Pongi v The Queen
[2012] NZCA 127
•29 March 2012
| IN THE COURT OF APPEAL OF NEW ZEALAND |
| CA523/2011 [2012] NZCA 127 |
| BETWEEN JOHN DAVID PONGI |
| AND THE QUEEN |
| Hearing: 23 February 2012 |
| Court: Randerson, Potter and Simon France JJ |
| Counsel: W T Nabney and D P Weaver for Appellant |
| Judgment: 29 March 2012 at 4.15 p.m. |
JUDGMENT OF THE COURT
AThe appeal against conviction on 18 counts under s 143A(1)(d) of the Tax Administration Act 1994 is allowed.
BThe convictions on those charges are quashed.
CNo retrial is ordered.
DThe appeal against sentence on all 31 counts in the indictment is allowed. In substitution for the sentence of two years and six months imprisonment, a sentence of 15 months imprisonment is imposed on each of the remaining counts in the indictment with all terms to be served concurrently.
____________________________________________________________________
REASONS OF THE COURT
(Given by Randerson J)
Introduction
The appellant was found guilty after jury trial before Judge Rollo of 31 counts of evading the payment of PAYE, GST and income tax. He was subsequently sentenced to concurrent terms of two years and six months imprisonment on all charges.[1]
[1] R v Pongi DC Tauranga CRI-2009-070-614, 16 August 2011.
Mr Pongi now appeals against conviction in respect of the 18 counts in the indictment which alleged that he knowingly applied or permitted the application of PAYE tax for a purpose other than paying it to the Commissioner of Inland Revenue, contrary to s 143A(1)(d) of the Tax Administration Act 1994 (the TAA).
The sole ground of the conviction appeal is that s 143A(1)(d) of the TAA does not apply unless PAYE has been actually deducted from the wages of the relevant employees, or there is a deemed deduction of PAYE under a tax law. The appellant’s submission is that neither of those circumstances occurred in the present case.
The appellant also appeals against his sentence on all counts in the indictment. The Crown acknowledges that, if the conviction appeal is allowed, there must be a consequential adjustment to the sentence.
Background
Mr Pongi was the majority shareholder and sole director of Quality Hort Limited, a company which provided labour to the kiwifruit industry. The company employed gangs of workers and charged orchardists for the services performed by its employees. It is not in dispute that the company did not pay any PAYE or GST over the period from May 2006 until January 2008. Over the same period, the company failed to furnish the Commissioner with the required monthly PAYE returns, two-monthly GST returns, and annual income tax returns.
In respect of PAYE, Mr Pongi’s evidence was that Quality Hort Limited received lump sums from the orchardists with whom the company contracted, less a 15 per cent withholding payment deducted by the orchardists. He said he believed that the 15 per cent withholding payment discharged the company’s tax obligations. The amounts received from the orchardists by the appellant’s company were divided between the workers and paid to them without any PAYE deduction.
One witness said he had received net wages after deduction of PAYE. This employee was only one of a number employed by the appellant’s company. His evidence was vague and lacked detail on matters such as the period over which payments were made and amounts involved. The jury could not have been satisfied on the basis of this evidence that net wages were paid either to him or to the other employees over the relevant period.
At the close of the Crown case, the appellant applied for a discharge under s 347 of the Crimes Act 1961 on the 18 PAYE counts on the same grounds argued on this appeal. Judge Rollo dismissed that application, ruling that the Crown did not have to prove the actual deduction of PAYE tax by Mr Pongi and that the law deemed the PAYE deductions to be made at the time the wages were paid to the employees.[2] In summing up, the Judge directed the jury consistently with his ruling on this aspect of the PAYE charges.
Conviction appeal
[2] R v Pongi DC Tauranga CRI-2009-070-614, 6 October 2011.
Although counsel referred to a number of statutory provisions under the TAA and the Income Tax Act 2004 (the ITA), the resolution of the conviction appeal turns largely on the construction of s 143A of the TAA and an interpretation provision in the same Act, s 4A.
Section 143A(1) of the TAA relevantly provides:
143A Knowledge offences
(1) A person commits an offence against this Act if the person—
…
(d)Knowingly applies or permits the application of the amount of a deduction or withholding of tax made or deemed made under a tax law for any purpose other than in payment to the Commissioner; or
(e)Knowingly does not make a deduction or withholding of tax required to be made by a tax law; or
…
Section 4A(2) of the TAA contains three relevant deeming provisions:
4A Construction of certain provisions
…
(2) For the purposes of this Act—
…
(b)A deduction is deemed to be made when a payment is made of the net amount of any source deduction payment:
…
(c)The amount of a deduction described in … (b) … is deemed to have been applied for a purpose other than in payment to the Commissioner if the amount is not paid to the Commissioner by the relevant due date.
