Deputy Commissioner of Taxation v Arora

1. [1]

   By Amended Statement of Claim filed 27 October 2016 the Deputy Commissioner of Taxation seeks judgment against the Defendant principally for various penalties due and payable to the DCT pursuant to s 269-20 of the Taxation Administration Act 1953 (Cth) (the TAA). At the date of the hearing (28 July 2017) the amounts claimed with interest totalled $1,892,842.59.

2. [2]

   The Defendant in his Amended Defence admits the claims pleaded but relies in relation to the whole of the claim on a defence pursuant to s 269-35 in sch 1 to the TAA as well as another matter, said to be a defence, to which I will come presently.

Background

1. [3]

   On 25 February 2010 Arora Markets Pty Ltd was registered as an Australian Proprietary Company. The Defendant was a director of Arora Markets from 25 February 2010 to 17 November 2014. On 14 October 2015 this Court made an order winding up Arora Markets and appointing a liquidator.

2. [4]

   On 26 September 2012 Arora International Markets Pty Ltd was registered as an Australian Proprietary Company. The Defendant was a director of Arora International from 12 October 2012. On 22 December 2014 an administrator was appointed to the company. On 9 April 2015 a liquidator was appointed by creditors to commence a voluntary winding up that company.

Taxation liabilities

1. [5]

   From 1 June 2013 to 31 October 2014 Arora Markets withheld various amounts from salary, wages and other payments totalling $674,959. The amounts withheld were reported by Arora Markets to the DCT through the lodgement of various Business Activity Statements and Instalment Activity Statements. Those withholdings were ultimately reduced to $610,966.85.

2. [6]

   Arora Markets was obliged under sub-division 16-B Sch 1 of the TAA to remit those amounts withheld to the DCT by their respective due days. Arora Markets failed to do so and its liability remains.

3. [7]

   By amended assessments dated 14 May 2014, 15 May 2014, 29 July 2014, 3 August 2015, 5 August 2015 and 10 August 2015 Arora Markets was assessed for superannuation guarantee charges (SGCs) and shortfalls totalling $214,986.71 for various quarterly periods between 1 April 2012 and 30 September 2014.

4. [8]

   Pursuant to ss 16 and 46 of the Superannuation Guarantee (Administration) Act 1992 (Cth) (the SGAA) Arora Markets was obliged to pay the assessed amounts of SGCs for the relevant quarters by their respective due dates. Arora Markets failed to do so and its liability remains wholly undischarged.

5. [9]

   Since the filing of the Statement of Claim payments totalling $77,755.96 have been received to reduce the SGCs to $137,230.75.

6. [10]

   In the period commencing 1 June 2013 and ending 30 June 2014 Arora International withheld various amounts from salary, wages and other payments totalling $649,717. The amounts withheld were reported by Arora International to the DCT through the lodgement of various Business Activity Statements and Instalment Activity Statements.

7. [11]

   Ultimately, the withholdings were reduced to $492,226.86 by reason of payments being made.

8. [12]

   Arora International was obliged under Sub-division 16-B Sch 1 of the TAA to remit the amounts withheld to the DCT by their respective due days. Arora International failed to do so and its liability remains undischarged.

9. [13]

   By amended assessments dated 23 September 2014, 29 September 2014, 7 October 2014 and 6 February 2015 Arora International was assessed for SGCs and shortfalls totalling $510,507.99 for various quarterly periods between 1 October 2012 and 30 June 2014.

10. [14]

    Pursuant to ss 16 and 46 of the SGAA, Arora International was obliged to pay the assessed amounts of SGCs for the relevant quarters by their respective due dates. Arora International failed to do so and its liability remains undischarged.

11. [15]

    Division 269 Sch 1 of the TAA imposes a duty on directors to ensure a company meets its obligations, or promptly goes into administration or liquidation. The failure to comply is sanctioned by penalties imposed on directors personally. When this occurs, the director's penalty operates in parallel with the existing liability owed by the company, so that a reduction of one liability reduces the parallel liability to the same extent.

