S & L Consulting Pty Ltd v FC of T

Members:
R Olding SM

Tribunal:
Administrative Appeals Tribunal, Sydney

MEDIA NEUTRAL CITATION: [2021] AATA 2714

Decision date: 5 August 2021

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R Olding (Senior Member)

1. The issue to be resolved in this case is whether the applicant is entitled to the first instalment of the first 'Cash Flow Boost' (' CFB '), one of the Coronavirus relief measures operating in 2020.^[1] Boosting Cash Flow for Employers (Coronavirus Economic Response Package) Act 2020 (Cth) ( ‘BCF Act ’). Whether it is depends on whether it was required to withhold Pay-As-You-Go (' PAYG ') amounts from fortnightly payments it made to a contractor (' the Contractor ') in the quarter ending 31 March 2020.^[2] BCF Act , s 5(1).

2. The applicant did not withhold any such amount either prior to or during the relevant period. In fact, it did not make any PAYG payments relating to the Contractor to the Australian Taxation Office (' ATO ') or even register for PAYG withholding until after the ATO refused to pay it the CFB.

3. However, the relevant requirement for eligibility for the CFB is not that a PAYG amount was in fact withheld or paid to the ATO. The legislative provision specifying the requirement that the claimant was obliged to withhold PAYG expressly states 'regardless of whether the entity actually withholds the amount'.^[3] BCF Act , s 5(1)(a)(i).

4. The applicant could only satisfy this requirement if it had entered into a voluntary withholding agreement with the Contractor in the approved form. The applicant says that it entered into a voluntary withholding agreement with the Contractor on 15 February 2017 (' the VA ') and, even though on its view of the matter the amount required to be withheld under the agreement was nil, the Tribunal should accept that the applicant was required to withhold an amount - an amount of nil.

5. I refer to the agreement the applicant 'says' it entered into because the Commissioner submits the Tribunal should not be satisfied the applicant and the Contractor actually entered into the VA on 15 February 2017 as it asserts. The Commissioner submits the Tribunal should not be satisfied on the evidence that the purported VA was not a late creation, brought into existence after the ATO refused to pay CFB to the applicant.

6. Additionally, even if it was entered into on 15 February 2017, the Commissioner says the VA is void for uncertainty or not a valid voluntary withholding agreement. An agreement to withhold an amount of nil is, the Commissioner says, not an agreement to withhold.

THE LEGISLATIVE PROVISIONS

Cash Flow Boost eligibility - BCF Act, s 5(1)

7. The eligibility requirement in contention^[4] There are other eligibility requirements. As they are not in contention, and neither party suggested they provide relevant context, I do not clutter these reasons by setting out the relevant provisions. is found in s 5 of the Boosting Cash Flow for Employers (Coronavirus Economic Response Package) Act 2020 (Cth) (' the BCF Act '). Section 5(1) relevantly states:

Entitlement to cash flow boost - first boosts

• (1) An entity is entitled to a payment (known as a cash flow boost) for a period covered by subsection (2) if:
  • (a) any of the following requirements are satisfied:
    • (i) the entity makes a payment in the period and must withhold an amount from the payment under Subdivision 12-B, 12-C or 12-D in Schedule 1 to the Taxation Administration Act 1953 (regardless of whether the entity actually withholds the amount);
    • . . .

The obligation to withhold - TAA, Sch 1, s 12-55

8. Subdivision 12-B of Schedule 1 to the Taxation Administration Act 1953 (Cth) (' TAA ') contains the requirements for PAYG withholding from payments for work or services where the payee is not an

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employee. The only contentious requirement in Subdivision 12-B is found in s 12-55(1), which states:

VOLUNTARY AGREEMENT TO WITHHOLD

• (1) An entity must withhold an amount from a payment it makes to an individual if:
  • (a) the payment is made under an *arrangement the performance of which, in whole or in part, involves the performance of work or services (whether or not by the individual); and
  • (b) no other provision of this Division requires the entity to withhold an amount from the payment; and
  • (c) that is in the *approved form and states that this section covers payments under the arrangement mentioned in paragraph (a), or under a series of such arrangements that includes that arrangement; and
  • (d) the individual has an *ABN that is in force and is *quoted in that agreement.

    For exceptions, see section 12-1.

