McArdle v Deputy Commissioner of Taxation

[2004] HCATrans 384

[2004] HCATrans 384

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Brisbane  No B63 of 2003

B e t w e e n -

BRENT ROGER McARDLE

Applicant

and

DEPUTY COMMISSIONER OF TAXATION

Respondent

Application for special leave to appeal

McHUGH J
CALLINAN J

TRANSCRIPT OF PROCEEDINGS

FROM BRISBANE BY VIDEO LINK TO CANBERRA

ON FRIDAY, 8 OCTOBER 2004, AT 11.45 AM

Copyright in the High Court of Australia

MR M.M. STEWART, SC:   May it please your Honours, I appear with my learned friend, MR C.A. WILKINS, for the applicant.  (instructed by Tucker & Cowen)

MR P.E. HACK, SC:   May it please the Court, I appear for the respondent.  (instructed by the Australian Government Solicitor)

McHUGH J:   Yes, Mr Stewart.

MR STEWART:   Your Honours will have noticed from our outline that there are three points raised.  The third articulated on page 36 of the record really forms a subset of the first, so we submit the application really raises two important issues.  The first is whether the gloss the Court of Appeal, we submit, put upon the language of section 222AOE of the Income Tax Assessment Act is justified, and the second is what is the proper test to be applied to ascertain whether such a notice is misleading so as to render it ineffective?  The gloss imposed by the Court of Appeal is a novel one and the view that court took of the proper test to be applied conflicts with the view adopted by its New South Wales counterpart. 

The applicant was a director of a company which deducted income tax payable by its employees, but failed to remit it to the Commissioner.  The respondent sued the applicant pursuant to the relevant section, which is 221R.  That section provided that the amount recoverable is:

An amount payable to the Commissioner under the provisions of this Division –

and, relevantly, the element of the division was Part VI, Division 2.  The penalty the applicant was made liable for by section 222AOC was the same amount that ought to have been but was not remitted by the company, but which it had deducted from its employees’ wages. 

That sum, the amount that ought to have been remitted, and therefore the amount of the penalty pursuant to section 222AOC, was – it is uncontroversial – $96,758.  However, the respondent did not seek to recover this sum, but sued instead for a little in excess of $6,000 less than that, a sum of just more than $90,000.  The explanation for that is that section 220AAOA(1) obliged the employer company to give the Commissioner notice of the sums that it should remit, and subsection (2) of that section provided for penalties to be payable by the company in the event that it underestimated or understated those amounts. 

The sum the respondent claimed, or the explanation for the inaccurate amount claimed by the respondent, is that it represented the total of the notices that the employer company had given under AOA(2).  So, as we have submitted, it is entirely uncontroversial that the sum the respondent claimed, and, incidentally, the sum referred to in the notice the subject of this appeal, was not the amount of the penalty for which the applicant was made liable by section 222AOC.

Section 222AOE is a notice before provision section.  In our submission, it unambiguously requires that the notice specify the amount of the penalty for which the director is liable; that is simply to be garnered from the clear language of subsection (a) of the provision.  It is perfectly consistent with the purposes of the notice, which are described in ‑ ‑ ‑

McHUGH J:   But does it not say the notice must inform the recipient of the unpaid amount of the company’s liability under the remittance provision as then known to the Commissioner? 

MR STEWART:   No.

McHUGH J:   Does it not?

MR STEWART:   That is precisely the gloss that their Honours in the Court of Appeal put upon the language of AOE.  There is not a word, in our submission, in the section that justifies it.  His Honour, Justice Davies, who delivered the judgment in which the other members of the Court of Appeal agreed, candidly conceded that he was adding something to the language of the section.  We can turn to that later in the course of our submissions and deal with the justification, if we can put it that way, that his Honour expresses for adopting that course. 

So our first point is that the language of the section is unequivocal.  The second point is that its unequivocal meaning is entirely consistent with the purpose or purposes of the notice which were described by this Court in the Woodhams Case (2000) 199 CLR 370 in this way – and one finds this passage at paragraph 36 of the judgment:

The first purpose of the notice is to inform the recipient of the unpaid amount of the company’s liability under the remittance provisions, and of the recipient’s liability to a penalty in the same amount.  The second purpose, consistently with s 222ANA, is to inform the recipient of the alternative courses available, as set out in s 222AOE(b), which will result in remission of the penalty, the object being to encourage the recipient to take such steps as are necessary to bring about the result that one or other of those courses are followed. 

