against the first defendant in the sum of $105,334.05 which is $6.01 less than the sum of $105,340.06. There has obviously been some small miscalculation somewhere but it is of no significance at all and does not change the substance of the plaintiff's claim as outlined herein. The plaintiff's application for summary judgment against the second named defendant was dismissed and the second named defendant was given leave to defend.

The plaintiff's claim pursuant to the Agreement

An affidavit sworn on 26 April 2000 by Frank Arthur Ball ("Mr Ball") was filed on behalf of the plaintiff in support of the application for summary judgment ("Mr Ball's affidavit"). When Mr Ball's affidavit was sworn he was an APS Class 5 Australian Public Servant in the Australian Taxation Office employed as a Legal Collections Officer in the small business debt collection team at Northbridge in the State of Western Australia. A copy of the Agreement is attached to Mr Ball's affidavit. The Commissioner entered into the Agreement with Citystone pursuant to s 222ALA of the Act. Under the Agreement Citystone was required to pay to the Commissioner the total sum of $152,120.67 by way of a number of specified instalments on various specified dates. Clauses 5 and 6 of the Agreement provide as follows:
"5.If, on or after the date of this agreement, the Company becomes liable to pay an amount to the Commissioner under a remittance provision of the Act (not being an amount referred to in Clause 1), the Company will pay such amount to the Commissioner on or before the day on which the amount becomes due and payable under the Act.
6.If the Company contravenes a provision of clause 5, so much of the total of the specified amounts in Column 4 of the Schedule that remains unpaid become due and payable on the day of the contravention."
Citystone contravened cl 5 of the Agreement by failing to pay an amount owing to the plaintiff under a remittance provision of the Act by the due date for payment, namely 7 January 1999. Pursuant to s 222ALA(3) and (5) of the Act and cl 6 of the Agreement this was a contravention of a special condition which caused the total amount outstanding under the Agreement to become due and payable on the date of the contravention. As at the date of the contravention the amount payable under the Agreement was the sum of $114,956.46. As a consequence of this contravention of the Agreement by Citystone, pursuant to s 222AQA(2) of the Act each of the defendants became liable to pay by way of penalty an amount equal to the balance payable under the Agreement namely the sum of $114,956.46. This sum was later reduced to the sum of $102,956.46 as a result of Citystone making further payments totalling $12,000. I have already mentioned that this sum of $102,956.46 has now been further reduced by $68,504.11 to the sum of $34,452.35 as a result of the Commissioner allowing the company prescribed payments system credits together with interest thereon for the financial years ending 30 June 1998 and 1999.
The first defendant has not taken any issue with the evidence presented on behalf of the Plaintiff that the balance payable by Citystone under the Agreement is $34,452.35. However the first defendant says that he has a defence pursuant to s 222AQD of the Act and is not liable to the plaintiff for such sum because he took all reasonable steps to ensure that Citystone complied with the Agreement.
Before I set out the provisions of s 222AQD of the Act I should first make some reference to the provisions of s 222AQA of the Act. Subsection 222AQA(1) of the Act provides inter alia that if a company makes an agreement with the Commissioner under s 222ALA of the Act then the directors of the company from time to time must cause the company to comply with the agreement. Subsection 222AQA(2) of the Act provides inter alia that if the company contravenes the agreement then each person who is a director of the company at any time during the period beginning on the day when the agreement was made and ending on the day of the contravention is liable to pay to the Commissioner, by way of penalty, an amount equal to the balance payable under the agreement. In this particular case the first defendant was a director of Citystone when the agreement was entered into on 18 December 1998 and to and including 7 January 1999 the day of the contravention.
Section 222AQD of the Act provides the grounds for statutory defences to a director of a company in relation to s 222AQA of the Act. Section 222AQD of the Act provides as follows:
"Defences
222AQD. (1) This section has effect for the purposes of:
(a)proceedings to recover from a person a penalty payable under section 222AQA; or
(b)proceedings under section 222AQC against a person of the kind referred to in paragraph 222AQC(d).
(2) It is a defence if it is proved that, because of illness or for some other good reason, the person did not take part in the management of the company at any time, during the period referred to in subsection 222AQA(2), when the person was a director.
(3)It is also a defence if it is proved that:
(a)the person took all reasonable steps to ensure that the company complied with the agreement; or
(b)there were no such steps that the person could have taken.
(4)In subsection (3):
"reasonable" means reasonable having regard to:
(a)when, and for how long, the person was a director and took part in the management of the company; and
(b)all other relevant circumstances.
(5) If the person was a director of the company at the time when the agreement was made, he or she is not entitled to rely on a defence under subsection (2) or (3) unless it is also proved that, at that time, the person had reasonable grounds to expect, and did expect, that the company would comply with the agreement."
