Commissioner of Taxation of the Commonwealth of Australia v 4 Doonan Street Collinsville Pty Ltd

Court of Appeal (NSW)|2016-02-23|Before: Gleeson JA, Leeming JA, Black J

[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]

Judgment

THE COURT: This appeal by the Commissioner and cross-appeal by the respondent (Company) concern the treatment of debits and credits in the system of accounts known as "Running Balance Accounts" or "RBAs" established by the Commissioner pursuant to Pt IIB of the Taxation Administration Act 1953 (Cth) (TAA) and the application of those provisions during the winding-up of the Company. For the reasons which follow, the primary judge erred in concluding that four debits made by the Commissioner were not authorised by the TAA, and the Commissioner's appeal must be allowed. However, the primary judge correctly accepted the Commissioner's submission that the provisions applied notwithstanding the insolvency of the Company. The cross-appeal must be dismissed.

The Commissioner's internal accounting of the Company's tax obligations

The accounts maintained by the Commissioner record the Company as becoming liable to pay a variety of federal taxes: Goods and Services Tax (GST), Pay As You Go: Income Tax Withholding (PAYG withholding), Pay As You Go: Income Tax Instalments (PAYG), Superannuation Guarantee and General Interest Charge. It will not be necessary to say anything more about the details of most of those taxes in order to resolve this appeal and cross-appeal.
The appeal and cross-appeal both concern the steps taken by the Commissioner between 16 November 2012 and 14 May 2013: the dates respectively of the lodgement of the application for an amended assessment and the Commissioner issuing an amended notice of assessment. The effect of those steps was to deduct from the amount to be refunded to the Company by reason of the amended assessment five separate sums due by the Company in respect of tax liabilities it had incurred. It will be convenient to refer in what follows to the First, Second, Third, Fourth and Fifth Debits. The primary judge found that the First, Third, Fourth and Fifth Debits were not authorised by the regime established by Pt IIB of the TAA.
The Commissioner maintained an "account" described as "Income Tax Account 551" for the Company. An extract of the page dealing with the debits and credits in that account which are central to this appeal and cross-appeal is annexed to this judgment. Omitting rows and columns not presently relevant, the table is as follows: Processed Date Transaction Description Debit $ Credit $ Running Balance $ 12/01/2012 Trustee Liability Form - Income Tax for the period from 01 Jul 10 to 30 Jun 11 717,816.75 0.00 717,816.75 DR 21/02/2012 Payment received 0.00 717,816.75 0.00 07/02/2013 Client initiated amended Trustee Liability Form - Income Tax for the period from 01 Jul 10 to 30 Jun 11 0.00 651,340.85 651,340.85 CR 16/02/2013 Credit offset to integrated client account 50,464.52 0.00 600,876.33 CR [First Debit] 16/04/2013 Trustee Liability Form - Income Tax for the period from 01 Jul 09 to 30 Jun 10 173,692.35 0.00 453,368.35 CR [Second Debit] 29/04/2013 Credit offset to integrated client account 2,176.00 0.00 451,192.35 CR [Third Debit] 29/04/2013 Credit offset to integrated client account 52,238.48 0.00 398,953.87 CR [Fourth Debit] 29/04/2013 Credit offset to superannuation guarantee account 35.45 0.00 398,918.42 CR [Fifth Debit]

(The material in bold has been added.)

