MJ and IT Holdings Pty Ltd v FC of TMembers:
K James SM
Administrative Appeals Tribunal, Melbourne
MEDIA NEUTRAL CITATION:
 AATA 3250
K James (Senior Member)
WHAT THIS CASE IS ABOUT?
1. This is a referral of a decision of the Commissioner of Taxation (in the role of the administrator of the Boosting Cash Flow for Employers (Coronavirus Economic, Response Package) Act 2020 (Cth) ( the CFB Act ) to disallow an objection of the Applicant's company ( the company ) to an amended assessment reducing the amount of a 'Cash Flow Boost' ( CFB ) issued pursuant to the CFB Act.
2. The dispute centres on the eligibility for a CFB of a director's fee expensed by way of a journal entry in the accounting records of the company between 29 and 31 March 2020.
CORPORATION LAW ACCOUNTING REQUIREMENTS
3. The accounting requirements in the Corporation Act 2001 (Cth) (
) imposed on a small proprietary company that does not prepare 'financial statements' is to 'keep sufficient financial records to record and explain their transactions and financial position.... Financial record here means some
ATC 9614kind of systematic record of the company's financial transactions-not merely a collection of receipts, invoices, bank statements and cheque butts'.
4. Where financial statements are prepared, financial records include 'working papers and other documents needed to explain':
- (a) the methods by which the financial statements are made up; and
- (b) adjustments to be made in preparing financial statements.
INCOME TAX ACCOUNTING REQUIREMENTS
5. Section 262A of the Income Tax Assessment Act 1936 (Cth) (
) relevantly provides that 'a person carrying on a business must keep records that record and explain all transactions and other acts engaged in by the person that are relevant for any purposes of this Act'.
6. Section 262A of the 1936 Act also provides a number of specific records keeping provisions in regard to specific provisions of the Act, none of which have any relevance here.
THE ACCOUNTING CONUNDRUM
7. At the end of March 2020, after discussions with the sole director, Mrs Merilyn Knight and her husband Mr Ian Knight, together as the shareholders of the company, the company's external accountant and tax agent, (
) raised an accounting entry (
) a 'wage' expense in respect of Mrs Knight of $25,000. The credit entry being made to a 'Wages Payable-Payroll' account. The single touch payroll system generated the following payslip dated from 23 March 2020 to 29 March 2020.
8. On 31 March 2020, Ms Nossova created a journal entry 6666 which states:
ID 6666 To record a payment of wages for Merilyn Knight (Manual Journal: Posted by Ioulia Nossova on 31 Mar 2020 - 2 Jun 2020)
|Wages Payable - Payroll (804)||13,602.00|
|Directors Loan (904)||13,602.00|
9. A notation was also made in a ledger account 'Directors Loan Transactions' under the heading 'description' 'to record a payment
ATC 9616of wages for Merilyn Knight. Reference #6666'.
10. On 8 April 2020, the company lodged its Business Activity Statement ( March BAS ) in which it included the amount withheld in the payslip, and presumably until that time, still standing in the 'Wages Payable-Payroll account' or 'other clearing account within the single touch payroll system' ( STPS ).
11. On 4 May 2020, the superannuation guarantee contribution of $2,375 was paid to Australian Super. This payment was due on 28 April 2020 and paid after an enquiry by the Australian Taxation Office auditor enquiring into the March BAS.
THE PAYMENT ISSUE
12. Section 5(1) of the CFB Act contains eligibility criteria that must be met to be entitled to the Cash Flow Boost payment. The section relevantly provides:
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);
- (c) the period applies to the entity under subsection (3); and
- (d) any of the following requirements are satisfied:
- (i) the entity was a small business entity or a medium business entity for the most recent income year for which there is an assessment in respect of the entity of a kind mentioned in subparagraph (a)(ii) of the definition of assessment in subsection 6(1) of the Income Tax Assessment Act 1936;
- (ii) the Commissioner is satisfied on a reasonable basis that the entity is a small business entity or a medium business entity for the income year in which the period starts; and
- (e) the entity notifies the Commissioner, in the approved form lodged with the Commissioner, of its withholding period total for the period; and
- (g) neither the entity nor any associate or agent of the entity has entered into or carried out a scheme or part of a scheme for the sole or dominant purpose of achieving any of the following:
- (i) making the entity entitled to the cash flow boost for the period;
- (ii) increasing the amount of the cash flow boost to which the entity is entitled (disregarding this paragraph) for the period.
13. The term 'withholding period total' is defined in section 4(4)(a) of the CBF Act as:
the total of all amounts that the entity withholds under Subdivision 12-B, 12-C or 12-D in Schedule 1 to the Taxation Administration Act 1953 from payments that it makes in the period.
14. The Applicant's Statement of Facts, Issues and Contentions (
) relevantly included:
The application of the constructive receipt rule in s 11-5 of Schedule 1 of the TAA
41. The application of the $25,000 director fee ($13,602 net of withholding tax) by MJIT to the amount standing to Merilyn's credit on the Directors Loan Account constituted constructive receipt of the director fee pursuant to s 11-5 of Schedule 1 of the TAA.
15. The Respondent's submissions were that $13,602 was not paid, or constructively paid to Mrs Knight on 29 March 2020, and to the extent that the payslip may have suggested that, it was wrong. In cross-examination, Mr Knight conceded that the net amount of $13,602 was not paid into his wife's bank account on that date. He explained he simply pressed the print button on the STPS and the above slip was printed.
16. Section 11-5(1) of the Tax Administration Act 1953 (
) - Schedule 1 provides:
ATC 9617Constructive payment
- (1) In working out whether an entity has paid an amount to another entity , and when the payment is made, the amount is taken to have been paid to the other entity when the first entity applies or deals with the amount in any way on the other's behalf or as the other directs.