On 25 September 2000 the first defendant swore an affidavit ("the first defendant's affidavit") in opposition to the plaintiff's application for summary judgment. Paragraphs 3 to 9 inclusive of the first defendant's affidavit provide as follows:
"3.I took all reasonable steps to ensure that the Company complied with the Agreement which required payment of $152,120.67 in that:
3.1The Company was fully trading as at 18 December 1998 and I believed that it had the ability to meet its obligations to the plaintiff.
3.2I consulted the Company's accountant Charles Napoli of the firm Napoli Fernandes Moore. Mr Napoli informed me and I verily believe that:
(a)The Company was entitled to certain tax credits from the plaintiff which would substantially reduce the amount referred to in the Agreement.
(b)The amount of the tax credits would be well in excess of $100,000.00.
3.3The Company subsequently made payments of $12,000.00 in reduction of the said sum of $152,120.67, as referred to in paragraph 7 of the statement of claim.
4.In or about the first half of 1999 the Company encountered financial difficulties as a result of a number of factors including that a number of the Company's large contracts went over time and over budget resulting in the Company having to complete the work at a substantial loss. The unprofitable contracts included contracts with Pindan Constructions, BGC and Esslemont Builders (The Clarkson High School).
5.The Company ceased trading as at 30 June 1999 and an administrator was appointed to the Company on 24 January 2000.
6.The Company's creditors placed the Company in liquidation on about 19 July 2000. I am informed by Mr Mark Reilly the Company's liquidator and verily believe that he foresees no dividend to unsecured creditors whatsoever as a result of the high number of preferential creditors including unpaid employees remuneration including superannuation. Annexed hereto and marked "VLR 1" is a copy of report of administrators.
7.I have been informed by Mr Napoli who is handling the financial affairs of the Company for the financial years ending 30 June 1997, 30 June 1998 and 30 June 1999 that the Company is entitled to tax credits from the plaintiff totalling $105,888.00 which may be offset against the plaintiff's claim. Annexed hereto and marked "VLR 2" is a letter from Mr Napoli to my solicitors dated 16 June 2000 enclosing documents confirming the amount of $105,888.00 for tax credits.
8.By letter dated 13 August 1999 from the plaintiff to the Company the plaintiff confirmed an agreement to allow $105,888.00 tax credits against the amount claimed by the plaintiff. Annexed hereto and marked "VLR 3" is a copy of the said letter.
9.As a result of the agreement referred to in paragraph 8 above I have made payments to creditors and arranged the financial affairs of the Company and myself in reliance on the said agreement."
The first defendant relies on evidence in affidavits sworn by the second named defendant to support his position namely that he had reasonable grounds to expect and did expect that Citystone would comply with the agreement as provided in s 222AQD(5) of the Act. In an affidavit sworn by the second named defendant on 14 July 2000 the second named defendant stated inter alia:
"11.At the time I was appointed as a Director, I enquired of the Managing Director, Mr Vincent Leonard Rossi as to the liquidity of the company.
12.Vince Rossi stated to me that; 'Everything was OK and there would be no problems in settling all debts when the bulk of the work had been completed.' At the time, the company was responsible for the employment of over forty (40) people on approximately 16 building sites. The work atmosphere at that time was very active."
In an affidavit sworn on 25 September 2000 the second named defendant stated inter alia:
"3.I also expected the Company to be capable of meeting its obligations under the Agreement because at the time I signed the same, the Company was trading actively, and had approximately 16 ongoing building contracts. The Company was employing over 40 employees, and cash was coming in on a regular basis.
4.Further, the Company was owed substantial amounts by its builders, and at the time of signing, it was expected that there would be payments forthcoming from the Company's builders which would be sufficient to completely cover the debt under the Agreement."
The first defendant has not sought to raise any defence pursuant to s 222AQD(2) of the Act.
Given that the first defendant was a director when the Agreement was made and absent any defence pursuant to s 222AQD(2), for the first defendant to successfully make out a defence pursuant to s 222AQD it would be necessary for him to prove either one or both of the requirements provided in s 222AQD(3)(a) and (b) and in addition thereto it would also be necessary for him to prove the requirements provided in s 222AQD(5). Subsection 222AQD(5) by itself does not provide a defence for a person who was a director at the time the company entered into a s 222ALA agreement. In other words if a director on reasonable grounds expects a company to comply with such an agreement at the time the company enters into the agreement then that is not enough to give rise to a defence pursuant to s 222AQD of the Act. Such a director must also prove and all other directors appointed after such an agreement has been entered into must prove that he or she took all reasonable steps to ensure that the company complied with the agreement or that there were no such steps that he or she could have taken.
