Deputy Commissioner of Taxation v Heinrich [2024] QSC 51

SUPREME COURT OF QUEENSLAND CITATION: Deputy Commissioner of Taxation v Gerhard Horst Heinrich [2024] QSC 51 PARTIES: DEPUTY COMMISSIONER OF TAXATION (Applicant) v GERHARD HORST HEINRICH (Respondent) FILE NO/S: BS 9192 of 2022 DIVISION: Trial Division PROCEEDING: Application ORIGINATING COURT: Supreme Court at Brisbane DELIVERED ON: 3 April 2024 DELIVERED AT: Brisbane HEARING DATE: 9 February 2024 JUDGE: Martin SJA ORDER: The defendant pay to the plaintiff the amount of $10,870,135.92 including interest in the amount of $1,033,738.75 pursuant to s 58 Civil Proceedings Act 2011. CATCHWORDS: PROCEDURE – CIVIL PROCEEDINGS IN STATE AND TERRITORY COURTS – ENDING PROCEEDINGS EARLY – SUMMARY DISPOSAL – GENERALLY – where the Deputy Commissioner of Taxation seeks summary judgment against the defendant in relation to directors’ penalties under the Taxation Administration Act 1953 (Cth) – where defendant seeks to defend claim on the basis that he and the Company paid the amount owing by entering into an agreement with the Commissioner or that the Commissioner’s claim was compromised by entry into the agreement – where defendant seeks to defend claim on the basis that he took all reasonable steps under s 269-35 of Sch 1 of the Taxation Administration Act 1953 (Cth), or alternatively, there were no reasonable steps he could have taken – whether there is any real prospect of defendant successfully defending all or part of the claim Taxation Administration Act 1953 (Cth), Sch 1, s 269-15, s 269-25, s 269-35 Uniform Civil Procedure Rules 1999, r 292 Canty v Deputy Commissioner of Taxation (2005) 63 NSWLR 152; [2005] NSWCA 84, applied -- 1 of 9 -- 2 Deputy Commissioner of Taxation v Salcedo [2005] 2 Qd R 232; [2005] QCA 227, cited Deputy Commissioner of Taxation v Woodhams (2000) 199 CLR 370; [2000] HCA 10, cited McDermott v Black (1940) 63 CLR 161; [1940] HCA 4, applied Shaw v Deputy Commissioner of Taxation [2016] QCA 275; (2016) 104 ATR 1, applied Westpac Banking Corporation v Hughes [2012] 1 Qd R 581; [2011] QCA 42, cited COUNSEL: A M Roberson (Solicitor) for the applicant P K O’Higgins KC for the respondent SOLICITORS: ATO Litigation and Legal Services for the applicant James Conomos Lawyers for the respondent [1] The Applicant (DCT) seeks summary judgment in the sum of $9,836,352.17 with interest against Mr Heinrich on the basis that he is required to pay a penalty arising out of the failure of Heinrich Formwork Pty Ltd (the Company) to remit Pay As You Go Withholding (PAYGW) amounts to the DCT. [2] Mr Heinrich resists summary judgment on these bases: (a) the tax related liabilities have been compromised; (b) he has a defence under s 269-35(2) of the Taxation Administration Act 1953 (Cth) (the TAA) because: (i) he took all reasonable steps to ensure the amount was paid; or (ii) there were no reasonable steps he could have taken to ensure that the Company complied with its obligations. [3] For the reasons which follow, the DCT is entitled to judgment, with interest, pursuant to UCPR r 292. The test for summary judgment [4] The DCT applies under r 292 of the Uniform Civil Procedure Rules. It provides: “(1) A plaintiff may, at any time after a defendant files a notice of intention to defend, apply to the court under this part for judgment against the defendant. (2) If the court is satisfied that— (a) the defendant has no real prospect of successfully defending all or a part of the plaintiff’s claim; and (b) there is no need for a trial of the claim or the part of the claim; the court may give judgment for the plaintiff against the defendant for all or the part of the plaintiff’s claim and may make any other order the court considers appropriate.” -- 2 of 9 -- 3 [5] The court must consider whether there is no real, as opposed to fanciful, prospect of the defendant succeeding with respect to all or part of the claim and, as a result, there is no need for a trial of claim.1 [6] Proceedings will be determined only in the clearest of cases, where there is a high degree of certainty about the outcome.2 The basis of the DCT’s claim [7] Under Division 12 of Schedule 1 of the TAA the Company was obliged to withhold an amount from certain payments made to, among others, employees and office holders and then pay those withheld amounts (PAYGW obligation) to the Commissioner of Taxation. [8] The TAA imposes an obligation on a director of a company to cause that company, on or after the initial day on which that obligation arises, to comply with its obligations. [9] If that payment is not made, then the Director Penalty regime applies. [10] Division 269 of Schedule 1 of the TAA contains the Director Penalty regime. It provides, among other things, for the imposition of penalties on the directors of companies which do not meet the obligation to pay withheld amounts to the Commissioner. The penalty will ordinarily be the same as the outstanding PAYGW obligation. [11] Directors of a relevant company continue to be under their obligation to cause the company to comply with its obligation until: (a) the company