Dimitrios Christis v Deputy Commissioner of Taxation

Judgment 1GILES JA: I agree with Meagher JA. 2MEAGHER JA: The appellant is the sole director of Woronora Pty Ltd (' Woronora '). By a partnership deed executed in about November 2005, Woronora, as trustee for the Dimitrios Christis Family Trust, and Mr John Apostolopoulos (' Mr Apostolopoulos '), as trustee for the Babar Penrith Trust, agreed to establish and carry on a cafe and bar business at Penrith trading under the name 'Babar Cafe & Bar (Penrith)'. Before November 2005 the partnership, as an entity carrying on an enterprise in Australia, applied for and was registered in the Australian Business Register pursuant to the A New Tax System (Australian Business Number) Act 1999 (Cth). As part of that process of registration it was allocated an Australian Business Number ( ABN ). 3In District Court proceedings heard by Elkaim DCJ, the respondent ('the Commissioner ') sought to recover from the appellant an amount of $159,114.37 pursuant to s 222AOC(1) of the Income Tax Assessment Act 1936 (Cth) ('the ITAA '). 4Section 222AOC permits the Commissioner to recover from directors of a company by way of penalty, an amount equal to the unpaid amount of the company's liability to pay moneys withheld by it from salaries or wages of an employee in accordance with its obligations under s 12-35 of Schedule 1 to the Taxation Administration Act 1953 (Cth) ('the TAA '). In this context, "withheld" describes an amount held back or deducted from moneys otherwise due to the employee. As Edmonds J observed in Cassaniti v Federal Commissioner of Taxation [2010] FCA 641; (2010) 186 FCR 480 at [163]-[168], the holding back or deprivation "may be reflected in actual funds held by the payer on behalf of the employee pending payment to the Commissioner ... [or] it may only be reflected in the wage records and books of account of the payer as an accounting entry". 5The Commissioner alleged that the partnership as the relevant "entity" withheld amounts from salaries or wages of its employees and as a consequence was liable to pay those amounts under s 16-70 of Schedule 1 to the TAA. The amounts were alleged to have been withheld over the period June 2006 to February 2008. Woronora, as a partner, was said to be jointly and severally liable for the payment of those amounts by reason of s 444-30(2) of Schedule 1 to the TAA. 6If amounts were withheld by the partnership, the appellant, as a director of Woronora, was required by s 222AOB of the ITAA to cause Woronora to comply with its obligations to pay those amounts to the Commissioner or to take at least one of the other steps provided for in s 222AOB(1)(b), (c) or (d): Canty v Deputy Commissioner of Taxation [2005] NSWCA 84; (2005) 63 NSWLR 152. If that requirement was not complied with, the appellant was liable under s 222AOC(1), in the absence of his having any defence under s 222AOJ. 7Before the primary judge, the appellant (who was unrepresented) submitted that he had done everything he could reasonably have done to see that moneys which had been withheld were paid to the Commissioner. He was not, he said, primarily responsible as between himself and Mr Apostolopoulos for the remittance to the Commissioner of any moneys withheld and, from 7 February 2007, had been excluded from the operation of the partnership's business. 8The primary judge considered whether these matters provided the appellant with a defence under s 222AOJ of the ITAA. That section relevantly provides: "(1) This section has effect for the purposes of: (a) proceedings to recover from a person a penalty payable under this Subdivision; or ... (3) It is also a defence if it is proved that: (a) the person took all reasonable steps to ensure that the directors complied with subsection 222AOB(1), 222AOBAA(1) or 222AOBA(1) (whichever is relevant); or (b) there were no such steps that the person could have taken." 9He concluded that there was no defence under s 222AOJ(3) because there was no evidence that the appellant had taken any steps as the sole director of Woronora to cause it either to comply with its payment obligations, to make an agreement with the Commissioner, to appoint an administrator or to begin winding-up proceedings. The primary judge's decision in that respect was correct: see Canty v Deputy Commissioner of Taxation at [37]-[46]; and was not challenged on appeal. 10Being satisfied of the matters in s 222AOC(1) of the ITAA and that the Commissioner had served a notice as required by s 222AOE, the primary judge entered judgment against the appellant for the amount claimed together with interest. 