PAOLA (TR) v DEPUTY COMMISSIONER OF TAXATION; PAOLA

CASES CITED: Deputy Commissioner of Taxation v Gillis (2003) 59 NSWLR 153

CA 40237/06; Trent Nicholas Paola - Appellant Deputy Commissioner of Taxation - Respondent PARTIES: CA 40238/06; Shane Jonathan Paola - Appellant Deputy Commissioner of Taxation - Respondent

COUNSEL: Dr H Sorensen (Appellants) P Rodionoff (Respondent)

SOLICITORS: Guild Legal (Appellants) Deputy Commissioner of Taxation (Respondent)

LOWER COURT JURISDICTION: Supreme Court - Common Law Division

LOWER COURT FILE NUMBER(S): SC S 11957/04; S 11399/05

LOWER COURT MEDIUM NEUTRAL CITATION: [2006] NSWSC 193

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40237 of 2006 CA 40238 of 2006

SANTOW JA CAMPBELL JA HANDLEY AJA

9 MAY 2007 TRENT NICHOLAS PAOLA v DEPUTY COMMISSIONER OF TAXATION SHANE JONATHAN PAOLA v DEPUTY COMMISSIONER OF TAXATION CATCHWORDS

TAXATION - group tax withheld by company employer - amounts withheld not remitted to Commissioner - liability of directors to penalty - remission by statute - whether agreement one for discharge of group tax liabilities - whether penalty remitted. FACTS

The appellants were directors of a company which withheld $423,589 from the salaries and wages of its employees between February and June 2003. This amount was not remitted to the Deputy Commissioner of Taxation. Section 222AOB(1) requires directors to cause a company to do at least one of the following on or before the due date for remittance:

(a) comply with Division 1AAA in relation to each deduction that the company has made for the purposes of that Division; (b) make an agreement with the Commissioner under s.222ALA in relation to the company's liability under a remittance provision in respect of such deductions; (c) appoint an administrator of the company under s.436A of the Corporations Law; (d) begin to be wound up within the meaning of that law. Section 222AOC makes directors liable to a penalty equal to the amount of the unremitted tax if a company fails to comply with s.222AOB. Under s.222AOG the penalty is remitted if a company complies with s.222AOB within 14 days after the Commissioner gives notice to the directors under s.222AOE. Notices were given to the appellants on 12 September 2003. The Commissioner sued the directors to recover the statutory penalties. The only substantial defence was that the company made an agreement with the Commissioner under s.222ALA on 15 August 2003. An agreement was made on that date for the company to pay its accrued taxation liabilities by instalments but Patten AJ held that the agreement did not comply with s.222ALA and gave judgment for the Deputy Commissioner. The directors appealed. On appeal Held: the agreement of 15 August did not fall within s.222ALA(1) because the payment of specified amounts on specified days that were provided for were not "for the purpose of discharging one or more specified liabilities" each of which was a liability under a remittance provision. The agreement included other taxation liabilities which fell outside s.222ALA(1) and it did not identify the company's liabilities under a remittance provision. Moreover the agreement did not appropriate specified payments to discharging specified liabilities under remittance provisions. The appeal therefore failed. ORDERS

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40237 of 2006 CA 40238 of 2006

