Legislation cited: Tax Administration Act 1999 s 31

Payroll Tax Act 1987

Payroll Tax Act 2011

List of

Texts/Papers cited: Revenue Circular GEN006.1 Penalty Tax

Tribunal: Mr W.G Stefaniak AM - Appeal President

COMMISSIONER FOR ACT REVENUE

TRIBUNAL: Mr W.G Stefaniak AM - Appeal President

1. The decision of the appeal tribunal is that the appeal is allowed, and the decision appealed from in matter AT 113 of 2014 is set aside. The consequence of this is that the original decision of the appellant is restored and confirmed.

1. This is an appeal from a decision dated 9 July 2015 in matter number AT 113 of 2014. The case was brought by the respondent against the appellant arising out of a failure by the respondent to pay payroll tax in the ACT. The appellant, after conducting an investigation, determined that the accrued tax be paid together with the consequential imposition of interest and penalties pursuant to the Taxation Administration Act 1999 ('TA Act'). The liability of the respondent arose under the provisions both the Payroll Tax Act 1987 and the Payroll Tax Act 2011 (collectively referred to as 'the PT Act'). The respondent then instituted proceedings to contest the extent of the penalties imposed.
2. In the decision on that application, Presidential Member Symons and Senior Member Sinclair (collectively referred to in these reasons as 'the tribunal') sitting at first instance determined by order dated 9 July 2015 and the supporting reasons for decision ('the decision') that the determination of the appellant be confirmed, except in relation to the imposition of penalty tax. The tribunal determined that the penalty tax imposed for the years 1 July 2007 to 30 June 2011 inclusive should be set aside and substituted a decision that no penalty tax was payable in relation to the respondent's tax defaults in each of those financial years. The tribunal upheld the decision of the appellant that penalty tax was payable for the years ending 30 June 2012 and 2013.
3. The appellant now appeals against the decision overturning the order for the payment of the remaining penalty tax. In the appeal notice dated 5 August 2015 the appellant argued that the decision of the tribunal and its order should be set aside and the decision under review, namely the appellant's reviewable decision of 28 November 2014, should be affirmed.
4. The respondent acknowledges that it was liable to pay the unpaid payroll tax for the years in question[1] and has not sought to contest that finding on appeal. Further, the imposition of interest on unpaid payroll tax is not a matter for review by the ACT Civil and Administrative Tribunal. The only issue for determination on this appeal is whether the penalty tax that was otherwise payable under the TA Act should have been relieved under section 31(6)(b) of the TA Act on the grounds 1 to 5 of the appeal notice. There was a subsidiary question (ground 6) as to whether any of the years during which payroll tax was unpaid should have been treated differently for purposes of deciding whether a penalty should be relieved from, because of the role of certain accountants engaged by the respondent. However, if the appellant is successful on the main argument in grounds 1 to 5, then this subsidiary matter does not need to be considered.

1. The respondent was incorporated in June 2006,[2] with the sole director and shareholder being Mr Geoffrey Kalsbeek ('the director'). It conducted a business of steel fixing for the construction industry. There were a variable number of employees of the respondent, depending on the amount of work available to it. Evidence at the hearing below indicated that this was between 16 and 40.[3] There were senior employees who were familiar with the operational side of the business, and the business had an internal accountant.
2. In around 2004, when it appears that the director was working with a partner in a separate business conducting the same sort of activity, the director was diagnosed with Hodgkin's disease, a rare form of cancer of the lymphatic system.[4] It is a serious condition and severely affected the ability of the director to operate that business. The director experienced a period of remission in 2005, and resumed some of his business duties. As a result of the partner moving interstate in 2006, the director decided to start his own business. The respondent was formed with the director as the sole director and shareholder. It appears that about the time of the formation of the respondent, a further serious relapse of the director's illness occurred and he required aggressive medical treatment.
3. At some time after the incorporation of the respondent, the relapse of the director meant that he was unable to attend to the direction of the business of the respondent. He had difficulty implementing policies and systems in the respondent to manage its affairs, and he handed over the direction of its business affairs to the control of senior employees.[5] At this time, the respondent through the director had also engaged an external firm of accountants and financial advisors to advise the company generally, although the detailed terms of the retainer were not before the tribunal.
4. The health of the director continued to deteriorate, and he had several aggressive forms of medical treatment. Ultimately, through the use of some alternative medical procedures he was able to improve.
5. Around 2010, the director sought to resume his active involvement in the affairs of the respondent but could only do so in a limited capacity. It was not until 2011 when with the assistance of family and employees of the respondent, he was able to work in a more hands-on capacity.[6] During the periods that he was unable to effectively control the business, it was operated at his request by senior employees. The director had expected the accountants to ensure the continued operation of the respondent in compliance with all relevant taxation laws.[7]
6. Following the return of the director to a more active management role in 2011, new accountants were engaged and advice sought regarding the restructuring and rebuilding of the respondent's business. It had suffered from unmanageable and inefficient growth and cash flow problems during the absence of the director. This culminated in a significant downsizing of the respondent's operations in 2013.
7. The respondent did not pay payroll tax on the wages of its employees in relation to the period from the 2007/8 financial year to the 2012/13 financial year. The respondent does not dispute its liability to pay that tax and the interest charged on it, but disputes the penalty tax imposed.[8]
8. The level of penalty tax is a percentage of the original tax, based on the appellant's consideration of the culpability of the taxpayer in failing to make the original payment. The rates of penalty tax are prescribed by section 31 of the TA Act. The penalty tax had been imposed by the decision of the appellant following an investigation into the affairs of the respondent. That investigation had been triggered by an enquiry by the New South Wales payroll tax office to the respondent, in which the respondent had declared that its operations were all in the ACT. Presumably information passed between the two offices, as a result of which the appellant commenced an investigation into the payroll tax affairs of the respondent.

