Deputy Commissioner of Taxation v Trent Nicholas Paola & Deputy Commissioner of Taxation v Shane Jonathan Paola

Deputy Commissioner of Taxation - Plaintiff PARTIES : Trent Nicholas Paola - Defendant Shane Jonathan Paola - Defendant

FILE NUMBER(S) : SC S 11957 of 2004; S 11399 of 2005

COUNSEL : P. Rodionoff - Plaintiff H. Sorensen - Defendant

SOLICITORS : Australian Taxation Office - Legal Services Branch - Plaintiff Guild Legal Limited - Defendants

IN THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION

Deputy Commissioner of Taxation v Trent Nicholas Paola

Deputy Commissioner of Taxation v Shane Jonathan Paola

1 It is common ground that these two actions raise the same issue, the resolution of which will be determinative. 2 The Defendants are sued as directors at the material time of Educom Holding Pty Ltd (the Company). In each case the cause of action was relevantly pleaded as follows:- " …….. 3. The company withheld amounts for the purposes of Division 12 in Schedule 1 to the (Taxation Administration Act) 1953 (TAA1953). 4. The details of the company's liabilities under subsection 16-70(1) in Schedule 1 to the TAA 1953 in respect of the amounts withheld for the purposes of Division 12 in that Schedule, together with details of the due date of each amount withheld and details of the first deduction day in respect of each amount withheld, for the purposes of section 222AOB of the Income Tax Assessment Act 1936 ("the ITAA 1936) are as follows:

("There followed a table indicating that amounts withheld totalled $423,589 in the period from 1 February 2003 to 30 June 2003.") 5. Section 222AOB of the ITAA 1936 was not complied with in relation to the amounts withheld, on or before the due dates of the amounts withheld; that is, the company had not been caused to do, and the company did not do, any of the things set out in subsection 222AOB (1) and/or (2) of the ITAA 1936, namely: a) Comply with Subdivision 16-B in Schedule 1 to the TAA 1953 in relation to the amounts withheld for the purposes of Division 12 of that Schedule. b) Make an agreement with the Commissioner under section 222ALA of the ITAA 1936 in relation to the company's liability under Subdivision 16- B in Schedule 1 to the TAA 1953 in respect of the amounts withheld for the purposes of Division 12 of that Schedule; c) Appoint or suffer the appointment of an administrator of the company under section 436A, section 436B or section 436C of the Corporations Act; or d) Begin to be wound up within the meaning of the Corporations Act. 6. The defendant was a director of the company continuously in the period beginning on 1 February 2003 and ending on 30 June 2003. (Paragraph 7 of the Statement of Claim allowed for a credit of $2096.49). 8. By reason of the foregoing, and by force of section 222AOC of the ITAA 1936, the defendant is liable to pay to the commissioner a penalty equal to the unpaid amount of each of the amounts withheld and each penalty is due and payable to the Commissioner. The defendant is liable to pay to the Commissioner the total sum of the penalties, which is $421,492.51. 9. The unpaid amount of each penalty after it has become due and payable is a debt due to the Commonwealth and pay able to the Commissioner. 10 the total amount of the penalties referred to above that remain unpaid after becoming due and payable is the sum of $421,492.51"

3 In each case a defence was filed in respect of the whole of the Plaintiff's claim. That part of the Defence which raised the single issue debated before me (other defences being abandoned) was contained in paragraphs 9 to 11 inclusive, as follows: "…………………… 9. Further or in the alternative, on or before 15 August 2003 the Company and the plaintiff entered into an agreement under section 222ALA of the ITAA for the payment by the Company of the Company's liabilities under subsection 16-70(1) in Schedule 1 to the Taxation Administration Act 1953 (the TAA) in respect of amount withheld for the purposes of division 12 of that Schedule (the Agreement). Particulars The agreement was in writing: a) from the Company to Mr Alfredo Arcilla on behalf of the plaintiff dated 25 July 2003; b) from the Company to the Commissioner of Taxation on behalf of the plaintiff dated 30 June 2003; and/or c) from the plaintiff to the Company dated 15 August 2003. 10. Commencing on or about 15 August 2003 the company made certain payments to the plaintiff in accordance with the Agreement. Particulars Date of payment Amount 15 August 2003 $15,000 22 August 2003 $15,000 (collectively the "Payments") Further particulars will be provided following discovery and answers to interrogatories, if any. 11. In the premises pleaded in paragraphs 9 and 10 above, any liability to penalty was remitted by operation of section 22AOG of the ITAA. 4 The relevant statutory provisions are contained in Divisions 8 and 9 of the Income Tax Assessment Act 1936 (the act). Those relevant to this case in Division 8 are:

222AFA (1) The purpose of this Division is to enable the Commissioner to take prompt and effective action to recover amounts not remitted as required by Divisions 1AAA, 3B and 4 of this Act , or Part 2-5 in Schedule 1 to the Taxation Administration Act 1953 . (2) It does so by empowering the Commissioner to make an estimate of the amounts, and to recover the amount of the estimate. (3) Although an estimate creates a liability distinct from the underlying liability to remit amounts, the person liable can ensure that the Commissioner does not keep more than those amounts. (4) This Division also empowers the Commissioner to agree to a person paying off over a period liabilities under: (a) Division 1AAA, 3B or 4; or (b) this Division; or (c) Part 2-5 in Schedule 1 to the Taxation Administration Act 1953 "