17. The Respondent's submissions are as follows:
The payment and withholding requirement (Issues 1, 2 and 3)
60. Section 5(1)(a) of the BCF Act requires, broadly, that an entity:
- i. makes a payment in the period which is subject to a withholding obligation under Subdivisions 12-B, 12-C or 12-D in Schedule 1 to the TAA (s 5(1)(a)(i)); or
- ii. must pay an amount under Division 13 of Schedule 1 to the TAA in relation to an alienated personal services payment that it receives in the period (s 5(1)(a)(ii)).
61. The requirement in s 5(1)(a)(ii) does not appear to be relevant in the present case and is therefore not discussed any further.
62. Importantly, s 5(1)(a)(i) requires the relevant payment to be made "in the period". "The period" is that identified by reference to subsection (2). In turn, subsection (2) provides as follows:
- (2) The following periods are covered by this subsection:
- (a) the months of March 2020, April 2020, May 2020 and June 2020;
- (b) the quarters ending on 31 March 2020 and 30 June 2020.
63. The Applicant is a monthly lodger and the month in dispute is March 2020. Therefore, "the period" for the purposes of s 5(1)(a)(i) is the month of March 2020.
64. It follows that, in order to satisfy the criteria in s 5(1)(a)(i), the Applicant must show that it made a payment of a type that is subject to withholding (under Subdivision 12-B, 12- C or 12-D in Schedule 1 to the TAA) and that it made the payment in March 2020.
65. For the reasons set out below, the Commissioner submits that the Applicant does not meet these criteria.
The character of the payments made to Mrs Knight
66. The Applicant made payments totalling $28,417.97 to Mrs Knight between 1 July 2019 and 30 March 2020.
67. The evidence shows that the Applicant accounted for each of these payments by debiting the directors loan account, which had a credit balance throughout that period. Each debit entry had the effect of reducing the balance of the directors loan account and, therefore, reduced the amount that the Applicant owed to Mrs Knight. The Applicant's bank statements are consistent with the entries in its books: the bank statements describe the various payments as "director's loan" and, in a few cases,45 as "director's drawings".
68. Therefore, the contemporaneous documentary evidence before the Tribunal shows that the Applicant recorded the c.$28k it had paid to Mrs Knight between 1 July 2019 and 30 March 2020 as reductions in a liability described in its books as a loan.
69. Mr and Mrs Knight's evidence is that they were content to leave the characterisation of the payments to the Applicant's accountant. There is no suggestion that the accountant recorded the payments to Mrs Knight as loan repayments in error.
70. The Applicant has not identified any authority for the proposition that, absent an error, amounts paid by a company and recorded as loan repayments can become a payment of remuneration simply because the company's shareholders agree to retrospectively change the character.
71. The proper conclusion from the evidence is that the Applicant's accountant recorded the payments as repayments of a loan and that she did so within the scope of her authority. This is conclusive of the legal character of the payments being repayments of a loan.47
ATC 9618There was no actual payment of a wage/director ' s fee
72. If, contrary to the Commissioner's submissions, the attempt to convert loan repayments to a wage/director's fee was effective, the Applicant nevertheless fails to satisfy the eligibility criteria for the CFB because the purported wage/director's fee was not "paid" to Mrs Knight.
73. The credit entry made to the directors loan account on 31 March 2020 increased the balance of the amount owing to Mrs Knight by $13,602. That amount has not actually been paid to Mrs Knight, nor does the Applicant contend that there has been actual payment but the Applicant states that the amount credited to the loan account reflected the company's increased indebtedness to Mrs Knight.48 It follows that the journal entries record nothing more than a promise to pay an amount of $13,602 to Mrs Knight.
74. Book entries made by agreement between two parties can effect payment (under the doctrine of set-off) where the parties agree to offset mutual liabilities presently owing to each other. However, a unilateral action by one of the parties, such as a mere entry in its books of account, cannot reflect a payment in the absence of an agreement.50 Payment can only be effected in this way if there are mutual liabilities owing by the parties to each other. As Dixon J explained in
Federal Commissioner of Taxation v Steeves Agnew and Co (Victoria) Pty Ltd (1951) 82 CLR 408 (at 421):
But for the application of these principles there must be cross-liabilities and agreement, express, tacit or implied, and the cross-liabilities must be equal. If they are not equal payment of the residue must be effected by other means.
75. Therefore, if:
- (a) there was evidence of an agreement between the Applicant and Mrs Knight that she would be paid a wage/director's fee of $25,000; and
- (b) at the time Mrs Knight became entitled to receive the wage/director's fee, she owed the Applicant an amount of at least $25,000; and
- (c) Mrs Knight had agreed to not receive her wage/director's fee entitlement in cash but instead agreed to offset it against the amount she owed to the Applicant,
then journal entries made to record the agreed offset of the mutual liabilities could amount to a payment of the wage/director's fee.
76. However, that is not what happened in the present case. The evidence shows that it is the Applicant that owed an amount to Mrs Knight, meaning that there were no mutual liabilities that could be offset. All that happened, purportedly on 31 March 2020, is that the Applicant increased its existing liability to Mrs Knight by $13,602.
77. It follows that the Applicant did not pay Mrs Knight the amount of $13,602.
There was no constructive payment of a wage/director ' s fee
78. Subdivision 12-B of Schedule 1 to the TAA requires an entity to withhold from certain payments. The obligation to withhold from salary, wages and similar amount paid to employees arises under s 12-35. The obligation to withhold from remuneration paid to a director arises under s 12-40.
