Deputy Commissioner of Taxation v Arnold & Ors
[2007] VSC 75
•23 March 2007
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMON LAW DIVISION
No. 4212 of 2004
| DEPUTY COMMISSIONER OF TAXATION OF THE COMMONWEATH OF AUSTRALIA | Plaintiff |
| v | |
| ERIKA GERTRUD ARNOLD and ROBERT ARNOLD and MARTIN O'CONNOR AND PARTNERS (the firm) | Defendants Third Party |
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JUDGE: | WILLIAMS, J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 13 March 2007 | |
DATE OF JUDGMENT: | 23 March 2007 | |
CASE MAY BE CITED AS: | Dep Comm of Taxation v Arnold & Ors | |
MEDIUM NEUTRAL CITATION: | [2007] VSC 75 | |
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Income Tax – Collection and recovery – Recovery from directors of penalties relating to company’s failure to remit withholding tax – Notice of Penalties – Whether the directors given a Notice under s 222AOE of the Income Tax Assessment Act 1936 (Cth) – Notice addressed incorrectly – Income Tax Assessment Act 1936 (Cth) s 222AOE and s 222AOF.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Ms C Mavroudis | ATO Legal Services Branch |
| For the Defendants For the Third Party | No appearance Mr P Solomon | DLA Phillips Fox |
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TABLE OF CONTENTS
The proceedings................................................................................................................................. 2
Relevant interlocutory history.................................................................................................... 2
Findings of fact................................................................................................................................... 3
The statutory scheme......................................................................................................................... 7
The issues raised by the defence..................................................................................................... 8
Appointment of administrator.................................................................................................... 8
“Giving” a notice under s 222AOE............................................................................................. 8
The 7 October 2002 notices........................................................................................................ 9
The “reasonable steps” defence................................................................................................ 11
Estoppel........................................................................................................................................ 12
Misleading and deceptive conduct........................................................................................... 13
The Commissioner’s claim............................................................................................................. 13
The third party proceedings........................................................................................................... 13
Orders................................................................................................................................................. 13
HER HONOUR:
The proceedings
By her Further Amended Statement of Claim filed on 13 March 2007, the plaintiff (”the Commissioner”) claims that the defendants (individually “Mrs Arnold” and “Mr Arnold”) are indebted to the Commonwealth of Australia in the sum of $626,748.60. The alleged debt represents the sum of penalties relating to amounts of Pay As You Go tax withheld under the Taxation Administration Act 1953 (Cth) by Victorian Snow Resorts Pty Ltd (in liquidation) (“the company”) for the period from 1 September 2001 to 30 September 2003.
The defendants in turn have brought proceedings against the third party firm of accountants. They seek damages for alleged negligent breach of a retainer to advise in relation to “accounting, taxation and compliance matters” and, in particular, in relation to the defendants’ liabilities in respect of penalty notices served upon them by the Commissioner under s 222AOE of the Income Tax AssessmentAct 1936 (Cth) (“the ITAA”).
The defendants have not appeared to defend the Commissioner’s proceedings or to prosecute their own against the third party.
Relevant interlocutory history
On 23 June 2006, the Master set down the proceedings for trial commencing on 13 March 2007. The Commissioner’s claim was to proceed by affidavit and the third party proceeding by viva voce evidence. The Master gave directions for interlocutory steps in each of the proceedings. She ordered that affidavits be filed and served and outlines of evidence and submissions be provided in the third party proceeding.
On 6 February 2007, the Master granted the defendants’ solicitors leave to cease to act. The Court record notes that the defendants were present at the hearing of the solicitors’ application. A notice filed on 12 February 2007 by the defendants’ former solicitors stated that the last known address of the defendants was in East Malvern, Victoria.
Mr Arnold signed a form dated 7 February 2007 which indicated the defendants’ readiness for trial.
However, the defendants have not served any affidavits in response to the nine filed and served by the Commissioner. Each of the defendants did, however, make an affidavit, affirmed on 13 April 2005 and filed in opposition to an application for summary judgement made by the Commissioner.
The defendants have also failed to comply with orders to supply outlines of evidence and submissions in the third party proceedings. The third party issued a summons on 28 February 2007 seeking the dismissal of the claim against it on the grounds of the defendants’ failure to comply with the Master’s directions or, alternatively, for want of prosecution. That summons was adjourned to the trial date and the third party now does not wish to pursue its application. It seeks an order that the summons be dismissed.