In the preamble of par 3 of the first defendant's affidavit he has stated that he took all reasonable steps to ensure that Citystone complied with the Agreement which required payment of $152,120.67. This statement on its face relates to s 222AQD(3)(a) of the Act. However in the sub-paragraphs immediately thereafter the first defendant has not set out any such step at all. Instead he has set out matters which relate to reasonable grounds to expect and that he did expect Citystone would comply with the Agreement at the time it was entered into. These matters relate to s 222AQD(5) of the Act and not to s 222AQD(3)(a) of the Act.
Paragraph 3 of the first defendant's affidavit requires further comment in the context of s 222AQD(5) of the Act. Subsection 222AQD(5) requires the reasonable grounds to expect and the expectation that the company would comply with the s 222ALA agreement to exist at the time that the company enters into the agreement, ie in this case 18 December 1998. Paragraph 3 of the first defendant's affidavit is vague and short on detail. The first defendant has failed to expressly state in par 3.2 of his affidavit or at all when he consulted the company's accountant Charles Napoli and was informed as stated in sub‑par 3.2(a) and (b) of his affidavit. Given that both the reasonable grounds to expect and the expectation that the company would comply must exist at the time that the Agreement was entered into this failure by the first defendant is significant.

Paragraph 7 of the first defendant's affidavit does not overcome the inadequacies in par 3 on the question of the time that the information was given to the first defendant by Mr Napoli on tax credits. Indeed the reference in par 7 to the financial year ending 30 June 1999 suggests that Mr Napoli told the first defendant that Citystone would be entitled to tax credits of $105,888 sometime after 30 June 1999. At best when pars 3 and 7 of the first defendant's affidavit are read together it could be concluded that Mr Napoli informed the first defendant that the tax credits "would substantially reduce the amount referred to in the Agreement" and "would be well in excess of $100,000" sometime before 30 June 1999. However it would not be open to conclude that the first defendant was so informed on or before 18 December 1998.
In my view par 4 of the first defendant's affidavit raises more questions than it provides answers. What financial difficulties were encountered by Citystone in or about the first half of 1999 and what was the extent of them in money terms? Further, when precisely or with some better precision than that given by the first defendant in his affidavit did these financial difficulties arise? The timing is important because as mentioned the relevant time for the purpose of s 222AQD(5) in this case is 18 December 1998 which is very close to the commencement of the first half of 1999. I consider it reasonable that large contracts going overtime and budgets being exceeded would rarely eventuate without some warning or prior indication of some sort. The first defendant's affidavit provides no detail at all on these important matters.
Subsection 222AQD(5) of the Act clearly means that there must be both reasonable grounds to expect and an actual expectation that the company would "fully" comply with the agreement. Therefore if there are only reasonable grounds to expect a "substantial" compliance with the agreement or if there is only an expectation that the agreement will be "substantially" complied with then that is not good enough to satisfy the requirements in s 222AQD(5).
Although the first defendant states in par 3.1 of his affidavit that Citystone was trading as at 18 December 1998 he has failed to give any details of monetary amounts on revenue, expenses and cash on hand of Citystone leading up to 18 December 1998 or as at 18 December 1998. The first defendant has also failed to give any details on what the financial projections were if any for Citystone as at 18 December 1998 for the times or sometime about the times when Citystone would be required to make payments pursuant to the Agreement.
Section 222AQD(5) requires a director to prove not only that he or she expected that the company would comply with the agreement but also that he or she had reasonable grounds for having such an expectation. Even if a finding was made that the first defendant did have such an expectation when Citystone entered into the Agreement it would also be necessary for him to prove on balance that there were reasonable grounds for him to have held such an expectation in order for him to satisfy the requirements of s 222AQD(5). When considering whether or not there were reasonable grounds for him to have held such an expectation it would be necessary to consider the combination of all of the relevant information that he took into account. Information of the sort stated by the first defendant in pars 3 and 4 of his affidavit would clearly be relevant.
In my view the combination of the statements by the first defendant in his affidavit on tax credits and the financial position of Citystone is so vague and short on important detail that it does not provide the basis to conclude that if the plaintiff's claim went to trial he would have a real prospect of successfully arguing that reasonable grounds existed for him to have held an expectation that Citystone would comply with the Agreement.
It is also my view that the vagueness and lack of detail of the first defendant's affidavit is not overcome by the statements made by the second named defendant in his affidavits. First, it seems that the second named defendant relied in part on what the first defendant told him about the financial position of Citystone. Secondly, what the first defendant said to the second named defendant may be relevant when considering whether the first defendant actually held a particular expectation at a particular time but it does not provide a ground or add any weight to any ground for holding the expectation. Thirdly, it can't be concluded from the first defendant's affidavit that he formed an expectation that Citystone would comply with the Agreement for all of the same reasons as the second named defendant. Fourthly, the statements by the second named defendant are in their own right somewhat vague and short on the same type of financial detail that I have already mentioned is missing from the first defendant's affidavit.
