Decision date: 28 May 2013
Case: Lim v Commissioner of Inland Revenue
Act(s): Income Tax (Withholding Payments) Regulations 1979
Keywords: Honestly relied, withholding tax
The Court concluded that Mr Lim honestly relied on the IR330 forms when he stopped deducting withholding tax.
The disputant, Chye Heng Lim ("Mr Lim"), operated a partnership ("the partnership") with a Ms Sia running a painting and decorating business. On 31 March 2005, the partnership business was taken over by K L Decorators Limited ("the company"). The company was owned by Mr Lim and his wife, Foong Ling Lim ("Mrs Lim").
The business involved entering into contracts to paint houses. The work would then be completed by subcontractors who either supplied labour only or labour as well as materials. The majority of subcontractors were labour and materials subcontractors.
The Income Tax (Withholding Payments) Regulations 1979 ("the regulations") specified that "payments for work done or services done under contracts or arrangements which are wholly or substantially for the supply of labour …" were subject to withholding tax.
In March 2000, Inland Revenue issued a tax declaration form being an IR330 form ("the 2000 IR330") which listed the categories of persons in respect of whom withholding payments must be deducted including "labour only contracts in the building industry".
Mrs Lim took primary responsibility for the tax affairs of the partnership and company although she had access to independent tax agents.
For the years ending 31 March 2001 and 2002, the partnership complied with the regulations and paid the full amount of withholding tax owing. In 2003, the partnership stopped deducting withholding payments from all of its subcontractors and only deducted a portion of the amount owing to Inland Revenue. The partnership and later company failed to make deductions for the 2004-2007 tax years. The company started making deductions again in 2008.
In January 2003, Inland Revenue issued another IR330 form which was materially identical to the 2000 IR330.
In January 2006, Inland Revenue issued another IR330 form. The new form said that "contracts wholly or substantially for labour only in the building industry" were to be subject to withholding tax.
In 2006, the Commissioner began an audit of the partnership's tax affairs. During this audit, two records relate to the alleged reliance on the IR330:
Mr Lim signed agreed adjustments in 8 April 2009 for the tax in dispute. He then began to negotiate with Inland Revenue to settle the debt for a lesser sum. During these debt proceedings, both his local MP and his barrister wrote to the Commissioner explaining that they had relied on the 2000 IR330.
On 21 July 2011 Inland Revenue issued a bankruptcy notice against Mr Lim.
Mr Lim commenced court proceedings against the Commissioner. These proceedings initially contained seven causes of action however, both parties agreed to limit the issue to a question of fact. The parties agreed that if the Court was satisfied Mr Lim relied honestly on the IR330's when he decided not to deduct withholding tax, the Commissioner would set aside the outstanding debt and penalty payments.
Collins J found that the Lims did act honestly when they relied on the IR330s for the following reasons:
Although Collins J considered that there was an advantage to the Lims in not deducting withholding tax, he did not consider this enough to outweigh the other factors. His Honour concluded that Mr Lim honestly relied on the IR330 forms when he stopped deducting withholding tax.
The issue of costs was reserved.