79. In each case, the obligation to withhold arises upon payment of a relevant amount. However, s 11-5(1) of Schedule 1 to the TAA extends that obligation to constructive payment. It provides that:
In working out whether an entity has paid an amount to another entity, and when the payment is made, the amount is taken to have been paid to the other entity when the first entity applies or deals with the amount in any way on the other's behalf or as the other directs.
80. For the reasons set out above, the $13,602 has not actually been paid to Mrs Knight.
81. Further, and contrary to the Applicant's submissions, the amount of $13,602 has also not been constructively paid to Mrs Knight because the authorities establish
ATC 9619that an amount is not "applied" or "dealt with" where all that happens is that the amount remains payable.
82. In Permanent Trustee Company of New South
Wales v Federal Commissioner of Taxation (1940) 6 ATD 5, the High Court had to consider the application of former s 19 of the Income Tax Assessment Act 1936. Former s 19 deemed income to have been derived when, even though the income was not actually paid, it had been dealt with on the taxpayer's behalf or as he directs. The taxpayer (who was deceased) was owed an amount of interest which had never been paid to him. Rich J said (at 12) that the object of former s 19:
is to prevent a taxpayer escaping tax though his resources have actually been increased by the accrual of that income and its transformation into some form of capital wealth or its utilization for some purpose.
83. His Honour went on to say (at 13) that "to see whether income has been derived one must look to realities" and concluded that the interest had not been derived because the taxpayer was no nearer to getting his money or transferring it into anything of value.
84. Permanent Trustee was applied by the High Court in
Brent v Federal Commissioner of Taxation (1971) 125 CLR 418 which concerned Mrs Brent who was owed an amount by a media organisation but which she had not received because she had not asked for payment. The High Court found that former s 19 did not apply to deem the unpaid amount as having been received by Mrs Brent. Gibbs CJ, following the decision of Rich J in Permanent Trustee, held as follows (at 430):
The evidence is simply that the appellant did not ask for payment and that the company refrained from making payment. On the evidence I decline to hold that the company held the balance of the money pursuant to a request by the appellant not to pay it. However, even if the company had deferred payment at the request of the appellant, sec. 19 would not have applied. Income is not ``dealt with'', under sec. 19, when all that happens is that a debtor refrains from paying his debt at the request of the borrower.
85. His Honour went on to say (at 430-431):
In the present case, even if the money had been retained at the request of the appellant, her position would have remained exactly as it was; the income would not have been used on her behalf and the company would have remained under an obligation to pay it to her.
86. The same approach was adopted in Brookton Co-operative Society
Ltd v Federal Commissioner of Taxation (1981) 147 CLR 441 where the High Court held that a book entry recording an interim dividend as payable did not amount to "payment" of the dividend.
87. A more recent authority which considered the constructive payment provisions in relation to employment income is
Blank v Commissioner of Taxation (2015) 242 FCR 96. The case concerned the proper characterisation of amounts received by Mr Blank under a profit participation plan with his former employer. One of the questions for the Court was whether there was constructive receipt under s 6-5(4) of the Income Tax Assessment Act 1997 where amounts due to Mr Blank from his former employer had not been paid to him because he had asked the employer to refrain from paying. The Full Court, applying Brent, found that s 6-5(4) did not apply because the income had not been "dealt with" on behalf of Mr Blank just because his employer refrained from making payment of the amount due to him at his request. Kenny and Robertson JJ said (at ):
Brent v Federal Commissioner of Taxation  HCA 48; 125 CLR 418 indicates that more is required: see Brent v FCT at 125 CLR at 430 (Gibbs J). There was therefore no derivation of income in the 2007 income year when the first two instalments, though due, were merely withheld from payment to the appellant. It was the additional events in
ATC 9620January 2008 that gave rise to the relevant derivation of income. The applicant derived the first two instalments as income when, in January 2008, they were paid, with his agreement, to the FTA by GI on his behalf.
88. The events in 2008 which amounted to a constructive payment (and therefore derivation of income) to Mr Blank was when his employer, upon his request, paid the Swiss tax authorities to discharge Mr Blank's obligation for Swiss tax. There is no suggestion in the present case that the $13,602 has been paid in such a manner.
89. Therefore, the authorities establish that the mere crediting in an entity's books to recognise an amount payable does not, without more, amount to a constructive payment. The mere recognition of an amount being payable is not enough for that amount to be "applied" or "dealt with" on the creditor's behalf or as the creditor directs.
90. It follows that, even if the Tribunal accepts that the 31 March 2020 journal entries were effective to change the character of earlier loan repayments to a wage, the net wage of $13,602 has not been "paid" to Mrs Knight and the Applicant was not required to withhold under Subdivision 12-B of Schedule 1 to the TAA.
18. Section 12-40(a) of the TAA provides that a 'company must withhold an amount from a payment of remuneration it makes to an individual: if the company is incorporated - as a director of the company'.
19. The Respondent's submissions focus on the accounting of the $13,602 rather than the expensing of the $25,000. At paragraph 17 of the above submissions it correctly states that sections 12B, 12C and 12D of the TAA provide that the obligation to withhold relates to the gross directors' fee. If, you focus on the remuneration of $25,000, the company and the director (Mrs Knight wearing both her hats) agreed that the company should withhold $11,398 from her remuneration and pay it to the Commissioner, where it will be held on her behalf. After entering the journal, the 'withheld' amount of $11,398 was now held by the company on the terms as provided in the TAA.
20. The lodgement of the March BAS on 8 April 2020 effected a remission of that amount to the Commissioner.
21. The expensing of the directors' fee, as reflected in the payslip, also created an obligation on the company to provide for a superannuation guarantee payment of $2,375.
22. Mrs Knight's written evidence was that she was aware that she had drawn down $29,352, as at the end of February 2020, as directors' loans and directors drawings.
