FEDERAL COURT OF AUSTRALIA

Deputy Commissioner of Taxation v Pedley (No 2) [2018] FCA 2015

ORDERS

THE COURT ORDERS THAT:

1.    There be judgment for the applicant against the respondent in the sum of $159,767.79.

2.    The respondent pay the applicant’s costs, to be assessed if not agreed.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

MCKERRACHER J:

INTRODUCTION

1    The applicant, the Deputy Commissioner of Taxation, seeks recovery of $159,767.79 from the respondent, Mr Michael Pedley. Mr Pedley has raised several defences, but at trial proceeded with only two of the defences, adduced no evidence and relied only on cross-examination and certain tendered documents. It was common ground that the Commissioner was entitled to the sum claimed unless either of the defences succeeded. For reasons that follow, in my view, neither defence succeeds and the Commissioner is entitled to the sum claimed.

RELEVANT HISTORY

2    On 21 January 2014, the Commissioner issued a director penalty notice (DPN) to Mr Pedley in relation to outstanding Pay As You Go Withholding (PAYGW) liabilities of the company Stellar Corporate Solutions Pty Ltd. Mr Pedley was a director of Stellar during the periods 28 June 2013 to 15 July 2013 and 26 September 2013 to 30 April 2014. The DPN on which the Commissioner relies was issued in accordance with the provisions of Div 269 of Sch 1 of the Taxation Administration Act 1953 (Cth) (TAA) discussed below. As payment was not forthcoming pursuant to the DPN, this proceeding was originally commenced by an action in the District Court of Western Australia, commenced by writ on 4 May 2015. It was later remitted to the Supreme Court of Western Australia. Ultimately, as a result of the pleadings raised in Mr Pedley’s defence and counterclaim (cross-claim in this Court), it was then cross-vested to this Court by a judge of the Supreme Court. In the end, as the matter was argued in this Court, only two issues arising under the defence and cross-claim were advanced. They can be dealt with together. Either of those matters would be sufficient, Mr Pedley says, to justify complete relief against the claim by the Commissioner.

THE ISSUES

3    Although summary judgment by the Commissioner was refused in the District Court (by Judge Petrusa in Deputy Commissioner of Taxation v Pedley (No 2) [2017] WADC 107) on the basis that Mr Pedley had a triable issue, being that he took reasonable steps as a director, Mr Pedley has now abandoned that defence.

4    Mr Pedley also abandoned a defence that the policy expressed in one of the Commissioner’s Law Administration Practice Statement, PS LA 2011/20 (the Policy), taken with s 118 of the Constitution, required that the Commissioner dismiss or discontinue his case and that the failure to do so gives rise to jurisdictional error.

5    The remaining defences are: first, that Stellar’s relevant debt has been paid such that the director’s liability is also discharged; and secondly, that the Commissioner’s decision regarding the allocation of payments by Stellar (such that the liability of Mr Pedley was not discharged) was unreasonable and irrational in the legal sense.

THE EVIDENCE

6    Mr Mark Simpson is an officer of the Australian Taxation Office (ATO). He affirmed four affidavits. Much of this affidavit material was of a formal nature, although some of the material responded to the defences. He was taken to documents in cross-examination. His was the only oral evidence in the proceeding.

7    I should say at this stage that I found Mr Simpson to be an honest, thoughtful and reliable witness. I did not consider that his testimony was shaken at all in cross-examination. To the extent that concessions should have been made, they were made.

THE LEGISLATIVE FRAMEWORK

8    Division 269 of Sch 1 to the TAA imposes a duty on directors to ensure a company meets its obligations with respect to PAYGW or, alternatively, that the company promptly goes into administration or liquidation. A failure to comply is sanctioned by personal penalties imposed on directors. The directors’ penalties in such circumstances will operate in parallel with the liability owed by the relevant company. It follows the reduction of one liability reduces the parallel liability to the same extent.

9    Relevant parts of Div 269 for the purpose of this case are:

Division 269—Penalties for directors of non-complying companies

…

269-1    What this Division is about

…

269-20    Penalty

Penalty for director on or before due day

  (1)    You are liable to pay to the Commissioner a penalty if:

(a)    at the end of the due day, the directors of the company are still under an obligation under section 269-15; and

(b)    you were under that obligation at or before that time (because you were a director).

Note:    Paragraph (1)(b) applies even if you stopped being a director before the end of the due day: see subsection 269-15(2).

  (2)    The penalty is due and payable at the end of the due day.

Note:    The Commissioner must not commence proceedings to recover the penalty until the end of 21 days after the Commissioner gives you notice of the penalty under section 269-25.

Penalty for new director

  (3)    You are also liable to pay to the Commissioner a penalty if:

(a)    after the due day, you became a director of the company and began to be under an obligation under section 269-15; and

(b)    30 days later, you are still under that obligation.

(4)    The penalty is due and payable at the end of that 30th day.

Note:    The Commissioner must not commence proceedings to recover the penalty until the end of 21 days after the Commissioner gives you notice of the penalty under section 269-25.

Amount of penalty

(5)    The amount of a penalty under this section is equal to the unpaid amount of the company’s liability under its obligation.

Note 1:    See section 269-40 for the effect on your penalty of the company discharging its obligation, or of another director paying his or her penalty.

Note 2:    See section 269-45 for your rights of indemnity and contribution.

269-25    Notice

Commissioner must give notice of penalty

(1)    The Commissioner must not commence proceedings to recover from you a penalty payable under this Subdivision until the end of 21 days after the Commissioner gives you a written notice under this section.

