W. R. Healy Pty Limited and Commissioner of Taxation

[2003] AATA 476

Administrative

Appeals

Tribunal

 

DECISION AND REASONS FOR DECISION [2003] AATA 476

ADMINISTRATIVE APPEALS TRIBUNAL        NT 2001/527

TAXATION APPEALS DIVISION

Re: W.R.Healy Pty Limited

Applicant

And:    Commissioner of Taxation

Respondent

DECISION

Tribunal:       P.J. Lindsay

Date:             26 May 2003

Place:            Sydney

Decision:The Tribunal varies the decision under review by reducing the penalty for failure to deduct from $135,603.30 to $101,702.47.  The matter is remitted to the respondent with a direction that the general interest charge is payable in respect of the reduced penalty.

(sgd) P. J. Lindsay

Senior Member

©        Commonwealth of Australia          (2003)

CATCHWORDS

TAXATION – failure to deduct tax from certain payments and to remit to ATO – respondent’s decision to impose penalty and not to remit penalty for applicant’s failure - whether applicant liable to deduct tax – whether penalty should have been remitted – decision varied.

Income Tax Assessment Act 1936 ss.221C, 221EAA, 221N, 221YHA, 221YHD, 221YHDA, 221YHH, 221YHL, 221YHP, 221YHT

Taxation Administration Act 1953 ss.14ZZA, 14ZZK

Income Tax Regulations reg 126

Jones v Dunkel (1959) 101 CLR 298
Trautwein v Federal Commissioner of Taxation (1936) 56 CLR 63
Richard Walter Pty Ltd v Commissioner of Taxation (1996) 67 FCR 243
Temples Wholesale Flower Supplies v Commissioner of Taxation (1991) 29 FCR 93
A.W. Furse No 5 Will Trust v. Commissioner of Taxation 91 ATC 4,007

REASONS FOR DECISION

P.J. Lindsay, Senior Member

1. At the hearing of this application, W.R. Healy Pty Limited (the applicant) was represented by its accountant Mr G. Lawrence. The Commissioner of Taxation (the respondent) was represented by Mr D. McGovern, Senior Counsel. Mr William Richard Healy, a director of the applicant, gave evidence on its behalf. The applicant also called Mr John William Bull, a surveyor, and Mr Paul Cejka, a civil engineer, to give evidence. The Tribunal had before it documents (T documents) prepared under s.37 of the Administrative Appeals Tribunal Act1975 (the AAT Act) and the exhibits tendered during the hearing.

background

2.      The applicant has its business in the building industry. During the years in question, the years ended 30 June 1996, 30 June 1997 and 30 June 1998 (the relevant years), the applicant engaged the services of labourers and other workers  to enable it to carry out its contractual obligations to various construction companies. 

3.      On 8 March 2000 the respondent’s officers informed Mr Healy, on behalf of the applicant, that they wished to interview him (T20-80).  He was told that this was part of an audit project by the Australian Taxation Office (ATO), which was enquiring into labour hire and the hire of plant and equipment within the building and construction industry.  By letter dated 10 November 2000 (T25-89) the applicant was advised that the audit had been concluded and that:

… a failure to deduct penalty has been imposed against payments made to Southern Cross Excavation, Barrowmount Construction Services Pty Ltd and Kilmoylan Construction Pty Ltd.  The undeducted amount from these payments has been calculated at the top marginal rate of tax and the penalty has been imposed at 100%.  A General Interest Charge will apply in this instance.  The breakup of the undeducted amount and penalty is attached.  You will receive an advice in the near future requesting payment of the amount outstanding.

The attachment to the letter was headed ‘Penalty Calculations’..  It referred to various periods between 31 August 1995 and 30 June 1997.  For each period, the attachment specified an undeducted amount as well as a flat penalty applicable to the undeducted amount.  The total of the undeducted amounts was $135,590 and the total of the flat penalties was also $135,590.  As will appear below, the total for the undeducted amounts seems to be incorrect and is $135,603.30. 

4.      Subsequently, the respondent issued to the applicant a document headed ‘PAYE running balance account (RBA) statement’ (Exhibit R6).  It was dated 6 December 2000. The total sum shown therein as due and payable, $231,785.37, corrected an omission from the penalty calculated in the attachment to the respondent’s letter of 10 November 2000.  The sum of $231,785.37 included a total for general interest charge to date of $96,182.07.  The respondent’s statement of facts and contentions noted that the sum of $279,595 was the total of amounts paid by the applicant to Southern Cross Excavation (Southern Cross), Barrowmount Construction Services Pty Ltd (Barrowmount) and Kilmoylan Construction Pty Ltd (Kilmoylan) during the years ended 30 June 1996 and 30 June 1997.  It would appear from the respondent’s statement of facts and contentions, that the quantum of the penalty, excluding the component for general interest charge of $96,182.07, has been calculated as 48.5 per cent of $279,595. 

5.      On 11 December 2000 Mr Lawrence, on behalf of the applicant, wrote to the respondent (T27-93) to object against the respondent’s decision to impose a penalty including interest of $231,785.37, which the objection inferred had been imposed “for failure to deduct for the period 1 February 1996 to 7 August 1996 inclusive and 1 January 1997 to 7 July 1997 inclusive”.  The grounds of the objection were expressed as follows:

W.R.Healy Pty Limited (the company) did not employ the people for whom you claim deductions should have been made.  “The company” needed labourers on its building site and these labourers were provided by a labour hire company.

It is contended that the labourers were at all times employees of the labour hire company and it is strenuously denied that they could ever be held to be employees of “the company”..  To support this contention I would initially refer to the case of World Book (Australia) Pty Limited v FC of T 92 ATC where the NSW Court of Appeal held that PAYE tax instalments were not required to be deducted because those payments did not constitute salary or wages within Section 221A(1) of the Income Tax Assessment Act 1936. …

The facts of this matter are that “the company” entered into an implied contract with a labour hire company to supply workers.  Those workers were always employees of the labour hire company and the contractual payments between “the company” and the labour hire company are, by virtue of the World Book and Vabu [96 ATC 4898]  cases, payments wholly for the purpose of providing a result and as such the payments are not payments under a contract for labour. …

I would also draw your attention to the last paragraph of the preamble in TR 1999/13 under the heading “Labour Hire Arrangements”.  The last sentence of that paragraph states ‘Therefore, the labour hire firm is liable to make PAYE tax instalment deductions from payments to contracted workers …’

… the responsibility for PAYE deductions was at all times with the labour hire company and as such I ask that all penalties be immediately withdrawn.

6.      The objection has been treated by the respondent as an objection against the decision not to remit any of the penalty imposed for the applicant’s failing to deduct tax from its payments to Southern Cross, Barrowmount and Kilmoylan.

7. By notices dated 19 June 2001 (T28-95, 28-98, 28-101), the respondent disallowed the objection against the decision of 10 November 2000 in respect of the relevant years. In his reasons for disallowing the objection (T2-7) lodged with the Tribunal under s.37 of the AAT Act, the respondent stated that the background to the decision was the audit of the applicant in relation to its failure to deduct the relevant tax payments under the Prescribed Payments System (PPS). The reasons noted:

Questions raised and our response:

We consider your objection raises particular question(s).  These question(s) and our answer(s) to them are set out below

Whether the taxpayer failed to deduct the relevant tax payments relating to the Prescribed Payments System.

Yes.  The taxpayer has failed to deduct the Prescribed Payments and the penalty is to be maintained.

…

We considered these to be the relevant facts:

The taxpayer is involved in the building and construction industry.

The taxpayer was audited by the ATO.

The audit concluded that there was a failure to deduct Prescribed Payments amounts from payments made to so called ‘bodgie’ hire companies which were to supply labour and/or material to the taxpayer company.  A cheque is paid to the hire company and an amount of cash is paid back to the taxpayer company less a commission. 

