Key News Summary – a director was held liable for almost $160,000 of a company’s PAYGw liabilities, under the DPN provisions, because the company’s instalment payments were not made under any agreement to pay the company’s parallel (DPN) liabilities first, and so were allocated to liabilities to the ATO on the PS LA 2011/20 basis of ‘oldest first’.
The Federal Court has confirmed an ATO application for summary judgment in respect of a director penalty notice (DPN) liability of almost $160,000. This followed the director being unable to convince the Court that payments by the company extinguished or reduced the specific debt identified in the DPN.
The facts and background law, were these:
- There are ‘Director Penalty Notice’ (DPN) provisions in Div 269 of Sch 1 of the Taxation Administration Act 1953 (Cth) (TAA53). These provisions allow the Commissioner to recover some debts of a company, from the directors of a company (at the time) as well as from the company (parallel liability provisions).
- Those debts include liabilities of the company, to pay amounts of PAYG withheld from employee’s wages (under s12035 of the TAA53) to the Commissioner (under s16-70 of the TAA53).
- It was common ground that some $555,763.81 was paid to the Commissioner by Stellar between April and August 2014.
- f that sum, payments were made pursuant to a payment arrangement, which had been agreed, while Court proceedings were not pursued: see the discussion in Deputy Commissioner of Taxation v Pedley [2018] FCA 2014 (Pedley No 1). These were DPN proceedings, also.
- The ATO Statement of Account for Stellar (MS-11), placed into evidence before the Court, recognised the receipt of the following payments:
- (a) payments totalling $200,000.00 (comprised of separate payments of $50,000.00, $50,000.00 and $100,000.00) on 7 April 2014;
- (b) a $50,000.00 payment on 4 June 2014;
- (c) a $50,000.00 payment on 27 June 2014; and
- (d) a $50,000.00 payment on 5 August 2014.
A key issue was how those payments were allocated on receipt by the Commissioner.
- The Commissioner’s position is that no payments made by Stellar were characterised by any person as being payments of specific debts in express terms. They were allocated by the Commissioner, he says, consistent with the Policy which provides for repayment of the earliest (oldest) debts of the company first. This meant that there was less reduction of the PAYGW debt to which the DPN related as there were other earlier taxation liabilities to which the payments were applied.
- The Commissioner’s position is that the mere fact that amounts were paid by Stellar, to the ATO, in discharge of some of its taxation liabilities, will not extinguish or reduce Mr Pedley’s liability, as a director, to pay the penalty, unless the sum paid was on account of Stellar’s PAYGw debt, for the precise four monthly periods of 1 August 2013 to 30 November 2013.
- This is the effect of the Commissioner’s Practice Statement PS LA 2011/20. The background to this is that the ‘Running Balance Account’ system can lead to various taxes and liabilities being recorded in a single account, and the normal common law position, of a creditor being entitled to nominate the particular liability paid, is negatived by s8AAZLE of the TAA53.
- As a result, the Commissioner has a complex and internecine system of allocating amounts, to liabilities, which includes the ‘oldest last’ rule, where it is not clear, by the payment matching the exact amount due, the liability reference number accompanying the payment, or an instalment payment agreement nominating the liability to be reduced.
- Obviously, a director, having a parallel liability, to the company, would want those ‘parallel liabilities’ (for which the director could be personally liable) reduced first.
- The amounts paid above, were round amounts and fairly clearly did not match any particular liability. It seems, also, that the payment agreement didn’t nominate that payments would discharge the DPN (parallel) liabilities first.
The Director’s (Mr Pedley’s) contentions were:
- He contended that the communication on 23 December 2014 was a clear notification that it was intended at that time that the payments made were against the PAYGW liabilities. Particular reference is made to the statement, ‘I disagree with the figures as per the writ, as we made payments [of] a significant amount of these debts, whilst I was a director, for the second time’.
- For Mr Pedley it is argued that the 23 December 2014 communication is a clear indication that it was intended that the payments made should be against PAYG liabilities and that, in those circumstances, the ATO should have allocated them accordingly.
- But, a direct question was put to counsel for Mr Pedley, as to whether there was any point in time, when Mr Pedley expressly requested any officer, in the ATO, to ensure that payments were applied against PAYGW, so as to avoid liability under DPNs. Counsel was unable to point to any such express request.
PS LA 2011/16 says the following about allocating payments to liabilities:
- The law specifies that a taxpayer must pay the amount of the debt in one payment unless we agree to allow the taxpayer to make more than one payment to satisfy the debt. However, in practice, payments (whether partial or full) are allocated to the appropriate accounts based on the information available when the payment is received.