…

Subdivision 269-C—Discharging liabilities

Table of sections

269-40    Effect of director paying penalty or company discharging liability

269-45    Directors’ rights of indemnity and contribution

269-40    Effect of director paying penalty or company discharging liability

Liabilities

(1)    This section applies to the following liabilities:

(a)    the liability of the company under its obligation referred to in section 269-10;

(b)    the liability of each director (or former director) to pay a penalty under this Division in relation to the liability of the company referred to in paragraph (a);

(c)    a liability under a judgment, to the extent that it is based on a liability referred to in paragraph (a) or (b).

Discharging one liability discharges other liabilities

(2)    If an amount is paid or applied at a particular time towards discharging one of the liabilities, each of the other liabilities in existence at that time is discharged to the extent of the same amount.

(3)    If, because of section 268-20 (Nature of liability to pay estimate), one of the liabilities is discharged at a particular time to the extent of a particular amount, each of the other liabilities in existence at that time is discharged to the extent of the same amount.

(4)    This section does not discharge a liability to a greater extent than the amount of the liability.

269-45    Directors’ rights of indemnity and contribution

(1)    This section applies if you pay a penalty under this Division in relation to a liability of the company under an obligation referred to in section 269-10.

(2)    You have the same rights (whether by way of indemnity, subrogation, contribution or otherwise) against the company or anyone else as if:

(a)    you made the payment under a guarantee of the liability of the company; and

(b)    under the guarantee you and every other person who has paid, or from whom the Commissioner is entitled to recover, a penalty under this Division in relation to the company’s obligation were jointly and severally liable as guarantors.

(Emphasis added.)

10    The second area of the tax legislation, which is not at all in dispute, is this. An entity is required to withhold an amount from payments made to employees or officeholders and to remit those payments to the Commissioner in accordance with s 16-70(1) of Sch 1 to the TAA. By s 269-15 of Sch 1 to the TAA, the obligations of a director in respect of such amounts are set out in the manner indicated above. Those directors who were not directors as at the date of the liability being incurred by the company, will still be liable in this manner if 30 days after their appointment, the company’s liability remains unpaid and the company has neither had an administrator appointed nor begun to be wound up: see s 269-20(3) above.

11    As seen, there is an obligation for the Commissioner to give 21 days’ notice to such a director by way of DPN before commencing recovery proceedings: see s 269-25 above.

12    The discharging of parallel liabilities is provided for by s 269-40, but the Commissioner contends that the provision at s 269-40 will only extinguish a parallel liability of a director incurred under Div 269 when the company or another director discharges the precise obligation the company had and by which the penalty arose. Mere payment by a company of funds, which reduce the total amount of taxation liability the company has, will not necessarily discharge a parallel liability of a director for a specific liability of the company when that liability is caught by s 269-10 of the TAA.

13    The Commissioner contends that to discharge the specific liability under s 269-10, a company either:

(a)    must enter into an agreement with the Commissioner that specific payments will go to discharge a specific liability; or

(b)    reduce the debt by reason of the application of the Policy, which provides guidance to the Commissioner’s staff on the order of allocation of amounts.

14    Those parts of the Policy that are relevant are these:

This practice statement is an internal ATO document, and is an instruction to ATO staff.

Taxpayers can rely on this practice statement to provide them with protection from interest and penalties in the following way. If a statement turns out to be incorrect and taxpayers underpay their tax as a result, they will not have to pay a penalty. Nor will they have to pay interest on the underpayment provided they reasonably relied on this practice statement in good faith. However, even if they don’t have to pay a penalty or interest, taxpayers will have to pay the correct amount of tax provided the time limits under the law allow it.

This Law Administration Practice Statement outlines the payment and credit allocation policy to be applied to taxpayer accounts.

1. What is this practice statement about?

This practice statement outlines the way you should allocate payments and available credits to debts owed by taxpayers. It outlines the discretion available to the Commissioner to disregard taxpayers’ instructions regarding their preferred allocation of amounts to specific debts, and how this is applied in:

•    our general policy for payment and credit allocation, and

•    the specific rules for some types of payments, credits and situations.

2. General rules about the allocation decision

When you make a decision about allocation of payments and credits, you must apply the policy in this practice statement, but you must also consider the particular facts of the case at hand. You must decide each case on its merits, and exercise your judgment to make a decision that is made in good faith and without bias. You should not consider irrelevant considerations.

Your decision must be consistent with the commitments made by the ATO in the Taxpayer’s Charter, and you should also be aware of and follow Chief Executive Instruction CEI 2014/06/04 Respecting Clients’ Rights of Review Policy.

3. What does the law say?

The common law provides that a person who owes two debts to the same person is entitled to nominate that a payment applies to one debt rather than another.

In some instances, even if they have not nominated, it will be clear from the amount of the payment that it is to be allocated to a specific debt.

If the debtor does not indicate the specific debt at the time of payment, the creditor is entitled to make that decision. We do not have to follow any instruction given by the taxpayer when allocating payments (see further discussion at section 5 of this practice statement).

Common law principles have been modified by legislation in some instances, as will be discussed.

4. The rules about payment of tax debts

The following outline some basic rules about the payment of tax debts:

•    For the purposes of the tax laws, a payment in respect of a tax debt is taken not to have been made until it is received by the ATO.

•    The law specifies that a taxpayer must pay the amount of the debt in one payment unless we agree to allow the taxpayer to make more than one payment to satisfy the debt. However, in practice, payments (whether partial or full) are allocated to the appropriate accounts based on the information available when the payment is received.