1. Payroll tax is payable on the amounts of wages and benefits paid by an employer to employees in the Australian Capital Territory, in accordance with the PT Act. The liability for payment of payroll tax is subject to a threshold, so that if an employer's wages for a given year fall below it no payroll tax becomes payable. The salaries and benefits paid by the respondent in the years in question exceeded the payroll tax limits for those years, and accordingly payroll tax was payable.
2. The TA Act sets out the provisions relating to the enforcement of payroll tax and other revenue obligations owing to the Australian Capital Territory. The Act imposes penalty tax in circumstances where there has been a tax default (a failure to pay the correct tax), depending upon the circumstances of the taxpayer. The provisions of section 31 of the TA Act are set out below:
   1. Amount of penalty tax

(1) The amount of penalty tax payable in relation to a tax default is 25% of the amount of tax unpaid, subject to this division.

(2) The amount of penalty tax payable in relation to a tax default is 50% of the amount of tax unpaid if the commissioner is satisfied that the tax default was caused wholly or partly by a failure by the taxpayer (or a person acting on behalf of the taxpayer) to take reasonable care to fulfil the taxpayer's obligations under a tax law.

(3) Subsection (2) does not apply if the tax payer satisfies the commissioner that the taxpayer (or a person acting on behalf of the taxpayer) had a reasonable excuse for the failure.

(4) Subsections (2) and (3) apply to a tax default that happened before their commencement in the same way as they apply to a tax default that happened after their commencement.

(5) The amount of penalty tax payable in relation to a tax default is 75% of the amount of tax unpaid if the commissioner is satisfied that the tax default was caused wholly or partly by the intentional disregard by the taxpayer (or a person acting on behalf of the taxpayer) of a tax law.

_(6) No penalty tax is payable in relation to a tax default if the commissioner is satisfied that - _

(a) the taxpayer (or a person acting on behalf of the taxpayer) took reasonable care to comply with the tax law; or

(b) the tax default happened solely because of circumstances beyond the taxpayer's control (or if a person acted on behalf of the taxpayer, because of circumstances beyond either the person's or the taxpayer's control) but not amounting to financial incapacity.

Note The commissioner's decision to impose penalty tax is an internally reviewable decision (see s 107, def internally reviewable decision), and the commissioner must give an internal review notice to the taxpayer (see s 107B).

1. The section imposes penalties on a taxpayer at varying rates, depending upon the appellant's view of the circumstances and intention of the taxpayer in failing to pay or avoiding the tax. It also provides in subsection 31(6)(b) circumstances where no penalty tax is payable, notwithstanding that there has been a tax default. It is these provisions of the TA Act that are the subject of this appeal.