The penalty was imposed for the failure to deduct for the years ended 30 June 1996, 1997 and 1998.

The respondent’s reasons stated that his decision had taken into account the provisions of the Income Tax Assessment Act 1936 (the Act) in Part VI, Division 3A – collection of tax in respect of certain payments for work (prescribed payments).  Not only did the respondent’s decision find that there was a liability to withhold tax from the applicant’s payments to Southern Cross, Barrowmount and Kilmoylan, it also “maintained” the penalty without any remission.  The applicant seeks review of the decision to impose penalty, without any remission, for failure to deduct tax from the payments.

evidence

Mr Healy

8.      In his evidence, Mr Healy said he was born on 4 July 1953 in Bendon, County Cork, Ireland. After he moved to Australia in 1974, he found work in the building industry doing formwork and carpentry. Mr Healy later became a licensed builder and started his own business in 1981 as a contracting form worker.  He said that most of his business at the time came from a company called Abignano, which he said later changed its name to Abigroup Limited (Abigroup) and became a public company. He did concrete, steel and form work for Abignano.  Mr Healy said he obtained this work by word of mouth.  He did not have to engage in a formal tender process to secure jobs, although he did provide written quotes. According to his evidence, he would make progress claims on Abignano and receive progress payments.

9.      Mr Healy’s witness statement dated 9 January 2002, which was admitted in evidence (Exhibit A1), stated as follows:

1. W R Healy Pty Limited (hereinafter referred to as WRH) carries out specialist contracting work for various large construction companies. These corporations at times require that a sub contractor is prepared to carry out work at short notice day or night. Between the years 1995 to 1999 WRH contracted with Abigroup, Leighton Contractors, CSR Hebel, John Holland Constructions and Westfield Design and Constructions. …

2. Commencing around July 1995 part of the work of WRH involved the upgrading of railway stations owned by the State Rail Authority where the head contractor was Abigroup.

3. Because of the need to avoid peak commuter travel periods much of the work for the State Rail Authority had to be carried out during weekend shutdowns of the stations. The operations were labour intensive and required the immediate mobilisation of labourers, carpenters, steel fixers and concreters as soon as the shutdown was notified. The work generally continued through the day and night typically from Friday night to Monday morning.

4. The required labourers were hired from various labour hire companies at agreed hourly rates. Because of the need to appease the trade unions these hourly rates were extended into a lump sum figure and it is this lump sum figure which was charged on the labour hire company invoice. All invoices rendered by WRH are held by the company and available for inspection as required. Similarly all quotes given are documented and can also be inspected.

5. The railway stations upgraded during this period included West Concord, Rhodes, Strathfield, Kogarah, Hamilton (Newcastle), Westmead and Parramatta. The head contractor for all these jobs was Abigroup.

6. Other work carried out during the same period included a bridge duplication over the Georges River at Liverpool, the head contractor being John Holland Constructions and the construction of acoustic sound barriers around a timber mill at Oberon owned by CSR.

7. In all instances the hire labour had to be sourced at short notice and they had to be prepared to work long shifts and work at odd hours.

8. WRH did at most times employ labourers and tradespeople each of whom was paid a wage, the appropriate deductions were made and remitted to the Australian Taxation Office and a group certificate issued at year end.

9. All labour hire arrangements were made at arms length. Neither WRH or William Richard Healy (hereinafter referred to as WH) were involved or had any association whatsoever with any of the labour hire companies.

…

10.     At various times Mr Healy’s business employed from 2 people to 19 people. He said he also had a lot of contractors who were subject to the PPS.  For example, if a job required a large amount of concrete to be poured over a day or so, Mr Healy would hire a few concretors to perform the necessary labour. He said he did not require a concrete truck because that was usually supplied by Abignano.  Asked to describe his participation in the PPS, Mr Healy said that when he required the services of a sub-contractor, such as a concretor or steel fixer, he would ask to see their PPS certificate and he would then deduct tax in accordance with the rate stipulated in the certificate.  Mr Healy had a nil rate of deduction PPS certificate himself, which he quoted to Abignano.

11.     On the advice of his accountant, from July 1994 Mr Healy conducted his business through W.R. Healy Pty Ltd, the applicant in this matter. His evidence was that incorporation did not change his business practices in relation to the use of contractors or his reliance on what he called his core contractors.

12.     During 1996, Mr Healy met a Mr John O’Reilly on the Greenwich Hospital site where the applicant was doing underpinning work for Abigroup. The applicant had negotiated an hourly hire rate with the Abigroup.  Mr Healy recalled that he needed some labourers to help with the excavation and jackhammering involved. Although the applicant had employees of its own, he said none were working at that site.  The number of labourers required depended on the extent of the under-pinning that became evident during the excavations. Mr Healy said Mr O’Reilly came up to him on the site and offered him the services of some labourers for a certain amount. Asked whether he could explain Mr O’Reilly’s appearance at this particular time, on this particular site, Mr Healy said that the grapevine in the building industry meant that most people knew where projects were going on and whether labour was needed. Mr Healy accepted Mr O’Reilly’s card and later called a telephone number on it and asked for four labourers to help at the site the next day. The arrangement they made was for a company, Kilmolyan, to provide the labourers and in return the applicant was to pay Kilmoylan an agreed hourly rate for each man. 

13.     Mr Healy’s evidence was that the amount he paid Kilmoylan was noted on the invoice as a lump sum price.  The amount was not stated as being for the agreed hourly rate times the number of men times the number of hours. The reason for referring only to a lump sum, Mr Healy said, was that the unions objected to what was termed pyramid sub-contracting, which involved one contractor providing labourers to another contractor who in turn provided them to, in this case, Abigroup. Mr Healy’s evidence was that he paid Kilmoylan’s invoice by cheque. He did not deduct any PPS because he said Kilmoylan had a nil PPS certificate. Mr Healy’s evidence was that both Barrowmount and Southern Cross Excavation also had nil PPS certificates.  He said that when he gave cheques to Kilmoylan, Southern Cross or Barrowmount in payment for the labourers’ services, he did not receive any money back from those businesses.

14.     The T-Documents (T3-10 to 12), contained PPS deduction variation certificates as follows:

Taxpayer	Date of Issue	Minimum Reduction Rate
Timothy James Walsh T/As Southern Cross Excavation	27 Mar 1995	0%
Barrowmount Construction Services Pty Ltd	27 Aug 1995	0%
Kilmoylan Constructions Pty Ltd	28 May 1996	0%

15.     Mr Healy said that the labourers supplied by Kilmoylan on the Greenwich Hospital site and later jobs were pre-dominantly English-speaking backpackers.  He did not see payment being made to the labourers. While Mr Healy agreed that it was common in 1995 and 1996 for Irish backpackers on temporary visas to work as labourers in the building industry, he said he had no knowledge of their insisting on being paid cash wages.

16.     During the relevant years, Abigroup secured a number of contracts with the State Rail Authority of New South Wales in the course of its upgrading or re-construction of stations around Sydney. Abigroup subcontracted parts of the work to the applicant.  These jobs would frequently require the applicant to start work late on Friday night and finish its work by early on Monday morning.  Mr Healy said that if he needed labourers or steel fixers to help with digging out the platform, re-constructing the platform with pre-cast concrete panels or related steel work, he could approach Kilmoylan or others to whom he was referred. Mr Healy said the applicant did not enter into formal agreements with Kilmoylan for the provision of labourers, adding that the lack of formal agreements was not unusual in the building industry. He said that he was also approached by backpackers who wanted work.

17.     Under cross-examination, Mr Healy agreed that neither Southern Cross, Barrowmount nor Kilmoylan provided the applicant with written quotations for the work or services they proposed to supply. Mr Healy said that invoices received from Southern Cross, Barrowmount and Kilmoylan were always for lump sum amounts. He agreed that it was not possible from those invoices to work out the number of men involved or the hourly labour rate per man that had been charged to the applicant. 

