Young v Commissioner of Taxation
[2012] FCA 1098
•10 October 2012
FEDERAL COURT OF AUSTRALIA
Young v Commissioner of Taxation [2012] FCA 1098
Citation: Young v Commissioner of Taxation [2012] FCA 1098 Parties: WARWICK RAYMOND YOUNG v DEPUTY COMMISSIONER OF TAXATION File number: NSD 1224 of 2011 Judge: EDMONDS J Date of judgment: 10 October 2012 Corrigendum: 11 October 2012 Catchwords: TAXATION – whether applicant entitled under s 18-15(1) of Sch 1 to the Taxation Administration Act 1953 (Cth) to credits for amounts contended to have been withheld from withholding payments contended to have been made to the applicant as an employee or director of a company – no evidence of what, if any, withholding payments were actually made to the applicant by the company – no evidence of any amounts having been withheld from withholding payments contended to have been made to the applicant – documentation relied upon and deposed by the applicant to show gross salary, PAYG withheld and net payments made to the applicant by the company, lack contemporaneity and provenance and do not prove applicant’s contentions
Held: Amended application dismissed.
Legislation: Judiciary Act 1903 (Cth) s 39B(1A)
Taxation Administration Act 1953 (Cth) Sch 1: ss 10-5(1), 12-35, 12-40, 18-15Cases cited: Cassaniti v Commissioner of Taxation (2010) 186 FCR 480 cited Date of hearing: 15 August 2012 Place: Sydney Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 32 Counsel for the Applicant: Mr C Catt Counsel for the Respondent: Ms SM Foda Solicitor for the Respondent: Australian Taxation Office Legal Services Branch FEDERAL COURT OF AUSTRALIA
Young v Commissioner of Taxation [2012] FCA 1098
CORRIGENDUM
1. In [20] of the Reasons for Judgment, in the second sentence of the first paragraph of the quote, the page reference in square brackets after the words “Ormiston J” should read “[at 358]”.
I certify that the preceding one (1) numbered paragraph is a true copy of the Corrigendum to the Reasons for Judgment herein of the Honourable Justice Edmonds. Associate:
Dated: 11 October 2012
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 1224 of 2011
BETWEEN: WARWICK RAYMOND YOUNG
ApplicantAND: DEPUTY COMMISSIONER OF TAXATION
Respondent
JUDGE:
EDMONDS J
DATE OF ORDER:
10 OCTOBER 2012
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.The applicant’s amended application dated 13 July 2012 be dismissed.
2.The applicant pay the respondent’s costs as agreed or taxed.
Note:Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 1224 of 2011
BETWEEN: WARWICK RAYMOND YOUNG
ApplicantAND: DEPUTY COMMISSIONER OF TAXATION
Respondent
JUDGE:
EDMONDS J
DATE:
10 OCTOBER 2012
PLACE:
SYDNEY
REASONS FOR JUDGMENT
INTRODUCTION
By his amended application dated 13 July 2012, the applicant invoked the jurisdiction of this Court under s 39B(1A) of the Judiciary Act 1903 (Cth) in seeking declaratory relief of various kinds relating to his employment by a company called Prospectus & Project Management Services Pty Limited (“PPM”).
The primary relief sought by the applicant is a declaration that he is entitled under s 18-15(1) of Sch 1 to the Taxation Administration Act 1953 (Cth) (“TAA”) to a credit of $159,859 against the assessment of income tax payable by the applicant for the year ended 30 June 2004 (“the relevant year of income”).
The credit of $159,859 to which the applicant claims to be entitled is said to be equal to the total of the amounts withheld from withholding payments made to the applicant by PPM during the relevant year of income.
“Withholding payments” encompass both a payment of salary to an employee (s 12‑35 of Sch 1 to the TAA) and payment of remuneration to a director of a company (s 12‑40 of Sch 1 to the TAA) (see items 1 and 2 of the table in s 10-5(1) of Sch 1 to the TAA) and it was common ground that the applicant was an employee or, if not an employee, a director of PPM during the relevant year of income.
