PM Roach SM
Administrative Appeals Tribunal
P.M. Roach (Senior Member)
A company (``Fam-co.'') is the applicant in this reference. It was referred to the Tribunal for a determination in March 1989. The application relates to the year of income ended 30 June 1986 and arises out of an assessment which issued in December 1987. It was referred to the Tribunal on 8 March 1989. At the request of the parties it was provided with an early hearing date available at short notice. The provision of such an early hearing was expected to avoid any need for the Commissioner to refer a number of other cases to the Tribunal for determination. Such a course cannot only avoid the risk of injustice being occasioned by delay, but it can also result in a substantial reduction in the costs to the community of providing for an independent adjudication upon such issues. In addition it can save many individuals from having to unnecessarily bear substantial expense.
2. The sole shareholders in and the only directors of Fam-co. were a married couple and their three sons. The parents, the three sons and the wives of the sons (``the employees'') were all employees of Fam-co. Each of them at all material times maintained a loan account with Fam-co. which was maintained with credit balances due to the account-holder. Each account-holder was entitled at all material times to draw on the loan account.
3. On Saturday 6 June 1986 at a meeting of directors Fam-co. resolved as follows:
Resolved that the following director's fees and bonuses be and are hereby payable from the profits of the year ended 30 June 1986.''
There followed a schedule identifying each of the eight employees and fixing upon $17,000 as the appropriate amount.
4. At some time thereafter which was unspecified, a written resolution to that effect was prepared and it was later adopted as the company's record of the passing of the resolution. Similarly, at some time unspecified, a journal entry was prepared in the books of account of the company to give effect to the resolution. The journal entry provided for the debiting of one account - presumably that for ``salary and wages'' or ``directors fees'' - with $136,000 and the crediting to the loan accounts of each of the eight employees previously mentioned of $17,000.
5. It was common ground that, by 30 June 1986, Fam-co. had ``incurred'' a liability within the meaning of sec. 51(1) of the Income Tax Assessment Act (``the Act'') for $136,000 and that each of the eight employees had ``derived'' $17,000 by way of assessable income within the meaning of sec. 25(1) of the Act. It was agreed that no amount had been drawn upon any of the loan accounts prior to 30 September 1987. A deduction of $136,000 was claimed by, and allowed to Fam-co., and assessable income (inter alia) in the sum of $17,000 derived following the resolution was returned as assessable income by each of the eight employees for the year of income ended 30 June 1986 and assessed.
6. On 30 September 1987 officers of the Commissioner investigated the records of Fam-co. and then discovered that no amounts had been withheld on account of income tax to become due by the individuals when they were credited with $17,000 each. In consequence the officers considered Fam-co. to have been in breach of its obligations under the Act. They judged that Fam-co. had failed to deduct $56,812.80 and to remit it to the Commissioner and, thereby, they further judged that Fam-co., subject to any remissions there might be, was liable to penalties in the sum of $56,812.80 plus 20% per annum of that sum for any period of default. As a result of the investigation it was recommended that penalty should be reduced to 20% of the undeducted amount: $11,362.56, together with interest thereon at 20% per annum. However, the recommendation was reviewed and revised upwards.
7. By notice of 4 December 1987 Fam-co. was advised that:
"a penalty as set out below, is now payable by you in accordance with provisions of Section 221EAA. This penalty is not to be shown on the above employee's group certificate, nor is it tax deductible. Penalty relating to failure to deduct (a) Total of wages paid without tax instalment deductions being made for the period $136,000.00 (b) Total undeducted amount as per schedule of (see attached) 56,812.80 (c) Penalty (called the flat penalty) remitted under Section 221N to the amount shown $22,725.12 (d) Penalty at 20% p.a. of the flat penalty, calculated from the date of undeducted amounts that would have been payable to the Commissioner 5,603.32 ---------- TOTAL AMOUNT OF PENALTIES (c) + (d) $28,328.44" ----------
8. Fam-co. objected to the imposition and, its objection having been disallowed, the matter was referred to this Tribunal for independent review. At the hearing the question for determination was limited to whether in the circumstances the Commissioner was empowered to impose any such penalties. No evidence or argument was presented in support of any contention that, in the alternative, there should be any further remission of penalties.
9. Whether the applicant is liable to the penalties assessed is to be determined by a construction of sec. 221EAA and the application of it to the circumstances of the case. So far as is material, sec. 221EAA(1) provides:
``Where an employer... refuses or fails, at the time of paying salary or wages to an employee to deduct from the salary or wages the amount required to be deducted under this Division, the employer is liable to pay to the Commission by way of penalty...''
10. The dispute is limited to the question as to whether the condition expressed by the words emphasised and which constitute a prerequisite to the exercise of the power claimed by the Commissioner has been satisfied. The correct construction of those words requires that the question be considered in the context of the entire Division and, indeed, of the entire Act. It also requires that, being a penal provision, sec. 221EAA should be strictly construed but not so strictly as to produce an unreasonable result.
F.C. of T. v. Westraders Pty. Ltd. 80 ATC 4357; (1980) 144 C.L.R. 55.)
11. Section 221EAA has its place within Pt VI of Act: a Part given over to provisions for ``Collection and Recovery of Tax''. It falls within Div. 2 of that Part: the Division given over to ``Collection by Instalments of Tax on Persons Other Than Companies''. Many relevant terms are defined in sec. 221A(1) but neither ``paid'' nor any related term is specifically defined. However, the term ``paid'' is defined in the Act inasmuch as sec. 6(1) provides:
``In this Act, unless the contrary intention appears -
- `paid' in relation to dividends includes credited or distributed;
12. Hence, it was argued by the solicitor for the applicant, the concept of ``payment'' used in the Division and in sec. 221EAA in particular is a narrow one, to be confined to the delivery of money, whether by way of legal tender or, in absence of protest, its equivalent by way of cheque (including bank cheque). He further supports that construction by referring to phrases used elsewhere in the Division such as:
``For the purpose of enabling the collection by instalments from employees of income tax, the regulations may prescribe rates of deductions to be made by employers from payments of salary or wages that employees receive or are entitled to receive in respect of a week or part of a week.''