222AFB (1) In this Division, unless the contrary intention appears: "remittance provision" means any of the following provisions: (a) in Division 1AAA - sections 220AAE, 220AAM and 220AAR (b) omitted by No 47 of 1998 (c) in Division 3B - subsections 221YHZD(1) and (1A); (d) in Division 4 - subsection 221YN(1); (e) in Schedule 1 to the Taxation Administration Act 1953 - section 16-70." 222ALA (1) The Commissioner may make with a person a written agreement under which the person is to pay specified amounts, on specified days, for the purpose of discharging one or more specified liabilities of the person , each of which is: (a) a liability under a remittance provision ; or (b) a liability to pay an estimate. (2) An agreement may contain other provisions. (3) An agreement may also provide that, if the person contravenes specified provisions of it, so much of the total of the specified amounts as remains unpaid becomes due and payable on the day of the contravention. If an agreement so provides , the specified provisions are called special conditions . (4) The amounts specified in an agreement are due and payable on the specified days. (5) However, if: (a) a specified amount is not paid on or before the specified day; or (b) the person contravenes a special condition; so much of the total of the specified amounts as remains unpaid: (c) becomes due and payable on that day, or on the day of the contravention, as the case may be; and (d) is called the balance payable under the agreement . (6) Subsections (4) and (5) have effect despite Divisions 1AAA, 3B and 4 and the other provisions of this Division, but are to be ignored: (a) in calculating a penalty under any of those Divisions; and (b) for the purposes of this Division (except this section) and Division 9. (7) The Commissioner may make with a person a written agreement varying or terminating an agreement with the person that is in force under this section. (8) Nothing in Division 9 obliges the Commissioner to enter into an agreement with a company . " 5 Other provisions of the Act relevant to this case contained in Division 9 which is headed "Penalties for directors of non-remitting companies" include: "222ANA (1) The purpose of this Division is to ensure that a company either meets its obligations under Division 1AAA, 3B, 4 or 8 of this Act , or under Subdivision 16-B in Schedule 1 to the Taxation Administration Act 1953 , or goes promptly into voluntary administration under Part 5.3A of the Corporations Act 2001 or into liquidation. (2) The Division imposes a duty on the directors to cause the company to do so. The duty is enforced by penalties. However, a penalty can be recovered only if the Commissioner gives written notice to the person concerned. The penalty is automatically remitted if the company meets its obligations, or goes into voluntary administration or liquidation, within 14 days after the notice is given. (3) A penalty recovered under this Division is applied towards meeting the company 's obligations under the relevant Division. Conversely, amounts paid by the company reduce the amount of a penalty. (4) Sections 220AAZA, 221YHZJ and 221YR of this Act , and Part 4-15 in Schedule 1 to the Taxation Administration Act 1953 , provide for the recovery of amounts payable under this Division. 222AOA (1) This Subdivision applies if a company incorporated under the Corporations Act 2001 has: (a) made one or more deductions having a particular due date , for the purposes of Division 1AA, 2, 3A, 3B or 4; or (b) withheld one or more amounts having a particular due date , for the purposes of Division 12 in Schedule 1 to the Taxation Administration Act 1953 ; or ………………………………….. …………………………………….

(2) The earliest day on which the company , for the purposes of one of those Divisions (other than Division 13 or 14 in Schedule 1 to the Taxation Administration Act 1953 ): (a) made a deduction that has that particular due date ; or (b) withheld an amount that has that particular due date ; is called the first deduction day " . (3) That due date is called the due date . ……. 222AOB(1) The persons who are directors of the company from time to time on or after the first deduction day must cause the company to do at least one of the following on or before the due date : (a) comply with its obligations in relation to deductions (if any) and amounts withheld (if any) whose due date is the same as the due date ; (b) make an agreement with the Commissioner under section 222ALA in relation to the company 's liability under a remittance provision in respect of such deductions (if any) and amounts withheld (if any); (c) appoint an administrator of the company under section 436A of the Corporations Act 2001 ; (d) begin to be wound up within the meaning of that Act. 222AOB(1A) For the purposes of paragraph (1)(a), the obligations are: (a) to comply with Division 1AAA, 3B or 4, as the case may be, in relation to each deduction (if any): (i) that the company has made for the purposes of Division 1AAA, 3B or 4; and (ii) whose due date is the same as the due date ; and (b) to comply with Subdivision 16-B in Schedule 1 to the Taxation Administration Act 1953 in relation to each amount that the company has withheld (if any): (i) for the purposes of Division 12 of that Schedule; and (ii) whose due date is the same as the due date . 222AOB(2) This section is complied with when: (a) the company complies as mentioned in paragraph (1)(a); or (b) the company makes an agreement as mentioned in paragraph (1)(b); or (c) an administrator of the company is appointed under section 436A , 436B or 436C of the Corporations Act 2001 ; or (d) the company begins to be wound up within the meaning of that Act; whichever first happens, even if the directors did not cause the event to happen. 222AOB (3) If this section is not complied with on or before the due date , the persons who are directors of the company from time to time after the due date continue to be under the obligation imposed by subsection (1) until this section is complied with.

