Penalty Upheld for Payroll Tax Defaults

The Tribunal affirmed the imposition of penalty tax and interest on two companies for payroll tax defaults, considering previous cases and legislation.

Administrative Decisions Tribunal New South Wales Medium Neutral Citation: [COMPANY] and [COMPANY] v Chief Commissioner of State [NAME] [2012] NSWADT 11 Hearing dates: 24 January 2012 Decision date: 01 February 2012 Jurisdiction: [NAME]: [NAME], Judicial member Decision: The decision under review is affirmed Catchwords: Payroll tax - penalty and interest charged in consequence of a default; consideration of case law and legislation Legislation Cited: Taxation Administration Act 1996 Cases Cited: Chief Commissioner of State [NAME] v [COMPANY] & Anor [2004] NSWADTAP 19 [COMPANY] v Chief Commissioner of State [NAME] [2002] NSWADT 21 [COMPANY] v. Chief Commissioner of State [NAME] [2005] NSWADT. [8] [NAME] v. Chief Commissioner of State [NAME] [2002] NSWADT 51 [COMPANY] v. Chief Commissioner of State [NAME] [2007] NSWADT 116 Re Confidential and Commissioner of Taxation [2008] AATA 415 Peco Arts Inc v Hazlitt Gallery Ltd [1983] 3 All ER 193 [NAME] v Commissioner of Taxation [2006] FCA 818 [COMPANY] v Chief Commissioner of State [NAME] [2008] NSWADTAP 14 Category: Principal judgment Parties: [COMPANY] and [COMPANY] (Applicant) Chief Commissioner of State [NAME] (Respondent) Representation: [NAME] (Applicant, agent) [NAME] (Respondent) File Number(s): 116053

REasons for decision

Part A Preliminary and Introduction 1The Applicants seek review of six decisions by the Chief Commissioner of State [NAME] ("the Chief Commissioner"), made under Part 5 of the Taxation Administration Act 1996 ("the TA Act"), to impose penalty tax at a rate of 25% and the market rate of interest on the Applicants with respect to a payroll tax default for the period 1 July 2006 to 30 November 2010 inclusive ("the relevant period"). The relevant decision of the Chief Commissioner resulted from a related decision that the Applicants constituted a "business group" pursuant to the Pay-roll Tax Act 1971 ("the PTA 1971 "), the TA Act and the Payroll Tax Act 2007 ("the PTA 2007 ") during the relevant period and were thereby liable to pay payroll tax on that basis. 2The Tribunal had before it two sets of documents lodged pursuant to section 58 of the Administrative Decisions Tribunal Act 1997; the first set was lodged on 26 August 2011 and the second or supplementary set was lodged on 2 September 2011. References to the section 58 documents which are preceded by "supplementary" should be construed as references to the second set of Section 58 documents. 3It is convenient in the first instance to draw on the Chief Commissioner's written submissions dated 17 January 2012 ("CCS") so as to include some of its content under the head of "Introduction and Background"; clauses 2 to 14 inclusive excluding footnotes (which have been checked and found to be correct) of CCS read as follows: 2The Applicants are: [COMPANY] ("[NAME]"); [NAME] ("[NAME]"); 3Following the Preliminary Conference in this matter on 26 October 2011, the Applicants do not dispute that they constituted a "business group" during the relevant period. The matter as now before the Tribunal is limited to the question of whether, in the circumstances, the decision to impose penalty tax and the market rate of interest was the correct and preferable decision. 4AES [NAME] is a limited liability company first registered with ASIC on 5 September 2001. [NAME] have been joint and sole directors of the company since 5 September 2001. Mr and Mrs [NAME] each hold five shares of the issued share capital of 10 shares in [NAME]. [NAME] carries on a business of manufacturing electrical looms and components for commercial and electrical purposes. 5AKS [NAME] is a limited liability company first registered with ASIC on 3 May 2004. [NAME] have been joint and sole directors of the company since 3 March 2004. Mr and Mrs [NAME] each hold two shares of the issued share capital of four shares in [NAME]. [NAME] procures copper wire and onsells this product to clients. (The fourth line of clause 5 of CCS refers incorrectly to [NAME] and this reference has been replaced by a reference to [NAME]) 6AES [NAME] first employed staff on 1 January 2002. [NAME] commenced trading in June 2006. 7. [NAME] was registered for payroll tax on 26 October 2005 following an Office of State [NAME] ("[NAME]") investigation, with liability backdated to July 2004. AES subsequently back-paid amounts of payroll tax in March-April 2006 after it emerged that it had exceeded the initial tax threshold. 8.On 31 March 2006, [NAME], the applicant's accountant, indicated to the [NAME] that the Applicants were grouped under common directors, but that [NAME] had not commenced paying wages and that AES was otherwise below the payroll tax threshold. [NAME] was informed by the relevant [NAME] officer that he should notify the [NAME] once [NAME] commenced employing personnel. According to subsequent [NAME] investigations, [NAME] commenced employing personnel in June 2006.

