Mr M Hines of counsel instructed by the Solicitor to Commissioner of State Revenue

1 Maax Spa Corporation Pty Ltd was incorporated on 12 October 1998. Its original directors were Russell Devenish and Gregory Ritchie. Mr Ritchie sold his interest in the company and ceased to be a director on 6 March 2001.

2 Mr Russell Devenish died in May 2002. He had been ill for some time and his son Scott Devenish returned from the United States some time in 2000 to assist his ailing father in the running of the companies.

3 He told the Tribunal he took over the management of the company in mid-2002. Company records indicate he was appointed a director on 21 December 2000.

4 Maax Spa Factory Outlet was incorporated in 10 September 1996. From approximately 2000 onwards the parties involved in the company were identical with those in Maax Spa Corporation Pty Ltd.

5 In February 2004 both companies were placed under external administration and in June this year a Deed of Company Arrangement was put in place. According to the evidence given at the hearing, Maax Spa has had difficulty with one of its suppliers and legal action against that supplier is imminent. Mr Devenish and his accountant are quietly confident as to the prospects of success of this action.

6 In April 2003 the Commissioner for State Revenue commenced an investigation into the companies. The result of that investigation was that the respondent ascertained the applicant herein was not registered for payroll tax and was not discharging the group liability to lodge returns and pay the tax. The two companies are a group for payroll tax purposes and it is now agreed that the liability to pay payroll tax was triggered during the year ended 30 June 2000 when wages paid exceeded the annual statutory exemption.

7 Mr Robert John Matthews is now the financial controller of the companies and commenced his employment on 19 June 2003. He told the Tribunal the companies' accounts were "a big mess" and it took some time and effort to resurrect the companies' balance sheets and generally to restore accounting order. Prior to his appointment, the company had no qualified accounting personnel on staff.

8 There was an unqualified bookkeeper and the sister of the present director did the wages. External accountants were responsible for preparation of unaudited final year accounts and taxation returns.

9 According to Mr Matthews, the late Mr Devenish had little business experience, this was his first business, the company expanded very quickly and when the supply problems began to emerge, the companies' experience base was found wanting.

10 Mr Scott Devenish told the Tribunal he knew nothing of payroll tax obligations. In fact he has spent most of his working life in the United States of America.

11 Mr Matthews told the Tribunal the first he knew of the payroll tax problems was on 5 August 2003. Clearly Mr Devenish knew of them some time earlier.

12 There had been discussions between the Commissioner's staff and the external accountant and the bookkeeper. It is perhaps due to the fact that Mr Matthews had no knowledge of the impending problems in the first few weeks of his employment that time limits set by the Commissioner were not met when set.

13 In any event final assessments of payroll tax, penalty tax and interest were issued on 3 September 2003. The total amount payable was $579,166.91 made up of -

14 The assessments cover the years ended 30 June 2000, 2001, 2002 and 2003.

15 Division 1 of Part 5 of the Taxation Administration Act 1997 ("the Act") is a precise all-encompassing code with the act. It provides for interest to be levied at the sum of two rates - the market rate and the premium rate. The Commissioner retains discretion pursuant to s.28 of the Act to remit interest payable.

16 In fact, consistent with the Commissioner's policy in cases of voluntary disclosure, the premium rate has been remitted in full - a reduction of $42,013.96.

17 It is well recognised that the imposition of market rate interest is simply compensation to the revenue for being deprived, not through its fault, of the use of the funds. The premium rate on the other hand is a form of penalty intended to operate as a key disincentive to delaying tax payments. (See Chief Commission of State Revenue v Incise Technologies & Anor Pty.Ltd [2004] NSWADTAP 19,para 60 per O'Connor J)

18 I indicated to the parties in the running of the hearing that there was nothing in the limited evidence before me that would give rise to a remission pursuant to section 28. A substantial reduction has already occurred in the form of the total remission of premium rate interest and there are no circumstances so compelling as to warrant any further reduction.

19 Again, as with interest, Division 2 of Part 5 forms a code in which provision is made for the imposition of penalty tax. Section 30(1) provides that the amount of penalty tax in respect of a tax default is 25% of the unpaid tax. The balance of the Division sets out the circumstances in which that percentage may be increased or decreased. There is power to increase the rate to 75% of unpaid tax where the default is caused wholly or partly by intentional disregard of the law.