222AOC (1) If section 222AOB is not complied with on or before the due date , each person who was a director of the company at any time during the period beginning on the first deduction day and ending on the due date is liable to pay to the Commissioner , by way of penalty, an amount equal to the unpaid amount of the company 's liability under a remittance provision in respect of deductions or amounts withheld: (a) that the company has deducted for the purposes of Division 1AAA, 3B or 4 of this Act , or withheld for the purposes of Division 12 in Schedule 1 to the Taxation Administration Act 1953 (as the case requires); and (b) whose due date is the same as the due date . …………………………..

222AOE The Commissioner is not entitled to recover from a person a penalty payable under this Subdivision until the end of 14 days after the Commissioner gives to the person a notice that: (a) sets out details of the unpaid amount of the liability referred to in subsection 222AOC(1), (1A) or (2) (whichever relates to the penalty); and (b) states that the person is liable to pay to the Commissioner , by way of penalty, an amount equal to that unpaid amount , but that the penalty will be remitted if, at the end of 14 days after the notice is given: (i) the liability has been discharged; or (ii) an agreement relating to the liability is in force under section 222ALA; or (iii) the company is under administration within the meaning of the Corporations Act 2001 ; or (iv) the company is being wound up. 222AOG If: (a) a penalty is payable by a person under this Subdivision; and (b) section 222AOB, 222AOBAA or 222AOBA (whichever relates to the penalty) is complied with at a time when the Commissioner has not yet given the person a notice under section 222AOE, or within 14 days after the Commissioner gives the person such a notice; the penalty is remitted because of this section. 222AQA (1) If a company incorporated under the Corporations Act 2001 makes an agreement with the Commissioner under section 222ALA of this Act , the persons who are directors of the company from time to time must cause the company to comply with the agreement. (2) If the company contravenes the agreement by failing to pay a specified amount on or before the specified day, or by contravening a special condition, each person who was a director of the company at any time during the period beginning on the day when the agreement was made and ending on the day of the contravention is liable to pay to the Commissioner , by way of penalty, an amount equal to the balance payable under the agreement. 6 In the Plaintiff's case, Mr Rodionoff counsel for the Plaintiff read the affidavits of Narwant Singh sworn 17 December 2004 and 3 June 2005 and of Justine Taylor (nee Byrnes) sworn 17 December 2004 and 6 June 2005. Similar affidavits were filed in each case and neither deponent was required for cross-examination. 7 Mr Singh testified to his service by post upon the Defendants of director penalty notices pursuant to s 222 AOE of the Act. Relevant paragraphs of the notices are: "Please find enclosed a notice of your liability to pay a penalty equal to the amount(s) unpaid to the Commissioner by the company EDUCOM HOLDINGS PTY LIMITED ACN 003249 045 of which you were a director at relevant times as referred to in section 222AOC and/or section 222AOD of the Income Tax Assessment Act 1936 (ITAA 1936). You automatically became liable to the penalty when the company failed to remit the amount(s) set out in the notice by the due date(s). Action to recover the penalty from you will be taken without further notice unless, after fourteen days from the date the enclosed notice is given to you:- a) the company's liability has been discharged; or b) an agreement under section 222ALA of the ITAA 1936 to pay the liability is in force; or c) the company is under administration within the meaning of the Corporations Act 2001; or d) the company is being wound up. The penalty will be remitted if any one of these options is adopted within 14 days from the date the notice was given to you." 8 Accompanying the director penalty notices was a notice of liability which omitting formal parts read: "In exercise of the powers and functions conferred on me as a Deputy Commissioner of Taxation by a delegation from the Commissioner of Taxation under the provision of the Taxation Administration Act 1953 (TAA 1953), I give you notice under section 222AOE of the Income Tax Assessment Act 1936 (ITAA 1936) that you, as a director of the company, are liable to pay the Commissioner by way of penalty an amount equal to the unpaid amount of each liability of Educom Holdings Pty Limited, ACN 003 249 045, ("the company") pursuant to subsection 16-70(1) of Schedule 1 of the TAA 1953 in respect of amounts withheld by the company for the purposes of Division 12 of Schedule 1 of the TAA 1953, details of which are set out in the following table:- TABLE

Column 1 Column 2 Column 3 Particular withholding Amount withheld Unpaid amount of period company's liability

