Deputy Commissioner of Taxation v Reidy

Corporations Act 2001 (Cwth) Income Tax Assessment Act 1936 (Cwth) LEGISLATION CITED: Income Tax Rates Act 1986 Taxation Administration Act 1953 (Cwth) Taxation Laws Amendment Act (No 3) 1999 (No 11 of 1999)

Browne v Dunn (1894) 6 R 67 DCT v Sargon [1985] FLR 394 16 ATR 355 FCT v Barnes (1975) 5 ATR 713 CASES CITED: Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 29 R v Iannelli [2003] NSWCCA 1; (2003) 56 NSWLR 247 Stergis & Ors v FCT (1989) 86 ALR 174 Taylor v DCT (1987) 16 FCR 212 Temples Wholesale Flower Supplies Pty Ltd v FCT (1991) 29 FCR 93

PARTIES: Deputy Commissioner ofTaxation (Plaintiff) Margaret Anne Reidy (Defendant)

COUNSEL: Ms S Foda (Plaintiff) Mr D Allen (Defendant)

SOLICITORS: Australian Government Solicitor (Plaintiff) Proctor & Associates (Defendant)

Nature of the case [1] - [3] Background [4] - [6] Issues for determination [7] - [8] Review of evidence in the plaintiff's case [9] - [27] Evidence in the defendant's case [28] - [70] Applicable legislation [71] - [83] The submissions of the parties [84] Plaintiff's submissions [85] - [97] Defendant's submissions [98] - [108] Submissions in reply [109] - [114] Credibility of testimony [115] - [130] Consideration of Issue 1 - Validity of tax assessments [131] - [132] Consideration of Issue 2 - Entitlement to tax credits [133] - [145] Disposition [146] Orders [147]

The plaintiff, the Deputy Commissioner of Taxation, seeks to recover assessed income tax from the defendant, Mrs Margaret Anne Reidy, in the amount of $190,001.64 including assessed penalties and accrued interest, for the financial years ending June 30 1996-2000 and 2005 ("the relevant years").

The underlying assumption in the plaintiff's case was that where an employer had failed to remit to the Australian Taxation Office ("ATO") the amount for tax instalments withheld from the earnings of an employee, in certain circumstances, the employee could nevertheless be held liable for such withheld amounts at the suit of the ATO where those withheld amounts could no longer be recovered from the employer who had become insolvent and was unable to pay the tax withheld.

In these proceedings, the defendant contested the entitlement of the plaintiff to recover the claimed amounts with accrued interest. The defendant's position was that her assessed liability for tax should take into account credits for the amounts of tax withheld by her former employer. There was a factual question as to whether any monies were deducted for tax and withheld by the defendant's former employer. The defendant claims that the end point of the accounting between the parties is that she is not liable and in fact is owed money by the ATO.

The assessments of the defendant's income tax liability relied upon by the plaintiff arose following an investigation and audit conducted by the ATO into the financial affairs of the plaintiff's former employers, variously described as Mr Peter George Samios trading as Freshly Squeezed Water Co, Jarra Waters Pty Ltd or Jarra Waters Australia Pty Ltd (the "Jarra" companies).

An ATO audit of the defendant's former employer's financial affairs detected that the Jarra companies had, for the relevant years, failed to remit group tax for the relevant years, including group tax that had allegedly been deducted from the earnings of the defendant whilst she was in the employ of the Jarra companies.

By reason of the operation of s 255-45 and s 255-50 of the Taxation Administration Act 1953 ("TAA"), the defendant conceded the correctness of the certified amounts of assessed tax liability as was claimed by the plaintiff. However, the defendant sought to resist the plaintiff's claim by maintaining that the operation of s 221H(2) of the Income Tax Assessment Act 1936 ("ITAA") entitled her to claim credit for amounts deducted by the Jarra companies from her earnings. The defendant sought to rely upon that defence, notwithstanding that the amounts for tax that she claimed to have been deducted from her earnings had not been remitted to the ATO by those companies or the principal of those companies.

Two principal issues arise for determination in these proceedings: Issue 1: Whether the defendant's liability for income tax under the assessments for the relevant years has been conclusively proven;

Issue 2: Whether, by reason of the operation of s 221H(2) of the ITAA, the defendant is entitled to credit for tax deducted from her earnings in the years 1996 to 2000. The defendant conceded that she is liable for $101.71 in respect of the 2005 tax year but claims this amount is eclipsed by her entitlement to credits for amounts for tax deducted in the previous years.

These issues require resolution of some contested factual matters.

The plaintiff relied upon an affidavit sworn on 5 November 2009 from Ms Louise Amunsden, a solicitor in the employ of the Australian Government Solicitor. The effect of the affidavit was to identify the ATO's proof of debt as at 12 April 2005 in the sum of $129,852.18. That amount, which was not disputed, did not include an up to date calculation of interest.

The plaintiff also relied upon an affidavit sworn on 3 June 2009 from Ms Suzanne Little Owl, who was employed by the ATO in its Strategic Recovery Team. Ms Little Owl had some familiarity with the ATO's records concerning the defendant's income-tax affairs, as well as those of the defendant's former employer. Her evidence was formal in nature and identified the revenue effect of the defendant's income-tax returns and the related notices of assessment for the relevant years. She was not involved in the audit, assessment or accounting processes that led to the calculation of the assessments issued to the defendant. Her evidence on these matters related to purely administrative issues. She identified another ATO employee, Mr Peter Spring, as the officer who had carriage of the ATO files relating to this matter.

The historical background that emerged from Ms Little Owl's evidence, following her review of the ATO files relating to the issues in the case, was that in the course of its internal procedures, the ATO had disallowed the defendant's claims for PAYE withholding credits and had disallowed the defendant's claims for the cost of managing her tax affairs in the years ended June 30, 1998, 1999 and 2000. This resulted in adjusted calculations made by the ATO in respect of the defendant's taxation liabilities. This position was reflected in the ensuing amended assessments.

