Deputy Commissioner of Taxation v Johnston [2006] QSC 61 (2006) 230 ALR 575

SUPREME COURT OF QUEENSLAND CITATION: Deputy Commissioner of Taxation v Johnston [2006] QSC 061 PARTIES: DEPUTY COMMISSIONER OF TAXATION (plaintiff) v FLOR MARIA JOHNSTON (defendant) FILE NO: BS 7008 of 2005 DIVISION: Trial PROCEEDING: Application ORIGINATING COURT: Supreme Court of Queensland DELIVERED ON: 3 April 2006 DELIVERED AT: Brisbane HEARING DATE: 13, 16 March 2006 JUDGE: Atkinson J ORDER: The application to set aside default judgment is dismissed CATCHWORDS: PROCEDURE – JUDGEMENTS AND ORDERS – AMENDING, VARYING AND SETTING ASIDE – application to set aside default judgment under s290 UCPR – whether judgment regularly entered – whether discretion should be exercised to set aside judgment – matters to be considered on application to set aside judgment. TAXES AND DUTIES – INCOME TAX AND RELATED LEGISLATION – COLLECTION AND RECOVERY OF TAX – PROCEEDINGS FOR RECOVERY – SUMMARY JUDGMENT – where defendant was a director of a company – whether the payments by the company to the defendant should have been treated as repaying the tax debt – where the Deputy Commission of Taxation has discretion on how to allocate payments to a specific tax debt – whether the payments were ‘listed payments’ as defined in the ATO Receivables policy. Uniform Civil Procedure Rules rr 290, 283 Income Tax Assessment Act 1936 (Cth) 222AOC Taxation Administration Act 1953, 8AAZ, 8AAZC, 8AAZLA, 8AAZLE Yankee Doodles Pty Ltd v Blemvale Pty Ltd (No 78 of 1998, 23 June 1999) applied -- 1 of 6 -- 2 Evans v Bartlam [1937] AC 473 cited Bratic v Toohey [1988] 2 Qd R 140 cited Aboyne Pty Ltd v Dixon Homes Pty Ltd [1980] Qd R 142 cited National Mutual Life Association of Australia Ltd v Oasis Development Pty Ltd [1983] 2 Qd R 441 cited COUNSEL: P Hackett for the applicant defendant M J Byrne for the respondent plaintiff SOLICITORS: Rick Jones & Associates for the applicant defendant Australian Tax Office Legal Practitioner for the respondent plaintiff [1] This was an application to set aside a judgment of this court given on 13 December 2005, in default of defence, that the defendant pay the plaintiff the amount of $245,522, which included $943 in costs. The application was made under the Uniform Civil Procedure Rules (UCPR) r 290 which provides that: ‘The court may set aside or amend a judgment by default under this division, and any enforcement of it, on terms, including terms about costs and the giving of security, the court considers appropriate.’ [2] The judgment by default was entered for a debt under rule 283 of the UCPR. The claim in respect of which judgment was given was filed on 23 August 2005 and served on 30 August 2005. The request for judgment in default was filed on 13 December 2005. The application to set aside the default judgment was filed on 24 February 2006 relying on two grounds: firstly that the judgment was irregularly entered and therefore should be set aside ex debito justitiae; and secondly that, if the judgment were regularly entered, it should nevertheless be set aside pursuant to the discretion found in r 290 of the UCPR. The defendant argued that the judgment was not regularly entered as the amount of the judgment had been miscalculated. Once the defendant’s counsel explained how the amount was calculated, this argument was seen to be without merit and submissions then centred on whether the court should exercise its discretion to set aside a regularly entered judgment. [3] The discretion to set aside a regularly entered judgment is unfettered but a number of matters are relevant to its exercise.1 As I held in Yankee Doodles Pty Ltd v Blemvale Pty Ltd, 2 there are three matters which will usually be relevant to the exercise of the discretion: (1) whether the defendant has given a satisfactory explanation of the failure to defend; (2) whether the defendant’s delay in making the application to set aside precludes it from obtaining relief; and 1 Evans v Bartlam [1937] AC 473 at 478, 481, 482: Bratic v Toohey [1988] 2 Qd R 140 at 145. 2 (No 78 of 1998, 23 June 1999) at [13] -- 2 of 6 -- 3 (3) whether the defendant has a prima facie defence on the merits.3 [4] As the cases referred to in the footnotes show, the defendant must demonstrate “a very compelling reason” for the failure to appear and that it has a plausible defence either in law or in fact. Before allowing a defendant to come in and defend, the court should have before it material which enables it to say how it came about that the defendant found itself bound by a regularly entered judgment; that the defendant genuinely desires to be allowed to come in and present its case; and that issues are raised in such a form as to require serious consideration of the defence put forward. The affidavit material in support of an application to set aside judgment entered into in default of appearance must set out all the defences on which the defendant intends to rely and briefly set out the facts by which the defendant seeks to establish such defences. A mere statement by the defendant that he or she has a good defence is not sufficient to justify a review of the exercise of judicial discretion. [5] The defendant explained that she failed to defend because she thought