Deputy Commissioner of Taxation v Clark - [2006] SADC 99

DISTRICT COURT OF SOUTH AUSTRALIA
(Civil)
DEPUTY COMMISSIONER OF TAXATION v CLARK
[2006] SADC 99
Judgment of His Honour Judge Anderson
29 August 2006
INCOME TAX - COLLECTION AND RECOVERY OF TAX - PROCEEDINGS FOR RECOVERY
Claim against director - judgment for Plaintiff
Income Tax Assessment Act 1936 Part VI, Division 2, referred to.
Deputy Commissioner of Taxation v Gruber (1998) 42 NSWLR 271; Deputy Commissioner of Taxation v Woodhams (2000) 169 ALR 503; Harpas v Federal Commissioner of Taxation 48 ATR 421; Deputy Commissioner of Taxation v McArdle 53 ATR 303; Adams v Lambert [2006] HCA 10, considered.

DEPUTY COMMISSIONER OF TAXATION v CLARK
[2006] SADC 99

This is an action in which the Plaintiff seeks to recover both actual and estimated liabilities pursuant to the provisions of Part VI, Division 2 of the Income Tax Assessment Act 1936 (“ITAA”).
It is convenient to consider the matter in chronological order rather than the inverse which is how the Amended Statement of Claim was drawn. Thus, paragraphs 10-19 of that document relate to the periods first in time.
In February 1997, Favaro Pty Ltd (ACN: 066 742 498) (“the company”) filed an application for registration as a group employer as the trustee of a partnership. The application was given the registration number 22489955 by the Australian Taxation Office (“ATO”). This is referred to as “the first group employer” in the pleadings.
At that time, and from 1 November 1996, the Defendant was a director of the company.
On 1 July 1997, a further application for registration as trustee for a different partnership was made by the company. This received the registration number 23697639.
It is not in dispute that all PAYE deductions made and received by the ATO prior to that date related to the first group employer and, from that date, the taxation obligations related to the partnership referred to in the pleadings as “the second group employer”. The company, however, remained as trustee for that partnership and the Defendant remained a director.
In the application for registration relating to the second group employer, it was indicated that the planned annual tax instalment deductions for remission to the ATO would be $120,000.00.
Section 221F(1) of the ITAA relates to the requirement for registration and has been complied with. Section 221F(5)(c) requires, inter alia, that the company or employer must pay to the ATO deductions made by the seventh day after the end of the month in which the deductions were made. This is the regime which applied to the company.
Consequent upon the failure by the company to comply with s221F(5), the Commissioner made estimates of unpaid amounts pursuant to s222AGA of the ITAA. In making this estimate the Commissioner had regard to the advised annual estimated figure for deductions to be remitted.
Such estimates, each in the sum of $10,000.00, were made for each month from November 1997 to March 1998, inclusive.
Notice of the first of these estimates was sent to the company by letter, dated 10 December 1997, pursuant to s222AGB(1). That notice indicated that the date on which the estimate was made was 10 November 1997. It has been accepted by Mr Hayes QC of senior counsel, who appeared for the Plaintiff, and Mr Robertson of counsel, who appeared for the Defendant, that this was a typographical error and that the correct date was 10 December 1997.
Notwithstanding this agreement as to this error, the consequence of it, in Mr Robertson’s submission, is such as to render the notice void and of no effect. He submitted that the legislation contained a positive obligation to include the correct date and the failure to do so was a material error such as to vitiate the notice. In this regard he relied upon the provisions of s222AGB(2)(b), which is in these terms:
The notice must:
(a) .....
(b) specify the date as at which the estimate is made. (emphasis added)
The requirement of the subsection is said to be mandatory because of the use of the word “must” in relation to each of the matters listed in the six subsections. We are here concerned only with ss(b).
In support of this submission, Mr Robertson relied upon the decision of Deputy Commissioner of Taxation v Gruber (1998) 42 NSWLR 271, in which “detail”, which was required, but not in mandatory terms as here, and omitted, was held to be fatal to a notice. By analogy, Mr Robertson submitted that an even stronger requirement in s222AGB(2)(b) must lead, in an even more obvious way, to a like conclusion.
This decision was overruled by the High Court in Deputy Commissioner of Taxation v Woodhams (2000) 169 ALR 503. Mr Robertson sought to distinguish this decision on the basis that it concerned whether, by virtue of an error, a notice was “misleading” rather than, here, where the requirement for inclusion in the notice was mandatory in the terms of the section. In my opinion, such an explanation of this decision is not persuasive.
Mr Hayes QC sought comfort from the decisions in Harpas v Federal Commissioner of Taxation 48 ATR 421 and Deputy Commissioner of Taxation v McArdle 53 ATR 303. Without discussing these decisions in detail, I am not persuaded that the mistake referred to in each of them was akin to an error as to a mandated requirement.
