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PAYE not deducted, relitigation of X16 [2009] NZTRA 10 (11 May 2009)

Last Updated: 23 June 2009

BEFORE THE TAXATION REVIEW AUTHORITY

Decision No. 10 /2009

TRA No. 029/07

IN THE MATTERS OF the Income Tax Act 1994

BETWEEN **********************

Disputant

AND THE COMMISSIONER OF INLAND REVENUE

Defendant

HEARD at AUCKLAND on 7 November 2008 with a subsequent series of written submissions

DATE OF THIS DECISION: 11 May 2009

APPEARANCES

The disputant on his own behalf
Ms M Deligiannis and Ms W Breedon, for defendant

DECISION OF JUDGE P F BARBER
AS TAXATION REVIEW AUTHORITY
ON DEFENDANT'S STRIKE-OUT APPLICATION

The Issue

[1] The substantive issue is whether the disputant has been correctly assessed for PAYE on his earnings over the period 20 June 2000 to 30 October 2000 as Chief Executive Officer (CEO) of a telecommunications group of companies.

[2] In his dated 16 November 2007 Notice of Claim, the disputant refers to the Commissioner's 23 October 2003 disputable decision of issuing a statement of account to the disputant under s.NC16 of the Income Tax Act 1994. Broadly, that section provides that where PAYE is not deducted from an employee's salary at source, the employee must by the 20th of the following month furnish the defendant with a return of that income and then pay the unpaid PAYE.

[3] The disputant challenges that disputable decision on the basis that, at material times, he was an employee whose employer remunerated him net of PAYE. He puts it he is not liable to pay that PAYE because the employer deducted it; although the employer did not account for it to the defendant.

[4] By 8 February 2008 Notice of Defence, the defendant, inter alia, admits that the disputant was at all material times an employee. However, the defendant denies that the disputant's remuneration as CEO was paid on a net basis and adds "that as the disputant had at 1 November 2000 not decided whether to treat himself for tax purposes as an independent contractor and/or employee, all payments up until that date were made in round figures on a gross basis". The defendant then pleads that the facts and issues now raised by the disputant have been the subject of a previous decision by me in Case X16 (2005) 22 NZTC 12, 216, that they are therefore res judicata, disclose no reasonable cause of action and constitute an abuse of process in that they attempt to relitigate matters already determined by me in Case X16.

[5] On 30 May 2008, the defendant filed an application to strike out the disputant's Notice of Claim.

[6] The tax aspects of this matter stem from the disputant claiming losses in his personal 2001 income tax return and a PAYE credit from his employer company. The disputant's position is that PAYE was deducted from payments made to him by his employer company, when he was employed as its CEO.

[7] The Commissioner's position is that PAYE had not been deducted from payments made to the disputant by his employer company and, therefore, the disputant is personally liable for the PAYE under s.NC16 of the Income Tax Act 1994.

[8] As a result, the commissioner issued PAYE assessments on 18 September 2002, for the PAYE periods ended 31 July 2000, 31 August 2000 and 30 September 2000 and 31 October 2000. The disputant disagreed with the Commissioner's PAYE assessments and initiated the formal disputes process under Part IVA of the Tax Administration Act 1994, by issuing a Notice of Proposed Adjustment on 20 November 2002. Following completion of the disputes procedure, the disputant challenged the PAYE assessments, by filing a Notice of Claim in the TRA (TRA 112/04) on 29 July 2004.

Case X16

[9] On 15 November 2005 the TRA issued a decision in favour of the Commissioner and found that the PAYE amounts in dispute had not been deducted by the employer Case X16 (2005) 22 NZTC 12,216. Judge Barber confirmed that the amounts for PAYE be assessed to the disputant pursuant to the Commissioner's power under s.NC16 of the Income Tax Act 1994.

[10] More specifically, the TRA confirmed the Commissioner's assessments (for $42,682.81) but made adjustments as agreed (para 51 of decision), this adjustment amounted to $28,199.84 and was assessed to the disputant under s.NC16 of the Act. Following the TRA decision the Commissioner issued a $1,891.98, default assessment to the disputant which related to the period ending 30 June 2000, and which he is now disputing.

[11] In accordance with the TRA's decision the Commissioner issued updated assessments on 30 November 2005 to the disputant for the periods ended 31 July 2000, 30 August 2000 and 30 September 2000. A further assessment was issued to the disputant for income tax and PAYE for the period ended 30 June 2000. The assessments were for $28,199.84 for the periods above and the said default assessment for $1,891.98 for the period ended 30 June 2000.