18.     An invoice dated 16 August 1995 from Southern Cross to the applicant claimed $10,000 by way of progress payment in respect of an upgrade to Strathfield station. The invoice noted “claim for work carried out at the abovementioned station, excavation and removal of spoil. Lump sum price. As agreed. (sgd) T G Walsh” (T9-19). Mr McGovern asked Mr Healy if he could, from the information in the invoice, determine how many men had been involved in the project and their hourly rate, and whether he could say how much spoil had been removed.  Mr Healy said he could tell from the invoice that the agreed hourly rate was $30 but he could not say how much spoil was removed or how many men were involved in the job. Mr Healy said that he engaged Southern Cross, for this particular job, without a quotation and that he agreed to pay whatever amount was invoiced. In explanation he said that he would know whether the price charged was about right because he was working on site, and would have known how many men had been working on the job and for how many hours.  Mr Healy conceded, however, that the invoice was incorrect in so far as it noted that Southern Cross would remove spoil, because he said Southern Cross did not carry out any removal of spoil.  He further conceded that some of the applicant’s jobs were carried out at the same time, and in such circumstances he could not have been at every site all of the time and would not have been in a position to supervise all of his labourers.  Mr Healy was cross-examined about an invoice from Southern Cross dated 7 February 1996 (T9-24).  The invoice stated that it was a progress claim for work to date at Kogarah station.  Mr Healy said that this job required three to four men.  He said he paid the lump sum invoice for $4,300 without regard to how much work the labourers actually performed.

19.     Mr Healy said that he was not aware, in around 1995 and 1996, of the expression ‘bodgy company’ being used in the building industry to describe a company that pretended to be a labour hire firm but in fact did nothing more than cash cheques. He was familiar with the Irish term ‘the craic’, which he said means ‘having a good time’, but was not aware it was used by Irish people in the building industry in Australia to describe bodgy companies. It was not until late 1999 or early 2000 that he learnt about bodgy companies, when he was informed by a colleague that the National Crime Authority (NCA) had arrested four or five directors of certain companies in the building industry. He said that he now accepts that Southern Cross, Barrowmount and Kilmoylan were bodgy companies in the sense that those companies were pretend labour hire firms. Mr Healy denied engaging bodgy companies to cash cheques so that he could make cash payments to labourers working for the applicant. In cross-examination, he said the applicant first engaged the services of Southern Cross, and then, after dealing with that firm, engaged the services of Barrowmount, and then later dealt with Kilmoylan.

20.     In response to a summons to produce documents to the Tribunal, Mr Healy said he had produced all the documents held by the applicant in relation to its dealings with Southern Cross, Barrowmount and Kilmoylan.  No quotations or specifications from those companies were produced, nor was any document produced that noted the identity of people who worked on jobs for which those companies invoiced the applicant.  Mr Healy said that, during the relevant years, he did not keep a site diary. He agreed that the hourly rates paid to those companies could not be verified by reference to any documents.  He said it was not simply a matter of his trusting these companies.  He worked on the sites alongside the men supplied and saw how many were involved, the time taken and the equipment in use that those companies had to provide. An invoice from Southern Cross dated 24 August 1995 (T9-20) in the sum of $6,452 was a progress claim that stated it was “for work carried out at Westmead st.  Supply of labour & materials.  Excavation & removal of spoil”.  Mr Healy told Mr McGovern that the charge for the equipment, in this instance dump trucks, would have been a reasonable amount for the work that was done.

21.     Mr McGovern suggested to Mr Healy that because the invoices the applicant received from Southern Cross between August 1995 (T9-19) and February 1996 (T9-24) were all signed “T.J.Walsh” in roughly the same place on the invoice, that Mr Healy had simply filled in the rest of the invoice.  Mr Healy denied doing that and denied receiving the invoices in blank.  The invoices were either progress claims, for which Mr Healy said there were no written agreements detailing the progress claim arrangements, or invoices submitted on completion of a job.  All invoices were for lump sums and did not contain any detail, which Mr Healy said was designed to eliminate problems with unions.  He agreed that the applicant’s invoices to Abigroup separately itemised the labour component, by reference to the number of men involved, the rates of pay and the hours they worked.  He agreed that the applicant’s invoices to Abigroup were in marked contrast with the invoices from Southern Cross, Barrowmount and Kilmoylan.  Asked to explain why the applicant did not insist on Southern Cross, Barrowmount and Kilmoylan providing quotations and detailed invoices, Mr Healy’ again replied that he worked on the site with the labourers, carpenters and steel workers those companies supplied, and he knew how many men were involved in a job and the number of hours they worked.  He conceded that as some of the applicant’s jobs were undertaken concurrently, he could not have supervised each job.  It was also suggested to Mr Healy that when the applicant was dealing with legitimate subcontractors, he insisted on considerable detail. An invoice dated 11 October 1996 (T11-33) from Disklane Pty Ltd specified the number of men to be supplied, the hours worked, the days worked and a claim for their travelling time. Mr Healy denied that detail of this nature was missing from Southern Cross, Barrowmount and Kilmoylan invoices because those invoices were not genuine invoices but fabrications.

22.     It was apparent from the questioning about par 9 in his statement (Exhibit A1) referring to the applicant’s dealing at arm’s length with Southern Cross, Barrowmount and Kilmoylan, that Mr Healy did not understand that ‘arm’s length’ meant genuine dealings.  Mr McGovern put it to him that the dealings with those companies were the result of collusion, which Mr Healy denied. 

23.     On a few of the applicant’s jobs with the Abigroup, such as for work carried out at Warringah mall and Westmead station, the applicant submitted claims for additional labour.  Mr McGovern put it to Mr Healy that the claims were made because the applicant was responsible for paying for extra men.

24.     Mr Healy was referred to an invoice for $53,775 from Southern Cross dated 12 June 1996 (T9-31).  The invoice stated that it was a progress claim in respect of panelling, moulding and sealing work at a cinema complex.  There was no detail covering hours, rates or equipment and no other documentation that would make clear how the figure was arrived at.  He said he had no back up that would clarify the basis on which the progress claim was made.  Mr Healy’s evidence was simply that it was a large job.  He thought it was for two to three months work.  Asked to explain why the firm would delay in rendering its account for two to three months, Mr Healy thought he would have had discussions with the firm and informed them that he did not have the funds to pay at that time.  He could not offer an explanation for receiving either this invoice or the invoice from Kilmoylan dated 4 June 1997 (T12-43) for $45,250, both being invoices submitted not long before the end of the financial year, for large sums and containing very little detail.  During the audit interview on 12 October 2000, Mr Healy had been questioned about the receipt of large invoices close to the end of the financial year. His response was that these claims were larger because the companies did not complete their paperwork until the end of the year.  He was also asked why a company would not invoice in respect of workers who would stay at a particular job for only a few weeks at most, thus requiring the company to keep its affairs up to date if only to make correct termination payments (T23-84).  His response was that this was the way the companies operated. 

25.     Mr Healy accepted that Irish backpackers commonly worked as labourers in the building industry in the mid-1990s. He also acknowledged that they were in Australia on temporary visas and were transient workers.  Mr Healy had no knowledge of Irish backpackers insisting on cash payment for their work in the industry.

26.     Mr Healy told the Tribunal that the applicant did not employ many labourers of its own because of the paperwork involved.  He said that he has dealt with other labour hire firms, in addition to the three bodgy companies.  He named an individual, Kelly, as his contact for labour hire when steel fixers, carpenters and labourers are required.  Some of Kelly’s invoices quote hourly rates, depending on whether the site is a union site and thus the need to avoid references to pyramid subcontracting.