complies with its obligation; or (b) an administrator is appointed to the company under s 436A, s 436B or s 436C of the Corporations Act; or (c) a small business restructuring practitioner for the company is appointed under s 453B of the Corporations Act; or (d) the company begins to be wound up (within the meaning of the Corporations Act). [12] Mr Heinrich was, at all relevant times, a director of the Company. The Company began to be wound up on 19 August 2022 on the application of the DCT. The amount sought by the DCT is the amount of PAYGW for the period 6 February 2020 to 10 June 2021. [13] It is not in dispute that the Company failed to pay the amount of PAYGW claimed by the DCT. [14] There is a precondition to the commencement of proceedings to recover a penalty under Division 269. Under s 269-25, the Commissioner must not commence 1 Deputy Commissioner of Taxation v Salcedo [2005] 2 Qd R 232. 2 Westpac Banking Corporation v Hughes [2012] 1 Qd R 581. -- 3 of 9 -- 4 proceedings against a director to recover a penalty, unless the Commissioner has given 21 days’ notice to the director setting out “what the Commissioner thinks is the unpaid amount of the company’s liability under its obligation”. This notice is usually referred to as a director penalty notice or DPN. [15] A DPN does not create a right of action. Its purpose is to inform the recipient of the unpaid amount as then known to the Commissioner and of the actions which would result in remission of the penalty. [16] The nature of the process was considered by the High Court in Deputy Commissioner of Taxation v Woodhams.3 The Court said that the provisions of the Act concerning collection by instalments of tax payable by employees require employers to make regular deductions from the salaries and wages of employees on account of income tax payable by those employees, and to remit the amounts to the revenue authorities on a monthly basis. They went on to say that the revenue needs to be protected against the case where an employer has made deductions from salaries or wages, but has failed to remit the amount of such deductions. This scheme imposes penalties upon directors of corporate employers which have failed to remit those amounts. The corporate employers do not incur a liability to pay tax, rather they incur a responsibility to collect tax with an obligation to remit the amounts collected.4 [17] Mr Heinrich did not dispute the proper service of the DPN on him. [18] The DCT is assisted by provisions of the TAA which provide that a statement or averment made in a claim is prima facie evidence of the matter (s 350-20(1) TAA). In this case there is an evidentiary certificate signed by the Deputy Commissioner of Taxation stating the amount payable and it is prima facie evidence that the amount is payable (s 350-10(3) and s 350-12 Sch 1 TAA). The grounds advanced to resist summary judgment [19] The amount owed by the Company was not contested. [20] The TAA provides for some limited defences in s 269-35(2): “(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 to be appointed under section 436A, 436B or 436C of the Corporations Act 2001; (iia) the directors caused a small business restructuring practitioner for the company to be appointed under section 453B of that Act; 3 (2000) 199 CLR 370; [2000] HCA 10. 4 These remarks concern predecessor provisions to Division 269. Those predecessor provisions are not materially different to the relevant parts of Division 269: see, Power v Deputy Commissioner of Taxation (2013) 284 FLR 42; [2013] NSWCA 428; and Snell v Deputy Commissioner of Taxation [2020] NSWCA 29. -- 4 of 9 -- 5 (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.” [21] Mr Heinrich says: (a) that he and the Company paid the amount claimed to be owing to the Commissioner by entry into an agreement between him, the Company and the Commissioner; or (b) the claim made by the Commissioner was compromised by the entry into that agreement; or (c) he took all reasonable steps to ensure that the directors caused the Company to comply with its obligations; or (d) there were no reasonable steps he could have taken to ensure that any of those things happened. Was there payment of the debt or compromise of the proceedings? [22] In mid-2021 Mr Heinrich negotiated with the Commissioner about the payment of tax owed by the Heinrich Group – of which the Company was a part. [23] Mr Heinrich’s argument is that the result of the negotiation and his conduct is that there was an agreement reached and it effected an accord and satisfaction such that the DCT has accepted the promises set out in the agreement in satisfaction of the Company’s obligations. [24] The principles relating to the formation of accord and satisfaction are well known and the commonly accepted expression of them is Dixon J’s formulation in McDermott v Black5 where he said: “The essence of accord and satisfaction is the acceptance by the plaintiff of something in place of his cause of action. What he takes is a matter depending on his own consent or agreement. It may be a promise or contract or it may be the act or thing promised. But, whatever it is, until it is provided and accepted the cause of action remains alive and unimpaired. The accord is the agreement or consent to accept the satisfaction. Until the satisfaction is given the accord remains executory and cannot bar the claim. The distinction between an accord executory and an accord and satisfaction remains as valid and as important as ever. An accord executory neither extinguishes the old cause of action nor affords a new one.” 6 5 (1940) 63 CLR 161. 