1 HANDLEY JA: The appellant stood trial before Hosking DCJ and a jury on two counts of being knowingly concerned in the commission by two companies of the offence of defrauding the Commonwealth contrary to s 29D of the Crimes Act 1914: "by failing to pay tax instalment deductions to the Commissioner of Taxation". She has appealed to this Court from her convictions on both counts.
2 The facts and the relevant provisions of the income tax legislation are set out in the reasons for judgment of Bell J, which I gratefully adopt. The principal submission for the appellant was that the charges were misconceived because the evidence did not disclose offences against the section.
3 The appellant was a director of and the sole shareholder in the two companies which she controlled for all purposes relevant to these appeals. If each company committed the offence of defrauding the Commonwealth she was knowingly concerned in its commission. There was no dispute that the first company deducted tax instalments (group tax) from the wages of its employees between 1 April 1994 and 1 December 1999 and the second between 1 July 1993 and 1 December 1999, which they did not remit or remit in full to the Commissioner. The real issue was whether the companies "defrauded the Commonwealth" by failing to pay group tax.
4 When group tax is deducted from wages payable to employees the employer incurs a debt to the Commissioner payable at the times specified in the legislation. The debt is an ordinary unsecured debt and the Commissioner enjoys no priority and has no legal or equitable interest in the assets of the employer.
5 The counts baldly allege that the Commonwealth as creditor was defrauded by the debtor's failure to pay the debt. The concept that defrauding can occur as a result of a mere omission raises immediate doubts which are not removed on closer examination.
6 The joint judgment of Gaudron, McHugh, Gummow and Hayne JJ in Spies v The Queen (2000) 201 CLR 603 provides authoritative guidance on the elements of an offence of defrauding another. Deceit is not a necessary element (ibid 630). "Nevertheless to prove a defrauding the prosecution must establish that the accused used 'dishonest means' to achieve his or her object" (630) (emphasis supplied). "This is an essential element in a defrauding offence" (633). The joint judgment quoted (630-1) from the judgment of Toohey and Gaudron JJ in Peters v The Queen (1998) 192 CLR 493, 503:
"Ordinarily ... fraud involves the intentional creation of a situation in which one person deprives another of money or property or puts the money or property of that other person at risk or prejudicially affects that person in relation to 'some lawful right, interest, opportunity or advantage' knowing that he or she has no right to deprive that person of that money or property or to prejudice his or her interests".
7 The joint judgment in Spies quoted (631) from the judgment of McHugh J in Peters (ibid 529):
"In most cases of conspiracy to defraud, to prove dishonest means the Crown will have to establish that the defendants intended to prejudice another person's rights or interest or performance of public duty by:
. making or taking advantage of representations or promises which they knew were false or would not be carried out;
. concealing facts which they had a duty to disclose; or
. engaging in conduct which they had no right to engage in".
8 In Wellham v DPP [1961] AC 103, 123 Lord Radcliffe said of defrauding in a passage quoted in the joint judgment in Spies at 633-4:
"It requires a person as its object: that is, defrauding involves doing something to someone. Although in the nature of things it is almost invariably associated with the obtaining of an advantage for the person who commits the fraud, it is the effect upon the person who is the object of the fraud that ultimately determines its meaning". (emphasis supplied)
9 The joint judgment in Spies concluded, relevantly, (635):
"... when there is a charge of defrauding, ... what is required is an actual obtaining of property or of depriving the person defrauded of something which is regarded as belonging to him or her ...The appellant had no relevant dealings with the creditors and obtained no property of any creditor. Nor did he alter their legal rights. It is not enough to constitute 'defrauding' that an accused has acted dishonestly or that his or her dishonest conduct has had an effect on creditors".
10 Spies therefore makes it quite clear that "dishonest means" are an essential element of an offence of defrauding, and that such means must "deprive the person defrauded" of some property, right, interest or advantage.
11 McHugh J in the passage from Peters, quoted in the joint judgment in Spies [par 7], lists examples of dishonest means all of which involve active steps on the part of the fraudster to prejudice the victim. These included making or taking advantage of false representations or dishonest promises, engaging in conduct which the fraudster had no right to engage in, or concealing facts which he or she had a duty to disclose. It might appear that a mere omission could constitute conduct of the latter kind but further consideration demonstrates that this is not the case.
