Commissioner of Taxation v Barnes Development Pty Ltd

REASONS FOR JUDGMENT 1 The Commissioner of Taxation seeks recovery of monies from the respondent as a result of its non-compliance with two notices issued under s 260-5 to Schedule 1 of the Taxation Administration Act 1953 (Cth) (TAA). The s 260-5 notices required payment from the respondent and relate to substantial taxation liabilities due by two of its then directors, Mr John Eric Barnes and Mrs Judith Angela Barnes ("Mr and Mrs Barnes"). 2 The claim is for paymentin respect of money alleged due by the respondent on, in the case of Mrs Barnes, and after, in the case of Mr Barnes, the issue of the s 260-5 notices on 22 June 2007 being: (1) as to Mr Barnes - $73,842.00 (becoming payable by the respondent effective 30 June 2007 or alternatively by 9 April 2008 at the latest); and (2) as to Mrs Barnes - $383,451.31. 3 The respondent has not made any payment to the applicant in response to the notices. 4 The application is supported by two affidavits of Aris Zafiriou, an officer of the Australian Taxation Office. The first, sworn 22 October 2008, is relied on as to certain paragraphs and attachments only as specified in a notice dated 10 June 2009. The second was sworn on 3 June 2009. 5 The applicant also relies upon the respondent's admissions in its amended defence as well as its admissions in respect of the applicant's notice to admit facts and authenticity of documents dated 9 April 2009. All facts and documents were admitted. 6 The respondent relies upon the affidavit of Paul Michael Tayler, its accountant, sworn 2 July 2009 although at the hearing, I struck out paragraphs 5-7 (inclusive) as being inadmissible. The time at which payment was required was stated in the following way in each notice: If you now owe the available money to the debtor, the payment to the Commissioner of Taxation is to be made IMMEDIATELY. If you do not owe the available money to the debtor but you will later owe it to the debtor, the payment to the Commissioner of Taxation is to be made immediately the money becomes owing to the debtor. 7 Since 22 June 2007 the tax-related liabilities of each of Mr and Mrs Barnes have reduced. The Commissioner contends, however, that these liabilitiesstill exceed the amounts alleged to be owed to each of them by the respondent. The applicant issued notices dated 23 February 2009 to the respondent amending, by reduction, the amounts under the s 260-5 notices, to $899,530.72 in respect to Mr Barnes and $497,854.76 in respect to Mrs Barnes. 8 Section 260-5 forms part of Subdivision 260-A to Schedule 1 of the TAA. It provides relevantly as follows: Commissioner may collect amounts from third party Amount recoverable under this Subdivision (1) This Subdivision applies if any of the following amounts (the debt) is payable to the Commonwealth by an entity (the debtor) (whether or not the debt has become due and payable): (a) an amount of a tax‑related liability; (b) a judgment debt for a tax‑related liability; (c) costs for such a judgment debt; (d) an amount that a court has ordered the debtor to pay to the Commissioner following the debtor's conviction for an offence against a taxation law. Commissioner may give notice to an entity (2) The Commissioner may give a written notice to an entity (the third party) under this section if the third party owes or may later owe money to the debtor. Third party regarded as owing money in these circumstances (3) The third party is taken to owe money (the available money) to the debtor if the third party: (a) is an entity by whom the money is due or accruing to the debtor; or (b) … (c) … (d) … How much is payable under the notice (4) A notice under this section must: (a) require the third party to pay to the Commissioner the lesser of, or a specified amount not exceeding the lesser of: (i) the debt; or (ii) the available money; or (b) if there will be amounts of the available money from time to time--require the third party to pay to the Commissioner a specified amount, or a specified percentage, of each amount of the available money, until the debt is satisfied. When amount must be paid (5) The notice must require the third party to pay an amount under paragraph (4)(a), or each amount under paragraph (4)(b): (a) immediately after; or (b) at or within a specified time after; the amount of the available money concerned becomes an amount owing to the debtor. Debtor must be notified (6) The Commissioner must send a copy of the notice to the debtor. Setting off amounts (7) If an entity other than the third party has paid an amount to the Commissioner that satisfies all or part of the debt: (a) the Commissioner must notify the third party of that fact; and (b) any amount that the third party is required to pay under the notice is reduced by the amount so paid. 9 Accordingly the following preconditions to an action under s 260-5, assuming one is available, arise: (1) the taxpayer (the debtor) has a debt to the Commonwealth which comes within subsection (1); (2) a notice has been served on a person (the third party) who owes or may later owe money to the debtor (subsections (2)-(3)); (3) the notice complies with subsection (4); (4) the notice correctly specifies the time at which payment is to be made by the third party under subsection (5) (i.e. after the "available money" has become an "amount owing to the debtor"); (5) that time has passed; and (6) a copy of the notice is, pursuant to subsection (6), sent to the taxpayer. 10 I am satisfied on the evidence, including admissions made by the respondent, as to the following matters: (1) The respondent is, and at all material times was, a company, of which Mr and MrsBarnes were directors and trustee of the Barnes Family Trust, a trust of which the Barnes were, among others, beneficiaries. (2) As at 22 June 2007, the taxation liabilities of Mr Barnes and Mrs Barnes disclosed in the s 260-5 noticeswere $3,081,279.67 and $3,087,362.87 respectively. The amounts were amended by notice dated 23 February 2009 to reduce the taxation liabilities to $899,530.72 and $497,854.76 respectively. (3) Compliant s 260-5 notices were served on the respondent on 22 June 2007 which specified the time for payment. This time in each case has passed. A copy of the relevant notice was sent to Mr and Mrs Barnes respectively. (4) The respondent has not paid any amount to the applicant. 11 The respondent does not concede that the amounts alleged by the Commissioner to be due to Mr and Mrs Barnes were due at the material times. 12 The Commissioner alleges that as at 22 June 2007 the respondent was an entity which "may later owe money" to Mr Barnes and submits that according to the respondent's financial records prior to 9 April 2008, but backdated to and effective from 30 June 2007, the respondent became an entity which owed money to Mr Barnes, being a debt payable on demand of $73,842. The Commissioner alleges that the respondent was an entity which, as at 22 June 2007, owed money to Mrs Barnes, namely, a debt payable on demand of $383,451.31. 13 The Commissioner relies upon an admission by the respondent that a $73,842 debt was due by it to Mr Barnes as at 30 June 2007. I am not satisfied for reasons to which I will refer later that this admission is unqualified and ought be accepted.