6 at 183-184. -- 5 of 9 -- 6 [25] Dixon J went on to consider the two types of accord and satisfaction: one where the making of the agreement itself is what is stipulated for, and the other, where it is the doing of the things promised by the agreement. He said: “The distinction depends on what exactly is agreed to be taken in place of the existing cause of action or claim. An executory promise or series of promises given in consideration of the abandonment of the claim may be accepted in substitution or satisfaction of the existing liability. Or, on the other hand, promises may be given by the party liable that he will satisfy the claim by doing an act, making over a thing or paying an ascertained sum of money and the other party may agree to accept, not the promise, but the act, thing or money in satisfaction of his claim. If the agreement is to accept the promise in satisfaction, the discharge of the liability is immediate; if the performance, then there is no discharge unless and until the promise is performed.”7 [26] The terms alleged to have constituted such an agreement need to be closely examined. [27] Mr Heinrich relies upon correspondence passing between the parties and, in particular, what is said to have been an acceptance by the DCT of the proposal put forward on his behalf. That acceptance is contained within a letter from the DCT of 24 September 2021. [28] The letter of 24 September discloses that the DCT was willing to enter into a “review payment plan” subject to certain terms. Of relevance to this proceeding are the following conditions: “▪ As proposed immediately commence weekly payment instalments of $30,000 and $50,000 for Heinrich Constructions Pty Ltd and Heinrich Formwork Pty Ltd respectively pending the sale of the Darlington Stud properties. The Darling [sic] Stud properties being the properties located at: [Four identified properties at Greenmount]. ▪ Mr Hoss Heinrich undertakes to ensure that the net proceeds, after selling costs and payment to parties with a secured interest in the properties, of the sale of the Darlington Stud properties will be remitted to the Commissioner in satisfaction of the taxation liabilities of Heinrich Formwork Gold Coast Pty Ltd, Heinrich Plant Hire Pty Ltd and Heinrich Constructions Pty Ltd. Furthermore, Mr Heinrich undertakes that the Darling [sic] Stud properties will not be further encumbered or dealt with in a manner that would diminish their value; and ▪ Following the sale of the Darlington Stud properties and the discharge of the abovementioned liabilities, submit a new payment proposal to reflect the suggested increased availability of funds and cashflow to address the remaining liabilities of Heinrich Formwork Pty Ltd and any other Heinrich Group debts that may be payable. 7 at 184-185. -- 6 of 9 -- 7 If you do not meet these conditions Should the companies fail to comply with these requirements the Commissioner reserves the right to proceed with recovery action. Recovery action may include the issuing of garnishee notices and the issuing of Statutory Demands pursuant to section 459e [sic] of the Corporations Act 2001.” [29] The condition that the failure to comply with the requirements set out in that letter would allow the Commissioner to proceed with recovery action renders this agreement an accord executory. Those terms make it clear that the Commissioner reserved his rights to pursue the parties to the agreement should the conditions not be met. It was not a case in which the Commissioner merely accepted the promises made in discharge of the liability. [30] The undertaking not to further encumber the Darlington Stud properties, or deal with them in a manner that would diminish their value, was breached. In a letter to the DCT from Mr Heinrich’s solicitors of 9 March 2022 it is admitted that $2 million was borrowed against the strength of “the contract and properties, despite the Undertaking”. It is further said that “our client accepts that it is unacceptable that he has breached the Undertaking but it has occurred entirely beyond the control of Heinrich Constructions.” [31] The agreement between the parties, then, was that there was to be no discharge until performance was complete. That conclusion is fortified by the term which envisages a new payment proposal after the sale of the Darlington Stud properties which was to “address the remaining liabilities of Heinrich Formwork Pty Ltd and any other Heinrich Group debts that may be payable.” That term is inconsistent with the notion that the liability had been discharged by the making of the various promises. Is there a statutory defence