Cassaniti v Commissioner of Taxation of the Commonwealth of Australia (No. 1) [2006] FCA 1666

FEDERAL COURT OF AUSTRALIA

Cassaniti v Commissioner of Taxation of the Commonwealth of Australia (No. 1) [2006] FCA 1666 DAVID SALVATORE CASSANITI v COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA NSD 2489 OF 2005

EDMONDS J

5 DECEMBER 2006

SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY NSD 2489 OF 2005

BETWEEN: DAVID SALVATORE CASSANITI

Applicant

AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Respondent

JUDGE: EDMONDS J DATE OF ORDER: 5 DECEMBER 2006

WHERE MADE: SYDNEY

THE COURT ORDERS THAT:

1. The motion be upheld and the subpoenas addressed to Reliance Financial Services Pty Limited and Quest Enterprises (NSW) Pty Limited ('the addressees') be set aside. 2. Any order pursuant to O 27 r 11 of the Federal Court Rules be reserved. 3. The respondent pay the addressees' costs of the motion. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY NSD 2489 OF 2005

BETWEEN: DAVID SALVATORE CASSANITI

Applicant

AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Respondent

JUDGE: EDMONDS J

DATE: 5 DECEMBER 2006

PLACE: SYDNEY

REASONS FOR JUDGMENT 1 The respondent, the Commissioner of Taxation ('the Commissioner'), has served subpoenas upon Quest Enterprises (NSW) Pty Ltd ('Quest') and Reliance Financial Services Pty Ltd ('Reliance') requiring them to produce various books, records, documents and correspondence relating to payments of salary or wages to their respective employees, including the applicant. Quest and Reliance move the Court for an order setting aside the subpoenas and an order pursuant to O 27 r 11 in relation to the costs and expenses of complying with them. At the outset of the hearing I gave Quest and Reliance leave to file notice of the motion and a supporting affidavit in Court. On reviewing the notice of motion, it is apparent that it erroneously refers to the moving party as the applicant rather than Quest and Reliance. Both documents also state that they were filed by the applicant, which is also incorrect. I merely note these errors since it was common ground before me that the motion was brought by Quest and Reliance and not by the applicant. 2 The applicant's application in the proceeding is made in response to the Commissioner's decision to refuse to allow the applicant credits for tax instalment deductions from his salary or wages on the ground that the applicant is not entitled to such credits. The applicant invokes the Court's jurisdiction under ss 39B(1) and 39(1A) of the Judiciary Act 1903 (Cth) and claims relief as follows: 1. A declaration that the decision of the Commissioner to refuse to allow a credit to the applicant in the sum of $55,963, $55,843 and $55,299 deducted by the applicant's employer, Reliance, from salary or wages paid to the applicant was an invalid decision. 2. An order in the nature of mandamus requiring the Commissioner to allow a credit in the amount of $55,963, $55,843 and $55,299 in respect of Pay As You Go Withholding deducted from the salary or wages of the applicant for the years of income ended 30 June 2002, 30 June 2003 and 30 June 2004 respectively. 3 While the applicant's application was filed on 13 December 2005 with a supporting affidavit (O 4 r 6(1)), no pleadings have been filed. While the applicant identifies the ultimate issue between the parties, the lack of pleadings makes it impossible to identify the underlying issues relevant to the determination of that ultimate issue. I have come to the view, particularly after hearing the motion, that this proceeding should only go forward by the defining of the issues by pleadings or otherwise. My view in this regard is reinforced by the fact that, contrary to the applicant's application, his entitlement to a credit for amounts withheld in the relevant years of income would not seem to be sourced in subs 221H(2) of the Income Tax Assessment Act 1936 (Cth) ('the 1936 Act'), but in s 18 – 15 of Schedule 1 to the Taxation Administration Act 1953 ('the TAA'). 4 Four affidavits were read on the hearing of the motion, three on behalf of Quest and Reliance in support of the motion and one on behalf of the Commissioner in opposition to the motion. I gave Quest and Reliance leave to file in Court an affidavit of Gino Cassaniti sworn 10 July 2006. That affidavit was read and Mr Gino Cassaniti gave further evidence in chief and was cross-examined. The Commissioner read the affidavit of Gary Elmore sworn 16 June 2006. Two affidavits of the applicant, Mr David Cassaniti, one sworn 13 December 2005 and a second sworn 26 May 2006 were read in reply. 