In Adams v Lambert [2006] HCA 10 an issue arose as to the use of the word “must” in certain provisions relating to a Bankruptcy Notice issued, having regard to the saving provisions of s306 of the Bankruptcy Act 1924. It is not necessary to consider the facts of that case.
At paragraph 30, the Court posed the issue as this:
The question is whether the misdescription involved a failure to meet a requirement made essential by the Act. On the true construction of the Act, is it essential that there be no misdescription of the relevant section? Is it the purpose of the legislation that any slip, ..... should invalidate the notice? Is this so no matter how clear it might be from other parts of the notice that the claim is for .....
When regard is had to the provisions of s222ANA(2) which, in reference to the requirement of written notice to a person concerned, such as the Defendant here, allows a period of 14 days after the date thereof for the Defendant director to cause the company to comply, a different light is thrown upon the nature of the obligation contained in s222AGB(2)(b). It is the date of the written notice which sets the time from which any subsequent action is measured and not the date required by ss(b).
In my opinion, as that subsequent liability attaches to time measured from the date of the notice rather than the date on which the estimate is made, it cannot be said that absence of error as to a requirement of s222AGB(2)(b) is made essential by the ITAA. It is not the obvious purpose of the legislation that any slip should invalidate the notice.
Thus, it has not been shown that the notice, dated 10 December 1997, is invalid and of no force or effect. Nothing to disadvantage the Defendant flows from the obvious error.
Mr Robertson also submitted in relation to all of the notices of estimate, dated 10 December 1997, 13 February 1998 and 8 April 1998, that the subsequent actions of the Plaintiff had rendered them of no force or effect.
Each notice, as is set out in paragraph 11 of the Amended Statement of Claim, was in the sum of $10,000.00. Each estimate was made pursuant to s222AGA and the notices were sent to the company pursuant to s222AGB.
In relation to the Defendant it was then necessary to issue a notice before action in respect of each period. That for the first period was issued, pursuant to s222APE, on 16 December 1997. That for the remaining periods was issued on 23 April 1998.
On or about 10 June 1998, the Defendant provided the Plaintiff with a statutory declaration pursuant to s222AGB. That statutory declaration, whilst not essentially complete, was accepted as such by the Plaintiff for the purpose of future actions. It indicated that the relevant deductions for periods 1, 2 and 3, as set out in paragraph 11 of the Amended Statement of Claim, were in excess of the sum of $10,000.00. The ITAA does not permit any re‑assessment upwards for the purposes of recovery action based upon an estimate.
That statutory declaration also indicated that the relevant deductions for periods 4 and 5 were less than the $10,000.00 for which the notices of estimate had issued and the subsequent “Notice of Directors Liability to Pay a Penalty to the Commissioner of Taxation” (s222APE notice) issued on 23 April 1998.
Consequent upon the acceptance by the Plaintiff of that advice, the amounts of the estimates for periods 4 and 5 were reduced to the accepted figures pursuant to s222AGC. Thereupon, a notice of reduction pursuant to that section issued for those two periods on 12 June 1998. The notice was sent to the company as the section requires. No separate notice was required to be, or was, sent to the Defendant. No further adjustment was made in relation to the remaining estimates, each of $10,000.00.
When the information in the statutory declaration was received by the Plaintiff, her employee assessed it in terms of the company’s ongoing indebtedness to the ATO and the estimates were deleted in relation to each period and the correct figures entered for the purpose of accurately recording due payments and penalties.
Thus, what had been estimates in the company’s account with the ATO became, by this process, Mr Robertson submitted, actuals and, as such, required that a notice reflecting a new, actual liability, issue. In the absence of such an occurrence, and it is not in dispute that it did not occur, he submitted that the action of the ATO of changing the value of the debt from an estimate to an actual figure had effectively brought to an end the life of the estimates and any consequences which flowed from them either, for the company or, for the Defendant. Support for this change of character was said to come from the fact that the witness, Mr Lambert, who made these ledger adjustments in June 1998 said that, having made them with effect from the relevant months as shown in Exhibit P1, Tab 3, he then calculated the relevant additional late tax penalty from the relevant date and thus the liability became one based upon an actual rather than an estimated liability.
As there was no notice of the new liability for the periods 1, 2 and 3 to either the company or the director Defendant, it is said for the Defendant that it is not possible for the Plaintiff to proceed to recovery.
As Mr Hayes QC pointed out, this submission finds itself in difficulty when reference is had to s222AKA(1), which is in these terms:
If the amount of an estimate is reduced or an estimate is revoked, Section 222AHA, Subdivision E and Division 9 have effect and are taken always to have had effect as if:
(a)the original amount of the estimate had been the reduced amount, not the amount set out under paragraph 222AGB(2)(c); or
(b)the estimate had never been made
as the case may be.