The courses include payment of the penalty by the company, thereby discharging the debt, or putting the company into administration or liquidation, the object of which is to prevent further like liabilities to arise in circumstances where the deductions are not remitted to the Commissioner.

McHUGH J:   But the notice under 222AOE does not create the liability.  It is merely a notice provision, is it not?

MR STEWART:   It is. 

McHUGH J:   Its object is fulfilled if the notice sets out the liability of the company’s unpaid amount that the Commissioner knows when he sends out the notice.  You have to say that in some way or other that is exhaustive, is it not? 

MR STEWART:   There is nothing, with respect, in the language of the section that justifies the construction that your Honour has just mentioned.  The section explicitly says that what the notice must tell the recipient, what the notice must specify, is the unpaid amount of the liability referred to in section 222AOC.  As I infer your Honour indicated, it is that section that is the source of the liability to pay the penalty.  Yes, we concede, with respect, your Honour’s characterisation of this as being a notice provision, but it is a notice provision which acts as a complete bar to the Commissioner being able to take any steps to recover the penalty as a debt under section 221R in circumstances where it has not been complied with.

CALLINAN J:   Mr Stewart, can I ask you this question.  Say you were to succeed and appeal and succeed on the appeal, is there any dispute about the amount that was actually recovered on the judgment, that is, dispute if you leave aside the question of the notice? 

MR STEWART:   There is no dispute, your Honour, that the amount recovered by way of the judgment was ‑ ‑ ‑

CALLINAN J:   So the respondent would get what has been ordered to be given by the summary judgment, except that the respondent would get it much later, assuming that the money is still available.

MR STEWART:   Your Honour, I had not really completed the answer, I think, to your Honour’s question.  The judgment is less than the penalty that the applicant became liable for as a result of the operation of section 222AOC.

CALLINAN J:   So the Commissioner would ultimately get at least that, is that correct? 

MR STEWART:   We agree with that.

CALLINAN J:   Well, is this not futile litigation?  It is just delaying the inevitable. 

MR STEWART:   It is not delaying the inevitable, as the facts of this case have panned out, because, with respect, as I think his Honour Judge Robin pointed out in the court at first instance, supervening events have overtaken things so that a notice could not be given now.  The company was insolvent, which perhaps one may reasonably infer resulted in these things not being remitted in the first place, and it has been placed in liquidation.  That will act as a bar to a further notice being given.  So, as between the parties to this case, the result of the appeal will be that there will be no penalty recoverable by the respondent from the applicant.

CALLINAN J:   Why could not a further notice be given?  Could the respondent get leave of the court to ‑ ‑ ‑

MR STEWART:   Your Honour, one of the purposes of the notice, as identified in the Woodhams Case, is to alert the recipient of the notice to the fact that one of the courses he can follow, and by following avoid being sued by the Commissioner or the Deputy Commissioner for the penalty, is to put the company into liquidation.  The company has been put into liquidation.  I think it is uncontroversial that a notice would not be given now, so that the result of the success of the appeal, if any, if leave be granted, would be that the applicant would be relieved of the obligation to pay the penalty. 

CALLINAN J:   Do we know whether the money has been paid, the judgment has been satisfied?

MR STEWART:   I understand it has not been satisfied, your Honour, and that is uncontroversial, I am told by our learned friend.

CALLINAN J:   So, assume that you do not get leave, what will happen then?  Will the respondent prove in the insolvency?

MR STEWART:   No, the respondent will seek to enforce its judgment against the applicant, a judgment which would not exist and which could not be replaced by means of delivering a further notice, should the appeal succeed. 

CALLINAN J:   Thank you. 

MR STEWART:   I am sorry, I should have made that clear at the outset, perhaps.  The last point we were addressing when we commenced to answer your Honour’s questions was the purpose, as identified in the Woodhams Case, and the manner in which, in our submission, it is entirely consistent with the literal meaning of the words, which do not admit of the gloss imposed or introduced by members of the Court of Appeal.  It is also, in our submission, entirely consistent with the observations of Justice Stein in Gruber’s Case (1998) 43 NSWLR 271 in a passage that is found at page 276B. That is to the effect that the most important purpose of the notice is accurately to set out the amount of the penalty the recipient is to pay, so as to avert proceedings by the Commissioner to recover that sum as a civil penalty.