This information was made available to the Company's tax agent via a "tax agent portal" (using which the authorised agent of the Company could view the information from time to time).
The first row in the table reflects the (self-assessed) amount of income tax payable by the Company. The second row records the payment of income tax (in full) on 21 February 2012. The credit in the third row, with a processed date of 7 February 2013, may be thought to be attributable to the acceptance by the Commissioner of the Company's application to amend its assessment. Each of the remaining five rows reflects the Debits in issue in these proceedings.
The credit entry in the third row was "processed" more than three months before an amended assessment issued. As will be seen below, it is vital to distinguish between the entries in the account and the Company's legal rights. It may be tempting to regard the account established by the Commissioner as analogous to a bank account, in which the customer has a presently existing debt enforceable against the bank in the amount of the balance from time to time. But, as will be seen, it would be erroneous to do so.
The entries in the Income Tax Account 551 described each of the First, Third, Fourth and Fifth Debits as "credit offset to integrated client account" while the Second Debit referred to the Company's liability to pay income tax in respect of the period from 1 July 2009 to 30 June 2010. The two forms of description reflected two separate ways in which the Commissioner treated tax liabilities of the Company internally.
The Second Debit has a "Processed Date" of 16 April 2013. On 2 April 2013, the liquidator lodged the Company's income tax return for the financial year ended 2010. It recorded a total income of $373,532. Consistently with that return, on 6 May 2013, a notice of assessment issued to the Company identifying the taxable income as $373,532, and tax payable of $173,692.35, payment for which was due on 7 June 2011. It is to be inferred that the Second Debit was processed, on 16 April 2013, to record in the Income Tax Account 551 the Company's debt created by the issuing of the notice of assessment.
The First and Third Debits were derived from entries contained in a different account maintained by the Commissioner, called the Insolvency Account. That account was opened in July 2008, and until November 2009 contained amounts of PAYG and GST liabilities and corresponding payments or refunds. (It also contained numerous debit and credit entries for PAYG tax withheld, which are not summarised in what follows, because they made no net contribution to the running balance.) On 18 November 2009, a payment of $32,901 corresponding to PAYG and GST for the quarter ended 30 September 2009 was made, but dishonoured a week later. The running balance remained in debit in amounts slightly exceeding $32,000 until, in late February 2010, another amount of approximately $32,000 representing PAYG and GST was debited. In March and April, amounts totalling just over $20,000 were paid and credited to the account, but a further $39,000 was debited in May, reflecting PAYG and GST for the quarter ended 31 March 2010. In May, June and July $35,000 in payments were made, leaving a debit balance of just under $50,000. The PAYG and GST debts for the quarter ended 30 June 2010 were paid in full, and there were no substantial entries thereafter, and no entries at all after 6 September 2010.
The outstanding debit balance on the Insolvency Account of $50,464.52 on 16 February 2013 was therefore attributable to the non-payment of part of the Company's GST and PAYG liabilities in the financial year ended 30 June 2010, and a small amount of interest. This debit balance corresponded with (a) the amount initially lodged by the Commissioner as a proof of debt, and (b) the Second Debit. On 16 February 2013, the debit balance in the Insolvency Account was reduced to $0.00 by the credit of $50,464.52 which was described as "payment transferred in from another account".
There were two subsequent PAYG withholding debits entered in the Insolvency Account in March 2013, which appear to relate to August and September 2010, which resulted in that account having a debit balance of $2,176 at 29 April 2013. On that date there was another credit, of $2,176, producing a closing balance of $0.00. The credit was described as "payment transferred in from another account"; that corresponds to the Third Debit.
In relation to the Fourth Debit, a separate account established by the Commissioner, known as the "Integrated Client Account", contained one entry for GST (apparently for a liability in November 2010), and three debit entries for general interest charges. At 29 April 2013, the balance of this RBA, according to the information made available in the "tax agent portal", was $52,238.48. On that date, that amount was credited, by a transaction described as "payment transferred in from another account", leaving a balance of $0.00. That corresponds to the Fourth Debit.
Finally, a separate account described as "SGER" which the Court was told had to do with superannuation guarantee obligations of the Company, contained a debit balance of $35.45 by the end of 2010. The document tendered by the Commissioner stated that a credit amount of $35.45 was posted on 21 November 2011. There was nothing to explain the discrepancy as to dates, but the Commissioner maintained that the Fifth Debit processed on 29 April 2013 corresponded to the crediting of $35.45 to the SGER Superannuation Guarantee Account, producing a $0.00 balance.
There was also no explanation of why each of the First, Third, Fourth and Fifth Debits were all described as "credit offset to integrated client account" in the Income Tax Account 551, despite the Commissioner maintaining three separate accounts, only one of which was called "integrated client account".

The pleadings and the Commissioner's admission

By its amended originating process the Company sought declarations that all five of the Debits were void and amounted to an attachment, sequestration, distress or execution against the property of the Company within the meaning of s 500 of the Corporations Act. The Company alleged that the Commissioner was not authorised to deduct the Debits from the RBA Credit Surplus and identified five bases for that contention as follows: "enforcing a process against property of [the Company]; not authorised by the TAA or otherwise; in breach of s 471B of the Corporations Act 2001; attaching and/or sequestrating and/or raising a distress and/or executing against property of [the Company]; in breach of s 500 of the Corporations Act 2001."
The Commissioner's verified defence asserted that on each of the dates recorded in the "processed date" column of the table, he made an "allocation" in the amount debited from the account. The allocations were said to be to "Income Tax Withholding and Goods and Services Tax" (First Debit), "Income Tax" (Second Debit), "Income Tax Withholding" (Third Debit), GST (Fourth Debit) and "Superannuation Guarantee Charge" (Fifth Debit).
The Commissioner's defence purported to admit that all of the accounts maintained in relation to the Company were RBAs. It is a striking feature of the litigation (and perhaps indicative of the complexity of the legislation) that the Commissioner advised the primary Judge that the admission that Income Tax Account 551 was an RBA was incorrect. Despite this advice, it does not appear that the Commissioner at any stage sought to withdraw his admission. This Court was not given any reason for the Commissioner making what was said to be a mistaken admission. Nor was any explanation given for the Commissioner's failure to seek to withdraw what he maintains is a factually incorrect admission.
Whatever the explanation for the Commissioner's approach, it seems that the parties have conducted the litigation on a false premise. As the primary judge remarked, the parties have therefore proceeded on the "artificial" basis that Income Tax Account 551, the character of which is central to the appeal and cross-appeal, is an RBA.
The Commissioner's submissions did not explain how the issues at the trial and on appeal would have been different (if at all) had he pleaded the correct status of Income Tax Account 551. As a consequence, it is not entirely clear whether the artificial basis on which the parties conducted the proceedings has affected the significance of the reasoning in this judgment for other cases.
There was very little testimonial evidence from the Commissioner about the creation of the accounts, how and when the entries were made, and why the Income Tax Account 551 was not in truth an RBA. Omitted from the extract of that account reproduced in the table above are 18 entries, all of which are calculations of interest and the cancellation of those calculations. That is to say, of the 26 entries in the critical account in this litigation, 18 are on their face either erroneous calculations of interest or entries to correct those errors. There was no evidence of how those entries had been made.
Also omitted from the table above is a column of dates described as an "Effective Date" for each entry. The "Effective Date" for each of the First, Third, Fourth and Fifth Debits was 13 May 2013, the day before the amended assessment issued. It seems unlikely that those identical dates were recorded at the time each entry was processed. One possibility is that the Debits were processed on the dates stated, and only given an "Effective Date" at a time shortly before the amended assessment issued. But that is speculation; the Commissioner gave no specific evidence directed to the Effective Date of 13 May 2013, and said that it was "the date the account entry of posting is taken to have been allocated to the RBA".

