Deputy Commissioner of Taxation v Lee; Deputy Commissioner of Taxation v Silverbrook (No. 2)

1. [1]

   The plaintiff claims an amount of $10,281,534.67 plus interest from the defendants as the directors of a company called Worldwide Speciality Property Services Pty Limited (ACN: 066 573 671), formerly known as Silverbrook Research Pty Limited (“the company”). The amounts claimed are in respect of director penalties imposed as a result of the failure of the company to pay three amounts in total as follows:

Legislative provisions

1. [2]

   Pursuant to s 16-70 of Sch 1, an entity that withholds an amount under Div 12 of Sch 1 in accordance with the PAYG withholding rules is required to pay the amount withheld to the Commissioner Such payment is to be made in accordance with Sub-div 16-B of Sch 1.

2. [3]

   Pursuant to s 268-10 of Sch 1, the Commissioner may make an estimate of the unpaid and overdue amount of an entity's liability to pay the Commissioner as required under the PAYG withholding rules and s 16-70 of Sch 1. If the Commissioner makes an estimate of an entity's liability, the Commissioner is to give the entity written notice of the estimate pursuant to s 268-15 of Sch 1. Unless the estimate has been reduced or revoked, an entity which has been given a notice of estimate under s 268-15 is required to pay to the Commissioner the amount of the estimate (s 268-20 of Sch 1). The amount is due and payable when the Commissioner gives the entity the notice of estimate. The liability of an entity to pay the amount of the estimate is a separate and distinct liability from the underlying liability of the entity to pay the amount withheld (s 268-20 of Sch 1).

3. [4]

   Pursuant to s 36 of the Superannuation Guarantee (Administration) Act 1992 (Cth), the Commissioner may make an assessment of the unpaid amount of the superannuation guarantee charge (SGC) payable by an entity if an employer has not lodged a SGC statement for the quarter. An assessment of an employer’s superannuation guarantee shortfall made pursuant to s 36 is payable on the day the assessment is made.

4. [5]

   Subdivision 269-B of Sch 1 TAA contains provisions dealing with directors’ obligations to cause a company to pay certain liabilities due and payable by the company, directors’ liability to penalty if the company fails to comply with its obligations, and the recovery of director penalties by the Commissioner. The obligations which relevantly attract director penalties include a company's obligation to pay by the relevant due date:

5. [6]

   Section 269-15 of Sch 1 provides that the directors of the company must, from time to time, cause the company to comply with its obligations to pay relevant liabilities by the due day. Directors continue to be under their obligation until:

6. [7]

   Section 269-20(2) of Sch 1 imposes a penalty on a director in respect of a director's unmet obligations under s 269-15 of Sch 1 to cause payment to be made to the Commissioner. The amount of the penalty is equal to the unpaid amount of the company's liability under its obligation pursuant to s 269-20(5) of Sch 1. A penalty payable by a director under Subdivision 269-B is a tax related liability, and is a debt due to the Commonwealth, payable to the Commissioner, and recoverable by the plaintiff (s 250-10(2), item 139 and s 255-5 of Sch 1).

7. [8]

   Pursuant to s 269-25 of Sch 1, the Commissioner is required to give to a director 21 days' notice under that section prior to commencing proceedings to recover a penalty. Notice may be given by the Commissioner by leaving it at or posting it to, an address that appears from information held by the Australian Securities Investment Commission to be, or to have been within the last seven days, the place of residence or business of the director (s 269-50 of Sch 1). Notice under s 269-25 is given at the time that the Commissioner posts or leaves the notice: s 269-25(4) of Sch 1, s 29 of the Acts Interpretation Act 1901 (Cth) having no operation.