Mr Bull

27.     Mr John William Bull, a self-employed surveyor, gave evidence that he first met Mr Healy in about 1983.  At that time Mr Bull was employed by Abignano, who had a contract with Mr Healy relating to the construction of two bridges over the freeway at Somerset.  Mr Bull said that, some years later while he was employed by CSR Hebel as a contracts manager, he was involved in a project with Mr Healy to build a noise attenuation barrier around CSR’s timber mill and logging field at Oberon. The work was definitely carried out in mid-year 1996.  Prior to coming to the hearing, Mr Bull had checked some photos he had taken while working on the Oberon job and obtained the date from the photos.  He recalled that Mr Healy’s part of the project would have taken approximately two to three months.  He said that it was the usual practice for contractors to submit their bills to CSR Hebel at the end of each month and for CSR to pay the invoice after thirty days.  Mr Bull had to authorise payment of such progress claims.

28.     In his statement dated 23 December 2001 (Exhibit A2) Mr Bull noted that Mr Healy’s contracts with CSR Hebel required him to supply all plant, equipment and labour.  Mr Bull stated that he was aware that the applicant engaged subcontractors with specialised boring equipment, as well as casual labour to carry out the manual work.  In answer to Mr McGovern, he acknowledged that he did not see any  contracts between the applicant and subcontractors or other people and that his observation about the applicant’s use of subcontractors was based on his own knowledge of usual practice in the building industry.  He thought the Oberon job was finished in about two to three months.  He recalled the applicant lodging claims for monthly progress payments, which were usually paid within thirty days. In Mr Bull’s experience it would be extraordinary for there to be a six month delay in making payment.

29.     It was also Mr Healy’s recollection that the job with CSR Hebel at Oberon was completed in about three months and by the end of July 1996.  If he submitted a progress payment claim Mr Healy would expect payment within 60 days though it could take longer.  He recollected receiving an invoice from Southern Cross in relation to the Oberon project and delaying its payment.  Mr Healy denied that the invoice from Kilmoylan dated 4 June 1997 “ … for supply of labour, materials and equipment for installation of noise wall around CSR mill Oberon, NSW.  Lump sum price as agreed.  $45,250”  (T12-43) and signed by John O’Reilly, was a false invoice.  Mr Healy thought there must have also been an invoice from Southern Cross in 1996 for the Oberon project.  He confirmed that he did not receive a quotation from Kilmoylan for the work referred to in the invoice.  He agreed that, from the invoice, it was not possible to determine the rate of hire for the equipment or an hourly rate for the labour.  Mr Healy’s evidence was that the equipment referred to was a crane and the materials were electrical tools.  He said that he had a fair idea of the time taken for the job and he could estimate whether the amount invoiced by Kilmoylan was a fair figure including a fair charge for the crane. Mr Healy insisted that the Kilmoylan invoice T12-43 was a genuine invoice, that the applicant did work at Oberon in 1997 and that Kilmoylan provided it with labourers and a boring rig at the time.  He could not explain why Mr Bull did not refer to a second job at Oberon in 1997.

Mr Cejka

30.     Mr Paul Cejka, a civil engineer employed by Abigroup, gave evidence about his business dealings with Mr Healy throughout the past fifteen years. Mr Cejka said that during the relevant years, Abigroup had a contract with State Rail Authority for platform reconstructions and upgrades, some of which had to be carried out on weekends. Mr Cejka was responsible for the letting of contracts to subcontractors. For excavation work, Mr Cejka said Abigroup arranged with subcontractors such as Mr Healy to quote on an hourly hire basis. Abigroup supplied all of the materials for the work, Mr Healy provided the labourers and some of the equipment.  He estimated that between 20 to 40 labourers would be needed over a weekend for a platform reconstruction. Initially the applicant had to submit tenders. As it became apparent that Mr Healy was able to find experienced people and complete the jobs on time Abigroup no longer required formal tenders.  

31.      Mr Cejka said he saw Mr Healy at various railway platform reconstruction sites.  He said Mr Healy would be directing and controlling a gang of men when working on a railway site during a weekend closure.  Under Abigroup’s contracts with subcontactors, such as the contract with the applicant for the Warringah mall project, the applicant was to be wholly responsible for superintending its part of the works.  Mr Cejka had referred in his statement dated 9 January 2002 (Exhibit A3) to the projects that the applicant was subcontracted to complete between 1994 and 1998.  To Mr Cejka it was relevant to distinguish the different kinds of projects that Abigroup, and the applicant as subcontractor, had completed. One such project, at Strathfield rail station, was described as ‘platforms replacement’.  A project at Kogarah rail station was a ‘platforms extension’ project, another project at Kogarah was a ‘station replacement’, and a project at Westmead rail station involved a ‘station upgrade’.

32.     Abigroup’s procedures for approving payment of subcontractors’ invoices did not require the subcontractor to submit source documents supporting the claim for so many hours of work by different categories of workers.  A foreman’s recall of such details could suffice.  If, during the course of a job, Mr Healy decided that he would require additional labourers and could justify his requirements, Abigroup would pay the applicant for the extra men and pass on the claim to their client. Mr Cejka was unable to explain why the applicant’s claims for additional men and equipment hire were approved by Abigroup but reduced by 6 per cent (Exhibit R5).

Mr Schlosser

33.     An affidavit dated 11 June 2002 by Mr Robert Schlosser, one of the respondent’s officers, was accepted in evidence as Exhibit R2.  From March 1998 to 5 April 2002 Mr Schlosser was posted to the NCA to assist in an investigation known as Operation Tubu.  Based on that experience Mr Schlosser gave expert evidence about the characteristics of bodgy companies.  Mr Schlosser stated:

3. Operation Tubu was commenced as a joint investigation between the NCA and the Australian Taxation Office (‘the ATO’) in November 1997 in relation to tax fraud by a large number of Irish born members of the NSW building and construction industry.

4. That investigation revealed that a significant number of companies / businesses, known in colloquial parlance as ‘bodgies’ have operated fraudulently in NSW over the last ten years.

5. The term ‘bodgie’ refers to a tax evasion scheme which has operated in the building and construction industry in Australia. The main purpose of a bodgie is to operate as a cheque cashing facility. The bodgie charged a commission for cashing the cheque. While the bodgie operates under the guise of supplying plant, equipment or labour it does not supply any of these items. Where the bodgie is a company it is registered with the Australian Securities and Investment Commission sometimes using false identification in a false name. Bank accounts are opened in the company name. The promoter of the bodgie obtains a nil PPS variation certificate from the Australian Taxation Office which enables the company to create the impression that it may receive payments without tax being deducted. Companies and persons dealing with the bodgie are provided with invoices stating that services such as labour or plant hire were provided, when in fact those services have not been provided. The bodgie has no labour force, does not supply the services it purports to supply and generally does not have any equipment. The scheme facilitates the payment of cash wages to workers thereby evading the payment of group tax which ordinarily would have been deducted from any wages paid as well as avoiding any payment of superannuation and workers compensation payments.

…

7. The bodgie entities purported to hire out labour and equipment but did not legitimately do so and usually had little or no equipment to hire. The NCA obtained a number of statements from witnesses who had dealings with a bodgie entity which supported this conclusion. Copies of those statements are contained in Exhibit RS1. Two of these statements, that of Colin McAusland and Matthew Nagle have been filed in these proceedings. I have also consulted the records held in electronic form by the Australian Taxation Office in relation to bodgie entities and found that in most instances they were not registered to remit PAYE or PPS, or if registered had not remitted any PAYE or PPS.

…

9. The major services provided by the bodgies was a cheque cashing facility for persons and entities engaged in the building and construction industry and for this assistance a 6-7% commission was charged. The benefit of the bodgie to a participant was that it facilitated the payment of cash wages to workers without a deduction for group tax. Usually a cheque would be drawn by the participant and exchanged with the bodgie for cash (less the 6-7% commission) which would then be used to pay the workers.

10. The participant was able to attract and retain workers because of the cash wages without a deduction for tax at source.