(d)If the amount of a deduction described in … (b) … is not paid to the Commissioner by the due date, the amount is deemed to be unpaid tax.
(Emphasis added)
It is common ground that a “source deduction payment” in s 4A(2) includes the payment of salary or wages.[3] On the face of ss 143A(1)(d) and s 4A(2)(b) of the TAA, it follows that:
An offence under s 143A(1)(d) of the TAA is committed only if, with the relevant knowledge, the offender deducts PAYE tax or is deemed to have done so by virtue of a tax law.
A deduction is deemed to be made only when payment is made of the net amount of the relevant salary or wages.
If a deemed deduction occurs, then the amount of the deduction is deemed to have been applied for a purpose other than in payment to the Commissioner if the amount is unpaid by the relevant due date.
If a deemed deduction applies, the amount of the deduction is deemed to be unpaid tax.
[3]Income Tax Act 2004, s OB 2(1) which applies by virtue of s 3(2) of the Tax Administration Act 1994.
Mr Nabney focused on the expression “net amount of any source deduction payment” under s 4A(2) of the TAA. There is no definition of the term “net amount” but we are satisfied that, in context, it refers to gross wages or salary less the amount of PAYE. Mr Downs for the Crown did not endeavour to argue otherwise. Since there was no reliable evidence to contradict Mr Pongi’s account that his employees were paid gross amounts without deduction of PAYE, we are satisfied that PAYE was not actually deducted from the employees’ wages. We are also satisfied that Mr Pongi’s company did not pay the net amount of a source deduction payment in terms of s 4A(2)(b) of the TAA.
Mr Downs referred us to the decision of this Court in R v Fepuleai[4] where the same point arose. The Court concluded:[5]
The relevant tax legislation did not allow an employer to decide whether to make gross payments or net payments. On the contrary, all payments were treated as net payments whether the employer had actually made deduction from the employee’s wages with the consent of the employee or was by law deemed to have deducted them. Under no circumstances did the Tax Administration Act or any other provision of income tax law allow gross payments to field workers without any tax deduction, be they field worker employees or grouped in teams and operating as contractors.
[4] R v Fepuleai [2008] NZCA 339, (2008) 23 NZTC 22,083.
[5] At [9].
It appears that the appellant’s counsel did not present any detailed argument to the Court in Fepuleai. With respect, we are unable to agree with the Court’s conclusion. While it is not in dispute that the law required Mr Pongi to make the relevant PAYE deductions and that he failed to do so, it does not necessarily follow that s 143A(1)(d) applies. Section 143A(1)(e) sets out an alternative offence of knowingly failing to make the required deductions. The interpretation favoured by this Court in Fepuleai does not deal with the separate offences created by ss 143A(1)(d) and 143A(1)(e) as we discuss below. Nor does it recognise that a deemed deduction of PAYE under s 4A(2)(b) of the TAA only occurs upon payment of net wages or salary to an employee. Section 4A(2)(b) does not deem the net amount to have been paid irrespective of whether it has been actually paid.[6]
[6]R v Fepulaei was mentioned in passing by this Court in the context of a sentence appeal but without further discussion: R v Dhillon [2009] NZCA 597, (2010) 24 NZTC 24,030 at [39].
We sought further submissions from counsel as to whether, for the purposes of s 143A(1)(d) of the TAA, there was any other tax law under which a deduction of PAYE was deemed to have been made. We have received and considered the further submissions. Mr Downs acknowledges that there is no such deeming provision. Both he and Mr Nabney have drawn attention to provisions in the ITA relating to the payment of PAYE including, in particular, the PAYE provisions in subpart NC of the ITA which applied at the time of the alleged offending.
In essence, the statutory regime under subpart NC requires an employer to deduct PAYE from the employee’s salary or wages and pay it to the Commissioner each month. In addition, the employer is obliged to furnish a monthly return known as an employer monthly schedule setting out details of employees, salary or wage payments, PAYE deductions and net payments made. If a tax deduction is not made by the employer, the employee must pay to the Commissioner the amount that should have been deducted.[7]
[7] Income Tax Act 2004, s NC 16.
Subpart NC of the ITA is supplemented by s 168 of the TAA under which tax may be recovered from the employer or employee when the employer fails to deduct PAYE. Section 168(1) contains a deeming provision, but it does not deem a deduction of PAYE to have been made. Rather, where an employer fails to pay PAYE, s 168(1) deems the PAYE to have become due and payable to the Commissioner on the date on which the employer would have been required to pay the tax deductions.
Mr Nabney also drew our attention to s LD 1 of the ITA which applies where the Commissioner has received an employer monthly schedule showing tax deductions for source deduction payments in relation to employees. Under that section, the Commissioner is obliged in the relevant tax year to credit against any tax liability of the employee, the amount of the tax deduction shown in the employer monthly schedule. Mr Nabney suggested this might be regarded as a deeming provision on the basis that the required tax credit arises whether or not any deduction has been remitted to the Commissioner.
