Taxation, Deputy Commissioner of v McArdle

[2002] QDC 367

DISTRICT COURT OF QUEENSLAND

CITATION:	Deputy Commissioner of Taxation v Wells [2002] QDC 367 Deputy Commissioner of Taxation v McArdle [2002] QDC 367
PARTIES:	DEPUTY COMMISSIONER OF TAXATION Plaintiff v HEATHER MARIE WELLS Defendant
DEPUTY COMMISSIONER OF TAXATION Plaintiff v BRENT ROGER McARDLE Defendant
FILE NOS:	D3604 of 2002 D3605 of 2002
DIVISION:
PROCEEDING:	Application
ORIGINATING
COURT:	Brisbane
DELIVERED ON:	6 December 2002
DELIVERED AT:	Brisbane
HEARING DATE:	29 November 2002
JUDGE:	Judge P D Robin QC
ORDER:
CATCHWORDS:	Summary judgment application – claim against directors of company which failed to remit to Commissioner of Taxation “pay as you earn” or PAYE deductions – director penalty notices claimed to be invalid because (although they accorded with deduction amounts notified to the Commissioner) the company had not notified the full amounts of deductions actually made – whether penalty notices could be retrospectively invalidated (by advice of true amount of deductions) as too low – whether notifications by telephone were “in a form approved in writing by the Commissioner” – summary judgment granted
Income Tax Assessment Act (Cth) s220AAM, s220AAOA, s222AOB, s222AOC, s222AOE,
Uniform Civil Procedure Rules r292, r295
COUNSEL:	C. Coulsen for the applicant/plaintiff C. Wilkins for the respondents/defendants
SOLICITORS:	Australian Taxation Office Legal Practice for the applicant/plaintiff Tucker & Cowan for the respondents/defendants

REASONS FOR JUDGMENT

[1] In each of the actions the plaintiff applies for summary judgment under rule 292 of
the UCPR.

[2]     Each of the defendants was a director of a company called Bicon Management Pty Ltd, at other times known as Logic World Pty Ltd ACN 076 084 743. Ms Wells belatedly resiled from her denials in her pleading and in affidavit material of having been a director at relevant times.

[3]     The litigation arises because of the company’s failure to pay to the Commissioner of Taxation amounts deducted or withheld from people who may conveniently be regarded as “employees”, whether or not that is in all instances the applicable term. Sub-s 222AOB(1) of the Income Tax Assessment Act 1936 as amended provided at relevant times:

“[Duty of Directors] The persons who are directors of the 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 its obligations in relation to deductions (if any) and amounts withheld (if any) whose due date is the same as the due date;
(b)	make an agreement with the Commissioner under section 222ALA in relation to the company’s liability under a remittance provision in respect of such deductions (if any) and amounts withheld (if any);
(c)	appoint an administrator of the company under section 436A of the Corporations Act 2001;
(d)	begin to be wound up within the meaning of that Act.”

[4] The defendants are said to be liable under s 222AOC(1):

“[Sec 222AOB compliance] If section 222AOB is not complied with on or before the due date, each person who was a director of the company at any time during the period beginning on the first deduction day and ending on the due date is liable to pay to the Commissioner, by way of penalty, an amount equal to the unpaid amount of the company’s liability under a remittance provision in respect of deductions or amounts withheld:

(a)	that the company has deduced for the purposes of Division 1AAA, 3B or 4 of this Act, or withheld for the purposes of Division 12 in Schedule 1 to the Taxation Administration Act 1953 (as the case requires); and
(b)	whose due date is the same as the due date.”

[5] It seems unnecessary to set out here relevant definitions in s 222AFB. Section
222AOE is:

“The Commissioner is not entitled to recover from a person a penalty payable 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 subsection 222AOC(1), (1A) or (2) (whichever relates to the penalty); 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 Act 2001; or

(iv)   the company is being wound up.”