On 11 December 2006, the respondent (“Commissioner”) issued a notice of assessment of income tax to the applicant for the relevant year of income. The notice of assessment did not allow the applicant any amount of credit under s 18-15(1) of Sch 1 to the TAA.
The Commissioner’s position at that time, and at all subsequent times up to and including the hearing, has to be understood in a dual factual context: first, that PPM has not remitted any amounts allegedly withheld from withholding payments made to the applicant during the relevant year of income; and second, that, over a four to five year period, despite repeated requests of the applicant and his agents/representatives for contemporaneous documentation, in particular relevant books and records of PPM and the applicant, to establish that the withholding process had in fact taken place, none have been provided; such documentation that has been provided has not satisfied the Commissioner that the withholding process had taken place and that he should accept the applicant’s claimed credit entitlement. Some of these requests and the responses, if any, of the applicant and his agents/representatives, are detailed later in the background below.
BACKGROUND
During the relevant year of income the applicant was a director of PPM, an office he had held since 1990. He was also a 50% shareholder in that company. A Mr John Michael Whitfield was also a director of, and 50% shareholder in, PPM although there is no evidence to suggest he received remuneration from PPM during the relevant year of income. Mr Sheldon Warwick Young, the applicant’s son, was also a director and employee of PPM, or if not an employee, remunerated by PPM for his services as a director during the relevant year of income.
Mr Thakor Lal Morar (“Mr Morar”), a chartered accountant, was the Financial Controller of PPM for ten years up until April 2004 when he left the employ of PPM. Mr Morar received remuneration from PPM during the relevant year of income and gave evidence in support of the applicant’s application.
PPM went into administration on 15 February 2005 and Mr Peter Ngan of Ngan & Co was appointed Administrator on 18 February 2005. The company then went into liquidation and on 15 March 2005 Mr Ngan was appointed liquidator.
Sometime after 29 August 2006, the applicant lodged his income tax return for the relevant year of income returning as assessable income salary or wages paid by PPM of $363,999 and claiming a credit of $159,859 in respect of tax withheld from those salary or wages: Ex C, MA4.
On 11 December 2006, the Commissioner issued a notice of assessment of income tax to the applicant for the relevant year of income which allowed no credit under s 18-15(1) of Sch 1 of the TAA: Ex C, MA5.
On 3 October 2007, the applicant, through CT Accounting Pty Ltd (Helena Hutton) purported to object to the Commissioner’s failure to accept his claimed entitlement to the withholding credits: Ex C, MA6. The Commissioner reviewed the matter on the basis that it was a valid objection and on 20 August 2008 disallowed the purported objection, notwithstanding that the allowance or disallowance of such credits is not part of the assessment process.
It may be noted here that the applicant never objected to the assessment on an alternative basis that he only ever received from PPM the sum of $204,140 ($363,999 less the amount of $159,859 alleged to have been withheld) and, being a cash basis taxpayer, his assessable income from salary or wages paid by PPM in the relevant year of income was no greater than the amount paid to him. The Commissioner’s disallowance of an objection on that ground could have been resolved in a proceeding brought by the applicant under Part IVC of the TAA, but no such proceeding has ever been brought. This is not to suggest that any such proceedings would have necessarily been successful; it would be incumbent on the applicant to prove, on the balance of probabilities, that he received no more than $204,140 from PPM by way of salary or wages in the relevant year of income; on the state of the evidence in this case, that might be easier said than done. Certainly, the evidence led by the applicant in this case would not permit such a finding to be made. However, as a fall-back position, it never appears to have been considered, let alone ventured, by the applicant.
In the course of his reasons for decision, disallowing the applicant’s purported objection, the Commissioner wrote (Ex C, MA11):
[T]he company has not remitted any PAYG withholding credits to the Tax Office and there is no documentary evidence to substantiate that the company did in fact “withhold” an amount from a payment of remuneration to an employee or director under section 12-25 or 12-40 40 [sic] of Schedule 1 to the TAA 1953. As a result of this, it means you would not be entitled to any PAYG withholding credits for the 2004 year unless other documentary evidence such as copies of payslips confirm the company did withhold PAYG credits for this year. Therefore, your PAYG withholding credits for the 2004 year are disallowed.