11. Also if there was an audit by the Australian Taxation Office the participant would be in a position to suggest that he did not have any employees on the books and had only engaged workers through the bodgie labour hire company. Many of these are believed to have been Irish travellers on holiday visas, who departed Australia without declaring any of their income. 

12.  Other benefits which were available to a participant were:

(a) the flexibility to employ, stand down and dismiss workers without normal employer obligations and the administrative burdens associated with PAYE employees.

(b) reduced operating costs through avoidance of deducting group tax, PPS tax, superannuation, workers compensation and other normal operating expenses.

(c) a reduction in operating costs, which enabled a participant to underquote other legitimate competitors when a tender was put in for a contract.

…

16. Each bodgie normally existed for approximately 12 months and at any one time a number operated concurrently. A number of factors were critical to the success of a bodgie:

(a)  persons with no or a limited record of tax compliance in Australia were able to obtain 0% PPS variation certificates;

(b)  liability for deferred tax was normally attributed to the bodgie which had by that stage ceased operation;

(c)   the predominant use of sub-contracting within the building and construction industry enabled fraudulent invoicing to be readily concealed by participants;

(d)  good knowledge of ATO audit processes enabled strategies to be devised to avoid those processes;

(e) Irish nationals in Australia on working holiday visas provided a cheap pool of labour.

18. The applicant in this matter dealt with the following bodgies: Southern Cross Excavations Pty Ltd, Barrowmount Construction Services Pty Ltd, and Kilmoylan Construction P/L. As a result of my investigations, research and experience in relation to bodgies, I am able to conclude that each of these companies fitted the profile of a bodgie and operated in the manner described.

34.     A number of witness statements were exhibited to Mr Schlosser’s affidavit.  Each witness made their statement with an assurance by the NCA that the statement and the information within it would be used for the basis of an application for indemnity from prosecution to the Commonwealth Director of Public Prosecutions. Some of the witness statements are referred to below.

Witness statement of Mr Nagle

35.      The witness statement of Mr Matthew Nagle dated 17 January 2000 was separately accepted in evidence as Exhibit R1. Mr Nagle is a company director of a firm called CID Plastering. He was not required to attend the hearing for cross-examination.

36.     Mr Nagle’s statement referred to his introduction to Irish renderers and plasterers in mid 1996.  He was undertaking a major rendering project and in answer to his advertisement, was approached by an Irish man, Padraic Macentameny, who applied for work.  After working with Mr Nagle for a few days, Padraic offered to get other Irish renderers and plasterers to help complete the job.  This arrangement led to Padraic finding all types of tradesmen including plasterers, renderers and general labourers for Mr Nagle.  Mr Nagle stated that all the Irish workers were a tight group:

…

17. During my dealings with Barnard Civil [a labour hire firm] some of the workers who had stayed with me, through the ATO audit had learned that Barnard Civil was just a front company that was designed to provide cash wages to the employees. When the staff I had on my books found out about this system which the Irish guys were on, most of them approached Padraic and asked him if they could go onto the system as well.

18. The Irish guys would not let any other people go into the system unless they were Irish or Australian Catholics.

19. It was through the workers changing systems from me paying them wages to being employed through Barnard Civil, Southern Cross and Kilmoylan Construction I became aware that Barnard Civil, Star Suppliers, Abbey Excavations, Southern Cross and Kilmoylan were cash wages systems. I came to know at a later stage that these businesses were referred to as Bodgies, the craic or the sausage. …

20. During my dealings with the Irish community, I can say that Irish people quite often used the term ‘craic’, which could have a number of meanings. However, on most occasions when the term was used in the building industry, I knew it to mean the cheque cashing system also known as the bodgie or the sausage. One of the most common usages I can recall for the word was when I was discussing employment and wages with an Irish guys they would say something like ‘are you being sorted with the craic’.. I knew this to be an offer by them to arrange a person to supply a further bodgie company, so they could get cash wages. …

34.  From the outset I knew that Kilmoylan was a bodgie company again set up to provide cash wages.  I knew that this company was cashing cheque for a commission.  I am not sure at what stage I first got to know about it but at some stage I came to know that the commission retained by the bodgie operator was usually 7 percent, however on occasions this varied.  …

Witness statement of Mr McAusland

37.     The witness statement of Mr Colin McAusland dated 18 October 1999 was separately accepted in evidence as Exhibit R1.  Mr McAusland was not required to attend the hearing for cross-examination.  Mr McAusland is a director of Metropolitan Dampcure Pty Ltd, which started a business of building maintenance and waterproofing in 1985.  He first became aware of Kilmoylan through an Irishman, Tim, to whom he was introduced by two labourers he was employing on a job.  He stated:

9. Approximately 3 years ago in 1996, I became aware of a business called Kilmoylan Constructions Pty Ltd (Kilmoylan). A person I only know as Tim introduced this business to me. Tim was an Irish person. I first met Tim through two guys I employed at Bondi, I only recall their names and [sic] Jim and Allan. They introduced me to Tim and asked me if they could be paid their wages through the company Kilmoylan.

10.  The two guys told me about a system that Kilmoylan was offering. From that time I used the company Kilmoylan. Originally for the wages for these two guys, I would write out a cheque to Kilmoylan and give it to either Allan or Jim, and they would take it to Tim. I did this with the understanding that they were only using Kilmoylan as a cheque cashing service. Allan and Jim told me that Kilmoylan never had anything to do with the supply of the labour that these two people were providing to me.

11.   I knew that Allan and Jim would take the cheque to Tim who would cash it and retain a seven- percent commission for doing so. Tim would give the balance of the cash back to Jim and Allan, which was for their wages. Allan or Kim gave me a Prescribed Payment System variation certificate of 0% for Kilmoylan which allowed me to not deduct tax from the wages. I knew at the time of paying the cheque to these guys that it was not a legal way of paying wages.

…

13. Under the system with Kilmoylan, the seven- percent was deducted from the workers wages, no additional money was paid in the cheque to cover the seven- percent.

…

15. Under this arrangement with Tim, when I needed wages for workers, I would ring him on his mobile telephone. I would tell him that I needed a certain amount of cash and when I needed it. Tim would then add his seven- percent to the amount that I needed. I would meet Tim as per the arrangement on the telephone. On most occasions that I met him it was in the Royal Hotel in Randwick, usually in the carpark or very close by, but that was dependant on where I was working at the time. When I met Tim, he would have the cash for me then and there, I would have my chequebook there with me and write him out a cheque for the whole amount including the seven- percent. At the time of the exchange Tim would give me the cash, which was always in an envelope. Under this system I do not recall any invoices being given to me.

…

19. None of the payments to Tim or the company Kilmoylan was legitimate, Kilmoylan never supplied any labour or services to Metropolitan Dampcure Pty Ltd. other than cheque cashing. All of my dealings with Tim occurred in the same manner. At the end of the relevant financial years I claimed that the payments made to Kilmoylan were legitimate expenses incurred in the employment of subcontractor to complete work for Metropolitan Dampcure Pty Ltd. I never informed my accountant that these payments were not legitimate.

…

Witness statement of Mr Ganley

38.     Mr John Timothy Ganley, a director of a company that conducts civil construction, made a statement dated 16 May 2000 as follows:

19. My records indicate that the first payment I made to Southern Cross was on or about the 16/9/95. Chris again gave me a PPS variation certificate and insurance documents for Southern Cross. No tax was deducted from any of the wages paid through Southern Cross due to the PPS variation certificate that was given to me. Chris and the others stayed with me up until I started a job for the R.T..A. at Warimoo in around February 1996. A short time later in about March 1996 Chris introduced me to three other workers, Mick Coughland, Edward Quigley and one other whom I can not recall the name of. These three worked with me for a short time under Southern Cross.