[6]     Such a notice was described during the hearing as a “DPN” (Director’s Penalty Notice). Each of the defendants was sent such a notice. Each raises as a ground of defence the invalidity of the relevant notice, claiming it asserted a liability in the wrong amount. It is a curious feature that in each case the amount set out in the notice is claimed to be too low. There cannot be many situations in which a revenue authority’s demand may be successfully challenged on the ground it is inadequate by reason of not demanding a sufficiently high payment.

[7]     Events have happened (reflecting language in lettered sub-paragraphs of provisions set out above) so that there is no prospect open to the Commissioner of issuing any new DPN.

[8]     The DPNs issued reflected accurately what the Commissioner had been told.

[9]     The company had the obligations (under threat of penalties set out) in s 220 AAOA:

“220AAOA(1) [Obligation to notify] A medium remitter that must pay an amount to the Commissioner under section 220AAM must notify the Commissioner of the amount on or before the day on which the amount is due to be paid (regardless of whether it is paid).

220AAOA(2) [Failure to notify penalty] If the medium remitter fails to do so, or notifies the Commissioner of an amount that is less than the correct amount the medium remitter is liable to pay the failure to notify penalty on the amount, or on the amount of the shortfall, for each day in the period that:

(a)	started At the beginning of the day by which the amount was due to be paid; and
(b)	finishes at the end of the day before the Commissioner receives notification from the medium remitter, or otherwise becomes aware, of the correct amount.

220AAOA(3) [Approved Form] The notification must be in a

form approved in writing by the Commissioner, unless:

(a)	it is by way of a statement under section 220AAO accompanying a payment; and
(b)	the Commissioner requires statements under that section to be in a particular form; contain particular information or be given in a particular manner; and
(c)	the statement meets those requirements.

[10] Section 220AAM(1) identifies the company’s obligations as to payment to the
Commissioner:

“220AAM(1) [7TH day after month] A person who is a medium remitter in relation to a month must pay to the Commissioner the amount of any deductions that the medium remitter makes under Division 1AA, 2 or 3A in that month by the end of the 21st day after the end of the month.

[11]     The company’s obligation is to pay “the amount of any deductions that (it) makes”.

[12]     At the time when each DPN was issued, the Commissioner had been informed (not always in a timely way, with the consequence that penalties were levied) of the monthly deductions in respect of the relevant calendar months from August 1999 to June 2000. An identical schedule is set out in the Statement of Claim filed 27 July 2001 in each matter as follows: “

The	Period of Deduction	Due Date	Amount of
Deduction	(The firsts deduction day was a day	Deduction
falling within this period)
First	1 August 1999 to 31 August 1999	21 September 1999
Second	1 September 1999 to 30 September	21 October 1999
1999
Third	1 October 1999 to 31 October 1999	22 November 1999
Fourth	1 November 1999 to 30 November	21 December 1999
1999
Fifth	1 December 1999 to 31 December	21 January 2000
1999
Sixth	1 January 2000 to 31 January 2000	21 February 2000
Seventh	1 February 2000 to 29 February 2000	21 March 1999
Eighth	1 March 2000 to 31 March 2000	26 April 2000
Ninth	1 April 2000 to 30 April 2000	21 June 2000
Tenth	1 May 2000 to 31 May 2000	21 June 2000
Eleventh	1 June 2000 to 30 June 2000	21 July 2000
Total

”

[13]     Neither defendant raises any issue as to the correctness of the last item or the DPN based on it. Further, having regard to matters standing outside that schedule, Mr McArdle concedes there ought to be judgment against him for the aggregate of $4,925.72 mentioned and an additional $19,942.48.