[12] On 19 March 2006 he disputant disputed the Commissioner's 30 November 2005 assessments by issuing a NOPA. The NOPA proposed adjustments for PAYE over 20 June 2000 to 30 October 2000 on the grounds that the disputant was an employee of the employer company and that the employer company had already deducted PAYE from payments made to him so he is not liable to make any PAYE payments to the Commissioner.

[13] The Commissioner rejected the disputant's NOPA, inter alia, because such a challenge had already been dealt with by Judge Barber in Case X16 and it the disputant now challenges identical issues to those determined by the TRA in that case.

[14] By way of further background I set out the headnote of Case X16 as follows:

"This was a challenge by the taxpayer to the Commissioner's assessment under s.NC16 of the Income Tax Act 1994 for $42,682.81 PAYE on his remuneration from 20 June to 31 October 2000.

When the taxpayer was first engaged by his employer company as its Chief Executive Officer on 9 June 2000, there was some uncertainty as to whether he was offered the position as an employee or as an independent contractor. The taxpayer preferred to operate as an independent contractor rather than as an employee. However, by the time he realised that he had not achieved creating independent contractor status, the employer was in financial difficulties and the taxpayer sought to backdate his employee status situation. Because the taxpayer had initially left his options open as to his employment status, no PAYE was deducted from his remuneration. This situation continued for the June to 31 October 2000 period. When the accounts staff were made redundant upon the insolvency of the company, the taxpayer assumed responsibility for PAYE matters. After his employment ceased on 30 October 2000, the taxpayer made contact with the Inland Revenue Department about the outstanding PAYE. He advised the Department that he had been missed off his employer's PAYE schedules because it had not been determined whether he was an employee or an independent contractor. The retrospective reconstruction by the taxpayer after his employment had ceased was made without authority from the directors of the company or its receiver. The taxpayer knew that the company did not have the means to pay outstanding PAYE or the further PAYE added to the schedules by and for the taxpayer.

Held, Judgment for the Commissioner.

1. The relevant PAYE amounts which were not deducted by the employer should now be paid by either the former employer or the taxpayer. The former employer was in liquidation, insolvent and unable to meet payment. In the circumstances of this case, it was fair and just that the PAYE amounts which were not deducted by the employer company should be assessed to the taxpayer under s.NC16 of the Income Tax Act 1994.

2. The letter offering employment to the taxpayer was for a position as either a contractor or an employee. The taxpayer deferred making an election until October 2000. However, the taxpayer was an employer from the outset of his employment and should have been paid salary net of PAYE on a fortnightly basis.

3. No PAYE deductions were made by the employer in relation to salary payments made by the employer to the taxpayer. The taxpayer knew this and did nothing about the situation until the receiver of the company had been appointed and the taxpayer's employment contract was terminated. In October 2000, the taxpayer accelerated the rate of his salary payments to cover the arrears of his remuneration which had accrued due to the financial problems of the employer. The taxpayer knew that the employer was unable to pay outstanding PAYE on these payments.

4. The taxpayer was responsible for non-deduction and non-payment of PAYE. He received his salary as gross income. Accordingly, it was appropriate that he now be assessed for the PAYE content of his remuneration."

The Strike Out Application of the Defendant

[15] The defendant's strike-out application seeks to strike out the disputant's said 16 November 2007 Notice of Claim on the ground that the disputant has disclosed no reasonable cause of action, that his claim is an abuse of process and, in particular, attempts to relitigate matters already determined by me in Case X16 and is therefore res judicata. That application is supported by an affidavit of Mr K R Green, an IRD Team Leader responsible for the relevant audit of the disputant's tax affairs by the IRD.

[16] That application for strike out is opposed by the disputant for reasons I summarise below but he, eventually, on 12 December 2008 filed affidavits from Messrs CGG and JRS respectively in support of his opposition. Ms Deligiannis (for the defendant) has given notice that she does not wish to cross-examine any witnesses for the disputant. She asserts that the said two affidavits add nothing new to this case. The disputant's submissions, understandably, were a mixture of evidence and argument.

[17] At this stage, by consent, the parties seek that I issue a decision on the strike-out application based on their written and oral submissions. However, I first refer further to the said two affidavits.

A Summary of the Affidavit from Mr CGG

[18] CGG had been the managing director and a founding partner of the relevant group of companies which required a new CEO in May 2000. He explained how the disputant was offered this position in June 2000 and elected to take it as an employee.