20. At the Warimoo job, effectively Mick Coughlan took over from Chris. He organised for the wages for the boys, originally through Southern Cross but a short time after that it was through a new company called Star Suppliers. Effectively none of the workers that were there actually changed, only the company that they wanted to get their wages through changed. Again with this scenario, I kept the wages in a diary, the hourly rates of pay were set by me. I never met any person from Southern Cross Excavations, nor did I have any contact with any one else other than Chris and later Coughlan for Southern Cross. At the Warimoo job I have the cheque for the wages to Coughlan each week up until he left on or around the 10/10/96. I do not know what he did with the cheque after I had given it to him. …

Witness statement of Mr McCrossan

39.     Mr John Damian McCrossan, a director of an excavation and pipelaying company, made a statement dated 24 June 1999 as follows:

29. I was introduced to William Broderick sometime around July 1995. I don’t recall who introduced me to him or where it was. I came to know that he ran a false labour supply company called Southern Cross Excavations.

30. The system with William Broderick worked in the same method as Star Suppliers. William Broderick would deduct a seven percent commission from all cheques that I paid to him. William Broderick never supplied or arranged any labour for me at all. The system that he offered to me was purely a cheque cashing system.

31. I would contact William Broderick by mobile telephone, when ever I needed to pay workers on my site. William Broderick would then come to meet me to pick up the cheque or return cash to me. These meetings occurred at my home. The normal turn around time between the payment of the cheque and the cash was about a week.

…

33. William Broderick gave me PPS documents and insurance documents relating to Southern Cross Excavations. These documents had the name Timothy James Walsh on them. On the occasion that the cash was returned by Broderick, he would also give me a blank invoice.

34. The amount of commission Broderick deducted from the payments made to Southern Cross was seven percent.

35. I did not deduct any tax from the payments made to Southern Cross Excavations as the PPS documents identified that the company had a 0% variation, and I was not required to. …

Witness statement of Mr Hasson

40.     Mr Charles Joseph Gerard Hasson, a director of a company with its principal business in gyprock, demolition and carpentry, made a statement dated 24 January 2000 as follows:

10. I was approached by a number of people, in person and on the telephone that all wanted work. After the first contact I would arrange for them to meet me at the work site. At the meeting at the site, I would ask them what type of work they were after, and what money they were looking for. I would ask them for any formal proof of their skill or trade. Then I would give them a day or two’s work to see if their work was up to scratch, and then decide whether to keep them or not. I think originally two or three men approached me, then as the jobs progressed there was a fairly regular turnover of workers.

11. When I was first approached by a lot of the workers at this stage, I noticed that the way that they all wanted to be paid was not normal. By that I mean that they would attend on the sites and I would negotiate their wages without consulting the labour hire company that they said they were working for. I would get them to work unusual hour, including night shift for me without consulting the labour hire companies that they claimed to be working for. The hourly pay rates for overtime and for penalty rate hours were slightly more than hours that they worked during the day, usually it was about $5 per hour more, but again I was aware under normal circumstances workers would be entitled to double time or time and a half or the like. Again I negotiated any overtime rates with the worker without consulting the labour hire company that they claimed to be working for.

12. I believe that it was about three months after I first started to employ the extra workers, that I came to know of a system nicknamed ‘the bodgie’. I don’t recall discussing it directly with anyone in particular, but it was an accumulation of knowledge from what I was seeing on my sites that gave me the knowledge of the bodgie. It mostly came from the workers approaching me for work and asking me ‘what was the story with the pay’ and they would ask ‘have you got the bodgie’. From that time I was aware of the companies that I was making the cheques out to for these types of workers were bodgies.

13. The following companies were used as ‘bodgies’ by myself for the purposes of providing wages to people doing work on my sites, Kilmoylan Constructions Pty Limited, Tomdeely Constructions, Pro Line Plant Hire Pty Limited and Carrig Constructions Pty Ltd.

14. When I first came to know that the bodgie was available I was in a position where I needed a regular supply of workers.  The bodgie was so well known at that stage that it was nearly impossible to get and retain workers unless you could pay them cash wages.  All of the workers knew the system existed and mostly they knew the companies or people that were providing the system.  As a result when they would come onto the site looking for work, thy were blatant about wanting to be employed on the bodgie for cash and refused to start work unless they could be paid cash, without tax being deducted.

15. I also found a large number of my competitors that were tendering and quoting for the same jobs, were quoting low prices that I could not match unless I was using bodgie labour, and getting overtime and things like that done cheaper than if the workers were on the books.

16. The whole industry became almost impossible to exist in unless you could compete with companies using bodgie labour.  Essentially if a worker was on the books and being paid according to the relevant awards, you would have to pay them at a rate of about three times the award for them to take home the same amount of cash as the bodgie workers.

…

Mr Dwyer

41.     An affidavit sworn on 14 June 2002 by Mr Martin Dwyer (Exhibit R3), one of the respondent’s officers, stated that he had searched the records held by the Australian Taxation Office for the companies Barrowmount and Kilmoylan and for Mr Timothy James Walsh trading as Southern Cross Excavation.  Mr Dwyer found that neither of the companies had ever lodged an income tax return. The records noted that income tax returns for Barrowmount were ‘not necessary’.  Mr Dwyer’s affidavit explained that this term meant the company’s income did not reach a taxable level.  Similarly returns by Kilmoylan were not necessary, except for the 1996 income year but Kilmoylan failed to lodge that return and was prosecuted.  Mr Dwyer found that Mr Walsh trading as Southern Cross Excavation, lodged a non-taxable return for the 1994 income year but did not lodge returns for the years prior to or following 1994. 

consideration and findings

42.     The respondent’s statement of facts and contentions argued that, under ss.221YHD and 221YHDA of the Act, the applicant should have deducted tax from prescribed payments totalling $279,595.  Alternatively, the respondent contended that the applicant should have deducted group tax from salary or wages totalling $279,595 under ss.221C(1) and 221C(1A).

43.     In relation to PPS, Mr McGovern noted that s.221YHDA of the Act required the applicant to deduct tax from the payments it made to the labourers and other workers, the payments being made in cash and facilitated by the cheque encashment provided by Southern Cross, Barrowmount and Kilmoylan.  By virtue of s.221YHH, failure to deduct resulted in imposition of a penalty equal to 48.5 per cent of the amounts paid to the labourers and other workers.  The respondent, and the Tribunal on review, has a discretion to remit the penalty: s.221YHL(2).  Relevantly those provisions state:

Section 221YHDA: DEDUCTIONS WHERE NO PAYEE DECLARATION

(1) This section applies if an eligible paying authority makes a prescribed payment to a payee and:

(a) no payee declaration made to the eligible paying authority by the payee is in force when the payment is made; and

(b) the eligible paying authority is not a householder in relation to the prescribed payment; and

(c) the payee has not quoted a reporting exemption number to the eligible paying authority before the payment is made, or has done so but the eligible paying authority reasonably believes the approval to quote it is not in force when the payment is made

(2) If this section applies, the eligible paying authority must deduct the non-declaration percentage of the payment. If working out that percentage of the payment results in an amount of dollars and cents, the cents are to be disregarded.

Section 221YHH: FAILURE TO MAKE DEDUCTIONS FROM PRESCRIBED PAYMENTS

(1)  Where an eligible paying authority other than a government body refuses or fails, at the time of making a prescribed payment to a payee, to deduct from the payment the amount required to be deducted under this Division, the eligible paying authority is liable to pay to the Commissioner, by way of penalty –

(a) an amount (in this subsection referred to as the “undeducted amount”) equal to the amount that the eligible paying authority failed to deduct; …

Section 221YHL: REMISSION OF CERTAIN AMOUNTS

…

(2) The Commissioner may, in any case, for reasons that he thinks sufficient, remit the whole or any part of any amount payable by a person under paragraph 221YHH(1)(a), subsection 221YHH(2) or sub-subparagraph 221YHJ(1)(b)(ii)(A).