12 In Peters the conspiracy to defraud the Commonwealth involved sham transactions for the purpose of disguising assessable income of one of the conspirators. The fraud became complete when that conspirator failed to report the income in his tax return. This omission in a return which should have disclosed all the taxpayer's assessable income involved concealment and its half truths were fraudulent misrepresentations. Spencer Bower, Turner and Handley "Actionable Misrepresentation" 2000, pp 45-9. See also R v Kylsant [1932] 1 KB 442 where omissions made a prospectus false and misleading although it contained no positive untruth. In Peters the conspirators intended the Commissioner to act on the return when issuing his assessment and he did so.
13 In Adams v The Queen [1995] 1 WLR 52, referred to by McHugh J in Peters [ibid 530], the Privy Council upheld convictions of company directors for conspiracy to defraud where they had concealed their interest in assets purchased by the company and the secret profits they earned as a result. Lord Jauncey said at 65:
"Since a company is entitled to recover from directors secret profits made by them at the company's expense ... any dishonest agreement by directors to impede a company in the exercise of its right of recovery would constitute a conspiracy to defraud. In their Lordships' view a person can be guilty of fraud when he dishonestly conceals information from another which he was under a duty to disclose to that other or which that other was entitled to require him to disclose".
14 In the present case, for reasons given later, there was, in my opinion, no evidence that the companies made any false or misleading statements to the Commissioner, or concealed their failures to pay, or that the Commissioner was deceived. The charges in the indictment were based on the bare fact of non payment (as a matter of law in breach of statutory duty) by Dromore Fresh Produce Pty Ltd (Dromore) of $556,027 between April 1994 and December 1999 and by Iannelli Freight Pty Ltd (Freight) of $61,301 between July 1993 and December 1999.
15 Dromore made a number of payments of group tax between 1993 and 1995, and none thereafter. The trial was conducted on the basis that Freight made no payments but Ex U, which details its liability for group tax, shows no debts for July and August 1994. This matter was not explored. The companies had no overdraft facilities (145) but from time to time each had enough funds in its bank account to pay its current group tax and part of the arrears, but the funds were used to pay other creditors. There was no evidence that the recipients were not genuine creditors whose debts were payable. The payment of a genuine creditor is not a fraud on other creditors who are not paid although it may be a voidable preference if an insolvent administration should supervene.
16 Lord Mansfield developed the principle that where a debtor paid a creditor on the eve of his bankruptcy with the intention of preferring that creditor over others the transaction was void as a fraud on the bankruptcy laws. Alderson v Temple (1768) 4 Burr 2235, 2240 [98 ER 165, 168]; Thompson v Freeman (1786) 1 T.R. 155, 157 [99 ER 1026, 1028].
17 Australian insolvency laws have for a long time provided for the avoidance of de facto preferences not just fraudulent preferences.
18 A fraudulent preference must be a voluntary act of the debtor and payments to creditors under legal or commercial necessity are not voluntary for this purpose. Sharpe v Jackson [1899] AC 419, 422-5. There is no evidence that any of the payments to other creditors were voluntary in this sense and as such fraudulent preferences. Thus the use of available funds to pay other creditors did not constitute dishonest means for present purposes even if a fraudulent preference was capable of satisfying this requirement.
19 The appellant may have caused the companies to continue trading after they became insolvent but that also cannot be dishonest means for present purposes and the Crown case was not conducted on that basis. In Hardie v Hanson (1960) 105 CLR 451 the High Court reversed a judgment of the Supreme Court of Western Australia that a director had carried on a company's business with intent to defraud its creditors. The High Court held that the fact that a company continues to trade, to obtain goods on credit, and to incur other liabilities without any reasonable prospect of being able to pay for them does not, of itself, show that the directors carried on the business with intent to defraud creditors. The intent to defraud must be real and a constructive, imputed or implied intent was not sufficient.
20 These convictions therefore depend essentially on omissions. Criminal liability for mere omissions in Anglo-Australian law is exceptional unless it has been expressly imposed by statute. Glanville Williams "Criminal Law - The General Part" (1961) states at pp 3-5:
"In some instances a omission will create criminal responsibility without any positive act ... In law, as in morals, the concept of culpable omission presupposes a duty to act; and a rule penalising an omission must state to whom this duty belongs ... the criminal law does not impose a duty upon someone to act to prevent a consequence whenever it imposes a duty not to bring about the consequence. The law relating to omissions is not co-extensive with the law relating to acts. It is partly coincident in manslaughter and murder, but here the event of death leads the law to look upon the omission with special severity. Most crimes, particularly those at common law, are defined to need a positive act ...".