•    Sometimes, a taxpayer’s payment may be accompanied by correspondence which indicates that acceptance of the money implies acceptance of certain conditions. Taking the money does not bind the ATO to the terms stipulated by the taxpayer. If this happens though, you should issue advice to the taxpayer as soon as possible to indicate that the amount is being retained unconditionally as payment towards their debt. In some instances, the stipulated conditions may instead be treated as a proposal to the ATO, and the taxpayer should also be advised whether this proposal is acceptable or not.

•    You cannot accept payment of a tax debt in foreign currency.

•    Sometimes, the administrator of an insolvent company, that has no realisable assets but the possibility of trading out of its difficulties, may offer equity in the company to creditors. This situation is discussed in Law Administration Practice Statement PS LA 2011/16 Insolvency - collection, recovery and enforcement issues for entities under external administration.

5. Our general policy

Payments

Payments representing the full amount of a taxpayer’s obligations are usually applied to the taxpayer’s accounts in accordance with the taxpayer’s directions (for example by using a payment reference number).

However, in appropriate circumstances you can choose to set aside a taxpayer’s directions and allocate the payment differently, using the discretion in section 8AAZLE of the TAA. Common examples of when we would do this are:

•    Where a payment does not finalise the outstanding tax debts or is less than the full amount of an obligation

•    Where legislation requires that we allocate certain payments with specific components of a debt (for example superannuation guarantee charge (SGC))

•    Where an account reconciliation is required to isolate certain component debts (for example, in the case of director penalty liabilities[)],

Unless there is a valid reason not to do so (see above for examples), our policy for allocating a payment for which no direction is received, is:

•    all payments will be allocated to the earliest (oldest) debts within an account

•    except where the payment relates to a ‘Listed Payment’.

Listed payments have specific rules in relation to their allocation. These are outlined in Attachment A.

The order of allocation for the accounts themselves (where the payment is not a listed payment) is outlined separately at Attachment C.

If payments are allocated differently to a taxpayer’s direction, you should advise the taxpayer as soon as possible.

…

Attachment A

…

Director penalty liabilities

Where a payment is received (in full or in part) in relation to a director penalty liability, you must allocate the payment to reduce the penalty on the director’s account, and the corresponding parallel liability on the company’s account. If the payment is for less than the full amount, it will reduce the penalty on the director’s account, and will be allocated against the company’s earliest parallel liability. In accordance with the order of allocation (see Attachment C), parallel SGC liabilities will be cleared first and then PAYG withholding.

…

(Emphasis added and citations omitted.)

THE CASE AGAINST MR PEDLEY

15    It is common ground that some $555,763.81 was paid to the Commissioner by Stellar between April and August 2014. Of that sum, payments were made pursuant to a payment arrangement, which had been agreed while Court proceedings were not pursued: see the discussion in Deputy Commissioner of Taxation v Pedley [2018] FCA 2014 (Pedley No 1). The ATO Statement of Account for Stellar (MS-11), placed into evidence before the Court, recognised the receipt of the following payments:

(a)    payments totalling $200,000.00 (comprised of separate payments of $50,000.00, $50,000.00 and $100,000.00) on 7 April 2014;

(b)    a $50,000.00 payment on 4 June 2014;

(c)    a $50,000.00 payment on 27 June 2014; and

(d)    a $50,000.00 payment on 5 August 2014.

One of the questions is how those payments were allocated on receipt by the Commissioner.

16    The Commissioner’s position is that no payments made by Stellar were characterised by any person as being payments of specific debts in express terms. They were allocated by the Commissioner, he says, consistent with the Policy which provides for repayment of the earliest (oldest) debts of the company first. This meant that there was less reduction of the PAYGW debt to which the DPN related as there were other earlier taxation liabilities to which the payments were applied.

17    As to the first defence, the parties accept it is necessary for the Court to ascertain what payments were made and which part of Stellar’s total taxation debt was discharged by reason of those payments. Put another way, the question is whether any part of the payments by Stellar (and if so how much) discharged any part of the debt for which Mr Pedley would be liable as director in accordance with the Commissioner’s claim in this proceeding.

18    The Commissioner’s position is that the mere fact that amounts were paid by Stellar to the ATO in discharge of some of its taxation liabilities will not extinguish or reduce Mr Pedley’s liability as a director to pay the penalty unless the sum paid was on account of Stellar’s PAYGW debt for the precise four monthly periods of 1 August 2013 to 30 November 2013.

19    It is common ground that between April 2014 and August 2014, Stellar made payments totalling at least $350,000, which reduced the overall liabilities of Stellar. It also does not appear to be disputed that the liabilities of Stellar immediately prior to the payments stood at $684,066.70 and comprised a range of liabilities of Stellar including many earlier than, and different from, the PAYGW liabilities for the four monthly period from 1 August 2013 to 30 November 2013, which totalled $203,798.

20    As noted, the Commissioner’s position is that the reduction of the liabilities of Stellar was undertaken on the basis of the Policy, being an allocation of payments on the basis of the earliest liabilities being reduced first. In accordance with the Policy, credits totalling $44,030.21 were applied to the PAYGW for that period, which in turn operated to reduce the penalty payable by Mr Pedley from $203,798 to $159,767.79.

21    In allocating payments, the Commissioner is not required to take any account of any instructions of any entity, as is made clear by s 8AAZLE of the TAA as well as the Policy. That section provides:

8AAZLE    Instructions to Commissioner not binding

In doing anything under this Division, the Commissioner is not required to take account of any instructions of any entity.

