Deputy Commissioner of Taxation v Freudenstein

[2007] NSWCA 297

NEW SOUTH WALES COURT OF APPEAL

CITATION:      Deputy Commissioner of Taxation v Freudenstein  [2007]  NSWCA 297

FILE NUMBER(S):
40039/07

HEARING DATE(S):            19 October 2007

JUDGMENT DATE: 23 October 2007

PARTIES:
Deputy Commissioner of Taxation - Claimant
Peter John Freudenstein - Opponent

JUDGMENT OF:      Spigelman CJ Mason P Giles JA   

LOWER COURT JURISDICTION: District Court

LOWER COURT FILE NUMBER(S):        DC  1488/05

LOWER COURT JUDICIAL OFFICER:     O'Toole DCJ

LOWER COURT DATE OF DECISION:    20 December 2006;  15 March 2007 (Costs)

COUNSEL:
D Fagan SC & M P Cleary - Claimant
A Ogborne - Opponent

SOLICITORS:
Australian Government Solicitor - Claimant
Paul Bard Lawyers - Opponent

CATCHWORDS:
Leave to appeal - taxes and duties - claim to recover from director of corporate taxpayer - agreement to pay by instalments - defence under s222AQD - whether director had reasonable grounds to expect company would comply with agreement - judge so found - if arguable case for error, not a strong case - no question of principle - amount involved $66K - leave to appeal refused.

LEGISLATION CITED:
Income Tax Assessment Act 1936 (C'th), ss 222ALA, 222AQA, 222AQD

CASES CITED:

DECISION:
Summons for leave to appeal dismissed with costs.

JUDGMENT:

IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL

CA  40039/07
DC  1488/05

SPIGELMAN CJ
MASON P
GILES JA

Tuesday 23 October 2007

DEPUTY COMMISSIONER OF TAXATION v FREUDENSTEIN

Judgment

1. THE COURT:  The claimant applied for leave to appeal from a verdict and judgment for the opponent in proceedings claiming from the opponent $66,763.28 and interest.  For the reasons which follow, leave to appeal should be refused.

2. The opponent was a director of Penta Productions Pty Ltd (“Penta”). Penta made with the claimant an agreement under s 222ALA of the Income Tax Assessment Act 1936 (C’th) (“the Act”), under which Penta agreed to pay the claimant $105,663.03 by the instalments of $38,899.75 on 23 December 2002, $8,589.00 on 31 January 2003 and $58,174.28 on 28 February 2003. The first instalment was duly paid. The remaining instalments were not, and the claimant brought proceedings to recover them on the basis that the opponent was liable to pay them as a penalty pursuant to s 222AQA of the Act. The opponent invoked the statutory defence in s 222AQD of the Act, which amongst other things by s 222AQD(5) required that he prove that at the time the agreement was made he “had reasonable grounds to expect, and did expect, that the company would comply with the agreement”.

3. O’Toole DCJ upheld the defence. Although the claimant was critical of the expression of her Honour’s conclusion, it is plain that she held that the opponent had proved the expectation, and reasonable grounds for the expectation, required by s 222AQD(5). The proposed appeal was concerned with that holding.

4. A proposed ground of appeal to the effect that there was no evidence or insufficient evidence for proof of the expectation was abandoned;  rightly so, since the opponent gave direct evidence of it. 

5. The principal proposed ground of appeal was that there was no evidence or insufficient evidence that the opponent had reasonable grounds for the expectation.  There was certainly evidence of reasonable grounds, and the ground came down to the submission that the evidence did not suffice to discharge the opponent’s burden of proof.  The claimant contended to the effect that the evidence did not rise above hope that revenue from future trading would enable payment, and that in order for the opponent to discharge his burden of proof it was necessary for him to have shown as a starting-point Penta’s financial position as at 25 November 2002, and then to have shown expected expenses as well as expected revenue, and thus to have established mathematically ability to make the payments required by the agreement. 

6. The reasonable grounds were grounds to expect that Penta would comply with the agreement.  They were not grounds of certainty that it would do so, or grounds to expect that Penta would meet all its liabilities in a timely manner.  Further, it was not necessary that the reasonable grounds be established in the manner put forward by the claimant.  Whether there were reasonable grounds for the expectation was a question of fact, with the evaluative element brought in by “reasonable”. Like any fact, the manner of proof was confined only by rational persuasion. 

7. The opponent had successfully conducted Penta’s business for over twenty years.  It specialised in the production of corporate audio visuals, videos, events and digital media with large international and major Australian corporate clients.  The nature of the business was such that it was adversely effected by the events in New York in September 2001, which brought cancellation or deferment of some $1.8 million worth of work.  The opponent said that considerable measures had been taken to overcome this.  He said (and was not pressed on the matter) that he had “a fairly good understanding” of the financial state of Penta in November 2002.  He gave evidence of work in progress, for which invoices totalling approximately $215,000 were issued in January and early February 2003, and of lucrative work for which he had a “firm project expectation” (meaning that he believed the work had been secured and was expected to proceed), and other work for which proposals to clients had been submitted.  The opponent said that in November 2002 he was “working on the assumption of both work in progress which was subsequently invoiced and a belief that the work that we were in dialogue with clients about at that point in time was going to be completed”.  They were “definitely projects that we believed that we were going to be working on”.

8. The manner in which the industry within which Penta conducted its business operated was such that the judge was entitled to rely on the opponent’s experience of how projects came to fruition;  and to find that what he said made out reasonable grounds for an expectation, being more than a hope, that Penta would comply with the agreement.  Penta did so in part - $38,899.75 was paid.  As it happened, not all the projects came to fruition;  the opponent said, and the judge accepted, that this was unexpected.  While relevant, a disappointed expectation does not deny reasonable grounds for the expectation. 

9. If the claimant has an arguable case for error in the judge’s fact-finding, it is not a strong case.  No question of principle is involved.  Having regard also to the amount involved, which although not small is well below the threshold of $100,000, in our opinion leave to appeal is not warranted.

10. The remaining proposed ground of appeal was that the judge failed to give adequate reasons for holding that there were reasonable grounds for the opponent’s expectation.  The reasons were, with respect, less than full in their consideration of the evidence going to the existence of reasonable grounds.  The reasons for our conclusion that leave to appeal is not warranted, however, bypass any ground of inadequacy in reasons. 

11. We order that the summons for leave to appeal be dismissed with costs.

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LAST UPDATED:     23 October 2007