21 "Halsbury's Laws of England" 4th ed Criminal Law vol 11 p 15 is to the same effect:
"As a rule the criminal law imposes no obligation on persons to act so as to prevent the occurrence of harm or wrongdoing. There is no general duty to prevent the commission of crime; nor does a person commit a crime or become a party to it solely because he might reasonably have prevented its commission. Omission to act in a particular way will give rise to criminal liability only when a duty so to act arises at common law or is imposed by statute. Such a duty is exceptional and the criminal law does not ordinarily require a man to be his brother's keeper".
22 Criminal responsibility for omissions can occur where the accused has, or has accepted, the duty of looking after another, such as an infant, or an invalid, who is not able to look after himself or herself and that person dies or suffers injury through neglect of that duty. Compare Glazebrook "Criminal Omissions : The Duty Requirement in Offences Against the Person" (1960) 76 LQR 386 and Ashworth "The Scope of Criminal Liability for Omissions" (1989) 105 LQR 424.
23 In my judgment a bare omission cannot constitute "dishonest means" for the purposes of the crime of defrauding another. Criminal responsibility in such cases depends on proof of the use of active steps to "achieve his or her object" [par 6] of defrauding the victim.
24 Simpson J has concluded that there was evidence that the appellant intended to use dishonest means to prejudice the Commonwealth's economic interests which would entitle a jury to convict and would therefore order a new trial. With respect I am unable to agree.
25 The group certificates issued to employees of the companies at the end of the relevant fiscal years set out the wages paid and the tax deducted in accordance with ss 222F(5), Exs (5A), (5B) and (5D). The companies were obliged by s 221F (5) (f) no later than 14 August each year to furnish to the Commissioner copies of the group certificates and a statement reconciling the total deductions on the group certificates with the amounts paid to the Commissioner.
26 Dromore was incorporated in 1992, probably as a shelf company, and the appellant became a director in September 1993. On 22 September 1993 it applied for registration as a group employer (374) which was granted with effect from 1 September. The company remitted group tax until April 1994 (ex F) and payments for the 1994 fiscal year totalled some $47,000 (50). No payments were then made until November but after that were made until May 1995. No further payments were made until the Tax Department investigation commenced.
27 Mr Lane, the tax investigator who audited these companies, said that Dromore sent copies of its group certificates to the Tax Office (16). He did not say that the company failed to submit reconciliations as required by s 221 F (5) (f) (ii). The appellant was asked about the reconciliations in her interview but it was not suggested to her that they had not been lodged.
28 Mr Lane believed that Freight was not registered as a group employer and was thus bound until 1995 to pay its group tax by purchasing tax stamps (45). The law was changed in 1995 to oblige non group employers to periodically remit group tax to the Commissioner direct (45). Freight was in fact registered as a group employer as from 1 October 1991 (73, 82, 134, Exs 1 and 2) although it had no employees until 1993 (85, 135, 464).
29 Mr Lane had been unable to discover this registration in the Department's records (73) and had also been unable to discover any group certificates or reconciliations from Freight (46). However he agreed in cross-examination that if the registration of Freight as a group employer was genuine its group certificates "are with the ATO somewhere" (73). Moreover Ex W shows that the appellant's personal return for the 1994 year was accompanied by a group certificate from Freight showing a credit for $12,766 tax deducted by that company. The company could only have obtained that group certificate from documents supplied to it by the Commissioner on the basis that it was a group employer.
30 The accused said she had sent in "her" paperwork and group certificates to the Department (194). This was correct in the case of Dromore, as Mr Lane accepted (32). On the above evidence the jury could not have been satisfied beyond reasonable doubt that it was not also true in the case of Freight.
31 The reconciliations and copy group certificates sent by Dromore to the Department should have revealed its true position with respect to unpaid group tax. Copies of those reconciliations and group certificates were obtained by the Department from Dromore pursuant to notices under s 264 of the Income Tax Assessment Act and following their return to the company, when search warrants were executed by the Federal Police. They are not in evidence. There was no evidence that they contained any misrepresentation or fraudulent concealment, or that the Department was induced by them to act, or refrain from acting, to its financial prejudice.
32 Copies of the reconciliations retained by Freight were available to the Commissioner prior to the trial as a result of their seizure by the Federal Police. They were not in evidence. There was no evidence that they contained any misrepresentation or fraudulent concealment, or that the Department was induced by them to act, or refrain from acting, to its financial prejudice.
33 Section 221H (1) requires employees to forward their group certificates to the Commissioner with their return. Under sub s (2) the employee is entitled to credit against his or her tax for the amount of the group tax shown in any group certificate whether or not the employer has paid the group tax to the Commissioner. The risk of non payment falls wholly on the Commissioner.
