Snell v Deputy Commissioner of Taxation

GLEESON JA: I agree with Brereton JA.

BRERETON JA: The appellant Mr Snell appeals to this Court from a judgment of the District Court in favour of the respondent Deputy Commissioner of Taxation (“the Commissioner”) for $33,811.76, plus interest and costs, being penalties in respect of unpaid tax liabilities of The CAT CLUB Pty Ltd (“the Company”), which is now in liquidation, for which he was held liable as a director pursuant to s 269-20 of Sch 1 of the (CTH) Taxation Administration Act 1953 (“TAA”). [1] The relevant tax liabilities of the Company comprised unremitted Pay As You Go Withholding (“PAYGW”) amounts in respect of the months June 2013 to February 2014 (except July 2013), and Superannuation Guarantee Charge (“SGC”) amounts for the quarters ending June 2012 to September 2013 (other than the quarter ending March 2013). Despite the amount of the judgment, leave to appeal is not required because, as recorded by the District Court judge, the proceedings were conducted on the basis that if Mr Snell succeeded, not only would the amount claimed by the Commissioner not be payable, but also an amount of about $182,000 which had been applied by the Commissioner, from credits arising from Mr Snell's income tax assessments, against the sum of $216,447.12 which had been sued for by the Commissioner, would be repayable to Mr Snell. [2]

In about August 2001, the Company – of which the then directors were Mr Ireland and Mr Dutton – commenced a restaurant business in Richmond, Melbourne. Mr Snell, a Queanbeyan resident who was engaged, through a number of corporate entities, in a defence procurement business based in Canberra, had met Mr Ireland in the 1990s. Commencing from 1996, Mr Snell and Mr Ireland established and conducted some joint business enterprises. Mr Snell agreed to join Mr Ireland in the restaurant business, and for that purpose acquired a 50% shareholding in the Company, and became a director, on 5 April 2002. Mr Dutton ceased to be a director on 9 December 2003, and thenceforth Mr Ireland and Mr Snell were the Company’s only directors and shareholders.

As between him and Mr Snell, Mr Ireland, who resided in Melbourne, and had had some experience in operating a restaurant, was solely responsible for the day-to-day management and operation of the restaurant business. Nonetheless, at least until 2012, Mr Snell actively participated in the management of the Company: he travelled regularly to Melbourne to meet Mr Ireland and be briefed on the financial performance of the restaurant; he received and reviewed financial statements provided to him by the Company’s accountants; and he signed solvency resolutions for the years from 2004 to 2012. It appears that from 2012 onwards, Mr Snell’s relationship with Mr Ireland deteriorated, and during that period Mr Snell was affected by ill-health. It was Mr Snell’s case that from 2012 until the Company went into liquidation on 6 October 2015, he was “excluded” from the management of the Company. As will appear, however, His Honour was not satisfied that Mr Snell no longer participated in management of the Company.

The Company lodged business activity statements for the months from June 2013 to February 2014, by which it notified the Commissioner that it had withheld money from employees’ remuneration in respect of PAYGW obligations, which it was obliged to remit to the Commissioner, on the “due day”, as summarised in the following table: [3]

The Company did not, however, remit the amounts withheld, by the relevant due day or at all.

Between 19 June 2013 and 16 April 2014, the Commissioner issued the Company with default assessments of SGC in respect of the quarters ending June 2012 to September 2013, [4] and the Company was obliged to pay the assessed amounts to the Commissioner, on the “due day”, as summarised in the following table:

The Company did not comply with its obligations to pay the assessed SGC, by the relevant due day or at all.

On 28 April 2014, the Commissioner gave Mr Snell a director penalty notice (“DPN”) under TAA s 269-25 in respect of the unpaid SGC amounts for those six quarters. The DPN corresponds with the default assessments. On 12 August 2014, the Commissioner gave Mr Snell two further DPNs under s 269-25, in respect of the unpaid PAYGW amounts.

The Commissioner issued notices of amended assessment for SGC on 30 July 2014 [6] and on 25 August 2014. [7] The amended assessments were as follows:

The proceedings were commenced by statement of claim filed on 2 May 2017, by which the Commissioner originally sought to recover from Mr Snell director penalties in the amount of $201,738.48, of which $86,754 was in respect of unremitted PAYGW amounts and $114,984.14 was in respect of unpaid SGC amounts. Insofar as it concerns SGC, the original statement of claim reflected the original default assessments and the DPN.

On 22 January 2018, the statement of claim was amended to claim the sum of $216,447.12. As in the original pleading, $86,754 was claimed in respect of unremitted PAYGW amounts; but $129,693.12 was now claimed in respect of unpaid SGC amounts. In respect of SGC, the amended statement of claim thus reflected the amended assessments, and differed to that extent from the DPN. The amended statement of claim omitted any claim in respect of the quarter 1 January 2013 to 31 March 2013, for which there was no amended assessment.

By a further amended statement of claim filed on 16 October 2018, the amount of the claim was reduced to $33,811.76. The components of the claim were unchanged, but the net amount claimed was reduced by the credit allowed in respect of refunds to which Mr Snell was entitled as a result of assessments of his income tax for the financial year ended 30 June 2016.

