Lee v Deputy Commissioner of Taxation; Silverbrook v Deputy Commissioner of Taxation

PAYNE JA: On 31 July 2019, the primary judge, Davies J, gave reasons foreshadowing orders made on 6 August 2019 that the appellants, Ms Lee and Mr Silverbrook, pay the respondent, the Deputy Commissioner of Taxation, an amount of $13,961,633.90.

The appellants had been directors of the company Worldwide Speciality Property Services Pty Ltd (ACN: 066 573 671), formerly known as Silverbrook Research Pty Ltd (“Worldwide”).

The Deputy Commissioner of Taxation, as a delegate of the Commissioner of Taxation, sought in these proceedings an amount of $10,281,534.67 plus interest from the appellants as the directors of Worldwide. The amounts claimed were in respect of Director Penalties imposed as a result of the failure of Worldwide to pay in total three amounts as follows:

It was only the second of these amounts which was ultimately in issue on the appeal.

Worldwide withheld amounts for the purposes of the PAYG provisions in Div 12 of Pt 2-5 Div 12 of Sch 1 to the Taxation Administration Act for the period 17 October 2012 to 23 March 2013. Worldwide did not pay by the due dates any of the amounts withheld. On 11 April 2014, Director Penalty Notices were issued by the Commissioner to the appellants for the PAYG withholding amounts. The amount the subject of the Director Penalty Notices was not remitted to the Commissioner. The primary judge entered judgment against the appellants for the amount of these Director Penalty Notices plus interest. This is no longer in issue on this appeal.

On 31 March 2014, the Commissioner issued Worldwide with a Notice of Estimate of Liability under s 268-15 of Sch 1 to the Taxation Administration Act in respect of PAYG amounts withheld and not paid to the Commissioner for 22 periods concluding no later than 1 June 2012. Under s 268-20 of Sch 1 to the Taxation Administration Act, the estimates contained in the Notice of Estimate became due and payable on 31 March 2014. Worldwide did not pay the liabilities notified in the Notice of Estimate by the due date nor did it lodge a statutory declaration pursuant to s 268-40 of Sch 1 to the Taxation Administration Act. The purpose of s 268-40 is to permit the recipient of a Notice of Estimate to identify in a statutory declaration that a lesser PAYG amount was in fact the amount unpaid. The statutory declaration could also be deployed to show that the estimated liability never existed.

On 11 April 2014, Director Penalty Notices were issued by the Commissioner to the appellants for the amount of the PAYG liabilities notified in the Notice of Estimate. The amount the subject of the Director Penalty Notices was not remitted to the Commissioner. The primary judge entered judgment against the appellants for the amount of these Director Penalty Notices plus interest. This is the subject matter of this appeal.

Pursuant to s 36 of the Superannuation Guarantee (Administration) Act 1992 (Cth), Worldwide was assessed for the superannuation guarantee charge amount for the quarters ending 30 June, 30 September and 31 December 2012, and 31 March and 30 June 2013. Section 350-10 of Sch 1 to the Taxation Administration Act makes the Notices of Assessment conclusive evidence in proceedings of this kind, save for circumstances not presently material. Worldwide did not remit the superannuation guarantee charge amounts on or before the due dates. On 28 March 2014, Director Penalty Notices were issued to the appellants for the superannuation guarantee charge amounts. The amount the subject of the Director Penalty Notices was not remitted to the Commissioner. The primary judge entered judgment against the appellants for the amount of these Director Penalty Notices plus interest. This is no longer in issue on this appeal.

Worldwide went into voluntary liquidation on 16 April 2014.

The hearing before the primary judge commenced on Monday 25 March 2019. Counsel for the Commissioner opened the case. The primary judge invited Ms Lee, who appeared for herself and who was granted leave also to appear on behalf of Mr Silverbrook, to outline in general terms the appellants’ defences 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 granted.