Ms Little Owl also gave evidence concerning the effect of various historical company searches from within the records of the Australian Securities and Investment Commission. The effect of this evidence was to establish that Jarra Waters Australia Pty Ltd was registered as a company in New South Wales on 16 November 1999 and was subsequently deregistered on 18 December 2005 after being wound up by order of the Supreme Court of Queensland on 7 January 2004, following appointment of liquidators. Ms Little Owl's evidence also established that during the period in which the company was registered, Mr Peter George Samios, the plaintiff's former employer, was the sole director and secretary of the company.

It was these events, and the related ATO investigations and audits that were conducted in relation to the business affairs of the defendant's employer, that had led to the amended assessments being issued to the defendant and to which I have already referred.

In cross-examination, Ms Little Owl confirmed that the ATO personnel who conducted the audit of the defendant's employer's financial and taxation affairs had constructed a table of earnings paid to the employees of the Jarra companies including to the defendant for the financial years ended 30 June 1996-2000.

The audit report, which was tendered as Exhibit "1", demonstrated that Mr Samios and his accountant provided limited assistance to the auditors in their quest to examine the financial affairs of the Jarra companies. The audit report at page 3 set out a series of tabulations for the years ended 30 June 1996, 1997, 1998 and 1999. Those tabulations listed the names of the relevant employees of the Jarra companies, the gross salary for the year, the tax instalments deduction for each year and the net amount after deduction of tax.

Replicated below in Table 1 is an extract of those tables, but condensed to relate only to the defendant, using exactly the same headings as were used by the auditors:

Financial year ending June 30th Gross Salary Tax Instalments Deduction Net Amount 1996 $39,825.00 $12,688.17 $27,136.83 1997 $40,530.00 $13,186.72 $27,343.28 1998 $41,718.00 $13,502.07 $28,215.93 1999 $42,089.00 $13,833.54 $28,255.46 TOTALS $164,162.00 $53,210.50 $110,915.50

It is clear from this tabulation that the amount sought by the plaintiff in these proceedings includes not only amounts for tax but also a substantial penalty and/or interest component.

It was clear from the evidence of Ms Little Owl, and from ordinary experience, that the way the taxation system was administered, in the ordinary course, employers deducted monies on account of tax from the earnings of employees, and the ATO collected that tax from employers at the time employers remitted such amounts to the ATO. There was no evidence of a requirement that employers who had deducted or withheld such amounts for tax, had to keep the deducted or withheld amounts in a separate account, pending remittal to the ATO although it may have been prudent to have done so. In any event, Mr Samios stated he did not keep a quarantined account for such monies in the Jarra companies' accounts

The plaintiff also relied upon three affidavits from Mr Philip Spring, a member of the Strategic Recovery Team employed by the ATO. His affidavits were respectively sworn on 6 November 2009, 10 November 2009 and 16 February 2010. Mr Spring had taken over the ATO's files relating to the proceedings against the defendant about a year before the hearing. Those files also related to the businesses conducted by the defendant's former employer, Mr Samios.

Mr Spring confirmed that these proceedings, and the reassessments issued to the defendant which based these proceedings, arose out of an audit of the business affairs of Mr Samios. In this regard, Mr Spring noted that Mr Samios claimed ownership and directorship of the entity Jarra Waters Pty Ltd. Mr Spring also noted that Mr Samios had earlier been conducting a business trading as Freshly Squeezed Water. There was no dispute that Mr Samios had earlier conducted the business of Jarra Waters Pty Ltd. Mr Spring confirmed that in 2000, Mr Samios' financial affairs had been audited by the ATO. Following that audit, Mr Samios was assessed for unpaid group tax concerning monies that had been paid by his business to his employee, the defendant, as earnings.

Mr Spring also confirmed that as a result of that assessment, Mr Samios became bankrupt. Mr Spring was not sure as to whether or not the bankruptcy was at the petition of the ATO. Mr Spring also confirmed that in the bankruptcy of Mr Samios, the ATO presented a proof of debt for assessed unpaid tax liability.

In his affidavit sworn on 6 November 2009, Mr Spring explained the ATO's internal record keeping procedures. He stated that the results of his searches revealed that, according to the ATO records, the defendant's former employer had never lodged any Business Activity Statements or Instalment Activity Statements. Analysis of any such statements, and the underlying documentation which would have based them, if they had been available, would have been expected to have revealed any amounts deducted from the defendant's salary for tax instalment deductions or group tax deductions. Mr Spring stated that the ATO records do not confirm whether or not the defendant's employer had ever lodged an income-tax return.

In his affidavit sworn on 16 February 2010, Mr Spring further explained how the ATO's accounting records operated and how they were managed. His evidence was that according to the records of the ATO, as at 16 February 2010, the defendant's indebtedness to the ATO in respect of unpaid income tax and interest thereon amounted to $190,001.64. A certificate to that effect, which was prepared pursuant to section 255-45 of Schedule 1 of the Taxation Administration Act 1953, was marked as Annexure "B" to Mr Spring's affidavit. The assessed amount was not disputed by the defendant.

Mr Spring stated that from what he could gather from the ATO's audit reports in relation to this matter, the ATO had determined that, for its own purposes, deductions for tax had not been taken from the defendant's earnings. Necessarily, that was opinion evidence which did not have any relevant input from Mr Samios or the defendant. Mr Spring stated that he was not in a position to explain the manner, detail or the progress of the audit of the defendant's former employer. He was only able to relate the findings made by the ATO in relation to that audit. He confirmed that the ATO's proof of debt in the bankruptcy of Mr Samios was based on estimates made by the ATO auditors.

In re-examination, Mr Spring confirmed that following the bankruptcy of Mr Samios, the ATO was unsuccessful in its attempt to recover monies relating to its proof of debt for claimed unremitted group tax in relation to the earnings of the defendant.

Mr Spring confirmed that the amount the ATO sought to prove as a debt in Mr Samios' bankruptcy was different to the amount now sought to be recovered from the defendant in these proceedings. It appears from the evidence that the explanation for the difference in these amounts is that the unsuccessful claim the ATO had made against the bankrupt estate of Mr Samios related to unremitted tax concerning more employees than just the defendant so that following the decision to pursue the claim against the defendant the internal ATO accounts had to be reversed and re-written. In these proceedings the ATO only seeks to cover tax payable on the earnings derived by the defendant, which is necessarily a lesser sum.