available? [32] Section 269-35(2) and (3) of Schedule 1 of the TAA provides a defence to persons against whom a penalty is sought. It provides: “(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 to be appointed under section 436A, 436B or 436C of the Corporations Act 2001; (iia) the directors caused a small business restructuring practitioner for the company to be appointed under section 453B of that Act; (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: -- 7 of 9 -- 8 (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.” [33] The operation of the defences under those provisions was considered by Handley JA in Canty v Deputy Commissioner of Taxation.8 He said: “[38] The defences under para (a) and para (b) are cumulative not mutually exclusive. A defendant may establish that there was nothing that could reasonably be done to achieve payment. He or she may also establish that there was no point in attempting to negotiate an agreement with the Commissioner. In such a case the defence under para (b) would succeed pro tanto leaving the defence under para (a) to address the remaining options. … [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. …” (emphasis added) [34] The explanation given by Handley JA was adopted by Gotterson JA (with whom McMurdo JA and Atkinson J agreed) in Shaw v Deputy Commissioner of Taxation9 where he said: “[37] The explanation given by Handley JA had regard for the dicta in Miller to the effect that each of the options under the defence provision must be addressed. It then elucidated how that may be done conformably with the provision: it may be reasonable to choose and take all reasonable steps to pursue one option but if pursuit of it fails, then all reasonable steps to pursue another option must then be undertaken. Significantly, steps to pursue all of the options concurrently need not be taken. It is obvious that to attempt to do so could be counterproductive.” (emphasis added) [35] Mr O’Higgins KC argued that: (a) Mr Heinrich had taken all reasonable steps to ensure that the Company had complied with its obligations by pursuing the negotiations with the Commissioner and then entering into the agreement referred to above; or, in the alternative (b) that there were no reasonable steps Mr Heinrich could have taken to ensure that any of the things referred to in s 269-35(2)(a) happened. [36] In light of the findings above concerning the nature and effectiveness of the agreement, there is no force in the first part of that defence. The agreement did not cause the Company to comply with its obligations. No other action was taken to ensure that any of the matters set out in s 269-35(2)(a)(ii)-(iii) happened. 8 [2005] NSWCA 84; (2005) 63 NSWLR 152 (Beazley and Santow JA agreeing). 9 [2016] QCA 275; (2015) 104 ATR 1. -- 8 of 9 -- 9 [37] The second part of Mr Heinrich’s argument is that the COVID-19 pandemic and the disruption and delays associated with it caused the Company to lose more than $10 million even though it continued to employ people to perform work at the Queens Wharf project as a subcontractor to Multiplex Constructions Pty Ltd. The contention is that the effects of the pandemic upon the Company and Mr Heinrich occurred entirely beyond his control and that, but for the pandemic, the Company would have had sufficient income to discharge its debt to the Commissioner and, therefore, there would have been no debt to which a DPN could attach. [38] The argument advanced is confined to the loss of capacity, due to COVID-19 restrictions, for the Company to make sufficient money to satisfy its indebtedness to the DCT. In the written submissions from Mr Heinrich it is contended that he seeks “to have the benefit of the usual interlocutory process that would allow the collation of further evidence, including as to the impacts on the Company of the COVID-19 restrictions (such as evidence as to the government directives, evidence from a quantity surveyor and construction expert as to the effects on the business and the contracts that were undertaken and forensic accounting to assess the financial impacts on the Company)”. [39] That argument does not assist the defendant. It might, if all the evidence favoured the defendant on that point, go some way to demonstrating that there were no reasonable steps available to Mr Heinrich to ensure that the Company complied with the obligation in s 269-35(2)(a)(i). But, the argument (and the evidence sought to be obtained) does not provide any basis for a conclusion that there were no reasonable steps able to be taken to achieve any of the matters set out in s 269-35(2)(a)(ii)-(iii). Conclusion [40] There is no real, as opposed to a fanciful, prospect of the defendant succeeding with respect to all or part of the claim and, as a result, there is no need for a trial of claim. The DCT is entitled to judgment, with interest, pursuant to UCPR r 292. Orders [41] The defendant pay to the plaintiff the amount of $10,870,135.92 including interest in the amount of $1,033,738.75 pursuant to s 58 Civil Proceedings Act 2011. [42] I will hear the parties on costs. -- 9 of 9 --