20 Similarly, there is power to determine the penalty to be NIL in circumstances where the taxpayer has taken reasonable care to comply with taxation laws or the default occurred solely because of circumstance beyond the taxpayer's control. That discretion is found in section 30(3) and it gives the Commissioner absolute discretion to determine that no penalty is payable.

21 Section 31 provides for a reduction in penalty tax in two separate circumstances. If the taxpayer makes disclosure before an investigation commences, the tax is to be reduced by 80%. On the other hand, if an investigation has commenced and the requisite co-operation is forthcoming from the taxpayer, then the penalty tax can be reduced by 20%. There is a further provision providing for additional penalty in cases where a taxpayer prevents or hinders the Commissioner from ascertaining the nature and extent of the tax default.

22 In the instant case, the penalty has been reduced by 20% in accordance with Section 31(2).

23 It is clear from the Commissioner's decision that he was not satisfied that reasonable care was taken or that the default occurred solely because of circumstances beyond the taxpayer's control. Had he been so satisfied he might have exercised his discretion to determine that no penalty was payable at all. The first question that must be answered is whether the taxpayer took reasonable care to comply with the taxation laws. In RVO Enterprises Pty Ltd v Chief Commissioner of State Revenue [2004] NSWADT 64 at para 23, the Tribunal held -

In each case it is essentially a question whether the taxpayer has taken reasonable care in attending to its tax obligations. Factors that would indicate that a taxpayer took reasonable care include reasonable attempts to comply with the tax law, reasonable professional and other enquiries to ensure compliance, reliance on professional advice or on official published views of the tax laws. Factors which indicate that a taxpayer failed to tax reasonable care include oversight or forgetfulness to meet the obligations, failure to maintain adequate records and procedures to prevent errors from occurring, not seeking professional advice and errors in complying with the law.

Non-compliance with the payroll tax obligations in this matter were due to "inadvertent error", complexities of the PRT wage provisions, fluctuations of wages at the end of financial year for presumably income tax purposes, introduction of GST and lack of advice from professionals employed by the applicants. These are not factors that indicate that the applicant took reasonable care to attend to its payroll obligations. On the contrary, they are factors, which indicate that the applicant failed to take reasonable care.

24 The Commissioner's Revenue ruling TAA.006 states that the reasonable care standard requires taxpayers to keep complete and accurate records, to make diligent efforts to understand and comply with the law and to seek expert advice on uncertain or complex matters, and that in determining whether or not a taxpayer has taken reasonable care, the respondent will consider a range of factors including the taxpayer's knowledge of tax legislation, commercial experience and access to expert advice. Whilst these rulings do not have the force of law, the requirements set out therein are sensible and not unduly onerous. Rather they set out ordinary requirements of good commercial governance.

25 The Tribunal has no evidence before it to indicate why Mr Devenish Snr, in the time he controlled the company, did not take the relevant steps to ensure compliance with the law. This is somewhat exacerbated by the absence of Miss Devenish (who did the wages) and the former bookkeeper, neither of whom was called.

26 Whilst the imposition of, and liability for payroll tax might not receive the same constant publicity as, for instance, income tax and GST, it is a tax that has been in place for a long time, it is not an especially esoteric tax and it is frequently the subject of press discussion, debate in the Parliament and general public denunciation. It is difficult to understand how individuals, who take advantage of the corporate veil and limited liability, who incorporate companies through which to run their business, fail to make the relevant enquiries in order properly to understand their taxation responsibilities at both a State and Federal level. Whilst Mr Devenish Jnr informed the Tribunal that he only returned in the year 2000 and he knew nothing of payroll tax, he was a main director of this company for the next 3 financial years during which no attempt was made to register or to file the necessary monthly returns. On that basis it cannot be said that the taxpayer has taken reasonable care. Further, when approached by the Commissioner and given deadlines, those deadlines were extended twice and eventually not met. The taxpayer was notified in April 2003 of its payroll tax obligations and the Tribunal was informed that registration was delayed until 21 July of 2003.

27 As Mr Hines of counsel submitted, the tax liabilities were substantial, the period of non-compliance stretched over 4 financial years and the number of employees in the relevant years was 65, 98, 208, and 168.