[14]     He wrote a letter to the plaintiff’s office on the letterhead of Logic World Internet ABN 97 076 084 743 dated 2 May 2001. The letter included some arguments against voluntary administration (which the company entered on 28 June 2001, appointing John Richard Park as administrator) and enclosed, inter alia, “Full PAYG total and monthly final reconciliation up to 1/4/00”. According to that document the deductions previously reported required substitution of higher amounts as follows:

First	August 1999	$9,107
Third	October 1999	$9,518
Fourth	November 1999	$9,800
Fifth	December 1999	$15,711

[15]     The plaintiff has accepted the higher figures are factual (meaning that deductions actually made from employees’ remuneration were higher than previously reported) and does not assert any impropriety.

[16]     Of the series of DPNs issued, only the two relating to June 2000 were in accordance with the actual deductions. The others relied on collective amounts payable in respect of more than one month.

[17] Our taxation system depends upon the Commissioner of Taxation being provided with information. The argument here is that the information supplied was incorrect, without any fault on the Commissioner’s part. Everything done by or on behalf of the Commissioner has been completely regular, for all that appears. The argument against summary judgment, which, if good, would defeat the claims at a full trial, is that a lesser amount than that indicated in s 220AAM(1) was demanded under the retrospectively challenged DPN.

[18]     No one could have any difficulty with the contention that where a DPN is wrong when issued, through the Commissioner’s doing, there may be problems in establishing the validity of the DPN. The case principally relied on by the defendants was Deputy Commissioner v Gruber (1998) 43 NSWLR 271. Stein JA (the other members of the court agreeing) said of an erroneous notice at 275-276:

“I do not accept the submission that the errors can be “blue- pencilled” out without affecting the sense, nature and substance of the document which remains. Having elected to proceed by way of a composite notice (as I believe the appellant was entitled) a recipient may reasonably expect it to correctly state the discrete liability in respect of each month. It did not. The recipient may have information of his own to check the accuracy of the material in the notice. However, here the amount said to be due for September 1994 was either overstated or was for the wrong month. The recipient is left to guess. I do not accept that it would have been “blindingly obvious” to the respondent that the October and September figures had been transposed. Nor do I see that the respondent’s knowledge is a material factor. For example, a recipient may have no personal knowledge of the deductions. Such a notice needs to be complete on its face and accurate in its substance.

The second error concerns the total amounts “you are liable to pay by way of penalty”. This was overstated by almost $130,000. I cannot regard the stated total amount of the penalty payable (printed in bold in the notice) as mere surplusage. The composite nature of the document, covering the period of months between July 1993 to November 1994, needed to be totalled to make it clear to the recipient what were the total of the penalties imposed on the director and liable to be paid by him. A recipient of such a notice will want to know what is the “bottom line”. Here the total amount payable was included but was in error and an error which was in favour of the Commissioner.

In my opinion, neither of the admittedly erroneous portions of the first notice may be severed from the notice. While the “total” may not have been required to be stated in the notice (since the Act does not expressly contemplate a composite notice) nevertheless its inclusion by the appellant cannot be said to have been gratuitous and irrelevant.

While a notice does not have to be absolutely correct (and one can well imagine some de minimis mistakes) the notice must fulfil its statutory purpose. That purpose is not merely to give the recipient the opportunity to check the accuracy of the penalties sought to be imposed by the notice. Rather it is to accurately set forth the amount of the penalty the recipient is to pay within 14 days or be sued by the Commissioner for that civil penalty. It seems to me that to any recipient the amount of the liability for the penalty is the most important aspect of the notice. It needs to be correct. It was not. Rather it was some $130,000 in excess of what it should have been had the “total” been accurate. The plain fact is that the notice overstated the amount of the penalty.

I agree with Graham A-J that, bearing in mind that the Act may visit liability on persons who may only have been directors for part of a deduction period or became directors after the due date for payment, they had the right to know precisely what liability of the company is being visited personally upon them by way of penalty. The finding of Graham A-J that the first notice was invalid was correct.”

[19] The written outline of argument handed up by Mr Wilkins, Counsel for the
defendants, includes the following:

“9. A notice that purports to be given under s 222AOE will be invalid (and a nullity) if it fails to meet a requirement that is made essential by the legislation, or it could reasonably mislead a debtor as what is necessary in order to comply with it: DFCT v Woodhams (2000) 199 CLR 370 at 385.”