Later that morning, Ms Lee contacted the primary judge’s associate and said that she would be unable to appear on Tuesday 26 March because of Mr Silverbrook’s condition. The proceedings were adjourned part heard to the following Monday, 1 April 2019. On Monday 1 April 2019, Mr Lipp of counsel appeared for the appellants to apply for an adjournment of the hearing. The primary judge refused the adjournment application: Deputy Commissioner of Taxation v Lee; Deputy Commissioner of Taxation v Silverbrook (No 1) [2019] NSWSC 346. Mr Lipp withdrew and the appellants played no further part in the proceedings below. No appeal is brought from the decision to refuse the adjournment.

The only grounds of the amended notice of appeal which were pressed were grounds 6 and 7 which provided:

For the reasons which follow the appeal should be dismissed.

The findings of fact made by the primary judge on the relevant issues were set out in Deputy Commissioner of Taxation v Lee; Deputy Commissioner of Taxation v Silverbrook (No 2) [2019] NSWSC 954:

The primary judge concluded, relevantly, that:

Finally, his Honour rejected the defences advanced by the appellants in their defence:

On 6 August 2019, his Honour made orders that in proceedings 2015/50686 against Ms Lee:

In proceedings 2015/50872 against Mr Silverbrook the following orders were made:

On the morning of the hearing of the appeal, Mr McGovern SC, Senior Counsel for the appellants, sought to file in court a further amended notice of appeal containing the following additional ground:

Leave to amend was refused on that day with reasons reserved. These are my reasons for refusing leave to amend.

Leave to rely on the new ground was opposed by Mr Lloyd SC, Senior Counsel for the Commissioner, for the following reasons:

Those submissions should be accepted.

The primary judge set out the history of these proceedings in Lee (No 1). On 18 February 2015, these proceedings were commenced against each of the appellants. A notice of appearance was eventually filed on behalf of the appellants on 7 September 2015. The first defence was filed by the appellants on 10 October 2016. A further amended defence was filed on 14 November 2017. After a series of further procedural delays the matters were eventually brought on for hearing before the primary judge in March 2019, over four years after the proceedings had been commenced. His Honour’s judgment was delivered on 31 July 2019.

On 13 August 2019, the appellants each filed a notice of appeal. The matter was listed for hearing in this Court on 6 December 2019. On 7 November 2019, the appellants’ then solicitors filed a notice of ceasing to act. On 25 November 2019, the appellants filed notice of the appointment of new solicitors. On 27 November 2019, the week before the date fixed for the appeal hearing, the appellants filed written submissions raising substantially new issues. On 2 December 2019, the respondent filed a notice of motion seeking an order that the appeal date be vacated in order to investigate the new matters raised by the appellants. On 2 December, the 6 December hearing date was vacated and the present hearing date fixed.

The Commissioner’s submission that the proposed new ground of appeal is weak should be accepted. The onus of proving the s 269-35(2)(a)(iii) defence sought to be raised was a matter on which the appellants bore the onus. The appellants chose not to participate in the hearing before the primary judge in the circumstances described in Lee (No 1). Mr Lloyd SC is correct to submit that in the circumstances there described and on the basis of the evidence led the appellants “can’t possibly be seen as having proved a defence”. To permit them to attempt to do so for the first time on appeal is not a course to be encouraged.

The Commissioner’s submission that the proposed new ground of appeal would need properly to be investigated should also be accepted. The primary judge considered the appropriate test set out in Canty v Deputy Commissioner of Taxation (2005) 63 NSWLR 152; [2005] NSWCA 84. His Honour addressed the appellants’ pleaded defences. The present claim was not raised as a distinct issue before the primary judge. As the appellants bore the onus on that matter it needed to be squarely raised. I accept Mr Lloyd’s submission that if the amendment were allowed an adjournment would be required as the Commissioner was taken by surprise.

All litigation in this Court, including litigation involving the collection of tax, attracts the obligations in Pt 6 of the Civil Procedure Act 2005 (NSW). A hearing date for this appeal was previously vacated by reason of a late change in the appellants’ grounds of appeal. The appellants have had ample opportunity to formulate and present their case on appeal. Even though the proposed new ground of appeal is weak, if it were allowed the appeal would have needed to be adjourned with the consequent expense and delay to the parties. The interests of other litigants in the Court whose cases could otherwise have been heard would have been adversely affected. That outcome is antithetical to the dictates of ss 56-58 of the Civil Procedure Act. For these reasons I joined in the order refusing the application to further amend the notice of appeal.