22    In order to guide the Commissioner’s officers in making consistent allocation decisions, the Policy sets out the usual manner in which allocations should occur. It does specifically recognise that agreements may be reached with taxpayers as to how particular payments are to be allocated.

23    In this instance, there is no evidence of any agreement being requested or being in place as to how payments made by Stellar should be allocated. Essentially, Mr Pedley argues that in the circumstances to which he points through cross-examination, it was unreasonable or irrational not to allocate payments in reduction of the PAYGW debt so as to reduce liability of Mr Pedley as a director or, alternatively, it was unreasonable and irrational not to at least contact Stellar or Mr Pedley to check how the payments should be allocated. The Commissioner, however, says that the payments were allocated in accordance with the publicly stated Policy and if Stellar sought some other allocation, it should have requested the Commissioner to allocate the payments to the PAYGW debt. A request the Commissioner may have (but was not bound to) taken into account.

24    The Commissioner also makes the point that in the period April 2014 to August 2014, when Stellar made the payments, both Mr Pedley and the other company director (a Mr Dale) had other outstanding liabilities to pay penalties pursuant to Div 269 of the TAA for each of the periods from June 2013 to November 2013. By allocating, in accordance with the Policy, part of the total liabilities of Stellar were paid, including the earliest liabilities for which both directors were liable and in respect of which both directors had also been issued DPNs. These older PAYGW liabilities arose in June and July 2013.

25    Mr Pedley points to the fact that the Commissioner allocates any amount not exactly referable to a specific debt to the earliest outstanding debt first. This means, Mr Pedley contends, that a correct application of the Policy would have resulted in the Commissioner seeking $136,141.97, rather than $159,768. Rather, the Commissioner made an adverse allocation decision against Mr Pedley in respect of $25,218.81 by allocating it to a more recent amount, which was approximately the same quantum, that is of $25,219. Mr Pedley says this demonstrates that the Commissioner has not been faithful to his default position of allocating amounts not exactly referrable to any debt to the earliest outstanding debt first.

26    It is difficult to see where this submissions leads, but Mr Pedley argues that if the Commissioner insists on following the Policy to the letter then he should immediately adjust his claim downwards to $136,141.97. He says that this inconsistency sounds in some jurisdictional error, but has not articulated what form of jurisdictional error. To the extent it is argued that this reallocation should occur pursuant to the first ground of appeal, I do not consider this course is open. It was allocated in the manner determined by the ATO in the absence of any request to the contrary. That is the simple fact.

MR SIMPSON’S EVIDENCE

27    Mr Simpson’s evidence was, essentially, formal in nature.

28    I do not propose recording Mr Simpson’s affidavit evidence in great detail because only certain aspects of it were the focus of cross-examination and, as I have said on a number of occasions, the real issue in this case is the decision as to the allocation of payments.

29    In his first affidavit, affirmed on 12 July 2016, Mr Simpson described the computer database of the ATO’s business records, including the Automated Document Despatch System, the Storage and Access System, the ATO Integrated System (AIS), the Integrated Core Processing System (ICP), the Receivables Management System and ATO’s Siebel Client Relationship Management System which includes the Siebel Note Clicker. He explained:

(1)    The Automated Document Dispatch System stores electronic copies of documents sent to taxpayers.

(2)    The Storage and Access System stores data contained in income tax returns lodged with the ATO.

(3)    The AIS contains a record of credit and debit accounting postings for taxpayers, including payments on income tax accounts that were posted to the account up to and including 14 January 2010.

(4)    All liabilities, payments and credits for income tax accounts from 15 January 2010 were recorded on the ICP. The information recorded on the ICP is input into the system either manually by employees of the ATO, based on information furnished to the ATO by the taxpayer through their tax returns, or automatically if the taxpayer lodges their tax returns electronically. The ICP records liabilities, payments and credits in chronological order and does not show how individual payments and credits have been allocated between different liabilities on the same account.

(5)    The Receivables Management System is a case management system, which assists the ATO in the collection of outstanding debts. It has a note function which enables the ATO officers to enter and keep notes on the conduct of cases and contains an accounting function in which debts are recorded along with the specific allocation of payments and credits are reflected, and from which statements of account (or ‘worksheets’) may be generated.

(6)    Siebel stores correspondence and records interaction with taxpayers. It has a note function which enables ATO officers to enter and keep notes on the conduct of cases.

30    Mr Simpson is employed in the Debt Business Line of the ATO which, relevantly, maintains a file for Mr Pedley containing hard copies of the debt collection material (Legal Collections File). His affidavits were prepared following consideration of records held on the ATO’s computer database and those within the Legal Collections File.

31    In Mr Simpson’s second affidavit, affirmed on 3 March 2017, he expanded upon the content of these records and confirmed that both in his knowledge of the records and the Policy, he believed that payments were allocated in accordance with the Commissioner’s allocation policy, being against the earliest debts first. Specifically, first against the goods and service tax (GST), PAYGW and general interest charge (GIC) amounts then due and outstanding on Stellar’s account. An amount of $44,031.21 from a payment of $50,000 made on 5 August 2014 was applied in reduction of Stellar’s PAYGW liabilities for August 2013 and by virtue of application of s 269-40, reducing the debt originally pleaded in the statement of claim from $203,798 to $159,776.79.

32    In Mr Simpson’s third affidavit, affirmed on 3 September 2018, he refers to the ‘narrative’ which is the typed record in Siebel of the dealings between an ATO officer and a taxpayer in respect of a taxpayer’s taxation affairs. Siebel is password protected with each authorised user being issued a unique password. A narrative can only be amended or otherwise altered by the user who recorded it and on the date on which the narrative was created. He referred to common acronyms used by the ATO in narrations, including:

(a)    ‘POI’ – meaning ‘Proof of Identity’, and indicating that certain personal questions have been asked to satisfy the ATO officer that the person they are speaking to is who they say they are.