12. [16]

    The Defendant was a director of Arora Markets from 25 February 2010 to 17 November 2014 and a director of Arora International from 12 October 2012 until a liquidator was appointed on 9 April 2015. The DCT’s case is that the Defendant as a director of those companies was under an obligation to cause those companies to comply with their obligations to pay the withholding tax and the SGCs. He remained under that obligation at the end of each due day because the companies had not complied with their obligations to pay those monies to the DCT, an administrator had not been appointed nor had the companies begun to be wound up.

13. [17]

    Before bringing proceedings to recover a director penalty, the DCT must give a Director Penalty Notice under s 269-25 Sch 1 of the TAA. Director Penalty Notices were given to the Defendant on 11 June 2014, 13 June 2014, 25 March 2015, 14 May 2015, 9 June 2015 and 28 January 2016.

14. [18]

    In addition, the DCT claims an amount on a Running Balance Account in respect of primary tax debts owed by the Defendant under the Business Activity Statements provisions as defined in s 995-1(1) of the Income Tax Assessment Act 1997 (Cth).

Legislative provisions

1. [19]

   Sub-division 269-A of the TAA relevantly provides:

Legal principles

1. [20]

   As a result of the failure of the companies to pay the amounts withheld and the SGCs the Defendant became liable to pay to the DCT a penalty of an amount equal to each unpaid amount under s 269-20, Sch 1: Re Scobie & Anor; ex parte Commissioner of Taxation (1995) 59 FCR 177 at 182. This liability is subject to any defences available to the Defendant

2. [21]

   The Director Penalty Notice does not itself impose a liability or create a right of action but is a requirement before commencing proceedings to recover the penalty: Deputy Commissioner of Taxation of the Commonwealth of Australia v Woodhams (2000) 199 CLR 370; [2000] HCA 10 at [19] and [35]. The liability derives from s 269-20 of the TAA.

3. [22]

   As noted, the Defendant does not dispute his liability subject to establishing an available defence.

Application to adjourn

1. [23]

   Two days before the appointed hearing date for these proceedings the Defendant by Notice of Motion filed on 26 July 2017 sought that the hearing date be vacated. Although counsel initially said that there were two bases for the application, it became apparent from an affidavit filed in support of the Motion by the Defendant that there was a third basis.

2. [24]

   The first basis was said to be that Arora Markets and Arora International were in liquidation and the liquidations had not yet been finalised. It was likely or possible, so it was submitted, that there would be funds in the hands of the liquidators in respect of each company which would be able to satisfy the taxation liabilities.

3. [25]

   The second basis was said to be that in the course of the liquidation it was ascertained that the liquidators or one of them had sold off assets comprising supermarkets. There was some evidence that the buyers of those supermarkets had assumed responsibility for the accrued superannuation entitlements crystallised in the superannuation charge.

4. [26]

   The third basis arose out of proceedings that had commenced in the Federal Circuit Court against the Defendant by the Shop, Distributive and Allied Employees Association on behalf of their members. This concerned the Defendant’s directorship of Arora International. In those proceedings the SDA was seeking, amongst other things, amounts equivalent to the superannuation entitlements of the employees of Arora International. The Defendant submitted that if the SDA was successful in the Federal Circuit Court proceedings then the part of the DCT’s claim for the SGCs in respect of Arora International would no longer be necessary.

5. [27]

   The Defendant submitted that there would be a risk that, if judgment was given against him in the present proceedings in relation to the SGCs, the judgment may turn out to exceed what was really owing because in the proceedings in the Federal Circuit Court the Defendant may be able to establish, perhaps, that the liquidator would have paid the employees’ entitlements or some employees may have resigned so that the amount claimed by the DCT in the present proceedings would be more than the correct amount due.