Mr Lambert’s entries to the general ledger relating to the company’s indebtedness to the ATO did not undermine the validity of estimates 1, 2 and 3 which, for the purposes of these proceedings, have not been increased.
Nothing done by Mr Lambert in relation to the company’s liability to the ATO has changed the character of the estimates made for the first three periods.
Section 222AKI(1) recognises what is plain from s222AHA, namely, that it is that section which creates the liability and that liability is “separate and distinct for all purposes”: ss(2). Thus, the liability is separate from and, not dependent upon either the notice of estimate (s222AGB) or the notice of penalty to a director (s222APE). Neither is the liability diminished in any way by the requirements of s222AOE which refers to the notice before recovery.
When regard is had to the objective of prompt identification of debt and the steps which immediately follow so as to ensure that there is no, or limited, ongoing accruing liability in this Part of the ITAA, there is no basis upon which a proper interpretation of s222AKA(1) may require that the separate and distinct liability, as established, might in some way be diminished by the insertion of implied procedural steps so as to alter the nature of the liability and especially is that so when general ledger alterations are made.
I am unable to agree with the submission made by Mr Robertson which, if correct, would require another notice of a liability where the Plaintiff’s representative properly acts in accord with the legislative provisions. Were Mr Robertson correct, there could be a continual stream of notices each time there was the smallest adjustment or payment thus effectively preventing proper management of any accruing liability.
I have not yet dealt with the Plaintiff’s claim as it relates solely to the actual alleged liabilities as set out in paragraph 4 of the Amended Statement of Claim. Because of the way in which the Defence is pleaded in paragraph 7 and, in particular, paragraphs 7.2 and 7.3, it is convenient to now do so.
It is apparent from Exhibit P1, Tab 6, that on 30 April 1998 a summons seeking winding up under Part III of the Rules was issued on behalf of the Plaintiff and directed to Favaro Pty Ltd.
Lest there be any uncertainty and, in regard to the matters alluded to in paragraphs 5.1 and 5.2 of the Amended Defence, there is no doubt that at all relevant times the company was the trustee of the relevant trading partnership and the Defendant was a director of it. This includes the period prior to 1 July 1997 when the first trading partnership existed. Nothing turns on the change of trading entity because of the continuous nature of the role played by both the company and the Defendant.
Mr Robertson objected to the affidavit of Mr Lambert, dated 29 April 1998, on the grounds of relevance. The affidavit is relevant as the document supporting the summons. It is relevant in the sense of establishing the truth of the matters deposed to therein, namely the history and extent of the company’s indebtedness to the Plaintiff, to support the summons.
From the history of the winding up proceedings it is not in doubt that, after negotiations between the Defendant and Mr Lambert, it was agreed that, upon a certain payment being made by the Defendant, those proceedings would be adjourned to allow for expected future income to accrue so as to meet the liability of the company, the subject of the proceedings.
The agreed condition of the adjournment was that there would be paid to the Plaintiff, in those proceedings, the sum of $30,000.00. This was done on 9 June 1998 when the Defendant gave to Mr Lambert the cheques set out in Exhibit P1, Tab 6, pp 29 and 30.
Those funds were applied by Mr Lambert to extinguish the oldest of the company’s debt first. This meant that the account of the first partnership was reduced to nil and the account of the second partnership was reduced by the remaining balance of the paid sum.
In evidence, Mr Lambert said that in so dealing with the payment he acted in accordance with usual practice. The Defendant did not give him any instructions as to how the funds were to be allocated. Presumably, he was relieved simply to have obtained the adjournment. There was no evidence to the contrary.
In any event, on 12 June 1998, Mr Lambert sent a letter to the company explaining what he had done. That letter brought no reply. The letter is in Exhibit P1, Tab 6, at pp 31-34.
The plea in paragraph 7.2.3 of the Amended Defence is to the effect that all credit should have been in relation to the second group employer because all debts post dated the commencement of that partnership on 1 July 1997 and, had that occurred, there would have been a reduction of the debt owed by the company in relation to the actual estimates made and pleaded in paragraph 4 of the Amended Statement of Claim and, in accord with the legislation, of the parallel liability of the Defendant.
In my view, that cannot be so. For it to be a correct conclusion it is necessary to ignore that the debt, the subject of the winding up proceedings, was larger than, but included, the debt the subject of these proceedings. The affidavit of 24 April 1998 establishes as much.
The winding up proceedings are entirely separate and remain so. I need not repeat what I have earlier said as to how the payment of $30,000.00 came about except to say that it was in the context of a far greater debt than that presently claimed against the Defendant. The claim against the Defendant goes no further than the estimates (as adjusted) and the advised actuals of April, May and June 1998.
I am satisfied that each part of the Amended Statement of Claim has been proved and the Plaintiff is entitled to judgment against the Defendant in the sum of $70,533.80. I shall hear counsel as to costs and interest.