Kanwa Nominees Pty Limited (Acn 080 604 753) as Trustee for the Kanawaty Family Trust v Australian Taxation Office [2001] ACTSC 114 (23 November 2001)

Last Updated: 11 June 2002

Kanwa Nominees Pty Limited (ACN 080 604 753) as Trustee for the Kanawaty Family Trust v Australian Taxation Office [2001]

ACTSC 114 (23 November 2001)

CATCHWORDS

CORPORATIONS LAW - Application to set aside Statutory Demand - Failure of Applicant to remit tax deduction instalments to the Australian Taxation Office.

Corporations Act 2001

Income Tax Assessment Act 1936

Taxation Administration Act 1953

Federal Commissioner of Taxation v Hoffnung & Co Ltd [1928] HCA 46; (1928) 42 CLR 39

F.J Bloemen Pty Ltd v Federal Commissioner of Taxation [1981] HCA 27; (1981) 147 CLR 360

Hoare Bros Pty Ltd v Deputy Commissioner of Taxation (1996) 62 FCR 302

Moutere v Deputy Commissioner of Taxation [2000] 44 ATR 623

No. SC 856 of 2000

Coram: Master T. Connolly

Supreme Court of the ACT

Date: 23 November 2001

IN THE SUPREME COURT OF THE )

) No. SC 856 of 2000

AUSTRALIAN CAPITAL TERRITORY )

BETWEEN: KANWA NOMINEES PTY LIMITED (ACN 080 604 753) AS TRUSTEE FOR THE KANAWATY FAMILY TRUST

Applicant

AND: AUSTRALIAN TAXATION OFFICE

Respondent

ORDER

Coram: Master T. Connolly

Date: 23 November 2001

Place: Canberra

THE COURT ORDERS THAT:

1. The application to set aside the statutory demand be dismissed.

2. The applicant pay the respondent's costs;

3. The statutory demand is varied to the sum of $311,378.74 and shall be taken to have had effect as varied from 21 November 2000.

1. This is an application pursuant to s 459J of the Corporations Act 2001 to set aside a creditor's statutory demand served by the respondent on the applicant on 21 November 2000. The statutory demand dated 20 November 2000 asserts a debt due by the applicant to the respondent in the sum of $311,585.71. The applicant brought this application to have the statutory demand set aside on 13 December 2000.

2. The application is brought pursuant to s 459J (1) (a) and (b) rather than s459H, which is applicable when there is a "genuine dispute" as to the existence or extent of a debt. Section 459J provides:

1 [Power to set aside demand] On an application under s 459G, the Court may by order set aside the demand if it is satisfied that:

a. because of a defect in the demand, substantial injustice will be caused unless the demand is set aside; or

b. there is some other reason why the demand should be set aside.

2 [Mere defect not ground to set aside] Except as provided in subsection (1), the Court must not set aside a statutory demand merely because of a defect."

3. The applicant company operates a rural labour supply company providing workers for rural enterprises. Mr Kanawaty, the director of the applicant, gave evidence in this hearing, and filed affidavit evidence. While he maintains that he has a difference with the Australian Taxation Office in respect of certain labourers who he claims to be contractors and he says the Taxation Office says are employees, he acknowledged that, in respect of workers who he admits are his employees, taxation instalments were deducted from the employees wages, but that the company had failed to remit those deductions to the respondent.

4. I am satisfied that the statutory demand relates to the applicant's liability to the respondent in relation to sums of money that were deducted from the wages of certain of the applicant's employees in respect of Tax Instalment Deductions, but not remitted to the Australian Taxation Office as required by legislation. The statutory demand describes the debt due to the respondent of $311,585.71 as:

"Running Balance Account deficit debt as at 20 November 2000 in respect of primary tax debts due under Divisions 1AAA and 2 of Part VI of the Income Tax Assessment Act 1936 (as amended) [PAYE deductions] and the general interest charge payable under section 8AAZF of the Taxation Administration Act 1953 (as amended), being a debt due and payable by the company pursuant to section 8AAAZH of the Taxation Administration Act 1953 as trustee for the Kanawaty Family Trust."