11In this Court the appellant was represented by Counsel. The amended notice of appeal raised a number of grounds. Only two arguments, however, were pressed. The first encompassed three of the grounds of appeal. The second was not dealt with in the amended notice of appeal but no objection was taken to this Court dealing with it. 12The first argument was that the partnership was terminated or came to an end as a result of events which happened on 7 February 2007, with the consequence that from that point in time Mr Apostolopoulos was not authorised to act on behalf of the partnership or to withhold moneys from employee salaries or wages on behalf of Woronora. If that was the position, it was argued that there could have been no withholding by the partnership and accordingly Woronora after that date within s 222AOA(1)(b) of the ITAA. 13The second argument was that the appellant had a defence to the claim under s 8Y of the TAA. Subsection 8Y(1) provides that where a corporation does something or omits to do something "which constitutes a taxation offence", a person who is concerned in or takes part in the management of the corporation is deemed to have committed the taxation offence. Subsection 8Y(2) provides that in a "prosecution of a person for a taxation offence" by virtue of subsection (1), it is a defence if the person proves that the person "did not aid, abet, counsel or procure" the relevant act or omission and was not in any way, directly or indirectly, knowingly concerned, in or a party to, the act or omission. 14This second argument may be disposed of shortly. The proceedings brought against the appellant were not to prosecute him for a "taxation offence". That expression is defined in s 8A of the TAA as "an offence against a taxation law" or an offence against various provisions of the Crimes Act 1914 or the Criminal Code "that relates to an offence against a taxation law". Division 2 of Part III of the TAA creates various taxation offences. Section 8ZE draws a distinction between offences and civil penalties and the note to that section provides an example of a civil penalty in s 284-75 of Schedule 1 to the TAA. The proceedings brought against the appellant were to recover an amount due as a civil penalty and not for the prosecution of an offence. For those reasons, the second argument is rejected. 15In order to address the first argument, it is necessary to summarise briefly the evidence before the primary judge as to the circumstances in which the appellant was excluded from the operation of the partnership business. That evidence included an affidavit of the appellant sworn on 4 March 2010, a draft affidavit of the appellant prepared in April 2008 and oral statements made at the hearing before the primary judge which the appellant affirmed were true and correct. 16The premises at Penrith from which the business was conducted were leased by Babar Cafe Pty Ltd, a company associated with Mr Apostolopoulos. It licensed the premises to permit the partnership to conduct the business. The evidence does not indicate whether that licence was to one or both of the partners. Under the arrangements between the partners the appellant was to manage the cafe business and bank the takings into an account with the Commonwealth Bank on a weekly basis after paying suppliers and wages. He would then provide receipts, invoices and other primary records to a bookkeeper in Canberra who was involved in two other cafe businesses in which Mr Apostolopoulos had an interest. The appellant's understanding was that the bookkeeper would attend to the payment of, among other things, PAYG group tax deductions to the Commissioner, workers compensation insurance premiums and superannuation payments for employees of the business. 17By February 2006 relations between the appellant and Mr Apostolopoulos had become strained. In particular, there were issues as to whether moneys generated from the business were being applied to pay liabilities of the business. The appellant made requests for financial information. Those requests were not answered. In about October 2006 the appellant retained solicitors to assist him to obtain that information. The information sought included details as to the lodgement of Business Activity Statements with the Commissioner and the making of payments due on account of PAYG group tax deductions and GST. 18In correspondence between the solicitors acting for the partners there were allegations and counter-allegations made as to irregularities in the conduct of the business. The appellant had become concerned that payments were being made from the business bank account in respect of liabilities unrelated to the partnership business. To address that concern, he had in November 2006 opened a new Commonwealth Bank account and deposited moneys from the business into that account for the purpose of his paying rent and other liabilities of the partnership. In January 2007 the solicitors acting for Mr Apostolopoulos asserted that the appellant had not since July 2006 provided information about "takings of the business, purchases, wages, superannuation, PAYG, GST paid and invoicing". 