[20] In my opinion that may overstate what five judges in a joint judgment intended to
convey. This is what their Honours said:

“The notice in the present case contained all the information that was necessary to fulfil the statutory purposes to be served by the notice. It informed the recipient, in detail, of the unpaid amounts of the company’s liability, and of the liability by way of penalty which the revenue authorities were asserting attached to him. It also informed him of the steps available to bring about a remission of that penalty. The statute fixed the due dates in respect of each deduction. Fulfilment of the purpose to be served by the notice before action did not necessitate informing the recipient of the operation of the statute in that respect.

The decision in Gruber, so far as it held that a notice under s 222AOE is required to set out the due dates of amounts to be remitted, is erroneous and should be overruled.

In Kleinwort Benson Australia Ltd v Crowl (36) it was said that a bankruptcy notice is a nullity if it fails to meet a requirement made essential by the legislation, or if it could reasonably mislead a debtor as to what is necessary to comply with the notice. For the reasons given above, the notices in the present case did not fail to meet a requirement made essential by the Act. In this Court it was argued, for the first time, that they were misleading. In that connection reference was also made to a covering letter accompanying the notices.

It was argued that the notices, and the letter, in asserting in a peremptory and summary fashion the recipient’s liability to a penalty, incorrectly represented the true position. The existence of liability of the kind asserted depended upon a number of facts and circumstances which, at least in theory, might have been open to question or dispute. (In fact, they were not disputed in the subsequent recovery action.) This argument proceeds upon a false premise as to the purpose of the statutory notices. They were not intended to explain the legal basis of the asserted liability. They were notices before action; not pleadings. They were designed to serve a specific purpose, explained above.

It was also argued that the notices were misleading because they failed to inform the recipient of the statutory defences available under s 222AOJ, such as that the director, at material times, took no part in the management of the company as a result of illness or some other good reason. This argument involves a similar error.

The notices, whether read alone or in the light of the covering letters, were not misleading.”

(The comment about Gruber does not affect its standing in respect of a DPN
demanding an excessive amount.)

[21]     While the DPNs here may have been factually wrong in the sense more could have been demanded from the defendants than was, they were unexceptionable in terms of information the Commissioner had been given at all relevant times. The defendants argue that this is immaterial, that it has been retrospectively revealed, upon the true amounts of monthly deductions coming to light, that the amounts levied as penalties in the impugned DPNs were too low, and that the DPNs are not saved by the Commissioner’s having correctly processed information supplied.

[22] One line of challenge was to dispute that the information upon which the Commissioner relied came in the form of a “notification” as referred to in s 220AAOA, sub-s (3) of which requires that “a notification must be in a form approved in writing by the Commissioner”, with presently irrelevant exceptions. On certain occasions, the information was provided by telephone. Although, in most contexts, the use of the word “form” might indicate there should be a document, this is not always so. Thus, the Australian Concise Oxford Dictionary says a form can refer to the mode in which a thing exists or manifests itself. A “form of address” may be spoken or written.

[23]     A further aspect of this argument was that, even if a non-written notification is permissible, it could not be shown that such a form of notification had been “approved in writing by the Commissioner”. In this regard, it has to be accepted that a document is necessary, but there is no express (nor do I think there is any implied) further requirement of an approval of a form by the Commissioner, other than writing; there is no basis for concluding that the writing must be signed by the Commissioner, for example. Mr Coulson, for the plaintiff, sought to meet this situation by an affidavit of Mr Alizart obtained during the course of the luncheon adjournment. Mr Alizart deposed:

“I have worked in the Australian Taxation Office since July 1973. I am currently an EL1 Projects Officer in Operations Division. In 1996 I was one of the taxation officers who formed part of the Documentation Review Group of the Wittholding and Indirect Taxes Policy and Procedures Manual published in 1996 (“the 1996 manual”). This manual was updated in 1997 (“the 1997 manual”). I was also part of the documentation review group for the 1997 manual. I did not have any direct involvement with the PAYG, STAX, PPS Policy and Procedures Manual-Lodgement Enforcement and Debt Establishment which came into effect on 1 July 2000 (“the 2000 manual”) but I am familiar with its contents.