(b)    ‘DCD CAC Account’ – ‘DCD’ meaning ‘Defaulting Company Director’ and ‘CAC’ meaning ‘Client Activity Centre’. The phrase ‘DCD CAC account’ means the director penalty liability account created in parallel to the company’s liability; and

(c)    ‘ITW’ meaning ‘Income Tax Withholding’.

33    In his final affidavit (fourth affidavit), affirmed on 11 September 2018, Mr Simpson referred to the annexures in his second affidavit. Mr Simpson confirmed that MS-11 was prepared by him for the purpose of allocating the payments made by Stellar to its various debts and for reconciling amounts owed by the directors of Stellar. He could not recall precisely when he prepared MS-11, but noted in his second affidavit that it was generated from the Receivables Management System and which recognises receipt of various payments by Stellar. MS-11 identifies Stellar’s taxation liabilities and the allocation of payments to those liabilities. It is unnecessary for present purposes to go into that detail as the relevant detail will emerge in the discussion of the cross-examination.

The cross-examination of Mr Simpson

34    In Mr Simpson’s cross-examination, he accepted that he was ‘deeply experienced in deposing affidavits for the Commissioner’. He was employed fulltime at APS 3 level. He started work on the matter involving Mr Pedley when he was allocated it to prepare a referral to the ATO’s legal section. He started working on the matter on or about 13 July 2015. As far as he could recall, he thought it was likely that he was not working on the file before 1 June 2015.

35    Reconciliations prior to the MS-11 reconciliation were carried out by other staff. His preparation of MS-11 was a separate and original reconciliation, which he did ‘from the start’. He confirmed, and I accept, he did it ‘from scratch’ even though he knew previous allocations had been done. It was put to Mr Simpson that it had been misleading to depose in his second affidavit that his reconciliation in MS-11 was ‘[f]rom my review of the Records and the Statement of Account’. I do not accept that this statement was at all misleading, nor do I consider the questioning on this topic was particularly relevant. He came to almost the same number as an earlier ATO officer in a reconciliation in April 2014.

36    It was also put to Mr Simpson that his statement in his fourth affidavit that ‘I recorded the allocations in the RMS, and made the allocations using my experience and [the Policy] to make the allocation decisions’ was also misleading. Mr Simpson rejected that this statement was misleading in failing to record the fact that he arrived at almost the same six allocation numbers as the previous ATO officer. I do not consider the statement to be at all misleading.

37    Mr Simpson accepted that a director penalty was a penalty rather than primary tax. It was put to him that director penalties were draconian. He declined to comment on that proposition. There were several policy questions put to Mr Simpson. He did not consider it appropriate that he express views on matters of ATO policy. I agree with his position.

38    Mr Simpson was questioned about departure from the earliest debt paid first part of the Policy. He pointed to the Policy and the exceptions therein provided; for example, he indicated that an exception would be where a payment was intended to pay a specific debt rather than a general payment to the running balance account. Mr Simpson did say that accounts could be adjusted, even now, if it was appropriate. However, he explained that any information received would have to be considered in context.

39    Mr Simpson was cross-examined about his preparation of MS-11. He was asked about when MS-11 was created, but was unable to recall the precise date. He confirmed that the document was created on the Commissioner’s systems and that it would be possible to determine the date of creation from the Receivables Management System. It was put to Mr Simpson that it was ‘highly unsatisfactory’ that such evidence was not before the Court. He commented that this was matter for other people to determine. What followed was some confusing questions in cross-examination, but it became clear that the focus was the decision-making process.

40    Mr Simpson reinforced that when he created the worksheet on the Receivables Management System he was making the decisions personally, not simply copying other people’s work. He made decisions from the start. Mr Simpson explained that he had a team leader and reported to a lawyer, whom he identified. Mr Simpson acknowledged that the allocation decisions made by previous staff in April 2014 resulted in the same determination as his.

41    Mr Simpson was cross-examined about an email he sent internally concerning the DPNs and Stellar following a telephone conference. In that email, he said:

When reconciling the DCD account, a payment of $25,218.81 with effective date 21/7/14 was regarded as being a payment of the Jun 14 BAS debt of $25,219 ($24,610 ITW + $609.00 GST) and allocated against that debt (see paragraphs 17, 18, 28, 47, 48 and particularly 49 of PS LA 2011/20 ‘Payment and credit allocation’). Other staff can make a similar assumption when reconciling a DCD account.

42    Mr Simpson went onto explain:

The payment is obviously not identical to the BAS debt and can be moved up the account to offset the earliest unpaid debt and the effect would be to reduce the remaining ITW amount in the Aug 13 BAS from $9,903.79 to nil and to reduce the ITW amount in the Sep 13 BAS of $38,992.00 by $13,722.03 to $25,269.97. The total DCD/DPN debt of $159,767.79 would therefore be reduced to $136,141.97.

43    He noted ‘$1,592.99 out of the payment of $25,218.81 is offset against a GIC amount of $1,592.99 with effective date [27 September 2013]’.