The reasons of the primary judge

The primary judge rejected the Company's submission that the powers under Pt IIB Div 3 of the TAA were not available once a liquidator had been appointed to the Company: at [13]-[31]. His Honour also rejected the Company's submission that the Debits amounted to an attachment, sequestration, distress or execution contrary to s 500 of the Corporations Act: at [32]-[40]. However, the primary judge accepted in large measure a narrower submission advanced by the Company, namely that the method of allocation of the Debits was not undertaken in compliance with s 8AAZLA of the TAA: at [42]-[50]. The primary judge found that the Second Debit (that in the amount of $173,692.35 processed on 16 April 2013) was authorised by s 8AAZLA, but that none of the remaining Debits were. Finally, his Honour rejected a submission made in supplementary written submissions filed by the Company that a "partial" allocation was not authorised by s 8AAZLA: at [47].
It will be convenient to return in more detail to the reasons of the primary judge below. For now, it suffices to note merely that his Honour gave judgment in favour of the Company in an amount slightly in excess of $100,000, reflecting the sum of the First, Third, Fourth and Fifth Debits. (It was common ground that there was a minor arithmetical error in his Honour's calculations, in the amount of some $9,000 which required correction if the appeal and cross-appeal were both dismissed.) His Honour also awarded interest pursuant to s 100 of the Civil Procedure Act 2005 (NSW) to the Company, and ordered the Commissioner to pay 50 per cent of the Company's costs of the proceedings.

The appeal and cross-appeal

The Commissioner has appealed against the judgment entered against him, maintaining that the First, Third, Fourth and Fifth Debits were authorised by s 8AAZLA of the TAA. Against the possibility that leave was required pursuant to s 500(2) of the Corporations Act, the Commissioner filed a notice of motion seeking leave. That subsection provides: "After the passing of the resolution for voluntary winding up, no action or other civil proceeding is to be proceeded with or commenced against the company except by leave of the Court and subject to such terms as the Court imposes."
The bringing of an appeal (or a summons seeking leave to appeal) is the commencement of a proceeding. Accordingly, leave is required under s 500(2) to appeal against a decision in favour of a company in liquidation: Naaman v Sleiman [2015] NSWCA 259 at [82]; see also Distinctive FX 9 Pty Limited v Statewide Developments Pty Limited [2012] NSWCA 393 at [11]-[13] in respect of the relevantly identical terms of s 471B of the Corporations Act. There was no opposition to the grant of leave, and plainly, given the importance of the underlying questions of construction, leave should be granted.
By amended notice of cross-appeal, the Company maintained that s 8AAZLA was not available when a liquidator had been appointed to the Company. An additional ground which had been directed to the Second Debit was abandoned at the outset of the hearing.