6. [28]

   I did not consider, for the reasons that follow, that those matters provided any basis for adjourning the present proceedings. As a general answer to the application for an adjournment the position is that, if the sorts of contingencies identified came to pass, it would be open to the Defendant to claim a refund from the DCT and, if satisfactory evidence is provided, such amounts would be refunded.

7. [29]

   This argument arises from the second defence made by the Defendant to the whole claim. As will be seen when I discuss the defences raised, that defence is not a defence as such to the claim, and there was no basis for adjourning the proceedings for that purpose.

8. [30]

   In relation to the basis concerning the sale by the liquidators of the supermarkets, my attention was drawn to the terms of one contract that the Defendant had come upon. This was a contract between Arora Markets and Dotown Pty Ltd on a date not identified and in a contract signed by the liquidators but not the purchaser. There was in fact no evidence that this contract had been exchanged. For the purpose of considering the adjournment, however, I am prepared to assume that exchange has taken place.

9. [31]

   Clause 31 of this contract provides:

10. [32]

    Employee entitlements is defined in clause 1.2 as meaning:

11. [33]

    The Defendant argued that if the purchaser under this or any other contract was accepting liability for superannuation entitlements of employees then that would effectively provide a defence to the Defendant in the present claims to the extent of the responsibility taken on by the purchaser.

12. [34]

    Two things should be said about that. First, the liability that attaches to the Defendant in the present claim is a personal and primary liability brought about by the legislation, the SGC assessments and the Director Penalty Notices. The liability is not a contingent one, that is, contingent on some other body having a parallel liability and not ultimately meeting that liability. Secondly, until such time as the DCT has actually been paid the amounts in the SGCs by the purchaser companies, the Defendant cannot obtain any benefit from the contractual arrangements: s 269-40.

13. [35]

    The DCT submitted that clause 31.3 contemplated a list of the transferring employees who have employee entitlements. No such list was attached to the contract, nor was it put into evidence. In that way it cannot be known what actual employee entitlements are being taken over by the purchaser under the contractual arrangements. In any event, the DCT acknowledges that if the purchaser pays liabilities that are otherwise sought from the Defendant in this regard the Defendant will obtain the benefit of that payment.

14. [36]

    The liability of the Defendant for the SGCs at the present time is not contingent upon payments which might be made by the liquidator in the future or by later demonstrating that personnel changes in relation to employees reduce the company’s liability for those payments. The Defendant faintly suggested that, because the proceedings in the Federal Circuit Court commenced in 2015 whereas the present proceedings commenced in 2016, it was appropriate for the Federal Circuit Court proceedings to proceed first. I can see no basis for that. These proceedings were at the date of the adjournment application ready to be heard and had a hearing date appointed. In any event, the Defendant must have been aware of the existence of the other proceedings at the time these proceedings were fixed for hearing by the Registrar on 19 May 2017 without opposition from the Defendant. No explanation has been provided for why an application to adjourn was made so late.

Defences

1. [37]

   The Defendant pleads two defences to each of the four claims. The first is a defence based on s 269-35 of Sch 1 of the Taxation Administration Act 1953 (Cth). The second defence is pleaded in this way:

2. [38]

   It is convenient to deal with this second defence first. Under s 269-15 the directors have an obligation from the day when the company’s obligation is due to the DCT to cause the company to comply with its obligation to forward the withholding tax or to pay the SGCs. Under s 269-20 if the money has not been paid and the director remains under the obligation, the director becomes liable to pay the DCT a penalty equal to the unpaid amount of the company’s liability under its obligation. In that way, it cannot be of any relevance whether the money will ultimately be found in the liquidation to pay the amounts that were formerly due by the company. At the relevant time, the Defendant became liable for those amounts as a primary and principal debtor, subject only to obtaining the benefits described in ss 269-40 and 269-45. Accordingly, what is pleaded in this way as a defence to the claim is no defence at all.