(emphasis added)

9. It is uncontroversial that the applicant had an arrangement for the Contractor to provide services to the applicant in return for regular payments as contemplated by paragraph (a) of s 12-55(1). It is also uncontroversial that the form the applicant says it and the Contractor filled out and signed on 15 February 2017 was the relevant approved form. However, the effect of the way it was completed is contentious, as discussed further below.

10. Under s 388-50 of Schedule 1 to the TAA, a document is in the approved form:

'if, and only if . . . it contains information that the form requires . . .'

Withholding rates - Withholding Schedule 29

11. The required rate of withholding - the amount required to be withheld - is, for withholding under Subdivision 12-B, specified in Withholding Schedule 29, a legislative instrument made by the Commissioner pursuant to s 15-25 in Schedule 1 to the TAA.

12. Under Withholding Schedule 29, the required rate of withholding depends upon whether the payee (here, the Contractor) has informed 'you' (the applicant) of their 'Commissioner's instalment rate' (' CIR '), as indicated by the following extracts:

If the payee has informed you of their CIR

If the payee has informed you of their CIR, use the following to work out how much to withhold:

If the payee's CIR is greater than or equal to 20% - withhold the amount worked out by multiplying the amount of the payment by the CIR.

If the payee's CIR is less than 20% - withhold the amount worked out by multiplying the amount of the payment by 20%. However, if your voluntary agreement with the payee states that their CIR will apply, you must withhold the amount worked out by multiplying the amount of the payment by the CIR.

If the payee has informed you that they don't have a CIR

You must withhold 20% of the amount of the payment.^[5] The amounts are exclusive of any GST.

THE EVIDENCE OF THE APPLICANT'S DIRECTOR

13. The applicant's director, Mr Stephen Lee, is a registered migration agent as well as a chartered accountant and registered tax agent. In the latter capacity, Mr Lee prepared the Contractor's income tax returns.

14. Mr Lee gave evidence which included that he and the Contractor signed the VA in his office on 15 February 2017 and concerning what he said was the agreement the applicant struck with the Contractor.

15. The applicant initially claimed the agreement with the Contractor was that the withholding rate would be nil until the Contractor's income reached a point where her taxable income would exceed the tax-free threshold at which time withholding at the Contractor's marginal tax rate would commence.

16. Referred in cross-examination to the tax returns he prepared as tax agent for the Contractor, Mr Lee conceded that after the date of the VA the Contractor's taxable income did in fact exceed the tax-free threshold in the

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first year she provided services to the applicant, and that tax would have been payable but for the low income rebate applying that year and, in fact, every year thereafter.^[6] See Transcript, P-27, Line 1 and following for the evidence regarding the taxable income revealed by the Contractor’s tax returns and the applicant’s response, or more accurately absence of response, in respect of its asserted PAYG withholding obligations. However, the applicant did not commence to withhold PAYG when the Contractor's income exceeded the tax-free threshold as Mr Lee had indicated was their agreement.

17. Further, Mr Lee conceded that in respect of subsequent income years, the Contractor's returns revealed the Contractor would have a tax liability even after allowing for rebates, albeit in the relatively low amounts of less than $100. Again, the applicant did not commence withholding when that point was reached.

18. Mr Lee finally said that the applicant's agreement with the Contractor was that withholding would commence when the Contractor had an 'effective' amount of tax payable^[7] Transcript, P-47, Line 39. which I understood to mean an amount that is not insignificant. He suggested it would make no sense to withhold insignificant amounts of around $2 per payment (that is, the annual tax payable divided by 26 fortnightly payments).

THE TERMS OF THE PURPORTED AGREEMENT

19. The VA comprises the Commissioner's approved form for such agreements but filled out in a particular way.^[8] T8-25.

20. Aside from Section C, the form meets the requirements of s 12-55 in Schedule 1 to the TAA. It identifies the parties; references the Contractor's ABN;^[9] Australian Business Number. and states that the parties agree that payments for work performed by the Contractor for the applicant 'are subject to withholding under section 12-55 of schedule 1 Part 2-5 of the Taxation Administration Act 1953' and that '[t]he rate of withholding is notified at section C above.'

21. It is the manner in which Section C is completed that gives rise to issues in this case. Section C, as completed, is reproduced below:

WOULD THE PURPORTED AGREEMENT SATISFY THE REQUIREMENTS OF SECTION 12-55?