Applicable legislation

Part IIB of the TAA is titled "Running balance accounts, application of payments and credits, and related matters". Division 1 contains the following relevant definitions in s 8AAZA: "excess non-RBA credit means a credit that arises under section 8AAZLA or 8AAZLB. … primary tax debt means any amount due to the Commonwealth directly under a taxation law (other than, except in Division 4, the Product Grants and Benefits Administration Act 2000), including any such amount that is not yet payable. … RBA means a running balance account established under section 8AAZC. RBA deficit debt, in relation to an RBA of an entity, means a balance in favour of the Commissioner, based on: (a) primary tax debts that have been allocated to the RBA and that are currently payable; and (b) payments made in respect of current or anticipated primary tax debts of the entity, and credits to which the entity is entitled under a taxation law, that have been allocated to the RBA. … RBA surplus, in relation to an RBA of an entity, means a balance in favour of the entity, based on: (a) primary tax debts that have been allocated to the RBA; and (b) payments made in respect of current or anticipated primary tax debts of the entity, and credits to which the entity is entitled under a taxation law, that have been allocated to the RBA. secondary tax debt means an amount that is not a primary tax debt, but is due to the Commonwealth in connection with a primary tax debt. Note: An example of a secondary tax debt is an amount due to the Commonwealth under an order of a court made in a proceeding for recovery of a primary tax debt. tax debt means a primary tax debt or a secondary tax debt. tax debtor means: (a) in relation to a tax debt - the person or persons who are liable for the tax debt; and (b) in relation to an RBA - the person or persons who are liable for the tax debts that are allocated to the RBA."
Division 2 is headed "Running Balance Accounts (or RBAs)". Section 8AAZC(1) empowers the Commissioner to establish "one or more systems of accounts for primary tax debts", each of which is to be known as an RBA. The section provides expressly that "separate RBAs may be established for different types of primary tax debts" (subs (4A)). A note to subs (1) states: "this section does not prevent the Commissioner from establishing other accounts that are not RBAs".
The link between primary tax debts, RBAs, and the obligations of taxpayers is contained in ss 8AAZD and 8AAZH(1), which are as follows (omitting provisions directed to where there are several tax debtors): "8AAZD Allocation of tax debts to RBAs (1) The Commissioner may allocate a primary tax debt to an RBA that has been established for that type of tax debt. Note: General interest charge on an RBA deficit debt is not allocated to the RBA: it accrues automatically under section 8AAZF. … Definition (2) In this section: primary tax debt does not include: (a) general interest charge; or (b) an RBA deficit debt. … 8AAZH Liability for RBA deficit debt (1) If there is an RBA deficit debt on an RBA at the end of a day, the tax debtor is liable to pay to the Commonwealth the amount of the debt. The amount is due and payable at the end of that day. Note: For provisions about collection and recovery of the amount, see Part 4‑15 in Schedule 1."
Consistently with the special definition of "primary tax debt" in s 8AAZD(2), the General Interest Charge is dealt with separately by s 8AAZF, which is as follows: "8AAZF General interest charge on RBA deficit debt (1) If there is an RBA deficit debt at the end of a day, then general interest charge is payable by the tax debtor on that RBA deficit debt for that day. (2) The balance of the RBA is altered in the Commissioner's favour by the amount of the general interest charge payable."
There are also provisions, relied upon by the Commissioner in this litigation, to the effect that an RBA statement is prima facie evidence that it was "duly kept" and that "the amounts and particulars in the statement are correct": s 8AAZI(1).
The central provisions in this litigation are contained within Div 3, which is headed "Treatment of payments, credits and RBA surpluses". Section 8AAZL is as follows: "8AAZL Amounts covered by this Division (1) This Division sets out how the Commissioner must treat the following kinds of amount: (a) a payment the Commissioner receives in respect of a current or anticipated tax debt or tax debts of an entity; (b) a credit (including an excess non‑RBA credit) that an entity is entitled to under a taxation law; (c) an RBA surplus of an entity. (2) The Commissioner must treat each such amount using the method set out in section 8AAZLA or 8AAZLB (but not both). Note: In either case, section 8AAZLC has some additional rules that apply to RBA surpluses and to certain excess non‑RBA credits. (3) However, the Commissioner does not have to treat an amount using either of those methods if doing so would require the Commissioner to apply the amount against a tax debt: (a) that is due but not yet payable; or (b) in respect of which the taxpayer has complied with an arrangement under section 255‑15 to pay the debt by instalments; or (c) in respect of which the Commissioner has agreed to defer recovery under section 255‑5. (4) Furthermore, the Commissioner does not have to treat an amount using either of those methods if: (a) doing so would require the Commissioner to apply the amount against a tax debt; and (b) the tax debt is a penalty that is due and payable under section 269‑20 in Schedule 1 (penalties for directors of non‑complying companies)."
Sections 8AAZLA and 8AAZLB provide for the two methods (Methods 1 and 2) anticipated in s 8AAZL(2). It was common ground that the Commissioner had not applied Method 2. Further, it was not suggested that the additional rules in s 8AAZLC applied. Accordingly, it will suffice for present purposes to reproduce only s 8AAZLA: "8AAZLA Method 1 - allocating the amount first to an RBA (1) The Commissioner may, in the manner he or she determines, allocate the amount to an RBA of the entity or, if the entity is a member of an RBA group, to an RBA of another member of the group. (2) The Commissioner must then also apply the amount against the following kinds of debts (if there are any): (a) tax debts that have been allocated to that RBA; (b) general interest charge on such tax debts. (3) To the extent that the amount is not applied under subsection (2), it gives rise to an excess non‑RBA credit in favour of the entity that: (a) is equal to the part of the amount that is not applied; and (b) relates to the RBA to which the amount was allocated."
Within Div 3A, s 8AAZLF(1) provides: "8AAZLF Commissioner must refund RBA surpluses and credits (1) The Commissioner must refund to an entity so much of: (a) an RBA surplus of the entity; or (b) a credit (including an excess non‑RBA credit) in the entity's favour; as the Commissioner does not allocate or apply under Division 3." There are provisions within that Division for the retention of an amount which would otherwise be required to be refunded under s 8AAZLF if (speaking generally) notifications by the tax payer are required, or investigations are being undertaken by the Commissioner. In the facts of the present case, no separate issue was taken about the delay between 7 February 2013 (when a credit entry was processed in the Income Tax Account 551 corresponding to the (pending) application for an amended assessment) and the subsequent entries processed in February and April prior to the amended assessment issuing.