23. The Respondent's submission refers to authorities concerned with whether the recognition of a liability in the accounting records of an entity, on their own, do not result in a constructive derivation in the recipient,
24. In these cases, there is a factual finding that the only evidence of the obligation or derivation, or constructive payment is the accounting entry in the books of the payer. Significantly in Temples Wholesale Flower Supplies Pty Ltd,
Rather, the Tribunal, required by the agreed facts to eschew such a basis of decision and invited by the Commissioner to rely upon the journal entries, accepted the credits to the loan accounts as sufficient. In doing so, it seems to have been fortified to some extent by the directors' acknowledgment that they had returned the directors' fees and bonuses as income in their own income tax returns for the relevant year. But s 19 of the Act provides that:
"Income or money shall be deemed to have been derived by a person although
ATC 9621it is not actually paid over to him but is reinvested, accumulated, capitalized, carried to any reserve, sinking fund or insurance fund however designated, or otherwise dealt with on his behalf or as he directs." [Emphasis added.]
Having regard to the terms of s 19, and although the decision of Gibbs J in
Brent v Commissioner of Taxation (Cth) (1971) 125 CLR 418 suggests the section may have had but limited application in the circumstances of this case, it could not be said that an acknowledgment of the derivation of income within the meaning of the Act by a director involved any admission that a payment had been made to him, even if a director's admission in relation to his own affairs could bind the appellant.
The crux of this appeal is the Commissioner's contention that "an amount credited by journal entry to the name of a director in the books of the [company] represents a payment" and the agreed fact that "the only evidence of a ... 'payment' is the journal entries in question". Since the authorities make it plain that entries of this kind, standing alone, do not constitute a payment, the appeal must be allowed. The appellant must succeed, as a matter of law.
25. The Tribunal notes that the case is authority where the only evidence before it is the journal entry in the payers books and that by an acknowledgement by the director of derivation of income within the meaning in the Act, there is a 'payment' within the then tax instalment provisions of the then Act.
Derivation of income in the 2007 income year
At first instance, the appellant argued, and the primary judge accepted, that the appellant derived the first two instalments of the Amount in January 2008. As noted earlier, the Commissioner contended by his cross-appeal that the primary judge was wrong on this point and that the first two instalments of the Amount were derived in the 2007 income year because the appellant was entitled to receive those payments then and, in withholding them, GI acted consistently with the terms of the IPPA 2005. The Commissioner submitted that, in withholding the payments, GI dealt with them on the taxpayer's behalf for the purposes of s 6-5(4) of the ITAA 1997 and, for this reason, that the payments were derived in the 2007 income year. The primary judge rejected this submission, finding that the relevant agreement was made in January 2008, pursuant to which GI made a payment to the Swiss authorities in discharge of the appellant's obligations to them: Blank 98 ATR 379 at . The appellant argued, and we accept, that his Honour was correct in this regard. An amount representing the two payments in question was not in fact dealt with on the appellant's behalf until January 2008, as evidenced by a letter of 24 January 2008 with the accompanying agreement. The difficulty with the Commissioner's submission is that it postulates that income is relevantly "dealt with" on behalf of a taxpayer when the debtor (here GI) refrains from making payment of a debt due to the taxpayer at the creditor's request.
Brent v Federal Commissioner of Taxation (1971) 125 CLR 418 indicates that more is required: see Brent v FCT at 430 (Gibbs J). There was therefore no derivation of income in the 2007 income year when the first two instalments, though due, were merely withheld from payment to the appellant. It was the additional events in January 2008 that gave rise to the relevant derivation of income. (Emphasis added.) The applicant derived the first two instalments as income when, in January 2008, they were paid, with his agreement, to the FTA by GI on his behalf. For these reasons, we reject the Commissioner's contention that the primary judge was in error in holding that there was no derivation of income in the 2007 income year in respect of the first two instalments of the Amount. (Emphasis added.)
27. The Explanatory Memorandum accompanying the Bill amending the TAA in 1999 stated:
Preliminary Matters - constructive payments
ATC 96221.79 For the purposes of PAYG withholding, new subsection 11-5(1) provides that an entity will be taken to have paid an amount to another if the amount is applied or dealt with on the other's behalf, or as the other directs. For example, an employer will be treated as paying an amount to an employee if the employer, at the employee's direction, pays the amount to a health fund to meet the employee's liability to pay health insurance contributions to the fund.
28. In this example the 'payment' is the health fund deduction grossed up with the amount that is withheld from what would otherwise be an amount paid to the employee. The payment subject to withholding is not the actual (health fund) payment, but the amount paid and the amount required to be withheld.
29. In Commissioner of Taxation and Cassaniti
Meaning of "to withhold"
Whilst the term "amount withheld" in s 18-15 is defined, the word "withheld" is not. The parties accepted that the judgment of Edmonds J in
Cassaniti v Federal Commissioner of Taxation (2010) 186 FCR 480 (David Cassaniti) authoritatively determined the meaning of that word in s 18-15. Edmonds J said at -:
While the term "amount withheld" by an entity from a "withholding payment", and that term itself, are defined (by s 995-1(1) of the [Income Tax Assessment Act 1997 (Cth) (the "ITAA 97")]), the word "withhold" is not defined. Its meaning must be considered in the legislative context in which it exists. The previous (PAYE) system that existed used the term "deduct". It was this expression which was considered in Sargon 16 ATR 355 where Ormiston J concluded that a deduction involved an arithmetic subtraction from a gross amount and the payment of a net amount, but did not specifically require the retention of the amount so deducted in any identifiable form: see  above.
The expression "withhold" is relevantly defined by the Oxford English Dictionary to mean:
To keep back; to keep in one's possession (what belongs to, is due to, or is desired by another); to refrain from giving, granting, or allowing. Formerly with dat. of person. (The current sense.)