9. Between June 2006 and the commencement of the [NAME] audit investigation in November 2010, [NAME], through [NAME], made annual representations to the [NAME] that the company was below the payroll threshold. No record of any representation regarding AKS Distribution's wage level is apparent. 10 [NAME] was subsequently registered for payroll tax following, backdated to 1 July 2006 (Section 58 documents, Tabs 1 and 8) 11.On 10 November 2010, the [NAME] notified the Applicants of the commencement of an investigation into the payroll tax liabilities of the Applicants (Supplementary s.58 documents, Tab 1). 12.On 13 January 2011, following a detailed investigation, including an audit of corporate records and discussions with representatives of the Applicants, the Chief Commissioner issued the companies with assessments for payroll tax on the basis of the grouping of AES and AKS for payroll tax purposes for the period of 1 July 2006 to 30 November 2010 inclusive ("the assessments"), with AES listed as single lodger from 1 July 2007 (s. 58 documents, Tab 1). A penalty amount calculated at 25% of the unpaid liability was also applied, with the premium component of interest remitted. 13.On 4 April 2011, the companies lodged an objection ("the objection") to their grouping for payroll tax purposes (s. 58 documents, Tab 9).

14. On 19 May 2011, the Chief Commissioner disallowed the companies' objection ("the objection decision") (s. 58 documents, Tab 12). 4The term "[NAME]" as used in these reasons refers to [COMPANY] while the term "[NAME]" refers to [COMPANY]; [NAME] and [NAME] are collectively the Applicants or "the Companies". Unless the context otherwise require terms defined in the portion of CCS quoted in clause 3 have the same meanings when used in these reasons 5Oral evidence was given by [NAME] who is one of the directors of and one of the shareholders in each of the Companies; in each case the only other shareholder and director is his wife [NAME]. 6Put in broad terms the evidence before the Tribunal establishes that there were in fact two separate payroll tax defaults by the Applicants (although in the case of the first default referable to [NAME] only). The term "first default" refers to the fact that [NAME] was, although incorporated on 5 September 2001, and although it first employed staff as from 1 January 2002, registered for payroll tax purposes only in October 2005 after an investigation by the Office of State [NAME] ("[NAME]"); in addition it had not paid tax which had become due for payment. [NAME] said in evidence that Wirings did not exceed the threshold (and which he thought was $550000 or $575000 at that time) until the 2005 payroll tax year. As to whether he intended to refer to the year ending 30 June 2005 or the year commencing 1 July 2005 was not clear although, and having regard to a questionnaire which will be referred to later in these reasons, the latter is probably more likely. As to when precisely Wirings exceeded the threshold is not directly relevant for the purposes of these reasons. It is clear however that Wirings should have been registered some considerable time before it in fact was registered and it was indeed in default as to the payment of its tax obligations. [NAME] attributed the first default to the failure of his accountant [NAME] to advise Wirings of its obligations. [NAME] is, according to [NAME] an employee of [NAME], accountants, who have for a number of years attended to the accounting and tax affairs of the Applicants. [NAME] in his evidence made light of the first default on the basis that the tax was, albeit belatedly, then paid. He said, on more than one occasion, that [NAME] had failed to advise the Applicants as to their payroll tax obligations; he said also that he did not believe that [NAME] was aware of the relevant legislative provisions. 7The term "second default" refers to the fact that the Applicants were clearly and from the time when [NAME] was incorporated and commenced business a group for the purpose of payroll tax legislation. This is so because they had exactly the same directors and shareholders and directors ([NAME]) and so that, and as a matter of law, the fact that they engaged in different business activities did not have the effect that they were not a group. 8Mr [NAME] said in evidence that [NAME] commenced business some time after it was incorporated in May 2004. He again placed the blame for the failure of the Applicants to comply with their obligations squarely on [NAME] who, he said, had never advised the Applicants of the fact that they constituted a group, and so that the Applicants became so aware only after the second investigation which is referred to in clauses 11 and 12 of CCS quoted previously in these reasons. [NAME] said that the relevant business had previously been conducted through a [NAME] and that the relevant Company was incorrectly set up by [NAME]. He said that if he, [NAME], had been aware of the relevant grouping provisions Directions would have been set up differently although he did not elaborate how Directions (which also operated in effect a husband and wife owned business) could have been set up in such manner that it fell outside the grouping provisions of the payroll tax legislation. He said also that there were tax implications (not detailed or explained) which prevented him from taking steps designed to ensure that the Applicants were not so grouped. (Given the scope of the grouping provisions it is difficult to envisage how it would have been possible in such circumstances to structure Directions in such manner that it fell outside those provisions.) 9Following the assessments the Applicants made arrangements with the Chief Commissioner for the discharge of their arrear tax obligations in instalments; there does not appear to be any dispute as to the fact that the Applicants have complied with their instalment obligations and so that there is currently a balance of only approximately $10000 still owing,