Please note: Should the additional information requested becomes [sic] available, you can lodge a further objection with the information included.
On 23 January 2009, Mr Colin Thomas of CT Associates Pty Ltd purported to lodge, on behalf of the applicant, a further objection to the Notice of Decision on Objection: Ex C, MA12.
On 4 March 2009, the Commissioner responded in the following terms (Ex C, MA14):
As the director of Prospectus & Project Management Pty Limited, it was your responsibility to ensure withholding tax payments were deducted from payments made to the company’s employees/directors and then forwarded to the Tax Office. This did not happen. You held a non-arm’s length position within the company to that of other employees. The onus of proof to show that the tax was withheld from the payments you received is looked upon more stringently than that of other employees because of the position you held.
… you never received any on going [sic] pay slips during the relevant year and it appears there was also no employment contract prepared in which to provide added support in relation your salary entitlement from your employer. You are advised that we cannot use as supportive evidence your unsubstantiated spread sheet and the other documentation is not conclusive evidence in supporting a claim that your income payments were net of tax.
No response was received to this letter.
On 26 July 2011, the applicant filed an application in this Court by way of commencement of this proceeding seeking relief in the form of a writ of mandamus ordering the Commissioner to allow a credit in the sum of $159,859 to which the applicant claimed to be entitled under s 18-15 of Sch 1 to the TAA for amounts withheld from the applicant’s salary under Subdiv 12B of Sch 1 to the TAA, ss 12-35, 12-40, in the relevant year of income.
On 17 November 2011, the Commissioner wrote to the applicant providing an analysis of scenarios the Commissioner had considered in an effort to consider the applicant’s claim. The Commissioner wrote (Ex C, MA17):
6. We confirm that we have also completed an inspection of the documents produced by both Colin Thomas and Associates (“CTA”) and Peter Ngan. After reviewing Company records obtained under subpoena from Mr Ngan, it is noted that any payments made to you for less than $11,765 are annotated as “advance” or similar. Unfortunately we were unable to discover any documents describing what your gross salary was, such as an employment contract or similar. Accordingly, it is not possible at this time to ascertain whether the payments were “net” of PAYG-W. We could also not find sufficient records to substantiate all of the payments that you claim were made to you…
21. It is our view that the onus to illustrate your entitlement to the credits you seek has not been displaced. We would welcome any further evidence you might be able to provide to us to explain why the amounts that you were paid do not match any calculations that purport to be a calculation of your salary.
LEGISLATIVE SCHEME
I canvassed the legislative scheme, both its history and the current withholding system in Pt 2-5 of Sch 1 to the TAA, at some length in my reasons for judgment in Cassaniti v Commissioner of Taxation (2010) 186 FCR 480 at [12] to [41]. I do not intend to repeat what I there said if only because not all of it is relevant to the case at hand. However, what I said at [31] to [37] inclusive will, generally, always be relevant:
[31] Section 12-35 of Sch 1 to the TAA provides as follows:
An entity must withhold an amount from salary, wages, commissions, bonuses or allowances it pays to an individual as an employee (whether of that or another entity).
It is clear from s 12-35 that the obligation to withhold is one that falls on the payer of salary and wages, although that entity may not necessarily be the employer.
[32] Pursuant to s 15-10 of Sch 1 to the TAA the amount to be withheld from a withholding payment is to be worked out under the withholding schedules made under s 15-25. Section 15-25 empowers the Commissioner to make one or more withholding schedules. The amount to withhold will also depend upon the information provided in the TFN declaration and a withholding declaration.
[33] Section 16-5 of Sch 1 to the TAA provides that an entity required to withhold under Div 12 must do so when making the payment. This timing requirement was previously embodied in s 221C(1A) of Div 2 of Pt VI of the ITAA 36. Section 16-20 provides that an entity that withholds an amount as required by Div 12 is discharged from all liability to pay or account for that amount to any entity except the Commissioner. The amount that the entity must withhold in accordance with the tax tables, regulations or under the terms of a variation, is the only amount that the entity is discharged from any liability to pay to any other entity.