8. [9]

   Section 269-30 of Sch 1 provides that a penalty will be remitted if, before or within 21 days after the Commissioner gives a notice under s 269-25, a director is no longer under the obligation imposed by s 269-15, for example, because the company begins to be wound up or an administrator is appointed. However, a penalty cannot be remitted to any extent because a director ceases being under an obligation because of the operation of s 269-15(2)(b) or (c) (an administrator is appointed or the company begins to be wound up) where:

The company’s tax obligations

1. [10]

   In the present case, the company withheld amounts for the purposes of the PAYG provisions in Div 12 of Pt 2-5 of Sch 1 for the period 17 October 2012 to 23 March 2013. Those amounts were notified by the company's accountant, Michael Kuster, of MTK Accounting Services Pty Ltd on 15 July 2013. Mr Kuster notified the Commissioner of the company's obligations to pay the PAYG Withholding Liabilities more than three months after each of the respective due dates. The plaintiff claims that the company did not pay by the due dates any of the amounts withheld.

2. [11]

   On 31 March 2014 the Commissioner issued to the company a Notice of Estimate of Liability in respect of PAYG withholding under s 268-15 of Sch 1 for 22 periods commencing 10 August 2011 and concluding 1 June 2012. Under s 268-20, the estimates contained in the Notice of Estimate became due and payable on 31 March 2014.

3. [12]

   The company did not pay by the due date the liabilities notified in the Notice of Estimate nor did it lodge a statutory declaration pursuant to s 268-40. Under that section, the statutory declaration could identify facts sufficient to prove that a specified lesser amount was the amount unpaid or could show that the identified liability never existed.

4. [13]

   Pursuant to s 36 of the Superannuation Guarantee (Administration) Act, the company was assessed for the SGC for the quarters ending 30 June, 30 September and 31 December 2012, 31 March and 30 June 2013. Section 350-10 of Sch 1 makes the notices of assessment conclusive. The company did not remit the SGC on or before the due days.

5. [14]

   On 28 March 2014 Director Penalty Notices were issued to the defendants for the SGC amounts. On 11 April 2014 Director Penalty Notices were issued to the defendants for the PAYG withholding amounts and the PAYG estimates. Those notices were posted to the defendants at the address in ASIC’s records for the company. The evidence is that those notices were not returned to the ATO.

6. [15]

   The company went into voluntary liquidation on 16 April 2014.

7. [16]

   While the Notice of Estimate establishes a due date for payment of the estimate, the company remains obliged to have notified and remitted the actual PAYG withholding. As the company was a large withholder the due dates for the payment of the PAYG Withholding Actuals are pursuant to s 16-75 of Sch 1.

8. [17]

   The last due date, that is the date each actual tax liability should have been originally reported and paid, for each tax liability in each of the respective groups of tax liabilities is:

9. [18]

   Three months from each of those dates is 28 June 2013, 7 September 2012 and 28 November 2013 respectively. The result is that the provisions of s 269-30(1) of Sch 1, which govern the remission of penalties, do not operate. Accordingly, the fact that the company went into liquidation on 16 April 2014 will not mean that the penalties are remitted. The failure to liquidate the company within the three month period has implications for defences which the defendants seek to raise under s 269-35 of Sch 1.

10. [19]

    A statement of claim was issued against each of the directors on 18 February 2015. In each proceedings, the statement of claim was amended on 12 December 2016 simply to correct the date on which the Commissioner gave the company written notice of the estimates. The original statement of claim had pleaded that the Notice was given on 11 April 2014 but it was corrected in the amended statements of claim to 31 March 2014.

11. [20]

    The defendants seek to defend the claims made on four broad grounds as follows:

The hearing

1. [21]

   It is necessary to say something about the course of the hearing. The hearing commenced on Monday, 25 March 2019. Ms Foda of counsel for the plaintiff opened the case. I then invited Ms Lee, to whom l had granted leave to appear also for Mr Silverbrook, to outline in general terms what her and Mr Silverbrook’s defences were to the claims made. Shortly after she began to do that, she received a message on her phone to say that Mr Silverbrook had been taken to hospital, or needed to be taken to hospital, because of his heart condition. She sought an adjournment of the proceedings to the following day. That adjournment was not opposed and I granted it.