Availability of Civil Recovery Proceedings 14 There is a threshold legal issue. The respondent contends, as a matter of law, that s 260-5 does not enable the applicant to pursue civil recovery proceedings as it is a penal provision and that non-compliance with this provision does not entitle the Commissioner to recover from it the amount specified in the notices. 15 The Commissioner submits that, as a matter of construction, once a notice has been validly served under s 260-5(2), and the time specified in s 260-5(5) has arrived in respect of a sum of money which is the subject of the notice, an action lies to enforce payment of that sum to him. 16 Section 260-5 provides that the notice must require an amount of money to be paid to the Commissioner. The Commissioner submits that the section gives statutory backing to that requirement so as to impose an obligation on the recipient to pay money and, in turn, an action lies for its recovery. 17 The Commissioner submits that an action in debt arises by implication upon the proper construction of s 260-5. Alternatively he submits that the monies alleged due to Mr and Mrs Barnes by the respondent are tax related liabilities which may be sued for as debts under the provisions of s 255-5 of the TAA.

Action in Debt Available by Implication 18 The Commissioner's primary submission is that each amount, the subject of a notice under s 260-5, is recoverable by an action in debt under the principles of the general law as explained by the High Court in the following passage from its unanimous judgment in Mallinson v Scottish Australian Investment Co Ltd (1920) 28 CLR 66: The rule applicable here is stated in Shepherd v Hills as follows, viz, 'Wherever an Act of Parliament creates a duty or obligation to pay money, an action will lie for its recovery, unless the Act contains some provision to the contrary'; and where the amount is liquidated the action of debt is appropriate. The obligation is none the less a debt because the statute gives no particular method of enforcing it. In cases in which the statute contains no express denial of the right to bring an action, the proper course to adopt in order to determine whether it contains 'some provision to the contrary' within the meaning of the rule stated above is to consider whether it appears from the whole purview of the Act that it was the intention of the Legislature that the remedy provided should be a substitute for the right of action which would otherwise exist; and in determining this question it is material to consider whether the obligation imposed by the Act was designed to benefit a particular class of persons …. It is also material to consider whether the provision made by the Act for compelling obedience to its commands is in the nature of a penalty for disobedience or in the nature of compensation to the person whose rights are affected by the failure to perform the obligations imposed by the Act. [The case citations have been omitted]. 19 This general principle was re-affirmed recently by the High Court in Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd (2008) 248 ALR 693 at [51] where it was explained that where legislation creates a duty to pay money, an action in debt is "the appropriate remedy for which the general law provides". 20 The respondent argues, applying the Shepherd v Hillsproviso adopted in Mallinson,that s 260-20 constitutes a "provision to the contrary", which denies the right to sue for recovery that would otherwise arise by implication. This is because, it submits, s 260-20 provides a sanction for non-compliance with a notice under the criminal law, with power in the criminal court in its discretion to order payment of an appropriate sum to the Commissioner. 21 Section 260-20 relevantly provides: Offence (1) The third party must not fail to comply with the Commissioner's notice. Penalty: 20 penalty units (2) The court may, in addition to imposing a penalty on a person convicted of an offence against subsection (1) in relation to failing to pay an amount under the notice, order the person to pay to the Commissioner an amount not exceeding that amount. 22 As to s 260-20, there is no general principle that the availability of civil remedies is excluded by provision for a criminal sanction with a discretionary power to order payment of monies due. I do not consider that the Parliament intended the criminal sanctions in s 260-20 to be the exclusive means of enforcing a notice. 