5 The schedule to the subpoena addressed to Quest seeks the production of the following documents and things: (1) The original PAYG Payment Summaries for the years of income ended 30 June 2002, 30 June 2003 and 30 June 2004 for David Salvatore Cassaniti (Date of Birth: 03/02/1965), whose last known address is 236 Fowler Road, Illawong NSW. (2) All documents dated or brought into existence in the period 1 July 2001 to 30 June 2004 referring to, or evidencing the liabilities of Quest Enterprises (NSW) Pty Ltd ('Quest') or Cassaniti & Associates to the Commissioner of Taxation for amounts withheld from the salaries and wages of employees of Quest under Division 12 in schedule 1 to the Taxation Administration Act 1953. (3) The following documents and records kept by Quest or Cassaniti & Associates in the period 1 July 2001 to 30 June 2004: (a) Wage books (whether manual or in electronic form). (b) Any accounting record used to calculate salaries or wages in respect of an employee. (c) Employer's copy of PAYG Payment Summaries for each employee; (d) Bank statements of any bank account used to pay wages and salaries to employees. (e) All employment agreements or contracts entered into by Reliance or the Trust or both with an employee of those entities. (f) All payroll tax returns to the Office of State Revenue. (g) Copies of employment declarations in respect of each employee. (h) Rosters and time sheets in relation to employees. (i) Copies of all documents, files, correspondence, file notes, memos, evidencing any discussion or advice in relation to the deductions of tax from payments of salaries or wages of employees. (4) For the period 1 July 2001 to 30 June 2004 all weekly, monthly, quarterly and annual management accounts for Quest or Cassaniti & Associates stating any payments made to employees. (5) All financial accounts including profit and loss statements and balance sheets of Quest or Cassaniti & Associates for the years of income ended 30 June 2002, 30 June 2003 and 30 June 2004. (6) The minutes of any meetings of directors, and board papers for Quest for the period 1 July 2001 to 30 June 2004. (7) Copies of any insurance policies taken out by Quest or Cassaniti & Associates in respect of employees and all correspondence to or from Quest or Cassaniti & Associates in respect of workers compensation insurance or any type of insurances taken out for employees. (8) Copies of all correspondence between either Quest or Cassaniti & Associates and any employee in the period 1 July 2001 to 30 June 2004. 6 The schedule to the subpoena addressed to Reliance seeks the production of the following documents and things: (1) The original PAYG Payment Summaries for the years of income ended 30 June 2002, 30 June 2003 and 30 June 2004 for David Salvatore Cassaniti (Date of Birth: 03/02/1965), whose last known address is 236 Fowler Road, Illawong NSW. (2) All documents dated or brought into existence in the period 1 July 2001 to 30 June 2004 referring to, or evidencing the liabilities of Reliance Financial Services Pty Ltd ('Reliance') or the Reliance Service Trust ('the Trust') to the Commissioner of Taxation for amounts withheld from the salaries and wages of employees of Reliance under Division 12 in schedule 1 to the Taxation Administration Act 1953. (3) The following documents and records kept by Reliance or the Trust in the period 1 July 2001 to 30 June 2004: (a) Wage books (whether manual or in electronic form). (b) Any accounting record used to calculate salaries or wages in respect of an employee. (c) Employer's copy of PAYG Payment Summaries for each employee. (d) Bank statements of any bank account used to pay wages and salaries to employees. (e) All employment agreements or contracts entered into by Reliance or the Trust or both with an employee of those entities. (f) All payroll tax returns to the Office of State Revenue. (g) Copies of employment declarations in respect of each employee. (h) Rosters and time sheets in relation to employees. (i) Copies of all documents, files, correspondence, file notes, memos, evidencing any discussion or advice in relation to the deductions of tax from payments of salaries or wages of employees. (4) For the period 1 July 2001 to 30 June 2004 all weekly, monthly, quarterly and annual management accounts for Reliance and the Trust stating any payments made to employees. (5) All financial accounts including profit and loss statements and balance sheets of Reliance and the Trust for the years of income ended 30 June 2002 to 30 June 2004. (6) The minutes of any meetings of directors, and board papers for Reliance for the period 1 July 2001 to 30 June 2004. (7) Copies of any insurance policies taken out by either or both Reliance or the Trust in respect of employees and all correspondence to or from Reliance or the Trust in respect of workers compensation insurance or any type of insurances taken out for employees. (8) Copies of all correspondence between either Reliance or the Trust and any employee in the period 1 July 2001 to 30 June 2004. 7 The documents in pars 3(h), 7 and 8 of both subpoenas were not called for by the Commissioner. 8 In support of his opposition to the motion, the Commissioner's written submissions made broadly four contentions. First the Commissioner contended that the identity of the payer and whether amounts were withheld would be relevant to the determination of whether the applicant is entitled to a credit. This was repeated in his oral submissions. It is difficult to understand the relevance of the issue of the identity of the payer, specifically, whether the payer was Reliance or whether it was Quest, to the issue of the applicant's entitlement to a credit although clearly the issue of whether the applicant was paid the gross amount of the salary, that is, without the withholding of any amount, is relevant to that ultimate issue. 