The only grounds of appeal pressed are those set out at [12] above. In essence, the appellants submit that by reason of Worldwide going into liquidation on 16 April 2014 the amount of the Director Penalty Notices was remitted and there was no longer a liability upon them to pay the amount of the PAYG Notice of Estimate served upon Worldwide. The acceptance of that submission would have the consequence that the “lockdown” provisions in s 269-30(2) of Sch 1 to the Taxation Administration Act relating to Director Penalty Notices were ineffective in the present circumstances.

To determine the issue raised on this appeal, it is necessary to describe in a little detail the scheme of PAYG taxation, the PAYG Estimate Notice regime, the Director Penalty provisions and the “lockdown” provisions.

The essential feature of PAYG taxation is that employees earning salaries and wages do not themselves (at least in the first instance) remit income tax payable on those salaries and wages to the Commissioner. Instead, entities responsible for paying salaries and wages are obliged to withhold amounts payable as income tax from employees’ salaries and wages. The withholding entity is separately required to remit the amounts so withheld to the Commissioner.

The obligation to withhold is contained in Div 12 of the Taxation Administration Act. The relevant obligation here, the obligation to withhold from payments of salary and wages to an employee, is contained in s 12-35. That section provides:

An entity must not fail to withhold an amount that is required by Div 12 to be withheld:

Section 16-75 of Sch 1 to the Taxation Administration Act is the provision that imposes the relevant legal obligation in this case. A “large withholder” is required to pay amounts from salaries and wages withheld to the Commissioner within the time identified in the section. It is common ground that Worldwide was a large withholder. Section 16-75(1) relevantly provides:

In respect of any unpaid and overdue amounts, the Commissioner may make an estimate of the unpaid and overdue amount of a liability under s 268-10 of Sch 1 to the Taxation Administration Act which provides: [3]

An entity receiving a PAYG Notice of Estimate is obliged to pay the amount of the estimate in the Estimate Notice. Section 268-20 provides: [4]

The accuracy of the estimate contained in the Estimate Notice is irrelevant to liability imposed on the entity to pay the amount identified in the Estimate Notice. Section 268-25 provides:

The principal means by which a recipient may dispute a PAYG Estimate Notice are described in s 268-40. Under that section, a statutory declaration may be made which may identify that a specified lesser amount was the amount unpaid or no liability to pay PAYG amounts withheld existed. Section 268-40 provides:

The estimates regime was plainly designed to ensure that those responsible for collecting and remitting PAYG amounts (including company directors) both collected and paid the amounts required by the Income Tax Assessment Acts 1936 (Cth) and 1997 (Cth). The estimates regime was designed as a statutory tool facilitating recovery of unremitted PAYG amounts. This was explained at pp 19-20 of the Explanatory Memorandum to the Insolvency (Tax Priorities) Legislation Amendment Bill 1993 (Cth) which introduced the estimate regime:

The “opportunity to inform the Commissioner of the actual amounts deducted” refers to s 268-40 set out above. It was specifically envisaged that the estimate made by the Commissioner was unlikely to identify the actual amount withheld which is required to be paid. As the Explanatory Memorandum observed at p 25:

Thus, in context, relief from the obligation to pay the estimate should be understood as based upon relevant parties taking up the “opportunity to inform the Commissioner of the actual amounts deducted”, being that:

In addition to the opportunity to provide a statutory declaration relating to Worldwide’s liability to pay PAYG amounts withheld, the Commissioner accepted that the appellants were both “a party to proceedings before a court that relate to the recovery of the unpaid amount of the estimate” and could have served an affidavit for the purposes of s 268-40(1) – Item 2 that would have the effect of reducing or revoking the estimate given to Worldwide. That affidavit was required to be filed 14 days after the appellants first took a procedural step as a party to the present recovery proceedings (which would have been 14 days after the appellants first filed an appearance on 7 September 2015) [5] or such longer period allowed by the Court. No affidavit was filed and no application was ever made for an extension of time to file one.

