• Legal database
Legal database

IWEC PTY LTD v FC of T

Members:
R Hunt SM

Tribunal:
Administrative Appeals Tribunal

MEDIA NEUTRAL CITATION: [2007] AATA 1051

Decision date: 8 February 2007

R Hunt (Senior Member)

Background

1. The applicant, IWEC Pty Ltd, in 2003 and 2004, ran into financial difficulties and made late payment of certain superannuation contributions on behalf of some of its employees. The Commissioner raised default assessments of superannuation guarantee shortfalls in relation to the periods for which the late payments occurred. On 15 May 2005 and 3 May 2006, the applicant filed notices of objection to the default assessments and penalties. In the first objection made on 15 May 2005 the applicant objected to the default assessments for the periods from 1 July 2002 to 30 June 2004. In the second objection, concerning the default assessment for the period ending 30 September 2003, the applicant claimed to have made the required payment by the due date.

2. On 6 March 2006, the Commissioner issued a notice of decision, allowing the first objection to some extent. The decision varied the original assessments for the year ended 30 June 2003 and for the quarters ended 31 December 2003, 31 March 2004 and 30 June 2004 but disallowed the objection to the extent that the applicant was still required to pay a large amount in superannuation guarantee charges and penalties. As well, the applicant incurred "nominal interest" and administration fees. The amended assessments meant that the total superannuation guarantee charge (SGC) for the year ended 30 June 2003 was increased but the Part 7 penalty was reduced. For the additional quarters considered, the total SGC and Part 7 penalty was reduced in each instance.

3. The Commissioner's decision made on 22 August 2006 disallowed the applicant's objection of 3 May 2006 in full. The 22 August 2006 decision was in respect to the quarter ended 30 September 2003. The applicant's claim that it had made this payment on the due date was rejected.

4. The applicant sought review by the tribunal of both objection decisions and both matters were reviewed together.

Issue

Superannuation guarantee charge

5. The tribunal was asked to decide whether the applicant is liable to pay the SGC and additional penalty for the year of income ended 30 June 2003 and similar penalties for the quarters ended 30 September 2003, 31 December 2003, 31 March 2004 and 30 June 2004. If the applicant is so liable, further questions arise as to the extent of the liability for SGC and possible remission of Part 7 penalty. The applicant argued it was entitled to a reduction in the SGC as all payments had been made, albeit late. In particular, the applicant claimed that it should not incur SGC for the quarter ending 30 September 2003 as it made the requisite superannuation contribution on the due date.

Penalties

6. Because of the late payments, the applicant became liable to the assessment of penalties pursuant to Part 7 of the Superannuation Guarantee (Administration) Act 1992 (the Administration Act). The Commissioner imposed penalties but remitted them in part. For the quarter ended 30 September 2003, the Commissioner remitted the Part 7 penalty to nil. The Commissioner remitted the penalty for the other periods to 8%.

7. Pursuant to s62(3) of the Administration Act, the Commissioner may remit all or part of a penalty under Part 7. The Commissioner remitted the penalty to nil in one instance because his records showed the payment was made only one day late. In relation to the other periods, the Commissioner applied policy guidelines as to the imposition and remission of penalties taking into account the applicant's co-operation throughout the audit. The applicant sought a further reduction.

Evidence and submissions

8. The Commissioner's decisions on the applicant's objections relate to five periods, being the last quarter of the 2003 financial year and the four quarters for the 2004 financial year. The applicant made appropriate contributions to the superannuation fund for all these periods but not by the due dates. The deadline for the last quarter of 2003 was 28 July

ATC 2075

2003 and the Commissioner's records show payment was not made in full until 29 October 2003.

9. For the quarters ended 31 December 2003 and 31 March 2004, the Commissioner's records show the contributions were received on 2 August 2004, several months late. The applicant missed the deadline for the first quarter of 2004 by one day, the deadline being 28 October 2003. The trustee of the fund to whom the applicant made its payments recorded receipt of the payment on 29 October 2003. In relation to the quarter ended 30 June 2004, the contributions were 5 days late according to the records of the Commissioner. Some part payments were received before these dates but the applicant conceded that total payments for all the periods at issue were somewhat late apart from the payment made for the quarter ended 30 September 2003.

10. Counsel for the Commissioner told the tribunal that, towards the end of 2004, the applicant was selected for a superannuation guarantee audit in respect of the five periods at issue. As a result, a superannuation guarantee charge and a Part 7 penalty were imposed in relation to four out of the five periods at issue and, eventually, for all five periods.