Primary tax debts

The subject matter of Div 2 of Pt IIB is Running Balance Accounts or RBAs. They are accounts for primary tax debts. The term "primary tax debt" means (save for a presently immaterial exception), any amount due to the Commonwealth directly under a taxation law, including any such amount that is not yet payable.
Thus an RBA may include debts which are due to the Commonwealth but not presently payable, as well as debts due to the Commonwealth which are presently payable.
Division 2 confers a very flexible power upon the Commissioner. The Commissioner may (but need not) establish "one or more" "systems of accounts", and "on any basis that the Commissioner determines". Subsection (4A) of s 8AAZC makes it clear that separate RBAs may be established for different types of primary tax debts. The Insolvency Account (which included amounts for GST and PAYG), the Integrated Client Account (which included amounts for GST) and the SGER Superannuation Guarantee Account are exercises of that broadly expressed power.
Primary tax debts may be allocated to an RBA pursuant to s 8AAZD(1). For example, in this case it is clear that the superannuation contribution tax debts were allocated to the SGER Superannuation Guarantee Account. Subsection (1A) of s 8AAZD confirms that more than one RBA may exist for primary tax debts of the same kind, in which case the Commissioner has a broad power to allocate the debt amongst those RBAs. In the present case, it is clear that GST owed by the Company has been allocated both to the Insolvency Account and to the Integrated Client Account.

Payments to the taxpayer's credit

RBAs need to address the payment of primary tax debts by the taxpayer, and other ways in which the taxpayer may obtain a credit. This is done by Div 3. In contrast with the broad power to create RBAs and allocate tax debts to them, the power to allocate and apply amounts to the taxpayer's credit is highly circumscribed.
Each of the "amounts" identified in s 8AAZL(1) (namely, a payment, a credit, and an RBA surplus) is an amount to the credit of the taxpayer. Where there is an "amount" engaging s 8AAZL(1), then it is mandatory for the Commissioner to "treat" that amount using either "Method 1" or "Method 2" in ss 8AAZLA or 8AAZLB. The Commissioner is free to choose either method, but must choose one: s 8AAZL(2). That obligation is subject to the qualifications in subss 8AAZL(3) and (4) (neither of which was said to be presently relevant, and which may be passed over).
What follows focusses upon Method 1, because it was common ground that only Method 1 in s 8AAZLA was employed in this appeal. (Method 2 deals with the application of an amount to the credit of a taxpayer to a non-RBA tax debt.)

Allocation to an RBA and applying against a primary tax debt

Section 8AAZLA distinguishes between the power to allocate an amount to an RBA (subs (1)), and to apply the amount "against" either tax debts or general interest charges on those tax debts (subs (2)). It follows that the power to allocate is a power to choose a particular RBA of that entity, while the power to apply is a power to deal with particular debts (either tax debts or the general interest charge) which themselves have been allocated to the same RBA. Section 8AAZL is to be read together with s 8AAZD, which confers a corresponding power to allocate a primary debt to an RBA, and also with s 8AAZF, which automatically alters the balance of an RBA in the Commissioner's favour by the amount of general interest charge payable where there is an RBA deficit debt at the end of a day.
In short, just as a primary tax debt may be allocated to an RBA, so too an amount to the credit of a taxpayer may be allocated to an RBA.
Dealing with the allocation of tax debts and the general interest charge pursuant to ss 8AAZD and 8AAZF, it seems clear that the amounts in the Insolvency Account, the Integrated Client Account, and the SGER Superannuation Guarantee Account corresponding to the First, Third, Fourth and Fifth Debits represented the total of a number of tax debts which had been allocated to the particular RBA, together (in most cases) with the general interest charge.
The process of dealing with an amount under s 8AAZLA is quite different. As noted above, each of the classes of amount defined in s 8AAZL(1) reflects a credit in favour of the taxpayer (unlike the tax debts and general interest charge addressed in s 8AAZD and 8AAZF). Ordinarily, s 8AAZLA amounts will post-date primary tax debts (which is merely to observe that ordinarily taxpayers do not make payments in respect of their tax debts before those tax debts come into existence).
When a primary tax debt comes into existence, it suffices for it to be allocated to an RBA (alternatively, it need not be allocated at all, in which case it becomes a non-RBA tax debt). However, when the taxpayer is entitled to a credit, then the legislation appears to proceed on the basis that the Commissioner may need to perform two tasks: (a) allocating the credit to a particular RBA, and (b) applying the credit to particular primary tax debts or general interest charges within that RBA.
It may be that, in this respect, the legislation is drafted in a way which is more complex than it need be. The evidence demonstrated that the RBAs maintained by the Commissioner were accounts which would, as a matter of ordinary accounting practice, also be termed "running balance accounts". Each account comprised debits and credits with a running balance of the net amount (whether in surplus or deficit) at any given time. In such an account, the immediate and automatic effect of posting a credit entry is that it will be applied against any existing debit balance and therefore to the debit entries which contribute to that balance. In other words, there is no separate step of applying a credit entry as opposed to generating the running balance from time to time. However, there may be reasons, not explained in argument, why the legislation requires separate steps of allocation and application.