44    It was put to Mr Simpson that someone had made a decision adverse to Mr Pedley by choosing to allocate the $25,218.81 to more recent payments, notwithstanding that if it was allocated to the earlier payments, it would have advantaged Mr Pedley. To this Mr Simpson said he did not believe that the decision was based upon whether or not it advantaged Mr Pedley, but rather whether or not it was appropriate considering the Policy. He explained that there was another side to this, namely:

[I]f a company is making payments to later debts then that is what they want us to do; to credit those payments against the later debts. We are giving the payer – the company, or the entity, whatever the taxpayer is, what it wants. We are considering the needs or requirements of … a company.

45    He explained that, unfortunately, there is some subjectivity. It is not ‘absolutely simple the way everything should be done in a manual allocation’. Some decisions have to be made. He accepted that another person making a decision might be able to interpret the Policy differently.

46    Mr Simpson was taken to an entry on the Siebel Note Clicker made on 24 May 2014:

A payment arrangement was activated by another Case officer on 8.5.2014 on main CAC and there was no payment arrangement activated on the parallel debts on DCD 2 and DCD 3. Received a fax from TAG on 20.5.2014 requesting confirmation that any action in relation to the summons issued to the director will be put on hold now that the ATO has accepted a payment arrangement on the main CAC. I have now activated a PA for the DCD 2 and DCD 3 to be completed on 6.4.2015 when the payment arrangement on the main CAC would expire. APS 3 TOW 5.

47    Mr Simpson was also questioned about a note on 5 June 2014 concerning receipt of a telephone call from Aspect Accountants to check if there had been any further action on the director personally who was issued with a summons as the company had entered into a payment arrangement and a similar note of 24 June 2014 in which it was recorded that an agent from Aspect Accountants was advised that the ‘DPN forms part of the company’. It was unclear what Mr Pedley’s counsel sought to achieve through this line of questioning.

48    Aspect Accountants wrote, on 20 May 2014, with a ‘REQUEST FOR LETTER ADVISING LEGAL ACTION ON HOLD WRIT OF SUMMONS – as Director of [Stellar]’. The letter was in these terms:

Our client has enquired on whether the ATO would be able to provide a letter advising that action in relation to the Writ of Summons issued to [Mr] Pedley in his capacity as Director of [Stellar] has now been put on hold as a payment arrangement has been granted to [Stellar].

Our client requires that it provide to their bank to advise on the status of the legal action.

Mr Simpson had not seen this letter before.

49    On 24 May 2014, the Commissioner did confirm with Mr Pedley that a payment arrangement had been ‘activated on the integrated client account for [Stellar]’. The letter continued:

As the director liability is a parallel debt any legal action on the directors of the company will be on hold whilst the payment arrangement is active.

In the circumstances that the payment arrangement defaults then legal action will continue on the directors without any further notification for the amounts of the outstanding PAYGITW.

50    Mr Simpson did not consider that this exchange related to, or affected, the amount of the debt until payments were received. It was at that point that the debt could be adjusted or reconciled. He did not construe the letters (which he had not previously seen) as being a message from Mr Pedley that he was attending to the payment of the writ through the payments made by Stellar. It appears to me that this construction by Mr Simpson is correct. It appears that the point sought to be made for Mr Pedley was that the Commissioner was put on notice by this communication, that any payments made by Stellar should be treated as going to the portion of its debt which would reduce, on a parallel basis, Mr Pedley’s personal liability. The problem is that it does not say that, nor does it even invite an agreement with the Commissioner to so allocate payments.

51    Mr Simpson was also questioned about a note detailing a call from a tax agent from Aspect Accountants. The note recorded:

… [The tax agent] called to check if their [sic] would be any further action on Director personally who was issued with Summons as company entered into payment arrangement. Reviewed the account, and advised [the tax agent] that once the arrangement is entered for the debt on the company, no further action would be taken as long as they adhere to the terms of the arrangement as DCD liability is part of the company debt…

Mr Simpson had not seen that entry before.

52    It was put to Mr Simpson that if Mr Pedley had called up and asked for payments to be allocated differently, consideration would have been given to making a decision along those lines. Mr Simpson accepted that any request would have been duly considered. However, Mr Pedley did not state that the payments were made only towards the DPN, nor did he seem to imply that. Mr Simpson said it would be necessary for the ATO to have a statement to the effect that the payments were in relation to the DPN. In the absence of that, they would apply the Policy.

53    Mr Simpson was also taken to another document which he had not seen, being a facsimile from Mr Pedley to the Commissioner referring to discussions held on the morning of 23 December 2014 indicating:

I would like this escalated as quickly as possible as the bank if [sic] doing my review and has said they will not continue my funding while this writ is hanging over my head.

I confirm to you that I was NOT served with this writ and the first time I have seen it is today.

I was a director from 28/6/13 to 15/7/13 and then from 26/9/13 to 30/4/14 (as per ASIC records)[.] I actually resigned 15/4/14[.]

I believe

1    I have not been served and therefore it should not be on my credit report – please remove asap

2    I should not be held responsible for periods I was NOT a director

3    I disagree with the figure as per the writ, as we made payments off [sic] a significant amount of these debts whilst I was director for the second time

Further

1    I sold out of [Stellar] in July 2014. I have a guarantee from the continuing director to make good on the payments (see agreement attached) and to pay off $50,000 per month off the debt (see attached)

2    I have no way of knowing if the funds are being paid to the ATO or not and feel that being responsible for them all is unfair on me. It will bankrupt me for starters.

54    Mr Simpson said that although he had not seen this facsimile before, it could be seen that Mr Pedley disagreed with the figures in the writ. With a request like that, a review could be undertaken. Mr Simpson could not say whether that occurred. Mr Simpson agreed that if he had seen it, he would have checked the allocations, but of itself it might not be sufficient for him or another officer to change their decision. He did accept that if he had seen the document, he would have reconsidered his allocation, but did not believe that his decision should be reconsidered on receipt of that document. The usual approach would be to contact the taxpayer and query whether they had other information, but that communication by itself was not enough to alter the allocation.