Section 221 YHT: NOTIFICATION AND REVIEW OF DECISIONS

(2) A person who is dissatisfied with a decision of the Commissioner in relation to the person made under:

(aa) subsection 221YHB(8); or

(a) subsection 221YHL(2) (other than in relation to an amount payable under subsection 221YHH(2)); or

(b) any of sections 221YHP, 221YHQ, 221YHS and 221YHSA;

may object against the decision in the manner set out in Part IVC of the Taxation Administration Act 1953.

44.     So far as PAYE is concerned, Mr McGovern noted that employers are required by s.221C to deduct tax from their payments of salary or wages.  Penalty is imposed under s.221EAA(1) for failing to make deductions of tax from payments of salary or wages.  The respondent’s power to remit the penalty, exercisable by the Tribunal on review, is found in s.221N(2).  The provisions read:

Section 221C: DEDUCTIONS BY EMPLOYER FROM SALARY OR WAGES

(1) For the purpose of enabling the collection by instalments from employees of income tax, the regulations may prescribe rates of deductions to be made by employers from payments of salary or wages that employees receive or are entitled to receive in respect of a week or part of a week.

Section 221EAA: FAILURE TO MAKE DEDUCTIONS FROM SALARY OR WAGES

(1)  Where an employer other than a government body refuses or fails, at the time of paying salary or wages to an employee, to deduct from the salary or wages the amount required to be deducted under this Division, the employer is liable to pay to the Commissioner, by way of penalty –

(a) an amount (in this subsection referred to as the “undeducted amount”) equal to the amount that the employer refused ot failed to deduct; …

Section 221N: REMISSION OF CERTAIN AMOUNTS

…

(2) The Commissioner may remit the whole or part of any amount payable by an employer by virtue of paragraph 221EAA(1)(a), subsection 221EAA(2), sub-subparagraph 221F(12)(b)(ii)(A) or subparagraph 221G(4A)(d)(i).  …

(4) A person who is dissatisfied with a decision of the Commissioner in relation to the person under subsection (2) (other than in relation to an amount payable under subsection 221EAA(2)) may object against it in the manner set out in Part IVC of the Taxation Administration Act 1953.

45. The Tribunal’s jurisdiction in this matter is found in s.14ZZA of the Taxation Administration Act 1953 (the Administration Act). Subject to modifications made by the Administration Act, the AAT Act applies to the review of reviewable objection decisions. It was noted above that the applicant’s objection against the imposition of the penalty, as notified by the respondent’s letter of 10 November 2000 and its quantification in the running balance account (Exhibit R6), was treated by the respondent as an objection against the decision to impose a penalty in full (PAYE – s.221N(3), PPS – s.221YHT(2)). That is, as Mr McGovern submitted, it was a decision to impose a penalty on the total of amounts that the applicant paid during the relevant years to Southern Cross, Barrowmount and Kilmoylan, calculated by reference to the highest marginal rate of income tax payable by an individual including the Medicare levy, without any remission of that penalty. Such a decision is reviewable by the Tribunal (Temples Wholesale Flower Supplies v Commissioner of Taxation (1991) 29 FCR 93).

46. Under s.14ZZK of the Administration Act, the applicant:

…

(b) … has the burden of proving that:

(iii) in any other case – the taxation decision concerned should not have been made or should have been made differently.

The burden on the applicant, therefore, is to prove on balance that the decision to impose the penalty without remission for failure to deduct tax from payments totalling $279,595 should not have been made or should have been made differently.

47.     Mr Lawrence submitted that the cheques drawn by the applicant in payment of invoices it received from Southern Cross, Barrowmount and Kilmoylan, were for the supply of labour and other more specialised building services by those entities to the applicant.  It was said that these entities were labour hire firms and they actually supplied the labour and services referred to in the invoices. Mr Lawrence submitted that the applicant’s payments were not salary or wages.  As Southern Cross, Barrowmount and Kilmoylan held nil PPS deduction certificates, the validity of which the applicant was entitled to accept, there was no obligation to withhold tax under the PPS rules from its payment of the invoiced amount.  It was further submitted for the applicant that it was these entities that were responsible for paying the labourers and other service providers.  Reliance was placed upon the reasoning in the respondent’s ruling TR 1999/13 ‘Tax Instalment Deductions’ where it is stated “… the labour hire firm is liable to make PAYE tax deductions from payments to contracted workers, unless the payment is a prescribed payment within the meaning of PPS.”  Mr Lawrence did not make a separate submission regarding the respondent’s decision not to remit the whole or any part of the penalty.

48.     Mr Lawrence contended that there was no evidence of any sum of money having been received by the applicant or Mr Healy as a result of bogus cheque encashment transactions.Further he said that no money had been found in the applicant’s or Mr Healy’s bank accounts that might be evidence of a kickback for their participating in the transactions with Southern Cross, Barrowmount and Kilmoylan. 

49.     For the respondent Mr McGovern submitted that the payments the applicant made to Southern Cross, Barrowmount and Kilmoylan were not the consequence of genuine contractual arrangements.  He submitted that an inference could be drawn from the applicant’s failure to call evidence from representatives of those companies that their evidence would not have been of assistance (cf. Jones v Dunkel (1959) 101 CLR 298). It was further submitted that the purported invoices from the companies were facades used to create the impression that there were real transactions behind the invoices, when there were none (Richard Walter Pty Ltd v Commissioner of Taxation (1996) 67 FCR 243 at 258, Hill J). Failure to deduct tax from the payments and then to remit the required amounts of tax to the Australian Taxation Office, rendered the applicant liable for a penalty. Mr McGovern submitted that, regardless of whether liability was established under the group tax rules or the PPS rules, the amount of penalty would be the same since the penalty was calculated as the product of the amount of the payment and the highest marginal tax rate including the Medicare levy.

50.     In relation to PPS, the applicant must satisfy the Tribunal that the payments it made to Southern Cross, Barrowmount and Kilmoylan were prescribed payments in the circumstances noted in s.221YHD of the Act. If so, the applicant then has to show that at the time of making the payments, the payees held current deduction variation certificates issued under s.221YHP, the certificates in this case specifying a nil percentage.  There was no evidence before the Tribunal that would suggest that the deduction variation certificates held by Southern Cross, Barrowmount and Kilmoylan were not validly issued.  Consequently the applicant would not have to deduct tax from any prescribed payments it made to those entities.

51.      ‘Prescribed payment’ is defined in s.221YHA(1) of the Act as “a payment of a kind declared by the regulations to be a prescribed payment for the purposes of this Division.”  Reg 126 of the Income Tax Regulations (the regulations) relevantly provided that:

126(1) A payment, being a payment within the meaning of Division 3A of Part VI of the Act, that is made, or is liable to be made, under a contract the performance of which, in whole or in part, involves the performance of work that consists of the carrying out of for a person who is a prescribed person of any activity to which subregulation (2) or (3) applies is declared to be a prescribed payment for the purposes of that Division. 

Activities carried out in the building and construction industry are covered by reg 126 (2).  It may be accepted that the applicant is a ‘prescribed person’ under reg 126(4), as it carries on a business that consists wholly or principally of activities referred to in reg 126(2). 

52.     The Tribunal found a number of inconsistencies in Mr Healy’s evidence which leads the Tribunal to conclude that his evidence was not reliable:

·     Mr Healy conceded that an invoice from Southern Cross to the applicant (T9-19) was false concerning some of the services purportedly supplied by that firm to the applicant.

·     His evidence regarding the timing of the job at Oberon for CSR Hebel was inconsistent with Mr Bull’s evidence.  The Tribunal prefers Mr Bull’s evidence since he checked the dates by reference to photos he had taken while working on the job.  The Tribunal finds that the applicant’s only work for CSR Hebel at Oberon was in mid 1996 and it lasted approximately three months. The invoice from Kilmoylan relating to this job was received in the subsequent year and the Tribunal does not accept it as being a genuine invoice.  There was no explanation for such a delay in submitting the invoice, indeed Mr Healy’s evidence was that Kilmoylan rendered an invoice for this work immediately upon completion.