I am aware from my experience and knowledge of practices and procedures in the ATO that the manuals referred to in the preceding paragraph are cleared by the Commissioner of Taxation through the normal delegation and authorisation processes and are regarded as having issued on behalf of the Commissioner of Taxation.

In 1996 and 1997 hard copies of the relevant manuals were issued to members of the ATO. I have retained my copies and the extracts therefrom, which comprise Exhibit 1 hereto, have been photocopied from my copies.

The current Policy and Procedures Manual is stored electronically on the computer system maintained in the Australian Taxation Office and can be accessed and downloaded during the normal course of the duties of a taxation officer. The copy document which is Exhibit 3 hereto has been printed from the said computer system.

Now produced shown to me and marked “Exhibit 1” is an extract from Chapter 9 page 11 of the 1996 manual and an extract from Chapter 9 page 11 of the 1997 manual.

As far as I am aware, there were no complete manuals reproduced, but rather updated pages were inserted where applicable until the 2000 manual. Also, there were various bulletins and booklets issued to PAYE and PPS withholders. Those publications included information about the new penalty arrangements for late payment of taxes. Now produced and shown to me and marked Exhibit 2 is a copy of a page from a PAYE Employers’ Payment Book which was published in April 1999.

No produced and shown shown to me and marked “Exhibit 3” is a copy of paragraph 11.2 of the 2000 manual.”

[24]     In my view any form contained in such documents as those exhibited may be taken as one approved in writing, and, moreover, approved in writing by the Commissioner. No basis appeared on which it could be suggested that the exhibits were of other than universal application or that they did not have the Commissioner’s approval. In each instance there is a provision in respect of “PAYE and/PPS” that “Debts can be established over the telephone. There is no need to ask for (a) written advice of the liability.”

[25]     Mr Alizart’s affidavit was a way of answering an affidavit from Mr Dietz, the defendants’ solicitor, on hearsay from a practising accountant, Mr Solomon, whose experience so far as he and his clients were concerned was that the Commissioner required written notifications of deductions. While there was no particular reason to doubt that hearsay material, Mr Coulson was at a disadvantage in not having Mr Solomon himself available for cross examination; however, rule 295 (2) requires the affidavit to be available to the defendants. In the circumstances, whatever Mr Solomon’s personal experience may have been, he cannot, in my view, overcome the conclusion that the evidence regarding the Commissioner’s manuals from Mr Alizart compels. The notifications on which the plaintiff relies were valid, in my opinion.

[26]     That conclusion restricts the defendants to their remaining point, of the non- coincidence between the true monthly deductions for some months and the amount of “penalty” fixed in the impugned DPNs. I accept Mr Wilkins’ point that legislative schemes may not always be perfect or internally consistent, that deficiencies may be revealed which stand in the way of achievement of what may fairly easily be identified as the legislative intention – perhaps particularly so in legislation as complex and frequently changing as the Income Tax Assessment Act and related Acts. The intention I have in mind here is one that directors be made responsible for ensuring that deductions and withholdings of the kind in question are paid over to the Commissioner.

[27]     It is convenient to set out from Mr Wilkins’ written argument:

“It is submitted that the correct statement of the amount of the liability for the penalty is properly to be characterized as an essential requirement of the legislation. The Act does not contain any provision preventing invalidity for formal defects or irregularities: cf Kleinwort Benson Australia Limited v Crowl (1988) 165 CLR 71 at 80-81 where a provision of that kind, section 306 of the Bankruptcy Act 1966 (Cth), was employed to avoid the invalidity of a bankruptcy notice which understated the amount of interest due. Strict compliance with the requisites of the notice is essential to its validity: see also James v FCT (1955) 93 CLR 631 at644. (I interpolate that James was a case about a bankruptcy notice.)