Part B. The evidence of [NAME]. 10Each of [NAME] has tertiary qualifications. [NAME] obtained a diploma in engineering in Bombay while his wife obtained a degree in commerce in Bombay. The businesses of the Applicants are by no means insubstantial; in closing submissions [NAME] said that their combined turnover is in the region on an annual basis of an amount which is not much less than $5m, The businesses were commenced after [NAME] came to Australia about 15 years ago; one of the businesses was as set out previously at first conducted, through a [NAME]. 11The evidence of [NAME] was at first punctuated by frequent interjections by his wife until she was informed that while she could give evidence herself interruptions could not be permitted. (She did not in the event elect to give evidence herself) His evidence was to a considerable extent of a hearsay nature and consisting in large part of what [NAME] had said to him on various occasions. Hearsay evidence of this kind cannot be accorded any substantial weight. In essence, and as I have indicated, [NAME] attributed all of the blame for both defaults entirely and only to [NAME] on the basis that [NAME] had failed to advise the Applicants of their obligations. 12The evidence of [NAME] was frequently repetitive; it could be summarised on the basis that any and all payroll tax failures or defaults were attributable entirely and only to [NAME] who failed to advise the Applicants properly or in some cases at all. He said also that he consulted the [NAME] web site as to payroll tax matters and in particular after the investigations referred to in clauses 11 and 12 of CCS. He said that the Applicants dealt with the [NAME] of which [NAME] is a member for a number of years; he referred in this context to his contact with one of the partners ([NAME]) in the [NAME] and which apparently took place before [NAME] assumed responsibility for the relevant work. 13Mr [NAME] said also that after the investigations by the [NAME] which commenced in November 2010 he was informed by [NAME] that if the Applicants paid the tax they would not be required to pay the interest or the penalty. He spoke also of a meeting with two female employees of the [NAME] who suggested that he send an objection to the [NAME]; [NAME] did not allege that the [NAME] employees had given him any assurances as to penalty and interest if the tax was paid. As appears from CCR interest at the premium rate was remitted. 14The evidence of [NAME] took some time and this part B seeks to include a summary only of relevant content. At one time he became emotional and in consequence of which an adjournment was allowed. After he resumed he complained as to the fact that the Chief Commissioner had not taken action against [NAME] or the [NAME] of which he is a member. In closing submissions [NAME] spoke of the fact that the Applicants had considered taking action against the accounting [NAME] but were concerned about the expense which would be involved. He made it clear that the Applicants did not intend to call [NAME].