28 Nothing in the evidence before me persuades me that the tax default occurred solely because of circumstances beyond the taxpayer's control. Indeed all of these matters were firmly within its control.

29 The result is that no reduction is available pursuant to the terms of section 30(3) because the taxpayer did not take reasonable care to ensure compliance with the taxation law and the default did not arise due to circumstances beyond the taxpayer's control.

30 So, are the circumstances as told to the tribunal by Mr Devenish and Mr Matthews such that the tribunal should consider it appropriate it to remit the penalty tax by any amount at all? Section 35 of the Act provides that the Commissioner, in such circumstances as he considers appropriate, may remit the penalty tax by any amount.

31 It is difficult not to feel sympathy for Mr Devenish Jnr, faced as he was with personal tragedy and corporate misadventure at a time when he probably did not have enough experience to be running any company. But for section 35 to be brought into play, the circumstances that give rise to an exercise of the Commissioner's discretion to reduce the penalty must be rare and exceptional.

32 Mr Hines referred me to the observations in Ruling TR94/7 paras 15 and 16, which although dealing with different legislation, are apposite and I agree with the sentiments expressed in the ruling, viz:

The new system specifies the penalties attracted for specific kinds of behaviour, and does not contemplate for most cases a further reduction from the rates set in the legislation. A major objective of the new penalties is to promote certainty in respect of the rates of penalty attracted and that objective would be compromised if the specified rates were regularly remitted. However, the new system does recognise, though the remission power, that there will be certain exceptional cases where the penalty standards or the rates of penalty prescribed, if applied rigidly, provide and unintended or unjust result."

33 Although I am satisfied that Mr Scott Devenish did not set out deliberately to avoid the payment of pay roll tax I am not persuaded that the explanations provided are so exceptional or rare as to prompt any further reduction of penalty pursuant to section 35. Factors militating against such a remission include the taxpayer's failure to obtain proper advice, the failure to ensure that company officers were properly acquainted with the taxation law, the fact that the default occurred over four consecutive financial years, the tardiness in responding to the Commissioner's enquiries once the default had been discovered, the failure to register for some three months after notification and the fact that the amount of primary tax levied was substantial. On one view one might considers the remission in full of premium rate interest and the reduction in penalty provided in section 31(2) relatively generous in the circumstances.

34 There are a couple of observations I should make. Mr Matthews told the Tribunal that the representative of the taxpayer's external accountants (Mr Adam Scott) indicated to him that he understood from the respondent's officer that the penalty tax would be in the order of 5% and Mr Matthews explained that in the circumstances of that indication he felt the taxpayer had been treated unduly harshly. No evidence was produced to substantiate this claim, but even if it had been, it would have been of no effect. In my view it is most unlikely an officer of the respondent would volunteer such a concession but even if he or she did so, the Commissioner would not be bound to honour the officer's estimate.

35 Another observation concerns the directions given by this Tribunal about the conduct of the case and the timetable provided for the filing of witness statements. The taxpayers filed no statements of evidence and were not represented at the hearing. Considering the seriousness of the matters to be argued that was unfortunate particular as the onus falls squarely on the taxpayer. In those circumstances (no statements and no representation) the tribunal was anxious to provide Mr Devenish and Mr Matthews with an adequate opportunity to put the company's case in the absence of legal or other representation. Viva voce evidence was given by both of them during the hearing and counsel for the Commissioner took no objection to this course.

36 The third observation concerns the absence from the proceedings of Ms Devenish and the former bookkeeper. Their absence (for whatever reason) is regrettable. This is so because they are the only persons capable of giving evidence about the period of the company's operations prior to the return of Mr Devenish Jnr from overseas. It is possible that either Ms Devenish or the bookkeeper might have been able to point to rare and exceptional circumstances in play during the year ended 30 June 2000 which might have provided some avenue for reduction in respect of some part of that year's penalty. As I understand the evidence, the external accountants for the 2000 year were not the same as those for the 2003 year which meant that their absence was not crucial although it might have been instructive to have heard from them in relation to later years. Sadly, no such evidence was available.

37 The result is that the assessments issued by the Commissioner are confirmed.