My decision in this case is not primarily based on the view that the first defendant has no real prospect of successfully arguing that he has satisfied the requirement of s 222AQD(5) of the Act that his expectation was based on reasonable grounds. In this case the result in relation to the plaintiff's claim based on the Agreement would be the same no matter what order the requirements of s 222AQD(3) and s 222AQD(5) were considered.
In relation to s 222AQD(3) I repeat the view I have already expressed namely that although the first defendant has stated in par 3 of his affidavit that he took all reasonable steps to ensure that Citystone complied with the Agreement he has actually failed to give any detail at all of any such step actually taken by him for this purpose. He has not suggested that there were no such steps that he could have taken. At best he has really only stated that when Citystone entered into the Agreement he expected on reasonable grounds that Citystone had the financial capacity to make the necessary payments pursuant to the Agreement.
Subsection 222AQD(3) does not require a director to have a belief or expectation on reasonable grounds that the company has the capacity to pay. That is covered by s 222AQD(5). Section 222AQD(3) requires the director to take all reasonable steps to ensure that the company makes all of the payments required by the agreement or prove on balance that there were no such steps that he or she could have taken.
Even if the first defendant consulted Mr Napoli before the first time that Citystone failed to comply with the Agreement and was told that Citystone had tax credits that "would substantially reduce the amount referred to in the Agreement" or "would be well in excess of $100,000" it would not be open to argue on the strength of this that such a consultation amounted to a step to ensure that Citystone complied with the Agreement. Such evidence simply amounts to an expression in approximate terms by Mr Napoli of his view of Citystone's entitlement to tax credits. There is no mention at all in the first defendant's affidavit that:
1.he spoke with Mr Napoli before the Agreement was entered into or during the operation of the Agreement before any particular payment was required to be made about Citystone complying with the Agreement; or
2.that he gave any instruction to any person including Mr Napoli for the purpose of ensuring that Citystone made all of the payments that it was required to make under the Agreement; or
3.that he carried out some inquiry from which he ascertained that some arrangement was in place to ensure that Citystone made all of the payments required by the Agreement.
It has been submitted on behalf of the first defendant that in determining the reasonableness of his conduct in the context of the requirement of s 222AQD(3)(a) it is necessary by virtue of s 222AQD(4)(b) to consider all other relevant circumstances. I agree with this as a matter of construction.
It is then submitted that two other relevant circumstances that should be taken into account when considering whether or not the first defendant took all reasonable steps to ensure that Citystone complied with the Agreement are first, that he believed Citystone was entitled to tax credits which would satisfy the plaintiff's claim and secondly, that on 29 July 1999 the plaintiff agreed to a settlement proposal regarding Citystone's outstanding tax liability as a result of which the first defendant believed that Citystone would be entitled to tax credits of $105,888.00 in satisfaction of Citystone's arrears of income tax. In my view there is no merit in this second limb of the submission.
The reference to "all other relevant circumstances" in s 222AQD(4)(b) clearly relates to s 222AQD(3)(a) of the Act. It therefore follows that for a circumstance to be a relevant circumstance under s 222AQD(4)(b) and to be taken into account when deciding whether a director took all reasonable steps to ensure that the company complied with the agreement as provided in s 222AQD(3)(a) such circumstance must have existed at or before the time when the company was required to make the payment under the agreement which it failed to make.
It follows from these comments on the proper construction of s 222AQD(3)(a) and (4)(b) that this second limb cannot succeed simply because for reasons already given the first defendant did not take any step to ensure that Citystone complied with the Agreement. Therefore in this particular case reasonableness is not an issue and so s 222AQD(4)(b) does not apply. Even if the first defendant did take some step to ensure that Citystone complied with the Agreement the evidence does not support either or both of the circumstances referred to in the second limb of the submission being taken into account to determine whether he took all reasonable steps to ensure that Citystone so complied.
The Agreement required Citystone to make various specified payments on 7 January, 8 February, 8 March, 7 April, 7 May, 7 June and 8 June 1999. In addition to these payments cl 5 of the Agreement also required Citystone to pay every amount to the Commissioner under a remittance provision of the Act when it became due and payable. Citystone contravened the Agreement on 7 January 1999.
I repeat all of my comments on the vagueness and lack of detail of the first defendant's evidence in relation to tax credits and in particular his failure to indicate when he consulted with Mr Napoli as referred to in par 3 of his affidavit. On the evidence presented by the first defendant it would not be open to find that Mr Napoli, informed him on or before 7 January 1999 that Citystone's tax credits "would substantially reduce the amount referred to in the Agreement" or " would be well in excess of $100,00". Therefore on the proper construction of s 222AQD(3)(a) and (4)(b) and the evidence presented it would not be open for the first defendant to argue that the information he says he was given by Mr Napoli as stated in par 3 of his affidavit can be taken into account as a relevant circumstance for the purpose of deciding whether he took all reasonable steps to ensure that Citystone complied with the Agreement.