The Commissioner’s case was that, by reason of the Company failing to remit the PAYGW and SGC amounts, Mr Snell, who was one of its directors as at each of the relevant due days, became liable to a penalty equal to the amount that the Company had failed to remit, by operation of s 269-20 of Sch 1 of the TAA. Mr Snell propounded two defences: the first was that the proceedings were not validly commenced, essentially because the DPN in respect of the unpaid SGC amounts was said not to accord with what the Commissioner thought the Company’s unpaid liability was when proceedings were commenced, and thus was not an effective statutory notice before action under s 269-25 for the purpose of the proceedings; and the second was that for the purposes of s 269-35, because of illness or some other good reason, he did not at any relevant time take part in the management of the Company and it would have been unreasonable to expect him to do so. In a judgment delivered on 2 May 2019, Weber SC DCJ rejected Mr Snell’s defences and gave judgment for the Commissioner. [8]

In this appeal, the main issues are:

Under TAA, Sch 1, Divs 12 and 16, an entity is required to withhold an amount from payments made to employees or office holders and to remit those payments to the Commissioner, in accordance with TAA, Sch 1, s 16-70(1). Under (CTH) Superannuation Guarantee (Administration) Act 1992 (“SGAA”), an employer is required to pay an amount of SGC each quarter.

TAA, Sch 1, s 269-15, imposes an obligation on a director of a company to cause a company to comply with its PAYGW and SGC obligations. Section 269-15(1) provides that the directors of a company from time to time, on or after the initial day on which the obligation arises, must cause the company to comply with its obligations. Section 269-15(2) provides that, if s 269-15(1) is not complied with on or before the due day, the directors of the company from time to time after the due day, continue to be under their obligation, until the company complies with its obligation, or an administrator is appointed to the company, or the company begins to be wound up.

TAA, Sch 1, s 269-20 provides that a director is liable to pay a penalty if the obligations of that director pursuant to s 269-15 are not complied with by the due day, the amount of the penalty being equal to the amount of PAYGW and/or SGC that the company has failed to remit. [9] However, by s 269-25, before commencing proceedings against a director to recover a penalty, the Commissioner must give at least 21 days’ notice (colloquially referred to as a director penalty notice) to the director. [10] By s 269-30, the penalty is remitted if, within that 21-day period, the director complies with the DPN by taking action to ensure that the company’s liability has been discharged; or an administrator is appointed to the company; or the company begins to be wound up.

Section 269-35 provides a number of defences for directors. [11]

As was explained by the High Court in Deputy Commissioner of Taxation v Woodhams, [12] the purpose of these provisions is to protect the revenue, by making directors of non-remitting corporate employers liable to penalties equivalent to the amounts which the corporation fails to remit.

The issue is whether the Commissioner was entitled to commence and maintain the proceedings to claim the amount ultimately claimed, when the only relevant DPN given was that of 28 April 2014. [13]

Liability for a penalty is created by s 269-20, which is as follows:

The requirement for a DPN is imposed by s 269-25, which is as follows:

The appellant submitted that the proceedings were invalid, by reason that notice as required by s 269-30(1) had not been given. The appellant did not dispute the validity of the 28 April 2014 notice, but argued that it did not authorise the proceedings that were instituted, because while it accurately stated what the Commissioner thought was the relevant liability when it was given, the Commissioner’s “thinking” had changed before the proceedings were commenced – with the consequence that a new notice would be required before proceedings could be commenced.

The facts essential to an understanding of this argument are:

For Mr Snell it was submitted that:

The primary judge rejected this argument. His Honour said:

The relevant grounds of appeal were to the effect that the primary judge: [16]

The appellant also submitted that there was not a “reasonable proximity between the giving of the notice and the commencement of proceedings”, and that “what the Commissioner thinks at the time he or she commences proceedings is the unpaid amount of the company’s liability is what must be notified to a director”.

The essential question is whether s 269-25 has the effect that if what the Commissioner thinks is the unpaid amount of the company’s liability (and thus the amount of the director’s penalty) changes after a DPN is given, then the Commissioner is precluded from commencing proceedings for recovery of the penalty from the director unless a further DPN, specifying what the Commissioner now thinks is the amount of that liability at the time of commencing proceedings, is first given.

Although giving a DPN is not an element of liability, it is a precondition to commencing proceedings against a director to recover the penalty. [17] Being a notice before action, strict compliance with its requirements is required. [18] Nonetheless, while absence of a notice is a bar to proceedings, the giving of notice is not a material fact in the cause of action: all the requisite elements of director’s liability to pay a penalty are stated in s 269-20(1), which creates the liability, and they do not include the giving of a DPN. The DPN merely lifts the prohibition on commencing proceedings.

The requirements of a DPN, as prescribed by s 269-25(2), are that it (a) set out what the Commissioner thinks is the unpaid amount of the company’s liability; and (b) state that the director is liable to pay to the Commissioner, by way of penalty, an amount equal to that unpaid amount; and (c) explain the main circumstances in which the penalty will be remitted.

By s 269-20(5), the amount of the penalty recoverable is equal to “the unpaid amount of the company’s liability under its obligation”. Under s 269-25(2), the DPN is not required to state the amount of penalty with objective accuracy, but to state what the Commissioner “thinks” is the amount. Use of the word “thinks” allows that the Commissioner may not, and may not be in a position to, know with certainty, the amount of that liability; for example, what the Commissioner “thinks” for the purposes of s 269-25(2) may be based on incomplete information. Because s 269-25 applies to liabilities that are not assessment-based (such as remittal of PAYGW deductions) as well as to liabilities that are assessment-based, what the Commissioner “thinks” cannot depend upon there being an assessment, or the amount of an assessment.