- Sometimes, a taxpayer’s payment may be accompanied by correspondence which indicates that acceptance of the money implies acceptance of certain conditions. Taking the money does not bind the ATO to the terms stipulated by the taxpayer. If this happens though, you should issue advice to the taxpayer as soon as possible to indicate that the amount is being retained unconditionally as payment towards their debt. In some instances, the stipulated conditions may instead be treated as a proposal to the ATO, and the taxpayer should also be advised whether this proposal is acceptable or not.
- Payments representing the full amount of a taxpayer’s obligations are usually applied to the taxpayer’s accounts in accordance with the taxpayer’s directions (for example by using a payment reference number).
- However, in appropriate circumstances you can choose to set aside a taxpayer’s directions and allocate the payment differently, using the discretion in section 8AAZLE of the TAA.
- Unless there is a valid reason not to do so (see above for examples), our policy for allocating a payment for which no direction is received, is:
- all payments will be allocated to the earliest (oldest) debts within an account;
- except where the payment relates to a ‘Listed Payment’
- Listed payments have specific rules in relation to their allocation. These are outlined in Attachment A.
- Attachment A, provides:
- Where a taxpayer has been granted permission to pay tax-related liabilities by instalments, the payment received in accordance with such an arrangement will be allocated in the order advised by the ATO, and usually personalised payment slips will be provided to the taxpayer.
- Generally, the order will be in accordance with the ‘order of allocation’ as outlined at Attachment C. However, it may be appropriate sometimes for the ATO to take a different approach to the allocation order.
- Directors Penalty liabilities: Where a payment is received (in full or in part) in relation to a director penalty liability, you must allocate the payment to reduce the penalty on the director’s account, and the corresponding parallel liability on the company’s account. If the payment is for less than the full amount, it will reduce the penalty on the director’s account, and will be allocated against the company’s earliest parallel liability. In accordance with the order of allocation (see Attachment C), parallel SGC liabilities will be cleared first and then PAYG withholding.
- Attachment C, provides:
- That 2nd in priority (behind SGC debts) is ‘any RBA deficit debt which represents pay as you earn (PAYE) debts’, which probably includes both PAYG withholding as well as PAYG instalments (of the company’s own income tax).
- When it comes to paying the particular debt type, the rule is oldest first.
So, the issue for the Court (given the payments did not exactly match the liabilities) was whether there was some agreement, with the ATO, to take the payments as reducing the PAYG withholding liabilities first, rather than applying them on an ‘oldest first’ basis (per 5th bullet point).
- The bulk of the Court’s consideration then turned to examining the evidence emerging in cross examination of the ATO officer who performed the payment allocation. This evidence, which covered internal ATO procedures, the role of the Practice Statement and communications from the company and the director, was relevant in establishing whether there has been an agreement (or a request for an agreement) directed at matching a specific payment to a specific liability.
- The Court found that there was no evidence of any agreement being in place as to how payments made by the company should be allocated. The Court further said that the taxpayer did not make a request of the ATO in explicit terms to allocate the company’s payments so as to eliminate his liability under the DPN.
The ‘moral’ of this storey, is:
- If you get behind in your tax payments, DON’T just make round payments. They will go to the ‘oldest first’, including liabilities for which you (the director) will be liable personally (and old GIC).
- The rules for allocating payments to amounts (if this matters) are very complicated (see summary of PS LA 2011/20) and this can matter, especially when there are DPN consequences for the director personally. You can see from this case, that the entire liability, in issue (for the director) hinged on the allocation of the very considerable payments that had been made by the company.
- You cannot challenge the Commissioner’s allocation of payments, except by ‘judicial review’ (which is NOT merits review, but limited to finding fault with the Commissioner’s decision making process).
- You ought get advice, and it ought to be from someone who knows about these complex allocation rules, and the importance of getting agreement about how instalments will be credited.
- Apart from that, pay only ‘exact’ amounts, for the liabilities that suit you (viz: the ones with parallel liability for the director personally).
(DCT v Pedley (No 2) [2018] FCA 2015, Federal Court, McKerracher J, 14 December 2018).
FJM 22.12.19
[LTN 243, 17/12/18; Tax Month – December 2018]
CPD (comprehension) questions:
- Was Mr Pedley liable for the $160k amount in the DPN notice?
- Why?
- How could this have been avoided?
- What is the common law position for a person paying one of two debts?
- What is the TAA53 provision that affects this, and what does it say?
- What was the practical implication of this TAA53 provision?
- Is the resulting position complex?
- Should you make payment of ’round amounts’ as ‘good faith’ instalments?
- Should you be getting competent advice, if your company falls behind in it’s tax liabilities (especially if some of them could make you liable personally)?