That strict compliance is required also follows from the potentially draconian effect of the provisions. Section 222AOE is a penal provision in a taxing statute and is therefore to be interpreted in the way described by Isaacs J in Scott v Cawsey (1907) 5 CLR 132 at 154-155. For the sections to impose the penalty they must be strictly adhered to; a court should not ignore the clear words of a provision so as to give it a meaning that might make it easier to impose the penalty: Krakouer v R (1998) 194 CLR 202 at 223 per McHugh J.

In Partington v Attorney-General (1869) LR 4HL 100 at 122, Lord Cairns said: “If the person sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be. On the other hand, if the Crown, seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to be.”

This statement by Lord Cairns has since been applied by the House of Lords and the High Court of Australia as stating the appropriate test for construing a taxing statute: Inland Revenue Commissioners v Duke of Westminster [1936] AC 1 at 24 per Lord Russell of Killowen; Ransom v Higgs [1974] 1 WLR 1594 (HL) AT 1617 PER lord Simon of Glaisdale; Anderson v Commissioner of Taxes (Vic) (1937) 57 CLR 233 at 239 per Latham CJ: Federal Commissioner of Taxation v Westraders Pty Ltd (1980) 144 CLR 55 at 60 per Barwick CJ, with whom Aickin J agreed (and with whose decision Mason J agreed). See also Maurici v Chief Commissioner of State Revenue (2001) NSWLR 673 (CA) at 681.

There is a recent tendency to depart from this strict approach to construction if tax avoidance is involved, or if a transaction is concealed by artificialities of form: Hepples v Federal Commissioner of Taxation (No 2) (1992) 173 CLR 492 at 510 per Deane J. This case does not involve such features.

If one of several amounts stated in a notice that purports to have been given under section 222AOE is incorrect, the error is incapable of being severed so as to validate the notice; the notice is invalid in its entirety: DCT v Gruber at 275 per Stein JA, with whom Powell JA and Sheppard AJA agreed.”

[28]     The plaintiff’s response, effectively, was to insist on the integrity of the system of notifications given to the Commissioner. It provides the information on the basis of which the Income Tax Assessment Act’s provisions are to be applied. The plaintiff asserted the impermissibility of retrospective invalidation of a DPN correctly issued, on the basis of everything that was known at relevant times. It was suggested that if the defendants’ contention was correct, then every director could escape liability from an s 222AOC penalty by simply, after proceedings had been commenced, notifying the Commissioner that a different amount had been deducted from one(s) previously notified.

[29] Without rejecting Mr Coulson’s argument, I do not find it necessary to accept it for purposes of resolving these applications. I would be reluctant to recognise anything in the nature of a blanket rule which might apply in circumstances where the penalty levied by a DPN was excessive, having regard to the provision of s 22OAAM. It is proper, here, to limit consideration to the arguments presented to the court which assert that penalties were too low, and make the assertion on the basis that true information was not supplied to the Commissioner until it was “too late”. Provided the court can be satisfied, as it is here, that a penalty does not exceed the amount indicated in s 220AAM, the recipient of a DPN which is otherwise compliant with the Act has no entitlement to object to the DPN on the sole ground that the Commissioner might have levied some higher penalty, by reference to additional deductions having been made than were in contemplation of the Commissioner.

[30]     The summary judgment applications succeed. It had been agreed by Counsel that, if judgment went only for the conceded amounts, the plaintiff would get costs, but be restricted to part only of the costs attributable to the lengthy hearing, which was essentially about issues to do with the impugned DPNs.

[31]

There will be judgment under rule 292 for the plaintiff against the defendants as
follows:

Ms Wells	$85,967.41
Mr McArdle	$105,909.89

together with costs of the relevant action including costs of the summary judgment
application to be assessed.