1. In the hearing before the tribunal, evidence was provided by way of a statement from the director, together with oral evidence that he gave, and he was cross-examined. In the director's statement of 16 March 2015, he set out that he and his father had established a steel fixing business in the 1980s. It was in 2006 that the respondent was incorporated as a result of one of his business partners moving to Queensland. The decision of that partner was directly related to the health of the director.[9]
2. The director's statement sets out in detail his medical condition, and the steps that he had taken to continue the business while receiving medical treatment for his serious illness. That statement indicated that the director had suffered a serious relapse in 2006 (apparently shortly after the incorporation of the respondent) and as a result, the director was unable to continue to manage the business affairs of the respondent. He placed the control of the business affairs in the hands of senior employees of the respondent. He also engaged external accountants and financial advisors to provide assistance in the management of the company and to ensure its continued operation and compliance with all relevant requirements, including taxation laws. The director stated that while those employees did their best, they lacked the skills and experience to effectively manage the operations of the respondent. During this period due to a lack of leadership and management oversight, the business operations of the respondent expanded in a significant and unsustainable manner.[10]
3. Once the director returned to a more active role in the business in 2011, he realised that the employees had not had the capacity to properly manage the business, and that the advice and support that he had expected from his financial advisers had not been provided. Over the next two years, he engaged new accountants and sought advice regarding the restructuring of the business. The director has been in some form of active management of the company since 2011. However, he continues to suffer from both physical and psychological symptoms as a result of his illness.
4. The director was cross-examined on his witness statement. He acknowledged that he was aware of the existence of payroll tax[11] and had some knowledge of this since the incorporation of the respondent. Considering that he had been in business for a substantial period of time prior to this, and to the general publicity that is given within the corporate and employer sector of society about payroll tax, one would have expected a company employing a significant number of employees to have been aware of this liability. The director conceded that he was aware that there was a threshold below which payroll tax was not payable, and he didn't think that he was paying benefits at that level. He conceded that in the financial years 2007 and 2008, his previous accountants may have provided advice to the respondent about payroll tax obligations,[12] but he could not recall this. When the new accountants were engaged in 2011, the director acknowledged that they would have advised him about the payroll tax obligations. Notwithstanding this, there was no disclosure of payroll tax obligations to the appellant by either the respondent through the director, or through the new accountants.
5. Neither the old accountants nor the new accountants were called to give evidence about any discussions with the director, or their roles in relation to advising on payroll and other taxation obligations.

1. In its decision under review, the tribunal found that while there had been failings by the initial accountants retained by the director on behalf of the respondent, that cannot by itself excuse a lack of reasonable care on the part of the company as taxpayer.[13] The actions and failures of the senior staff and the initial accountants (whatever those actions and failings were) which led to the failure of the respondent to file payroll tax returns and pay the appropriate tax does not relieve the respondent itself from its obligations. The tribunal found that the respondent did not take reasonable care, so that relief was not available under section 31(2) of the TA Act.[14]
2. The tribunal considered the provisions of the appellant's 'Revenue Circular GEN006.1 Penalty Tax', which is provided for general information of taxpayers and as a guide to the way in which the appellant will administer the payroll tax legislation. That circular addresses the issue of what may constitute 'reasonable care' within the meaning of section 31(6)(a) of the TA Act. However, as noted above, the tribunal found that the respondent did not take reasonable care and that relief under section 31(6)(a) was not available.[15]
3. The tribunal referred to the provisions of 31(6)(b), and considered whether the tax default happened "solely because of circumstances beyond the taxpayers control (or if a person acted on behalf of the taxpayer, because of circumstances beyond either the persons or the taxpayers control) but not amounting to financial incapacity."
4. While it was the director rather than the taxpayer who suffered the debilitating illness, the tribunal referred to the example in the attachment to the revenue circular that circumstances beyond the taxpayers control could include "an unforeseen traumatic or significant event affecting the taxpayers health as to prevent them from meeting their tax obligations."
5. Clearly, the tribunal equated the taxpayer and director for purposes of considering this issue. Bearing in mind that the director was the sole director and shareholder of the company and was effectively the company's controlling decision-maker, this is a reasonable position. The appellant did not seek to persuade us otherwise.
6. The tribunal was satisfied about the existence and the seriousness of the director's illness, provided by a specialist medical report which was not challenged. The tribunal found that there were circumstances beyond the control of the taxpayer which warranted the exercise of the discretion under section 31(6)(b) of the TA Act.[16] Accordingly, the tribunal found that no penalty tax was payable on the payroll tax assessments issued prior to 30 June 2011.
7. The tribunal considered that with the retention of the new accountants after that date, there were opportunities to comply with the payroll tax obligations of the respondent, and accordingly, the failure after 30 June 2011 should not be attributed 'solely' to the health of the director. Accordingly, the assessments of penalty tax for the years 1 July 2011 to 30 June 2012 and 1 July 2012 to 30 June 2013 were upheld.[17]