2. [22]

   Later that morning, Ms Lee contacted my Associate and informed her that she would be unable to appear on 26 March because of Mr Silverbrook’s condition. After ascertaining the attitude of the plaintiff to a further adjournment, I adjourned the proceedings part heard to Monday, 1 April 2019. On that day, Mr Lipp of counsel announced his appearance for the defendants to apply for an adjournment of the hearing, to the intent that the proceedings would be stood over to the Registrar’s list at a future date and be given a further hearing some time subsequent to that.

3. [23]

   This application for an adjournment was notified on Friday, 29 March 2019. I instructed my Associate to forward an email to the parties on that day to inform the defendants, in particular, that if the adjournment application was unsuccessful, the hearing would continue immediately after the determination of the adjournment application. That email was acknowledged by Mr Lipp.

4. [24]

   I refused the adjournment application: Deputy Commissioner of Taxation v Lee; Deputy Commissioner of Taxation v Silverbrook (No. 1) [2019] NSWSC 346.

5. [25]

   Mr Lipp informed me that he was instructed only to appear on the adjournment application. When the application was refused, Mr Lipp informed me that neither of the defendants would be appearing. He sought and was granted leave to withdraw, with the result that there was no appearance for the defendants. Counsel for the plaintiff informed me that the plaintiff wished to proceed. In the circumstances, I determined that the hearing should proceed notwithstanding the absence of the defendants. Rule 29.7 Uniform Civil Procedure Rules 2005 (NSW) applied. However, in fairness to the defendants who had, to that time, appeared and filed evidence, I indicated to counsel for the plaintiff that I would give consideration to any defence raised by the defendants that was able to be raised in answer to the claim.

The evidence

1. [26]

   The plaintiff read two affidavits from Fiona Hill, a public servant in the Australian Taxation Office, who had the care and conduct of the matter concerning the defendants and their company. Ms Hill identified relevant documents upon which the plaintiff relied to issue the various assessments and penalty notices.

2. [27]

   The plaintiff relied on the affidavits of two other public servants who were responsible for preparing the penalty notices and posting them. Finally, the plaintiff relied on the affidavit of a postal transport coordinator at Dandenong Letter Centre, employed by Australia Post, to explain the usual practice of the collection of letters posted in a box on the ground floor of a building in Dandenong, Victoria occupied by the plaintiff.

3. [28]

   The defendants’ evidence is voluminous. The first affidavit of Janette Lee sworn 8 May 2017 contains 2,615 paragraphs and makes reference to documents extending to 7,711 pages. Her second affidavit of 3 April 2018 contains 975 paragraphs, many of which are repetitive of material contained in the first affidavit. Mr Silverborrok filed two affidavits, the first consisting of 899 paragraphs and the second 380 paragraphs. The defendants refer in total to some 19,227 pages of documents which were exhibited to the affidavits.

4. [29]

   A great deal of the material in the affidavits is irrelevant and most of it is in inadmissible form. It consists of conclusions, statements of belief and statements of intention.

5. [30]

   In the light of the defences raised, the decision of the Court of Appeal in Anglo American Investments Pty Ltd v Deputy Commissioner of Taxation [2017] NSWCA 17; (2017) 347 ALR 134 was relevant. As far as the defences raised by the defendants in the present proceedings, the Court of Appeal determined that:

6. [31]

   The effect of those determinations is that the only defence available to the defendants in the present matter is the statutory defence provided in s 269-35 of Sch 1. Before considering that defence, it is necessary to see if the Commissioner otherwise establishes that the debts said to be owed by the defendants are indeed owing.

The plaintiff’s claim

1. [32]

   The obligations on the part of the company and the obligations on the part of the defendants have been set out earlier. The evidence establishes that the actual PAYG withholding, the estimates PAYG withholding and the SGC were not paid by the company. Subject to a consideration of the defence available to the defendants under s 269-35, the evidence discloses that the defendants did not pay the amounts for which the company was liable.

2. [33]

   Section 255-45 provides:

3. [34]

   There are in evidence certificates by the Deputy Commissioner of Taxation in relation to each of the defendants stating that the directors have a tax-related liability being director penalties arising under s 269-20 of Sch 1 with respect to SGC amounts, PAYG withholding amounts and PAYG withholding amounts (estimates), and that the sum of $10,281,534.67 is a debt due and payable by each of the directors. Contrary to the way the defence is expressed, the certificate was not given by Fiona Hill, but by the Deputy Commissioner of Taxation. Nor was it given pursuant to 255-5 of Sch 1 but pursuant to s 255-45 of Sch 1.