SANTOW JA CAMPBELL JA HANDLEY AJA

9 May 2007 TRENT NICHOLAS PAOLA v DEPUTY COMMISSIONER OF TAXATION SHANE JONATHAN PAOLA v DEPUTY COMMISSIONER OF TAXATION Judgment 1 SANTOW JA: I agree with Handley AJA. 2 CAMPBELL JA: I agree with the orders proposed by Handley AJA and with his Honour's reasons. 3 HANDLEY AJA: This is another appeal arising from Subdivision B of Div 9 of Pt VI of the Income Tax Assessment Act 1936 which penalises directors of a company that fails to pay the Commissioner of Taxation group tax instalments deducted from the wages and salaries of its employees. 4 While the appellants were directors of Educom Holdings Pty Ltd (the company) it withheld amounts from the wages and salaries of its employees during the months of February to June 2003 which totalled $423,589. Those amounts which are set out in the amended statement of claim should have been remitted to the Deputy Commissioner on or before the due dates in the following month. 5 Subdivision B makes directors responsible for any failure by their company to remit group tax instalment deductions to the Commissioner on or before the due date for payment. 6 Section 222AOB(1) requires directors to cause the company to do at least one of the following on or before the due date: "(a) comply with Division 1AAA … in relation to each deduction: (i) that the company has made for the purposes of Division 1AAA …; and (ii) …; (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; (c) appoint an administrator of the company under section 436A of the Corporations Law ; (d) begin to be wound up within the meaning of that Law." 7 The appellants were in breach of this duty on each of the relevant due dates. Section 222AOC relevantly provides: " Penalty for directors in office on or before due date 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 …" 8 The Commissioner is not entitled to recover the penalty until 14 days after he has given a notice under s 222AOE. Appropriate notices were posted to the appellants on 12 September 2003. 9 Section 222AOG which remits the penalty in certain circumstances provides: "If: (a) a penalty is payable by a person under this Subdivision; and (b) section 222AOB 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." 10 Nothing of relevance occurred within the 14 day period following service of the notices. 11 The only substantial defence to the actions to recover the penalties was that the company made an agreement with the Commissioner under s 222ALA on 15 August 2003. If the agreement was within that section it satisfied the requirements of s 222AOG because it caused s 222AOB to be complied with "at a time when the Commissioner has not yet given … a notice". Patten AJ rejected this defence and entered judgments for the Deputy Commissioner after giving credit for a payment on 13 October 2003. 12 The defendants' appeals challenge the Judge's finding that the agreement of 15 August 2003 was not made under s 222ALA. Sub-section (1) of that section provides: "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." 13 An estimate of the type referred to is one made by the Commissioner under Div 8 of Pt VI where an employer has failed to report the gross wages and salaries payable to its employees during a relevant period and the amount which should have been remitted to the Commissioner. The expression is defined in s 222AHA(1). 14 The Commissioner is authorised to make and enforce an estimate of the employer's liability for unremitted group tax. This case involves the company's liabilities under a remittance provision, and not its liability to pay estimates. Remittance provision is defined in s 222AFB(1) to include the provisions requiring remittance of group tax deductions. 15 The agreement of 15 August 2003 was headed "PAYMENT ARRANGEMENT INTEGRATED CLIENT ACCOUNT". It continued: "We refer to your request regarding your outstanding account and agree to the following payment arrangements". This was followed by a table of dates at fortnightly intervals from 15 August 2003 to 9 July 2004 when payments of $15,000 were to be made to the Deputy Commissioner with a final payment of $11,223.16 due on 23 July 2004. The agreement continued: "This arrangement MUST be adhered 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 … Should any tax credits arise during the life of this arrangements 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." 16 The company's integrated client account in the office of the Deputy Commissioner showed that on 15 August 2003 it owed $522,396.84 for unremitted group tax, goods and services tax (GST), and for interest and penalties (blue 29-30). 17 The trial Judge held that the agreement was not made under s 222ALA because the amounts specified for payment on the days specified were intended to cover all the company's liabilities to the Deputy Commissioner, and not just its liabilities under a remittance provision. There is no doubt that the agreement was "to pay specified amounts on specified days". The only question is whether it was an agreement "for the purpose of discharging one or more specified liabilities of the person, each of which is: (a) a liability under a remittance provision". 18 Section 222AOB(1)(b) refers to "an agreement with the Commissioner under section 222ALA" and this must mean an agreement which that section authorises the Commissioner to make. The words in s 222ALA(1) "for the purpose of" refer back to an antecedent verb which could either be "make" or "pay". The nearest is "pay" and the remoter refers to action by the Commissioner, ie the making of the agreement, which he does not make "for the purpose of discharging … liabilities". Thus in context the purpose qualifies the verb "pay". The agreement must be one under which the other person agrees to pay specified amounts for the purpose of discharging one or more specified liabilities of that person. 19 If the company made all of the scheduled payments it would discharge all its tax liabilities as at 15 August 2003 including its liabilities under a remittance provision. These liabilities were ascertained and known to both parties but, although they were covered by the agreement, they were not specified in it. 20 Section 222ALA(1) applies to a "written agreement" and the writing must specify the matters required. This agreement did not specify the total liability of the company under a remittance provision. Moreover it did not appropriate each payment to a particular liability or type of liability. It therefore could not be said of any specified amount payable on any specified day that that payment was "for the purpose of discharging one or more specified liabilities … under a remittance provision". 21 Although the agreement as a whole was for the purpose of paying the company's liabilities under a remittance provision the purpose required by the section is more specific. 22 Section 222ALA(2) provides that an agreement may contain other provisions and s 222ALB(1) applies to some agreements that do this. Thus a s 222ALA agreement may also provide for the discharge of other taxation liabilities, but not in a manner which destroys its character as a s 222ALA agreement. The provisions of the agreement relating to other taxation liabilities must be severable so that it can be said of specified payments that they are, in whole or in part, for the purpose of discharging one or more specified liabilities falling within s 222ALA(1). This agreement did not do this. 23 The appellants relied on the decision of this Court in Deputy Commissioner of Taxation v Gillis (2003) 59 NSWLR 153. The agreement in that case evidenced by an exchange of letters, provided for $190,815.28 which was the company's outstanding liability for group tax, to be paid by specified amounts on specified days. It did not state in terms that "the outstanding amount" was for group tax, although the letters referred to "the current group tax", and to "current remittances". Hodgson JA, giving the principal judgment of the Court, said (164): On this approach, a list or separate mention of each individual liability would not be required, so long as what is mentioned identifies each and every liability with unambiguous clarity. Thus, for example, if an agreement stated '$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.

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 … 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." 24 This passage does not assist the appellants because the agreement in this case does not specify, or make unambiguously clear, the liabilities under a remittance provision which are to be discharged by payment of the sums specified. The agreement also falls outside the section for the other reasons identified above (paras [20] and [21]) where Gillis is not relevant. 25 The agreement was not one under s 222ALA and the appellants' liability for the penalties was not remitted by s 222AOG when it was made. The appeals should be dismissed with costs. **********

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