The issue on this appeal arises in circumstances where:

Section 269-15 of Sch 1 to the Taxation Administration Act provides that:

Section 269-20 to Sch 1 of the Taxation Administration Act provides that:

The issue on this appeal is the operation of the “lockdown” provisions contained in s 269-30(2) of Sch 1 to the Taxation Administration Act. At the relevant time they provided:

The relevant item of s 269-30(2) is Item 2. The question is the identification of the “day by which the company was obliged to pay the underlying liability to which the estimate relates”. The appellants contend that the trial judge erred in finding that s 269-30(2) of Sch 1 to the Taxation Administration Act applied in respect of Director Penalties which had become payable by the appellants in respect of Notices of Estimates issued to Worldwide such that those Penalties were not remitted under s 269-30(1) by reason of Worldwide being placed into liquidation.

The essence of the appellants’ submission is that the Commissioner was required to prove the “day by which the company was obliged to pay the underlying liability to which the estimate relates”, meaning that for the “lockdown” provisions in s 269-30(2) of Sch 1 to the Taxation Administration Act to apply, the Commissioner was required to prove that an underlying liability existed in respect of the withholding periods referred to in the Notice of Estimate. It was submitted that the Commissioner had failed to do so.

I reject the appellants’ submission for two reasons:

In context it is clear that s 269-30(2) directs attention to the date when the asserted underlying liability the subject of an estimate became due. Subsection 269-30(2) operates, and is plainly intended to operate, irrespective of the existence of any underlying liability in fact. The Commissioner was not in the present case under a burden to establish the existence of any underlying liability in fact.

As I have explained, Worldwide was a large withholder within the meaning of s 16-95. Worldwide became liable to pay to the Commissioner the amount specified in the Notice of Estimate given to Worldwide on 31 March 2014. Worldwide’s liability for the estimate given by the respondent was for periods of withholding that concluded no later than 1 June 2012. Pursuant to s 16-75 the due date for payment of the amounts the subject of the underlying withholdings the subject of the Notice of Estimate was no later than 7 June 2012.

On 31 March 2014, pursuant to s 269-20, the appellants became liable to a penalty in an amount equal to the unpaid amount of Worldwide’s liability under the Notice of Estimate. The amount was due and payable on 31 March 2014.

Worldwide was wound up on 16 April 2014, being a date prior to 21 days after the appellants were given written notice under s 269-25. By reason of s 269-15(2)(c), upon Worldwide being wound up the appellants were no longer under the obligation imposed on them by s 269-15(1) to cause Worldwide to comply with its obligation to pay the amounts specified in the Notice of Estimate. Under s 269-30(1), if it applied, the appellants would “stop being under the relevant obligation” to pay the amount of the Director Penalty Notices as Worldwide went into liquidation within 21 days after the Commissioner gave the appellants the Penalty Notices.

As the heading of s 269-30 indicates – “Effect on penalty of directors’ obligation ending before end of notice period” – the section is directed to the precise question here. As a Notice of Estimate is here involved, the relevant item is s 269-30(2) – Item 2 which, in the circumstances of this case, putting all elements of the table together, reads:

The question on the appeal is whether the appellants ceased being under the relevant obligation “after the last day of the 3 months after the day by which the company was obliged to pay the underlying liability to which the estimate relates”. The appellants’ essential case is that:

Some points about the differing nature of an estimate made of the amount required to be paid and the separate underlying liability to pay the PAYG amount withheld should be made.

The Commissioner is empowered by s 268-10(1) to estimate “the unpaid and overdue amount of a liability” in respect of withholding amounts. In doing so, the Commissioner is entitled to have regard to anything he or she thinks relevant: s 268-10(3). The clear legislative intent is that the liability to pay the amount of the estimate should be separate to the liability to pay the PAYG amount actually withheld. This can be seen in the following provisions:

These provisions are designed to give effect to the “efficient and timely recovery of the unremitted deductions”, as stated in the Explanatory Memorandum to the Insolvency (Tax Priorities) Legislation Amendment Bill 1993 at p 19, by making those responsible for withholding and paying PAYG amounts liable for the full amount of the estimate, regardless of the existence of any underlying liability in fact, subject always to the opportunity to “inform the Commissioner of the actual amounts deducted” (at p 20) by statutory declaration or affidavit, by which means the liability to pay can be reduced or eliminated.