23 The offence created by s 260-20(1) is not an offence of strict or absolute liability. Accordingly, so the Commissioner submits,the relevant mental element must therefore be proved, to the criminal standard, before a conviction can be obtained; and, in the case of a failure to comply (which is an "omission to perform an act", and therefore "conduct" for the purposes of s 4.1(2) of the Criminal Code Act 1995 (Cth), the mental element is intention. There is scope, the Commissioner contends, for controversy as to whether the relevant intention would involve knowledge of the existence of obligations under the notice but thatwhatever the extent of the practical difficulties may be, it is clear in principle that the Commissioner's rights may be infringed by conduct that does not constitute an offence. The consequence he submits,if s 260-20 were the only means of enforcement, is that there would necessarily be a class of cases in which the obligation created by a notice would be wholly unenforceable and that Parliament should not be taken to have intended that result. 24 The Court, under s 260-20(2), may order the third party topay some or all of the debt to the Commissioner. However, such an order can be made only if a conviction has been obtained, and the power is discretionary. 25 In my opinion the evident purpose of s 260-20(2) isthat, in an appropriate case, an order for payment can be obtained without the need for multiple proceedings. It does not provide a basis for an inference that Parliament intended to exclude the enforcement of a notice by civil remedies. 26 The respondent further submits that s 255-5, which provides for an express regime of civil recovery but does not extend to amounts arising under s 260-5, is also "a provision to the contrary". This seeks, in effect, to apply the maxim expressio unius est exclusio alterius as an aid to construction. It is an aid which must be used with caution: Houssein v Under Secretary of Industrial Relations and Technology (1982) 148 CLR 88 at 94; Barratt v Howard (1999) 165 ALR 605 at 615 per Hely J. If applied in this case it would bring about a result which I doubt the Parliament intended: Ainsworth v CJC (1992) 175 CLR 564 at 575. The existence of affirmative provisions elsewhere in the Act does not, in my opinion, override the principle articulated in Mallinson. 27 The proposition that s 260-5 creates an obligation which is enforceable by an action in debt is supported by cases concerning one of its statutory predecessors, former s 218 of the Income Tax Assessment Act 1936 (ITAA36). This provision, as the parties accepted, is substantially to the same effect as ss 260-5 and 260-20 taken together. 28 In Clyne v Deputy Commissioner of Taxation (1981) 150 CLR 1, Mason J (Aickin and Wilson JJ agreeing) described s 218 as imposing an obligation on the recipient of a notice to pay money which falls within the statutory description. Brennan J observed that the Commissioner was entitled to insist on compliance and that there was no reason why the Commissioner's right should not be enforced by proceedings other than prosecution under subs (2). No other member of the Court considered this point. When Clyne was decided s 218 did not confer any power on the Court convicting an entity for non-compliance with the notice to pay some or all of the amount in the notice. I do not consider that this affects the proper construction of s 260-5. Brennan J furtherobserved that the statute worked an assignment of the moneys to be paid to the Commissioner as though the taxpayer had charged the moneys otherwise payable to him with payment of his tax liability. 29 Bryson J of the Supreme Court of New South Wales, referring to that observation, held in Deputy Commissioner of Taxation v Lanstel Pty Ltd (1996) 22 ACSR 314 that the s 218 worked an assignment of the debt so that it became payable to the Commissioner. In doing so his Honour observed: A conclusion that, quite apart from prosecuting a recipient of a notice for an offence, the Commissioner has a legal right to compel the payments to be made to the Commissioner, and to sue for the amount if it is not paid, is left to implication, but the implication is clear. 30 This conclusion was reached despite the then inclusion by s 218(3) of the discretionary power to order payment. 