On 31 August 2012, the Full Federal Court handed down its much awaited decision in Commissioner of Taxation v Kassem and Secatore  FCAFC 124 which provides clarification regarding third party preference payments received by the ATO and the practice of the ATO appropriating payments made by taxpayers from one account (ie the integrated client account) to another (ie the superannuation guarantee account - SGER).
The main points to take away from this case are as follows:
- The Full Federal Court has reaffirmed the position that in determining if there has been an unfair preference payment, the question to ask is whether the creditor has received more than it would have received if it was made to prove for the debt in the winding up of the company. The correct time to measure this from is from the time of the winding up, not the time of the payment.
- A payment by a related third party may be construed as a payment on behalf of the company and may be recoverable by a liquidator.
- Company directors should be careful when recording the accounts to which their company’s debts are paid to. Since the new Director Penalty Notice Regime came into place on 30 June 2012, directors can be held personally liable for unpaid superannuation guarantee charge debts. Should the ATO decide to reallocate payments from, for example, the SGER account to the company’s running balance account, this will increase the SGER debt and therefore the potential for personal liability of a director.
Third party preferences are where a third party pays an insolvent company’s debt. Generally, an argument is raised that as the payment was made not by the insolvent company but by a third party (quite often a related entity), the payment is not voidable as an unfair preference as it does not fall within the ambit of s 588FA and s 588FC of the Act.
In the case before the Full Federal Court, the debts owed to the Commissioner of Taxation by the insolvent company Mortlake Hire Pty Ltd were paid by a related company Antqip Pty Ltd.
These payments had been made by EFT to the ATO, and allocated to the integrated client account for the company’s income tax, GST and other related debts owed. It was apparent from the account that after the payment was made, interest accruing on this account decreased given that the balance of the account had reduced.
Approximately 4 months later, the ATO then reallocated the payments made to the SGER account. It was noted by the Court however, that a file note of an employee of the ATO indicated that this reallocation of the funds occurred just prior to the winding up of the company when it was discovered that a date had been set for the hearing of the petitioning creditor’s winding up application.
Firstly, the Commissioner argued that the payment by the related entity was a substitution of a new creditor of the company’s, for the existing creditor (in this case, the Commissioner).
Next, the Commissioner submitted that there was no element of unfairness as required by the Act and therefore, the payment should not be construed as an unfair preference payment and the Commissioner could not be compelled to pay back the payments pursuant to the Act.
The Commissioner argued that there was no unfairness and therefore no unfair preference payment as, at the time of the re-allocation of the payments to the SGER account, there were no other debts of the company with priority equal to or higher than that which applied to the payments received by the Commissioner for the superannuation guarantee charges.
Further, the Commissioner argued that he had the power to re-allocate the money from the integrated client account to the SGER account pursuant to s 8AAZD of the Taxation Administration Act 1953 (Cth) (“the Administration Act”).
Full Court’s Findings
It was held that as the payments made to the ATO were made from the account of Antqip, these payments are to be considered to be just like a lender paying money to a creditor on behalf of a borrower, on the borrower’s instruction. The Court pointed out that this situation is similar to if the company decided to draw down an overdraft from its bank and paid with those funds. In the alternative, the Court found that the funds were paid to the ATO on behalf of the company.
In relation to the argument regarding the absence of an element of unfairness, the Full Court dismissed these submissions as the end result was that the Commissioner would receive 100 cents in the dollar in respect of the debt owed, if the transaction were allowed to stand. The Court found that it would be unfair on the other unsecured creditors that they would receive nothing. The Court stated that the time to measure this from is the time of the winding up, not the time of the payment.
The Full Court also noted that the allocation of the funds to the integrated client account constituted the “relevant transaction” as the ATO Tax Agent Portal showed the payments being credited to this account for 4 months before their reversal and also they noted the interest accruing on the account at a reduced rate. They concluded that the Commissioner could therefore not argue that he should be afforded priority for the superannuation guarantee charges as the payments to the integrated client account were the relevant “transactions” and such payments, did not obtain priority.
The Full Court also found, in the alternative, that the Commissioner still received more than he would have received if he was made to prove for the debt in the winding up of the company. Therefore, an unfair preference payment was found to have occurred.
Interestingly, the Full Court, also specifically found that the Commissioner attempted to obtain priority over other unsecured creditors in the event of the winding up of the Company by reversing the payments to the integrated client account and re-appropriating the funds to the SGER account.
The Commissioner’s appeal was therefore dismissed with costs.