In requiring that the notice set out what the Commissioner thinks is the unpaid amount of the company’s liability, the provision speaks in the present tense; on its face, that must be what the Commissioner thinks is that amount when the notice is given. One reason for that is that, although the penalty is always equivalent to the company’s unpaid liability, it may change – due to payment, in part or in whole, or due to the accrual of interest. And what the Commissioner thinks is the amount of that liability may also change from time to time, due, for example, to receipt of new information. A further reason is that proceedings are necessarily instituted some time (at the least, 21 days) after a notice is given, and the unpaid amount of the liability – and/or the Commissioner’s understanding of it – may change in the interim, by reason of part payment, or the accrual of interest, or the receipt of further information. The Commissioner cannot know, in advance, what he or she will think is the amount of the liability at a later time.

The notice serves two purposes: the first is to inform the recipient of the unpaid amount of the company's liability, as understood by the Commissioner at the date of the DPN; and the second is to inform the recipient of the courses open to result in remission of the penalty, with the object of encouraging the recipient to cause one of those courses to be adopted. [19] In Deputy Federal Commissioner of Taxation v McArdle, Davies JA (with whom Williams and Jerrard JJA agreed) said (emphasis added): [20]

The appellant submitted that a DPN has a third purpose, said to be of more significance than either of the others, namely to warn a director that the Commissioner may commence proceedings to recover a penalty, and that the quantum of the unpaid amount is crucial to that purpose. The authorities referred to above do not support that submission, as they identify only the two purposes mentioned. Moreover, the only purpose of warning a recipient of the prospect of proceedings is to afford the recipient an opportunity to avoid them; and the only way in which they could be avoided is by taking one of the available steps, namely by taking action within the 21-day period to ensure that the company’s liability has been discharged; or an administrator is appointed to the company; or the company begins to be wound up. Notably, the notice does not require the director to pay the penalty. I do not accept that it is a purpose of the notice requirement to enable a director to make a fully informed tactical choice as to whether or not to take any and if so what action, or to inform the director of the actual amount of the penalty: it informs the director of his or her exposure to the penalty, and what the Commissioner at that time thinks is its amount, so as to encourage the director to take one of the courses of action that will result in its remission.

Section 269-25(2)(a), in referring to “the unpaid amount of the company’s liability under its obligation”, describes the identical concept as is referred to in s 269-20(5). The reference in s 269-25(2)(b) to “that unpaid amount” refers back to s 269-25(2)(a), namely to “the unpaid amount of the company’s liability under its obligation”; it does not refer to the amount stated in the notice as what the Commissioner thinks that amount to be: use of the phrase “that unpaid amount”, rather than “that amount” or “the amount set out” favours that view. Accordingly, the effect of the notice is to inform the director that the director is liable to pay to the Commissioner, by way of penalty, an amount equal to the unpaid amount of the company’s liability under its obligation, which the Commissioner thinks is the stated amount; not that the director is liable to pay the stated amount.

Thus a DPN is required to state what the Commissioner thinks is the unpaid amount of the company’s liability, as at the date of the notice. Neither the plain words of s 269-25, nor its context, nor the authorities that have considered its predecessors, nor the purpose of the notice, suggest that it must state the amount thought to be the unpaid liability as at the date of commencement of proceedings. It is the Commissioner’s thinking at the date of the notice – not at the subsequent commencement of proceedings – that informs the content, and determines the validity, of the DPN.

However, the actual amount of the penalty recoverable is not dependent on nor controlled by what the Commissioner “thinks” it is at the time when the DPN is given. Regardless of what is stated in the notice, by s 269-20(5), the amount of the penalty recoverable is equal to the company’s unpaid liability, whatever the Commissioner “thinks” it is; the true amount of the liability is for the Court to determine (subject to any conclusive evidence provisions).

The notice, once the 21-day period after it has been given has expired, lifts the bar on commencing proceedings to recover the penalty for which the director became liable on the “due day” to which the notice relates. [21] The appellant submitted that it ought to be implied that proceedings had to be commenced within a reasonable time after notice was given. However, the legislation imposes no time limit for commencing proceedings after the notice is given. The only temporal requirement, which is to be found in s 269-25(1), is that proceedings must not be commenced until the end of 21 days after the Commissioner gives the notice. Once a valid notice is given and expired, the bar is lifted, and short of a statute of limitation, there is no reason to imply a requirement to commence proceedings within any particular time after the 21-day period has expired.

Accordingly, after the 21-day period of the notice has expired, the bar on commencement of proceedings to recover the penalty for the period to which the notice relates is lifted. Once the bar is lifted, it does not matter if, before or after commencing proceedings, the unpaid amount of the company’s liability – or what the Commissioner thinks it is – changes. There is no requirement that proceedings be commenced within any specific, or a reasonable, time after the notice is given.

The appellant rightly accepted that the April 2014 DPN was valid when given, because it stated what the Commissioner thought was the company’s unpaid liability when it was given. The primary judge was correct in rejecting Mr Snell’s contention that the proceedings were invalid.