22. The applicant cannot succeed unless it proves the applicant entered into the VA with the contractor on 15 February 2017 and that, if so, the VA falls within s 12-55(1)(c) in Schedule 1 of the TAA, properly construed in its context.

23. On the view that I take as explained below, it is not necessary for the Tribunal to make a finding regarding whether the VA was in fact signed in February 2017 or is a late creation. Even assuming, without deciding, that the VA was signed in February 2017, it is in my view not capable of meeting the requirements of s 12-55(1)(c).

24. Section C of the approved form for a voluntary withholding agreement contemplates the form being completed to indicate that either the payee has a CIR or the payee does not have a CIR. That is information required by the approved form. Furthermore, it is significant information because the existence or otherwise of a CIR determines the rate of withholding.

25. The difficulty with the VA in this case is that the inserted answer to the first question in Part C is to the effect that the Contractor does

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not have a CIR - which is correct - while the inserted answer to the second question is to the effect that the parties agree the rate of withholding will be the Contractor's CIR. Those answers are irreconcilable. It is impossible to determine a rate of withholding by reference to those irreconcilable statements.

26. There is another irreconcilable inconsistency in Part C as completed. The answer to the first question indicates on the one hand that the applicant and the Contractor agree the rate of withholding is 20% while the answer to the second question says they agree the rate of withholding will be the CIR.

27. The consequence is that the VA does not contain the information required by the approved form. The information that is required by the approved form, but not provided in the VA, is necessary to work out the payer's PAYG withholding obligation which is, after all, the whole purpose of a voluntary withholding agreement.

28. The applicant's written opening submissions initially sought to overcome this difficulty by reference to Mr Lee's evidence in his witness statement that he considered the Contractor's level of income meant her 'implied CIR' would be nil. I do not see how this can assist the applicant. Neither the legislation nor the approved form contemplates any concept of an implied CIR. In any case, it does not solve the inconsistency between the specifying of the 20% withholding rate on the one hand and the CIR on the other.

29. Mr Josifoski, who appeared for the Commissioner, pointed to the evolving nature of Mr Lee's evidence - that first the applicant said the agreement was to withhold PAYG when the Contractor's taxable income exceeded the tax-free threshold; then to withhold when tax became payable; and finally to withhold when 'effective' tax became payable.

30. The Commissioner also highlighted that the Contractor did not give evidence regarding whether the VA was in fact signed in February 2017 or her understanding of the agreement struck with the applicant. Further, the Commissioner pointed out that Mr Lee's reference to not making miniscule PAYG payments when the Contractor had a tax liability of less than $100 incorrectly proceeded on the premise that PAYG is calculated as a percentage of the net profit of the Contractor rather than of the gross payments to the Contractor.

31. In some parts of his evidence Mr Lee referred to an agreed rate of withholding of 20% and in others at the Contractor's marginal rate plus the Medicare Levy. Ultimately, in closing submissions Mr Meng, who appeared for the applicant, submitted the terms of the purported agreement having regard to Mr Lee's evidence could be summarised as:

if no material tax paid or (indistinct) tax offsets, no withholding, otherwise withholding at marginal rate, taking into account Medicare Levy, or Commissioner's - an instalment rate given to you by the Commissioner. As between the parties, that was the terms of their agreement. Expressed now, not in their words but by a lawyer. There is nothing uncertain about that. …

32. I agree there is nothing uncertain, other than perhaps the inherent imprecision of a 'material' amount, in Mr Meng's summary. The difficulty is that it bears little resemblance to Part C of the VA. Mr Meng sought to overcome this difficulty by acknowledging that the VA is ambiguous and submitting in those circumstances the Tribunal could construe the VA by reference to Mr Lee's evidence of the agreement between the applicant and the Contractor.

33. In support of that contention, Mr Meng cited two authorities.^[10] Matthews v Smallwood [1910] 1 Ch 777 ; Wingadee Shire Council v Willis (1910) 11 CLR 23 . However, as Mr Meng indicated in his summary of the cases, both involved the court referring to another document - in one case a provision in a governing statute - to resolve an ambiguity in the document in question. Neither involved the court construing a document by reference to evidence of parties as to what they intended by the document, let alone, as in this case, the evidence of only one of two parties to an agreement.