Part C. [NAME] and related matters 15Tab 8 of the Supplementary Section 58 documents includes a Payroll Tax Questionnaire by [NAME] which was filed on 7 September 2005 in relation to the first default. Clause 10 indicates that the contact person was [NAME] while clause 27 contains a monthly breakdown of taxable wages indicating an aggregate amount of $708461 for the year commencing 1 July 2005. (In respect of the first default, and as I have said, it was at times difficult to follow whether reference was being made to the year commencing 1 July 2005 or the year ending 30 June 2005 and possibly and in addition previous periods but nothing significant turns on the question). Clause 28 of the questionnaire (question and answer) reads as follows: "If you are liable for pay-roll tax but not registered please state why you were not registered. The reasons you provide will be used to decide if any penalty should be imposed; The client was not aware of the payroll tax issues as they have never paid payroll tax. This was the first time their payroll has gone over $600000". The questionnaire was signed by [NAME]. 16Tab 8 of the Supplementary Section 58 Documents also contains a document entitled "Print Notes"; the entry dated 31 March 2006 reads (omitting a short part which is not relevant) as follows; "Called external accountant Arvin, discussed possibly related entities. He stated that there is a grouping with [NAME] P/L under Common Control "Directors s 106l but the entity is not yet paying any wages, The coy is expected to employ in the near future. Advised Arvin to notify [NAME] once the business begins employing." 17As these reasons have made clear the Applicants seeks to place the blame squarely and entirely for their payroll tax difficulties on [NAME]. The Applicants did not seek to call him or endeavour to compel his attendance and even though his evidence would have been highly relevant. No good purpose would be served by speculation as to what [NAME] might or might not have said in response to allegations that he failed in his duty of care. That said is it is not easy to accept that a professional accountant would know nothing at all about payroll tax; even if there is any truth in that assertion the first default would have placed him on notice that payroll tax was an issue which required attention. It does not seem likely that he would have failed to advise his clients of the communication set out in the preceding clause 16. 18Having heard nothing at all from [NAME] I do not think it proper to make any further comment as to his conduct; however I consider that the circumstances are such that it is reasonable to consider that his evidence would not have assisted the Applicants

Part D Interest 19It is of course clear that there was in respect of the second default a tax default as referred to in section 3 of the TA Act 20Section 21(1) of the TA Act provides that if a "tax default" occurs, the taxpayer is liable to pay interest on the amount of tax unpaid. The market rate component fluctuates and is connected to the Reserve Bank's Bill rate: see s.22(2). 21The relevant principles governing the imposition and remission of market interest were considered in Chief Commissioner of State [NAME] v [COMPANY] & Anor [2004] NSWADTAP 19 as follows: "[60] In our view the primary interest rate (the market rate component) is intended to compensate the Commissioner (on behalf of the Government of New South Wales) for not having the benefit of the tax payment from the time it was due. So a rate is set which fluctuates, and is connected to an external rate, the Reserve Bank's Accepted Bill rate. This, as we see it, is a component that could rarely, if ever, be waived as otherwise tax would be paid at a devalued amount thereby discriminating against taxpayers who meet their obligations on time. The Tribunal made the observation at [50] that to justify any remission of the market rate component of interest, it would be necessary to show that in some way the Commissioner contributed to the default. We agree with this observation." 22In [COMPANY] v Chief Commissioner of State [NAME] [2002] NSWADT 21, Verick JM stated in relation to the imposition and remission of the market rate component (at paragraphs [25] & [27]: "[25] The market rate component would reflect the use by the party in question of the relevant amount of money on one hand, and the lack of use of the relevant funds by the state on the other. But the fixed premium rate component is a rate imposed by way of a penalty for the "tax default" in question. A premium rate of interest is imposed where a "tax default" is a result of some culpable conduct on the part of the taxpayer. The Chief Commissioner can also impose a penalty tax under s 26 of the TA Act in cases where more serious tax defaults occur due to deliberate conduct of taxpayers. ... [27] In cases where an amount of interest is imposed by the application of the market rate, only exceptional circumstances would justify any remission. The narrow category of circumstances would include cases where the "tax default" is entirely due to a fault of the Chief Commissioner. Other circumstances would include situations completely out of the control of the taxpayer, such as postal strikes, serious illness of the taxpayer and natural disasters (bush fires, floods and earthquakes)." See further [COMPANY] v. Chief Commissioner of State [NAME] [2005] NSWADT 21, at para. [8], [NAME] v. Chief Commissioner of State [NAME] [2002] NSWADT 51, at para [30] and [COMPANY] v. Chief Commissioner of State [NAME] [2007] NSWADT 116, at para. [22] ff, particularly in relation to the principle that "exceptional circumstances" will be required to justify a remission of market rate interest. 23Consistent with the principles laid down laid down in the cases referred to in the two preceding clauses, the Chief Commissioner's decision to impose market rate interest was correct. There is no suggestion that there are exceptional circumstances, which would justify remission of the market rate interest imposed. It cannot be said that the taxpayer's tax default arose through the fault of the Chief Commissioner. (It should be noted that the Applicants did not contend that there was any fault on the part of the Chief Commissioner).