The ultimate issue is whether, because of illness or for some other good reason, it would have been unreasonable to expect Mr Snell to take part, and he did not take part, in the management of the company at any of the relevant times. This is one of the defences afforded by s 269-35, which is as follows:

Before the primary judge, Mr Snell contended that:

The primary judge rejected these arguments. His Honour found that Mr Snell continued to take part in management of the Company:

Although that was sufficient for the defences to fail, his Honour nonetheless considered whether it would have been unreasonable to expect Mr Snell to take part in the management of the Company at any relevant time because of illness or some other good reason. As to illness, his Honour said:

As to “some other good reason”, his Honour concluded:

The notion of taking part in the management of a company generally comprehends management activity by a person, such as a director, having a decision-making role in the company as a whole. In this context, “management” means the type of managerial role that a director performs; it does not necessarily involve the day-to-day supervision of the business. It is through participation in management that a director is able to ensure that a company meets its obligations. [22]

The defence provided by s 269-35(1) requires that the director did not participate in management of the company at the relevant time because of illness or some other good reason on account of which it was unreasonable to expect the director to participate in management. Although it is sometimes not unhelpful to break down the situation described by s 269-35(1) into its various component phrases, this should not detract from consideration of the provision as a whole. As a whole, the provision contemplates the circumstance that the director does not, and could not reasonably have been expected to, participate in management, because of illness or some other good reason. Essentially, this envisages a situation in which, though nominally remaining in office as a director, the relevant director does not participate in management because of illness or another good reason. In short, it involves justifiable non-participation in management, against the backdrop that it is the obligation of a director to participate in management of the company, and a director is not entitled to choose not to participate. [23] It is unsurprising that, against that backdrop, the defence is not easily established. [24] The defence means that a director who justifiably does not participate in management is not responsible for the Company’s default. Broadly it has two components: first, that the director does not participate in management at any relevant time, and secondly, that it would have been unreasonable to expect him to do so either because of illness or for some other good reason. Thus if, despite even serious illness, the director continues to participate in management, the defence is not available.

The primary judge said:

The appellant contended that the primary judged erred in:

Although the appellant submitted that his Honour found that the relevant period was “30 June 2012 but ongoing” in conformity with what was said in the judgment at [67], the reference to “plaintiff” in [68] was a slip, and was intended to be to “defendant”, and his Honour was adopting the position most favourable to the defendant, in circumstances where all agreed that it made no difference. That is supported by the conventional approach of assuming the position most favourable to a party against whom a point is decided, and by the authority referred to by His Honour, Canty v Deputy Commissioner of Taxation “(Canty)”, [25] in which Handley JA, with whom Beazley and Santow JJA agreed, said, in respect of an equivalent section, [26] that the obligation of a director was a continuing one that applies throughout the period commencing on the breach of the director’s obligation on the due day and continuing until the expiry of the DPN, with the consequence that the defence must cover the whole of that period. [27] It is not to be supposed that his Honour intended to assume the position most adverse to Mr Snell, and to depart from Canty. But in any event, as was common ground before his Honour, it made no difference, as will appear below.

Section 269-35(1) refers to the period when (a) the director was a director of the company; and (b) the directors were under the relevant obligations under s 269‑15(1). It is true, as is emphasised for Mr Snell, that s 269-15(1) provides that the directors of the company from time to time, on or after the initial day, must cause the company to comply with its obligations to pay amounts of PAYGW and SGC owing by the company. The “initial day” in the case of PAYGW amounts is the date on which the amount is withheld, and in the case of SGC amounts is the last day of the relevant quarter; whereas the “due day” (upon the expiration of which the penalty arises if the company has not paid the amount due) is, in the case of PAYGW amounts, generally 21 days after the end of the month in which the withholding is made, and in the case of SGC amounts, generally the 28th day of the second month following the end of the relevant quarter. As has been observed, each period having a “due day” for a tax-related liability gives rise to a separate liability and, if unpaid, a separate penalty, which becomes due and payable at the end of the due day for the period to which it relates. [28]

If that was all there was to s 269-15(1), then there might be some force in the submission made on behalf of Mr Snell to the effect that s 269-15(2) provides that the period during which “the directors were under the relevant obligations under subsection 269‑15(1)” referred to in s 269-35(1)(b) is the period from the initial day to the due date. However, while the phrase “on or after the initial day” in s 269-15(1) describes the commencement date of the obligation, s 269-15(2) provides that if section 269-15(1) is not complied with on or before the due day, the directors of the company continue to be under the obligation, until the company complies with its obligation, or an administrator is appointed to the company, or the company begins to be wound up. This means that the obligation in s 269-15(1) does not come to an end on the due date, unless it is complied with, but continues until compliance, administration or winding up. It follows that the directors are under the relevant obligation under subsection 269‑15(1), for the purposes of s 269-35(1), from the initial day (or from when they subsequently become a director), until the company complies with its obligation, or an administrator is appointed to the company, or the company begins to be wound up.