5. Section 8AAZH (1) of the Taxation Administration Act 1953 provides:

"If there is a Running Balance Account deficit due on a Running Balance Account at the end of the day, the debtor is liable to pay to the Commonwealth the amount of the debt. The amount is due and payable at the end of that day."

6. There was an affidavit in these proceedings from Michelle Plunkett of 29 March 2001 in which the deponent, an officer of the respondent, set out the details of how the Running Balance Account debt on which the statutory demand was based was accrued. I am satisfied from this evidence that the amount was based on instalments of taxation deducted from employees wages, but not remitted to the Taxation Office, together with the statutory penalties and interest charges. I am further satisfied that the debt does not relate in any way to any sums which might relate to persons who the respondent asserts were employees but the applicant asserts were contractors. I am satisfied that the debt relates only to primary sums which were deducted by the applicant from his employees wages, in respect of pay as you earn (PAYE) tax instalment deductions, but which were not remitted to the Australian Taxation Office, together with associated statutory interest charges and penalties. Mr Kanawaty in cross examination was referred to tables prepared by Mr Lane, an officer of the respondent who conducted an audit of the debt, and admitted that he could not deny that the applicant had deducted sums of money for taxation instalments during the period November 1997 to June 1999, and he accepted that he did not know how much money had been deducted but not remitted. He admitted that since June 1999 the applicant had a procedure whereby it notified the respondent about the tax instalments that it deducted from employee wages.

7. Mr Kanawaty referred at various points in his evidence to difficulties that he says he has because certain documents of the applicant company have been seized under process of law by either the Federal Police or the Taxation Office. He did not say, however, that any request had been made to access documents for the purposes of preparing for these proceedings, and I do not consider this issue to be important for these proceedings.

8. Mr Warwick Bentley, an officer of the respondent, gave evidence at the hearing of a further review which he conducted of the applicant's affairs after the audit by Mr Lane. This review had been referred to in the affidavit of Ms Plunkett. The review found that the Running Balance Account figure which was the basis of the statutory demand contained certain errors, both with amounts shown to be owing that should not have been owing, and with amounts not shown as owing which were owing, and he said that the outcome was that the statutory demand should have been for the sum of $311,378.74 rather than $311,585.71 a credit in the applicants favour of $206.97. Although Mr Bentley was cross examined at some length, I am satisfied that his figures are correct.

9. The applicant challenges the statutory demand on the basis, pursuant to s459J(1)(a) that there was a defect in the process of issuing the demand leading to a substantial injustice, being that no assessment had been issued by the respondent before the statutory demand. I was taken to a number of authorities (F.J Bloemen Pty Ltd v Federal Commissioner of Taxation [1981] HCA 27; (1981) 147 CLR 360, Federal Commissioner of Taxation v Hoffnung & Co Ltd [1928] HCA 46; (1928) 42 CLR 39 and Hoare Bros Pty Ltd v Deputy Commissioner of Taxation (1996) 62 FCR 302 in support of the proposition that failure to serve a formal assessment prior to raising a statutory demand is a fatal defect.

10. The respondent submits that these authorities go to the issue of liability of a taxpayer (whether individual or corporate) in respect of that taxpayers taxable income. In the present case, the liability is in respect, not of the applicant company's liability for taxation in respect of its taxable income, but in respect of taxation instalment deductions that it admits (at least in part) that it has deducted from employees but not remitted to the respondent.

11. I am satisfied that section 8 AAZH(1) of the Taxation Administration Act 1953 on its face creates a statutory debt due and payable being the balance of the Running Balance Account on any given day. I am therefore not satisfied that there is any defect in the statutory demand, and I am not satisfied that it should be set aside on the s 459J (1) (a) ground.