It became apparent from the evidence of Mr Spring that the present proceedings have been taken against the defendant because during the audit, and regrettably for all concerned, there was nothing produced by Mr Samios' taxation accountant that served to substantiate the fact or assertion that tax had been deducted from the earnings of the defendant.

In the defendant's case, affidavit evidence was introduced from the defendant and, affidavit and oral evidence was also given by her former employer, Mr Samios.

In her affidavit sworn on 15 October 2009, the defendant stated that she had commenced employment as a marketing consultant with Mr Samios after she had answered an advertisement for the position. Her work required her to promote the sale and use of water filters. She carried out her work at home shows and shopping centre sales promotions venues, as well as at her employer's retail outlet which was located in Five Dock, in Sydney.

In her affidavit, the defendant confirmed her understanding that initially, Mr Samios had traded through an entity known as Freshly Squeezed water Co, and then through a company called Jarra Waters Pty Ltd. She stated that the business involved the selling of water filters. She confirmed that her employment with the company had commenced on 16 November 1999 and had ceased on 7 January 2004. She said that in this time her salary was usually paid in cash, given to her each week, occasionally by cheque. She stated that whereas she initially received pay slips with her wages envelopes, after some time. This did not continue.

In her affidavit, the defendant stated that for the financial year ended 30 June 1998, the company paid her a gross salary of $41,700 from which the company deducted $13,002.07 for tax. For the financial year ended 30 June 1999, the defendant stated that the company paid her a gross salary of $42,089 from which $13,833.54 was deducted for tax. Similarly, for the financial year ended 30 June 2000, she stated that the company paid her a gross salary of $35,125, from which $9865.30 was deducted for tax. She also produced copies of group certificates from the company for those years, consistent with her evidence. The defendant's evidence of the amounts of her income for the 1996 - 1999 years did not precisely match the analysis set out by the ATO auditor in his report that became Exhibit "1".

The evidence comprising the available group certificates and the ATO audit analysis is summarised in Table 2 as follows to reveal a $331.47 balance in favour of the defendant for the 1998 tax year:

Financial year ending June 30th Gross Salary Tax Instalments Deduction Tax difference compared with Table 1 1998 $41,700.00 $13,002.07 + $331.47 1999 $42,089.00 $13,833.54 ($Nil) 2000 $35,125.00 $9,865.30 ($Nil) TOTALS $118,914.00 $36,700.91 + $331.47

In her affidavit, the defendant also said that for the years stated, she lodged income-tax returns through her accountants, Cassaniti and Associates. These were the same accountants that had been used by Mr Samios and his businesses.

The defendant stated that on or about 4 February 2002, her accountant had contacted her concerning communications he had received from the ATO. This concerned her income tax returns for the years 1996-2000. It appears that the ATO had decided to disallow credits for group tax that she had claimed in her income-tax returns for those years. On 17 December 2008, the plaintiff issued a Statement of Liquidated Claim against her in this court regarding re-assessments the ATO had issued to her regarding her taxation liabilities.

In her oral evidence, the defendant confirmed that when she was first employed by Mr Samios the arrangement was that she would receive a salary of about $40,000 per anum, but this would fluctuate depending on commissions if she sold goods at shows and the like. She could not recall whether or not she had signed an employment contract for the position. She stated that she was paid about $550 in cash on a weekly basis. Those wages were received by her in a plain envelope given to her every Friday. In the beginning of her employment, that is for about the first two years, she also received a pay slip with her wages envelope.

The defendant was cross-examined about the copies of the group certificates she produced for the financial years ended June 1998, 1999 and 2000. She confirmed that she had not produced copies of certificates for the 1996, 1997 and 2005 financial years. It was not suggested to her that there were no group certificates issued to her for those years. It was not suggested to her in cross-examination that the copies of the group certificates that she had produced and which she had annexed to her affidavit were anything other than genuine.

In cross-examination, the defendant confirmed that she had a bank account. She also confirmed that she had not provided any of her bank statements in her evidence in the proceedings. I do not consider that any adverse inference arises from this as there was no evidence that either she or her solicitors had been provided with a Notice to Produce in respect of any such bank statements.

The defendant was questioned as to whether she had kept any records of her earnings during the period she had been in the employment of Mr Samios. In response she stated that she did not always bank the cash she received from her earnings. She said she often spent those monies without first depositing them in a bank account. She stated that she relied upon the contents of her group certificates as a record of her gross earnings and as a record of the income tax that had been withheld from those earnings by her employer.

The defendant was also questioned as to whether she had taken any part in the maintenance or supervision or the making of entries in the business records of her employer's company. She stated that on occasions, she had been instructed to pay bills by raising cheques on an account to which Mr Samios was a signatory. She stated that she did not know the nature of records kept by Mr Samios concerning financial matters such as wages and "the withdrawal of the money from (her) payments that (she) received as income-tax withholding?"

The defendant's former employer, Mr Samios, was called to give evidence in the case for the defendant. His affidavit, which was sworn on 15 October 2009, was read subject to a number of matters that were objected to and ultimately not relied upon. Mr Samios was cross-examined on the content of his affidavit, and in particular the nature, terms and detail of his employment of the defendant. He was also cross-examined concerning the details of matters that arose in the course of an audit conducted by the ATO into his financial affairs as well as in relation to his bankruptcy.

Mr Samios provided some historical background to his business affairs. He stated that between 1989 and 26 September 1990 he had operated a water purification sales business known as Freshly Squeezed Water Co as a registered business name. the business sold water purification products and accessories through retail outlets. He initially operated as a sole trader.

On 26 September 1990, Mr Samios incorporated a company called Jarra Waters Pty Ltd. At that time he became a director and shareholder of that company, which then acquired the business of Freshly Squeezed Water Co from Mr Samios. The company then continued to trade until 16 November 1999. The company was subsequently de-registered by ASIC pursuant to s 601AB(1) of the Corporations Act 2001 (Cwth), for non-lodgement of annual returns.