34. I am, with respect, unable to accept Mr Meng's submission. It amounts, in my view, to more than reference to context to construe the terms of the VA. It invites the Tribunal to impermissibly substitute for the VA an agreement in different terms based on the evidence of one party to the agreement as

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to his subjective intention in entering into the agreement.

35. However, I emphasise that even if I am wrong in that conclusion, the outcome of this proceeding would be the same. This is because, even assuming, without deciding, that the VA should be construed to be in the terms Mr Lee finally asserted in his oral evidence, or as summarised by Mr Meng, the VA would still not state a rate of withholding available under the legislative provisions.

36. Mr Meng sought to meet this difficulty by submitting that s 12-55(1)(c) does not authorise the Commissioner to impose rates of withholding through the mechanism of the approved form. Section 12-55(1)(c) merely requires that there be an agreement to withhold and, so the submission went, that requirement is satisfied because the parties clearly agreed that withholding would apply, albeit, I would add, at a nil rate in the relevant quarterly period.

37. In my respectful view, to approach the construction of s 12-55 in this way is to do so in a vacuum, divorced from its statutory context, contrary to accepted principles of interpretation.^[11] Mr Meng sought to draw support for his submission that s 12-55(1) in its terms did not require the VA to state an applicable withholding rate from the Tribunal’s decision in Slatter Building Group Pty Ltd v Commissioner of Taxation [2021] AATA 456 . However, the current case is quite different from Slatter Building Group where the Tribunal concluded the applicant’s proposed construction was not reasonably open on the terms of the provision there under consideration. Here, s 12-55(1) is in my view readily construed in the way I have concluded, by uncontroversial and indeed mandatory reference to its statutory context as confirmed in innumerable authorities. Once the context is considered - specifically that withholding rates are determined by legislative instruments made under s 15-25 - it is plain that s 12-55(1) does not contemplate an agreement to withhold at any rate that might be agreed between the payer and payee, even less so at the rate of nil. It contemplates an agreement to withhold at the rate specified in Withholding Schedule 29 according to the particular circumstances, which is reflected in the information contained in and required by the approved form.^[12] This conclusion is reinforced by various references in Division 16 of Schedule 1 to the TAA to Division 12 requiring ‘ an amount ’ to be withheld and paid to the Commissioner, such as in ss 16-1, 16-5 and 16-20. The natural reading of those provisions contemplates an identifiable amount being required to be withheld by Division 12. Nothing in those provisions suggests Division 12 could impose an obligation to withhold, and pay, at a nil rate; a statutory command to pay such an amount, under peril of penalties for non-compliance, would be self-evidently nonsensical.

38. The VA does not do this. On the applicant's case, it imposed an obligation at the relevant time to withhold an amount of nil. A nil rate is not available under the legislation for the unsurprising reason that, withholding from payments to contractors being voluntary unless the payer and payee entered into a withholding agreement, an agreement for a nil rate of withholding would serve no purpose.

39. An agreement in those terms, even if that is how the VA should be construed, would not be an agreement to withhold that is in the approved form. It could not be said that the applicant 'must withhold an amount from the payment' to the Contractor in the March 2020 quarter as required by s 5(1) of the BCF Act. The applicant did not withhold any amount for the simple reason that, as the applicant itself asserts, it was not required to under the terms of the VA (or otherwise).

40. For completeness, I note that Mr Meng also submitted that under the VA the withholding obligation was 'always there', it just had 'never been triggered' (before or during the relevant period) by the Contractor becoming liable to pay a material amount of tax.^[13] Transcript, P-64, Lines 1-2. I am, with respect, unable to accept this submission. The applicant either was in a position where, in the terms of the eligibility requirement in s 5(1)(a)(i) of the BCF Act, it 'must withhold an amount' from the payments to the Contractor or it was not. Section 5(1)(a)(i) does not contemplate a middle position of a potential obligation that has not been 'triggered'. In my view, the applicant had no such obligation, 'triggered' or otherwise.

DISPOSITION OF APPLICATION FOR REVIEW

41. For the reasons outlined above, consistent with its conduct in not withholding any PAYG amounts from its payments to the Contractor, the applicant was not under an obligation to withhold PAYG in the March 2020 quarter. It is therefore not entitled to the first instalment of the CFB.

42. It follows that the decision under review must be affirmed.