[34] If during the financial year an entity made one or more withholding payments such as in this case a payment covered by s 12-35, within 14 days after the end of the financial year, the payer must provide a payment summary to the recipient: s 16‑155(1)(a). Section 16-170 deals with the form and content of the payment summary and s 16-175 deals with the penalty for not providing a payment summary.
[35] In the relevant years of income, s 18-15 of Sch 1 to the TAA relevantly provided:
18-15 Tax credit for recipient of withholding payments
(1) A person is entitled to a credit equal to the total of the amounts withheld from withholding payments made to the person during an income year if:
(a)an assessment has been made of the income tax payable by the person for the income year; or
(b)the Commissioner is satisfied that no income tax is payable by the person for the income year.
[36] Entitlement to a credit in a particular income year depends in the first instance upon the satisfaction of either of the two pre-conditions in s 18-15(1), first, that an assessment has been made for the income year, or secondly, that no income tax is payable for that income year. The evident policy reason for these conditions was to ensure that there was quantification by assessment of any impending tax payable in a particular income year before an entitlement to a credit would arise.
[37] If either of the two conditions referred to in s 18-15(1) is met, then a taxpayer will be entitled to a credit “equal to the total of the amounts withheld”. It follows that if no amount was withheld there will be no entitlement to a credit amount.
At [161] to [173] I went on to consider the term “amount withheld” by an entity, from a “withholding payment” and noted that while the word “withheld” is not defined, its meaning must be considered in the legislative context in which it exists. At [161]–[165], I said:
[161] … The previous (PAYE) system that existed used the term “deduct”. It was this expression which was considered in Sargon 16 ATR 355 where Ormiston J [at 285] concluded that a deduction involved an arithmetic subtraction from a gross amount and the payment of a net amount, but did not specifically require the retention of the amount so deducted in any identifiable form…
[162] The expression “withhold” is relevantly defined by the Oxford English Dictionary to mean:
To keep back; to keep in one’s possession (what belongs to, is due to, or is desired by another); to refrain from giving, granting, or allowing. Formerly with dat. of person. (The current sense.)
[163] It is clear that the prevailing sense is one of deprivation, the holding back of something due to the employee, resulting in the reduction of a gross amount to a net amount which is paid to the employee. Accordingly, no credit will be available to the payee if they have received a gross amount. There must be a process by which this withholding takes place. It may be reflected in actual funds held by the payer on behalf of the employee pending payment to the Commissioner; on the other hand, and more usually, it may only be reflected in the wage records and books of account of the payer as an accounting entry.
[164] Where an amount has been set aside by the payer and is quarantined in a bank account pending its remission to the Commissioner clearly the presence of the funds so designated will demonstrate that a withholding has been made. Indeed the remission of the amounts withheld will invariably lead to the same conclusion.
[165] Where in the usual case the withholding process is represented only by accounting entries the question whether a legitimate process of withholding has ensued will depend upon a close examination of those books and records and the surrounding circumstances to see whether it may be inferred from those records and circumstances that a withholding has occurred. At one end of the spectrum, a mere journal entry in the absence of other evidence may not be sufficient evidence, having regard to the surrounding circumstances, that there has been a payment of salary and wages and a withholding from that payment. The authorities make it plain that entries of this kind, standing alone, are not conclusive evidence of the transaction: see, Temples Wholesale Flower Supplies Pty Ltd v Federal Commissioner of Taxation (1991) 29 FCR 93 at 100 – 103.
THE EVIDENCE
For the Applicant
The applicant affirmed two affidavits, one dated 26 July 2011 (Ex 1), parts of which were not read or pressed over objection, and a second dated 20 April 2012, no part of which was ultimately read. Annexures “A” and “B” to Ex 1 were admitted as Ex 2. Part of Annexure “A” (so much as concerns the applicant) and the whole of Annexure “B” are reproduced in [25] below.
Mr Morar affirmed two affidavits, one dated 25 June 2012 (Ex 3), parts of which were not read or pressed over objection, and a second dated 6 August 2012, including exhibits TM1 to TM15 (Ex 4).