Findings of fact
Having taken into account the contents of the affidavits relied upon by the Commissioner and the defendants’ 13 April 2005 affidavits in response to the Commissioner’s summary judgment application, I am satisfied of the following facts:
(a)On 22 March 2002 each of the defendants was appointed a director of the company and continues to be a director.
(b)The address for service of each of the defendants recorded by the Australian Securities and Investment Commission (“ASIC”) at all relevant times was and is “Unit 6, 1 Balfour Street, Toorak, Vic 3142”.
(c)The third party acted at all relevant times from early October 2002 as the agent of the defendants, retained by them to act as their representative in dealings with Australian Taxation Office (“the ATO”) in relation to their liabilities and those of the company.
(d)The company withheld amounts totalling $738,146 for the purposes of Division 12 in Schedule 1 to the Taxation Administration Act 1953 (Cth) for the period from 1 September 2001 to 30 September 2003 inclusive.
(e)On 7 October 2002, Lance Raymond O’Neill, an officer employed by the ATO sent a notice under s 222AOE of the ITAA to Mrs Arnold, under cover of a letter dated 7 October 2002, by pre-paid post addressed to her at “Unit 6, 1 Balfour Street, Toorak, Vic 3412”. Mrs Arnold’s address, as it appeared in the ASIC records at the time, correctly showed the Toorak Victoria postcode as “3124”. The digits were transposed on the envelope containing the 7 October 2002 notice sent by Mr O’Neill. The notice stated Mrs Arnold’s liability under s 222AOC and, or s 222AOD of the ITAA, by way of penalty for an amount equal to the amounts withheld by the company for the period from 1 September 2001 to 31 May 2002, if the condition specified in s 222AOE and set out in the notice were not met.
(f)A notice in similar form, also dated 7 October 2002 and claiming the same amount with a covering letter in similar form, was sent by Mr O’Neill to Mr Arnold in an envelope bearing the same address, including the same incorrect postcode “3412”.
(g)Mr O’Neill is not aware of either of the 7 October 2002 notices being returned to the ATO as undelivered mail and there is no evidence that they were.
(h)On 16 October 2002, Mr O’Neill received a facsimile transmission from Mr Arnold. The facsimile stated that Mr Arnold gave permission for Mrs Veronica Hammat to “be a contact person” on his behalf. It made reference to Mr Arnold’s understanding that there was an arrangement in place involving the company and the ATO relating to a payment schedule in respect of the company’s taxation liabilities.
(i)On 17 October 2002 Mr O’Neill had telephone conversations in which the 7 October 2002 notices were discussed with Mr Arnold, Mrs Hammat and Mr Danny Brady of the third party which was representing Mr and Mrs Arnold. Mr O’Neill made a contemporaneous electronic record of the conversations in the ATO’s Receivables Management System database.
(j)On 22 October 2002, Mr O’Neill wrote to the directors of the company rejecting an offer relating to the payment of amounts owing to the ATO, made by them by a facsimile transmission of the same date from Mr Brady. The letter referred to the Directors Penalty Notices issued on 7 October 2002 (subsequently using the acronym “DPN”) and Mr O’Neill noted that it would not be possible for a Payment Agreement to be executed before 23 October 2002 “to avoid the directors assuming personal liability for the amount on the DPN.”
(k)23 October 2002 was the due date for payment of the amounts listed in the 7 October 2002 Directors’ Penalty Notices relating to Mr and Mrs Arnold.
(l)Further Director Penalty Notices, similar in form to those of 7 October 2002, were served upon each of the defendants by pre-paid post at the address listed as their residential address in ASIC records:
(i) notices dated 7 May 2003, stating their respective liabilities by way of penalty for an amount equal to the amounts withheld by the company for the period from 1 June 2002 to 28 February 2003;
(ii) notices dated 26 August 2003, stating their respective liabilities by way of penalty for an amount equal to the amounts withheld by the company for the period from 1 June 2003 to 31 July 2003;
(iii) notices dated 7 October 2003, stating their respective liabilities by way of penalty for an amount equal to the amounts withheld by the company for the period from 1 April 2003 to 31 May 2003; and
(iv) notices dated 27 November 2003, stating their respective liabilities by way of penalty for an amount equal to the amounts withheld by the company for the period from 1 September 2003 to 30 September 2003;
(m)The Commissioner commenced the proceedings by a writ filed on 22 January 2004, claiming the sum of $673,559.74 by way of penalties for which each of the defendants was alleged to be liable under s 222AOC and, or s 222AOD of the ITAA.
(n)There were continuing negotiations between the defendants, the third party as their representative, and the Commissioner with respect to payment of the outstanding amounts up to about 24 February 2004 when Mr Len Crisp of RSM Bird Cameron Partners was appointed as administrator to the company.