1 January 2003 to 31 January 2003 $80,892.00 $80,892.00 1 February 2003 29 February 2003 $72,363.00 $72,363.00 1 March 2003 to 31March 2003 $95,175.00 $95,175.00 1 April 2003 to 30 April 2003 $103,929.00 $103,929.00 1 May 2003 to 31 May 2003 $75,263.00 $75,263.00 1 June 2003 to 30 June 2003 $76,859.00 $76,859.00" 9 The above amounts total $504,481.00. 10 Ms Taylor's affidavit of 17 December 2004 included the following paragraphs: "……………………………. 2. The Plaintiff maintains a paper file and computer records in relation to each entity or individual having a tax file number or Australian Business Number. The plaintiff's computer records include a computer accounting system called Receivables Management System (RMS) which records liabilities, payments and credits for each taxpayer. RMS also contains a computer diary system by which case officers record details of what officers carry out in a given matter. These records are known as narratives. The narratives cannot be changed. They record the date and time that the narrative was made, and details of the case officer who recorded the narrative. The account records and narratives held on RMS may be viewed on a visual display unit (computer screen) and also printed. 3. Taxpayers with an Australian Business Number may have an account with the Tax Office that is used for recording amounts payable by the person under the "BAS provisions" within the meaning of section 995-1(1) of the Income Tax Assessment Act 1997 (ITAA1997)". Such amounts may include amounts withheld under the Pay As You Go Withholding (PAYG Withholding) provisions within Division 12 in Schedule 1 to the Taxation Administration Act 1953 (TAA1953), and required to be paid to the Commissioner of Taxation, penalties and interest thereon, and payments and credits of the taxpayer. Liabilities under BAS provisions also include Goods and Services Tax, Income Tax Instalments and Fringe Benefits Tax Instalments. 4. Liabilities in relation to PAYG Withholding are recorded on a taxpayer's BAS liabilities computer account on the day when the taxpayer advises the Commissioner of the amount of the liability (typically by a telephone call, in writing, or by lodging a Business Activity Statement). 5. On or about the date the Director Penalty Notices are issued to directors of companies under sections 222AOE or 222APE of the Income Tax Assessment Act 1936 (ITAA 1936) a new computer record is set up to record liabilities and payments/credits allowed in reduction of the liabilities. 6. If a payment/credit is made to partially discharge a PAYG Withholding liability of a company, the payment is incorporated into the computer records of both the company's Integrated Client Account and the director penalty account. 7. On 17 December 2004,I accessed the account records held on RMS in relation to the BAS liabilities of A.C.N. 003 294 045 Pty Ltd (formerly known as Educom Holdings Pty Limited A.C.N. 003 249 045) ("the Company") and caused a printed report of those records to be made. Annexed hereto and marked with the letter "A" is a copy of the report relating to the Company, being a statement of account in respect of the company's Integrated Client Account. "PAYG Withholding" liabilities appears on RMS with the letters "ITW" in the description. The year and number appearing prior to those letters indicate the year and calendar month to which the liability relates. The column marked "Effect. Date" is the date on which the liabilities were due, or in the case of payments and credits, the date on which the payment was made or the credit was applied. …………………………………….

9. The statement of account in paragraph 7 reveals that the Company withheld amounts under Division 12 of Schedule 1 to the TAA 1953: (a) for the period 1 January 2003 to 31 January 2003 in the sum of $80,892.00 ("the first amount withheld"). (b) for the period 1 February 2003 to 28 February 2003 in the sum of $72,363.00 ("the second amount withheld"). ( c) for the period 1 March 2003 to 31 March 2003 in the sum of $95,175.00 ('the third amount withheld"). (d) for the period 1 April 2003 to 30 April in the sum of $103,929.00 'the fourth amount withheld"). (e) for the period 1 May 2003 to 31 May 2003 in the sum of $75,263.00 ("the fifth amount withheld'). (f) for the period 1 June 2003 to 30 June 2003 in the sum of $76,859.00 ("the sixth amount withheld"). ……………………………. 11. The statement of account reveal that the Company did not pay to the Commissioner the amounts of the first to sixth amounts withheld by their respective due dates. 12. The statements of account referred to in paragraph 7 and 8 above in relation to the director penalties liabilities of the defendant reveal that the following payments and credits were applied towards the first to sixth amounts withheld: (a) a payment/credits totalling $80,892.00 were credited to the Company's BAS liabilities account on the following dates, 21 February 2003, 21 March 2003, 9 April 2003, 12 August 2003, 18 August 2003, 13 October 2003 and 22 April 2003 and reduced the first amount withheld to nil; (b) payments/credits totalling $8,895.85 were credited to the company's BAS liabilities account on the following dates, 13 October 2003 and 20 July 2004 reduced the second amount withheld to $63,467.15. 13. The statements of account reveal that no payments or credits other than those referred to in paragraph 12 herein have been made in reduction of any of the first to sixth amounts withheld.