11. Four periods were the subject of the first objection decision before the tribunal made on 6 March 2006 and the last period is the subject of the second objection decision made on 22 August 2006 and they have all been brought before the tribunal in this matter. The one set of facts applied to the periods under review except for the disputed payment date applicable to the quarter ended 30 September 2003. Counsel, however, indicated that the Commissioner had realised some of the individual shortfalls that were previously determined needed revision. Regardless of the outcome of the tribunal proceedings, the Commissioner would amend the shortfall calculations.

12. Mr Leonard Cullen is a director of the applicant company and appeared on its behalf at the tribunal hearing. Mr Cullen gave evidence that, as a director of the company, he could demonstrate that the superannuation contributions were paid to all employees over a period of three years albeit that they were paid late. He explained that this was because of cash flow issues with the business which had subsequently been sold. The business was sold in late July 2004, and Mr Cullen said it was from the proceeds of the sale that the payment in August 2004 was made. The employees were probably oblivious to the fact that there was any issue about those contributions and that the ATO was pursuing the applicant, in effect, to pay the contributions again.

13. Mr Cullen explained that the applicant had been known as Southern Cross Motorcycles Pty Ltd and had acquired the business of Stony Creek Motorcycles. The company changed its name to IWEC Pty Ltd. For convenience, he had continued the relationship with the former providers of the employee superannuation fund. He had believed that these providers were agents for AXA Australia (AXA). The contributions were handled by AZ Solutions Pty Ltd (AZ Solutions). The superannuation contribution cheques were paid to AZ Solutions. Correspondence before me shows that AXA did operate a fund for Southern Cross Motorcycles Pty Ltd.

14. Mr Cullen gave evidence that he had arranged for his son to deliver a cheque for the payment on the last day for the 30 September 2003 quarter, being 28 October 2003. He gave evidence that the cheque was delivered to a person whom he believed was an agent for the fund. He argued that this meant the payment was made by the due date and he should not have to meet any further liability for this quarter.

15. The Commissioner's papers before me show that the ATO auditor wrote to AXA to verify the date of payment. AXA advised that it had received the payment on 29 October 2003, that is, one day late. AXA also wrote to Mr Cullen on 12 April 2006 informing him that it did not consider that forwarding the cheque to his adviser on 27 October 2003 (the date he had originally claimed when payment was made to AXA) was payment to AXA. Mr Cullen clarified that a cheque was drawn on 27 October 2003, the day before it was delivered to the agent.

16. Mr Cullen told me he did not believe AZ Solutions was his adviser but that it was AXA's agent and that payment to the agent was payment to the principal. In support of his contention that AZ Solutions was AXA's agent, Mr Cullen pointed to a letter from AXA which

ATC 2076

suggested he should get in touch with one of their agents. He also recollected a piece of correspondence that had referred to AZ Solutions as their agent some time earlier. Among the supplementary documents produced to the tribunal by the Commissioner, at S6-15, is a communication to Southern Cross Motorcycles Pty Ltd with a handwritten note on the bottom saying, in part:

"… Kindly contact our call centre … or contact our agents …"

17. Mr Cullen gave evidence that, when a new employee started, he would contact the agent, a Mr Zammit from AZ Solutions, and Mr Zammit would come and sign that person up with AXA. He added:

"I don't believe I have anything from AZ Solutions. He was more a conduit for passing on the information to AXA to deal with any issues arising from the superannuation fund."

18. Mr Cullen admitted that documents he had received from AXA neither confirm nor deny that Mr Zammit was their agent. He argued to the effect that AXA had held out Mr Zammit as their agent. Mr Cullen did not produce any further supporting evidence about the alleged relationship.

Analysis

19. The due dates for contributions for the superannuation scheme fall quarterly on the 28th day after the end of each quarter. As an employer during the financial year ending 30 June 2003, the applicant was required to provide superannuation support for its eligible employees by the due date, being 28 July 2003. The applicant had similar obligations for each of the quarters to 30 June 2004. The applicant made the payments late with the possible exception of one payment made to an agent but not received by the superannuation provider by the due date.

20. In consequence of the late payments, the applicant became subject to a SGC on the superannuation guarantee shortfall, pursuant to s5 of the Superannuation Guarantee Charge Act 1992, for each of the periods in question. In addition to becoming liable for payment of the superannuation guarantee shortfall, the applicant became liable for payment of interest pursuant to s31 of the Administration Act, as well as an administrative component pursuant to s32 of the Administration Act.