3. [39]

   The factual basis for the defence under s 269-35 is found in the affidavit of the Defendant sworn 3 March 2017. That affidavit relevantly discloses the following information:

4. [40]

   The affidavit then went on to say this:

5. [41]

   The only objection taken by counsel for the Plaintiff to any of this material was to exhibit 1 being a copy of the complaint the Defendant made about the ATO to the Commonwealth Ombudsman.

6. [42]

   At the time the objection was taken, it was not clear what other evidence was to be led in the matter, particularly, whether the Defendant would be cross-examined. I indicated that I would provisionally admit exhibit 1 to the Defendant’s affidavit and rule on its admissibility in the final judgment.

7. [43]

   As it transpired, no further evidence was given and, in particular, the Defendant was not cross-examined. The Defendant submitted that the material in exhibit 1 provided the evidence of the various items of correspondence between the ATO and the Defendant at the relevant time and demonstrated the complaint that he made that led to the evidence given in his affidavit.

8. [44]

   This is not the sort of case where evidence of a complaint is in some way corroborative of the events about which the complaint was made. Certainly, the correspondence forming part of the exhibit shows that a large number of notices were issued to the Defendant and various entities under his control. It is not suggested that there was any impropriety in the issue of those notices. A number of them were notices concerning the failure on the part of Arora Markets and Arora Markets International to comply with their obligations that led to the present proceedings. The material attached does not provide the primary evidence of other matters raised in the affidavit such as, for example, the negotiation of the facility with the ANZ Bank referred to in paragraph 16 of the affidavit. In my opinion, the exhibit is irrelevant and should be rejected.

9. [45]

   It is difficult to understand why objection was not taken to a number of paragraphs in the Defendant’s affidavit. They contain conclusion and assertion without any admissible evidence to support them. Moreover, a number of the assertions made are vague and imprecise in time. The assertion that the Defendant suffers from hypertension in paragraph 10 cannot be properly made by him. It is a medical diagnosis and any statement by him that he suffers from it could only be hearsay when there is no admissible evidence to justify it. Moreover, the assertion that while the due diligence report into the Defendant’s companies was being prepared by the ANZ, the ANZ management became aware of friction in the relationship between his wife and himself which led to the withdrawal of the loan offer is entirely unsubstantiated. It could only be hearsay. Similarly, the assertion that “as the news spread” Westpac withdrew its credit facilities is without any basis.

10. [46]

    I accept that the evidence was not objected to but, given the form in which the evidence is put forward, I am not obliged to accept it even though it is not contradicted. In my opinion it has little or no weight in the form in which it is given.

11. [47]

    It needs to said in that regard also that if the Defendant is to rely on illness so that it could be said to have been unreasonable to expect him to take part in the management of the companies, I would have expected that there would have been medical evidence to support and justify the defence.

12. [48]

    However, even if all of this evidence had been proved in admissible form the defence would still have failed for the reasons which follow.

13. [49]

    Canty v Deputy Commissioner of Taxation (2005) 63 NSWLR 152; [2005] NSWCA 84 concerned a similar claim by the DCT under the predecessor provisions of the TAA which were then contained in sub-division B of Division 9 of Pt VI of the Income Tax Assessment Act 1936 (Cth). Those provisions were very similar to what are now contained in sub-division 269-A of the TAA.

14. [50]

    Section 222AOB provided:

15. [51]

    Section 222AOC provided:

16. [52]

    Section 222AOJ provided:

17. [53]

    Justice Handley, with whom Beazley JA agreed, and Santow JA agreed with additional reasons, said:

18. [54]

    The material in the Defendant’s affidavit seems to point to two matters; first, he was unable by reason of illness (sub-section 1) and that by arranging the loan with the ANZ Bank he had taken all reasonable steps to ensure that the company complied with its obligation (sub-section 2(a)(i)). Of course, in the first place, reliance on both subsections gives rise to a logical inconsistency, and it is difficult to see how both matters can stand together. Taking all reasonable steps, as the Defendant submitted he did, does not sit easily with it being unreasonable to expect him to take part in the management of the companies by reason of illness. However, that may be put to one side.