[19] The disputant was to be paid a net sum for his services and the employer group was responsible for the deduction of PAYE on the disputant's salary and for accounting to IRD for that in the usual way for an employee.

[20] CGG explained that due to the employee environment in the group being "slightly hostile" and due to "disarray and panic" in the group from loss of business, staff became overloaded and the disputant did not receive his full salary entitlements. That also seemed to be due to cash flow difficulties.

[21] Prior to the disputant's appointment, the group's payroll staff had allowed employee PAYE tax deductions to became unpaid to IRD for over five months. The disputant brought that up-to-date for all other staff.

[22] CGG deposed that the group was always conscious of its obligation to pay IRD the equivalent of PAYE deductions from the disputant's remuneration on the basis that the latter was a net payment in terms of PAYE. CGG emphasised that the disputant was never told by the group that he (the disputant) was to be responsible for his own PAYE deductions from the payments made to him because that was not the arrangement agreed to between the group and the disputant.

[23] The affidavit of JRS seems almost identical in content to that of CGG. There is no convincing evidence of PAYE having been deducted, but the evidence of the disputant and his two deponents seems to be that they regarded the remuneration paid to the disputant as net of PAYE.

Analysis and Reasons for Decision

[24] The issue in this dispute is whether the disputant is liable to pay PAYE under s.NC16 of the Income Tax Act 1994 for the June 2000 period because PAYE on his remuneration over this period has never been paid.

[25] It is clear that PAYE was not deducted from payments made to the disputant by his employer company. Therefore, the disputant was personally liable for the PAYE under s.NC16 of the Act.

[26] This Authority has already made similar findings against the disputant in relation to the PAYE periods ended 31 July 2000 to 31 October 2000, as reported in Case X16 (2005) 22 NZTC 12,216 where, obiter, similar findings were also made in relation to the June 2000 period.

[27] The point of allowing the disputant to file further evidence (from Messrs CGG and JRS) was to determine whether there was any evidence unavailable at the earlier hearing which would make a material difference to the decision of the Authority. At the strike out hearing, I made it clear that the filing of the further evidence would not, and could not, lead to the reopening of the other periods (31 July 2000 to 31 October 2000) and that the disputant could only rely on the said affidavits from the two directors of the employer company for the period ending 20 June 2000. However, the affidavit evidence of Messrs CGG and JRS filed on 12 December 2008 does not disclose any new matters which would make any material difference to my previous decision. Apart from a paragraph or two, the evidence filed by the two deponents is word for word identical. I emphasise that they both state that PAYE was never deducted and paid to IRD by the employer company from the disputant's salary.

[28] The defendant's position is simply that as PAYE has never been paid by the employer, s.NC16 applies and makes the employee, the present disputant, liable to the defendant for the PAYE. That is correct.

[29] Accordingly, the same issues, facts, and legal arguments which were canvassed before me in the Case X16 are applicable in relation to the June 2000 PAYE period (the period in dispute in this current proceeding). The disputant gave extensive evidence at that hearing, as did the employer group's payroll clerk who took her instructions directly from the disputant.

[30] The defendant submits that, in the circumstances, the disputant's challenge must be struck out as an ill-conceived attempt to relitigate matters which have been the subject of previous proceedings, and it is therefore an abuse of the Court's process. Ms Deligiannis' submitted in particular:

• [a] the disputant is attempting to relitigate the issue whether or not his employer over the period 20 June 2000 to 30 October 2000 deducted PAYE from his salary; and
  
• [b] that although the statement of account, which the disputant is currently challenging, relates to the June 2000 PAYE period, I specifically dealt with the June 2000 PAYE period in Case X16 and found that no PAYE was deducted from the salary received in June 2000.
  

[31] In the substantive proceedings the disputant challenges the Commissioner's statement of account to the disputant issued under s.NC16 of the Income Tax Act 1994. In his Notice of Claim the disputant alleges that, while he was paid as an employee by his employer company over 20 June 2000 to 30 October 2000, his salary was made net of PAYE. The disputant submits that he is not liable to pay PAYE because his employer company already made the PAYE deductions, but did not account to IRD for them. These are the very same issues which the disputant raised in the previous proceedings.

