Decision by Randerson, Potter and Simon France JJ in:

Pongi v R [2012] NZCA 127, 29 March 2012

Background:

The taxpayer was the majority shareholder and sole director of Quality Hort Ltd, which provided labour to the Kiwifruit industry. The company employed gangs of workers and charged orchardists for the services performed by its employees. The company did not pay any PAYE or GST over the period - May 2006 until January 2008. It also failed to furnish its monthly PAYE returns, two monthly GST returns and annual income tax returns.

The jury found the taxpayer guilty of 31 counts of evading the payment of PAYE, GST and income tax and was sentenced to two years and six months imprisonment, R v Pongi DC Tauranga CRI-2009-070-614, 16 August 2011.

The Appeal

The taxpayer appealed against the conviction for 18 of the counts in the indictment which alleged that he knowingly applied or permitted the application of PAYE tax for a purpose other than paying it to the CIR, contrary to s 143A(1)(d) of the Tax Administration Act 1994, (TAA).

The taxpayer contended that s 143A(1)(d) does not apply unless PAYE has been actually deducted from the wages of the employees or there is a deemed deduction of PAYE under a tax law. Neither of which applied to the taxpayer.

The taxpayer also appealed against his sentence on all counts in the indictment.

With respect to the PAYE the taxpayer contended that the company received lump sums from the orchardists less a 15 per cent withholding payment which the orchardists deducted. It was contended that the 15 per cent withholding payment discharged the company’s tax obligations. The amounts received from the orchardists were divided between the workers and paid to them without any PAYE deductions.

At trial the taxpayer applied for a discharge under s 347 of the Crimes Act 1961 on the PAYE counts on the same grounds as contended in the appeal. The District Court dismissed that application finding that the Crown did not have to prove the actual deduction of PAYE by the taxpayer and that the law deemed the PAYE deductions to be made at the time the wages were paid to the employees. The jury were directed accordingly in the Judge’s summing up.

 Decision:

 (1)     The taxpayer’s appeal against conviction on the PAYE counts was allowed. There was insufficient evidence to establish that PAYE was actually deducted from the employees’ wages and that a deduction of PAYE was not deemed to have occurred. The convictions on those charges were quashed and no retrial was ordered as there was no realistic prospect that evidence could now be obtained to support fresh convictions. The appeal against sentence on all counts in the indictment was allowed. A substituted sentence of 15 months imprisonment on each of the remaining counts was imposed with all terms to be served concurrently.

(2)     For the conviction appeal to be successful their Honours needed to consider the construction of ss 4A and 143A of the TAA. A “source deduction payment” in s 4A(2) includes the payment of salary or wages. Therefore:

(a)     An offence under s 143A(1)(d) is committed only if, with the relevant knowledge, the offender deducts PAYE tax or is deemed to have done so by virtue of a tax law.

(b)     A deduction is deemed to be made only when payment is made of the net amount of the relevant salary or wages.

(c)     If a deemed deduction occurs then the amount of the deduction is deemed to have been applied for a purpose other than in payment to the CIR if the amount is unpaid by the relevant due date.

(d)     If a deemed deduction applies, the amount of the deduction is deemed to be unpaid tax.

Their honours found that in this context “net amount “refers to gross wages or salary less the amount of PAYE. With their being no evidence to the contrary it was determined that PAYE was not actually deducted from the employees wages nor did the company pay the net amount of a source deduction payment in terms of s 4A(2)(b).

(3)     Their Honours did not agree with the decision of R v Fepuleai [2008] NZCA 339 finding that it was not in dispute that the law required the taxpayer to make the relevant PAYE deductions and that he failed to do so but it did not necessarily follow that s 143A(1)(d) applied. Fepuleai did not deal with the separate offences created by ss 143A(1)(d) and 143A(1)(e) or that a deemed deduction of PAYE under s 4A(2)(b) only occurs upon payment of net wages or salary to an employee. Section 4A(2)(b) does not deem the net amount to have been paid irrespective of whether it has been actually paid.

(4)     The statutory regime under subpart NC requires an employer to deduct PAYE from the employee’s salary or wages and pay it to the CIR each month. Further the employer must furnish an employer monthly schedule. If a tax deduction is not made by the employer, the employee must pay to the CIR the amount that should have been deducted (ITA 2004, s NC 16). Section NC 16 is supplemented by s 168 of the TAA which contains a deeming provision but does not deem a deduction of PAYE to have been made, rather where an employer fails to pay PAYE, s 168(1) deems the PAYE to have become due and payable to the CIR on the date of which the employer would have been required to pay the tax deductions. Section LD 1 of the ITA 2004 does not create a deemed deduction for the purposes of s 143A(1)(d). It only obliges the CIR to credit to the employee the amount of any tax deduction shown in the employer monthly schedule. No monthly schedules were furnished by the taxpayer.

(5)     The Court also referred to the decision of R v Smith [2008] NZCA 371 which considered the interrelationship between ss 143A(1)(d) and 4A(2)(b). In that case the Court of Appeal rejected the argument that the Crown could only succeed with a prosecution under s 143A(1)(d) if it proved that the person accountable had failed to  account for the precise amount of the deduction. The facts in Smith were different however, (in this case the taxpayer had not furnished the employer monthly schedule) but the views expressed about s 143A(1)(d) did provide some support for their Honours’ view.

(6)     Further support could be found by referring to the clear distinction drawn between the separate offences under s 143A(1)(d) and (e). The former applying where there is a failure to account for PAYE deducted, or deemed to have been deducted, the latter applies where there has been a failure to deduct PAYE from source deduction payments. That distinction is emphasised by the difference in penalty between the two offences. Both offences required proof of knowledge but they carry different maximum penalties which is explained by the nature of the offences. Section 143A(1)(d) carries a substantially higher penalty and therefore the provision is aimed at the knowing failure by an employer to account to the CIR for PAYE actually deducted or deemed to be deducted under a tax law. With respect to the Crown’s contention that the CIR had concerns about the operation of s 143A(1) (ie the formidable difficulties of proof which can arise in cases such as this due to the absence of documentary records and the transitory nature of many of the employees engaged in the horticultural sector) the remedy lies in the hands of Parliament.

Legislation cited:

 Tax Administration Act 1994, ss 3(2), 4A, 4A(2), 4A(2)(b), 143A, 143A(1)(d), 143A(1)(e), 143A(7), 143A(8), 167(1), 168, 168(1)

 Income Tax Act 2004, s LD 1, OB 2(1), subpartNC,NC16

 Crimes Act 1961, s 347

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