``...where an employee receives from an employer salary or wages, being an amount to which section 26AC applies..., the employee shall be deemed to have received the salary or wages in respect of a week.''
``... where an employee receives from an employer salary or wages, being an amount to which paragraph 26(eb) applies, the employee shall be deemed to have received the salary or wages in respect of a week.''
``... where an employee receives from an employer salary or wages, being an eligible termination payment, the employee shall be deemed to have received the salary or wages in respect of a week.''
13. In considering those arguments it needs to be remembered that the circumstances that the Act speaks of:
``deductions to be made from payments... that employees receive''
is alone sufficient to indicate that some terms at least are not used strictly. What an employee
ATC 478``receives'', in the sense contended for, is only what remains after moneys are withheld on account of tax and other matters. But in my view the term, as used in the section, refers to the entitlement which would exist but for the operation of the Division or of other authorities; rather than to any lesser amount placed at the disposition of the employee.
14. In support of the construction contended for, the solicitor for the applicant further points to the use of the phrase ``sets apart or pays'' used in sec. 82AAC(1) (relating to contributions to superannuation funds) and to the provisions in sec. 19 and 128A(2) of the Act making express provision to the effect that money
``shall be deemed to have been paid by a person to another person although it is not actually paid over to the other person.''
15. The final argument of the solicitor concluding a comprehensive review of provisions of the Act, was that, as with the Prescribed Payment System provided for by Div. 3A of Pt V of the Act, so too with the PAYE provisions: the concern of the Act is only to prevent moneys passing from an employer to his employee without moneys being withheld from the payee on account of the payee's liability to tax.
16. In my view the arguments must fail. Individuals become entitled to remuneration. That remuneration ordinarily constitutes assessable income and, thereby, plays its part in contributing to a liability in that individual to income tax. Entitlements of employees may or may not be satisfied. Ordinarily for employees receipt constitutes derivation but ``receipt'' in that sense will be when the employer satisfies its obligation to remunerate. That obligation will be fully satisfied even though the employer witholds some part of that remuneration pursuant to a statutory obligation to do so. That may be achieved in many ways. Those methods of discharging the obligation to remunerate, and of satisfying the employee's entitlement to be remunerated, commonly include payment in cash - by coins and notes of the realm as legal tender - directly from the hands of the employer to his employees; and may be achieved by a deposit by the employer by electronic transfer or otherwise to a bank, building society or credit union to an account of the employee. But there are many other commonplace methods too. The obligation to remunerate may be discharged by the employer by applying the moneys as directed by his employee, for example by payment to creditors; or by effecting payment to third parties as required by law, for example upon garnishee or attachment; or by payment in accordance with authority given to pay to a joint account of the employee and others.
17. In the circumstances of this case the course followed by the employer, with the approval of the employees, was to the same effect as would have occurred had the employer paid the moneys to a third party to be held for the employees. The only differences were that it was the employer rather than a third party who became debtor on loan account to the employees, thereby avoiding the necessity for the employer to diminish its immediately available cash resources.
18. It was argued that neither the passing of the resolution to effect the bonus or the documentation of it nor the making of journal entires in the books of account of Fam-co. could have themselves constituted ``payment''. In so far as they were only unilateral acts of the employer, I agree. But in so far as it is agreed that, on or before 30 June 1986, the moneys had been credited to the loan account of each person entitled thereto and were there available to be drawn on demand by the lender, I disagree. Section 19 of the Act provides:
``Income or money shall be deemed to have been derived by a person although it is not actually paid over to him but is reinvested, accumulated, capitalized, carried to any reserve, sinking fund or insurance fund however designated, or otherwise dealt with on his behalf or as he directs.''
19. In my view, just as the income was ``derived by'' the employee upon the crediting of the moneys to the loan account with Fam-co., so too that act of crediting the loan account constituted the discharge of the employer's obligation to ``pay''. It did so just as surely as the employer would have discharged his obligation to so ``pay'' salary or wages had he deposited the moneys to the credit of an account of the employee with a third party or if he had otherwise applied the moneys at the direction of the employee.
20. That conclusion accords with the view expressed by Walton J. in
Garforth (Inspector of Taxes) v. Newsmith Stainless Ltd. (1979) 2 All E.R. 73. Although meaning no disrespect to his Honour, I have not reached the conclusion I have by force of the finer points of his Honour's decision. As was contended before me, it was a decision based upon other legislation of another place. None the less it is not surprising that, having regard to the fact that the legislation of that other place is directed to grappling with substantially the same fiscal and legal problems as the legislation of this place, the conclusions reached should be the same. That being so, I find some support in that decision for the decision I have reached.
21. I am also confirmed in the decision I have formed by the realisation that, if the argument for the applicant was fundamentally sound, it would seem to follow that any employer who credited wages to a loan account of the relevant employee with the employer and who then permitted the employee to draw down on that loan account would have no obligation to comply with the PAYE provisions. Such a conclusion would be so remarkable that, for that reason if for no other, it should be considered as probably unsound.
22. Despite the circumstance that it was agreed that the employees had all returned the amounts in question as assessable income, and although there was no suggestion of default on the part of the employees in paying the tax duly assessed, and despite the recent issue of Taxation Ruling IT 2517, no evidence was placed before me, and no argument addressed to me, on the question of penalties. In those circumstances I say nothing more on that subject.
23. The determination of the Commissioner upon the objection under review shall be affirmed.