[32] The disputant referred to me having held in Case P44 [1992] NZTRA 22; (1992) 14 NZTC 4,308 that an employee is exonerated from liability for paying PAYE to the Commissioner once the employer deducts PAYE from the employee's wages. However, I find in the disputant's case that the employer failed to make any PAYE deduction. That aspect was simply not attended to, and the disputant knew that, and that the employer did not have funds available for PAYE on the disputant's salary. Also, there is considerable vagueness as to whether the disputant's salary payments were intended to be on an employment basis or independent contractor basis, and whether or not they were meant to be net of tax. The disputant refers to PAYE schedules relating to periods from 20 June 2000 to 30 October 2000. Over these periods the disputant received monthly salary payments under his employment contract with his employer company.

[33] As stated above, the current proceedings contain issues which have already been determined by me on 15 November 2005 in TRA Case X16 (2002) 22 NZTC 12,216). In those previous proceedings the disputant challenged identical issues and assessments for identical PAYE periods. The key disputed issue was whether the disputant's employer had made any source deductions from any such salary payments made by or on behalf of his employer company to or for the disputant. In the current proceeding this issue is also being challenged.

[34] In Case X16 I found that payments made by the employer company to the disputant over 20 June 2000 to 30 October 2000 were not net of PAYE and PAYE had not been deducted and retained by the employer, or passed onto the Commissioner. I confirmed the Commissioner's assessments and ordered that the amounts for PAYE be assessed to the disputant pursuant to the Commissioner's power under s.NC16 of the Income Tax Act 1999. I further ordered that amended PAYE amounts, which were not deducted by the employer company, be assessed to the disputant under s.NC16 of the Act. I confirmed the CIR assessments (for $42,682.81) to the disputant but made adjustments, as agreed, amounting to $28,199.84. Following the Case X16, the CIR issued a default assessment to the disputant for $1,891.98 relating to the period ending 30 June 2000. The disputant did not file an appeal against the TRA's decision.

Principles Applicable to Strike Out Applications

[35] High Court Rule 186 (set out below) provides grounds for a pleading to be struck out. There is no need to rely on the Court's inherent jurisdiction to strike out a proceeding "in the absence of special circumstances" (CED Distributors (1998) Ltd v Computer Logic Ltd (in receivership) (1991) 4 PRNZ 35 (CA)).

[36] Rule 186 of the High Court Rules provides:

"Without prejudice to the inherent jurisdiction of the Court in that regard, where a pleading –

(a) Discloses no reasonable cause of action or defence or other case appropriate to the nature of the pleading; or

(b) Is likely to cause prejudice, embarrassment, or delay in the proceeding; or

is otherwise an abuse of the process of the Court, -

The Court may at any stage of the proceeding, on such terms as it thinks fit, order that the whole or any part of the pleading be struck out." (Rule 209 of the District Court Rules 1992 is the District Court equivalent provision).

[37] In Hunter v Chief Constable of West Midlands [1981] UKHL 13; [1982] AC 529 (HL), Lord Diplock considered that the Court had a duty, not just a discretion, to protect its processes from abuse. That description was applied by the Court of Appeal in Bryant v Collector Customs [1984] 1 NZLR 280, 282-3.

[38] The general principles which underlie the doctrine of abuse of process have been variously described as follows:

• [a] Misuse of the judicial process is likely to produce unfairness and to undermine confidence in the administration of justice: Bryant v Collector of Customs [1984] 1 NZLR 280, 282 (CA);
  
• [b] Public interest in the due administration of justice necessarily extends to ensuring that the Court's processes are fairly used and that they do not lend themselves to oppression and injustice: Bryant at p282;
  
• [c] The Court is not simply protecting the interests of the parties to the case – it is also protecting its ability to function as a Court of law in the future: Bryant at p282;
  
• [d] Principles of public policy require that the appropriate method of correcting a wrong decision after a contested hearing is by appeal against the judgment to a superior Court: Saif Ali v Sydney Mitchell & Co [1980] AC 198.
  

[39] In Attorney-General v Prince & Gardner [1998] 1 NZLR 262 Richardson P enunciated relevant principles about strike-out, and I also take those into account. His Honour said (at p267):

"A striking-out application proceeds on the assumption that the facts pleaded in the statement of claim are true. That is so even although they are not or may not be admitted. It is well settled that before the Court may strike out proceedings the causes of action must be so clearly untenable that they cannot possibly succeed; the jurisdiction is one to be exercised sparingly, and only in a clear case where the Court is satisfied it has the requisite material; but the fact that applications to strike out raise difficult questions of law, and require extensive argument does not exclude jurisdiction."

[40] The general principles applicable to strike-out where no reasonable cause of action is disclosed, or the claim amounts to an abuse of process, can be summarised as follows:

• [a] Assume the facts pleaded are true. However, if the pleaded allegations are blatantly absurd, the Court is not required to assume they are true (Collier v Pankhurst CA 136/97, 6 September 1999).
  