1. The appeal notice set out six grounds of appeal from the decision. They were as follows:
   1. Was the Tribunal correct to make a finding that section 31(6)(b) of the TA Act applied in the circumstances of this case such that "the tax default happened solely because of circumstances beyond the taxpayer's control?"
   2. Was it open to the tribunal to find that the illness of the respondent's director was the sole reasons the tax default happened?
   3. Was it open to the tribunal to find that the illness of the taxpayer's director amounted to a circumstance beyond the taxpayer's control as to prevent it from meeting its tax obligations?
   4. Was the tribunal correct to find that section 31(6)(b) of the TA Act applied to the respondent's circumstances, where the tribunal found that it did not take reasonable care in relation the tax liability and did not have a reasonable excuse for the tax default?
   5. In all the circumstances, should the tribunal have set aside that part of the appellant's decision imposing penalty tax for financial years 2007/08 to 2010/11 and substituted a new decision that no penalty tax was payable for the financial years 2007/08 to 2010/11 rather than affirming the decision under review?
   6. In the alternative, and if the tribunal was correct to set aside part of the appellant's decision to impose penalty tax for the financial years 2007/08-2011/2012 was it correct for the tribunal to determine that the tax default involved two distinct periods, the second of which commenced from 1 July 2011?
2. The first five grounds were directed towards the proper interpretation of section 31(6)(b) and whether the evidence justified the tribunal's decision that it should be applied in this case. The sixth ground depended upon the outcome of the appeal tribunal's decision on the first five grounds. It was agreed that if the appeal tribunal found in favour of the appellant on the first five grounds, it was not necessary to consider the sixth ground.

1. Written submissions were provided, both initially and in reply. The appellant submitted that grounds 1 to 5 of the appeal notice should be upheld because there were a number of factors contributing to causing the failure to comply with payroll tax obligations of the respondent, and therefore the director's health could not be said to be the 'sole' cause of the failure to comply with the TA Act. Section 31(6)(b) requires that the tax default "happened solely because of circumstances beyond the taxpayers control" (our emphasis). The appellant's submissions contended that there were a number of factors affecting the failure of the taxpayer to pay the payroll tax. The appellants submitted that as the taxpayer was a company, its 'health' could not be a relevant consideration. Even if this argument was not accepted, the applicant contended that there were multiple factors leading to the failure to pay payroll tax, and therefore it could not be said that the failure was 'solely' beyond the control of the respondent or its director.
2. The appellant pointed to the failure of the director to fully acquaint himself with payroll tax obligations after the incorporation of the respondent, even though the director was prepared to concede that he may have had discussions about payroll tax with the first accountants. Further, the director had been in business with his father for a considerable period of time. There was no evidence about the size of that business, but the director did acknowledge that he was aware of the existence of payroll tax, and that there was a threshold for the level of remuneration of employees above which a payroll tax liability arose. That knowledge of itself should have alerted the director to the importance of finding out the company's payroll tax obligations, even if at the time of its incorporation it was not liable to pay the payroll tax.
3. Further, the unfortunate illness of the director and the handing over of managerial responsibilities to the employees was itself a cause leading to the failure to pay payroll tax. While the director maintained that the employees had insufficient experience and knowledge to comply with all of the respondent's obligations, it was his choice to choose them and the first accountants to look after the affairs of the respondent. To the extent that they failed to do so, that failure was attributable to the respondent, and was a cause of the failure to comply with payroll tax obligations. The appellant submitted that the director's illness affecting his health and management of the company was a factor but not the sole reason for the tax default.
4. While section 31(2) referred to a failure caused "wholly or partly by a failure by the taxpayer" and a similar qualification is included in the calculation of penalty in subsection (5), the relief provisions in subsection (6)(b) require the cause as defined to be the 'sole' cause of the failure. This necessarily requires an investigation into all of the causes of the default, and not merely one that may have initiated or contributed to it. There were multiple causes for the ongoing failure, not all of which were beyond control.

1. Written submissions were provided. The submissions contended that even if the taxpayer did not take reasonable care to comply with its obligations, and had no reasonable excuse, it was still open to the tribunal to apply section 31(6)(b), which it had correctly applied. The respondent submitted that as the director was the sole director and shareholder of the respondent since its incorporation, he had the sole authority to conduct the taxpayer's business and to make and carry out decisions in relation to the taxpayer. Therefore his ill-health necessarily impacted the taxpayer, and during the period of his ill-health no other person had the authority to undertake acts or make the decisions of the taxpayer except to the extent that the director gave other persons authority to do so. The respondent submitted that without the director's active involvement in the business all that the professional advisers and senior staff could do was to keep the business in a 'holding pattern' pending the director's return to fully active involvement. The respondent's submissions questioned who might have authority to give instructions to the taxpayers accountants to make a voluntary disclosure to the appellant. The lack of authority to deal with the outstanding payroll tax and make disclosure to the appellant meant that the 'sole' cause of the taxpayers failure was the very serious illness suffered by the director. This fell within the example set out in the revenue circular, and should there for be treated as the 'sole' cause.