Part E Penalty 24Section 27(1) of the TA Act provides and provided at all material times: "27 Amount of penalty tax (1) The amount of penalty tax payable in respect of a tax default is 25% of the amount of tax unpaid, subject to this Division. (2) The Chief Commissioner may increase the amount of penalty tax payable in respect of a tax default to 75% of the amount of tax unpaid if the Chief Commissioner is satisfied that the tax default was caused wholly or partly by the intentional disregard by the taxpayer (or a person acting on behalf of the taxpayer) of a taxation law. (3) The Chief Commissioner may determine that no penalty tax is payable in respect of a tax default if the Chief Commissioner is satisfied that: (a) the taxpayer (or a person acting on behalf of the taxpayer) took reasonable care to comply with the taxation law, or (b) the tax default occurred solely because of circumstances beyond the taxpayer's control (or if a person acted on behalf of the taxpayer, because of circumstances beyond either the person's or the taxpayer's control) but not amounting to financial incapacity." 25Section 33 of the TA Act empowers the Chief Commissioner to remit penalty tax by any amount in such circumstances as the Chief Commissioner considers appropriate. It therefore affords to the Chief Commissioner a discretion to remit penalty additional to that found in s.27. 26Subsection 27(3)(a) of the TA Act provides the Chief Commissioner with a discretion to determine that penalty tax is not payable where, relevantly, the Chief Commissioner is satisfied that the taxpayer (or a person acting on behalf of the taxpayer) took "reasonable care" to comply with the taxation law. The Applicants bear the onus of demonstrating that such "reasonable care" was taken. 27The concept of "reasonable care" is not defined in the TA Act. It is an established rule of construction that regard should be had, at first instance, to the ordinary and natural meaning of the words used in a statute. The Macquarie Dictionary defines the term "reasonable" as meaning, relevantly: "... 2. agreeable to reason or sound judgement: a reasonable choice..." 28The concept of reasonable care appears in a variety of legal contexts. In Re Confidential and Commissioner of Taxation [2008] AATA 415, a decision in which the penalty provisions of [NAME] legislation were considered, the Administrative Appeals Tribunal summarised the existing authority on the meaning of "reasonable care". The Tribunal cited the following passage from the matter of Peco Arts Inc v Hazlitt Gallery Ltd [1983] 3 All ER 19 3 at 199, a matter which considered the concept of "reasonable care" exercised by the buyer of an artwork: "Taking into account these authorities I conclude, first of all, that it is impossible to devise a meaning or construction to put on those words which can be generally applied in all contexts because, as it seems to me, the precise meaning to be given to them must vary with the particular context in which they are to be applied. In the context to which I have to apply them, in my judgment, I conclude that reasonable diligence means not the doing of everything possible, not necessarily the using of any means at the plaintiff's disposal, not even necessarily the doing of anything at all, but that it means the doing of that which an ordinarily prudent buyer and possessor of a valuable work or Art would do having regard to all the circumstances, including the circumstances of the purchase." In summarising the authorities, the Tribunal in Re Confidential concluded that in all cases where the question of whether a person was required to take "reasonable care" or exercise due diligence, "...Regard must be had to the nature of the obligation requiring the exercise of reasonable care and the particular circumstances in which the person under that obligation finds him or herself" 29Considering the term in the context of Commonwealth legislation, Dowsett J in [NAME] v Commissioner of Taxation [2006] FCA 818 characterized a lack of reasonable care as involving "conduct falling short of that expected of a reasonable person in the circumstances". In considering the relationship between the concept of reasonable care and a person's reliance on professional advice, his Honour made the following observation at [155]: "...It is in the nature of the relationship between a client and his or her solicitor or accountant that he or she can rely upon the advice given, save where the client would be expected to know that the advice was not worthy of such reliance ..." 