It is clear that the prevailing sense is one of deprivation, the holding back of something due to the employee, resulting in the reduction of a gross amount to a net amount which is paid to the employee. Accordingly, no credit will be available to the payee if they have received a gross amount. There must be a process by which this withholding takes place. It may be reflected in actual funds held by the payer on behalf of the employee pending payment to the Commissioner; on the other hand, and more usually, it may only be reflected in the wage records and books of account of the payer as an accounting entry.
Where an amount has been set aside by the payer and is quarantined in a bank account pending its remission to the Commissioner clearly the presence of the funds so designated will demonstrate that a withholding has been made. Indeed the remission of the amounts withheld will invariably lead to the same conclusion. Where in the usual case the withholding process is represented only by accounting entries the question whether a legitimate process of withholding has ensued will depend upon a close examination of those books and records and the surrounding circumstances to see whether it may be inferred from those records and circumstances that a withholding has occurred. At one end of the spectrum, a mere journal entry in the absence of other evidence may not be sufficient evidence, having regard to the surrounding circumstances, that there has been a payment of salary and wages and a withholding from that payment. The authorities make it plain that entries of this kind, standing alone, are not conclusive evidence of the transaction: see, Temples Wholesale Flower Supplies Pty
Ltd v Federal Commissioner of Taxation (1991) 29 FCR 93 at 100-103.
It is clear that what was said by Barwick CJ, Mason and Jacobs JJ in Barnes [
(1975) 133 CLR 483] at 494 (see  above), was predicated on deductions having in fact been made.
Where there is a controversy about the occurrence of a withholding the surrounding circumstances may either support or detract from the drawing of an inference that a withholding was in fact made. There are a number of reporting requirements where an employer makes a PAYG withholding. In particular, pursuant to s 16-150 of Sch 1 to the TAA the payer is required to give notification to the Commissioner of the amounts it was required to pay to the Commissioner 392 FEDERAL COURT OF AUSTRALIA [(2018) 26 under s 16-70(1) on or before the day on which the amount is due to be paid (regardless of whether it is paid).
The notification must be in the "approved form" and lodged with the Commissioner. This will usually be by way of lodgement of the Business Activity Statements ("BAS"). Further, pursuant to s 16-153(2) the payer is required to give an annual report to the Commissioner in the "approved form" being a summary of payments withheld not later than 14 August after the end of the financial year.
These provisions govern and describe the obligations of the payer of salary and wages. Compliance with those provisions will constitute contemporaneous documentary evidence from which it may be inferred that a withholding has occurred. Conversely, where there has been little or no compliance with those provisions, it may be an open question whether in fact a withholding was made.
I respectfully agree with the foregoing.
30. As stated at paragraph 21 above, the evidence in this case is that the company expensed the directors' remuneration fee on 29 March 2020 at the request of the director. She wanted to be renumerated as a director in the amount of $25,000. In complying with her request, the company withheld from the $25,000 directors fee $11,398 for remission to the Commissioner on account of its PAYG withholding obligations. It was her understanding that the net amount of the directors' fee would be accounted for in her loan account. The balance was credited to her loan account at her request. The company's withholding obligation was discharged when it lodged its BAS on 8 April 2020. Mrs Knight was entitled to be given the benefit of a credit of that amount when the Commissioner assessed her tax for the 2020 taxation year.
31. In these circumstances, for the purposes of determining derivation of the income there can be little argument that the director's remuneration has been constructively derived. The facts and circumstances are very different to the taxpayer in Brent
32. In the language of section 11-5 of the TAA, the $11,398 withheld on account of PAYG was applied or dealt with on Mrs Knight's behalf.
ATC 9624In summary, the Tribunal finds that the sole director determined, together with her husband, the other shareholder, that she was to be paid $25,000 remuneration for her services in March 2020. She instructed the company's accountant to raise the appropriate accounting entries which included the attending to the appropriate PAYG withholding and recording the balance to her loan account. Upon the expensing of the directors' fee, the withholding of the PAYG, and the dealing with the balance in the loan account, there was a constructive payment of the $25,000 to her.
THE ACCOUNTING ISSUE
34. The Commissioner also raised an accounting issue that goes to the question of whether the accounting journals were evidence of an actual payment. The consideration of whether there was an actual payment raises similar issues as to the application of the general anti-avoidance rule to be discussed below. In the context of the discussion of the integrity provision below it is appropriate that these submissions be discussed.
35. The Respondent's submissions are to the effect that there was not a director's ( debit ) loan from the company to her to convert. It was not disputed that Mrs Knight had drawn out $29,352 between 1 July 2019 and 31 March 2020. The submission was that the accounting software which listed Mrs Knight's loan transactions contained a 'Running Balance column'. The Running Balance amount at 30 March 2020 was a credit of $11,396 owing to Mrs Knight. That is, Mrs Knight was not able to account for her remuneration as a conversion of her drawings because the drawings had earlier been recorded in the 'Running Balance column' in the 'Directors Loan Transactions' ledger as a reduction from an opening credit loan. After the posting of the journals in relation to the expensing of the director's remuneration, the 'Running Balance column' in the ledger had a balance of $24,498.
36. It was not in dispute that the company's accounting software contained a ledger titled 'Directors Loan Transactions' and that the account had a 'Running Balance column' containing all of the financial year's entries made to and from Mrs Knight.
37. What was in evidence was that up until March 2017 the company used a different software package.
38. That package recorded Mrs Knight's regular drawing to a ledger account 'director's drawing', which was not linked to her credit loan account at the beginning of the period. It recorded debit balances for her regular drawings, against which year-end remuneration (if any) was recorded. Any balance was added or subtracted in the year end loan balance. The Tribunal notes that in Division 7A of the 1936 Act, where there is debit, not as here, credit shareholder loans, there can be year-end remuneration adjustments transacted with journal entries. The Commissioner accepted in submissions if there was a debit loan any such adjustment would satisfy the actual payment criterion.