MR PEDLEY’S CONTENTIONS

55    Mr Pedley stresses that Mr Simpson agreed that had he received the facsimile questioning various matters he would have contacted Mr Pedley to seek further information. I accept this, but the question is how this concession assists Mr Pedley. Mr Pedley contends that the communication on 23 December 2014 was a clear notification that it was intended at that time that the payments made were against the PAYGW liabilities. Particular reference is made to the statement, ‘I disagree with the figures as per the writ, as we made payments [of] a significant amount of these debts whilst I was a director for the second time’.

56    For Mr Pedley it is argued that the 23 December 2014 communication is a clear indication that it was intended that the payments made should be against PAYG liabilities and that, in those circumstances, the ATO should have allocated them accordingly.

57    Additionally, he relies on the fact that an allocation decision was made adversely to him by someone in the ATO in respect of the $25,218.81 sum.

58    Mr Pedley appears to suggest that Mr Simpson would be unlikely to depart from decisions made by people holding higher office within the ATO. Nonetheless, Mr Simpson was quite clear that when he reviewed the allocations, he did so on his own personal assessment. I accept his evidence.

59    A direct question was put to counsel for Mr Pedley as to whether there was any point in time when Mr Pedley expressly requested any officer in the ATO to ensure that payments were applied against PAYGW so as to avoid liability under DPNs. Counsel was unable to point to any such express request.

CONSIDERATION

60    Mr Pedley, a chartered accountant, was involved in the original negotiation of the instalments payment arrangement with Stellar. He was exposed both to DPNs and to a writ in respect of that liability. It is regrettable that he did not make a request of the ATO in explicit terms to allocate Stellar’s payments so as to relieve himself of liability under the DPN. While the ATO would not be bound to comply, and if it was thought likely that Stellar would default may be unlikely to comply, such a request could have been made. It was not.

61    Mr Pedley relies upon the fact that Mr Simpson gave evidence that had he received the communication from Mr Pedley on 23 December 2014 disputing the amounts that he would have contacted the taxpayer for more information as to what the problem was in order to explore the full nature of the complaint. Counsel for Mr Pedley argued that the fact that Mr Pedley was not contacted was the ‘clearest way of identifying jurisdictional error in Mr Simpson’s work’. I find this submission puzzling. It has not been pleaded or particularised at any point that Mr Simpson himself was in error in not making contact. Mr Simpson was speaking hypothetically when he said that, while he had never seen that document before (and it preceded his involvement), had he seen it he would have made contact with the taxpayer. It may not have changed his decision. I can see no possible basis for criticising Mr Simpson, who had not seen the document and was speculating as to what he would have done had he been in charge of the file at the time and seen the document. He did not come into the picture until some time later. If the submission was in fact intended to suggest there was some jurisdictional error on the part of the officer who was in charge of the file at the time by not making contact with Mr Pedley, that submission could not be accepted either.

62    It was submitted for Mr Pedley that Mr Simpson’s affidavit was less than frank in exposing the fact that he had prepared the schedule of allocations as he made them; specifically, that they were ‘misleading’. I have already indicated above that I reject this contention and my reasons for it. It reads far too much into the words of Mr Simpson’s affidavit evidence.

63    Some criticism was apparently made of Mr Simpson’s failure to record a contemporaneous entry on Siebel as to his computation reflected in MS-11, the Statement of Account which he constructed. I do not consider this reflects a failing on the part of Mr Simpson. The record he created was well after the relevant events and for the purposes of an historic assessment rather than a contemporaneous general account management.

64    It is significant, in my view, that the payment arrangement in respect of which there were rounded instalments, was an arrangement negotiated by Mr Pedley as the accountant and director of Stellar in early April 2014, following receipt of the statutory demand which required the payment of $776,210.88 of company debt. It is in that context that payments were made pursuant to the payment arrangement. There is no evidence from Mr Pedley at all that he concluded an arrangement, as he was entitled to attempt to negotiate, on behalf of Stellar under which the payments would be attributed to a specific debt. This may have been an unfortunate oversight, but it is too late now to blame the Commissioner for allocations made broadly in accordance with the Policy. It is obviously also unfortunate for Mr Pedley that his co-director, who is serving a term of imprisonment, is not shown to have had any capacity to assist in the debt reduction of Stellar. But that again is hardly the Commissioner’s fault.

65    I note what was said by McWilliam AsJ in Deputy Commissioner v Caudle [2017] ACTSC 216 (at [71]):

The other amounts set out above were said to be incorrect due to misallocation of payments made, as a result of which the defendant contended those amounts ought to have been significantly reduced. However, the complete answer to that complaint is s 8AAZLA of the Act (set out above), which allows the Commissioner broad discretion as to allocation of payments made in ‘the manner he or she determines’. The consequence of that section is that the allocation by the Commissioner of payments made to the running balance, rather than to debts on a chronological basis, does not amount to an error.

(Emphasis added.)