Where the entity in receipt of an estimate does not take advantage of the opportunity to “inform the Commissioner of the actual amounts deducted” the entity is liable for the full amount of the estimate, regardless of the actual liability, if any, to pay the PAYG amounts to the Commissioner. In recovering the amount of the Notice of Estimate from the entity served with the Notice, the Commissioner does not need to prove the extent of the underlying liability to pay PAYG amounts in fact, or even if such a liability exists. To impose such a requirement in the case of a Director Penalty Notice in the context of s 269-30(2) would be inconsistent with the statutory scheme of estimates. So much is made clear by s 268-25.

The words “the unpaid and overdue amount of a liability” in s 268-10(1) are not words of limitation. As was observed by Derrington J in CLK Kitchens & Joinery Pty Ltd v Federal Commissioner of Taxation (2019) 268 FCR 166; [2019] FCA 1086 at [74] :

Derrington J also explained the legislative purpose of the estimates regime as follows at [78]-[80]:

Despite this being the clear legislative intention of the estimate provisions, the appellants claim that when the “lockdown” provisions in s 269-30 come to be construed, the legislature should be understood to have adopted precisely the opposite approach, and to have required the Commissioner in seeking to recover the amount of a Director Penalty Notice based on an estimate to prove the existence of an actual liability to pay a PAYG amount the subject of a Notice of Estimate. No sensible reason why that might be so was advanced by the appellants.

The construction of the relevant provisions I prefer is consistent with the statutory purpose of the estimates provisions. The relevant “lockdown” provision, s 269-30(2) – Item 2, should be understood as consistent with and supportive of the legislative purpose of the estimate provisions.

Section 269-30(2) (the lockdown provision) was first inserted in the Taxation Administration Act by the Tax Laws Amendment (2012 Measures No. 2) Act 2012 (Cth). The purposes of the amendments are set out in the Explanatory Memorandum to the Bill at [1.14] as follows:

If the appellants’ construction is correct this clear legislative purpose has misfired spectacularly. Rather than “ensuring that directors cannot discharge their director penalties” by placing their company into liquidation when PAYG withholding remains unpaid and unreported three months after the due date, that construction would have precisely that effect unless the Commissioner was able to prove that the entity with the withholding liability based on a Notice of Estimate in fact had such an underlying liability.

To the contrary, s 269-30(2) – Item 2 does not require proof of an underlying liability for the subsection to apply. Instead, s 269-30(2) directs attention to the date when the relevant underlying liability the subject of a Notice of Estimate became due, assuming that liability to exist in the same way the estimate does. Section 16-75(1) is explicit as to how that date is to be ascertained for large withholders such as Worldwide. Subsection 269-30(2) – Item 2 is not concerned with establishing the quantum of the underlying liability or whether or not it exists in fact to any extent.

In making an estimate, the Commissioner must arrive at an amount that he or she thinks is reasonable: s 268-10(2). However, the liability to pay the estimate exists, even if the estimate is inaccurate or erroneous. Proof of the true extent of an entity’s non-compliance with its withholding obligations is not a pre-requisite to the Commissioner making a valid estimate. The essential purpose of the estimate regime is to require either a company or its directors to provide information about the correct amounts actually withheld to the Commissioner promptly, or to verify facts from which it could be concluded that the company did not fail to comply with its obligations to remit amounts withheld under Div 12.

The obligation that is sought to be enforced under the Director Penalty regime in respect of an estimate is the prompt reporting and payment by a company of its PAYG withholding amounts. The possibility that a director may be personally liable to pay an estimate even after placing a company into liquidation is plainly an intended consequence of the Act. The Director Penalty and lockdown provisions provide a strong incentive for a director to ensure the relevant company and the director the subject of a Director Penalty Notice provide information of the type permitted by s 268-40 promptly to the Commissioner to effect a revocation or reduction of the estimate. As I have explained, that course is also open to a director in proceedings to recover a Director Penalty based upon an estimate, and was open to the appellants here.