Further, the first defendant's affidavit does not support the submission that there were reasonable grounds for the first defendant to believe that Citystone was entitled to tax credits which would have satisfied the amounts payable under the Agreement in full. As already mentioned the first defendant has only given evidence that he was told that Citystone was entitled to tax credits that "would substantially reduce the amount referred to in the agreement" and "would be well in excess of $100,000". The evidence on Citystone's financial position is vague and short on detail. Further, when relating this evidence on the quantum of the tax credits to Citystone complying with the Agreement it also needs to be borne in mind that the Agreement went further than simply requiring Citystone to make certain specified payments on or before certain specified dates as set out in the schedule thereto. I have already mentioned that the Agreement also provided that if Citystone became liable to pay an amount under a remittance section of the Act on or after the date of the Agreement then it would do so as required by the Act and any failure to do so would result in the total amount in the schedule then outstanding becoming due and payable.
I will now comment on the second other relevant circumstance that counsel for the first defendant has submitted should be taken into account namely the express reference to tax credits of $105,880 in the plaintiff's agreement to the settlement proposal regarding Citystone's outstanding tax liability. The first defendant has attached to his affidavit a copy letter dated 13 August 1999 from an officer of the plaintiff to Citystone as trustee for the Trust. This letter sets out an arrangement agreed by and between the parties at a meeting on 29 July 1999. The letter provides inter alia:
"Arrangement agreed to is as follows:
-Proceeds from sale of Lot 8 Fraser Lane Strata Plan 9223 (South Perth) to be paid to Australian Taxation Office at settlement. An amount of $80,000.00 is expected;
-PPS credits from 1997, 1998 and 1999 Income Tax returns totalling $105,888.00 to be allocated to arrears;
-Balance of approximately $20,000.00 to be paid in full from other income received by no later than 30/9/99;
-Any current liabilities to be paid as and when due.
Please ensure Income Tax return for 1999 is lodged immediately so that credits available can be accessed. In addition, relative authorities are enclosed authorising transfer of various funds towards arrears. Please sign and return immediately. Failure to comply with any of the above conditions will result in further action being taken without notice."
I have already mentioned that the schedule to the Agreement required Citystone to make various specified payments on various specified days between 7 January 1999 and 8 June 1999 inclusive totalling $152,120.67. Citystone first contravened the Agreement on 7 January 1999. While the contravention of the Agreement on 7 January 1999 resulted in the total balance outstanding at that time becoming due and payable it could also be said that by 8 June 1999 Citystone had comprehensively failed to comply with the Agreement.
The key reason why this part of the submission relating to the settlement must fail is that the plaintiff's agreement to a settlement proposal on 29 July 1999 as set out in the plaintiff's letter dated 13 August 1999 was clearly a circumstance which did not exist before 7 January 1999 or on 7 January 1999 when Citystone contravened the Agreement. Therefore it is simply not arguable on the proper construction of s 222AQD(3)(a) and (4)(b) that the plaintiff's agreement to the settlement proposal on 29 July 1999 and its reference to tax credits of $105,888 is a relevant circumstance under s 222AQD(4)(b) for the purpose of considering whether the first defendant took all reasonable steps to ensure that Citystone complied with the Agreement as required by s 222AQD(3)(a).
For all these reasons I conclude that in relation to the plaintiff's claim against the first defendant based on the Agreement there is no arguable issue of law or fact for resolution. See Fancourt v Mercantile Credits Pty Ltd (1983) 154 CLR 87 at 99.
At the time of the contravention of the Agreement the sum of $114,956.46 was outstanding. Since then Citystone made payments of $12,000 and became entitled to tax credits of $27,488.79 for the year ending 30 June 1998 and $41,015.32 for the year ending 30 June 1999 all of which amount to the total sum of $80,504.11. The balance outstanding is therefore the sum of $34,452.35 for which the first defendant is liable by way of penalty pursuant to s 222AQA(2) of the Act.

Citystone's failure to remit tax instalment deductions and prescribed payments system deductions

Citystone failed to remit TID deductions to the Commissioner under Div 2 of Part VI of the Act for the months of December 1998 to March 1999 inclusive. The TID deductions for this period total $35,303.77. Citystone also failed to remit PPS deductions to the Commissioner under Div 3A of Part VI of the Act for the months of December 1998 to March 1999 inclusive. The PPS deductions for this period total $35,577.94.