The iterative procedure contemplated by ss 8AAZL and 8AAZLA

The primary judge accepted the Company's submission that there was an allocation of the $651,340.85 to the Income Tax Account 551 on 7 February 2013, pursuant to s 8AAZLA(1), relying upon the Commissioner's admission that that account was an RBA. However, the primary judge concluded that the First Debit was not authorised by Pt IIB. His Honour's reasons were as follows (at [46]): "The Commissioner in turn submits, and I accept, that the First Debit involved an allocation, using Method I, of the Credit Amount contained in the income tax account to discharge an RBA deficit debt of $50,464.52 in the Insolvency Integrated Client Account RBA. However, Method 1 under s 8AAZLA of the TAA 1953 only permitted an allocation of the Credit Amount to a tax debt allocated to the income tax account (once it was treated, by reason of the Commissioner's admission, as an RBA) and the tax debt that was extinguished by the First Debit was allocated to the Company's Insolvency Integrated Client Account rather than the income tax account. For that reason, the First Debit was not authorised by Pt IIB Div 3 of the TAA 1953."
The Commissioner's submission that that reasoning disclosed error must be accepted. The error is, with respect, twofold. First, there is a minor failure to distinguish between the allocation of amounts to a particular RBA and the application of an amount against a particular tax debt or general interest charge which itself has been allocated to that RBA. If that distinction be observed, then the second sentence of his Honour's reasons reproduced above would state that Method 1 permitted an application of the Credit Amount to a tax debt allocated to the income tax account. But nothing turns on this slip, which is merely an illustration of Lord Hoffmann's observation that the "exigencies of daily court room life are such that reasons for judgment will always be capable of having been better expressed": Piglowska v Piglowski [1999] UKHL 27; [1999] 1 WLR 1360 at 1372, cited in McGraddie v McGraddie [2013] UKSC 58; [2013] 1 WLR 2477 at [30].
Secondly, and fundamentally, the reasoning of the primary judge proceeded on the basis that there was no power to (re-)allocate an excess non-RBA credit to a different RBA. But, to the contrary, there was both power and an obligation upon the Commissioner to do just that.
An "excess non-RBA credit" is a credit that arises under s 8AAZLA or s 8AAZLB: see the definition of "excess non-RBA credit" in s 8AAZA (set out above at [33]). Thus the only way in which an "excess non-RBA credit" may be generated is following the exercise of the power conferred by s 8AAZLA(1) to allocate a s 8AAZL(1) amount to an RBA and then to apply part (but not all) of that amount to tax debts and the general interest charge in relation to that RBA. The position is identical in relation to Method 2 in s 8AAZLB. In short, there can be no "excess non-RBA credit" at the outset of the steps required by Div 3 of Pt IIB.
Section 8AAZL(1)(b) sets out the way in which the Commissioner must treat a "credit (including an excess non-RBA credit) that an entity is entitled to under a taxation law". It is plain that the procedure in Div 3 is intended to apply to excess non-RBA credits. The only way in which the bracketed words in s 8AAZL(1)(b) can ever have application is if they apply to a s 8AAZL "amount" which itself is the result of an allocation and application under s 8AAZLA (or s 8AAZLB) of an earlier (and larger) s 8AAZL "amount".
A simple example of the iterative operation of these sections may assist. Suppose that the Commissioner has established separate RBAs for a taxpayer's GST and PAYG obligations, that there were primary tax debts of $10,000 in each account, and that the Commissioner receives a payment of $16,000. The Commissioner would have to allocate the $16,000 payment into one of the RBAs, apply the $16,000 to the primary tax obligation in that account, resulting in an excess non-RBA credit of $6,000. The $6,000 excess non-RBA credit would itself be a s 8AAZL "amount", which in turn would have to be treated in accordance with Method 1 or 2. If the Commissioner employed Method 1, then the $6,000 would be allocated to the other RBA, and it would then be applied against the other primary tax debt. The result would be an RBA deficit debt of $4,000.
In February 2013, when $651,340.85 was credited to Income Tax Account 551, there were no tax debts or general interest charge which had been allocated to that account. That is a circumstance expressly contemplated in s 8AAZLA(2) by the words "(if there are any)" and which is the premise of s 8AAZLA(3). Because there were no tax debts or general interest charge allocated to Income Tax Account 551 against which the $651,340.85 could be applied, the $651,340.85 was an amount which was "not applied under subsection (2)" and accordingly constituted an excess non-RBA credit. The existence of that excess non-RBA credit in turn gave rise to an obligation on the part of the Commissioner to treat it in accordance with either Method 1 or Method 2. Relevantly, the Commissioner was empowered, in accordance with Method 1, to allocate the excess non-RBA credit to another RBA of the Company, such as the Insolvency Account, which contained primary tax debts and general interest charge of $50,464.52 against which it could be applied. The reasoning of the primary judge fails to have regard to these features of the provisions.
Contrary to the reasoning of the primary judge, not only is the Commissioner empowered to allocate and apply excess non-RBA credits to other RBAs established in respect of the taxpayer, but also the Commissioner is required to continue the process of (re-)allocation and application until there are no remaining primary tax debts or general interest charges against which the (ever-diminishing) credit amount may be applied. That is the necessary consequence of the words "Commissioner must treat ... an excess non-RBA credit" in s 8AAZL(1) when read with the recursive definition of "excess non-RBA credit" in s 8AAZLA(3) as being the amount remaining after allocation and application pursuant to s 8AAZLA(1) and (2).
Against this conclusion, the Company submitted that this approach overlooked the mandatory language of s 8AAZLA(2). It submitted that "[t]he words 'if there are any' ought not be read as effectively neutralising the mandatory nature of the language used in that subsection, by effectively permitting the Commissioner to apply the Credit Amount in the manner he or she determined." The Company observed that the discretion was conferred at the first "allocation" stage in subs (1) rather than the second "application" stage in subs (2).
The Company also drew attention to the concluding words of s 8AAZLA(3), to the effect that the excess non-RBA credit produced following the allocation of a credit to an RBA and then its application against tax debts or general interest charge is one which "relates to the RBA to which the amount was allocated".
Neither submission by the Company may be accepted. Neither is sufficient to displace the necessarily recursive nature of the provisions, which is driven by the fact that the result of an allocation and application of an amount may itself be "an excess non-RBA credit" to which the mandatory provision in s 8AAZL applies. Neither of the Company's submissions is an answer to the consideration that the Commissioner is not only empowered but obliged, in the course of applying Method 1 a second or subsequent time, to (re-)allocate the excess non-RBA credit to a different RBA.
It follows that the primary judge erred in concluding the First, Third, Fourth and Fifth Debits were not authorised by the TAA. The appeal must therefore be allowed and, subject to the cross-appeal, the judgment in favour of the Company set aside.