Apparently, Mr Samios was initially and for a time unaware that his company had been deregistered and he continued to trade and to operate merchant facilities, including a bank account in the name of the company. Mr Samios said he had about five employees in the business, including the defendant. He also stated that he had obtained signed employment declaration forms from each employee and that to his knowledge, these forms had been forwarded to the ATO.

Mr Samios stated that his companies had not met its employee superannuation obligations. However he stated that all employees were paid their net salary each week. He stated that he had remained the sole director, secretary and shareholder of his company between 16 November 1999 and 7 January 2004, at which time the company was placed into liquidation. At around that time, Jarra Waters Australia Pty Ltd was incorporated, and it acquired the business of Jarra Waters Pty Ltd.

Mr Samios stated that once the new company had taken over, all employees completed and signed new employment declarations and so far as the employees were concerned, nothing had changed with regard to their employment.

Mr Samios stated that in the meantime, in 2003, he was having financial difficulties and could not pay all these expenses. This resulted in a landlord pursuing action for unpaid rent. Consequent upon the litigation a liquidator of Jarra Waters Australia Pty Ltd was appointed and the company was deregistered on 22 September 2005.

Mr Samios stated that throughout the periods during which his companies had traded, the defendant was the sales manager until the appointment of a liquidator for the company. This took place on 7 January 2004.

Mr Samios admitted that neither of the Jarra companies had ever remitted any amounts for group tax to the ATO.

Mr Samios stated that in October 1999 he was advised that the ATO wished to conduct an audit of his companies. That audit proceeded in two stages. The first such stage took place on 9 February 2000, when Mr Samios and his accountant met two officers from the ATO at the office of his accountant. The second such stage took place on 6 March 2000, when officers from the ATO conducted their audit at the offices of Mr Samios' accountant, but in the absence of Mr Samios. Thereafter issues and correspondence ensued between Mr Samios, his accountant and the ATO.

On 16 June 2003, Mr Samios was declared bankrupt and an insolvency trustee was appointed to oversee the affairs of his bankrupt estate. The records show that on 25 July 2003, the ATO then proceeded to prove a debt in Mr Samios' bankruptcy, in the amount of $606,548.48. This was so notwithstanding that there was an apparent error in Section 4 of the form concerning the description of Mr Samios' trading entity. It seems that no point was taken on this error.

The proof of debt in Mr Samios' bankrupt estate included an accounting for the unremitted group tax which Mr Samios said he had deducted from the defendant's salary. It seems that in reaching its calculation of Mr Samios' indebtedness for tax, the ATO rewrote its internal accounts to reverse the amounts previously claimed to have been owing by the two Jarra companies, and instead debited the amounts recalculated to be owing, with penalties and interest, against the indebtedness of Mr Samios.

In his oral evidence Mr Samios confirmed the defendant's evidence concerning her salary arrangements. He estimated her gross salary to have been about $750 per week. He confirmed that he was the person who had kept the books and records that indicated the financial position of the business he had conducted. He also confirmed that he had kept wages books and a copy of the annual group certificates and all the books that he was required to provide to his accountant between 1990 and 1 July 2000.

Mr Samios stated that he no longer has access to those books and records. He stated that when his company was placed in liquidation, he was required to comply with a 48 hour demand to hand over all of his books to the liquidators, Worrells Forensic Accountants. He complied with that request, retaining no records thereafter. He stated that since then, he has not taken any steps to recover those books and records, as he assumed that they became the property of his bankrupt estate.

Mr Samios stated that he had maintained the wages book himself. He described the wages books as comprising a standard pre-prepared formatted wages books he had purchased from a newsagent, and in which he had filled out the hours per week that his employees had worked, noting the gross wage paid, the deductions made for tax and also noting the resultant net wages of the employees. He stated that he followed this procedure from 1990 through until 1 July 2000, with the qualification that there were some weeks when he didn't do it, and which then required him to catch up with his bookwork to annotate the wages book.

Mr Samios stated that he worked out the amount for tax that he had to deduct from the defendant's wages when filling out the wages book and he then deducted and retained the tax that he had withheld in this manner. He stated that he obtained the basis for such calculations from his accountant.

Mr Samios was cross-examined in detail by counsel appearing for the ATO.

Mr Samios was asked what financial records he kept in relation to his business. He stated that he had kept wages books and copies of the group certificates and basically that was all. He confirmed that he had kept these records at his principal place of business for a time, where he also resided, until he moved out in approximately 2002 or 2003.

Mr Samios described how, after the defendant answered the advertisement which led to her employment, he and the defendant became friendly as they had been working together for a long time. He denied the assertion that the defendant had ever lived at the address where the business was conducted, which was also the place where he and his wife resided.

Mr Samios denied that the defendant ever assisted him in the preparation of financial documents. He explained that the practice of him ceasing to supply pay slips to the defendant was because it "became a familiarity in - I just didn't do it." In this regard he stated that he was never questioned by his staff about the deductions he was taking from their pay on account of income tax. He stated that it was simply his practice to deduct the amounts for tax from the pay of his employees. He said he obtained the rate for these deductions from his accountant.

Mr Samios stated that his accountant had provided him with assistance in the preparation of his affidavit which was read by the defendant in the proceedings. When he was questioned about why he hadn't included in his affidavit the detail about him having written up the wages books, he said that issue had not been the focus of his affidavit. He stated that he believed the focus of the affidavit to have been the history of the relevant years. Similarly, he was asked questions as to why his affidavit did not contain any detail as to a process he had adopted for withholding tax. In this regard it was suggested to him that his oral evidence as to the existence of such a process was untrue. He denied the suggestion.

In cross-examination, Mr Samios was pressed about why he had not included in his affidavit some of the matters he had mentioned in his oral evidence. His response was that he intended his affidavit to be "succinct and to the point" with regard to the number of pages that could be taken up with setting out his evidence. When he was questioned as to the absence from his affidavit of accompanying financial documents he reiterated that the documents were with the company liquidator. He explained that as the company no longer existed he had no reason to collect the books from the liquidator.