21. The applicant pointed out that the imposition of the charge involved a double payment which it could not recover and which worsened its already poor financial situation. In effect, by the imposition of the charge, the applicant had to pay again the amount of superannuation contributions which had been paid late. As well, the employees for whom payment was made twice, received a windfall of which they might not even be aware. As was observed by Member Dr Gordon Hughes in
VCJ and Commissioner of Taxation [2006] AATA 955, an employer is unable to recoup the overpaid amount directly from the relevant superannuation fund as such recourse is precluded by s117(3) of the Superannuation Industry (Supervision) Act 1993.

22. The Commissioner has no discretion to remit any or all of the SGC. The law is well settled on this point. The legislation was designed to protect eligible employees by ensuring they received superannuation support from their employers. The legislation makes no provision for late payment. As well, there is no discretion to remit or waive the nominal interest or administration component:
Re Pye and Federal Commissioner of Taxation 2004 ATC 2029; (2004) 55 ATR 1024.

23. There are a number of cases where the harshness of the legislation has been noted. These include the recent case of VCJ already mentioned. An early example occurs in
Re Jarra Hills Pty Ltd and Federal Commissioner of Taxation 97 ATC 2132; (1997) 37 ATR 1022, where Senior Member Pascoe stated at paragraphs 5-8:

"…The legislation is quite clear in providing a deadline for contributions to superannuation of 28 July of the following financial year. There is no provision in the legislation which allows for any extension of time beyond that date nor any discretion given to the respondent or this tribunal to overlook a failure to make required levels of superannuation contributions by that date.

It is accepted that the likely result of the applicant's failure to avoid the shortfall by 28 July 1994 is that the total cost of superannuation to the applicant and the benefits derived in respect of certain

ATC 2077

employees have been higher than that intended by both the applicant and the legislation. Nevertheless, there is nothing that either the respondent or this tribunal can do to ameliorate that position…

The Tribunal must affirm the decision under review as the legislation under which the assessment was issued is clear and unambiguous…"

24. Re Jarra Hills Pty Ltd was subsequently followed in
Re Truelove and Commissioner of Taxation [2000] AATA 276;
Re Kancroft Pty Ltd (acting as trustee for Robertson Family Trust) and Commissioner of Taxation 2004 ATC 2126; [2004] AATA 591; and
Re Williams and Commissioner of Taxation 2005 ATC 2058; (2005) 58 ATR 1298.

25. In Re Truelove, Senior Member Block stated at paragraph 13:

"I have some sympathy for the Applicant. The additional amounts assessed against him are substantial in relation to the actual charge and the delays which occurred… Had the Act allowed me to do so, I might have been inclined to reduce such amounts; however, I have no such powers."

26. In Re Williams, Member Fisher stated at pages 1306-1307:

  • "54. This issue troubled the Tribunal greatly. The Applicant has attempted to perform his legal obligations in relation to the payment of superannuation on behalf of his employees, although he has done so late, and then by way of payment to the superannuation trustee. In view of the timing differential, the Respondent was empowered to, and did, impose a superannuation guarantee charge in respect of the late payment of superannuation.

  • …

  • 56. In both effect and broad terms, the Applicant has paid superannuation contributions twice. The Respondent is not obliged to refund any superannuation guarantee charge that it has properly raised against the Applicant. Whether the respondent chooses to do so on an ex gratia basis is a matter entirely for the Respondent…

  • …

  • 58. The correct (but not necessarily preferable) decision in this case is that the Respondent was lawfully empowered to raise and recover superannuation guarantee charges against the Applicant …
  • 59. There is an unfortunate legislative lacuna raised by the facts of this case where the Applicant paid superannuation contributions to a trustee late, yet still has incurred a superannuation guarantee charge liability…"

27. I agree with the comments made in these tribunal cases both as to the Commissioner's position and the unfortunate effect on an employer who has made late payment. The legislative inflexibility in circumstances where the employer is in a difficult financial position, as in the present case, results in the employer being unduly penalised for a relatively minor infringement. Nevertheless, for the above reasons, I must affirm the Commissioner's decision under review as to the application of the SGC where late payment has been made.

28. This means that I must affirm the decision of 6 March 2006 as to the imposition of the SGC. However, during the course of the hearing, counsel for the Commissioner indicated that some of the calculations in the decision on the objection were incorrect. This occurred because some of the applicant's employees had left the applicant's employ during the relevant period. As a result, I find that the imposition of the charge is required but that it should be recalculated according to the correct legislative formula.