31 The respondent contends thata dictum in the judgment of the High Court in Bluebottle UK Ltd v Deputy Commissioner of Taxation (2007) 232 CLR 598 referring to s 218 as a "penal" provision, might on one reading be seen as indicating that that section did not give rise to an obligation enforceable by civil proceedings. 32 Bluebottle concerned the scope of ITAA36 s 255 which made a person who had "control" of money belonging to a non-resident liable to pay "the tax due and payable by the non-resident". Section 255 did not, itself, contain any provision characterising the relevant amounts as "debts" due to the Commonwealth. Rather, the liability was described as one in respect of "tax", defined in subs (4) to include the general interest charge. Making a person liable to pay the "tax" due and payable by the non-resident clearly had significance: for example, ITAA36 ss 175 and 177(1) would apply to make the relevant assessment conclusive as to the amount payable, while TAA ss 14ZZM and 14ZZR would govern the recoverability of that amount pending the outcome of any review or appeal against the assessment. The Commissioner argued as the Court understood it that, if not given a relatively broad construction, s 255 would have "little or no work to do" different from that done by s 218. The Court considered that s 255 did have additional work to do, even on a narrower view than that urged by the Commissioner. The Court at [93] articulated the different effects of the two provisions: First, s 255 is directed to a more limited class of tax liabilities than those with which s 218 deals. Section 255 concerns only tax which is or will become due from a non-resident; s 218 is not so limited. Secondly, and perhaps more importantly, s 255 makes the controller of moneys liable for the tax payable by the non-resident (to the extent of the amount that was, or should have been, retained); s 218 is a penal provision and does not permit the Commissioner to recover any of the tax due from the person to whom the notice is given. These differences suffice to distinguish between the two provisions and give each a separate operation in the 1936 Act. (Emphasis added) 33 The references to "tax payable" and "tax due" are significant. I apprehend the Court here was saying no more than that under s 218 the third party was, unlike s 255, not liable to pay the "tax payable". Section 255(1)(c) rendered the "controller" of monies of a non-resident personally liable for the tax payable on behalf of the non-resident. Section 218, by contrast, created a new obligation for payment to the Commissioner of "money due, accruing or (which) may become due" by a person to a taxpayer, albeit the payment of that money by the person to the Commissioner was to be credited against the taxpayer's liability to tax. However, it did not in terms enable the Commissioner to recover from the other person the tax due by the taxpayer. The provisions to which I have referred in the ITAA36 concerning assessments of tax have no immediate application in respect of s 218. This, in my view, is how the distinction between ss 218 and 255 referred to in Bluebottle should be understood. I would expect that had the Court meant that s 218 provided no capacity for the Commissioner to sue for recovery of amounts the subject of a notice other than through criminal proceedings, it would have referred to earlier High Court authority on the subject such as Clyne and particularly the principle explained in Mallinson. Indeed Clyne was applied in Bluebottle in dealing with another issue and Mallinson was also referred to but not on this point. I do not regard Bluebottle as overruling the principle articulated in Mallinson. 34 Bluebottle therefore does not stand in the way of a conclusion that the ITAA36 s 218 permitted the Commissioner to sue in debt for the amount required to be paid pursuant to a notice. Other authority supports this conclusion. It also supports the same conclusion in respect of TAA s 260-5. There is therefore nothing to displace the ordinary rule that, where a statute creates an obligation to pay money, an action in debt will lie to enforce the obligation. 35 The Commissioner, in my opinion,may sue in debt to recover an amount that is required to be paid by a notice under s 260-5, when the time for payment of that amount as specified in s 260-5(5) has arrived.