14. If the plaintiff enters into an agreement under section 222ALA of the ITAA1936 with a company to pay overdue PAYG Withholding liabilities, a copy of the correspondence leading up to the agreement and the agreement itself is retained on the plaintiff's paper file relating to the Integrated Client Account and also noted on RMS in the narrations. 11 Ms Taylor also deposed to the fact that each Defendant was, according to the relevant records, a director of the Company at material times that the Company was not under administration and that as at 17 December 2004 the Defendants were each indebted to the Plaintiff in the sum of $414,693.15 12 Mr Singh, in his affidavit of 3 June 2005, explained that on 12 September 2003 he prepared a Statement of Account for the Company from the Plaintiff's records which, in effect, enabled him to prepare the Penalty Notice and the Statement of Amounts Withheld which accompanied it. 13 The Defendants do not challenge the Plaintiff's claim that the sums totalling $504,481 specified in the notices posted on 12 September 2003 to the Defendants were the sums which, according to the Plaintiff's records, represented the total of the liability of the Company to the Plaintiff as at 12 September 2003. The Defendants, however, deny that they are liable to the Plaintiff for the sum claimed or at all. 14 The Defendants called no oral evidence but tendered a bundle of documents, exhibit 1, which included a letter dated 15 August 2003 to the Company and copies of notes made by officers of the Australian Taxation Office presumably constituting "narratives" as deposed to by Ms Taylor. 15 The Defendants contended that the letter in exhibit 1 constitutes an agreement within section 222ALA of the Act, thereby satisfying the provisions of S 222OBA and by virtue of S 222AOC discharging the Defendants from any further liability as directors of the company in respect of remittance provisions. Any penalty would be remitted by virtue of s 222 AOG. The Defendants concede that if notices under s 222AOE were validly served then the Plaintiff is entitled to succeed. 16 The notes compromising part of exhibit 1 seem to relate to communications between Ms Catherine Earl, an officer of the Company and Mr Alfredo Arcillo and Mr Puru Govindasamy, officers of the Plaintiff. The notes relied on are: "28/07/03 Received fax from Catherine Earl outlining payment arrangement requested. In order to extinguish the outstanding debt they have proposed to pay $10,000 every week with first payment on Friday 8/8/03. With regards to lodgement outstanding, Catherine advised me last week that they will lodge the June-03 BAS …(due date 21/7/03) within one week. They will also request variation to the previous BASes which will reduce the liability by approximately $100k. Variation will also be lodged this week. Contacted Catherine to advise her that decision on the payment arrangement (request will be made after the lodgement of BAS and variation request). Meanwhile, I have entered an Interim Arrangement pending compliance of lodgement obligation. Alfredo Arcilla. 20/7/2003 In accordance with New Debt work practices, approved interim arrangement pending compliance of lodgement obligation. See case officer's (Alfredo Arcilla) notes dated 25/07/ 03 for compliance dates. Puru Govindasamy 7/8/2003 Client contact Catherine Earl in her letter dated 30/06/03 (Flocs WZI) advised lodgement of BASS for the period 12/02-05/03. Apologised for the late lodgement saying they only started operation in 12/02, were setting up their systems and getting advice on the correct treatment of various BAS items; Requested to pay monthly instalment + extra $50,000 each month. Referred case to case owner Alfredo Arcilla 11 August 2003 Catherine Earl (Financial Controller) rang today to submit a final payment arrangement proposal. Weekly payments of $15,000 for total 50 weeks or 11.5 months. The first payment to commence on 15/8/2003 and weekly thereafter until debt fully paid. Balance of CAC account; $705,744.69. Further discussed debt repayment with Ms Earl. She advised that -- 1. Due to cash flow difficulties, the company will not be able to pay the debt in one go. Based on current financial position, they can be able to sustain repayments of at least $15,000 weekly/every Friday. 2. Based on this payment plan, the expected monthly payment would be $60,000 which is $10,000 more than their previous proposal (as per letter 30/6/03). 3. Ms Earl advised that request for variation to the previous BASes will be lodged within a fortnight. Apparently the variation will reduce the debt by a substantial amount. 4. They didn't explore obtaining outside finance for the reason stated in 3 above. Advised that they would be able to pay the debt even quicker on the balance after BASes are revised. I have accepted the payment arrangement pursuant to Chapter 10.4.2 of the ATO Receivables Policy which talks about the guidelines in considering requests for payment by instalments. Explained to Ms Earl about conditions to the acceptance of this payment arrangement as follows: 1. All future tax liabilities must be paid on time. Additionally all tax returns and BASes are to be lodged by the due date. 2. Failure to meet payments as per payment schedule will result to payment arrangement being defaulted. As such legal action may commence without further warning for any amount unpaid. 3. Advised of GIC accruing at rate of 11.78 percent calculated at a daily compounding rate. 4. ATO offset policy whereby any credit that becomes due will be applied to debt to reduce the debt outstanding. 5. I also advised that the apparent reduction in the liability as a result of the variation will not in any way affect the terms of this payment arrangement.