That sum is the amount imposed by section 222AOC.  That sum is the $96,000.  The applicant never received notice of it.  There are undesirable potential practical consequences that flow from that and they are outlined in paragraphs 22 and 23 of our submissions.  One example that is given is that – and we address this point because of the perhaps natural inclination to view the fact that what the Deputy Commissioner has done here is really to do the applicant a favour by understating the amount.  If the actual liability is $200,000, let us say, and the notice – for the same reasons, because the notices as to the amount that should be remitted that had been provided by the employer were inaccurate – identified the amount having to be paid as $100,000, then a director could, acting reasonably, because the company had $100,000 in the bank, conclude that he would not take any steps to avoid being sued by paying the $200,000, because the company would be able to pay. 

That would be, in our submission, an entirely undesirable result and one which stemmed perfectly from the defect in the notice, being that it did not properly identify that which it was, by virtue of section AOE, supposed to identify, namely, the accurate amount of the penalty imposed by section 222AOC.  Your Honours will have observed from the outline that we do not shy away from, in fact embrace, the conclusion that the necessary consequence of the acceptance of our submissions is that there is a defect or an hiatus gap in the legislation. 

McHUGH J:   Yes, there is a big gap in the Act, on your submission. 

MR STEWART:   Division 8 of the Act enables the Commissioner to take action to recover amounts not remitted under Division 2 as well.  Division 8, however, applies in circumstances where the employer has not complied with its obligation to put in the notices.  In those circumstances, the Commissioner is empowered by the Act to make an estimate of the amounts that the Commissioner thinks would have fallen due and ought to have been remitted, and that power is given by section 222AFA.  The estimate is said to create a liability distinct from the underlying actual liability to remit amounts, and it is combined with provisions, including subsection (3) of that section, that ensure against double payment.  If that procedure is followed, the notice which the Commissioner must send to a person liable to remit sums is not a notice which should identify the actual liability, but the estimated liability.  This is all referred to in Woodhams’ Case at page 376, about line 12. 

In our submission, the existence of such a regime in such a closely related provision to section AOE justifies the submission that the gloss introduced by the Court of Appeal simply is not justified and that, indeed, there is a gap.  That being the case, it seems uncontroversial – and the decision of this Court in Krakouer’s Case seems to be one of the latest discussions of the principle – the existence of the defect, the existence of the gap, did not justify the Court of Appeal in introducing a gloss to fill it.  That is something that must be left to the legislature.

As to the second issue, the court concluded that the proper test is not whether some hypothetical person with no knowledge of the deductions that have been made by the company might reasonably have been misled, but rather whether the notice could have misled this particular recipient.  Your Honours will find the reasoning in respect of that at paragraph [17] of the Court of Appeal’s reasons.  That is in conflict, as the submissions point out, with the observations of Justice Stein in Gruber’s Case.  His Honour Justice Davies, in dealing with that point, seemed to draw comfort from the comments that have been made by this Court in Kleinwort’s Case and James v Federal Commissioner of Taxation.  In our submission, as pointed out in the written submissions, the passages found in those cases, while not directly on point – not on the same legislation – actually support the contention which the applicant makes. 

In any event, the notice in this case must have misled anyone, because it did not accurately identify the true extent of the penalty which had been imposed, quite separately from the notice, by AOC.  The notice…..to the facts and therefore the case is a perfectly legitimate vehicle for exploring these issues.  In our submission, they are issues of general importance, being at the very heart of such an important part of the recovery provisions of the Income Tax Assessment Act. 

In addition to being an element of the recovery provisions, they also play a very important part in the scheme which has the additional purpose of encouraging companies, through their directors, to comply with their obligations, firstly, accurately to remit notices setting out the sums they should pay to the Commissioner subsequently, and also to pay those sums or follow the other courses, such as putting the company into liquidation or administration. 

McHUGH J:   Yes, thank you, Mr Stewart.  The Court need not hear you, Mr Hack.

This case raises no question of general principle sufficient to warrant the grant of special leave and we are not satisfied that the actual decision of the Court of Appeal constitutes a miscarriage of justice in the particular circumstances of the case.  Accordingly, the application is refused.

MR HACK:   Your Honour, can we ask for costs?

McHUGH J:   Yes, the application is dismissed with costs.

AT 12.05 PM THE MATTER WAS CONCLUDED