39. Accounting software produces accounting records and work papers that were once prepared by bookkeepers and accountants manually. As the definition of 'financial records' in the CA recognises,
40. The Tribunal accepts that in instructing the accountant to raise the journal entries Mr and Mrs Knight expected that there would be a credit against a debit loan (ledger) as had occurred in the past. The Tribunal accepts that the accounting records show that the credit was added to an existing loan. In the context of the discussion of the application of the integrity provisions below, the Tribunal does not accept that any adverse conclusions can be inferred from Mr and Mrs Knight's misconception as to the appropriate journal, or Ms Nossova's misunderstanding of her accounting software or her instructions.
41. The Tribunal also accepts that the statement on the pay slip that the $13,602 was paid into Mrs Knights bank account was incorrect. Given their past experience with the previous accounting software package, Mr and Mrs Knight had no reason to query its correctness. In earlier years amounts that had
ATC 9625previously been deposited into her bank account were converted into her remuneration. The Tribunal also accepts Mr Knight evidence that the payslip was generated by the STPS on the information contained within it.
42. The company's accountant did not give any evidence. In correspondence with the Australian Taxation Office's ( ATO ) auditors she appears to not be familiar with the accounting software employed. Her passionate defence of her accounting makes sense in Division 7A of the 1936 Act context of there being a debit loan to the director. That said, her mistake is not seen by the Tribunal of being of any consequence. Mrs Knight chose to not be paid in cash and directed that the net of PAYG amount be processed through her loan account.
43. During the audit and objection stage the Commissioner restricted the decision to the payment issue discussed above. In the Respondent's Statement of Facts, Issues and Contentions ( RSFIC ) filed in this proceeding, the issue of the application of the integrity provision was raised for the first time.
44. Counsel for the Applicant questioned the ability of the Tribunal in the circumstances to deal with the integrity provisions. In submissions the following question was put:
CAN THIS TRIBUNAL SUBSTITUTE THE OBJECTION DECISION WITH AN AUDIT DECISION TO DETERMINE THAT THE APPLICANT IS INELIGIBLE FOR A CASH FLOW BOOST PAYMENT?
45. The Applicant's submission concluded:
The Tribunal cannot in the course of these proceedings set aside a decision of the s12(2)(b) genus and substitute it for a decision of the s 12(2)(a) genus. It can only allow the objection decision, wholly or in part or disallow it. If the Commissioner wishes to make a determination of the s 12(2)(a) genus then it must do so separate to these proceedings and give the applicant its right to object to that decision pursuant to s 14ZU of the TAA.
46. In the context of the CFB Act the Tribunal notes:
- (a) The Commissioner had the power to disallow the Applicant's objection on the basis that section 5(1)(g) of the CFB Act applied, and determine that the Applicant was not entitled to any CFB at all;
- (b) The authorities establish that section 43(1) of the Administrative Appeals Tribunal Act (
) gives the Tribunal the same power when it is reviewing the objection decision and this is so irrespective of the fact that the Commissioner did not apply section 5(1)(g) in disallowing the objection;
RS at p.6 .
- (c) It follows that the Tribunal has the power to vary a decision that the Applicant is entitled to a CFB of a particular amount to a decision that the Applicant is not entitled to the CFB at all; and
- (d) In so doing the Tribunal must ensure the Applicant has been provided with procedural fairness.
47. The Tribunal notes that the Applicant has not raised any concerns as to the lack of procedural fairness.
48. Section 5(1)(g) at paragraph 12 above has recently been the subject of a decision of the Tribunal in VNBM and Commissioner of Taxation.
49. Importantly, the sections' operation differs from Part IVA of the ITAA in that there is not a reconstruction power. Consistently, eligibility for the CFB is dependent on compliance with the section. If the scheme provision applies the eligibility for any CBF for that period is lost. The March 2020 BAS included PAYG withholdings for six staff of $3,681. In both the audit and objection decisions of the Commissioner the CFB was amended to that sum.
50. The expression 'scheme' in the section takes its meaning from the A New Tax System (Goods and Services Tax) Act (
the GST Act
) where it is defined in section 165.10(2)(a):
What is a scheme?
- (2) A scheme is:
- (a) any arrangement, agreement, understanding, promise or undertaking:
- (i) whether it is express or implied; and
- (ii) whether or not it is, or is intended to be, enforceable by legal proceedings
51. The Commissioner accepts that the company through its employment of six employees was an entity otherwise entitled to the CFB for the March 2020 period. The first limb of eligibility in section 5(1)(g)(i) is satisfied.
52. The issue before the Tribunal is whether there was a scheme or any part of a scheme that was entered into by the company or any associate or agent for the sole or dominate purpose of achieving an increase in the amount of the CFB to which the entity would be otherwise entitled.