This arrangement is not within my authority therefore I requested a Technical Adviser to approve the arrangement. Alfredo Arcilla 14/8 /2003. Reference to my earlier note dated 29/7/03 all outstanding activity statements have been lodged. Case officer (Alfredo Arcilla) has accepted the payment proposal with the client and has substantiated his decision with the RM Policy Chapter 10.4.2. See case officer's notes dated 11/08/03 for payment arrangement details. I approve and activate the arrangement in accordance with my authorisation as an APS5. Client has been notified by the case officer about following. · GIC accruing on compounding basis · All future lodgements and payments must be made on the due dates. · ATO credit offset policy. · Defaulted arrangement will result in legal action without notice. Puru Govindasamy" 17 The letter to the Company from the Plaintiff dated 15 August 2003 relied on by the Defendants as constituting an agreement for the purpose of S222ALA of the Act, commenced: "Educom Holdings Pty Limited Level12 1 Elizabeth Plaza North Sydney NSW 2050 Dear Sir/Madam Payment Arrangement Integrated Client Account We refer to your request regarding your outstanding account and agree to the following payment arrangements." 18 There followed a schedule in two columns headed respectively "Date" and "Amount". Under the "Date" column were 50 dates, each a week apart, commencing 15 August 2003 and ending 23 July 2004. Against each date an amount was recorded in the appropriate column. In each case except the last the amount was $15,000. The last amount was $11,223.16. Although the amounts were not totalled they in fact add up to $746,223.16. 19 The balance of the letter read: "This arrangement MUST be adhered to and all future payment and lodgement obligations must be met. Failure to do so may result in the commencement of legal action without further notice. If you have any difficulties in meeting any obligations, contact us immediately. Should any tax credits arise during the life of this arrangement they may be credited against this debt. Although your account is under arrangement, general interest charge (GIC) for late payment is continuing to accrue. This arrangement provides for payment of an estimated GIC amount, which is included in the payment schedule. Any variations to the payment dates will affect the final GIC amount payable and you may also receive another GIC notice at the end of the arrangement period. Interest is calculated daily on a compounding interest basis. GIC is currently imposed at a rate of 11.78% on any outstanding amounts. The GIC rate is reviewed every quarter. Amounts of GIC are tax deductible in the year in which they are incurred. Please pay by one of the methods described on the back of this letter." 20 It was formally agreed by counsel that the expression "Integrated Client Account", in the letter quoted above, encompassed all liabilities of the Company to the Plaintiff as at 15 August 2003 and was not restricted to remittance provisions as defined.

21 Essentially the submissions on behalf of the Plaintiff were twofold, first that under the ordinary principles of contract law the letter of 15 August 2003 does not constitute a written agreement and second, that, in any event, if it does constitute such an agreement it does not fall within the terms of s 222ALA. In relation to the first of those submissions the Plaintiff contends that there is no evidence that the conditions stipulated were or had been agreed to by the company. As to the second, it was submitted that s222ALA requires that the agreement be confined to remittance provision debts whereas according to the evidence the letter encompassed other liabilities such as Goods and Services Tax, Income Tax Instalments and Fringe Benefits Tax.

Upon the second question I was not referred to any authority directly in point but the sections under discussion have been considered by the Court of Appeal in at least two cases, Moss v Deputy Commissioner of Taxation (2003) 59 NSWCR 139 and Deputy Commissioner of Taxation v Gillis (2003) 59 NSWLR 153. The sections were also considered by Davies AJ (who was a party to the decision in both Moss and Gillis ) in ISO Lilodw' Aliphumeleli Pty Ltd (in liq) and Another v Commissioner of Taxation (CTH) and Others 42 ACSR 561. 22 In Moss, the question was (as here) whether an agreement had been entered into pursuant to s 222ALA of the Act. The letter from the Australian Taxation Office which, so the appellant contended, constituted such an agreement relevantly provided:

"GROUP TAX Balance owing as at 22 June 1999 $396,691.09

Your request of 21 June 1999 has been considered and action to recover the overdue group tax will be deferred if payment is made as follows:- $15000.00 is to be paid by 7 July 1999 $15000.00 is to be paid by 21 August 1999 $15000.00 is to be paid by 21 September 1999 Payments should be forwarded to - Dianna Eckmann Australian Taxation Office Withholding Taxes Team PO Box 422 Parramatta NSW 2123

Alternatively payments may be hand delivered to the 5th floor Enquiries Section of this office, provided that it is maked (sic) to the above mentioned officer's attention.

This arrangement is subject to the payment of all current months prior to or on the due date." 23 In the course of his judgment Hodgson JA, with whom Sheller JA agreed, said: "22. I accept the submission that a document can be a "written agreement" within s.222ALA, even if the document is not signed by both parties. I think the better view is that, if it is shown that both parties have agreed that a document is to be an authentic and conclusive record of their bargain, that is sufficient. It appears to have been accepted below that this document was such a document, and I will proceed on that basis.

23. The next question is, what liability or liabilities is or are specified in the alleged agreement? There is reference in the document to a balance of group tax owing as at 22 June 1999 of $396,691.09, and, although this figure does not correspond exactly with the bottom line claimed in the s.222AOE notice, I will accept that it does sufficiently identify liabilities of the company so as to make them specified liabilities: cf. Deputy Commissioner of Taxation v. Gillis [2003] NSWCA 340.

24. The next question is, whether the document is a written agreement under which the company "is to pay specified amounts, on specified days, for the purpose of discharging" those liabilities totalling $396,691.09. 25. In my opinion, an agreement does not amount to an agreement under which a taxpayer is to pay specified amounts, on specified days, for the purpose of discharging one or more specified liabilities, unless the agreement makes provision for the discharging of the whole of such liability or liabilities. In my opinion the effect of a s.222ALA agreement is to substitute, as the due dates for various payments, the dates specified in the agreement in place of the dates on which the amounts were previously made due and payable. I think this is confirmed by the consideration that the making of a s.222ALA agreement in relation to any liabilities fulfils the requirements of s.222AOB and discharges the obligations of the directors of a company under that section, so that the directors cannot thereafter be made liable for a penalty under s.222AOC in respect of that liability. Where a s.222ALA agreement is entered into, the directors may become personally liable for amounts payable under that agreement by virtue of s.222AQA. In my opinion, that consideration supports the proposition that the regime under the s.222ALA agreement displaces the previous payment regime, and also that s.222ALA requires that the agreement provide for the discharge of the whole of the relevant liability or liabilities.