1. In order for the provisions of section 31(6)(b) to operate to avoid penalty tax, the cause of that failure to pay tax must first be identified. An outcome (the failure to pay tax) may have several causes, depending on the length of time of the obligation. This appeal tribunal must then be satisfied that the identified cause (or causes, where there are more than one) is the 'sole' cause of the failure. Unless all of the causes of the failure are identified and (in the case of a single cause), it is beyond the taxpayers control, or (in the case of multiple causes), all are beyond the taxpayers control the relief under section 31(6)(b) is not available. This necessarily involves consideration of all of the factors which the evidence shows contributed to the issue of the failure to pay payroll tax.
2. The evidence clearly shows that the health of the director as the guiding mind and controller of the respondent was a major factor. However, there are other circumstances disclosed in the evidence which are relevant.
3. The director appeared to have little knowledge of the obligation of an employer to pay payroll tax, and had not taken steps to acquaint himself with this. This was indicated by his guarded acknowledgement that both the original accountants and the subsequent accountants could or would have discussed the issue of payroll tax with him.
4. The director had been in business for a substantial period of time, both with his father (where he may not have been a director or controller of the entity) and then subsequently with a business partner (when presumably he had equal control and responsibility with his partner). Operation of such a business necessarily involves an obligation to understand the law relating to payroll tax, as well as other legislation affecting the business. A failure to understand the legislation or to obtain advice about it does not put that ignorance beyond the control of the respondent or its director.
5. While the director was understandably focused on his serious medical conditions and the effect on his family, when he decided to step back from control of the respondent and handed over to his employees, if he had been conscious of the obligations in relation to payroll tax, one could reasonably have expected that this would be discussed with them to ensure that they understood and complied with the obligations. Further, when the director recovered his ability to be involved in the management of the respondent as his medical condition improved, one could reasonably have expected his knowledge of and concern for complying with payroll tax obligations to come into his mind. These considerations lead the appeal tribunal to the view that the director's lack of knowledge of, or concern for the obligation to pay payroll tax were factors or causes in the failure.
6. When he became ill, the director handed over control of the respondent to his employees, and had retained and expected his accountants and financial advisers to assist in the process of ensuring that the respondent's obligations were met. Both of these bodies of people appear to have failed in their obligations in this regard, as a result of which payroll tax was not paid during the time that they exerted control and/or provided advice. While this may not have been itself the 'sole cause', it was a factor which, had it not been present, should have ensured that the payroll tax was paid. This factor or set of circumstances was a 'cause' of the failure, even if it was not the initiating or sole cause.
7. While it is clear that the director has continued to suffer from the consequences of his illness, the fact that he is now able to resume control of the respondent would indicate that he would be aware of the respondent's obligation in relation to the payment of payroll tax. It is reasonable to expect that if he was at all conscious of the obligation, then once the illness went into remission and he was able to resume control then he would focus on the respondent's obligations in this area. The fact that he did not do so and that no steps were taken to approach the appellant to rectify the situation until the enquiries from the New South Wales payroll tax office, resulted in the appellant's investigation, support the conclusion that he was either not aware of or not committed to complying with the company's payroll tax obligations. Such a state of mind is part of the 'cause' for the failure, and cannot be regarded as beyond the control of the respondent through its sole director.
8. This appeal tribunal is satisfied that on the evidence, the tax default did not happen solely because of circumstances beyond the control of the respondent and its sole director and accordingly the relief from penalty tax provided for under section 31(6)(b) is not available in this case. Having come to this conclusion, it is not necessary to consider ground six of the appeal.
9. The decision of the appeal tribunal is that the appeal is allowed, and the decision appealed from is set aside. The consequence of this is that the original decision of the appellant is restored and confirmed.

[1] Statement of G.P. Kalsbeek dated 16 March 2015 ('statement') at [7]

[11] Transcript of proceedings 4 May 2015 page 10, lines 9-24

[12] Transcript of proceedings 4 May 2015 page 12, lines 1-4