• [b] The causes of action must be so clearly untenable that they cannot possibly succeed.
  
• [c] The strike-out jurisdiction is one to be exercised sparingly and only in clear cases where the Court is satisfied that it has the requisite material.
  
• [d] However, the fact that applications to strike out raise difficult questions of law and require extensive argument does not exclude the jurisdiction (Gartside v Sheffield Young & Ellis [1983] NZCA 37; [1983] NZLR 37 at p45).
  

Abuse of Process Based on Estoppel / Res Judicata

[41] The Courts have accepted that there is an abuse of process when the identical question, which has already been determined in earlier proceedings, is raised again in other proceedings. It is sufficient to quote from the decision of the Court of Appeal in Gregoriadis v CIR [1986] 1 NZLR 110, 114:

"It is fundamental to the judicial process that there be an end to litigation. Over recent years there has been considerable discussion in the cases and in legal periodicals in various jurisdictions concerning the responsibility resting on the Courts to prevent the relitigating of issues already decided and the precise scope and application of concepts such as res judicata, issue estoppel, double jeopardy, the specific pleas of autrefois acquit and autrefois convict, and abuse of process ...

Where a final judicial decision has been pronounced by a Court of competent jurisdiction, any party to that litigation is estopped in any subsequent litigation as against any other party to the earlier proceedings from disputing or questioning the first decision on the merits (Spencer Bower and Turner, Res Judicata (2nd ed, 1969) p9. In a case such as the present, in order to found an estoppel per rem judicatam there must be (i) identity of the parties; (ii) identity of subject matter; and (iii) sufficient co-extensiveness of the standard of proof."

[42] Applying these factors, I agree with Ms Deligiannis that the disputant's claim is a collateral attack on judicial decisions made in previous proceedings and, therefore, must be struck out on the basis that the present proceeding constitutes an abuse of process.

[43] Once a Court of competent jurisdiction has decided a matter in issue between parties, that gives rise to a defence of res judicata or issue estoppel. The matter cannot be litigated twice. The principle of res judicata was discussed by the Court of Appeal in Joseph Lynch Land Co Ltd v Lynch [1995] 1 NZLR 37 where Tipping J said (at 40-41):

"The expression "res Judicata" means the matter has been adjudicated. The concept of res judicata is often applied to both cause of action estoppel and issue estoppel. Traditionally its use was confined to the former. Cause of action estoppel is different from issue estoppel which can arise where a plea of res judicata in the strict sense is not open because the causes of action are not the same: see 16 Halsbury's Laws of England (4th ed, reissue) (Estoppel) at para 977. Cause of action estoppel is more precise than issue estoppel. For there to be cause of action estoppel the cause of action sought to be estopped must be precisely the same as that upon which there has been an earlier adjudication.

Issue estoppel is concerned with the prior resolution of issues rather than causes of action. In the same paragraph of Halsbury as that referred to above, it is said that issue estoppel precludes a party from contending the contrary of any precise point which, having once been distinctly put in issue, has been solemnly and with certainty determined against him."

[44] Fisher J considered the principles of issue estoppel in Russell v TRA (2000) 19 NZTC 15,924 (HC) at 15,929. In summary, there must be a final decision of a Court of competent jurisdiction deciding the same question between the same parties; the issue must be one which has been determined as an essential step in the logic of the judgment without which it could not stand; and the second proceeding will involve the same question as the first if the issue could with reasonable diligence have been raised in the first proceeding.

[45] In the present case, there has been a final decision of this Authority in relation to the disputant's claim that he had tax deducted from his salary payments. Such deductions were not made and it is correct and proper they be assessed to the disputant. The decision of the Authority was not appealed.

[46] In particular, the disputant is attempting to relitigate the issue whether or not, over the period 20 June 2000 to 30 October 2000, his employer deducted PAYE from his salary. Also, the statement of account, which the disputant appears to be currently challenging, relates to the June 2000 PAYE period. I specifically dealt with the June 2000 PAYE period in my decision X16 where I made a finding that no PAYE was deducted from the salary received by the disputant in June 2000.

Conclusion

[47] In the circumstances of this case, I now strike out the disputant's challenge as an ill-conceived attempt to relitigate matters which have been the subject of extensive proceedings and, therefore, an abuse of the Court's process.

_____________________________
Judge P F Barber
Taxation Review Authority
WELLINGTON

TRA 019-07.doc(aw)