29. Late payment is clear in all but one instance. In regard to the claim that payment to the agent was payment to AXA, I find that Mr Cullen has not satisfied me that Mr Zammit or AZ Solutions was the agent of AXA. I can understand why Mr Cullen may have been under the impression that he was dealing with an AXA agent but Mr Cullen has not produced any documentation or corroboration of his view of a relationship of AZ Solutions with AXA. The handwritten note advising him to contact one of AXA's agents does not amount to any holding out of Mr Zammit or AZ Solutions as an agent of AXA. AXA has written that it does not consider them its agent. Mr Cullen himself gave evidence at one stage that Mr Zammit was a conduit to AXA. Dealings of this kind may

ATC 2078

give rise to a misconception about the status of the agent and exactly who he or she is an agent for, the person relying on their assistance or the organisation they might appear to represent. Mr Cullen might have sought confirmation that payment to Mr Zammit was effective payment to AXA before he relied on his assumptions.

30. I further note that
Tilley v The Official Receiver (1960) 103 CLR 529 is authority for the proposition that payment by cheque is made when the cheque is received by the trustee, unless the cheque is dishonoured. This case is cited in the Commissioner's "Superannuation Guarantee Determination" SGD 2003/7. Paragraphs 37 to 41 of the Commissioner's written submissions set out the various pieces of evidence before the tribunal that confirm AXA received the payment, due on 28 October 2003, one day late, on 29 October 2003. There is no avenue which permits this late payment to be overlooked despite the applicant's unfortunate history.

31. As to the application of the Part 7 penalty provisions, I note that the Commissioner has already remitted it to nil for the amount that was paid one day late. I agree with this decision in view of the circumstances. Mr Cullen endeavoured to make the payment on time and his mistake about the status of the "agent" was understandable. I find that Mr Cullen did make a genuine attempt to comply, especially when he gave the cheque for the October 2003 payment to the person he thought was AXA's agent. I also note that the remission is in accordance with the ATO's guideline entitled "Practice Statement Law Administration", PS LA 2006/1 where the taxpayer has made a genuine effort.

32. The Commissioner has remitted the remaining penalties to 8% in respect to the year ending 30 June 2003 and the quarters ending ended 31 December 2003, 31 March 2004 and 30 June 2004. The remission already acknowledges Mr Cullen's difficulties in meeting the applicant's obligations and takes into account his co-operation. The imposition of 8% is near the bottom of the scale. However, I have turned to the Commissioner's published policy guidelines to consider whether this is the appropriate level of penalty.

33. PS LA 2006/1 is issued with the opening instruction that it must be followed by tax officers unless it creates unintended consequences or is incorrect. The level of penalty suggested as step 1, in paragraph 14, where the employer has provided information, is 10%. Step 2 involves the employer's history and co-operation. A genuine attempt to comply is a mitigating factor, as is a high level of co-operation. Had Mr Cullen contacted the ATO to remedy the situation as soon as a failure occurred, this would also be considered a mitigating factor.

34. Coming to that part of the payment that was 5 days late, that is, the component for the quarter ended 30 June 2004, I find that the imposition of the 8% penalty was harsh. The reason expressed in the Commissioner's contentions for this imposition is that Mr Cullen, by then, had a bad record. On the other hand, I think that Mr Cullen was at all times making strong efforts to keep up with the applicant's obligations. He did make part payment of employee superannuation as is shown in the Commissioner's facts and contentions. While it would have been advisable for him to contact the Commissioner and keep the tax office informed about his financial difficulties, he was not overlooking or disregarding his superannuation obligations. His oral evidence that he sold the business and made the payment out of the proceeds of sale is borne out by the facts. I find that the penalty for the late payment for the quarter ended 30 June 2004 and due on 28 July 2004, which was made on 2 August 2004, should be remitted in full.

35. As to the remaining late payments, I consider that they should be halved to 5%. This is because the penalty suggested in step 1 of PS LA 2006/1 for someone in Mr Cullen's position is 10% and further reductions are justified by the criteria referred to in step 2, paragraphs 15 to 17. Mr Cullen, on behalf of the applicant, had only a short history of late payment (due to the applicant's poor trading in the relevant period), he co-operated well with the Commissioner, and he made a genuine attempt to comply with his obligations. In addition, the applicant has been severely penalised by having to pay the SGC as well as having made all the superannuation payments for its former employees, albeit late.

ATC 2079

Decision

36. The objection decision dated 6 March 2006 is varied as follows:

  • • The tribunal remits the matter to the Commissioner to re-calculate the superannuation guarantee charges according to law.
  • • The Part 7 penalty for the quarter ended on 30 June 2004, payment for which was due on 28 July 2004 and made on 2 August 2004, is remitted in full.
  • • Part 7 penalties for the remaining quarters are reduced to 5%.

37. The objection decision made on 22 August 2006, disallowing the applicant's objection concerning the quarter ended 30 September 2003, is affirmed.


Back to top

This information is provided by CCH Australia Limited Link opens in new window. View the disclaimer and notice of copyright.