(o)Mr Crisp was subsequently appointed as liquidator of the company on 30 September 2004.
(p)The company has made part payments to the Commissioner and has had an income tax credit and what is known as an “energy grant credit” applied to its debt, reducing it to $626,748.60 as follows:
(1) energy grant credit of $5,912.17 on 6 February 2004;
(2) part payment of $15,399.57 on 10 June 2004;
(3) part payment of $19,600.43 on 10 June 2004; and
(4) income tax credit of $5,898.97 on 28 December 2006.
(q)The defendants, who claim Swiss citizenship, each left Australia for Switzerland on 13 February 2007. Records obtained by the Commissioner’s solicitors from the Department of Immigration indicate their stated intention to remain away from Australia for one year, mostly in Switzerland in Mrs Arnold’s case, and in France, in Mr Arnold’s.
(r)The defendants failed to cause the company to take any of the steps described in s 222AOB of the ITAA before any of the dates upon which the amounts withheld were due to be paid to the Commissioner.
(s)Neither of the defendants has paid the sum of $626,748.60 to the Commissioner and it remains outstanding.
The statutory scheme
The statutory scheme in the ITAA imposes a penalty upon a director of a company which the director has not caused to comply with s 222AOB in relation to the amount of tax withheld under Division 12 in Schedule 1 to the Taxation Administration Act 1953 (Cth).
Section 222AOB obliges a director to cause the company to remit the tax withheld to the Commissioner, to enter a payment agreement with her under s 222ALA, to appoint an administrator or to begin its winding up.
Section 222AOC imposes a penalty equal to the amount withheld upon a person who is a director at any time during the period from the date the money is withheld and the due date for its remittance. Section 222AOD imposes the same penalty upon a person who becomes a director when s 222AOB has not been complied with and is still a director fourteen days later when the requirements of the section still have not been met.
Under s 222AOE, the Commissioner is not entitled to recover the penalty from the director unless she has given the director a notice setting out the amount of the unpaid liability under s 222AOC and stating that the director must pay the penalty unless, within 14 days, the liability has been discharged, the company has entered into a s 222ALA agreement, an administrator has been appointed or the company is being wound up.
Save that the reference to ASIC replaced one to the ASC during the relevant period between 7 October 2002 and 27 November 2003, s 222AOF(1) was otherwise in the following form throughout that time:
222 AOF How service may be given
(1) If it appears from ASIC documents that a person is, or has been within the last 7 days, a director of the company, the Commissioner may give the person a notice under section 222AOE by leaving it at, or sending it by post to, an address that appears from such documents to be, or to have been within the last 7 days the person’s place of residence or business.
Note : Sections 28A and 29 of the Acts Interpretation Act 1901 are also relevant to the giving of notice under section 222AOE
The issues raised by the defence
Although the defendants did not appear at trial, it is necessary for the Court to be satisfied that the Commissioner has proved her claim. In that context, the allegations made in the last version of the defendants’ defence should be considered.
In their last defence filed on 4 March 2005 (“the defence”), the defendants allege that:
(a)section 222AOB was complied with by the appointment of an administrator on 24 February 2004;
(b) the Commissioner did not comply with s 222AOE of the ITAA “as no notice was given”;
(c)alternatively, the defendants took all reasonable steps to ensure that s 222AOB was complied with;
(d)the Commissioner is estopped from relying on any notices issued; and
(e)there were misleading and deceptive representations made to the defendants by the Commissioner which led to the defendants suffering loss and damage.
Appointment of administrator
First of all, it is clear that the defendants cannot rely upon the appointment of the administrator in 2004, which occurred well outside any of the 14 day periods specified in the notices to the defendants.
“Giving” a notice under s 222AOE
Secondly, I am also satisfied that the relevant notices were “given” as required by s 222AOE.
All the notices, apart from that dated 7 October 2002, were posted to the defendants’ address, extracted from the MASCOT database, as the address appeared at the dates of the various notices in the ASIC records. Those notices were thus “given”, within the meaning of s 222AOE, to each of the defendants under s 222AOF[1].
[1]See: Deputy Commissioner of Taxation v Nercessian [2006] NSWCA 268.
I am not satisfied that any of the notices were not received by the defendants. However, even if there were proof of non-receipt, it would be sufficient for the purposes of s 222AOE that there had been compliance with s 222AOF. Proof of non-receipt of a posted item does not constitute proof of its non-delivery[2] and if it were necessary to rely upon s 28A or s 29 of the Acts Interpretation Act 1901 (Cth) then the presumptions in those sections are not displaced by evidence of non-receipt[3].