19. [55]

    As Canty makes clear at [45], the obligation is throughout the entire period of the obligation. Similarly, in Deputy Commissioner of Taxation v George (2002) 55 NSWLR 511; [2002] NSWCA 336 Gzell J (with whom Handley and Giles JJA agreed) said:

20. [56]

    In the case of Arora Markets that period commenced on 1 April 2012 in relation to the SGCs and 1 June 2013 in relation to the PAYG tax withheld. In relation to Arora International the period for the SGCs relevantly commenced for the Defendant on 12 October 2012 when he became a director of that company. In relation to the withholding tax the period commenced on 1 July 2013. Those dates all predate the earliest of the dates mentioned in the Defendant’s affidavit for any issues which he claims ultimately led to his marriage breakdown, hypertension and emotional turmoil.

21. [57]

    Furthermore, they all well pre-date July 2014 when he says that he negotiated the facility from the ANZ Bank. As to the latter, I do not consider that one unsuccessful application for finance to meet the obligation of the director a year or two years after the obligation commenced amounts to reasonable steps. No explanation is given about why the amounts due were not paid when they were due, nor why no action was taken by the Defendant to arrange for finance so that they could be paid both before and after the application was made to the ANZ.

22. [58]

    Counsel for the Defendant suggested that the decision in Canty may not apply to the present form of the Act. No basis for that submission was proffered. The only difference between the legislative provisions considered in Canty and the present provisions would appear to be, as noted earlier, that one option previously available to a company, to make an agreement with the Commissioner under s 222ALA, is not now available. However, the remainder of the legislation is relevantly identical. There is no reason for concluding that Canty does not apply to the present provisions.

23. [59]

    In my opinion, the defences relying on s 269-35 of the TAA are not made out by the Defendant.

24. [60]

    Although the defence in s 269-35 was pleaded as a defence to the claim in respect of the Running Balance Account, that defence has no application to that claim. It is a defence concerned with a director’s duty to ensure his company complies with its obligations as set out in s 269-10. The Defendant otherwise admits liability for this Account.

Conclusion

1. [61]

   The affidavit of the duly authorised officer of the ATO, Belinda Eather sworn 28 July 2017, sets out how the amounts owing by the Defendant are calculated. In respect of the claim against the Defendant for the penalties relating to withholding tax and SGCs she annexes to her affidavit a certificate under s 255-45 of Sch 1 of the TAA signed by a Deputy Commissioner of Taxation stating that at 27 July 2017 the sum of $1,750,932.45 was a debt due and payable by the Defendant in respect of the tax related liability arising under s 269-20. Under s 255-45 a certificate containing the matters in the certificate signed by the Deputy Commissioner of Taxation is prima facie evidence of the matters stated in proceedings such as the present to recover an amount of a tax related liability. There is no evidence to the contrary.

2. [62]

   Interest pursuant to s 100 of the Civil Procedure Act 2005 (NSW) is claimed from the date of the issue of the statement of claim on 13 April 2016. Ms Eather’s affidavit calculates that interest to 27 July 2017 as $128,062.44. The daily rate of interest thereafter is $26.31. Accordingly, to the date of judgment herein the amount of interest pursuant to s 100 totals $130,167.38.

3. [63]

   Ms Eather also annexes a certificate under s 8AAZJ of the TAA in relation to the amount outstanding in respect of the running balance account deficit for the Defendant signed by a Deputy Commissioner of Taxation. Under that section the certificate is prima facie evidence of the amount specified in the certificate. That discloses that the amount due by the Defendant in relation to that debt is $13,829.70. There is no evidence to the contrary.

4. [64]

   Accordingly, the total owing to the Plaintiff in respect of the penalties and the RBA debt is $1,894,929.53.

5. [65]

   Accordingly, I make these orders: