Supreme Court New South Wales Medium Neutral Citation: Deputy Commissioner of Taxation v Lee; Deputy Commissioner of Taxation v Silverbrook (No. 2) [2019] NSWSC 954 Hearing dates: 25 March 2019 & 1 April 2019 Date of orders: 31 July 2019 Decision date: 31 July 2019 Jurisdiction: Common Law Before: Davies J Decision: The plaintiff should bring in short minutes showing calculation of interest to the date of judgment. Catchwords: TAXES AND DUTIES – proceedings for recovery against defendants under Taxation Administration Act 1953 (Cth) – defendants directors of a company – company had failed to pay withholding tax, estimates in relation to amounts withheld and superannuation guarantee charges – director penalty notices issued to defendants in relation to all three tax liabilities – evidence certificates provided by the plaintiff disclosed that the defendants did not pay the amounts for which the company was liable – whether the defendants had a defence to the plaintiff's claim – several defences relied upon by the defendants unavailable in recovery proceedings – only available defence was the 'all reasonable steps' defence – s 269-35 of Sch 1 of the Taxation Administration Act – whether the defendants took all reasonable steps – where the company went into voluntary liquidation – liquidation occurred outside the time allowed in s 269-30 of Sch 1 – liquidation cannot be relied upon by the defendants as evidence of steps taken – where the evidence relied upon by the defendants in support of this defence was largely in inadmissible form – conclusions, statements of belief and statements of intention – evidence contained unsubstantiated references to the defendants seeking external professional advice – evidence referred to the establishment of trusts – evidence highlighted the inadequacy of the company's tax compliance framework – insufficient proof of all reasonable steps – defence not made out – plaintiff entitled to judgment Legislation Cited: Acts Interpretation Act 1901 (Cth) s 29 Administrative Decisions (Judicial Review) Act 1977 (Cth) s 9 Income Tax Assessment Act 1936 (Cth) ss 222AOB, 222AOJ Superannuation Guarantee (Administration) Act 1992 (Cth) ss 33, 36 Taxation Administration Act 1953 (Cth) divs 12, 16, 250, 255, 268, 269, 350 Uniform Civil Procedure Rules 2005 (NSW) r 29.7 Cases Cited: Anglo American Investments Pty Ltd v Deputy Commissioner of Taxation [2017] NSWCA 17; (2017) 347 ALR 134 Canty v Deputy Commissioner of Taxation (2005) 63 NSWLR 152; [2005] NSWCA 84 Commissioner of Taxation of the Commonwealth of Australia v Futuris Corporation Limited (2008) 237 CLR 146; [2008] HCA 32 Deputy Commissioner of Taxation v George (2002) 55 NSWLR 511; [2002] NSWCA 336 Deputy Commissioner of Taxation v Lee; Deputy Commissioner of Taxation v Silverbrook (No. 1) [2019] NSWSC 346 Deputy Commissioner of Taxation v Saunig (2002) 55 NSWLR 722; [2002] NSWCA 390 Texts Cited: Nil Category: Principal judgment Parties: Deputy Commissioner of Taxation (Plaintiff) Janette Lee (Defendant) Kia Silverbrook (Defendant) Representation: Counsel: S Foda (Plaintiff) Janette Lee (In person for the Defendants) Solicitors: Craddock Murray Neumann (Plaintiff) Self-represented (Defendants) File Number(s): 2015/50686 & 2015/50872 Publication restriction: Nil Judgment 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: (1) Actual amounts withheld for the purposes of Div 12 of the Taxation Administration Act 1953 (Cth) - $378,674.00. This amount was reduced to $282,415 by reasons of amounts received by the plaintiff; (2) Estimates in relation to amounts withheld pursuant to sub-s 268–10(1) in Sch 1 to the Taxation Administration Act - $9,682,860.00. This amount was reduced to $9,285,767.19 by reasons of amounts received by the plaintiff; (3) Assessment of the company's superannuation guarantee shortfall and guarantee charge - $713,352.48. (The Taxation Administration Act 1953 (Cth) is hereafter referred to as "the TAA", and references to "Sch 1" are references to Schedule 1 of the TAA.) Legislative provisions 1. 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. 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. 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. 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: (a) amounts of actual PAYG withholding (s 269-10(1), Item 1); (b) amounts of estimates given to a company under Div 268 (s 269-10(3), Item 4); and (c) the amount of the SGC for the quarter (s 269-10(1) - Item 5). 1. 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: (a) the company complies; (b) an administrator is appointed; or (c) the company is wound up. 1. 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). 2. 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. 3. 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: (a) in respect of PAYG withholding amounts, the director's penalty relates to liabilities reported to the Commissioner after three months of the due date; or (b) in respect of PAYG estimates, the company begins to be wound up three months after the day on which the company was obliged to pay the underlying liability to which the estimate relates; or (c) in respect of the SGC, the company begins to be wound up three months after the due day and the company's liability for the SGC exceeds any amount reported by the company in a superannuation guarantee statement lodged by the company pursuant to s 33 of the Superannuation Guarantee (Administration) Act. The company's tax obligations 1. 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. 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. 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. 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. 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. The company went into voluntary liquidation on 16 April 2014. 7. 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. 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: 1. Actuals PAYG Withholding – 28 March 2013; 2. Estimates PAY Withholding – 7 June 2012; 3. SGC – 28 August 2013. 1. 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. 2. 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. 3. The defendants seek to defend the claims made on four broad grounds as follows: (1) The defendants dispute that the amounts claimed are owing; (2) The certificate given by an officer of the plaintiff, Fiona Hill (sic), dated 8 December 2016 for purposes of s 255-5 (sic) of Sch 1 is invalid and of no effect; (3) The defendants have taken all reasonable steps in accordance with s 269-35 of Sch 1; and (4) The Commissioner, through his officer Fiona Hill, has acted with maladministration in relation to the debt claimed in these proceedings. The hearing 1. 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. 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. 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. I refused the adjournment application: Deputy Commissioner of Taxation v Lee; Deputy Commissioner of Taxation v Silverbrook (No. 1) [2019] NSWSC 346. 5. 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. 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. 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. 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. 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. 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: (a) the conclusive evidence provisions in s 350-10(1) of Sch 1 apply in recovery proceedings such as the present: see at [43]; (b) an assessment entered into evidence will conclusively establish that the assessment was properly made and that the amounts and particulars of the assessment are correct: see at [47] and [50]. (c) The High Court's judgment in Commissioner of Taxation of the Commonwealth of Australia v Futuris Corporation Limited (2008) 237 CLR 146; [2008] HCA 32 establishes that a collateral challenge to the assessments based on illegality or bad faith or maladministration in making the assessments is not available in recovery proceedings: see at [52]-[54]. (d) Challenges in the form of administrative law review are not available in State courts by virtue of s 9 of the Administrative Decisions (Judicial Review) Act 1977 (Cth) and Sch 1 to that Act: see at [65]-[74]. 1. 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. 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. Section 255-45 provides: 255‑45 Evidentiary certificate (1) A certificate: (a) stating one or more of the matters covered by subsection (2) or (3); and (b) signed by the Commissioner, a *Second Commissioner or a *Deputy Commissioner; is prima facie evidence of the matter or matters in a proceeding to recover an amount of a *tax‑related liability. (2) A certificate may state: (a) that a person named in the certificate has a *tax‑related liability; or (b) that an *assessment relating to a tax‑related liability has been made, or is taken to have been made, under a *taxation law; or (c) that notice of an assessment, or any other notice required to be served on a person in respect of an amount of a tax‑related liability, was, or is taken to have been, served on the person under a *taxation law; or (d) that the particulars of a notice covered by paragraph (c) are as stated in the certificate; or (e) that a sum specified in the certificate is, as at the date specified in the certificate, a debt due and payable by a person to the Commonwealth. (3) … 1. 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. 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. The only defence available to the defendants is one under s 269-35 of Sch 1. That section relevantly provides: 269 35 Defences All reasonable steps (2) You are not liable to a penalty under this Division if: (a) you took all reasonable steps to ensure that one of the following happened: (i) the directors caused the company to comply with its obligation; (ii) the directors caused an administrator of the company o be appointed under section 436A, 436B or 436C of the Corporations Act 2001; (iii) the directors caused the company to begin to be wound up (within the meaning of that Act); or (b) there were no reasonable steps you could have taken to ensure that any of those things happened. (3) In determining what are reasonable steps for the purposes of subsection (2), have regard to: (a) when, and for how long, you were a director and took part in the management of the company; and (b) all other relevant circumstances. 1. 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). 2. The defendants' written submissions set out the steps they claim they took to satisfy s 269-35 as follows: 1. operated the company with a HR infrastructure over a period of nearly 20 years with a significant number of employees arising in the payment of around $250 million in taxes related to employees; 2. did not have fundamental payroll or tax issues until the hostile raid and dispute by a US billionaire's business interests arose; 3. undertook their actions in the context of a campaign of business interference by a US billionaire's business interests; 4. relied on internal company accounting staff that liaised with the external accountants and otherwise dealt with payroll issues; 5. relied on external accountants that were responsible for handling the payroll of the company; 6. were told by the internal staff and by the external accounting staff that the payroll matters were being taken care of; 7. throughout the period, took professional, legal and accounting advice including from external accounting firms Delloites and BDO, and legal firm Truman Hoyle Solicitors. 8. that around 30 September 2011, they reported a reduction of the payroll headcount due to the transfer of around sixty-six research staff, entitlements and ongoing payroll obligations to the R&D company Mpowa Pty Ltd, and such obligations have been paid; 9. caused BDO Chartered Accountants to be instructed to conducts audits of the period 1 July 2011 to 30 September 2011; 10. applied the time of the in-house legal, accounting and operations staff in Silverbrook Research in attempts to cause compliance with the ongoing Memjet arrangements, prioritizing wage related entitlements; 11. negotiated from 2011 to secure staff entitlements, including PAYG and on-costs by putting in place trusts (constructive) into which amounts payable and refundable to the company by the US billionaire's Memjet Group would be paid and preferring any employment related tax payments; 12. relied on written representations to Silverbrook Research staff from the then Memjet North Ryde Pty Ltd Managing Director that Memjet North Ryde Pty Ltd would pay for any unpaid gross salary and any leave entitlements from March 2012 (inclusive of PAYG and superannuation); 13. relied on agreements entered into with the US billionaire's Memjet Group which included provisions for transfer of staff, employment liabilities and superannuation and payments; 14. put in place trusts into which amounts payable and refundable to the company by the US billionaire's Memjet Group would be paid with the intention to preserve regulator obligations; 15. put in place a trust account at a large firm of Sydney Solicitors (Trust 1) into which payments and refunds for expenses incurred by Silverbrook Research on the Memjet project, remaining unpaid at a date and totalling millions, would be made including payments made for superannuation; 16. put in place a trust account at the company's solicitors (TH Trust) into which payments and refunds received from Trust 1 would be transferred for reconciliation and payment prioritization with tax payments being prioritised by the directors; 17. put in place a payroll administration trust arrangement (Trust 2) from which $5.5 million would be paid, including employment related taxes; 18. made continuing attempts to cause compliance with the operation of Trust 1 and Trust 2; 19. sought specialist advice from Delloites on Australian accounting definitions of staff entitlements to attempt to cause compliance; 20. applied the time of the remaining in-house legal, accounting and operations staff in Silverbrook Research in attempts to cause compliance with the Memjet transfer arrangements, which focussed on payment of gross staff entitlements as agreed, 21. reported that by the end of the 2012 financial year twenty-four staff, full and part time remained at Silverbrook Research; 22. knew that in financial year 2013 Silverbrook Research was not a Large Entity. 23. the Commissioner pursues this claim based on incorrect material, which the Directors have made plain to the Commissioner, and which otherwise evidence available to the Commissioner makes clear. 24. The defendants have continually sought legal advice and accounting advice DCT v Saunig [2002] NSWCA 390 at 37. The directors were not "sleeping directors." Deputy Commissioner of Taxation v Roget [No 2] [2014] WADC 25. 1. 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. 2. 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: [31] The appellant's defence under s 222AOJ(3) [para 10] as pleaded was that he had taken all reasonable steps to ensure that the directors had complied with s 222AOB(1), or there were no such steps that could have been taken. The trial judge held that the defence failed because there was no evidence that the appellant had taken any steps to cause the company to comply with s 222AOB(1)(b) by making an agreement with the Commissioner under s 222ALA. This is factually correct but the appellant argued that it was legally incorrect. [32] The point was considered in Miller v D C of T (1997) 98 ATC 4059 but not decided because the defence there was that no reasonable steps could have been taken to secure compliance. Proof of this negative required the defendant to address each of the steps. See Mason P (pp 4063-4), and Priestley JA (p 4067). [33] However there are dicta in Miller which appear to address the present issue. Mason P, with the concurrence of Beazley JA, said (pp 4063-4): "According to the DCT, the appellant could not make out 'a defence' under s 222API(3) [the equivalent of the defence under s 222AOJ(3)] unless the appellant showed what I shall loosely call the reasonableness of his conduct in relation to all four of the options offered to the directors … The appellant submits that a director need only address one of the four options … and that it suffices if he or she proves that, in relation to that option, all reasonable steps were taken by that person to ensure that the directors caused the company to do one of the four options, or that there were no such steps that the person could have taken … I would reject this submission. What the directors have to do to comply with s [222AOB(1)] is cause the company to do at least one of the four matters. If none of the four matters occurs there has been non-compliance by the directors … The taking by a director of 'all reasonable steps to ensure' compliance by the directors obviously requires that each option be addressed, either in the sense of taking reasonable steps to bring it about or declining to do anything on the basis that there were no such steps that the director could have taken." … [41] If reasonable steps taken in pursuit of one option fail, non-compliance and the obligation of the director or former director will continue. The director or former director will therefore have to take reasonable steps to achieve compliance in another way. If non-compliance continues long enough before a notice is served each of the four options will eventually have to be addressed and the subs (3) defences will have to cover all options. Compare D C of T v Solomon (2003) 199 ALR 325 CA, 335-7. [42] It is necessary to consider whether these defences must be established for the whole of the period between the due dates and the expiry of the notice. … [45] Under s 222AOJ(3) it is a defence if the defendant proves that he or she "took all reasonable steps to ensure that the directors complied with" the obligation, or that "there were no such steps that the person could have taken". The natural meaning is that the combined defences must cover the whole of the period between the breach of the obligation on the due date and the expiry of the notice. 1. 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]: The words "at any time" in s 222AOJ(2) related to the period when a person was a director and the directors were under an obligation to comply with s 222AOB(1). That means, in my view, that the director had to establish good reason for non-participation in the management of the company throughout the period the person was a director and the directors were under a s 222AOB(1) obligation. The defence was not enlivened if merely because on one or more discrete occasions during that entire period the director had good reason not to participate in the management of the company. The requirement was that a director did not take part in management at any time. That requirement was not satisfied if there was participation on one or more occasions. No participation at any time meant non-participation at all times. The submission of the respondent does not give weight to the negative requirement. In my view, a director who established that at some time during the directorship when under a s 222AOB(1) obligation, there was good reason for non-participation in the management of the company, did not gain a defence to a penalty under s 222AOC or s 222AOD based on an obligation continued by s 222AOB(3) at a time when there was no continuing defence. 1. 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: [25] In In Re A Solicitor [1945] 1 KB 368 at 371 Scott LJ, delivering the judgment of the Court of Appeal, said: "The word 'reasonable' has in law the prima facie meaning of reasonable in regard to those existing circumstances of which the actor, called on to act reasonably, knows or ought to know." The better construction of s 222AOJ(3) is that the test is an objective one, corresponding to that of Scott LJ. There is nothing in any of the relevant sections suggesting that all that matters is the actual knowledge of the director or that a director who is ignorant of the law or of any fact of which he ought to know is in a better position than a director aware of the law and aware of facts which he found out. In other words, there is nothing in the legislation to displace the prima facie meaning of "reasonable" in s 222AOJ(3) which adoption of Scott LJ's approach would ascribe to it. Hence, on its true construction, s 222AOJ(3) gives a defence to a defendant to proceedings for the recovery of a penalty imposed by s 222AOC if the defendant proves that he or she took all steps which were reasonable, having regard to the circumstances of which the defendant, acting reasonably, knew or ought to have known, to ensure that the directors complied with s 222AOB(1). It is not necessary to decide in this case whether the qualification to the test propounded by the appellant, namely that it was legitimate to take into account the knowledge and abilities of a particular director which were superior to those of an ordinary reasonable director: Mr Saunig did not have knowledge and ability superior to those of an ordinary reasonable director. … [28] Let it be assumed that for some period which included the early months of the seventeen month period in relation to which the appellant sued Mr Saunig, he was not attending to the company's taxation affairs, was trusting one or other or both of the other two directors to handle those affairs properly, and was ignorant of the fact that that role was not being satisfactorily performed. Even on that assumption, it cannot be said that during that period Mr Saunig established that he took all reasonable steps to ensure that the directors complied with s 222AOB(1). While even in a relatively small organisation like the company in this case it may not be right to require each director to take personal steps to ensure compliance with s 222AOB(1)(a), it was incumbent upon Mr Saunig to ascertain what the company's duties in relation to tax instalments deducted from employees' wages were and to ensure that some system was in place which would produce compliance. There was no evidence of any such system. There may have been an issue between the parties as to whether the s 222AOB(1) duty arose from the day each deduction for employees' wages was made (which the appellant favoured) or whether it only arose from the 7th day of the next month (which Mr Saunig appeared to favour at an early stage, though not at a later stage, of the argument below). The better construction is the former, but on either view Mr Saunig has not demonstrated that the s 222AOJ(3) defence has been made out. Applying the construction of s 222AOJ(3) adopted above, Mr Saunig's conduct must be judged not only by a reference to what he knew, but also by a reference to what he ought to have known. He ought to have known that there were deduction payments, that the deduction payments should have been passed to the Taxation Office and that they were not being passed to the Taxation Office. 1. 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. Affidavit of Janette Lee sworn 8 May 2017 149. In very difficult business interference circumstances in 2011 onwards, we continued to take more than reasonable care in compliance with its superannuation and PAYGW obligations, sought constant legal advice and assistance and considered known and possible options, and took all reasonable steps in PAYGW and SGC compliance. 1. 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. 2. There are a number of paragraphs concerning the use of external advisors: 173. Deloittes confirmed that superannuation for the transferred Memjet Project employees included superannuation and other costs such as payroll tax, PAYG and certain benefits applied to the transfer from 16 March 2012 onwards. 174. Our superannuation position has been calculated in accordance with our [sic] advices. … 636. We have always taken great care to ensure that staff were paid superannuation. 637. We have put in place processes for the monitoring, payment and reporting of payroll entitlements of staff, including superannuation and PAYGW for all relevant periods since incorporation in 1994. 638. Qualified professional [sic] and managers have been involved in superannuation management and reporting. The staff at Silverbrook Research has included a payroll management team, including two legally qualified solicitors and a payroll assistant to gather and compile the payroll inputs and an external payroll providing firm [sic] of accountants to process and report on the payroll. 639. The processes for the monitoring, payment and reporting of superannuation entitlements of staff for all relevant periods since incorporation have resulted in over $25 million being paid to staff during the period FY08 to end FY 13. 640. The corporate raid created a dynamic set of human resource and payroll management issues. We constantly turned our minds to adapting systems which for more than a decade has worked well, to what were deliberate business interferences. 641. During the corporate raid by US interests, we added to the existing payroll management system by having external lawyers well versed in employment law and superannuation assisting. We engaged with Truman Hoyle Lawyers and the in-house Counsels used the Partner in the Employment Law, Fiona Inverarity, as a constant resource. Fiona has a Bachelor of Economics and Bachelor of Laws and over 20 years experience, including at PwC Legal. 642. During the corporate raid by US interests, we added to the existing payroll management system by having two trusts operating through which superannuation and other employment matters could be recouped from the raiders by our solicitors at Truma Hoyle [sic], reconciled, reported and remitted to Government agencies, prioritising the ATO. 643. We took reasonable steps to ensure superannuation compliance, as part of the payroll management and reporting process, for staff employed at Silverbrook Researchh [sic]. We sought legal intrepretation [sic] as to definitions of "wages" components during the raid and paid accordingly. 644. We took care and reasonable steps of additional types in the face of changing circumstances due to the very stiff opposition to the concept of superannuation obligations, and tax in general, held by the US corporate raiders in the transfer of Silverbrook Research staff to a 100% US owned company from 15 March 2012. 645. We engaged external lawyers and law firms to advise and we according put in place trusts capture superannuation [sic], and other Australian regulatory payments from the increasingly recalcitrant 100% US owned company. 646. The details and supporting evidence of the reasonable steps and more taken by us in the challenging circumstances of the set up during FY11 and the subsequent implementation of a corporate raid featuring a protracted campaign of business interferences against Silverbrook Research and us, were put in with consideration as we knew that we were protecting the interesst [sic] of Australian staff, government and creditors and did not want to see these trashed as had been done by these raiders to Solyndra in the US in late 2011. 1. 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. 2. The affidavit continued: 647. I am defending DPN claims by the ATO in relation to allegations of SGC and PAYGW in various periods between 1 July 2011 and 30 June 2013. 648. I believe that we took all reasonable steps to ensure that we caused the company to comply with its PAYG and SGC obligations. 649. We caused the company to be put into voluntarily liquidation and a liquidator was appointed on 16 April 2014. 