Defences

1. [35]

   As noted earlier, the defendants did not ultimately appear at the hearing. In deference, however, to the fact that the defendants were appearing for themselves in the proceedings and had prepared extensive affidavits detailing matters associated with the incurring of the various tax liabilities, I will consider whether there is any defence to the plaintiff’s claim.

2. [36]

   The only defence available to the defendants is one under s 269-35 of Sch 1. That section relevantly provides:

3. [37]

   The defence makes clear that the defendants rely on paragraph (2)(a) and not paragraph (2)(b). They cannot, however, rely on sub-paragraphs (ii) or (iii) because the winding up took place outside the time allowed in s 269-30. Accordingly, the only defence available to the defendants is that allowed by sub-paragraph (i).

4. [38]

   The defendants’ written submissions set out the steps they claim they took to satisfy s 269-35 as follows:

5. [39]

   The principles applicable to a defence under s 269-35 are found particularly in a number of cases dealing with ss 222AOB and 222AOJ of sub-division B of division 9 of Part VI of the Income Tax Assessment Act 1936 (Cth). The provisions of s 222AOJ are relevantly similar to what is found in s 269-35 of Sch 1.

6. [40]

   In Canty v Deputy Commissioner of Taxation (2005) 63 NSWLR 152; [2005] NSWCA 84 Handley JA (with whom Beazley JA agreed and Santow JA agreed with additional reasons) said:

7. [41]

   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 at [27]:

8. [42]

   In Deputy Commissioner of Taxation v Saunig (2002) 55 NSWLR 722; [2002] NSWCA 390 Hayden JA (with whom Sheller JA and Gzell J agreed) discussed the meaning of the word “reasonable”, and said:

9. [43]

   I have endeavoured to take into consideration aspects of the defendants’ evidence that might, on its face, be thought to provide some support for their defence of having taken all reasonable steps. The plaintiff, at my request, has assisted in that exercise by identifying possible portions of the affidavit material that might require consideration. What is set out hereinafter are examples of the sort of evidence relied upon by the defendants in that regard.

10. [44]

    Although pursuit of professional advice may support a defence under s 269-35(2)(a), the statement in this paragraph (and many others) is conclusionary, with no detail provided nor contemporaneous documents identified to support the conclusionary statements. Since the obligation entails for the whole period, there would need to be proof of the “constant legal advice and assistance” sought.

11. [45]

    There are a number of paragraphs concerning the use of external advisors:

12. [46]

    The material in these paragraphs is in inadmissible form. It consists of conclusions and generalities with no admissible supporting evidence or corroboration. In any event, the obligation which the company had was to remit the withheld amounts, pay the PAYG estimates and pay the assessment of the superannuation guarantee charge. The material in these paragraphs does not evince reasonable steps to ensure that the company’s obligations were complied with.

13. [47]

    The affidavit continued:

14. [48]

    These paragraphs suffer in the first instance from similar problems to those previously discussed. In addition, many of these paragraphs give evidence only of belief and not of action. Finally, the statement that the directors caused the company to be put into voluntary liquidation cannot, in the circumstances, be a reasonable step because, pursuant to s 269-30, the time had passed for that step to be taken in a way which would relieve the directors of their liabilities.

15. [49]

    Paragraphs 655 and 656 do not constitute evidence of reasonable steps. Paragraph 657 to 659 suffer from the same problem of conclusionary evidence and broad generality earlier referred to.

16. [50]

    Paragraphs 94, 186, 654, 684 to 728 and 730 deal with a trust that the directors claim they set up called the Minter Ellison Trust.