30Relevantly, in the circumstances in [NAME] , his Honour characterised the failure of the taxpayers, experienced business people with imputed prior experience of handling the income tax affairs of trusts, to make further enquiries in relation to their tax liability beyond a "bland assurance" by a professional advisor regarding the operation of a tax scheme as involving a lack of reasonable care. 31The concept of "reasonable care" in s.27 (3) (a) has also been considered in several [NAME] decisions of this Tribunal. In [COMPANY] v Chief Commissioner of State [NAME] [2008] NSWADTAP 14, a payroll tax matter, the Appeal Panel made the following observations regarding the application of s.27(3)(a): "[46] Our own researches have unearthed a passage in a Tribunal decision, [COMPANY] as trustee for the [COMPANY] v Chief Commissioner of State [NAME] [2004] NSWADT 64 at [23], in which 'reasonable care' under section 27(3)(a) of the TA Act is discussed. Referring to an equivalent provision in Commonwealth income tax legislation and to an Australian Taxation Office ruling explaining this provision, the Tribunal said: In each case, it is essentially a question of fact whether the taxpayer has taken reasonable care in attending to its tax obligations. Factors that would indicate that a taxpayer took reasonable care include attempts to comply with the tax law, reasonable professional and other inquiries to ensure compliance, reliance on professional advice or on official published views of the tax law. Factors which indicate that a taxpayer failed to take reasonable care include oversight or forgetfulness to meet with obligations, failure to maintain adequate records and procedures to prevent errors from occurring, not seeking professional advice and errors in complying with the law." 32In this case there is clear evidence before the Tribunal as to the fact that there have been two defaults. [NAME] sought, as I have said, to make light of the first default the nature of the case for the Applicants, and pursuant to which they attributed all blame to [NAME], has the effect that, on their own showing they believed or should have believed, from the time of the first default that they could not and should not rely on him as to payroll tax in particular and perhaps at all, The case for the Applicants is that they nevertheless did so rely on him and that as set out previously [NAME] did not ever inform them of the warning as to grouping given by the [NAME] referred to in clause 16. The mere fact that they retained an accountant cannot, by and of itself, constitute reasonable care without more; this is so in particular where the Applicants contend that they relied on an accountant who on their own evidence did not merit reliance. (I repeat that I do not in this decision make any finding adverse to [NAME] or his [NAME]; this case turns on the question of whether the Applicants, assuming that they did rely on his advice in the manner alleged, were entitled to rely on it). 33The evidence indicates that [NAME] began employing personnel in the payroll tax year commencing 1 June 2006. The Tribunal again refers to clause 16 above. The Applicants contend that [NAME] did not inform them of the fact that [NAME] would have to be grouped from the time when it employed personnel but the Tribunal has doubts as to whether this evidence can be accepted as likely or true. For a period of years thereafter the Applicants did not take steps to have [NAME] registered for the payment of payroll tax in any capacity, and whether or not in a group with [NAME]. [NAME] was not registered for payroll tax until 13 January 2011, and being a date after the commencement of the [NAME] audit in November 2010. 34The Applicants' case it that they relied entirely on the advice of [NAME] as to [NAME]' payroll tax liability. Assuming that those assertions can be accepted in full (and as to which there must be some doubt) the Applicants have the onus of demonstrating that their reliance on external advice in the conduct of their payroll affairs was reasonable in the circumstances; that onus has clearly not been discharged. The Tribunal again refers to the comments of Dowsett J in [NAME] to the effect that it is not sufficient for a taxpayer of experience to rely solely on advice provided by an agent, and this must be so in particular where that advice has already proved to be defective. . 35There is in my view no basis upon which the Applicants are entitled to contend that the penalty at the rate of 25% (which is the lowest rate) should be further reduced pursuant to section 33 of the TA Act.

Part F Conclusion 36In all the circumstances the decision under review must be affirmed.

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