Various TID deductions and PPS deductions were required to be remitted not later than the seventh day after the end of the month in which the deductions were made. Pursuant to s 222AOA(2) and (3) of the Act, the first deduction day was the earliest day in which Citystone made a TID deduction or PPS deduction with the due date being the seventh day after the month in which the deduction was made. Therefore deductions in March 1999 should have been remitted no later than 7 April 1999.
Subsection 222AOB(1) of the Act provides that persons who are directors of a company from time to time on or after the first deduction day must cause the company to do at least one of the following on or before the due date:
(a)comply with Div 1AAA in relation to each TID deduction and PPS deduction (ie remit the deduction);
(b)make an agreement with the Commissioner under s 222ALA of the Act;
(c)appoint an administrator of the company under s 436A of the Corporations Law;
(d) begin to wind up within the meaning of the Corporations Law.
If s 222AOB of the Act is not complied with on or before the due dates, each person who is a director, from the first deduction day to the due date, is liable to pay the Commissioner, by way of penalty, an amount equal to such unpaid deduction. See s 222AOC of the Act.
Citystone did not do any of the things required to be done by s 222AOB of the Act on or before the due dates.
Subsections 222ANA(1) and (2) and s 222AOE of the Act provide as follows:
"Division 9-Penalties for directors of non-remitting companies
Subdivision A-Object and interpretation
Object and outline
222ANA. (1) The purpose of this Division is to ensure that a company either meets its obligations under Division 2, 3A, 3B, 4 or 8, or goes promptly into voluntary administration under Part 5.3A of the Corporations Law or into liquidation.
(2)The Division imposes a duty on the directors to cause the company to do so. The duty is enforced by penalties. However, a penalty can be recovered only if the Commissioner gives written notice to the person concerned. The penalty is automatically remitted if the company meets its obligations, or goes into voluntary administration or liquidation, within 14 days after the notice is given.
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Commissioner must give 14 days' notice before recovering penalty
222AOE. The Commissioner is not entitled to recover from a person a penalty under this Subdivision until the end of 14 days after the Commissioner gives to the person a notice that:
(a)sets out details of the unpaid amount of the liability referred to in section 222AOC; and
(b)states that the person is liable to pay to the Commissioner, by way of penalty, an amount equal to that unpaid amount, but that the penalty will be remitted if, at the end of 14 days after the notice is given:
(i)the liability has been discharged; or
(ii)an agreement relating to the liability is in force under section 222ALA; or
(iii)the company is under administration within the meaning of the Corporations Law; or
(iv)the company is being wound up."
The first defendant did not cause Citystone to do, and Citystone did not do, any of the things mentioned in s 222AOE(b) within 14 days of the notice being given.
Paragraphs 17 and 19 of Mr Ball's affidavit provide as follows:
"17.I am informed and verily believe that on 18 May 1999, Dennis Morrison of the Small Business Debt Collection Team of the Australian Taxation Office issued director penalty notices on behalf of the Plaintiff to the Defendants pursuant to section 222AOE of the Act.
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19.Each of the Notices specified the liability of the Company and within 14 days of service of each Notice, required the Defendant to either cause the Company to discharge such liability, enter into an Agreement under Section 222ALA of the Act in relation to such liability, appoint an Administrator to the Company or wind up the Company."

Copies of the relevant notices are attached to Mr Ball's affidavit. The notice to the first defendant in relation to the TID deductions provides that a total amount of $40,658.25 is payable for the months December 1998 to April 1999 inclusive. The amount for April 1999 is $5,354.48. The plaintiff's claim against the first defendant is limited to the TID deductions for December 1998 to March 1999 inclusive which total $35,303.77. The notice to the first defendant in relation to the PPS deductions provides that a total amount of $39.004.84 is payable for the months December 1998 to April 1999 inclusive. The amount for April 1999 is $3,426.90. The plaintiff's claim against the first defendant is limited to the PPS deductions for December 1998 to March 1999 inclusive which total $35,577.94. No issue has been made about the total amount sought on the notices being different to the total amounts claimed. The total amount on each of the notices for the months of December 1998 to March 1999 is the same as the total amount claimed.
It has been submitted on behalf of the first defendant that:
(1) to the extent that the summary judgment includes the sum of $70,887.71 for penalties in relation to the deductions it is irregular because it is not pleaded in the statement of claim that the plaintiff had given a mandatory 14 days notice to the first defendant and that the first defendant had failed to comply with the notice before the plaintiff has sought to recover a penalty pursuant to s 222AOE of the Act with the result that the plaintiff has not pleaded a cause of action against the first defendant. Counsel for the first defendant has also referred to s 222ANA(2) of the Act in support of this submission; and
(2) that the notices and the non-compliance with the notices in relation to both the TID deductions and the PPS deductions are material and essential facts for liability of the first defendant and must be pleaded in the statement of claim in accordance with O 20 r 8 of the Rules of the Supreme Court WA 1971 ("the SC Rules").