53. The following factual matters are found relevant to the section's application.
54. The order is chronological in nature, not in any order of importance:
- (a) 2011 tax year $13,000 of drawings of $19,918 was at year end converted to remuneration. PAYG was not withheld. Mr Knight's explanation in evidence being that Mrs Knight income was either below the tax-free threshold or the amount of tax would have been negligible;
- (b) 2014 tax year total drawings of $17,850 were converted to remuneration at year end. Again, no PAYG was withheld on the same explanation as above;
- (c) 2015 tax year $18,000 of drawings were converted to remuneration. Again, no PAYG was withheld on the same explanation as above;
- (d) 2016 tax year $19,000 of drawings of $27,000 were converted to remuneration at years end. Again, PAYG was not withheld on the same explanation as above;
- (e) The company changed accountants to Ms Nossova during the 2017 tax year. At that time, they changed their accounting software to Xero as discussed above. The entries in Xero commence on 1 April 2017;
- (f) 2017 tax year remuneration of $19,000 was expensed by a manual journal 'Directors fees'. Net withdrawals before the remuneration for the year were $20,868. The difference was journalised as a debit to the 'Directors Loan Transactions' ledger;
- (g) In the 2018 tax year, Mrs Knight did not receive any directors' fees and advanced a further $14,063 to the company;
- (h) In the 2019 tax year, Mrs Knight did not receive any directors' fees and advanced a further $41,000 to the company;
- (i) On 12 March 2020, the Treasury issued a fact sheet outlining the CBF;
- (j) The Treasury issued a further fact sheet on 22 March 2020 advising monthly BAS lodgers of the CBF for the March BAS would be able to multiply the March figure by three (in lieu of getting credit for withholdings in January and February);
- (k) On 23 March 2020, the CBF Explanatory Memorandum (
) and draft CFB Bill was publicly released.
Explanatory Memorandum, Guarantee of Lending to Small and Medium Enterprises (Coronavirus Economic Response Package) Bill 2020 (Cth) at p.58 [3.34].The EM contained a description of the 'scheme provisions';
- (l) On the 24 March 2020, the CBF Act was enacted;
- (m) On 24 March 2020, the ATO released a guidance on the CFB legislation. This included a brief discussion that the legislation contained a 'scheme' provision. It also explained how the second period CFB for monthly lodgers repeated the payment being based on three times multiple of the March BAS;
Australian Taxation Office, Boosting Cash Flow For Employers(Web Page, 24 March 2020) < Boosting cash flow for employers | Australian Taxation Office (archive.org)>.
- (n) During March 2020, Mr and Mrs Knight had discussions with their accountant at which:
- (i) The announcement of the CFB was discussed;
- (ii) A decision was made to bring forward the remuneration of Mrs Knight to March and to withhold PAYG for inclusion in the March BAS;
- (iii) The March remuneration, and accordingly the March PAYG withholding on behalf of Mrs Knight was to be calculated on the profits showing in the accounts for the nine months to March;
- (iv) The accountant calculated the amount to be withheld on the basis the remuneration was for one weeks service and that Mrs Knight had not provided a declaration that she had not claimed the tax free threshold previously; and
- (v) On 29 March 2020, a payslip advising the PAYG withholding was generated out of the Xero system by Mr Knight on the advice of the accountant. The Tribunal leaves open the explanation as to how or why in the Xero system the payslip carries the notation it was paid into Mrs Knights bank account.
55. Other relevant non chronological factors are:
- (a) That although Mr Knight does not show up on the Australian Securities and Investments Commission ( ASIC ) register as a director or officer, on the evidence that was an administrative oversight and he was fulfilling roles consistent with him being regarded as a common law director and/ or a voluntary unpaid officer;
- (b) It was a tax planning policy that Mrs Knight was only to be renumerated if there was otherwise taxable income as at years end; and
- (c) In March 2020, coronavirus pandemic had resulted in insignificant disruption in the community, hence the decision by government to provide the CFB. A national pandemic had been declared. Mr Knight confirmed in cross examination that the business had been shuttered at that time (late March) on a directive of the government.
WAS THERE A SCHEME AND IF SO, WHAT ARE ITS STEPS?
56. Section 5(1)(g) looks at whether the company or its associates or agents entered into a scheme as defined in the taxation law.
57. The purpose of a third party or agent can be attributed to the entity. Therefore, the acts of Mr Knight and the accountant and tax agent Ms Nossova are as relevant as those of Mrs Knight and the company itself.
58. The scheme identified by the Commissioner was of one or more of the following steps, matters, things or actions:
- (a) The decision by the Applicant (and Mr Knight as an associate of the Applicant and/or Ms Nossova as agent for the Applicant) to make journal entries in the Applicant's books on 31 March 2020 increasing the directors loan account by $13,602 and reducing the wages payable account by the same amount;
- (b) The issuing of a payslip to Mrs Knight purporting to show that a net wage of $13,602 had been paid to Mrs Knight on 29 March 2020, when no payment had been made; and
- (c) The lodgement of an Activity Statement for March 2020 which included the gross wage of $25,000 in the total of $48,183 at Item W1 and the purported withholding liability of $11,398 in the total of $15,079 at Item W2.
59. In submissions it was added that the reason why the Commissioner's formulation of the "scheme" focuses on the steps by which the Applicant had recorded the purported payment is because the Applicant claims that these steps (namely the journal entries) 'effected' the payment. It is contradictory for the Applicant to say that these actions 'effected' a transaction yet attempt to dismiss them as mere administrative steps.
60. Consistent with the reasons stated above the Tribunal accepts that the first step in the scheme was to create a payment that was subject to PAYG withholding. As stated above at paragraph 22 the Tribunal accepts Mrs Knights evidence that on advice, she 'decided' that she would receive the remuneration. That involved posting the credit in the earlier journal 'Wages Payable-Payroll account' or 'other suspense account'. That was a step that had not been followed in previous years. It demonstrates that on this occasion the company had the intention of making a PAYG withholding. The Tribunal accepts that the journal involved in step (a) above at paragraph 58 was a subsequent consequential step of the expensing of the $25,000 director's fee.
61. Step (b) above of paragraph 58 is accepted to the extent it is a confirmation addressed to Mrs Knight that a PAYG withholding was being processed. The lodgement of the BAS (step (c)) is accepted as a necessary step to obtain the CFB. The reference to a purported liability being unnecessary in this context.