the plaintiff had accepted a repayment proposal. There was no significant delay in seeking to have the judgment set aside. The argument on the hearing of this application, therefore, centred on whether the defendant had a defence on the merits. There were essentially two submissions put forward by the applicant: firstly, that there had been an agreement to compromise the debt; and secondly, that payments made by the company, Colorin Pty Ltd, (“Colorin”) should have been attributed to the defendant’s debt so as to extinguish it. The debt in respect of which judgment was given [6] The company, Colorin, owed various amounts to the plaintiff in respect of unpaid tax from 1 March to 30 September 2004. The amount said to be owing in the Statement of Claim was $295,000. The defendant was a director of Colorin throughout 2004 and remains a director of the company. The plaintiff issued director’s penalty notices (DPNs) in respect of Colorin’s unpaid taxation liability pursuant to s 222AOC of the Income Tax Assessment Act 1936 (ITAA). The DPNs were served on 26 July 2004 and 26 May 2005. Judgment was entered for $244,579 because an amount of $50,943 was received by the plaintiff in respect of the DPNs. Was there a compromise of the debt? The defendant argued that the plaintiff and the defendant had reached agreement as to a repayment plan. On 23 September 2005, the defendant’s lawyers put forward a payment proposal to pay the monies owing under the DPNs by monthly instalments. On 11 October 2005, the plaintiff said that the payment proposal was rejected unless within seven days the defendant provided certain information to the plaintiff (“the five conditions”). The plaintiff’s letter said that: “In order for the Deputy Commissioner of Taxation to consider a payment proposal an application to pay by instalments should:- (i) set out the reasons for non payment on time; 3 Aboyne Pty Ltd v Dixon Homes Pty Ltd [1980] Qd R 142 at 143-144; National Mutual Life Association of Australia Ltd v Oasis Development Pty Ltd [1983] 2 Qd R 441 at 449-450; Bratic v Toohey [1988] 2 Qd R 140 at 146-147. -- 3 of 6 -- 4 (ii) contain a detailed statement of the debtor’s current financial position (including what steps have been taken to obtain funds to meet the debt and what arrangements are in place to pay other creditors); (iii) contain sufficient information to satisfy the Commissioner that payment can be made by instalments without the total debt escalating (which would mean debtors will need to be able to show the steps taken to ensure future debts will be met as and when they fall due); (iv) be accompanied by an initial payment to the extent of the debtor’s present means as a sign of genuineness and commitment to pay; and (v) be accompanied by a payment to meet the costs the Commissioner has incurred in taking legal recovery action.” [7] On 17 October 2005, the defendant’s lawyers sent a letter by facsimile transmission to the plaintiff advising that the defendant had on that day paid $51,886 to the plaintiff. That payment satisfied the last two of the five conditions. However the letter did not address, much less satisfy, the first three conditions. On 19 October 2005, the defendant’s lawyers sent to the plaintiff a letter from the defendant’s accountants addressing the first condition but failing to address the second condition. With respect to the third condition, that is that the application to pay by instalments should contain sufficient information to satisfy the plaintiff that payment could be made by instalments without the total debt escalating (which would mean debtors would need to be able to show the steps taken to ensure future debts would be met as and when they fell due), the defendant’s accountants merely asserted “all current BAS will be lodged and paid on time, in addition to payment of the agreed instalments proposed.” [8] On 26 October 2005, in view of the defendant’s failure to address the second condition and its failure to satisfy the third condition, the defendant’s payment proposal was refused by the plaintiff. There was no agreement to compromise. Repayments in satisfaction of the debt [9] The second argument put forward by the defendant was that the company had made payments to the plaintiff which should have been treated as repaying the amounts of taxation owing which gave rise to the DPNs rather than as paying tax owing on current BAS statements. [10] The DPNs arose in respect of Colorin’s failure to pay to the plaintiff GST amounts and amounts withheld from the wages and salaries of the company’s employees. The company’s tax liabilities and payments made by it in respect of those liabilities were set out in a Running Balance Account (RBA) maintained by the plaintiff pursuant to s 8AAZC of the Taxation Administration Act 1953 (TAA). Section 8AAZI provides that the production of an RBA statement is prima facie evidence that the RBA was duly kept and that the amounts and particulars in the RBA are correct. [11] When the plaintiff receives a payment in respect of a current or anticipated tax debt, s 8AAZL of the TAA provides that he or she must treat such amount using the method set out in s 8AAZ LA or s 8AAZLB of the TAA, but not both. Section 8AAZL(3) sets out circumstances in which