The Company's cross-appeal

In its written submissions, the Company emphasised the regime established in 1980 by the Taxation Debts (Abolition of Crown Priority) Act 1980 (Cth), which inserted Pt 4-15 of Sch 1 to the TAA, including Div 260. Section 260-5 empowers the Commissioner to issue a garnishee notice. Section 260-45 provides for a different regime which, speaking generally, allows the Commissioner to recover a pro rata share of tax debts from a company in liquidation. Section 260-45 is as follows: "260‑45 Liquidator's obligation (1) This Subdivision applies to a person who becomes a liquidator of a company. (2) Within 14 days after becoming liquidator, the liquidator must give written notice of that fact to the Commissioner. (3) The Commissioner must, as soon as practicable, notify the liquidator of the amount (the notified amount) that the Commissioner considers is enough to discharge any *outstanding tax‑related liabilities that the company has when the notice is given. (4) The liquidator must not, without the Commissioner's permission, part with any of the company's assets before receiving the Commissioner's notice. (5) However, subsection (4) does not prevent the liquidator from parting with the company's assets to pay debts of the company not covered by either of the following paragraphs: (a) the *outstanding tax‑related liabilities; (b) any debts of the company which: (i) are unsecured; and (ii) are not required, by an *Australian law, to be paid in priority to some or all of the other debts of the company. (6) After receiving the Commissioner's notice, the liquidator must set aside, out of the assets available for paying amounts covered by paragraph (5)(a) or (b) (the ordinary debts), assets with a value calculated using the following formula: where: amount of remaining ordinary debts means the sum of the company's ordinary debts other than the *outstanding tax‑related liabilities. (7) The liquidator must, in his or her capacity as liquidator, discharge the *outstanding tax‑related liabilities, to the extent of the value of the assets that the liquidator is required to set aside. (8) The liquidator is personally liable to discharge the liabilities, to the extent of that value, if the liquidator contravenes this section."
The explanatory memorandum of the bill which inserted s 260-45 stated: "Out of any assets of the company remaining for ordinary creditors only a pro rata share will be required to be set aside for income tax, ie, no more than the Commissioner is … entitled to on a pro rata basis with ordinary creditors" (Taxation Debts (Abolition of Crown Priority) Bill 1980, Explanatory Memorandum, p 5).
It will be seen that, when a liquidator has been appointed, s 260-45 is mandatory.
In Bruton Holdings Pty Ltd (in liq) v Commissioner of Taxation [2009] HCA 32; 239 CLR 346 the High Court held that the general power to issue a notice under s 260-5 was inapplicable where a liquidator has been appointed to a company, because it would "disrupt" the proportionate system established by s 260-45 for liquidation: at [20]. The Company said that the same reasoning applied to exclude the provisions of Pt IIB of the TAA once a liquidator had been appointed. The Company submitted: "[T]here is no reason in principle why powers should be available to the Commissioner in circumstances when the relevant 'property' of the taxpayer is a chose in action to recover monies from the Commissioner, but not be available when the relevant 'property' is a chose belonging to the taxpayer to recover monies from a third party."
The Company also pointed to ss 500, 501 and 555 of the Corporations Act, noting that they were made applicable to the Commissioner by s 5A(2) of that Act.
Very considerable attention was given in the oral submissions advanced by the Company to s 553C, which is in the following terms: "553C Insolvent companies - mutual credit and set‑off (1) Subject to subsection (2), where there have been mutual credits, mutual debts or other mutual dealings between an insolvent company that is being wound up and a person who wants to have a debt or claim admitted against the company: (a) an account is to be taken of what is due from the one party to the other in respect of those mutual dealings; and (b) the sum due from the one party is to be set off against any sum due from the other party; and (c) only the balance of the account is admissible to proof against the company, or is payable to the company, as the case may be. (2) A person is not entitled under this section to claim the benefit of a set‑off if, at the time of giving credit to the company, or at the time of receiving credit from the company, the person had notice of the fact that the company was insolvent."
The essential point relied on by the Company was that the Commissioner (which had lodged a proof in the Company's winding up) at all times had notice of the fact that the Company was insolvent, and that the setting off of the credits and debits in the RBAs was at least analogous to (even if it did not squarely answer the description of) the limited setting off of mutual credits and mutual debts or other mutual dealings provided for in that section.