Order 20 r 8 of the SC Rules provides as follows:
"8 (1)   Subject to the provisions of this Rule, and Rules 11, 12 and 13, every pleading must contain, and contain only, a statement in a summary form of the material facts on which the party pleading relies for his claim or defence, as the case may be, but not the evidence by which those facts are to be proved, and the statement must be as brief as the nature of the case admits.
(2)      Without prejudice to paragraph (1), the effect of any document or the purport of any conversation referred to in the pleading must, if material, be briefly stated, and the precise words of the document or conversation shall not be stated, except in so far as those words are themselves material.
(3)      A party need not plead any fact if it is presumed by law to be true or the burden of disproving it lies on the other party, unless the other party has specifically denied it in his pleading.
(4)      A statement that a thing has been done or that an event has occurred, being a thing or event the doing or occurrence of which, as the case may be, constitutes a condition precedent necessary for the case of a party is to be implied in his pleading."
Two questions arise from all of this. First, whether the statutory requirement in s 222OAE to give notice is a condition precedent as provided in O 20 r 8(4) of the SC Rules and secondly whether the plaintiff's statement of claim must specifically include the fact of the Commissioner's action pursuant to s 222OAE.
A condition precedent includes a condition imposed by statute, the fulfilment of which is necessary before a party becomes entitled to sue. It is not a substantive or constituent element of a cause of action. A thing or event the doing or occurrence of which is a condition precedent does not need to be alleged and is implied in the relevant party's pleading. See Bullen & Leake & Jacob's Precedents of Pleadings 12th Edition p 42.
In my view in a case such as this the plaintiff's cause of action arises from the combination of the failure by the first defendant as a director of Citystone to cause it to do at least one of the things required in s 222AOB(1) and the operation of s 222AOC. The plaintiff's cause of action does not arise wholly or partly from the giving of the notice pursuant to s 222AOE of the Act. I note that this view is consistent with the view expressed by Eckhardt J in Deputy Commissioner of Taxation v Dunn & Ors, unreported; County Court of Victoria; No. 9607664; delivered 1997.
In Re Scobie & Anor; ex parte Deputy Federal Commissioner of Taxation (1995) 95 ATC 4525 Cooper J in the Federal Court held that:
"The obvious purpose of Division 9 … is to force directors to address the issue of compliance before the due date and to take whatever action is appropriate to bring about compliance. It is entirely contrary to the purpose of the Division to construe the requirements of compliance on the basis that directors are free to ignore the continuing statutory obligation imposed upon them by s 222AOB(1) until receipt of the notice."
Section 222AOB and s 222AOC are in Div 9 of the Act.
In my view the fact that the plaintiff's statement of claim makes no mention that the plaintiff gave a notice to the first defendant pursuant to s 222AOE and that the first defendant failed to comply with such notice does not make the statement of claim defective.
In my view this case can be distinguished from the authority of Deputy Commissioner of Taxation v Thai (1993) 26 ATR 108 which was referred to by counsel for the first defendant in support of his submission on this point. That case was concerned with different provisions of the Act where the service of a notice of assessment was an integral part of a person's liability to pay tax. In this case the notice pursuant to s 222AOE of the Act is not an integral part of a person's liability to pay a penalty. All of the necessary elements the Commissioner must prove to establish a director's liability to pay a penalty precede such a notice. In other words the notice is a condition precedent for the Commissioner to recover a penalty for which a person is liable.
Counsel for the first defendant has further submitted that proof of service of a notice pursuant s 222AOE is also essential and that it has not been proved by admissible evidence in this case. In particular it has been submitted that pars 17 and 19 of Mr Ball's affidavit in relation to service of the notices is hearsay and in admissible. It should be noted that Mr Ball has given the name of the person who issued the notices to the first defendant. He has also given sufficient detail of the person's work position to enable the person to be located. It has been open for the first defendant and/or his solicitors to contact this person about the service of the notices if he and/or they so desired. The first defendant's affidavit does not take any issue with the plaintiff's assertion that the first defendant was properly served with the notices for the TID deductions and the PPS deductions on 18 May 1999. Further, the first defendant's defence does not raise any allegation that the plaintiff has commenced these proceedings without complying with the notice requirement in s 222AOE of the Act.
Given all of this I think that the learned Deputy Registrar was correct to proceed and consider the plaintiff's application for summary judgment on the basis that the first defendant was properly served on 18 May 1999 with the necessary notices pursuant to s 222AOE on TID deductions and PPS deductions.