Monies alleged owed by respondent to Mr and Mrs Barnes 36 The loan accounts of Mr and Mrs Barnes with the respondent, at the material dates of 30 June and 22 June respectively,according to the records of the respondent were as follows at least prior to the application of a journal entry in each case amounting to $309,609.31. I will refer to the journal entries later: Mr Barnes' loan account with respondent as at 30 June 2007 (rounded)

1. Balance as at 30 June 2006 $1,035,444
2. Add: Capital introduced 75,491 2006/2007 (A/C 50101)
3. Less: Drawings to 30/06/2007 up (1,334,810) to $309,609.31 entry (running balance up to last drawings entry) (A/C 50103)
4. Less: Drawings, Income Tax up to (11,892) 30/06/2007 (A/C 50105)
5. Balance as at 30/06/2007 before ($235,767) $309,609.31 entry No 1 + No 2 - No 3 - No 4

37 Mr Barnes, in an affidavit read in proceedings in the Federal Magistrates Court and sworn on 27 March 2008, deposed to his loan account with the respondent being, upon his estimate as at 30 June 2007, the amount of $235,767 in debit. 38 This was admitted as a fact following delivery to the respondent of a notice to admit facts and authenticity of documents. Mrs Barnes' loan account with respondent as at 22 June 2007 (rounded)

1. Balance as at 30 June 2006 $395,343
2. Add: Capital introduced 2006/2007 (a/c 50201) 0.00
3. Less: Drawings to 22/06/2007 (1 entry on 29/05/2007) (a/c 50203) (11,892)
4. Balance as at 22/06/2007 $383,451 39 No 1 - No 3