BENEFIT AND SOLE OR DOMINENT PURPOSE
62. The concept of 'tax benefit' in Part IVA of the ITAA and Division 165 of the GST Act is comprehensively defined. The CFB Act simply states where there is a scheme 'carried out for the sole and dominant purpose of achieving...[a] increase [in] the amount of cash flow boost to which the entity is entitled...for the period'. The period here is the March 2020 BAS.
63. The key word in section 5(1)(g) is 'increasing'. The Macquarie Dictionary defines 'increasing'...'increase' as 'to make greater in any respects; augment; add to'. It involves a comparison with something else.
64. The comparison is to compare the PAYG in the March BAS to what it would have been if the scheme was not implemented.
65. In considering whether the above steps had in this context the necessary sole or dominate purpose the Tribunal makes the following observations:
- (a) It had been for some time the practice to fix the director's remuneration at the end of the financial year;
- (b) The company had for the same time period a practice of not remunerating the director to a level that the company incurred a tax loss. The nature of the pandemic was such that objectively trading uncertainties lay ahead. Objectively this suggests that if the remuneration decision took place at the end of June, as was the established practice, the remuneration would have been considerably less. In cross examination Mr Knight confirmed that this was a factor in bringing forward the payment;
- (c) The remuneration had been determined having regard to the profit recorded for the nine months to March 2020 and the amount that had been drawn down in that same period;
- (d) The company in the past, when expensing similar amounts, had not withheld PAYG. Mr Knight's explanation was that the payments were under the amounts that required withholding or alternatively very small amounts. Mr Knight confirmed in cross examination that in previous years the directors' fees were remuneration for twelve months service which is inherent in their decision in those years to not withhold PAYG. The 2020 directors fee was fixed on the same basis. That is, the $25,000 directors fee, consistent with the past, was for a period of nine months;
- (e) With the exception of a pay period of less than one week, the amount withheld was the maxim proscribed in the Commissioners PAYG withholding schedules. Given that the company had based the remuneration on factors measured over nine months, regard should have been held to withholding the significantly lower amount permitted by the Commissioners schedules. In the circumstances the Commissioner's schedules permitted a pay period of nine months;
- (f) For monthly BAS lodgers the CFB was calculated at three times the March BAS. The bringing forward of a PAYG withholding to the March BAS provided a much larger 'Boost' that if it was in a subsequent months BAS; and
- (g) Mr Knight confirmed in cross-examination that the above steps were undertaken to maximize the benefit from the CFB.
66. On the basis of the above, the Tribunal adds to the scheme the following decisions made by the company and/or Mr and Mrs Knight and/or the tax agent Ms Nossova:
- (a) The decision to remunerate the director in March and not, as was the past tax planning practice, at the end of the tax year;
- (b) The decision, on this occasion, to withhold PAYG from that renumeration;
- (c) The decision to deduct the PAYG withholding on the basis that the relevant period was one week not the nine months on which the amount was based; and
- (d) Had the remuneration been fixed in June, as it had in the past, the profits/taxable income would have been much less and the PAYG payable on that reduced amount remitted in the March BAS would have accordingly been much less.
ATC 9629The Applicant's submission was:
The sole purpose of the administrative step of making a record in the director's loan account to increase the applicant's indebtedness only gives effect to an anterior step taken by the applicant to resolve (whether in an irregular general meeting or otherwise) to pay Merilyn $25,000: Merilyn #2 ; Ian #2 -. The applicant's accountant's sole purpose was to record a transaction that the applicant had advised her had been taken: Ian #2 . No person had the dominant purpose of increasing the applicant's entitlement to a cash flow payment by the specific step of making of journal entries.
68. The Applicant also submitted that as the company routinely paid its payroll weekly the PAYG calculation of the PAYG payable on the $25,000 followed that practice.
69. Each of the above four steps at paragraph 66 would not have occurred if the parties were at arm's-length and/or the CFB did not exist. The explanation given by Mr Knight as to why the past practice of waiting to see what the profit/taxable income was at financial year end was altered, included consideration that the year-end profit/taxable income was going to be severely impacted by the pandemic. The withholding of $11,398 from the $25,000 remuneration is 45%. Why that cashflow is 'voluntarily' lost for at a minimum of three months was not explained, other than as the Commissioner submitted, the three-time boost for the monthly March BAS lodgers. Increasing the CFB for the month of March is the only conclusion that can be made of the steps, decisions, and actions of the company and its director Mrs Knight, its agent, Mr Knight and its agents, their accountant and tax agent Ms Nossova.
70. If the above steps had not been carried out the CFB would have been the amount determined by the Commissioner in the objection decision. That is, only containing the PAYG withheld from the six arm's-length employees.
71. As a consequence of the actions of the company, its sole director (Mrs Knight), its third party (Mr Knight) and its tax agent (Ms Nossova), the PAYG component of the March 2020 BAS was a 'increase' on the amount that would have been the amount for that month. That is, the bringing forward of the payment from June to March and the bringing forward of the determination of the fee and the change in the policy of its calculation. Similarly, the amount of PAYG withheld from Mrs Knight's remuneration is an increase on the amount that should have been withheld if Mrs Knight was an arm's-length employee. The one-week verses nine months issue. These actions, both objectively and subjectively, display a dominate, if not sole purpose, of increasing the March 2020 CFB.
72. The Applicant has the burden of proving the objection decision 'should not have been made or should have been made differently'.
73. The Tribunal is not persuaded on the evidence that the Applicant satisfies section 5(1)(g) of the CFB Act.
74. The Tribunal set aside the objection decision. The Tribunal determines that the Applicant was ineligible to receive a CFB for the March 2020 period as a consequence of its non-compliance with section 5(1)(g) of the CFB Act.
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