66    And in Deputy Commissioner of Taxation v Arora (2017) 106 ATR 257, Davies J said (at [38]):

It is convenient to deal with this second defence first. Under s 269-15 the directors have an obligation from the day when the company’s obligation is due to the DCT to cause the company to comply with its obligation to forward the withholding tax or to pay the SGCs. Under s 269-20 if the money has not been paid and the director remains under the obligation, the director becomes liable to pay the DCT a penalty equal to the unpaid amount of the company’s liability under its obligation. In that way, it cannot be of any relevance whether the money will ultimately be found in the liquidation to pay the amounts that were formerly due by the company. At the relevant time, the Defendant became liable for those amounts as a primary and principal debtor, subject only to obtaining the benefits described in ss 269-40 and 269-45. Accordingly, what is pleaded in this way as a defence to the claim is no defence at all.

67    At all times when the company payments were made, Mr Pedley was a director of Stellar and was undertaking negotiations with the Commissioner as to the payment arrangement. It was open to him at all times to request an allocation of the payments in a manner which was mutually beneficial to Stellar and to him personally. While it would have been open to the Commissioner to decline such a request or disregard a purported instruction, the simple fact is that, on any sensible reading of the communications, no such request was ever made. Moreover, and contrary to submissions for Mr Pedley, nothing else raised in the communications, or obvious in the communications, dictated that there be such an allocation. Further, regardless of the content of the Policy, it is clear that the Commissioner can disregard any such request by virtue of s 8AAZLE, which provides that in doing anything under Div 3 of Pt IIB of the TAA, ‘the Commissioner is not required to take account of any instructions of any entity’. The evidence from the Commissioner is that three people have done the allocation, including the officer who made the allocation recorded on Siebel in January 2015. Mr Simpson subsequently looked at it afresh again and made the same allocation, including of payments made before he became involved in June or July 2015 and before he swore his affidavit of March 2016.

68    The communication of 23 December 2014 was a challenge to the amount of the writ. But that sum of $497,466 was reduced to $159,767.79, reflecting the fact that Mr Pedley’s concern about payments not being taken into account was addressed. It was also taken into account by Mr Simpson when he did the further allocations. Although he did not know about Mr Pedley’s concern he still brought to account the payments made by Stellar, allocating $213,907.90 in respect of the DPN debt. The discussions and the evidence about what he would have done had he received and become aware of such a communication was firmly academic. Mr Simpson, in his allocation, allocated $213,907.90 to the DPN, just as it was taken into account in the January 2015 calculation. That was reflected in the fact that the writ was issued for $159,767.69.

69    Mr Pedley cites Leeson v Leeson [1936] 2 KB 156, followed in various cases, for the proposition that if a debtor desires to appropriate payments in a particular way that need not be done in express terms but must be communicated to the creditor or be capable of being inferred. To constitute an appropriation there must be more than an undisclosed intention to appropriate; but as noted by Lockhart J in Re Walsh; Ex parte Deputy Commissioner of Taxation (NSW) (1982) 60 FLR 355, where his Honour said (at 357-358 quoting from Leeson per Greene LJ):

When, however, he does not notify the creditor of his intention, and when the circumstances are such that the creditor receives the payment merely in satisfaction of the debts and the payment is not more appropriate to the payment of the one debt than to that of the other the creditor is entitled to make the appropriation. When it is said that there need not be an express appropriation of a payment, but that the appropriation can be inferred, that does not mean that appropriation of a payment can be inferred from some undisclosed intention in the mind of the debtor. It is to be inferred from the circumstances of the case as known to both parties. Any other view might lead to injustice, as the creditor’s right to appropriate a payment would be defeated. When the matter is examined upon principle it will be found that an undisclosed intention in the mind of the debtor is not sufficient to support an appropriation. If authority is needed for that proposition it can be found in the judgment of Lush J. in Parker v Guinness where he said: ‘What is to be considered is this. Is the true inference to be drawn from all the circumstances of the case that the debtor paid the moneys generally on account, leaving the creditor to apply them as he thought fit, or is the true inference that he paid them on account of special portions of the debt for the purpose and with a view to wipe these out of the account? His undisclosed intention so to do would, of course, not benefit him. It is what he did in fact, and not what he meant to do that is to be regarded’. A debtor’s undisclosed intention to appropriate a payment to one of two debts owed by him to a creditor cannot benefit him.

(Emphasis added, citations omitted.)

70    Mr Pedley argues that it may be inferred that the Commissioner was being told that Mr Pedley’s parallel debt was being addressed by way of the company making payments. He stresses the content of the Policy, which reads:

Director penalty liabilities

Where a payment is received (in full or in part) in relation to a director penalty liability, you must allocate the payment to reduce the penalty on the director’s account and corresponding parallel liability on the company’s account. If the payment is for less than the full amount, it will reduce the penalty on the director’s account, and will allocated against the company’s earliest parallel liability. In accordance with the order of allocation (see Attachment C), parallel SGC liabilities will be cleared first and then PAYG withholding.

(Citations omitted.)

71    This, of course, begs the question as to whether payment was received expressly or by implication in relation to director penalty liability.

72    Mr Pedley did not at any time, including in the December 2014 communication, request a specific allocation or reallocation. There is no basis for a conclusion that the payments made under the general payment arrangement were intended to be made by Stellar for the benefit of reducing Mr Pedley’s parallel liability, nor was any such request made at any time. The payments were made in order to reduce Stellar’s debt.

CONCLUSION

73    In conclusion, it follows that none of the payments for which the Commissioner now seeks recovery were payments previously made by Stellar in reduction of Mr Pedley’s liability claimed in the DPN. The second defence relating to the actions of the ATO in not allocating the debt so as to reduce Mr Pedley’s liability, for the reasons I have set out above, also fails. The Commissioner is entitled to judgment for the full amount plus costs, to be assessed if not agreed.

Associate:

Dated:    14 December 2018