On that construction, the defence must be established in respect of the whole of that period, because it must be shown that the director did not, and could not reasonably have been expected to, participate in management at any time during that period. That accords with the decision of this Court in Canty, [29] in which Handley JA, with whom Beazley and Santow JJA agreed, said, in respect of the predecessor section:

As that passage indicates, in Deputy Commissioner of Taxation v George, [30] the Court held that the defences had to be established for the entire period from the “due day” to the expiry of the DPN. Gzell J (with whom Handley and Giles JJA agreed) said:

The view expressed in Canty – which in my respectful view is plainly correct, given the terms of s 269-15(2) – has been referred to, without disapproval, in other intermediate appellate courts. In Shaw v Deputy Commissioner of Taxation, [31] Gotterson JA, with whom P McMurdo JA and Atkinson J agreed, said (citations omitted):

Accordingly, both construction of the terms of s 269-35(1) and s 269-15(1) in the light of s 269-15(2), and a well-established line of authority, require rejection of the appellant’s contention that the non-participation defences are to be judged by reference to the periods between the initial date and the due date for each penalty. There is room for argument whether they run from the initial date until expiry of the DPN, or continues thereafter until compliance, administration or winding up – an issue which was not considered in Canty and the cases which follow it – but it was common ground that that made no difference in the circumstances of the case, and his Honour proceeded on the basis most favourable to Mr Snell.

The appellant submitted that the primary judge did not examine the illness defence by reference to each relevant period, and thereby failed to consider a valid submission worthy of serious consideration. However, in circumstances where, although each relevant period had a separate commencement date, all extended until the expiry of the relevant DPN and thus largely overlapped, discrete consideration of each penalty period would not have made the slightest difference, and was unnecessary. Once the defence was not made out in respect of the whole of the period common to all the due days, between the due day of the last period and expiry of the relevant DPN (in the case of the SGC amounts, 28 November 2013 to 19 May 2014; and in the case of the PAYGW amounts, 21 March 2014 to 2 September 2014), it necessarily failed in respect of all the other periods, because they included those periods.

All these grounds therefore fail.

The primary judge’s conclusion that Mr Snell did participate in management was founded on findings that Mr Snell:

The appellant submitted that, in the context of s 269-35(1) and having regard to the objects of Div 269, the notion of taking part in the management of the company should be confined to those aspects of a company’s affairs that cause the company to incur an obligation to the Commissioner, and that steps taken by a director to bring about the discharge of taxation obligations should not count as taking part in management. On that basis, it was submitted that the matters relied on by his Honour as evidencing participation in management ought to have been excluded from consideration.

That submission is misconceived, for two reasons. The first is that the focus is participation in the “management of the company”, a concept which connotes policy and decision-making relating to the business affairs of the corporation as a whole, [37] and the plain words of which refer to the company, not any particular business it might operate. At the core of the concept is participation in governance of the company, whether formally (at meetings of directors) or informally. The various matters relied on by the primary judge are essentially indicia of participation in management from which that conclusion was ultimately drawn. The second is that there is no basis for distinguishing between “acts of management” that are within the concept of “taking part in management” and acts of management which are not. In particular, there is no reason to disregard the steps taken by Mr Snell to procure payment of the Company’s taxation liabilities in considering whether Mr Snell was not taking part in management. The act of engaging with the Australian Taxation Office on behalf of a company was considered to evidence participation in management of the company in Deputy Commissioner of Taxation v Lister, [38] in which Williams JA (with whom Davies and Jerrard JJA agreed), said:

The appellant submitted that the primary judge erred in having regard to his participation in the boat business, and erroneously assumed that it was an asset of the Company (ground 8). However, his Honour made no such assumption, observing that – in distinction to the Garners Beach Land – its ownership was “opaque”. The relevance of the boat business was twofold: first, that the act of negotiating the Separation Agreement, which included provision as to the future conduct of the Company’s affairs, was evidence of participation in management; and secondly, that ongoing participation in the boat business was inconsistent with illness precluding participation in business activity and thus weighed against it being unreasonable to expect Mr Snell to attend to his directorial duties notwithstanding his illness.

The appellant submitted that negotiation of the Separation Agreement, with a view to disengaging from the Company’s business, was not evidence of participation in management, as it was “a commercial step taken by him to divest his interest in the sole Company asset that was the cause of the Company incurring obligations to the Commissioner”, and that as he “ensured it was a term of the Separation Agreement that a company controlled by Mr Ireland would purchase the Restaurant Business from the Company and the new company would take steps to discharge the Company’s unpaid liabilities to the Commissioner”, the ultimate object of the Separation Agreement was to cause the Company to discharge its obligations to the Commissioner (ground 9). However, while it contemplated that the Company would divest itself of the restaurant business, the Separation Agreement did not involve Mr Snell disengaging from management of the Company; to the contrary, it involved him remaining not only a shareholder but also a director of the Company, and the issue is participation in management of the Company, not of any particular aspect of its business. The Separation Agreement was evidence of ongoing participation by Mr Snell in management of the Company, because by it, he participated in making arrangements in respect of the ongoing conduct of the Company’s affairs.

The appellant submitted that Mr Snell’s decision to remain a director in order to safeguard his interest in the Garners Beach Land was not evidence of participation in management (ground 10). This submission was founded on the notion that in the absence of evidence that the Garners Beach Land formed part of any income earing business of the Company, or that its ownership involved decision-making related to the “real business affairs” of the Company, it did not evidence participation in the management of the Company. To the contrary, however, a deliberate decision to remain a director, in order to retain influence over the Company in respect of a valuable asset, evidences ongoing participation in management. The issue is participation in management of the Company, not of its restaurant business. That ownership of the land may have had no PAYGW or SGC consequences does not mean that decisions about it were not an aspect of management of the Company.