the plaintiff does not have to treat an -- 4 of 6 -- 5 amount paid using either of those methods. It is not relevant to the disposition of this case. In this instance the plaintiff used the method set out in s 8AAZLA which provides that: “The Commissioner may, in the manner he or she determines, allocate the amount to an RBA of the entity”. (emphasis added). [12] Section 8AAZLA is found in Div 3 of Part IIB of the TAA. Also in that Division is s 8AAZLE, which provides that: “In doing anything under this Division, the Commissioner is not required to take account of any instructions of any entity.” [13] The plaintiff has published a policy, the ATO Receivables Policy (the “ATO RP”) in which it sets out its payment allocation policy. This policy is available on the internet and tells members of the public, inter alia, how the plaintiff will exercise the discretion found in s 8AAZLA of the TAA. Clause 7.4.6 of the ATO RP provides that where the Commissioner needs to consider how to allocate a payment to a specific tax debt, all payments will be allocated to the earliest debts within an account except where a payment relates to a “Listed Payment.” Clause 7.4.7 sets out what are considered to be “Listed Payments”. They include “full payment of tax obligations.” The rules for the allocation of such a listed payment are set out in clause 7.7 of the ATO RP. [14] Clause 7.7.1 provides that a full payment received in relation to a tax obligation will be allocated to that respective tax debt regardless of whether there are earlier unpaid tax debts within that account. Examples of full payments of tax liabilities are given in clause 7.7.2. They include “the balance payable under the BAS provisions for an Activity Statement.” Part-payment of tax obligations other than listed payments will be allocated to earlier tax debts within the account. “BAS” refers to a Business Activity Statement which includes moneys owing by or credited to the business for, inter alia, GST and PAYG withheld (“ITW”). [15] The defendant did not herself make any relevant payments. She relies on payments recorded in the RBA made by the company which she says the plaintiff should have attributed to the earlier tax debts which gave rise to the DPNs. [16] The submission finds no statutory basis as, under s 8AAZLA of the TAA, the plaintiff is able to allocate amounts paid to an RBA in the manner he or she determines. The defendant must therefore rely on the ATO RP to allege that the plaintiff has breached its own policy in the way in which it allocated payments. [17] The defendant’s counsel argued that the following payments made by Colorin should have been attributed to earlier debts rather as listed payments: 1. 10 September 2004 $13,898 2. 22 December 2004 $79,961 3. 4 March 2005 $60,049 -- 5 of 6 -- 6 4. 6 May 2005 $43,871 5. 21 June 2005 $56,285 6. 4 August 2005 $47,484 [18] If all of these were attributed to the earlier debts, so it is argued, all of Colorin’s debts which gave rise to the DPNs would have been repaid. [19] However the argument does not withstand close analysis. The payment of $13,898 was allocated in the RBA to the company’s self-assessed liability for GST for June 2004. The liability for GST appears on the BAS statement. The self-assessment was on 25 August 2004 and paid in full on 10 September 2004. This is a listed payment and would not therefore have been allocated to an earlier debt. [20] The second payment of $79,9610 was allocated in respect of self-assessed liability for GST for October 2004 of $13,523 and self-assessed liability for ITW of $66,438 for October 2004 both of which appeared in the BAS statement. These amounts total $79,961. The self-assessments were made by Colorin on 22 November 2004 and paid in full on 22 December 2004. It was a listed payment and would not and should not have been allocated to an earlier debt. [21] The third payment of $60,049 was made on 4 March 2005 and allocated in respect of a liability for January 2005 GST and ITW which had been self-assessed on 21 February 2005. The amounts matched exactly and so it was taken to be payment in full. [22] The fourth payment of $43,871 was the remainder owing, after an earlier part payment, in respect of the February and March 2005 BAS and so was allocated as payment in full of that debt. [23] The fifth payment of $56,285 was allocated as a listed payment. It was paid on the same day 21 June 2005 as the company assessed its liability for GST and ITW for May 2005 as $56,286 (after an adjustment made on the previous day). The $1 difference is neither here not there, as rounding of amounts occurs either up or down to the nearest dollar. [24] The sixth payment of $47,484 on 4 August 2005 was payment in full of the company’s self-assessed liability for GST and ITW for June 2005. It was self- assessed on 21 July 2005 and paid in full on 4 August 2005. [25] All the payments referred to by the plaintiff were listed payments and there is no merit in law or in fact in the argument that they could or should have been allocated to earlier debts. [26] None of the arguments put forward by the defendant suggest that she has a prima facie defence on the merits. The application should be refused. I shall hear submissions as to costs. -- 6 of 6 --