Practice and procedure - Summary judgment application by plaintiff and defendant - Income Taxation Assessment Act 1936 - Sufficiency of service of s 222AOE notice

Acts Interpretation Act 1901 (Cth)

Corporations Act 2001 (Cth)

Income Tax Assessment Act 1936

Taxation Administration Act 1953

Taxation Administration Act 2003

Tax Law Amendment (Transfer of Provisions) Act 2010

Canty v Deputy Commissioner of Taxation [2005] NSWCA 84; (2005) 226 FLR 121

Canty v Deputy Commissioner of Taxation [2005] NSWCA 84

Deputy Commissioner of Taxation v Meredith [2007] NSWCA 354

Deputy Commissioner of Taxation v Saunig [2002] NSWCA 390

Deputy Commissioner of Taxation v Woodhams [2000] HCA 10; (2000) 199 CLR 370

Fancourt v Mercantile Credits Ltd [1983] HCA 25; (1983) 154 CLR 87

General Steel Industries Inc v Commissioner for Railways (NSW) [1964] HCA 69; (1964) 112 CLR 125

Miller v Deputy Commissioner of Taxation (1997) 38 ATR 51

Miller v Deputy Commissioner of Taxation (1998) 98 ATC 4059

1 REGISTRAR KINGSLEY: The plaintiff's cause of action arises by virtue of s 222AOB of the Income Tax Assessment Act 1936 (the ITAA). Mad Monk Pty Ltd (Mad Monk) withheld amounts for the purposes of div 12 in sch 1 to the Taxation Administration Act 1953 (the TAA). There were six periods of withholding from 1 December 2008 to 31 August 2009. By 21 September 2009 (the due date) the total amount withheld was $101,138.

2 The plaintiff pleads that s 222AOB of the ITAA was not complied with in that, on or before the due date, Mad Monk did not:

(a) comply with subdivision 16-B in sch 1 to the TAA;

(b) make an agreement with the commissioner in relation to Mad Monk's liability;

(d) begin to wind up Mad Monk within the meaning of the Corporations Act 2001.

3 The plaintiff goes on to plead that the defendant (Roget) was appointed a director of Mad Monk in October 2009. As at 19 October 2009, and at the end of 14 days after the Roget's appointment as a director of Mad Monk, s 222AOB ITAA had not been complied with in relation to the amounts withheld. By a notice dated 18 November 2009, pursuant to s 222AOE ITAA the commissioner issued a directors penalty notice to Roget. The plaintiff pleads that by force of s 222AOD Roget is liable to pay to the commissioner a penalty equal to the unpaid amount of each of the amounts withheld. Those amounts now total $99,565.95 after a credit was allowed.

4 The plaintiff brought an application pursuant to O 14 of the Rules of the Supreme Court 1971 (RSC) supported by an affidavit of Anne Tombs sworn 12 October 2010. Roget has brought an application pursuant to O 16 RSC, and that is supported by the affidavit of Roget sworn 28 October 2010.

5 The principles to be applied in determining an application pursuant to O 16 RSC are well settled. It is sufficient to say that the power to order summary judgment should be exercised with great care and should never be exercised unless it is clear there is no real question to be tried (Fancourt v Mercantile Credits Ltd [1983] HCA 25; (1983) 154 CLR 87, 99)

6 Roget's argument is that the plaintiff issued a director penalty notice dated 18 November 2009 which gave notice that the plaintiff will commence action for the recovery of the penalty without further warning, unless at the end of 14 days Roget undertakes the actions described in [2] above. The director penalty notice states in two places that action must be taken 14 days from the date of the letter. Roget's argument is that under recent changes to the tax laws the plaintiff cannot commence proceedings until after 21 days from the date of issuance of the notice.

7 Counsel for the plaintiff suggested I read the Explanatory Memorandum to the Tax Laws Amendment (Transfer of Provisions) Bill 2010 (Cth) (EM) to understand the basis of the plaintiff's argument. The EM states that a Tax Law Improvement Project team was created, and progressively the team began to re-write the income tax laws. The Tax Law Improvement Project team had no mandate to make significant policy changes. Its brief was to improve the legislation it was writing (EM 1.8). The substantive provisions are now contained in div 269 in sch 1 of the Taxation Administration Act 2003 (TAA), which commenced on 1 July 2012.

8 In general the re-writes aim to reproduce the ITAA in language as little changed as possible and in the same order as the original material (EM 1.10). There was no intention to changes the ideas expressed in the original material, but where a different meaning was intended the relevant chapters were to state this expressly (EM 1.21).

9 The re-write has been drafted taking into account a number of court decisions, particularly Deputy Commissioner of Taxation v Meredith [2007] NSWCA 354 (Meredith). Meredith's case held that, where a director's penalty notice was posted, s 29 of the Acts Interpretation Act 1901 (Cth) (AIA) did not apply. Thus a notice was given when it was posted rather than when it was received (EM 2.79).