26. However, even if that were not correct, this case can be decided on a narrower ground. In my opinion, even if payments under an agreement could be for the purpose of discharging a liability or liabilities, within s.222ALA(1), even though the agreement does not provide for the discharge of the whole of the liability or liabilities, the agreement in this case does not provide for payments having that purpose. The purpose of the payments as manifested by this document is that of obtaining a brief moratorium, which is granted conditionally upon the company making three relatively small monthly payments on account. Although in a sense it might be said that the purpose of all such dealings between the Commissioner and a taxpaying company is to achieve a discharge of the company's liabilities, the relevant purpose under s.222ALA is the purpose of the payment of specified amounts on specified days; and the only substantial purpose of those payments in this case is to obtain a moratorium, albeit at the same time making a small reduction in the overall liability. For that reason, in my opinion, the written agreement in this case is not an agreement within s.222ALA. " 24 Davies AJA, in a separate judgment said at paragraph 35: "35. Whether or not the letter constituted an agreement, which is debatable, it did not provide for the discharge of specified liabilities by specified instalments on specified dates. The letter went no further than to say that recovery proceedings would be deferred if three sums of $15,000 were paid on the dates which the letter specified. As the trial Judge noted, none of the company's liabilities were precisely $15,000 or a composite of that sum. An essential element of s.222ALA, an agreement of a contractual nature providing a specified regime for the discharge of specified liabilities, was absent." 25 In Gillis, documents in the form of two letters relied upon by the respondent as constituting an agreement within s 222ALA, as in the case of Moss, but unlike the present case, referred only to remittance provisions (or the Commissioner's estimate of remittance provisions). 26 The first letter from the relevant company to the Australian Taxation Office commenced: " Following the telephone discussion with you yesterday we wish to confirm the following: We confirm the outstanding amount of $190,815.28 is to be repaid:" 27 There followed a list of dates and payments totalling $190,815.28. 28 The Australian Tax Office responded with a letter which, in effect, accepted the proposal made to it. At the foot of the response appeared: "All the terms of the arrangement you have been granted must be adhered to as specified. If you do not pay the repayment instalments on or before the due date, or current remittances are not paid on or before the relevant due date, the arrangement will be considered to be in default. Once the arrangement has defaulted legal action will commence for recovery of all amounts outstanding including additional amounts for late payment, unless the amounts owing are paid in full. Further arrangements will not be granted. Failure to pay the full amount outstanding on a defaulted arrangement will cause legal action to be initiated." 29 The Court in Gillis was constituted as in Moss. Sheller JA and Davies AJA agreed with Hodgson JA who said at paragraph 25 and following: "25. Initially, I was inclined to the view that a specified liability within s.222ALA(1) could be an aggregate of liabilities under a remittance provision for individual months: the fact that it must be a liability under a remittance provision is not inconsistent with it being an aggregate liability in respect of a number of remittance periods. Furthermore, plainly it did not have to be the original amount of a liability under a remittance period: if some of the liability had been paid, it could be the net amount owing. However, I think there is force in Mr. Aldridge's argument that, in the case of estimates, there had to be a separate specification of each liability in respect of each remittance period, and that specification of an aggregate would not directly satisfy the requirements. (I say directly, because of what I say later). The similarity of language between par.(a) and par.(b) of s.222ALA(1) suggests that a similar approach should be taken to par.(a). 26 I am inclined to the view that "a liability under a remittance provision" within s.222ALA(1)(a) does mean a liability in respect of a single remittance period; so that, if the document of 9 August 1999 is to be an agreement within s.222ALA, it must provide for payments for the purpose of discharging a number of "specified liabilities", namely those for a number of months up to and including June 1999. This in turn would require that the identification in the document of a total sum of $190,815.28 be sufficient to make the individual liabilities which total that sum "specified liabilities" within s.222ALA(1). 27 The Shorter Oxford Dictionary gives the meaning of "specify" as "to mention, speak of, or name (something) definitely or explicitly, to set down, to state categorically or particularly, to relate in detail": cf. Kuper v. Keywest Constructions Pty. Limited (1990) 3 WAR 419 at 429, Leros Pty. Limited v. Terara Pty. Limited (1992) 174 CLR 407 at 423. Although the precise meaning of "specify" (and correspondingly "specified") varies with context, in a context such as the present I think it means something like "indicate with unambiguous clarity": cf. Currency Brokers (Australia) Pty. Limited v. Corporate Affairs Commission (NSW) (1986) 5 NSWLR 483 at 489, Bond Corporation Holdings Limited v. Sulan (1990) 2 ACSR 435 at 448. On this approach, a list or separate mention of each individual liability would not be required, so long as what is mentioned identifies each and every liability with unambiguous clarity. 28 Thus, for example, if an agreement stated "$X being the aggregate of estimates for the months of January, February and March 2000", and if $X was in fact the aggregate of those estimates, in my opinion there would be specified liabilities in relation to each of those months. If the agreement stated "$X being the aggregate of estimates now due", and those estimates now due were for those months and did add up to $X, in my opinion that also would be sufficient. So long as what is stated identifies each liability with unambiguous clarity, in my opinion each liability is specified. 