40 The loan account figure as at 30 June 2007 was also the subject of an affidavit sworn by Mrs Barnes on 27 March 2008 in which she deposed to it being the amount of $383,451. This too was admitted by the respondent as a fact. 41 Journal entries, each in the sum of $309,609.31 were made by the respondent's accountant in the annual general ledger. They represent a double entry approach and are inextricably connected. This amount was credited to the loan account of Mr Barnes converting a debit balance of $235,767.74 to a credit balance, rounded up, of $73,842. The same figure of $309,609.31 was applied as a debit to the loan account of Mrs Barnes reducing her loan account also to the figure, rounded up, of $73,842. Each journal entry took effect as at 30 June 2007. 42 The Commissioner submits that because the effect of the journal entry operated on Mrs Barnes loan account only as at 30 June 2007 and because the amount due to her by the respondent crystallised upon service of the s 260-5 notice on 22 June 2007 it is the amount of $383,450.95 then owed to her by the respondent which is recoverable. I accept that submission. 43 The Commissioner accepts that as at 22 June 2007 Mr Barnes was not owed any money by the respondent, but as I explained earlier he has admitted in his defence at para 5-6 to being owed $73,842 by the respondent as at 30 June 2007. 44 It is to be remembered that the figure in respect to Mr Barnes was in respect of monies which "may become due" to him and accordingly the material date in respect to monies owed to him by the respondent is a date after 22 June 2007. The Commissioner says that the journal entry relating to Mr Barnes' loan account should be taken into account in his case. The effect of the application of the journal entry is, as I have said, to transform a very significant indebtedness on his part to the respondent to an amount of $73,842 owed to him by the respondent. Certainly the respondent has admitted that to be the position as at 30 June 2007 in its amended defence. However it is apparent, taking the evidence as a whole, that this admission proceeded on the premise that both of the journal entries in relation to Mr and Mrs Barnes respectively were effective as at that date. It is not an admission that this amount was owed to Mr Barnes at any time prior to then, including 22 June 2007. Nonetheless the Commissioner submits that I should accept at face value the efficacy of the journal entry in relation to Mr Barnes combined with the admission of the amount due to him at 30 June 2007 by the respondent. Indeed, as I referred to earlier, in his affidavit sworn for the Federal Magistrates Court proceedings, Mr Barnes deposed that as at 30 June 2007 he owed the respondent $235,767. This was sworn before the journal entries were put into effect by the respondent's accountant. 45 I do not think that produces a just result. The total balance of the loan accounts of Mr and Mrs Barnes with the respondent as at 30 June 2007 ignoring the operation of the journal entries was as follows: Mr Barnes ($235,767.74) Mrs Barnes $383,450.95 $147,683.21 46 The total amount said to be owed to Mr and Mrs Barnes upon the application of the journal entries and which the Commissioner submits I should accept is as follows: Mr Barnes $ 73,842.00 Mrs Barnes $383,450.95 $457,292.95 47 This result follows, as I have said, because the effective date of the journal entries was 30 June 2007 but the respondent does not get the benefit of the reduction to Mrs Barnes' loan account for present purposes, on the Commissioner's argument because on the date of the s 260-5 notice Mrs Barnes was indeed owed the higher amount. 48 I do not think that the Commissioner can have it both ways. That is to say to attribute the benefit of the journal entry to Mr Barnes but not in turn to Mrs Barnes. If the journal entry was applied to both loan accounts then each would be owed $73,842, a total of $147,684. This truly reflects the amounts owed to them in total as I have noted above. I have taken into account that the balance sheet for the respondent, for the year ended 30 June 2007 produced after the journal entries were made discloses the loan accounts of Mr and Mrs Barnes at the figure of $73,842 for each of them. The correctness of this is the subject of a written declaration by each of them as directors. However, these financial records are but prima facie evidence of the facts contained in them: s 1305 of the Corporations Act 2001 (Cth). They are not determinative of the factual position. If I were to proceed as the Commissioner would have it, this would, in my view, work an injustice upon the respondent by artificially increasing the loan account of Mrs Barnes viewed on a joint basis, by in excess of $300,000. 49 After producing draft reasons I was advised by the Commissioner's solicitor that the claim for $73,842 in respect of Mr Barnes is no longer pressed although its position that it was entitled to relief in this sum was maintained. I have considered it appropriate therefore to include in these reasons why I have come to an opposite conclusion. 50 I am satisfied that the Commissioner has established its claim in respect to monies owed by the respondent to Mrs Barnes in the amount of $383,451.31 but not at all in respect to monies alleged owed by the respondent to Mr Barnes. I find that as from 22 June 2007 to 9 April 2008,Mr Barnes was indebted to the respondent. 51 There should be an order that the respondent pay the sum of $383,451.31 together with interest pursuant to s 51A of the Federal Court of Australia Act 1976 (Cth) from 22 June 2007. The respondent should pay the applicant's costs. I will invite the parties to bring in a minute of proposed orders to reflect these reasons including a calculated figure for interest. I certify that the preceding fifty-one (51) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gilmour.

Associate: Dated: 7 August 2009 Counsel for the Applicant: Mr N J Williams SC with Mr J C Vaughan

Solicitor for the Applicant: Australian Government Solicitor

Solicitor for the Respondent: Butcher Paull & Calder Lawyers