19In February 2007 matters came to a head. On 7 February 2007 when the appellant arrived at the cafe at about 11am, he was confronted by Mr Apostolopoulos and his brother, Spiro Apostolopoulos and one of them said to the appellant words to the effect: "We have changed the locks to the cafe and you are out. You no longer have anything to do with the business. If you try to put a foot back in the cafe we will call the police to kick you out. We are thinking about starting criminal proceedings." From that time the appellant had no further access to the cafe premises. 20On 7 February 2007 the appellant also received a letter from the solicitors for Mr Apostolopoulos which denied any wrongdoing on the part of their client and suggested that the appellant's failure to bank receipts indicated that he had improperly taken payments for his own use. The letter continued: "... Babar Cafe Pty Limited is owed an administration fee amounting to 5% of the gross revenue of the business. That administration fee has never been paid and is overdue ... and the business Babar Cafe and Bar (Penrith) is in breach of the Licence Agreement. In the circumstances, our client has instructed us to hereby terminated (sic) the Agreement with the licensee. Our clients have resolved to take steps to be more involved in the management of the business and to ensure that the business is run effectively. A new manager will be appointed to the business this morning. Your client's services as manager are hereby terminated. Furthermore, Babar Cafe Pty Limited will be taking over possession of the premises in its capacity as lessee and will deal with the landlord directly. Our clients will ensure that your client continues to receive all information which is properly due to him." 21There followed a long period of communications between solicitors for the parties. Not all of this correspondence was in evidence before the primary judge. In late September or early October 2007 the appellant's solicitor wrote to Mr Apostolopoulos' solicitor requesting access to the books and accounts of the partnership in accordance with cl 9.3 of the partnership deed. That clause provided: "9.3 Inspection All books, accounts, particulars, vouchers and invoices and all other documents relating to the Partnership must be made open to inspection and examination by any Partner, and each Partner is entitled to all reasonable explanations and information relating to them." 22This letter also made reference to s 45 of the Partnership Act 1963 (ACT) ('the Partnership Act ') which, by cl 33 of the partnership deed, was the governing law of the partnership. That section deals with the rights of partners to the application of partnership property upon the dissolution of the partnership. The letter concluded: "We would be interested in your views whether you consider that the partnership has dissolved in light of the facts." A further request for access to the books and records of the partnership was made by the appellant's solicitors in late October 2007. 23These disputes were not resolved. On 30 April 2008, Woronora commenced proceedings in the Equity Division of this Court for an order that the partnership be dissolved and for the appointment of a receiver and manager. On 4 June 2008 orders were made by consent that the partnership be dissolved and wound-up under the direction of this Court and that a receiver and manager be appointed. 24Clause 27 of the partnership deed provided that the partnership would be dissolved "if each Partner agrees that the Partnership will be dissolved". There was no such agreement. The partnership deed did not expressly provide that the partnership would be dissolved upon the acceptance of repudiatory conduct but the appellant argued that that was the position under general law. 25The first step in the appellant's argument is to establish that there was a repudiation of the partnership agreement in the sense that there was conduct which evinced an unwillingness or inability on the part of Mr Apostolopoulos to perform and be bound by the partnership agreement: Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd [2007] HCA 61; (2007) 233 CLR 115 at [44]. If there was such conduct, the question then is whether the appellant elected to accept that repudiation. Even if there was such an election, there is a further question whether, in the absence of express agreement, a partnership can be dissolved by one or more of the partners accepting a repudiation on the part of the other partners: see Ryder v Frohlich [2004] NSWCA 472 at [127]-[133]. 