12. The applicant company also urged the Court to exercise its discretion to set the statutory demand aside pursuant to s 459J (1)(b) for "some other reason" on the basis that the respondent is taking advantage of the statutory provisions which establish conclusive indebtedness in order to thwart efforts by the applicant to challenge the taxation liability through appropriate appeal channels. In Moutere v Deputy Commissioner of Taxation [2000] 44 ATR 623 Austin J said:

"A statutory demand is not an instrument of debt collection. By analogy, the Commissioner should not use the statutory demand procedure to apply coercive pressure to a taxpayer who genuinely objects to the Commissioners decision. To do so would be to take unfair advantage of those provisions of the taxation legislation...which say that an amount owing in consequence of the Commissioner's decision is recoverable, notwithstanding that an objection has been lodged against the decision.

If the Commissioner decides not to await the outcome of the objection, the proper course will often be for him to take proceedings for recovery of the debt rather than to summon up the spectre of liquidation by issuing a statutory demand. If the Court forms the view that the Commissioner has acted oppressively or unfairly by issuing a statutory demand in such circumstances, the appropriate course is for the Court to set the demand aside under Section 459J(1)(b). By doing so the Court does not deny that the debt is recoverable although the objection has been made, but it thereby insists that the statutory demand procedure should not be used to apply pressure for payment of an amount which might ultimately be found not to be payable."

13. The affidavit of Mr Kanawaty states that he lodged a notice of objection to the claim by the Australian Taxation office on 18 January 2000, and this is annexed to his affidavit. This notice of objection objects, "against the imposition of penalties for the purported failure to deduct tax instalment deductions" for the financial years ended June 30 1998 and 1999. The notice of objection sets out the applicant company's assertions that certain workers are contractors rather than employees, and so the company should have no liability to make deductions of tax instalments from the payments it makes to those workers. This issue, however, is not relevant to the amounts claimed in the statutory demand, which I am satisfied relates only to the applicants failure to remit to the Taxation Office amounts that the applicant had deducted from its employees. The notice of objection, on its face, relates to other issues which may be in contest between the applicant and the respondent, but not the subject of the statutory demand, which is not in respect of any, "failure to deduct tax instalment deductions", but for the failure to remit such deductions after they had been made.

14. I am therefore not satisfied that this objection is relevant to the issues now between the parties. The applicant made criticisms of the speed with which the respondent has dealt with this objection. The applicant stated in their submissions that Mr Bentley had indicated in cross examination that he had apologised to the solicitor for the applicant for the slow way the respondent was dealing with the objection, but I note also that Mr Bentley said that the objection was "very confusing" and that he had contacted the applicant's solicitor on a number of occasions to obtain further information to assist him in resolving the objection, without success.

15. The delay in dealing with the objection, even if it be a delay that is attributable wholly to the respondent, does not, it seems to me, constitute reasons for exercising the s459J(1)(b) discretion, because the issues that have been raised in the objections are not relevant to the present statutory demand, which relates, I have found, solely to amounts which were deducted by the applicant from its employees wages but were not remitted to the respondent. It does not, I have found, relate to another dispute between the applicant and the respondent as to whether certain other workers should have been regarded as employees and should have had such sums deducted from their wages.

16. I am not satisfied that I should set the statutory demand aside. The respondent has conceded, however, that there is a genuine dispute in respect of $206.97, being the amount which Mr Bentley and Ms Plunkett say is in error in the statutory demand. Where there is an identifiable amount that is in dispute, indeed in this case a clear finding of an error, the appropriate course, pursuant to s 459H(4) is for the Court to vary the statutory demand, and declare that the demand shall have had effect, as so varied, as from when the demand was served on the company.

17. I dismiss the applicant's application to set aside the statutory demand. I vary the statutory demand to the sum of $311,378.74 and declare that the demand shall have had effect, as so varied, from the date on which it was served on the company, being 21 November 2000. The applicant should pay the respondent's costs.

I certify that the preceding seventeen (17) numbered paragraphs are a true copy of the Reasons for Judgment herein of Master T. Connolly.

Associate:

Date: 23 November 2001

Counsel for the Plaintiff: Mr Pappas

Solicitor for the Plaintiff: Powrie & Co.

Counsel for the Defendant: Mr Begbie

Solicitor for the Defendant: Australian Government Solicitor

Date of hearing: 24 October 2001

Date of judgment: 23 November 2001