Mr Samios denied the suggestion that the reason he had not produced those financial documents was that they would show an inconsistency with his evidence and his claimed position that he had withheld income-tax from the defendant's salary. In denying that proposition he suggested that a check be made with the liquidator for a comparison of those matters. He stated that before giving his evidence, nobody had suggested to him that he should try to take steps to recover his business records from the liquidator. I should observe that neither party made an application for an adjournment nor did they seek leave for the issue of an urgent subpoena to be served on the liquidator to produce the records referred to in cross-examination concerning this important issue of credit.

Mr Samios was asked some questions about the ATO audit of the financial affairs of his businesses. He reiterated that he gave his records to his accountant. He described those records as wages books, cheque books "and everything" so that his accountant could take it "from there." He was cross-examined as to his level of co-operation with the ATO audit. He denied the suggestion that financial material was not made available. He stated that in his view he had given the accountant the wages books and cheque butts. He agreed with the suggestion that he did not know what the accountant had given the ATO for the purposes of the audit.

When Mr Samios was asked to comment on the suggestion that the summary tables that were prepared by the ATO and incorporated in the ATO audit report involved figures that were not authentic in that they did not have a basis in any financial records that he had kept, he did not accept the proposition. He stated that if access was obtained to the books held by the liquidator, he believed that they would accurately reflect the financial position that prevailed in the particular year or years to which reference was made. Again, neither party made an application for the issue of a subpoena for such records to be produced.

Mr Samios was questioned about whether he had given the defendant's group certificates to the ATO. He stated that he had given them to the accountant rather than to the ATO. Neither party sought to call the accountant to give evidence.

Mr Samios was asked to review the photocopies of the 1998, 1999 and 2000 group certificates that were annexed to the defendant's affidavit. In particular, he was asked to review the signatures on those documents. Although he initially qualified his response by stating that the signatures looked like they were his, and that the 1998 group certificate had been prepared by his accountant, he ultimately identified the signatures on the documents as being his own. He stated that he assumed that that the accountant gave him the group certificates for signature after he had prepared the records. It was not suggested to him in cross-examination that his evidence in this regard was in any way untrue. The cross-examination did not suggest the documents were falsified.

Mr Samios was taken to a copy of the defendant's 2000 copy group certificate and to the notation on it concerning the name of the employer on that certificate, namely Jarra Waters Pty Ltd. He was asked to concede that by the time the group certificate had been issued, that company had ceased trading. He responded by saying that the company had never ceased trading, and that it had been deregistered, unbeknown to him.

There was some confusion over Mr Samios' understanding of the various dates upon which his company was variously deregistered, possibly re-registered or perhaps registered as a different entity using a slightly different name. He said that he left these details to his accountant. It was not suggested to Mr Samios that his evidence in this regard was either false or untrue.

Mr Samios again candidly agreed that his company and not remitted group tax to the ATO, thereby confirming in oral evidence, what he had said to the same effect in his affidavit.

Mr Samios stated that it was his understanding that the ATO did not receive any financial distribution of funds from his trustee in bankruptcy. He confirmed that he was no longer a bankrupt, having been discharged from bankruptcy some years before the hearing of the proceedings.

It is relevant to outline the legislative framework within the ITAA.

The plaintiff submits that s 221H(2) of the ITAA relevantly provided:

" If: … (a) an employer has made any deductions in respect of an employee under this Division during a year of income; and (b) an assessment has been made of the tax payable, or the Commissioner is satisfied that no tax is payable, by the employee or purchaser in relation to the year of income; the employee is entitled to a credit equal to the sum of the deductions."

This is the basis upon which an employee is credited for amounts deducted from earnings on account of tax. A deduction made for the purposes of the ITAA must satisfy s 221C(1A) of the ITAA, which is in the following terms: "Where an employer pays to an employee salary or wages before 1 July 2000, the employer shall, at the time of paying the salary or wages, make a deduction from the salary or wages at such rate (if any) prescribed in accordance with subsection (1) as is applicable."

That section has been amended by No 178 of 1999, effective from 22 December 1999. There is no material difference between the form of the section for present purposes prior to that amendment.

Section 221A is the definition section of Division 2 of Part VI of the ITAA which relevantly defines the terms "deduction", "employee", "employer", "group certificate", "PAYE deduction obligation", "PAYE obligation", "salary and wages". The word "deduction" is defined to mean "a deduction under s 221C or s 221D from the salary or wages of an employee".

Section 221C(1) states that the rate of deductions for "the purpose of enabling the collection by instalments of income tax" is prescribed by the regulations: "(1) [Regulations] For the purpose of enabling the collection by instalments from employees of income tax, the regulations may prescribe rates of deductions to be made by employers from payments of salary or wages that employees receive or are entitled to receive in respect of a week or part of a week."

Division 2 of Part 7 of the Income Tax Regulations fulfils the function of this scheme. In addition, the Income Tax Rates Act 1986 declares the rates of income tax and each year PAYE schedules with explanatory notes setting out the tax instalment deductions to be made by employers from salary or wages of employees are available from the ATO.

Section 221D provides that notwithstanding anything contained in s 221C, the Commissioner may vary the amounts to be deducted from salary and wages for the purposes of meeting the special circumstances of any case or class of cases. In the event that the Commissioner exercises his discretion, notification is required under s 221D(2). The Commissioner may also issue a certificate of exemption to an employee under s 221E that no deductions need be made from the salary and wages of that employee during the period specified in the certificate.

Section 221EAA states that if an employer does not deduct from salary and wages the amount required to be deducted the employer is liable to pay to the Commissioner an amount by way of penalty equal to the amount not deducted.

Section 221F(1) requires that an employer of one or more employees must apply to the Commissioner for registration as a group employer. An employer who contravenes s 221F(1) is guilty of an offence punishable by a penalty : s 221F(13).

The employer is required to remit the amount of the deductions to the Commissioner pursuant to s 221F(5) (operative until 30 June 1998) or under s 220AAM (from 1 July 1998 to 30 June 2000).

Section 221F(5A) requires an employer not later than 14 July in each year to complete a group certificate and to provide two copies to the employee. An employer who contravenes s 221F(5A) is guilty of an offence : 221F(15).