The intention of s 269-30(2) – Item 2 is to ensure that a director’s obligations in respect of estimates cannot be thwarted by putting a company into liquidation without the directors or the company advising the Commissioner of the true amount of a withholding, or that no withholding occurred. Absent such steps being taken, the director remains liable for the full amount and cannot evade liability by placing the company into liquidation.

The present is a stark case. Neither the appellants nor Worldwide availed themselves of the opportunity to effect a revocation or reduction of the estimate in the manner provided for in s 268-40. The periods in respect of which the estimate relates were significantly in excess of three months prior to the date that the appellants placed Worldwide into liquidation. Item 2 of s 269-30(2) operated, and was plainly intended to operate, so that the liquidation of Worldwide did not have the effect of remitting the Director Penalties.

The appellants’ fallback submissions contend that the Treasury Laws Amendment (2018 Measures No. 4) Act 2019 (Cth) had applied a legislative fix to the interpretation advanced by them of s 269-30(2) (although, not retrospectively). The appellants contend that by reason of the newly inserted s 269-10(6), s 269-30(2) is to be construed as if the underlying liability and the estimate liability exist to the same extent. This, it was submitted, was a subsequent legislative recognition that the construction they advance was correct.

The Treasury Laws Amendment (2018 Measures No. 4) Act does not have that effect. The directive in s 269-10(6) to treat the underlying amount and estimate amount as the same applies only for the purposes of determining the “initial day” (s 269-10(5)-(6)), being the date on which the directors of a company first come under an obligation (s 269-10(1)).

The amendments are not concerned with how s 269-30(2) applies to estimates, rather the amendments are intended to ensure that the directors of a company at the time of the underlying liability (rather than only those directors holding office as at the date of the Notice of Estimate) come under the obligations imposed by Div 269 for the whole period commencing on the day the underlying liabilities became due.

The second reason this appeal must be dismissed is that even if the Commissioner was required to establish the existence of an underlying liability of Worldwide to remit PAYG amounts the subject of the Estimate Notice, the Commissioner established that fact here.

The only evidence before the primary judge was the evidence read by the respondent without challenge or objection. The amended statement of claim averred that:

Section 255-50 of Sch 1 to the Taxation Administration Act provides:

By force of s 255-50 of Sch 1 to the Taxation Administration Act, the facts averred by the Commissioner were prima facie evidence of the facts alleged. The estimate and the period to which it related was identified. That, in the context of the legislative requirements upon large withholders, was sufficient proof of “the day by which the company was obliged to pay the underlying liability to which the estimate relates”, even on the appellants’ construction.

The averments were themselves sufficient evidence that Worldwide had unpaid withholding amounts for the periods identified in paragraph [13] of the statement of claim (being the periods in respect of which the Notice of Estimate was issued). In the absence of any evidence having been led by the appellants to the contrary, those averments were uncontradicted and provide sufficient proof, even on the appellants’ construction, for the purposes of s 269-30(2).

Additionally, an evidentiary certificate was tendered into evidence by the respondent under s 255-45 of Sch 1 to the Taxation Administration Act, which operated as prima facie evidence of the matters certified including certification that the sum claimed was a debt due and payable to the Commonwealth. I doubt that the evidentiary certificate here engaged was sufficient, of itself, to prove the Commissioner’s case on the appellants’ construction of the lockdown provision. This is because the certificate does not, in terms, address what is said by the appellants to be the critical issue. Given that the averments in the pleading provide a sufficient basis for the Commissioner to succeed, even on the appellants’ construction, there is no need to come to any final conclusion about this matter.

Accordingly, even if, contrary to the construction of s 269-30 I prefer, the date of the underlying liability needs be proved by the Commissioner, it was proven here.

For the foregoing reasons I propose the following orders:

McCALLUM JA: I agree with Payne JA.

SIMPSON AJA: I agree with Payne JA.