The 7 October 2002 notices
[2]Fancourt v Mercantile Credits Ltd (1983)145 CLR 87 at 97.
[3]Deputy Commissioner of Taxation v Jackson [2005] VSC 120 [76] per Bongiorno J; Commissioner of Taxation v Gruber (1998) 43 NSWLR 271 at 276-7 per Stein JA (Powell JA and Sheppard AJA agreeing); Commissioner of Taxation v Coco 2003) 179 FLR 362 at 369 per Mullins J.
The provisions of s 222AOF are facultative, rather than prescriptive. They do not prevent the Commissioner from giving notice under s 222AOE by another means[4]. In my opinion, proof that the notices dated 7 October 2002 were received by the addressees would constitute proof of compliance with the notice provision of s 222AOE[5].
[4]See: Deputy Commissioner of Taxation v Keck [2006] NSWSC 677 [16]-[18] per McDougall J.
[5]See: Wouters v Deputy Commissioner of Taxation (1988) 84 ALR 577 at 588-9 per Bowen CJ Wilcox and Lee JJ. In Wouters it was held that proof that a document had reached the addressee may constitute proof of service, notwithstanding failure to comply with a relevant facultative regulation in similar terms to s 28A of the Acts Interpretation Act 1901 (Cth).
I am satisfied that each of the 7 October 2002 notices arrived at the defendants’ Toorak address by post, notwithstanding the transposition of the digits in the postcodes on the envelopes. I am satisfied that Mr Arnold and Mrs Arnold received their respective notices before the conversations in October 2002 between Mr O’Neill and Mr Arnold, Mrs Hammat and Mr Brady.
In reaching those conclusions I have taken into account that the defendants have not taken the opportunity to attend the trial to contest the evidence adduced by the Commissioner.
Mr and Mrs Arnold each filed an affidavit, affirmed on 13 July 2005, in opposition to a summary judgment application by the Commissioner. The affidavits referred and appeared to respond to allegations made by Mr O’Neill in his 19 October 2004 affidavit in support of the application. Mr O’Neill had sworn that he believed that the wrongly addressed notices were “properly served to the correct address”. He further alleged that he had recorded telephone conversations which took place shortly afterwards with Mr Arnold, Mrs Hammat and Mr Brady of the third party in which the Director Penalty Notices were discussed.
In his 13 May 2005 affidavit, Mr Arnold referred to Mr O’Neill’s affidavit. He went on to depose that his solicitor had produced “the Penalty Notices” to him at the time of signing the affidavit and that he recalled seeing the first Penalty Notice issued on 7 October 2002, but did not recall seeing the notices “issued after that”. He stated that he was not living at the Balfour Street Toorak residence at the time of the issue of the notices.
Mrs Arnold’s 13 April 2005 affidavit is in very similar terms. She, however, is more vague about the notices. She deposes that she recalls seeing one of the Penalty Notices, but does not recall which. She states that she asked her husband about what the notice related to and he told her not to worry about it because the third party firm of accountants was “handling the matter.”
Neither of the defendants specifically denies that either of the 7 October 2002 notices was delivered at Unit 6, 1 Balfour Street Toorak. Neither of the letters bearing the postcode “3412” rather than the correct postcode of “3412” was returned as non-delivered mail. The defendants have not filed any other material answering that filed on behalf of the Commissioner.
I note further that the defendants have alleged in their statement of claim in the third party proceedings that each of the notices was served upon them. In a Further Amended Statement of Claim, filed on 6 October 2005, the defendants allege that they retained the third party to advise “with respect to the Penalty Notices generally”. The particulars allege that the retainer was constituted by a conversation, in early to mid October 2002, between Martin O’Connor of the third party and Mr Arnold (on behalf of himself and Mrs Arnold) “when Robert Arnold asked Martin O’Connor what they were required to do in relation to the Penalty Notices”. The only penalty notices which had been issued at that time were those dated 7 October 2002. The next notices posted by an officer of the Commissioner were dated 7 May 2003.
Whilst I do not treat the allegations in the third party notice as formal admissions in the proceedings brought by the Commissioner[6], I note that the defendants have not appeared to explain the apparently inconsistent allegations in their defences and that statement of claim.
[6]See: Laws v ABT (1990) 170 CLR 70 at 85 per Mason CJ and Brennan J; Stohl Aviation v Electrum Finance Pty Ltd (1984) 5 FCR 187.