10 The re-write clearly excludes the operation of s 29 AIA. According to EM 2.80 this has not resulted in a policy change but simply reflects the current state of the law. The implication of the Meredith decision was that directors could have had less than 14 days to comply with a notice. To address this issue the re-write extended the 14 day period to 21 days. This meant that directors would have as much time as they would have under the commissioner's administrative practice, which counted the 14 day period not from when the notice was posted but from when the notice would normally have been received (EM 2.81).

11 EM 2.104 provides that the re-writes of div 9 and div 10 of pt VI commenced on 1 July 2010. At EM 2.106 no penalties are imposed under the new law if a penalty was payable under the old law anytime before 1 July 2010 (preventing a taxpayer being subject to multiple penalties). Penalties that remain unpaid as at 1 July 2010 under the old law are taken to have been payable under the new law for the purposes of the machinery provisions. This was to ensure a smooth transition between the old and the new law (EM 2.107).

12 EM 2.107 refers to penalties unpaid as at 1 July 2010. Those penalties are deemed to be payable under the new law for the purposes of the machinery provisions.

13 The machinery provisions relate to the issuance of the director's penalty notice (DPN). The machinery provision under s 222AOE ITAA provides that the commissioner must give 14 days notice before recovering a penalty. The purpose of the notice is to inform the recipient director of the unpaid amount of the company's liability and the director's liability to a penalty in the same amount. The second purpose is to inform the director of the alternative courses available, namely the steps outlined in [2] above, which if undertaken will result in remission of the penalty. The object is to encourage the director to take those steps as are necessary to bring about one of those results (Deputy Commissioner of Taxation v Woodhams [2000] HCA 10; (2000) 199 CLR 370 [36].

14 Under the re-write at s 269-25 the commissioner must not commence proceedings to recover a penalty until the end of 21 days after the commissioner gives written notice of the section. There is a difference in wording between s 222AOE and s 269-25, but in my opinion, consistently with the re-write the meaning in s 222AOE is what is expressed in s 269-25.

15 Where a cause of action has arisen, before a writ may issue the commissioner must comply with the machinery provisions. In this case the right to issue the writ crystallised upon the expiration of the 14 days after notice was given in accordance with s 222AOE ITAA. In my opinion, the fact that the plaintiff waited until July 2010 to issue the writ, does not mean that the plaintiff must undertake the notice regime afresh. The plaintiff has complied with the machinery provisions under the ITAA and has a crystallised right to issue the writ.

16 In my opinion, this is consistent with s 8B and s 8C AIA. Section 8B AIA provides that when an Act repeals, in whole or part, a former Act then, unless the contrary intention appears, the repeal shall not affect the previous operation of any Act so repealed or anything or suffered under any Act so repealed. In this case the plaintiff has pursued the machinery provisions under s 222AOE ITAA to the point of a right to issue the writ in early December 2009.

17 Further s 8C AIA provides that where an Act repeals, in whole or in part, a former Act then, a less contrary intention appears, the repeal shall not affect any right, privilege, obligation or liability acquired, accrued or incurred under any Act so repealed. In this case the plaintiff has acquired the right to issue a writ against the defendant. The fact that the plaintiff does not issue the writ until after 1 July 2010 does not, in my opinion, affect the right so acquired.

18 It is Roget's argument that s 8 AIA does not operate where the contrary intention appears. Roget argues that items 64 and 65 in sch 1 to the Tax Laws Amendment (Transfer of Provisions) Act 2010 (the Amendment Act), manifests such a contrary intention. Item 65(4) provides that div 269, other than s 269-20, has effect from the commencement time (1 July 2010) as if the penalty were payable under subdivision 269-B in that schedule. This sub-item applies in relation to a penalty that just before the commencement time was payable under div 9 of pt VI ITAA.

19 Both the ITAA and the Amendment Act make a distinction between a penalty that was payable and the recovery provisions. Section 222ANA ITAA under the heading objects of div 9 provides that there is a duty on directors to cause the company to meet its obligations. The duty on the director is enforced by penalties. This is restated in s 269 TAA.

20 However, a penalty can be recovered only if the commissioner gives written notice to the person concerned; that is the commissioner complies with the machinery provisions. The amendments make no change to that distinction.

21 In my opinion, item 65 in sch 1 to the Amendment Act refers to the penalty created by the TAA to impose a duty on the director to cause the company to take the actions referred to above. The duty is enforced by a penalty. If that penalty is unpaid as at 1 July 2010 and the commissioner has already undertaken the notice provisions under the repealed Act then right to issue the writ has crystallised and in my opinion item 65 does not apply.

22 For these reasons, I am of the opinion that the defendant's application pursuant to O 16 RSC has no merit and will be dismissed.

The plaintiff's Order 14 application - Principles

23 The principle cited in Fancourt's case applies equally to applications pursuant to O 14 RSC. Great care must be exercised to ensure that, under the guise of achieving expeditious finality, a party is not deprived of its opportunity for the trial of its case in the appointed manner: General Steel Industries Inc v Commissioner for Railways (NSW) [1964] HCA 69; (1964) 112 CLR 125, 129.