17. [51]

    At Tab 11 to the affidavit of Mr Silverbrook sworn 8 May 2017 and Tab 1444 to the affidavit of Ms Lee was a copy of the restructure agreement between Memjet and Silverbrook Research which provided for the establishment of the trust account. Pursuant to clause 8.8.4 the trust fund was set up for the purpose of “paying unaffiliated third party vendors for services and/or materials provided to Silverbrook Research for Memjet related goods and services.” The clause provided that Minters was to be the sole arbiter in deciding whether payments should be made from the trust to Silverbrook Research.

18. [52]

    It is apparent that this arrangement was concerned with the payment of outstanding invoices for goods and services. Unless Silverbrook Research had already paid the invoice itself, the money was to go directly to the third party goods/service provider. It is unclear, in those circumstances, how the money could have assisted the company in discharging its tax liability. In any event, the directors cannot show that they have taken reasonable steps to cause the company to comply with its obligation to pay the amounts when the money was contained in a trust where external solicitors were to be the sole arbiters of deciding when monies should be paid.

19. [53]

    In any event, the obligation to pay existed throughout the period from 2012 (for the PAYG actuals and the SGC). The evidence at paragraphs 730, 763-764 and 770 demonstrates that the Minter Ellison trust was “frozen”. A meeting was to be held in October 2012 to discuss superannuation and unpaid costs from the trust.

20. [54]

    Paragraphs 802 and following of Ms Lee’s affidavit refer to what is described as the second trust for payroll administration. This was said to have been “set up to give effective [sic] to payment regime agreed between Silverbrook Research and Memjet parties”. Clause 8.8.2 placed a limit of $5.5million on the trust. The Deed establishing the trust was the same restructure agreement between the company and Memjet mentioned at [51] above. Clause 8.8.2 provides for Memjet to pay certain monies in respect of certain employees in terms of a definition of SBR Memjet Project Employee. The setting up of the trust cannot be considered as the taking of a reasonable step to ensure that the directors complied with their tax obligations.

21. [55]

    Paragraph 932 relies on the assertion that a former employee of the company, who took proceedings in relation to his wages, had been advised by the ATO that his SGC had been paid in full, to justify a belief that there was no outstanding SGC charges for all employees. This is not a step, let alone a reasonable one. It is a belief that was scarcely justifiable.

22. [56]

    Paragraph 103 of Mr Silverbrook’s affidavit says this:

23. [57]

    This paragraph highlights the inadequacies of the company’s tax compliance framework, which resulted in the aforementioned assumptions and expectations of the directors. By no means can it be found on the basis of this evidence, that the directors took all reasonable steps to ensure that the company’s tax obligations were complied with. The impression from this evidence and other paragraphs in both Ms Lee’s affidavits and Mr Silverbrook’s affidavits is that the directors were suggesting that there were no reasonable steps they could have taken in the circumstances, a position they eschewed in their submissions.

24. [58]

    A number of other paragraphs in Mr Silverbrook’s affidavit (277, 429, 689-690, 718-719 and 833) suggested that because of what had happened to the company, it did not have the resources to pay the tax. That does not amount to a defence to the claim.

25. [59]

    In Saunig, Heydon JA said at [28]:

26. [60]

    The same could be said here of Ms Lee and Mr Silverbrook. The evidence shows that despite the advice they received from external professionals, they believed or assumed that others within and outside the company would be responsible for the company’s tax obligations. As Mr Silverbrook said in his affidavit of 28 March 2018 at paragraph 276:

27. [61]

    Other evidence also pointed to an acknowledgement by the directors that things went beyond their control in 2011. In the same affidavit, Mr Silverbrook said at paragraph 277:

28. [62]

    Of course, that statement is a very broad conclusion. However, it tends to identify the problem which shows that at least from 2011 the directors were not taking all reasonable steps to ensure the company complied with its tax obligations.

29. [63]

    The evidence of the defendants does not show that they took all reasonable steps to ensure that the directors caused the company to comply with its obligation to pay the PAYG withholding amounts, the PAYG estimates or the SGC. The other defences pleaded are not available to the defendants: Anglo-American Investments.

30. [64]

    The plaintiff is entitled to judgment. The plaintiff should bring in short minutes showing calculation of interest to the date of judgment.