The “reasonable steps” defence
Paragraph 14 of the defence alleges that the defendants took “all reasonable steps to ensure that the directors complied with subsection 222AOB(1)” and, therefore, have a defence under s 222AOJ(3)(a) in relation to any liability under s 222AOC and, or s 222AOD.
Although there is evidence in Mr Arnold’s 13 May 2005 affidavit to the effect that the third party firm of accountants were retained to advise him in relation to the company’s tax liability and to liaise with the Commissioner in relation to that liability, there is insufficient evidence to satisfy me that either of the defendants has established a defence under s 222AOJ(3). I am not persuaded that they took reasonable steps in relation to all four options under s 222 AOB(1) or that there were none which could have been taken at the relevant times[7] as is required to make out the defence[8]. I note that I have reached this conclusion having also considered the evidence of communications between officers of the ATO and the defendants and the third party in the affidavit material filed on behalf of the Commissioner.
[7]Relevant times being the entire period during which Mr Arnold and Mrs Arnold respectively were directors with obligations under s 222AOB(1) and (3) : see: Commissioner of Taxation v Coco (2003) 179 FLR 362 at 374 [49] per Mullins J.
[8]Deputy Commissioner of Taxation v Solomon; Deputy Commissioner of Taxation v Muriwai (2003) 52 ATR 729 [53] per Gzell J (Handley and Sheller JAA agreeing).
Estoppel
The defendants allege, in paragraph 15 of the defence, that the Commissioner issued media releases stating that relief would be available to fire victims. They give particulars which recite the receipt of a letter from Peter Costello enclosing a media release issued by the Commissioner in January 2003. The particulars describe the contents of the alleged letter, including an alleged statement to the effect that the ATO could help in numerous ways including granting extensions of time for the payment of tax bills. A contact telephone number was alleged to have been included in the letter.
Paragraph 16 of the defence alleges that Mr Arnold contacted the ATO and “left messages for someone to return his call regarding the provision of the assistance to meet the tax liabilities” as a result of what are characterised as the “representations” in paragraph 16 (apparently referring to the contents of paragraph 15 and the particulars to that paragraph). Paragraph 16 goes on to allege that the calls were not returned.
Paragraph 17 alleges that the defendants acted to their detriment by relying on the alleged representations “and did not pay or make further arrangements”. The Commissioner is then said, in the following paragraph, to be estopped from relying on the notices issued by her.
However, there is no evidence of the alleged letter or the January 2003 media release or the alleged acts of reliance. Further the defendants have failed to adduce evidence to contest the assertions in the Commissioner’s affidavits that they did not mention any reliance upon the media release or the letter to the officers dealing with them during the relevant periods.
Ms Pamela Joy Roth, who dealt with Mr Brady and Mr O’Connor of the third party on numerous occasions between 21 February 2003 and 13 February 2004, refers to the allegations in paragraph 16 of the defence in her affidavit sworn on 6 March 2007. She states that at no time in any of her dealings with the first defendant or their representatives was she advised of their reliance on a media release or the letter from Mr Costello. Ms Susanne Leonie Vihm of the ATO makes a statement to similar effect in her 5 March 2007 affidavit. She had dealings with Mr Brady and Mr O’Connor between 26 August 2003 and 27 November 2003. Mr O’Neill had relevant ongoing dealings with Mr Arnold from 16 October 2002 and with Mrs Hammat, Mr Brady and Mr O’Connor between 17 October 2002 and 5 November 2002. He makes another such statement in his 1 March 2007 affidavit.
I am not satisfied that any representations were made to the defendants upon which they relied, as the defence asserts. Accordingly, I do not propose to address the issue as to whether the Commissioner could be estopped in the circumstances, as alleged.
Misleading and deceptive conduct
The allegations of misleading and deceptive conduct are premised upon the earlier allegations in the defence as to representations by the Commissioner said to found a defence of estoppel. In light of my conclusions about those allegations, it is sufficient to say that there is no evidentiary foundation for them before the Court.
The Commissioner’s claim
Mr Arnold and Mrs Arnold are each liable under s 222AOC and, or s 222AOD of the ITAA to pay to the Commissioner the total amount of the penalties, being the sum of $626,748.60, the balance of the amounts withheld by the company. The Commissioner is entitled to recover the penalties having given the requisite notice to the defendants under s 222AOE. They are each also liable to pay interest under s 60 of the Supreme Court Act 1986 and the Commissioner’s costs.
The third party proceedings
The defendants have not appeared to prosecute their claim against the third party. There is no evidence to prove their allegations and the third party proceeding should be dismissed with costs.
Orders
I will hear the parties in relation to the form of orders.
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