24 Roget was a director of Mad Monk from 19 October 2009 to 9 November 2009. As the plaintiff argues, within 14 days of the Roget's appointment Roget should have caused Mad Monk to take a step referred to in [2] above. It is because of not causing Mad Monk to take one of those steps that Roget becomes liable.

25 Section 22AOJ(3)(a) ITAA provides that it is a defence that a director took all reasonable steps to ensure compliance with their obligations. To establish this defence the defendant needs to prove that he took all reasonable steps, or that there were no reasonable steps that he could have taken, to ensure the directors complied with their obligations.

26 Deputy Commissioner of Taxation v Saunig [2002] NSWCA 390 is authority for the proposition that the test of reasonableness in s 222AOJ(3) TAA is objective. Reasonable means having regard to the existing circumstances of which a director is aware, or ought to be aware.

27 The taking by a director of all reasonable steps to ensure compliance requires that each of the options in s 222AOB (1) ITAA is addressed, either in the sense of taking reasonable steps to bring about compliance, or declining to do anything on the basis that there were no steps that the director could have taken (see: Miller v Deputy Commissioner of Taxation (1998) 98 ATC 4059 and Canty v Deputy Commissioner of Taxation [2005] NSWCA 84).

28 Roget in his affidavit sworn 19 November 2010 deposes that in October 2009, prior to his appointment as a director of Mad Monk, he sought but could not obtain the financial accounts of Mad Monk. Soon after his appointment as director of Mad Monk he telephoned a Kevin Hart, Mad Monk's former company secretary, to enquire of Mad Monk's liquidity. It appears that it had come to his attention that Mad Monk had fallen into arrears in paying rent. He was advised he should contact Mad Monk's accountant. This was the same advice given by Cindy Heppekausen, Mad Monk's managing director, to Roget regarding Mad Monk's account.

29 In late October Roget, with another, attended the office of Mad Monk's accountant. At that meeting the accountant advised he expected Mad Monk's accounts to be completed within one week but at least by early November 2009. At no time during his meeting with the accountant did the accountant inform Roget that Mad Monk had any outstanding tax liabilities.

30 Through October notwithstanding emails and telephone calls Roget states that he was not advised nor was he made aware that Mad Monk had fallen behind in payment of tax liabilities.

1. Oz Brewing's administrator Judge Constable;
2. Jason Giles, Mad Monk's accountant;
3. Kevin Hart, Mad Monk's former company secretary; and
4. Cindy Heppekausen, Mad Monk's managing director

that is enough to discharge his obligations to undertake reasonable steps.

32 Throughout the relevant paragraphs of Roget's affidavit he refers to others not informing him of the fact that Mad Monk had outstanding tax liabilities. Roget deposes that had Mad Monk's accounts been provided to him whilst he was a director he would have known of Mad Monk's financial position including the outstanding tax liability. However there was nothing in the Roget's affidavit to show that he directly asked the question about the tax liabilities. The defendant's argument is that, by relying on others to provide that information, this constituted reasonable steps on his part.

33 Roget's defence is that he took all reasonable steps to ensure the directors of Mad Monk had complied with s 222AOB(1), or there were no such steps that he could have taken. Miller v Deputy Commissioner of Taxation (1997) 38 ATR 51 is authority for the proposition that what a director has to do to comply with s 222AOD(1) is to cause the company to do at least one of the four matters set out in par 2 above. The taking by a director of all reasonable steps to ensure compliance requires that each option be addressed, either in the sense of taking reasonable steps to bring it about, or declining to do anything on the basis that there were no such steps that the director could have taken.

34 The obligation of a director acting reasonably is to choose one of the possible events and take all reasonable steps to bring that event about. If reasonable steps were taken in pursuant of one option and fails, the director would therefore have to take reasonable steps to ensure compliance in another way (Canty v Deputy Commissioner of Taxation [2005] NSWCA 84; (2005) 226 FLR 121).

35 The duty of achieving compliance is relevantly imposed on directors in office and, when default occurs, there is a continuing obligation until compliance is achieved (s 222AOB ITAA). Service of a notice under s 222AOE ITAA gives the recipient director a final chance of achieving compliance within 14 days (Canty [43]).

36 In his affidavit at par 31 Roget says that, as he was not a director of Mad Monk he had no authority to enter into an agreement with the commissioner, appoint an administrator, or commence winding up of Mad Monk. Mr Saunig in Deputy Commissioner of Taxation v Saunig ((2002) [2002] NSWCA 390; 55 NSWLR 722) was in a similar position. Heydon JA was of the opinion that Mr Saunig could have used provisions of the Corporations Law (Cth) to bring about a winding up, but in any event, once Mr Saunig had learnt of the problem he could have done one of two things; he could have approached officers of the Taxation Office at once and thrown himself on their mercy or, as reasonable director seek legal advice from a lawyer or practical advice from an accountant.

37 There is no evidence that any of these steps were taken. Accordingly, I am of the opinion that the defence of reasonable steps is not made out.

38 In my opinion, consistently with Saunig Roget has not taken reasonable steps and accordingly Roget does not show to have a triable defence. I allow the plaintiff's application pursuant to O 14 RSC.