34 The Crown proved that the appellant lodged her personal income tax returns for the relevant years, together with group certificates issued by Dromore and Freight for the group tax those companies had deducted. The credits claimed in group certificates attached to her returns were shown on Ex W (469). The appellant was lawfully entitled to those credits although the companies had not remitted, or fully remitted, the group tax.
35 An employee who annexes group certificates to his or her return makes no representation that the employer has paid the group tax to the Commissioner. The only representation is that the tax has been deducted. A representation must be found, if at all, in what is communicated to the representee. The representor's knowledge, as such, is not part of the representation. Thus if other employees made no representation in their returns that the companies had paid the group tax, neither did the appellant. All the returns would relevantly have been in the same form.
36 Although the appellant's tax returns were not exercises in good citizenship they contained no relevant fraudulent misrepresentation or non disclosure and the Crown did not establish that they deprived the Commonwealth of the group tax or put its right to that tax at risk. See Wai-Yu Tsang v The Queen [1992] 1 AC 269, Peters v The Queen (1998) 192 CLR 493, 525. There was no evidence on which the jury could have found that the Department was induced by them to act or refrain from acting to its financial prejudice in relation to group tax or that there was any other causal nexus. They did not constitute fraudulent means for present purposes.
37 The principal offences were charged as having been committed by the companies, not by the appellant who was charged as an accessory. Therefore any fraudulent means used to defraud the Commissioner had to be means used by the companies, their servants and agents. The appellant did not act on behalf of the companies when she lodged her personal tax returns, and in any event they could not constitute fraudulent means used by the companies.
38 The Crown proved that the companies claimed tax deductions in their returns for the gross earnings of their employees although the group tax component had not been paid or paid in full to the Commissioner. The companies' returns were correct because each had incurred an immediate obligation to pay the unremitted group tax to the Commissioner, and was entitled under s 51 of the Income Tax Assessment Act then in force to those deductions although the group tax had not been paid or paid in full. See generally Coles Myer Finance Ltd v Federal Commissioner of Taxation (1993) 176 CLR 640, 661-3 per Mason CJ, Brennan, Dawson, Toohey and Gaudron JJ.
39 Thus the companies' returns contained no fraudulent misrepresentation or non disclosure and in any event the Crown did not establish that they deprived the Commonwealth of the group tax or put its right to that tax at risk. There was no evidence that the Department was induced by these returns to act or refrain from acting to its financial prejudice in respect of the unremitted group tax or that there was any other relevant causal nexus. The company returns could not constitute dishonest means for present purposes.
40 In R v Walters [2002] NSW CCA 291 this Court upheld convictions of the appellant for being knowingly concerned in offences by ten companies between January 1989 and May 1998 in defrauding the Commonwealth of group tax amounting to some $7.3 million. The Crown case was that the income of the companies had been used to pay the personal expenses of the accused in maintaining an extravagant lifestyle. The figures for such personal expenditure varied between 69% and 100% of the income of the first nine companies and the figure for the tenth was 46%. The appellant had in this way stripped the companies of available funds in the knowledge and with the intent of depriving the Commonwealth of the tax.
41 Although the Crown case at this trial was not conducted on that basis there was evidence that the appellant or another company she controlled had acquired substantial assets during the period covered by the charges. Cantrala Pty Limited purchased the Dromore property from K E Finance which had lent money to the appellant and her husband in 1987 to enable them to purchase the property (131). The husband went bankrupt in 1991 and the appellant arranged to lease the Dromore property from the finance company at a yearly rent of $240,000 (131).
42 Cantrala Pty Limited purchased the Dromore property in 1995 borrowing $2 million for the purpose at 11% interest (142). Although the annual interest bill was $220,000 this was still less than the rent of $240,000 that "they" had previously been paying (136). The company later purchased some adjacent land (169) but there was no evidence of the price paid or the source of funds used for the purchase.
43 The appellant agreed in cross-examination that "she" had paid more than $500,000 in interest between 1995 and 1998 on the mortgage over the Dromore property. She also agreed that the unremitted group tax for these companies during that period was about $500,000 and that Dromore supplied the labour to work the property (170).
44 The appellant also agreed in cross-examination that she purchased a house in Chapman, Canberra, from her brother-in-law in 1995 for about $443,000. The property, which had formerly been her matrimonial home, was leased to the High Commissioner for Cyprus for a term of 5 years and the rent was used to pay off the mortgage of $360,000 (181-3). She funded the difference from her own resources but had no "deposits of cash" available to her and said that she thought the house was funded right to the maximum and she did not have to put much in there at all (183-4).
45 The bank statements of the two companies for the relevant periods were in evidence (Exs N and BB). Dromore's cheque butts were produced to the Tax Department (24) and the cheque butts of both companies were seized by the Federal Police under search warrants (44).