The appellant submitted that it was erroneous to rely on Mr Snell’s decision to remain a director, because otherwise the only option available to a director to avoid liability would be to resign, which is not what the section requires. However, it is not the mere circumstance that Mr Snell did not resign that was significant; it is that in the context of negotiating the Separation Agreement, he made a deliberate decision, for sound commercial reasons, to remain a director – and thus to remain involved in management. That, with the other matters to which reference has been made, contributed to the conclusion that he had not ceased to participate in management. This is manifest from the following excerpt from Mr Snell’s evidence, which was cited by his Honour: [39]

Significantly, the appellant did not challenge his Honour’s conclusion that although he found it increasingly difficult to make contact with Mr Ireland, Mr Snell nevertheless did succeed in contacting him, and did discuss the Company’s affairs with him. This was sufficient of itself to support the conclusion that Mr Snell continued to participate in management; it is not only through formal meetings of directors, but also through informal discussions between directors, that management is conducted.

Accordingly, in my view, there was no error in the primary judge’s conclusion that Mr Snell continued to participate in management of the Company during the period between 2013 and its ultimate winding-up. That conclusion was of itself fatal to the “illness” and “other good reason” defences.

His Honour’s rejection of the proposition that it would have been unreasonable to expect Mr Snell to participate in management because of illness was founded on the conclusion that not only did he participate, but that his illness, while serious, was not such as to incapacitate him from participation – except, perhaps, for short periods, as was demonstrated by his actual participation, and his participation in management of other entities. The appellant contended that the primary judge erred in concluding that it would not have been unreasonable to expect the appellant to take part in management. The appellant also submitted that although the primary judge canvassed the medical evidence, his Honour did not consider how the “illness” defence was to be applied in the light of that evidence.

Evidence of illness alone, however serious and prolonged, is insufficient to establish a defence under s 269-35(1). In the application of s 269-35(1), the question is whether by reason of the illness the director could not reasonably have been expected to take part in management. Although this does not require that the illness necessary be incapacitating, it must – given the fundamental responsibility of a director to participate in management – necessarily involve that the illness have a significant adverse impact on the director’s ability to participate.

Prior to 2012, Mr Snell travelled from Canberra to Melbourne at least monthly and met with Mr Ireland to discuss the restaurant business and its affairs. From 2012, as his Honour accepted, Mr Ireland became increasingly difficult, but Mr Snell persevered. Mr Snell contended that his medical conditions meant that his efforts to maintain contact with Mr Ireland were limited. The primary judge accepted that in the period from 2012, Mr Snell suffered from very significant bouts of ill-health, and in particular, during 2012 and 2013, angina, basal creps, ankle swelling, cardiac failure, paroxysmal nocturnal dyspnoea, sleep apnoea, gout, diabetes, severe osteoarthritis, hypertension, chronic kidney disease, peripheral oedema/fluid build-up, and heart-burn. On about 20 March 2013, while on a business trip in China, he had a heart attack, for which a coronary angiography and stent procedure were performed at a Hong Kong hospital; he was hospitalised in Hong Kong until 31 March, and was convalescing until 10 May 2013. Between 24 June and 8 July 2014, he was hospitalised in Canberra, with oedema and ascites.

However, although it may be accepted that it would have been unreasonable to expect him to participate in management while he was hospitalised, or while he was convalescing, that falls far short of showing that, by reason of illness, it was unreasonable to expect him to participate in management for the entire relevant period, and in particular during the common period between 28 November 2013 (the due day of the last relevant SGC period) and 2 September 2014 (the expiry of the PAYGW DPN). The medical evidence adduced on behalf of Mr Snell, viewed as whole, does not establish that it was medically impossible or imprudent for him to do so during the entirety of the period. And that is confirmed by the fact that he did continue to participate in management of his other businesses.

Dr Anthony Stevenson, general practitioner in Queanbeyan, was Mr Snell's general practitioner from June 2008; he last saw him on 10 May 2013. Of Mr Snell's condition in 2012, he reported:

Dr Stevenson also described Mr Snell's condition following his heart attack, suffered in China in March 2013:

In response to a request from Mr Snell’s solicitors for “any additional information, which I consider to be of note, regarding Mr Snell's functioning and capacity during the relevant period”, Dr Stevenson reported:

The effect of Dr Stevenson’s evidence is that while it would have been unreasonable to expect Mr Snell to participate in management when he was hospitalised or recuperating, that was only for limited periods; moreover, Mr Snell continued to travel frequently and to engage in his business affairs. Dr Stevenson does not refer to any impediment to his participation in management during the common period, although admittedly he last saw Mr Snell on 10 May 2013.