For the Commissioner
Two affidavits were read for the Commissioner without objection. The first sworn by Ms Shirley Bell on 2 May 2012 (Ex A) and the second sworn by Ms Marian Agbinya on 3 May 2012 (Ex B). Additionally, Exs MA1 to MA24 to Ex B were admitted as Ex C.
Assessment of Evidence
Paragraphs 6 to 11 of Ex 1, which I allowed to be read subject to objections I upheld to parts of paras 8 and 9, provided:
6. At all relevant times I was employed by Prospectus and Project Management Services Pty Ltd. (PPM). I was one of three directors. Colin Thomas of Colin Thomas & associates was my accountant and tax agent and he acted in the same capacities for PPM. PPM employed an internal chartered accountant Thakor (Tony) Morar part of whose duty was to make up salaries calculate PAYG and prepare salary cheques for the net due. He co-signed all cheques with me. For 10 years, Mr. Morar maintained all books and records and prepared all necessary returns for the ATO and other government bodies until his resignation in April 2004.
7. When Mr. Morar prepared salary cheques for signature, he also presented to me, spread sheets showing the gross salary payable, the PAYG deducted and the net amount payable to each employee. Individual employees were given that part of the spreadsheet relating to their own salary. This practice substituted for providing pay slips.
8. From September 2002 until November 2003, PPM suffered liquidity problems due to non payment of substantial costs and disbursements by a debtor and delays in the successful conclusion of a project by a company for which it had written a prospectus. Three key employees including Mr. Morar and me agreed to continue working in the belief that problems would be rectified. During that time cash advances … were made as cash flow allowed. These advances were not treated as loans by PPM.
9. In November 2003 PPM completed the sale of an investment property and outstanding salaries less the cash advances were paid… Cash advances were now treated as salary … I was paid my regular salary from December 2003 to March 2004 but nothing thereafter…
10. The payment of the arrears owed to me from June 2002 was made on 3 November 2003 together with my November salary which was due. Mr. Morar presented me with spreadsheets showing the amounts due to him, Sheldon Young and me. The gross amount due to me was $312,499.95. PAYG withheld was $136,024.95. From the net of $176,475 an amount of $52,195.86 being the total of cash advances referred to in paragraph 8 was deducted and a cheque paid to me of $124,729.14. This cheque was banked to my account. A copy of my bank statement showing the deposit was forwarded to Ms. Madelaine Chapman of the ATO in 2008. Annexed hereto marked ‘A’ is a copy of the spreadsheet prepared by Mr. Morar.
11. I received four monthly salary payments between December 2003 and March 2004 and PAYG was withheld from each payment. A spreadsheet produced by Mr. Morar shows total payments of Gross salary, PAYG withheld and net payments between July 2002 and March 2004. It shows that the total PAYG withheld in the 2004 tax year was $159,859. Annexed hereto marked ‘B’ is the spreadsheet prepared by Mr. Morar.
Exhibit 2, being the spreadsheets referred to as Annexures “A” and “B” in paras 10 and 11 respectively, relevantly provided:
“A”
“B”
One of the difficulties with this case, among many, is the lack of any evidence of the terms of any contract of employment between the applicant and PPM; indeed, as the Commissioner justifiably contended, there was no evidence of any contract of employment between the applicant and PPM. Mr Morar conceded in cross-examination that, to his knowledge, all payments made to the applicant were not referrable to the terms of a contract, but were made at the direction of the applicant and were based on information provided to Mr Morar by the applicant: T 85/1–14.
Another difficulty is that no books of account or other records of PPM, such as wage records, for the relevant year of income or, for that matter, any other year of income were put in evidence or produced on subpoena by the liquidator of PPM. Such evidence as was given as to their whereabouts was to the effect that such books and records once existed but that they were destroyed by Mr Thomas late in 2011, for reasons best known to himself. Having regard to the fact that PPM went into liquidation in March 2005, it would be interesting to know under whose authority Mr Thomas acted in destroying PPM’s books and records, whether Mr Ngan, the liquidator of PPM, authorised the destruction and, if not, what he has done about it. After all, the applicant’s dispute with the Commissioner over this whole issue has been on foot since December 2006. Nor was the applicant able to put in evidence any pay-slips or other records given to him at the time of payments of salary or wages showing his gross entitlement, the tax withheld from that gross entitlement and the net amount paid. The applicant’s evidence was that he did not receive any pay-slips, only spreadsheets which he disposed of on the premise that they were of no relevance. But there was no evidence as to what these spreadsheets recorded, and there was certainly no explanation provided as to how it was the Ex 2 spreadsheets “A” and “B” were available, but no others.