46 The Crown made no attempt to establish that the funds used to make up the difference between the mortgage on the Chapman property and the purchase price, or to make the rent and interest payments on the Dromore property, came from these companies. In particular there was no evidence that these payments came from the companies' bank accounts. If the rent and interest cheques for the Dromore property were paid from these accounts one would have expected the Crown to prove this.
47 There was no evidence of the actual purchase price for the Dromore property and thus no evidence of the amount (if any) which the purchaser then had to fund from its own resources and if so how and where the company obtained the necessary funds. There was also no evidence of the sources of funds available to the purchaser to make the interest payments under the mortgage and these matters were not explored with the appellant in her interview or in cross-examination.
48 The Crown's opening and closing addresses to the jury were not recorded, but the nature of the Crown case appears sufficiently from the summing-up. The Judge said (280-1):
"... the Crown says that you will find that the accused did deprive the Commonwealth of money, or at least put its money at risk ... because she chose not to remit the group tax but rather used those monies to meet her own business expenses ... a person can be deprived of something by that thing being withheld even though the deprivation is not permanent ... by not remitting this tax for month after month and instead continuing trading, that created the risk that at any time the companies could fail financially with the result that the Commonwealth's tax to which it was entitled would have been lost".
He continued (281):
"Let me come to the second part ... this adoption of dishonest means to ... arrive at that result. This part ... is concerned with what the accused's intention was ... The Crown must prove that the accused acted, knowing she had no right to deprive the Commonwealth of the tax it was entitled to or to prejudice its interest therefore the Crown can prove this element of dishonesty if it can show that the accused intended to prejudice the rights of the Commissioner of Taxation".
49 The Judge did not properly direct the jury on the onus borne by the Crown of establishing that the accused had used dishonest means to defraud the Commonwealth of the group tax and that the mere failure to pay the tax coupled with payments to other creditors could not constitute the use of dishonest means for this purpose.
50 Almost at the very end of his summing-up the Judge referred, as it were in passing, to "the Crown's proposition that what Mrs Iannelli was doing was using this money to, in effect, build up her assets". For the reasons already given there was no evidence that "this money" had been used to build up the assets of the accused. His Honour did not identify "this" money, but if he intended to refer to the credit balances in the companies' bank accounts shown in Exs C and DD (470-475), there was no evidence that those funds had been used to build up the appellant's assets. The Crown had not conducted its case on the basis that those funds had been used by the appellant for her own purposes and there is no other reference in the 39 page summing-up to a Crown case of that kind. Indeed earlier at 301 the Judge had said in relation to Freight:
"The Crown said that from July 1995 to June 1998 ... there were no remittances at all and that the company, and of course, Mrs Iannelli, had embarked upon a course by which the tax was not paid and the monies retained instead for company purposes".
51 A Crown case along the lines of the submission referred to was not within the charges in the indictment which simply alleged defrauding by failure to pay. By way of comparison the charges in Walters [par 40] alleged that the companies had defrauded the Commonwealth of the group tax without particularising the dishonest means that were used.
52 I conclude therefore that there was no evidence that the companies had used dishonest means to deprive the Commonwealth of the group tax, or to put its rights to that tax at risk, and that their failure to pay the tax cannot constitute dishonest means for this purpose.
53 A disturbing feature of the present case, which has been present in other recent cases in this Court and the Court of Appeal, has been the laxness of the Taxation Department during the relevant years in monitoring payments of group tax by employers and its failure to take prompt action when default occurred. The defaults by Dromore in this case could have been detected as soon as it failed to make a monthly payment on the due date. The defaults could also have been detected from documents lodged by it and by its employees after the end of the fiscal year. These matters were also a feature in the civil cases of DCT v George [2002] NSW CA 336 (September 1998-February 2000), DCT v Saunig [2002] NSW CA 390 (November 1996-March 1998) and in R v Walters [2002] NSW CCA 291 (January 1989-May 1998 involving ten different companies controlled by the accused). As Gzell J said in DCT v George, in a judgment concurred in by Giles JA and myself [par 33]:
"It is incumbent upon the Commissioner to exercise his powers under Division 9 expeditiously for otherwise their exercise after the escalation of debts can have draconian consequences. An early sign of problems in a company is its living on the false reserves of non remitted PAYG withholdings. The Commissioner is in the position that he will have notice of a failure to remit. He should act then, when PAYG withholdings are relatively low and the directors' liabilities are correspondingly so".
54 I would allow the appeal and make the orders proposed by Bell J.