The high point of Mr Snell’s case was the opinion of Dr Eccleston, cardiologist, who saw Mr Snell on seven occasions over the period 2008 to 2014. In respect of the period 2013 to 2014, he reported that he understood Mr Snell to have suffered from a myocardial infarction in March 2013 while overseas, but had no record of any consultation with him that year; he next reviewed him on 30 September 2014, when he had had a recent hospitalisation “with biventricular cardiac failure”. However, at the review on 30 September 2014:

That does not describe a person who could not possibly or prudently participate in management. More generally, he reported:

However, in cross-examination it emerged that Dr Eccleston’s assessment of the impairment to Mr Snell's cognitive capacities was not so much observed by him, as based on what medical literature suggested were the common effects of the illnesses affecting Mr Snell and his medications, although he recalled that on one or more consultations, Mr Snell did not recall certain details of both his hospitalisations, and his medication. Dr Eccleston’s speculation in this respect was not consistent with the observations of other treating medical practitioners of Mr Snell’s actual condition. As the primary judge observed, none of the other medical reports, or notes of other treating doctors, expressed in terms an opinion that Mr Snell’s medical conditions made him unable to discharge his duties as a director, and some tended to suggest otherwise. [40]

Mr Snell was in the care of Dr Gavin Carney, nephrologist, between 27 February 2014 and 23 January 2015. Dr Carney reported that when first referred, he had no cognitive impairment and was “stable of diabetic nephropathy”. In June 2014, he was physically incapacitated with peripheral oedema with swollen legs, and he was hospitalised between 25 June and 8 July 2014 during which period he was physically disabled and unable to attend to business matters; but when reviewed in February 2015, he was "in good health” and “stable of his cardiac failure”, he was “no longer physically incapacitated” and “there was no cognitive impairment”. The effect of that evidence is that it would have been unreasonable to expect him to participate in management between 25 June and 8 July 2014, but it goes no further.

In 2015, Mr Snell came under the care of Dr Farshid, cardiologist. Asked to express an opinion about his capacities following the heart attack in 2013, and having observed that he did not look after him during or following that episode, he said:

That evidence could support a view that it was unreasonable to expect him to participate in management for a period of four weeks following the heart attack on 20 May 2013, but again it does not tend to show that that extended to the common period at all, let alone the whole of it.

And that is consistent with the circumstance that, as Dr Stevenson observed in the passage extracted above, Mr Snell continued to work. As the primary judge said, in a finding which is not challenged, “Mr Snell also continued to stoically operate his other business during this time, albeit with some practical alterations to his business lifestyle, which would better accommodate his fluctuating health”. [41] Nor did illness prevent Mr Snell travelling to Melbourne to see Dr Eccleston, cardiologist, on seven occasions over the period 2008 to 2014. Moreover, illness did not prevent Mr Snell from travelling to China on business in May 2013 (during which trip he had the heart attack).

By ground 16, the appellant contended that the primary judge erred in concluding that Mr Snell’s involvement in other businesses meant that, to the extent he did not take part in the management of the Company, it would not be unreasonable to expect him to do so. The only submission developed in support of this was to the effect that his Honour’s conclusion departed from the statutory language, which was it would have been unreasonable to expect. [42] His Honour’s conclusion was plainly directed to the test expressed in the statute, and amounts to a conclusion that it was not satisfied, because it would not have been unreasonable to expect Mr Snell to participate in management, notwithstanding his illness. If illness, however serious, did not prevent Mr Snell from participating in management of his other businesses, it is not unreasonable to expect him to participate in management of the Company. To the contrary, Mr Snell’s ongoing involvement in management of his other businesses, however stoic, was compelling evidence that his illness was not such as to render it unreasonable to expect him to participate in management of the Company.

There is no doubt, as the primary judge accepted, that Mr Snell had significant and serious episodes of ill-health. It may well be that there were days, or even weeks (when he was hospitalised), on which it was reasonable for him not to participate in management. But the evidence falls far short from establishing that he was physically or cognitively unable to participate, nor that there were medical reasons why he should not participate, for the entirety of the relevant periods. His Honour was right to conclude that his involvement in his other businesses over the period demonstrates that it would not have been unreasonable to expect him to do so, notwithstanding his illnesses.

The primary judge rejected Mr Snell’s “some other good reason” defence on the basis that the Separation Agreement could not afford a “good reason”, as it amounted to no more than a choice not to participate in (certain) affairs of the Company. The appellant submitted that that conclusion was erroneous, as the effect of the Separation Agreement was not to divide responsibilities between directors, but was intended to result in the sale of the restaurant business to a new company controlled by Mr Ireland, with the result that the taxation liabilities would become the responsibility of that new company. The appellant also contended that in rejecting the “some other good reason” defence, the primary judge did not consider the appellant’s exclusion from management, his remoteness from Melbourne, the existence of the Separation Agreement, and Mr Snell’s serious ill-health.

Because the test is an objective one, it is not sufficient if the director had a genuine view that he or she had good reason for not participating: a reason for non-participation in the management of the company is “good” if, viewed objectively, it is not only adequate but “valid” and “sound”. [43] As Harrison J has explained: [44]

As has already been observed, it is a fundamental obligation of a director to participate in management. An agreement between directors cannot operate to override the statutory duties and obligations of a director. A deliberate decision not to participate in management while remaining a director is not a good reason. [45] In Deputy Commissioner of Taxation v Clark, [46] in which one director pleaded that she relied on and left management to the other (her husband), the Court held that total reliance on a fellow director in the management of a company was not a “good reason” for non-participation in the management of the company. Spigelman CJ, with whom Handley and Hodgson JJA agreed, said that “it is a basal structural feature of corporations legislation in Australia that directors are expected to participate in the management of the corporation”, [47] and: [48]

Likewise, a choice not to participate in the affairs of the company has been held not to be a “good reason” for the purposes of s 269-35(1). In Deputy Commissioner of Taxation v Holton, [49] the defendant pleaded that he had agreed to divide responsibilities with another director and had been excluded from the company after a certain date; neither reason was accepted to be a “good reason” for the purposes of the defence.