However, we do not view this section as creating a deemed deduction for the purposes of s 143A(1)(d). It simply obliges the Commissioner to credit to the employee the amount of any tax deduction shown in the employer monthly schedule. No employer monthly schedules were provided by Mr Pongi.
Mr Nabney also referred us to the decision of this Court in R v Smith[8] in which the inter-relationship between s 143A(1)(d) and s 4A(2)(b) of the TAA was considered. In that case, the appellant had filed employer monthly schedules showing net wage payments made to employees, but failed to remit PAYE to the Commissioner by the due date. This Court rejected the appellant’s argument that the Crown could only succeed with a prosecution under s 143A(1)(d) if it proved that the person accountable had failed to account for the precise amount of the deduction. However, this Court also observed that:[9]
Obviously the statutory purpose is to ensure that whenever there is a net payment of salary or wages the person paying those wages accounts to the Commissioner for the appropriate PAYE deduction by the relevant due date. Anyone who knowingly fails to account to the Commissioner commits an offence under s 143A(1)(d).
[8] R v Smith [2008] NZCA 371, (2009) 24 NZTC 23,004.
[9] At [14].
The facts in Smith differ from the present case since no employer monthly schedules were furnished to the Commissioner by Mr Pongi. However, the view expressed in Smith about the purpose of s 143A(1)(d) provides some support for our view.
Further support for that conclusion may be drawn from Mr Nabney’s submission, which we accept, that there is a clear distinction to be drawn between the separate offences under s 143A(1)(d) and (e). The former is intended to apply where there is a failure to account for PAYE deducted, or deemed to have been deducted, while the latter applies where there has been a failure to deduct PAYE from source deduction payments. The distinction is emphasised by the difference in penalty between the two offences. The former carries a maximum penalty of five years imprisonment or a fine of up to $50,000 or both[10] while the latter attracts only a fine of up to $25,000 for a first offence.[11]
[10] Tax Administration Act 1994, s 143A(8).
[11] Tax Administration Act 1994, s 143A(7) and (8).
Both offences require proof of knowledge, but the difference in maximum penalties may be explained by the nature of the offences. Where PAYE is deducted, the amounts deducted are held in trust for the Crown.[12] Using trust money for a purpose other than paying it to the Commissioner is a breach of a fiduciary duty. On the other hand, the failure to deduct PAYE amounts to a criminal offence but does not involve any breach of fiduciary duty. If an offence is committed under s 143A(1)(d), whether or not any actual or deemed deduction of PAYE is made, then the separate offence under s 143A(1)(e) would be superfluous. Given the substantially higher penalty under s 143A(1)(d), we are satisfied that this provision is aimed at the knowing failure by an employer to account to the Commissioner for PAYE actually deducted or deemed to be deducted under a tax law.
[12] Tax Administration Act 1994, s 167(1).
Mr Downs acknowledged the force of Mr Nabney’s submission based on s 167 of the TAA but pointed out that formidable difficulties of proof can arise in cases of this kind due to the frequent absence of documentary records and the transitory nature of many of the employees engaged in the horticultural sector. We accept there may be such practical difficulties, but if the Commissioner has concerns about the operation of s 143A(1) of the TAA, then the remedy lies in the hands of Parliament.
We conclude there was insufficient evidence to establish that PAYE was actually deducted from the wages of the employees of the appellant’s company and that a deduction of PAYE was not deemed to have occurred under a tax law in the circumstances of this case. For the reasons given, the appeal against conviction on the PAYE charges must be allowed.
Sentence appeal
As earlier noted, Mr Downs accepted there would need to be a reduction in the sentence imposed if the conviction appeal on the PAYE charges were allowed. We were advised that Mr Pongi has been in custody since his sentencing on 16 August 2011, a period of over seven months. Mr Downs accepted that a sentence reduction to the period of the time Mr Pongi has served in custody could not be seriously contested. We have been advised that a sentence of 15 months imprisonment would achieve that objective after taking into account parole.
We agree with that assessment.
Result
The appeal against conviction on 18 counts under s 143A(1)(d) of the Tax Administration Act 1994 is allowed.
The convictions on those charges are quashed.
No retrial is ordered since there is no realistic prospect that evidence could now be obtained to support fresh convictions on the PAYE charges.
The appeal against sentence on all 31 counts in the indictment is allowed. In substitution for the sentence of two years and six months imprisonment, a sentence of 15 months imprisonment is imposed on each of the remaining counts in the indictment with all terms to be served concurrently.
Solicitors:
Crown Law Office, Wellington for Respondent