Section 553C was not mentioned in terms by the primary judge. That is not said by way of criticism, for during final submissions his Honour raised it with counsel then appearing for the Company, who disavowed reliance on it. For the reasons which follow, counsel was correct to do so.
The cross-appeal can be resolved relatively simply. To the extent that the Company's submissions are based upon ss 500 and 501 and 555, each of the sections presupposes an effect upon "property of the company". It is incorrect to regard the crediting on 7 February 2013 of the amount of $651,340.85 as "property of the Company" whether a chose in action of the Company or otherwise.
Prior to the Commissioner issuing the amended notice of assessment on 14 May 2013, the Company had no entitlement to claim payment of the sum identified in its amended return for the year ended 30 June 2010. After the amended notice of assessment was issued, provided the Commissioner had not had any occasion to act in accordance with Pt IIB of the TAA, the Company would have had administrative law remedies available to it to enforce its entitlement to payment (see Federal Commissioner of Taxation v Official Receiver (1956) 95 CLR 300 at 311 (Williams J), at 324 (Fullagar J, Dixon CJ agreeing with both); Health Insurance Commission v Peverill (1994) 179 CLR 226 at 242-243 (Brennan J). But in this case, the Commissioner exercised his powers and performed his duties under Pt IIB prior to 14 May 2013, so that on that date the only amount due to the Company was that in fact refunded to it.
It is true that the Company had a statutory right (which it had exercised) to apply to amend its assessment, and it had other administrative law rights in the event that the Commissioner failed to accede to its application, or even took too long to do so. However, the Company had no right to recover any money until such time as the Commissioner had completed the process mandated by Pt IIB of allocating and applying the amount in credit. (To be clear, nothing in these reasons is directed to the position where a delay by the Commissioner in issuing an amended assessment produces an advantageous result, because the delay which occurred between February and May 2013 is not, despite some suggestions in the written submissions, the subject of complaint: the Company maintained that "nothing should turn on the circumstance that the funds were held for any period of time".) It follows that the administrative law remedies possessed by the Company can be put to one side.
The consequence is that the operation of Pt IIB did not affect any property of the Company, and is unaffected by ss 500, 501 or 555. To the extent that the Company relies on s 553C, the section cannot apply in terms, as the Company accepts. The point of the Company's contention that it applied analogously was to support a submission cognate with that upheld in Bruton Holdings. But the reasoning in Bruton Holdings is inapplicable. That was a case where the general power in s 260-5 to issue a garnishee notice was inapplicable in a winding-up, which was governed by the special regime in s 260-45. The present is a case where there are two mandatory regimes: the regime in Pt IIB in accordance with which the Commissioner must allocate and apply amounts to the credit of the taxpayer, and the regime in s 260-45. There is no difficulty in applying both according to their terms.
Ultimately, the Company's submission amounts to a complaint that where after the commencement of liquidation the Company became entitled to a repayment from the Commissioner, it was not lawful for the Commissioner to net off tax debts owed by the Company before making that repayment. But that was what the Commissioner was required by Pt IIB to do.

Conclusion and orders

For those reasons, the Commissioner's appeal should be allowed and the Company's cross-appeal dismissed.
It was common ground, in light of a decision to provide funding under the ATO Test Case Litigation Program, that there should be no orders as to costs on either the appeal or cross-appeal.
The formal orders of the Court are: 1. Grant leave pursuant to s 500(2) of the Corporations Act 2001 (Cth) to the Commissioner to appeal. 2. Appeal allowed. 3. Cross-appeal dismissed. 4. Set aside order 1 made on 1 May 2015 and orders 1 and 2 made on 15 May 2015, and in lieu thereof order that the proceedings be dismissed with the plaintiffs to pay the defendant's costs of and incidental to the proceedings. 5. No order as to costs of the appeal or cross-appeal.

annexure ICP Statement of Account - Extract (505 KB, pdf)

Amendments 13 April 2016 - [59] - delete "account" [66] - delete "Property" and replace with "Priority" 23 October 2017 - [7] - "amounts" replaced with "accounts" DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 23 October 2017

Part IIB of Tax Administration Act 1953(Cth)

Taxation Debts (Abolition of Crown Priority) Act 1980(Cth)

Corporations Act 2001(Cth)ss 500, 501, 553

At a glance

Court

Decision date

Before

Source

Judgment (17 paragraphs)

Parties

Legislation Cited (5)

Cases Cited (6)

Cited By (6)