·     Mr Cejka’s evidence emphasised that the various projects undertaken by Abigroup for the State Rail Authority were quite different in nature, and for example he differentiated station upgrades from platform reconstructions.  The Tribunal is satisfied that the invoice from Southern Cross at T9-19 was for a different kind of work to that described by Mr Cejka and thus was not carried out.

·     Mr Healy said he was satisfied with the content of invoices from Southern Cross, Barrowmount and Kilmoylan.  Working on the sites with the labourers and other workers, he said put him in a position to know whether the invoices were reasonable.  He admitted in cross-examination, however, that some jobs covered by the invoices were undertaken concurrenlty and therefore he was not always present on the sites.

In addition the Tribunal was not convinced by his evidence explaining why the level of detail in invoices received from other companies that supplied labour and related services, such as Disklane Pty Ltd, differed significantly from that in the invoices of Southern Cross, Barrowmount and Kilmoylan.

53.     In dealing with the burden of proof on the applicant in a case such as this, the Tribunal is mindful of the following statements of Latham C.J. in Trautwein v Federal Commissioner of Taxation (1936) 56 CLR 63:

The circumstance that the facts are (or were) peculiarly within the knowledge of one party is a relevant matter in considering the sufficiency of evidence to discharge a burden of proof. …

In the absence of some record in the mind or in the books of the taxpayer, it would often be quite impossible to make a correct assessment.  … There is every reason to assume that the legislature did not intend to confer upon a potential taxpayer the valuable privilege of disqualifying himself in that capacity by the simple and relatively unskilled method of losing either his memory or his books. (at 87)

54. Apart from the invoices submitted by Southern Cross, Barrowmount and Kilmoylan, there was no documentation regarding the arrangements entered into by the applicant with those companies, even though some of the invoices required payment of around $50,000. For example, there were no written agreements as to the terms of progress claims that could be made. Further, the invoices themselves contained very little information about the number of labourers and other workers supplied, the number of day or hours they worked on the applicant’s job, their rates of pay and the rates of hire payable for equipment. The uncontradicted evidence of Mr Schlosser is that Southern Cross, Barrowmount and Kilmoylan were bodgie companies. The witness statements of Mr McAusland, Mr Nagle, Mr Hasson, Mr Ganley and Mr McCrossan refer to Southern Cross, Barrowmount and Kilmoylan as bodgy companies. In the absence of evidence corroborating Mr Healy’s account of the applicant’s dealings with those companies, the Tribunal rejects his evidence that, contrary to the experience of others in the building industry, Southern Cross, Barrowmount and Kilmoylan entered into genuine contracts with the applicant in whole or in part for the performance of work. The weight of evidence is against such a finding. Accordingly the Tribunal finds that the applicant has not discharged the burden of proof required by s.14ZZK. The Tribunal accepts the respondent’s submission that the invoices recorded sham transactions involving “[a] common intention between the parties to the apparent transaction that it be a disguise for some other and real transaction or for no transaction at all” (Richard Walter at 258 per Hill J) is accepted. The Tribunal finds on the balance of probabilities that:

·     During the relevant years, the applicant did not enter into contracts with Southern Cross, Barrowmount and Kilmoylan, the performance of which, in whole or in part, involved the performance of work. On the contrary, the Tribunal finds that the applicant entered into contracts for the performance of work with those individuals, or their companies, who actually provided the labour or related services. Southern Cross, Barrowmount and Kilmoylan did not supply the applicant with labour or other services or materials.  The only service that the controllers of those companies provided to the applicant was to cash its cheques, for a commission. 

·     With the cash received from Southern Cross, Barrowmount and Kilmoylan, the applicant paid the labourers and other workers.  In relation to this finding the Tribunal accepts Mr Schlosser’s uncontradicted evidence that most ‘bodgy companies’ were not registered to remit PAYE or PPS, or if registered had not remitted any PAYE or PPS.

·     The Tribunal accepts that one of the main objects of obtaining cash from ‘bodgy companies’ was to pay building workers in cash.  The Tribunal is satisfied that the applicant did not deduct tax from the payments it made to those workers.  The Tribunal is not in a position to determine whether the applicant’s payments were made to employees or to contractors.

·     The applicant has failed to discharge the burden of proof to establish that its payments were made during the relevant years to Southern Cross, Barrowmount and Kilmoylan under contracts for the performance of work.  The Tribunal is satisfied on balance that the applicant’s payments were made to the labourers and others who worked on the particular jobs either as the applicant’s employees, or as subcontractors under contracts wholly or partly for the performance of work in the building and construction industry.  The Tribunal finds that the applicant did not deduct either group tax or the amounts required under the PPS rules from those payments and the applicant is liable for a penalty for not so deducting. 

55.     While the applicant did not make any submissions specifically about remission of penalty, the respondent contended that the penalty was appropriate in the circumstances and no remission was warranted.  On undertaking a merits review of the objection decision, the Tribunal has the powers of the Commissioner (A.W. Furse No 5 Will Trust v. Commissioner of Taxation 91 ATC 4,007 at 4,017).

56.     Mr Healy dealt with the ‘bodgy companies’ for approximately three years.  His participation in the arrangements with the companies allowed the applicant to enjoy the fiscal and commercial advantages identified by Mr Schlosser. His activities involved making false representations to the Australian Taxation Office concerning the true nature of the applicant’s arrangements with the labourers that it required for its subcontracting work.  The respondent has stated his view about remission of penalty in a public ruling, TR 2000/3 ‘Remission of penalty and general interest charge for failure to make deductions from RPS, PAYE and PPS payments’.  Noting that the level of culpability penalty imposed for not deducting tax from such payments is 100 per cent of the amount not deducted, the ruling at [54] states that typically the penalty will be reduced to the percentages below:

Reasonable care   nil per cent 

Lack of reasonable care   15 per cent

Recklessness   30 per cent

Intentional disregard   60 per cent

The ruling then states at [56] that “the typical rates set out above may be further decreased or increased should there be other mitigating or aggravating circumstances present.”  Where there are aggravating circumstances, the culpability penalty will be increased by either 10 per cent for lack of reasonable co-operation causing delay to the respondent, or 25 per cent for deliberate false or misleading statements. 

57.     In considering whether to exercise the discretion to remit part of the penalty, the Tribunal has had regard to all the facts of this case.  It is considered that the applicant, through the actions of Mr Healy, intentionally disregarded its obligations under the rules requiring the deduction of tax from payments made to employees or subcontractors.  There was no evidence of the applicant having been penalised by the respondent for a failure to deduct offence in the past.  However, due to the aggravating circumstance of making false representations as to the true nature of the transactions and asserting that the invoices from the ‘bodgy companies’ were in respect of genuine commercial transactions, the Tribunal is satisfied that the culpability rate of 60 per cent should be increased by 25 per cent.  Accordingly, the penalty is reduced to $101,702.47. The Tribunal is not satisfied that the circumstances of the case justify a remission, in whole or in part, of the general interest charge.

58.     Consequently, the decision under review is varied by reducing the penalty for failure to deduct from $135,603.30 to $101,702.47.  The matter is remitted to the Commissioner with a direction that the general interest charge is payable in respect of the reduced penalty.

I certify that the preceding 58 paragraphs are a true copy of the reasons for decision herein of P.J. Lindsay, Senior Member:

Signed:         
          ....................................................................................……………………………….

Associate

Date of Hearing  20 and 21 June 2002

Date of Decision  26 May 2003

Applicant’s Representative            Mr G. Lawrence, accountant

Respondent’s Representative       Mr D.B.McGovern, Senior Counsel