650. We believe that as a [sic] Directors of Silverbrook Research, we took all reasonable steps to ensure that the compliance with the PAYG and SGC obligations happened and we believe that we took all reasonable steps having regard to circumstances of which we knew and of which we ought to have known. We took legal and accounting advice from top firms in considering all possible options, though it was very difficult to operate while under concerted attack from seasoned raider with billionaire backing. 651. We took legal and accounting advice from different professionals in considering the possible options at different times as the circumstances confronting we [sic] in compliance issues were dynamic and unexperienced before in Australia. 652. We specifically reviewed and adjusted the systems and processes in place, adding employment lawyers and accountants; made regular enquires and sought reports on the status of PAYGW and superannuation compliance obligations; personally monitored and caused others to monitor payments. 653. We focused on determining the source of funds for payment of PAYGW and superannuation compliance obligations and created cashflow documents. 655. During the period, we also concertedly turned our minds to confronting the possible scenarios which could have been brought to bear in which the ATO could be deliberately gypped out of PAYG and SGC obligations payable during a hostile corporate raid by US interests. 656. I know that confronting a corporate raid funded by a billionaire and planning how to make sure that obligations are met, is not a consideration that directors usually have to turn their minds to in the ordinary course of business where transactions were made and conducted in good faith. 657. To support its employment requirements, in the years well prior to FY2012 we had put in place comprehensive systems and processes using suitably qualified internal staff, complemented by an external payroll service provider from an accounting firm, which remained in existence and functional up to the end of June 2012 and beyond. 658. Up to quarter ended 30 June 2012, SR maintain qualified staff including a legally qualified in-house Corporate Counsel, assisted by an in-house payroll officer. Project managers (around 10) used an intranet system and approved staff leave and holiday requirements, as well as any bonuses. The data was collated on a fortnightly basis by the in-house team and sent to the external payroll service for processing in the payroll system. Reports were generated on a fortnightly basis. 659. This system was supplemented by use of an external specialist employment solicitor at Truman Hoyle (also with accounting experience) when employment issues arose and was used at the discretion of the Corporate Counsel. 1. 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. 2. 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. 3. 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. 654. We relied on the proper operation of Trusts to recoup cost and have creditors paid. 684. We arranged for trust mechanisms to be put place [sic] in Australia from which payments were to be made to creditors, prioritising the ATO for PAYGW and SGC. 1. 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. 2. 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. 3. 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. 4. 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. 5. 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. Affidavit of Kia Silverbrook sworn 8 May 2017 1. Paragraph 103 of Mr Silverbrook's affidavit says this: At all times, we did everything that we could to ensure that taxes were paid. MTK accounting services ran payroll for us, and also calculated taxes, and filed the BAS statements to the ATO. Every fortnight, we remitted the total amount for MTK to pay salaries. I checked every two weeks that all staff salaries had been paid, and naturally assumed that the PAYG taxes were paid along with that, as salary payments were MTK's domain. Unbeknownst to me, it appears that MTK expected Silverbrook Research accounts department to pay the PAYG taxes owing, and the Silverbrook Research accounts department expected MTK to pay it. We had five full-time accountants on staff, and were the largest customer of MTK accounting services. 1. 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. 2. 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. 3. In Saunig, Heydon JA said at [28]: While even in a relatively small organisation like the company in this case it may not be right to require each director to take personal steps to ensure compliance with s 222AOB(1)(a), it was incumbent upon Mr Saunig to ascertain what the company's duties in relation to tax instalments deducted from employees' wages were and to ensure that some system was in place which would produce compliance. There was no evidence of any such system. (emphasis added) 1. 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: While I personally did the financial projections for Silverbrook Research, I did not have time to get involved in day-to-day accounting. Silverbrook Research had a team of five accountants for that. 1. 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: Silverbrook Research was able to maintain stable operation and meet all liabilities, including all employee and tax liabilities from its inception in 1994 until the attacks from the Kaiser Entities starting in 2011. 1. 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. 2. 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. 3. The plaintiff is entitled to judgment. The plaintiff should bring in short minutes showing calculation of interest to the date of judgment. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 31 July 2019