Section 221F(5J)(a) requires an employer to send to the Commissioner by not later than 14 August in any year, each group certificate completed by the employer in respect of salary or wages. Section 221F(5J)(b) requires an employer to give to the Commissioner an annual reconciliation statement reconciling the total deductions shown in each group certificate with the total amounts paid to the Commissioner in respect of those deductions. An employer who contravenes s 221F(5J)(a) is guilty of an offence : s 221F(15). An employer who fails to give the commissioner an annual reconciliation statement by the due date is liable to pay a late reconciliation statement penalty : s 221F(6).

The proceedings were heard on 17 and 18 February 2010 and concluded at that time. The plaintiff requested the opportunity to file further written submissions in addition to the written outline presented at the commencement of the case. A timetable for further written submissions was agreed to, but then required variation. The parties were unable to reach agreement on a suitable variation. These circumstances required that the matter be re-listed on 13 April 2010 for the purpose of settling a further timetable. Ultimately, the defendant's written submissions were received on 22 April 2010. The plaintiff's written submissions in reply were received on 30 April 2010. On 3 May 2010 the defendant made further submission in response to the plaintiff's submissions in reply. In the paragraphs that follow, I set out a summary of the submitted positions of the respective parties.

The plaintiff conceded that, according to the terms of s 221H(2) of the ITAA, an employee is entitled to a credit for tax instalment deductions if the court is satisfied that: (a) an employer has made deductions in respect of an employee during a year of income; and

(b) an assessment has been made or the Commissioner is satisfied that no tax is payable.

The plaintiff drew attention to the fact that s 221H(2) of the ITAA was amended by the Taxation Laws Amendment Act (No 3) 1999 (No 11 of 1999) with effect from 1 July 1999. In the plaintiff's submission, that amendment does not make a material difference in the operation of the section as it applied both before and after that amendment. The transitional provisions stated that "payments received by the Commissioner either before or after the commencing time (and not already applied before the commencing time) must be applied in accordance with that section after the commencing time." There is no dispute that the commencing time was 1 July 1999.

The term "deduction" was considered in DCT v Sargon (1985) 75 FLR 394; 16 ATR 355. In that case, Ormiston J discussed whether a "deduction" had been made for the purposes of the PAYE legislation and concluded that "deduction" involved an "arithmetic subtraction of instalments of income tax at the prescribed rates from the gross income".

The plaintiff conceded that in this context, the process of deduction must involve a deprivation of money or a genuine process of holding back of monies due to the employee. The plaintiff argued that the quarantining of funds in a bank account would be evidence of such a holding back. The plaintiff concedes that would be the usual case, but the plaintiff also concedes that there is a spectrum of activity within which holding back could be construed to have occurred.

In this regard, the plaintiff submitted that a mere journal entry, in the absence of other evidence, may not be sufficient to show there has been a relevant holding back. The plaintiff submits that entries of that kind, standing alone, do not evidence the transaction : Temples Wholesale Flower Supplies Pty Ltd v FCT 29 FCR 93; 21 ATR 1606.

The plaintiff conceded that whether or not a deduction has been made under s 221C(1A) of the ITAA is a question of fact. In this regard, it has already been authoritatively determined that it does not matter that the amount of a deduction may be identifiable or unidentifiable in the hands of an employer : FCT v Barnes (1975) 5 ATR 713.

The plaintiff conceded that where there is a controversy about whether a withholding of tax has occurred, the surrounding circumstances may support the drawing of an inference that deductions have been relevantly made.

The plaintiff submitted that where contemporaneous compliance documentation exists, such as registration for group tax under ss 221F of the ITAA and documentation of a PAYE deduction, a court would be more readily inclined to draw an inference that deductions have been made. Conversely, the plaintiff submitted that where there was little or no compliance, a court would be entitled to question whether in fact a deduction had been made in the circumstances under consideration.

In this regard, the plaintiff submitted that accounting and wage records would be compelling evidence of the fact that there had been an arithmetic deduction from a gross amount revealing both the net amount and the amount deducted for tax. The plaintiff points to an employer's obligation to keep such records. The plaintiff consequently submits that the absence of such records may inferentially lead to the conclusion that no amount was withheld.

The plaintiff pointed out that deducted amounts are characterised as advance payments of tax, in effect, held in trust by the employer, on account of the employee's ultimate liability to pay income tax for the particular year in which the deduction was made : Stergis & Ors v FCT (1989) 86 ALR 174; 20 ATR 591; 89 ATC 4442. The plaintiff submitted that such an arrangement would require documentation.

The plaintiff further submitted that in this case, the court could not be satisfied that deductions had been made for the relevant years, with the result that a consideration of s 221H(2) of the ITAA is rendered unnecessary, because the necessary pre-condition for invoking that sub-section, namely the making of a deduction, had not been met.

The plaintiff contended there had been no deduction of tax from the defendant's earnings. The defendant disputed that contention.

The relevant questions that emerge are, what constitutes a "deduction" within this statutory framework, and were the required deductions made.

The defendant did not contest the first issue calling for decision and accepts as correct the plaintiff's assessment of the amount assessed for tax.

In respect of the second issue calling for decision, the defendant maintained she had a right to credit, equal to or greater than the income tax payable by her, for the income tax years ending 30 June 1996, 1997, 1998 and 2000. That claim to a right to credit arose because of the effect of s 221H(2) of the ITAA if the employer had made deductions for income tax from an employee's earnings in a given tax year and an assessment has been made of the tax payable, the employee is entitled to a credit equal to the sum of deductions.

Whilst the defendant conceded that she owed $101.71 in tax for the 2005 year, she submitted that this amount is cancelled out when the appropriate excess credit of $331.47 is applied in respect of the 1998 tax year.

The defendant submitted that the decided authorities make it clear that the entitlement to a credit is shown by establishing that an employer made deductions from the gross wages payable to the employee : Commissioner of Taxation v Sargon [1985] FLR 394 at 397.8 per Orminston J.