26Mr Apostolopoulos' conduct in excluding the appellant from the operation of the business and in sending the letter of 7 February 2007 did not, in my view, evince an unequivocal intention no longer to be bound by the partnership agreement. The letter stated that the licence of the premises from Babar Cafe Pty Limited was to be terminated and that the appellant's services as manager were to be terminated. It also stated that a "new manager will be appointed to the business" and that the appellant will continue "to receive all information which is properly due to him". In the circumstances, what was done was consistent with a termination of the appellant's involvement in the management of the partnership business but not a termination of the partnership itself. The statements that the business was to continue and that the appellant was to receive all information "properly due to him" are more consistent with the continued existence of the partnership than in its repudiation. 27Even if that conduct did constitute a repudiation, the evidence does not suggest that the appellant elected to terminate the partnership agreement. On the contrary, the requests for information in reliance upon the terms of the partnership deed are consistent with its continued operation and the inquiry of Mr Apostolopoulos' solicitor by the letter of September 2007, was not consistent with the position being that the appellant had elected to terminate the partnership agreement. In answer to a question from the primary judge as to whether he had done anything "to bring the partnership to an end", the appellant answered that he had tried to organise a mediation and that "the other partners would agree and then not show up or just not respond at all" and that he eventually commenced the proceedings for an order that the partnership be dissolved. 28For these reasons the first two steps in the argument that the partnership agreement was terminated by acceptance of repudiatory conduct are not made out. 29This conclusion makes it unnecessary to address other questions which might have arisen as between the appellant and the Commissioner on the assumption that the partnership could be terminated by acceptance of repudiatory conduct. Those questions include, with respect to the continued lodgement of Business Activity Statements using the ABN, whether Mr Apostolopoulos had apparent or ostensible authority to lodge those statements on behalf of the partners both in respect of business periods prior to the asserted date of termination and after that date. It also makes it unnecessary to consider the effect of the consent order made on 4 June 2008 as to the dissolution of the partnership and whether the appellant was on some basis prevented from disputing in these proceedings that date as the date of dissolution. 30There is one further matter which should be noted. The partnership deed also provided for the partnership to be dissolved following the happening of certain events (described as 'Trigger Events'): cl 22. Those events included the retirement of a partner and, in certain circumstances, a partner was deemed to have retired: cll 1.1, 20. Those circumstances included that a partner did or permitted an act which "would be a ground for the dissolution of the Partnership" by a court. Section 40(1) of the Partnership Act gives the Court power to wind up a partnership when "a partner in a firm has been guilty of such conduct as, in the opinion of the court, regard being had to the nature of the business of the firm, is calculated to affect prejudicially the carrying on of that business". 31It was not argued before the primary judge or this Court that by reason of these provisions there had been in the circumstances a "deemed retirement" of Mr Apostolopoulos from the partnership on 7 February 2007 and that this may have resulted in a termination of the partnership at that time. That argument would have faced difficulties having regard to the terms of the solicitor's letter of 7 February 2007. It also could not have been made before this Court because it almost certainly would involve questions on which the Commissioner would have considered adducing evidence at the trial including by cross-examination of the appellant: Suttor v Gundowda Pty Ltd (1950) 81 CLR 418 at 438; Water Board v Moustakas [1988] HCA 12; (1988) 180 CLR 491 at 497-498; Minister Administering the Crown Lands Act v NSW Aboriginal Land Council [2008] HCA 48; (2008) 237 CLR 285 at [66]. 32Because the partnership was not terminated before June 2008, the Business Activity Statements lodged after February 2007 and on behalf of the partnership were evidence from which it could be inferred that a withholding had occurred and that the withholding had been made by the partnership: Cassaniti v Federal Commissioner of Taxation at [169]. On the basis of that evidence the primary judge was correct to conclude that there had been a withholding by the partnership entity and that each of the partners was jointly and severally liable under s 16-70(1) of Schedule 1 to the TAA to pay the amounts withheld to the Commissioner on or before the date required by s 16-75 of Schedule 1 to that Act. That conclusion enlivened s 222AOC of the ITAA and permitted the Commissioner to recover those amounts from the appellant. 33For these reasons the appeal must be dismissed with costs. 34GZELL J: I agree with Meagher JA.