29 In the present case, it seems to be common ground that $190,815.28 was the correct total of all liabilities outstanding for monthly remittances, up to and including June 1999. Certainly there was no evidence to the contrary, and one would have expected that, if there was any uncertainty as to what liabilities were included in that figure, this would have been drawn to the Court's attention. In those circumstances, in my opinion the document does specify, in the sense of making unambiguously clear, the liabilities to which it applies and which are to be discharged by payment of the sums specified in the agreement. I would add that, in my opinion, there is no substance in the submission that the agreement must state to which individual liability each specified payment is to be applied." 30 In Iso Lilodw' (which preceded Gillis) the agreement, which Davies AJ held to be an agreement within s 222ALA, solely concerned group tax. The issue before His Honour was whether the section required the agreement to specify the precise remittance liability to be discharged by each payment. In the course of his judgment at paragraph 42 Davies AJ said: "Section 222ALA uses the expression "one or more specified liabilities". In my opinion, by referring to the totality of the arrears, $124,788.47, the fax and the letter specified the liabilities to be paid. ILA and the Commissioner were in agreement as to the extent of the arrears and as to their composition. The agreed payments, totalling $124,788.47, were to pay off the whole of that outstanding liability. No more was required. The section does not require that particular payments accord with precise monthly arrears. It merely requires that the liabilities to be paid off be specified, which is to say, designated. The fax and the letter so provided." 31 The cases establish, in my opinion, that the general law as to the formation of contracts must be applied to documents said to constitute an agreement for the purposes of s 222ALA and that the requirement for a written agreement may be satisfied in the absence of signatures by one or both parties provided there is evidence that the writing was acknowledged by both parties as the record of their bargain. 32 It is also, I think, unnecessary for the written agreement to state, on its face, that it is an agreement pursuant to s 222ALA. But something more than a temporary moratorium is required and the agreement must specify the liabilities which compliance with it will discharge even though it does not spell out to which individual liability each specified payment is to be applied. 33 Although none of the cases expressly holds that an agreement under s 222ALA must be confined to remittance provisions, the remarks of Hodgson JA in Moss at paragraph 23 and in Gillis, particularly at paragraphs 25 and 26 seem to suggest that His Honour thought that it must. 34 The correspondence which, in Gillis, was held to constitute an agreement under s 222ALA was no more formal that the letter relied on in the present case, and did not purport to be a s 222ALA agreement. However, it did, unlike the present case, specify a sum which represented Group Tax only and it did provide for the discharge of that particular liability by instalments. 35 In the present case, the letter of 15 August 2003 is capable of constituting in my opinion an agreement under s 222ALA in that I think the records of the Australian Taxation Office sufficiently evidence that all the conditions were agreed to on behalf of the company. However, it does not specify an amount to be discharged by the listed payments. Those payments themselves as I have indicated are not totalled on the document, although, they add up to $746,223.16. That sum, on the evidence, does not correspond with the total of the Company's remittance provision liabilities at the time and, indeed, probably far exceeds them. 36 There are significant legal consequences which flow from the making of a s 222ALA agreement. For instance such an agreement constitutes the means by which directors of a company may avoid their personal obligations to cause the company to comply with its obligations in relation to deductions withheld and the means by which the directors of a company may avoid the personal liability arising under s 222AOC to pay a penalty equal to the unpaid amount of the company's liability under a remittance provision. Importantly to this case if a valid Section 222ALA agreement was constituted by the letter dated 15 August 2003 the notices served upon the Defendants by virtue of which their liability in these actions is said to arise would have been invalid. (Section 222AOG). 37 Mr Sorensen counsel for the Defendants submitted that nothing contained in Section 222ALA prevents the agreement relating to liabilities additional to those arising in respect of remittance provisions. Both the larger sum and the smaller sum (the remittance provision liabilities) within it would be discharged by performance. There seems to me to be two difficulties at least with that contention. The first is that if there is a contravention of the agreement it would be impossible for the important provisions of s 222AQA to operate. That section plainly as a matter of construction in my opinion can only operate in respect of remittance provisions. Yet if Mr Sorensen's argument be correct there would be no way at least in this case of calculating the balance payable under the agreement in respect of remittance provisions. The letter is entirely silent upon the subject. 38 The second basis upon which I would reject Mr Sorensen's submission is that as it seems to me the letter of 15 August 2003 simply does not comply with Section 222ALA. It does not identify and specify as in my opinion s 222ALA requires the liabilities under remittance provisions which are to be discharged by the stipulated payments. Compliance with that requirement was not in my opinion met by the mere listing of payments to be made which moreover in total, as it appears, represented the sum of all liabilities of the company to the Plaintiff at the time. 39 I hold that the Plaintiff is entitled to succeed in both actions and to recover verdicts for the amount identified in the affidavit of Ms Taylor sworn 17 December 2004 viz $414,693.15 plus interest. The Defendants should be ordered to pay the costs. I will defer formal orders in order that interest calculations may be made.

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