The defendant submitted, correctly, that the question of whether or not the employer had made deductions from gross wages paid to the employee is a question of fact.

The defendant submitted that this factual question should be determined in her favour in the light of her evidence and the evidence that was given by her former employer, Mr Samios. The defendant submitted that neither she nor Mr Samios were directly challenged concerning that evidence.

The defendant furthermore submitted that the copies of the group certificates which were tendered in respect of the years 1998, 1999 and 2000 which comprised Annexures "A", "B" and "C" to her affidavit corroborated that group tax had been deducted. It was submitted that in themselves, these certificates constitute evidence from which an inference to be drawn that the deductions in question were in fact made.

The defendant has also submitted that the table in Exhibit "1", parts of which are extracted in Table 1 incorporated into these reasons, was prepared from information provided by the employer's tax accountant to the ATO during a tax audit of the employer. It was submitted that this is a relevant circumstance from which an inference should be drawn that deductions of tax were in fact made as set out in the table.

The defendant submitted that the amounts of tax set out in the tables cited, correspond with the amounts in tax returns of the defendant and which appear in the group certificates that were in evidence.

The defendant submitted that the information in those tables can be comfortably relied upon as being correct because, as appears at page 18 of the affidavit of Mr Samios, there is an ATO file note dated 6 March 2000 in which it is recorded that Mr Samios was told by the ATO that any unpaid group tax would be raised against him. Exhibit "1" is dated 30 March 2000. The meeting between Mr Cassaniti, Mr Samios' tax accountant and the ATO occurred after the initial meeting. The defendant submitted that the inference is open that Mr Samios had informed the ATO of deductions he had made on account of group tax, knowing that the ATO would look to him for payment of that tax.

The defendant submitted that the amounts deducted from her earnings by her employer are equal to or in excess of the income tax assessed to be payable by her for the particular years in which the deductions were made and on an acceptance of that position, the plaintiff's claim must fail.

In submissions in reply, the plaintiff submitted that because the defendant did not call the accountant, Mr Cassaniti, and because the defendant did not tender wages books or other primary records evidencing the deduction of tax, an adverse inference should be drawn to the effect that the relevant deductions were not made, with the result that the evidence given by Mr Samios as to the existence of wage books and the deduction of tax should not be accepted: Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 29.

In my view that submission is not open to the plaintiff first, because it was not established by evidence that Mr Cassaniti was available to give evidence, and secondly, there was unchallenged evidence that the business records in question were in the hands of the Trustee in bankruptcy, and there was no notice to produce given, or a subpoena issued for those records. Accordingly, in my view the contended adverse inference does not arise.

In submissions in reply, the plaintiff contended that Mr Cassaniti was an essential witness who should have been called in the defendant's case, and without his evidence, the defence must fail. Submissions were also made concerning the legibility of the photocopies of the group certificates relied upon by the defendant and the status of those certificates as evidence constituting proof of what they represent. I do not accept these submissions. There was no obligation on the defendant to call Mr Cassaniti as a witness. I considered the photocopied group certificates sufficiently legible to enable a consideration of whether I should draw the inferences sought by the plaintiff.

In submissions in reply, the plaintiff also submitted that the tabulation of tax payable estimated by the ATO in Exhibit "1" could not be accepted as the basis of a finding in the proceedings. In response to that submission the defendant submits that the audit report identifies the appropriate tax payable and further submits that the defendant need not show the exact amounts deducted, but that the amounts were deducted as was required. In that regard, the tabulation in question can reasonably form the basis for an inference, as can the group certificates that were tendered. Further, The defendant submitted that the group certificates contain representations concerning the amount of tax deducted by an employer and are admissible to prove that deductions were made : R v Iannelli [2003] NSWCCA 1; (2003) 56 NSWLR 247 per Handley JA at [35]. I accept that submission as correct.

In submissions in reply, the plaintiff also submitted that as Mr Samios cannot specify the amounts deducted, his evidence should not be accepted concerning the contentious deductions. I do not accept the correctness of this submission as it assumes, incorrectly, that such evidence, of itself, requires corroboration rather than just the oral testimony of the person who claims to have made the deduction.

In submissions in reply, the plaintiff raised an issue alleging that the defendant's employment by Mr Samios was not at arm's length because, for the purpose of ATO records, the defendant used the business address, where it should be noted Mr Samios and his wife also lived. The defendant has submitted that this contention is terminally afflicted and is not open to the plaintiff as it was not properly put to the defendant in cross-examination as was required by the rule in Browne v Dunn (1894) 6 R 67. I accept that submission as correct.

Counsel for the plaintiff cross-examined both Mrs Reidy and Mr Samios. There were no credit challenges to any of the plaintiff's witnesses.

Mrs Reidy gave her evidence in a straightforward manner. There was nothing in her evidence that struck me as inherently improbable or unlikely.

As an employee she stated that she left it to her employer to deduct the appropriate amount of tax and regarded her group certificates as being the records of her earnings and the tax deducted from those earnings. She stated that her earnings were paid to her in cash which she generally spent without first banking. Having regard to the relatively small size of the employer's business and the relative amount of the income in question I did not consider her evidence to be unreasonable.

Significantly, from the viewpoint of assessing the credibility of the testimony, the defendant was able to produce three copy group certificates concerning some of the relevant years. Also of significance, it was not suggested to either the defendant or to Mr Samios that these copy certificates were false or falsified in any way.

The plaintiff sought to impugn the defendant's credit by seeking to explore the non-production of bank records. In the absence of a subpoena or notice to produce seeking the production of such records I do not consider such non-production to have any adverse impact on the defendant's credit.

On this analysis I am satisfied that the defendant's evidence could be relied upon and I reject the attack upon the credibility of her testimony.

Mr Samios was clearly in a difficult and uncomfortable position for giving evidence. He conceded that he had not complied with taxation and superannuation laws that required him to remit monies held by him in trust for tax and superannuation. These were not matters that enhanced his credit. He had been made bankrupt on account of these and other matters.

However, albeit with embarrassment, he candidly conceded those matters. I consider that this was a circumstance to his credit.

