Decision impact statement

Cassaniti v Commissioner of Taxation

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Venue: Federal Court of Australia
Venue Reference No: NSD 2489 of 2005
Judge Name: Edmonds J
Judgment date: 24 June 2010
Appeals on foot: No.
Decision Outcome: Partially adverse

Impacted Advice

Relevant Rulings/Determinations:

• None

Subject References:
Income Tax
PAYG withholding
What constitutes the withholding of an amount from salary or wages
Entitlement to a credit for amounts withheld
Whether quantification of a credit on a notice of assessment is part of the assessment process

Précis

Outlines the Tax Office response to this decision about what constitutes the withholding of an amount from salary or wages under the PAYG system - whether the taxpayer is entitled to a credit for amounts withheld regardless of whether any amount was actually withheld - whether PAYG withholding forms part of the assessment process.

Brief summary of facts

The taxpayer was an employee of Reliance Financial Services (RFS). RFS provided services to Cassaniti & Associates, Accountants (controlled by the taxpayer's cousin, Sam Cassaniti). The taxpayer claimed he was paid a gross salary of approximately $130,000 p.a. for the years of income ended 30 June 2002, 30 June 2003 and 30 June 2004. He further claimed his employer withheld the sum of approximately $56,000 p.a.

The taxpayer argued that all that was necessary for a withholding to be made is there be a mathematical subtraction of amounts from his gross salary or wages so that what is paid to him is a net amount. Hence, the word 'withhold' does not specifically require the retention of the amounts so withheld/deducted in any identifiable form.

The Commissioner refused to allow the full amount of credits sought on the basis that the amounts were fictional, inflated or both, and that the central document relied upon by the taxpayer to show that the credits were withheld was unreliable. The taxpayer sought declarations that he was entitled to credits totalling $167,105.

The taxpayer was granted leave to file an amended Application on the last day of the proceedings. Leave was granted on the basis that his claim for the larger amounts of PAYG credits had the effect that if he failed to prove the larger amounts were credited, then he would get no credits at all, although some may have been withheld. [para196].

Issues decided by the court or tribunal

1. Is the taxpayer entitled to a credit equal to the total of amounts said to be withheld from salary or wages said to have been made to him in each of the relevant years of income within the meaning of s 18-15(1) of Schedule 1 to the Taxation Administration Act 1953 (TAA).

His Honour found the obligation to withhold is on the payer of the salary. The payer is to withhold in accordance with the TFN Declaration, Withholding Declaration and the withholding schedules made under section 15-25 of Schedule 1 to the TAA and must be withheld at the time of making the payment. [paras 31-33 and 35-37]

His Honour also held that there must be a process by which the withholding takes place, and whether there has been a legitimate process of withholding will depend upon a close examination of the books of account and records of the payer, and the surrounding circumstances to see whether it can be inferred from those records and circumstances that a withholding has occurred. A mere journal entry, in the absence of other evidence, may not be sufficient. The authorities establish that entries of this kind, standing alone, are not conclusive evidence of the transaction [paras 163-165].

An employee may provide the payer with an Upwards Variation requesting the withholding amount be increased. There is only an obligation imposed on the payer if the payer holds the approved form. If the payer does not hold the approved form then any additional sum withheld does not form part of the PAYG credit. [paras 39-41] His Honour held that an employee is only entitled to a credit equal to the sum actually withheld by the payer.[para 173]

His Honour upheld the Commissioner's submission that the information relied on by the taxpayer was not contemporaneous but was concocted at a later point in time. [para 187-188] However, his Honour concluded that amounts totalling $73,406.26 were withheld from payments of salary or wages to the taxpayer, and he was entitled to a credit for those amounts [paras 197-199].

2. Did the Commissioner have the power to assess or amend an assessment so as to disallow a PAYG credit?

His Honour found that the PAYG credit is not protected by s 177(1) ITAA 1936. It is not a particular of the assessment - it is a particular of the statement of account between the taxpayer and the Commissioner. Hence, the production of a Notice of Assessment is not conclusive evidence that the amount of the credit is correct. He further held that if a person can provide evidence that the credit is greater than the amount shown on the Notice of Assessment, then they would be entitled to the credit for the greater amount. [para 175]

His Honour found that the "amended assessments" for the 2002 and 2003 tax years were Notices of Restatement of Account and not Notices of Assessment and therefore no objection rights arise under Part IVC. [para175]

Tax Office view of Decision

The decision clarifies the meaning of the word 'withhold' for the purposes of the PAYG system, and explains that, where the withholding is represented only by accounting entries then whether or not a legitimate process of withholding has been undertaken will depend on a close examination of the payer's books of account and other records, as well as the surrounding circumstances. Any documentation kept to support such entries should be contemporaneous to the events.

The decision also confirms that a credit for PAYG withholding is not a particular of a notice of assessment - it is a particular of the statement of account between the taxpayer and the Commissioner.

It also clarifies that, for amounts withheld to be credits for withholding tax purposes, they must be calculated in accordance with the employee-provided Withholding Declaration and the schedules of rates. Any amounts which are withheld at the request of the taxpayer without the formal documentation will not be able to be credits for PAYG withheld.

Administrative Treatment

Following the decision in this case, concern was expressed that, where an employer and an employee/taxpayer are not at arm's length (other than in circumstances where the ATO has reasonable grounds to suspect improper conduct), an unfair onus may be placed on the employee/taxpayer to provide information which an employee would not ordinarily be expected to provide.

The Tax Office has considered its practices for treating disputed PAYG withholding credits, as well as 2012 legislative amendments that prevent companies escaping liabilities and payments of employee entitlements. Following this consideration, the Tax Office confirms its treatment for such disputed claims. In addition, the Tax Office will ensure that its future communications with taxpayers involved in these types of disputes make it clear what the process involves, including what further evidence is required in the particular circumstances for each case.

Implications on current Public Rulings & Determinations

None

Implications on Law Administration Practice Statements

None

Amendment history

Court citation:
[2010] FCA 641
2010 ATC 20-192
79 ATR 340

Legislative References:
Taxation Administration Act 1953
Pt 2-5 of Sch 1
18-15(1)

Income Tax Assessment Act 1936
177(1)
Div 2 of Pt VI

Income Tax Assessment Act 1997
995-1

Income Tax Assessment Act 1947
221H

Income Tax Assessment Act (No. 2) 1947
221H
221Q


Income Tax Rates Act 1986


Evidence Act 1995 (Cth)


Income Tax Regulations 1936

Case References:
Constantinidis v FC T
(2004) 55 ATR 348
[2004] FCA 397
2004 ATC 4371

Cooke v FCT
(2002) 51 ATR 223
[2002] FCA 1315
2002 ATC 4937

DCT v Sargon
(1985) 16 ATR 355
85 ATC 4206

FCT v Barnes
(1975) 133 CLR 483
[1975] HCA 61
5 ATR 713
75 ATC 4262

FCT v Ryan
(1998) 82 FCR 345
38 ATR 464
98 ATC 4323

Fox v Percy
(2003) 214 CLR 118
[2003] HCA 22

Taylor v FCT
(1987) 16 FCR 212
18 ATR 715
87 ATC 4441

Temples Wholesale Flower Supplies Pty Ltd v FCT
(1991) 29 FCR 93
21 ATR 1606
91 ATC 4387