9 Second, the Commissioner said that it would be expected that an amount withheld from payments of salaries and wages to the applicant would not only be reflected in records pertaining to him individually but also as part of the total amount withheld in each reporting period and on an annual basis. 10 Third, it would be expected that payments of salaries and wages by the payer company would similarly be reflected in profit and loss statements or if the amounts said to be withheld were unpaid recorded in a balance sheet in each of the relevant years. 11 Fourth, a payer in any reporting period or in a financial year may also make a deduction of less than the amount required under the Act in respect of the amounts payable to employees. It is only through knowing the position in relation to all employees that it can be determined whether a sufficient amount at the prescribed rate has been withheld. It is therefore not possible to dissociate the position of the applicant from that of the other employees. 12 The Commissioner further submitted that at a final hearing of the matter he will contend that: (i) Reliance was an entity which did not make deductions at the prescribed rate in respect of the applicant or at all. (ii) Reliance had no legitimacy as an employer or payer. (iii) That Reliance was a company that: (a) Apparently did not trade and had not lodged tax returns since 1994 and therefore obviously had not claimed any deductions for payments of salary and wages; (b) had not lodged any tax file number declarations in respect of employees for the relevant years or any other years or income; (c) had not lodged Business Activity Statement since August 2000 and had a cancelled ABN; (d) had a registration for Income Tax Withholding which was 'inactive'; (e) had never lodged an annual payment summary. (iv) The present director of Reliance, Peter Pateman (appointed 4.11.05), and the previous director Kim Thorn (App date: 20.12.01; cease date: 4.11.05) were straw directors in name only and did not have any involvement in the management of Reliance. There is evidence filed by the Commissioner that this was the case in relation to Mr Pateman. (v) The appointment of these directors was to shield the real controllers from any potential liability. (vi) The shareholders of Reliance, Sam Peter Cassaniti and his wife Patricia Cassaniti, were the real controllers of the company or persons acting at their direction. Mr Sam Cassaniti is presently serving a lengthy term of imprisonment for defrauding the Commonwealth arising from the preparation of tax returns as a tax agent. (vii) The amounts recorded as deductions in the applicant's tax returns for the relevant years are fictitious and are not amounts withheld for the purposes of s 12-35 of the TAA. (viii) That the amounts recorded as deductions in the applicant's tax returns for the relevant years were calculated to ensure that a refund would be available to the applicant. (ix) A number of cases have been before the courts concerning the same artifice, all of which had the assistance of the accounting practice Cassaniti & Associates. Those cases have had the following features: a claim for inflated Tax Instalment Deductions in an employee's tax return which were engineered to result in a large refund; non remittance of deductions; an employer company whose director took no part in the management of the company, or did not know he was a director; an absence or a paucity of company record; and generally a liquidation of the company when the Commissioner pursued either the director or the company for unremitted group tax: see DCT v Scali in the District Court of NSW at Sydney, unreported, Sidis J, 24 February 2006. 13 It is not without relevance that nowhere in these contentions, which the Commissioner proposes to make at a final hearing, does Quest rate a mention. If only for this reason I would be of the view that the subpoena to Quest should be set aside. But there is a more compelling reason why, at this stage, both subpoenas should be set aside. Until the issues between the parties are joined, by pleadings or otherwise, the relevance of the documents cannot be properly assessed and determined: see Adelaide Steamship Company v Spalvins & Ors (1997) 24 ACSR 536 at 546 per O'Loughlin J. Indeed, at this stage, the recourse to the subpoena may well be seen as 'fishing' in a sense discussed by Jordan CJ in the Commissioner for Railways v Small (1938) 38 SR (NSW) 564 at 575 in that it is endeavouring not to obtain evidence to support the Commissioner's case but to discover the nature of the applicant's evidence. 14 The Commissioner's counsel relied upon affidavits which he said: '… to a large extent assist in the absence of pleadings to set the parameters of the issues before the court in the substantive hearing [and] in determining the validity of the subpoena [regard] would need to be had to those issues as identified in the Commissioner's evidence.' 15 With respect, one does not define the issues in the proceeding by reference to evidence. The universe of possible issues is defined, in this case, by the statute. Those issues may be narrowed by the parties in their pleadings. Evidence which is not relevant to those issues will not be admitted at trial and the test of adjectival relevance, although broad, is firmly anchored to those issues: see Trade Practices Commission v Kimberley Homes (1989) 217 ALR 110 at 115 per Hill J.