There is some evidence from the applicant that he was paid his “regular salary from December 2003 to March 2004 but nothing thereafter” (see [9] of Ex 1), but no quantification as to how much. The Annexure “B” spreadsheet in Ex 2 suggests that this was at the rate of $20,833.33 per month, but there is no evidence that this was a monthly amount to which the applicant was contractually entitled; moreover, there is no evidence of what was actually paid, if anything, to the applicant during each of the four months from December 2003 to March 2004; and there is no evidence of how much was actually withheld by PPM at the time of making any such payments. The applicant’s reliance on the figures in the Annexure “B” spreadsheet itself as evidence of his gross monthly entitlement for the four months from December 2003 to March 2004; as evidence of what, if anything, was paid to him in each of those months; and as evidence of how much was actually withheld by PPM at the time of making any such payments, is misconceived. The Annexure “B” spreadsheet provides no proof of these matters. Indeed, there is no evidence of the provenance of Annexure “B”. At [11] of Ex 1, the applicant deposed that Mr Morar produced this spreadsheet but in the witness box he resiled from that and said (T 32/42):
I believe it was prepared by CT Accounting from the records maintained by Mr Morar.
No one from CT Accounting was called; and Mr Morar confirmed that he did not prepare Annexure “B”; according to Mr Morar, it would appear to have been prepared after he left PPM in April 2004: T 73/2; T 87/30–39. If that be right, then irrespective of who prepared it, Annexure “B” cannot be a contemporaneous record of amounts withheld from payments, if any, made to the applicant by PPM during each of the four months from December 2003 to March 2004.
The Annexure “A” spreadsheet in Ex 2 was prepared by Mr Morar. He confirmed the applicant’s evidence in this regard (T 74/33) and his evidence was that he prepared Annexure “A” in November 2003, before all the staff salaries cheques were paid that month (T 74/40 – 75/4). His evidence was that “the salaries were long overdue” (T 74/46) and that corresponds with what appears from Annexure “A”, not only for the applicant but also for Mr Sheldon Young and Mr Morar himself. Annexure “A” shows an amount of $124,279.14 as being due to the applicant as at November 2003; an amount of $19,535 as being due to Mr Sheldon Young as at November 2003 and an amount of $38,721.81 as being due to Mr Morar as at November 2003. Following those entries, the net balance due column is zero for each. But none of this proves payment of these amounts by PPM to the individuals concerned and none of these entries is identified on Annexure “A” by reference to a transaction date.
There was evidence, in the form of a page (statement number 119) of the applicant’s bank account with National Australia Bank, 345 George Street, Sydney, which recorded a cheque deposit credit of $124,279.14 (Ex C, MA7, p 43), an amount which corresponds with the amount shown as being due to the applicant as at November 2003 in Annexure “A”. I would accept that such correspondence supports the applicant’s contention that this is an amount that was paid to him by PPM on 25 November 2003 or thereabouts, but it is not proof of that fact; neither the cheque nor any relevant deposit slip was put in evidence.
More importantly, for present purposes there is nothing on the face of Annexure “A” which records the amounts withheld by PPM from the payees at the time of making any such payments. For example, if, as the applicant contended, an amount of $124,279.14 was paid to him by PPM on or about 25 November 2003, there is nothing on the face of Annexure “A” to indicate the amount withheld by PPM from the applicant at the time of making that payment. According to Mr Morar, there was no other document that recorded any such withholding: T 87/1–43. It follows that there is no evidence that any such withholding was made at the time the applicant contended the amount of $124,279.14 was paid to him in November 2003.
CONCLUSION
For the foregoing reasons, the applicant’s amended application must be dismissed with costs.
I certify that the preceding thirty-two (32) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Edmonds. Associate:
Dated: 10 October 2012
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