Subsection 222AOJ(1)(a), (3) and (4) provide as follows:
"222AOJ. (1) This section has effect for the purposes of:
(a)proceedings to recover from a person a penalty payable under this Subdivision; or
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(3)It is also a defence if it is proved that:
(a)the person took all reasonable steps to ensure that the directors complied with subsection 222AOB(1); or
(b)there were no such steps that the person could have taken.
(4)In subsection (3):
"reasonable" means reasonable having regard to:
(a)when, and for how long, the person was a director and took part in the management of the company; and
(b)all other relevant circumstances."
It has been submitted on behalf of the first defendant that he has a defence pursuant to s 222AOJ(3) on the basis that his conduct was reasonable because first, he held a belief based on reasonable grounds that Citystone was not liable to the plaintiff as it was entitled to tax credits which would offset any liability and secondly, the settlement agreement reached on 29 July 1999 and set out in the plaintiff's letter dated 13 August 1999 led the first defendant to believe that Citystone was entitled to tax credits of at least $105,888 in reduction of the income tax arrears of Citystone.
The reference to "all other relevant circumstances" in s 222AOJ(4)(b) clearly relates to s 222AOJ(3)(a) of the Act. It therefore follows that for any other relevant circumstance to be taken into account when considering whether a person took all reasonable steps to ensure that the directors complied with s 222AOB(1) such circumstance must exist at or before the time when it was necessary for the compliance with s 222AOB(1).
In my view it is simply not open on the evidence presented to argue on behalf of the first defendant that he took some step to ensure that Citystone complied with the remittance provisions of the Act. It has not been argued on behalf of the first defendant that there were no such steps that he could have taken. Therefore in this particular case reasonableness is not an issue and so s 222AOJ(4)(b) does not apply. Even if the first defendant did take some step to ensure that the directors complied with s 222AOB(1) the evidence does not support either or both of the circumstances referred to on behalf of the first defendant being taken into account to determine whether he took all reasonable steps to ensure that the directors so complied.
The last of the four consecutive months for which the plaintiff has claimed amounts in relation to remittances for TID deductions and PPS deductions and has also alleged that nothing else was done pursuant to s 222AOB(1) of the Act is March 1999. On the evidence presented by the first defendant it would not be open to find that the first defendant first became aware of a figure of $105,888 for tax credits before 29 July 1999 when the settlement arrangement was made and total tax credits were quantified in the amount of $105,888. Both the day of the meeting and the plaintiff's letter were well after March 1999.
Therefore on a proper construction of s 222AOJ(3)(a) and (4)(b) and the evidence presented it is not open for the first defendant to argue that a belief tax credits amounted to $105,888 as a result of the settlement arrangement made on 29 July 1999 and as set out in the plaintiff's letter dated 13 August 1999 can be taken into account as a relevant circumstance for the purpose of deciding whether he took all reasonable steps to ensure that the directors of Citystone complied with s 222AOB(1) of the Act in December 1998 and January to March inclusive 1999.
For the purpose of considering whether the first defendant has a defence pursuant to s 222AOJ(3)(a) of the Act it would also not be open to take into account that he was informed by Mr Napoli that the amount of the tax credits "would substantially reduce the amount referred to in the Agreement" and "would be well in excess of $100,000" as stated in pars 3.2(a) and (b) of his affidavit because as already mentioned he has not given any evidence on when he contacted Mr Napoli and was given this information. I repeat everything that I have said about the vagueness and lack of detail in the first defendant's affidavit on the financial position of Citystone. In light of par 4 of the first defendant's affidavit I think that there is an even greater need for more evidence on Citystone's financial position in relation to the deductions than the Agreement because the remittance of the deductions was required in the first three months of 1999 and the first defendant has referred to financial difficulties and contracts not being completed on time in or about the first half of 1999.
Even if it is accepted that the first defendant had a belief as early as December 1998 and continued to hold it until 7 April 1999 that the amount of tax credits "would substantially reduce the amount referred to in the Agreement" or " would be well in excess of $100,000" or was $105,888 it must be borne in mind that the TID deductions and the PPS deductions for the months of December 1998 to March 1999 inclusive were at all times additional to the amount still outstanding under the Agreement entered into on 18 December 1998. It is simply not open on all of the evidence presented to submit that it could have been reasonably believed at all times during the period December 1998 to 7 April 1999 inclusive when compliance with s 222AOB(1) was necessary that tax credits could have covered the entire liability of Citystone and in turn the entire liability of the first defendant to the plaintiff in relation to both the Agreement and the TID deductions and the PPS deductions.

Conclusion

For all these reasons I am of the view that the learned Deputy Registrar was right when he granted summary judgment in favour of the plaintiff against the first defendant. It follows that the first defendant's appeal should be dismissed. I will hear from the parties on the wording of the final orders and the questions of costs.