The plaintiff sought to impugn the credit of Mr Samios by reference to the absence of his business and other financial records. In the absence of evidence suggesting he had failed to comply with a subpoena or with a notice to produce, I found his explanations for their absence reasonable and credible.

He stated that he had been required to deliver up his records to his Trustee in Bankruptcy and since then had no occasion to have access to the records of his now defunct businesses, especially where a fee would be payable. I regard these explanations as reasonable.

Central to Mr Samios' credit was the repeated failures on his part to comply with the taxation laws. Of itself, those matters, whilst not creditworthy, do not require that he be discredited as a witness in these proceedings.

Significantly, it was not suggested to Mr Samios that the copy group certificates produced by the defendant were false or forged. It is elementary that a suggestion of that kind needs to be properly put to a witness where it is ought to impugn his credit. That was not done in this case: Browne v Dunn (1894) 6 R 67. Mr Samios took some time to satisfy himself that he had signed these documents and he then acknowledged that he had done so.

He stated that he had withheld monies from the defendant's earnings for tax instalments. He stated that this was evidenced by wages books. No steps were taken to seek an adjournment of the proceedings to issue subpoenas or to have produced by less formal means, those records that were said to be held by the Trustee of Mr Samios' bankrupt estate in order to test such evidence. In the absence of such evidence to the contrary, I considered that the evidence given by Mr Samios on these matters was credible.

In weighing the credit challenges, such as they were, to the veracity of the copies of group certificates that had been produced by the defendant, it is noteworthy that such challenges fell short of alleging fraud on the part of either Mr Samios or the defendant.

I am persuaded that the copies of the group certificates in question are genuine and not false. I based my conclusion to this effect on my impression gained from the evidence of both Mr Samios and the defendant. Their evidence concerning the group certificates was not inherently glaringly improbable. It is clear that the affairs of the company were not run as efficiently as was required by the circumstances, and this may provide an adequate explanation as to the absence of copies of relevant documents being provided to the ATO either at the audit or generally, but it seems on the evidence that the ATO was provided with some records that enabled Mr Samios' liabilities to be pieced together, albeit fruitlessly.

I therefore accept that the defendant and Mr Samios gave their evidence truthfully.

Consideration of Issue 1 - Validity of tax assessments

The defendant led no evidence to contest the validity of the amount of the assessments of tax payable for the relevant years. I therefore find that the defendant's liability to pay income tax in the relevant years has been conclusively proven by the plaintiff.

This leaves the question of whether the defendant is entitled to tax credits in respect of such tax assessments.

Consideration of Issue 2 - Entitlement to tax credits

I have concluded that for a number of reasons, the evidence of both the defendant and Mr Samios has satisfied me that the tax required to be deducted from the defendant's earnings was in fact deducted by Mr Samios in the relevant years.

First, Mr Samios has stated, and I accept, that he withheld tax from the defendant's earnings in the relevant years.

Secondly, the defendant's evidence was to the effect, and I accept, that Mr Samios withheld tax from her earnings when he paid her weekly wages in an envelope in cash.

Thirdly, Mr Samios' evidence in that regard is to a degree corroborated by the copy group certificates produced by the defendant for the 1998, 1999 and 2000 years. I infer from the group certificates for the tax years 1998-2000 that it was more probable than not that Mr Samios also issued similar group certificates for the 1996 and 1997 tax years for the required amounts to be deducted from the defendant's earnings on account of tax, even though Mr Samios failed to remit that tax to the ATO.

Fourthly, it was not suggested to Mr Samios or to the defendant that their evidence was not true.

These matters reinforce my view that I should accept the evidence of both the defendant and that of Mr Samios on the question of the deduction of tax from the defendant's weekly earnings in respect of the relevant years.

I find, based on the copy group certificates that were produced, compared to the tabulation of applicable tax identified in the ATO audit tabulation, and from the evidence of the defendant and Mr Samios, that the applicable tax was withheld by Mr Samios from the defendant's earnings in the relevant years.

I also find, based on the same evidence, notwithstanding the absence of copies of group certificates for some of the relevant years, that the applicable tax was withheld, from the defendant's earnings by Mr Samios in those years.

It is acknowledged by the plaintiff that whether or not an employee is given credit for amounts deducted on account of tax is not to be measured by whether these amounts have been remitted to consolidated revenue, but rather, whether the amount claimed as a credit was actually deducted by the employer: Taylor v DCT (1987) 16 FCR 212 per Jenkinson J at 223.

I am satisfied that the required deductions were made, therefore mandating that in this litigation, the ATO give the defendant credits for the equivalent of the amounts deducted.

On reaching the conclusion that the required amounts of tax have been deducted in the relevant years it is necessary to address the question as to whether there are any circumstances within the evidence that would operate as a bar to the application of s 221H(2) of the ITAA. In my view there are no such barriers in this case. This necessarily requires that the defendant is entitled to credit for the amounts deducted by her employer.

In respect of the 2005 tax year, whilst the defendant has conceded that she owes the ATO the assessed sum of $101.71, I find that this amount is offset and eclipsed by the credit the defendant is entitled to in respect of the 1998 tax year, namely, $331.47.

In these circumstances, the accumulated penalties and interest fall away with the result that there must be a verdict and judgment for the defendant.

The defendant has mounted a successful defence to the plaintiff's claim. In those circumstances I consider that the ordinary costs rule should apply, with the result that the plaintiff should be required to pay the defendant's costs. The plaintiff sought an order for costs of the listing of the matter on 13 April 2010 concerning an explanation for the absence of outstanding written submissions. On that occasion, a solicitor appeared for the defendant as agent, notwithstanding that the defendant's solicitor was required to appear personally. The solicitor who appeared was without instructions as to the progress of the defendant's submissions. The defendant made no demur to the plaintiff's application for the costs of that listing.

I make the following orders: (a) Verdict and judgment for the defendant;

(b) The plaintiff is to pay the defendant's costs on the ordinary basis unless otherwise ordered;

(c) The defendant is to pay the plaintiff's costs of the listing of the matter on 13 April 2010;

(e) Liberty to apply on 7 days notice if further orders are required.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.