At its highest, Mr Snell and Mr Ireland had negotiated in principle an agreement under which they would cease to be engaged in certain businesses together, which would involve Mr Snell assuming responsibility for the boat business and its liabilities, and Mr Ireland assuming responsibility for the restaurant business and its liabilities; but would remain shareholders in and directors of the Company, which would continue to hold the Garners Beach Land. The agreement had not been documented, and it had not been carried into effect. Assuming that there was a binding and enforceable Separation Agreement (which may be open to question), it could not relieve the Company of its taxation obligations, at least unless and until the new company actually discharged them. Nor could it relieve Mr Snell of his responsibilities. Until discharged, the taxation liabilities would remain liabilities of the Company, of which Mr Snell was to remain a director. Agreement that the Company would sell one of its assets – albeit the income-generating one – to another entity in no way relieves or excuses a director from the obligation to participate in management of the Company – as distinct from its restaurant business – and does not afford a “good reason” for not doing so.

For similar reasons, geographical remoteness of a director from a business conducted by a company is not, at least in the present factual context, a good reason for not participating in management. It is not as if Mr Snell was suddenly required to be absent overseas and dislocated from the Company’s affairs for a sustained period. From the outset he had been resident in Queanbeyan while the restaurant was in Melbourne, and that did not change. That does not excuse him from the responsibility of a director to participate in management – as he did, including by frequently travelling to Melbourne. As this limb of the defence under s 269-35 refers to “some other good reason”, it means other than illness; his Honour having considered the “illness” defence did not err in not considering it a second time under “some other good reason”. In any event, as Dr Stevenson observed, while Mr Snell was afflicted by ill-health to the extent that it impaired his ability to exercise regularly, this was “not to the extent that he was unable to travel frequently about the country”. Nor did his Honour fail to consider the argument that it would have been reasonable to expect him to participate because he was “excluded from management”; the argument that he was excluded was rejected, it being found that Mr Snell continued to participate in management, although with greater difficulty than in the past.

My conclusions may be summarised as follows:

A DPN is required to state what the Commissioner thinks is the unpaid amount of the company’s liability, as at the date of the notice, not the true amount of the liability, which is for the Court to determine (subject to any conclusive evidence provisions), and is not dependent on nor controlled by what the Commissioner “thinks” it is at the time when the DPN is given. The notice, once given, lifts the bar on commencing proceedings to recover the penalty which arose on the “due day” to which the notice relates after 21 days, and it does not affect this if, before commencing proceedings, the unpaid amount of the company’s liability – or what the Commissioner thinks it is – changes. Short of a statute of limitation, there is no reason to imply a requirement to commence proceedings within any particular time after the 21-day period has expired. The primary judge was correct in rejecting Mr Snell’s contention that the proceedings were invalid.

The defence provided by s 269-35(1) requires that the director did not participate in management of the company at the relevant time because of illness or some other good reason by reason of which it was unreasonable to expect the director to participate in management. In short, it involves justifiable non-participation in management, against the backdrop that it is the obligation of a director to participate in management of the company, and a director is not entitled to choose not to participate.

To establish the defence provided by s 269-35(1), a director must satisfy its requirements for the entire period from the “due day” for the relevant period until at least expiry of the DPN, if not until compliance, administration or winding-up. In circumstances where although each relevant period had a separate commencement date, all extended until the expiry of the relevant DPN and thus largely overlapped, discrete consideration of the period referable to each due day would not have made the slightest difference, and was unnecessary.

There was no error in the primary judge’s conclusion that Mr Snell continued to participate in management of the Company during the period between 2013 and its ultimate winding-up. That conclusion was of itself fatal to the “illness” and “other good reason” defences.

There is no doubt, as the primary judge accepted, that Mr Snell had significant and serious episodes of ill-health. But the evidence falls far short from establishing that he was physically or cognitively unable to participate, or that there were medical reasons why he should not participate, for the entirety of the relevant periods. His Honour was right to conclude that Mr Snell’s involvement in his other businesses over the period demonstrates that it would not have been unreasonable to expect him to do so, notwithstanding his illnesses.

A deliberate decision not to participate in management while remaining a director is not a good reason for the purposes of the defence provided by s 269-35. Assuming that there was a binding and enforceable Separation Agreement (which may be open to question), it could not relieve Mr Snell of his responsibilities. Until discharged, the taxation liabilities would remain liabilities of the Company, of which Mr Snell was to remain a director.

One cannot but feel sympathy for Mr Snell, not only because of his health but particularly because he had already taken significant steps to meet, from his personal resources, the Company’s tax obligations, when they came to his notice. However, the obligations of directorship are stringent, and the grounds for relief from them correspondingly narrow. It cannot be said that, throughout the period from each relevant due date until expiry of the DPNs, he justifiably did not participate in management, or more precisely, that he did not, and could not reasonably have been expected to, take part in management of the Company, because of illness or some other good reason.

In my opinion, the appeal must be dismissed, with costs.

BARRETT AJA: As Brereton JA suggests, Mr Snell's predicament warrants some sympathy. But the legislature has imposed stringent obligations upon company directors who find themselves in the position that Mr Snell came to occupy. For the reasons stated by Brereton JA (with which I respectfully agree), the appeal should be dismissed with costs.