In the matter of 4 Doonan Street Collinsville Pty Ltd (in liq) [2015] NSWSC 437

The method of allocation of the Debits to the RBA

The Plaintiffs also advanced a narrower attack on the method of allocation of the Debits to the income tax account, contending that it was not undertaken in compliance with s 8AAZLA of the TAA. The Plaintiffs submitted that: "The obligation in s 8AAZLA(2) to next apply [the Credit Amount] to 'tax debts that have been undertaken to that RBA' (emphasis added) was incapable of being fulfilled, as there were no other tax debts allocated to 'that RBA' at that time. The subsequent posting of five debits to the income tax RBA was not in compliance with the method set out in section 8AAZLA(2)." In oral submissions, Ms Collins submitted that, if the Commissioner was permitted to exercise the powers in Pt IIB Div 3 of the TAA 1953 in the course of a liquidation, he had not done so in accordance with the requirements of the statute (T37) and that if, at the date the liquidator was appointed, an RBA records a credit in favour of a company, the Commissioner cannot apply that credit against other debts which subsequently arise. I also do not accept that submission, because I do not accept its premise that s 8AAZLA(2) applies only to permit the application of a credit in the RBA to a tax debt allocated to the RBA at a point in time. That reading of the section would, among other things, deprive those provisions that authorise the Commissioner to defer paying out a credit of practical effect because, on that reading of the section, if further inquiries indicated that a further debit should be allocated to the RBA, the credit which existed at a point in time could nonetheless not be applied against that further debit.
The Plaintiffs also submit that ss 8AAZLG and 8AAZLGA of the TAA 1953 do not purport to qualify the Commissioner's obligation to refund an RBA surplus or credit that he does not allocate or apply under Pt IIB Div 3, arising under s 8AAZLF(1) of the TAA 1953. Even if that proposition were correct, it does not seem to me to have the consequence that, having obtained further information under those sections, the Commissioner cannot then take further steps under Pt IIB Div 3 which would reduce the RBA surplus or credit which existed at a particular point in time, and comply with the obligation under s 8AAZLF(1) of the TAA 1953 by refunding the amount of the RBA surplus or credit as properly calculated after taking those further steps.
However, other difficulties arose with the application of Method 1 in the relevant circumstances, at least so far as I am required to approach the matter on a somewhat artificial basis, arising from the admission made by the Commissioner that the income tax account was an RBA. The application of Method 1 under s 8AAZLA of the TAA 1953 to each of the Debits was also addressed by additional written submissions made, by leave, by the Commissioner on 10 March 2015 and by the Plaintiffs, in reply, on 12 March 2015.
The Plaintiffs submit that the first relevant allocation, for the purposes of s 8AAZL, was an allocation of the amount of the Credit Amount to the Company's income tax account on 7 February 2013, which required the Commissioner to treat that amount by the method specified in s 8AAZLA (Method 1). I accept that the liquidator's amendment of the tax return gave rise to a credit to which the Company was entitled under a taxation law (subject, of course, to the terms of Pt IIB Div 3), and that credit could have been allocated to the income tax account which is to be treated as an RBA, by reason of the admission made in the Commissioner's Defence. By reason of that admission, and the fact that the Credit Amount was applied to that account, it seems to me that I must infer that the Commissioner undertook an allocation of the Credit Amount to that account for the purposes of Pt IIB Div 3, absent evidence to the contrary. I am conscious that there is a degree of artificiality in that result where, but for that admission, that matter may have involved no more than a credit arising from the payment of income tax being recorded, as an accounting matter, to the Company's income tax account.
The Commissioner in turn submits, and I accept, that the First Debit involved an allocation, using Method 1, 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.
In their supplementary written submissions, the Plaintiffs also submit that the Commissioner was not authorised to make a "partial" allocation of the Credit Amount to the Company's Insolvency Integrated Client Account on the basis that s 8AAZLA of the TAA 1953 does not permit a "partial" allocation. It is not strictly necessary to determine that question given the finding that I have reached above. However, I should indicate that it seems to me that ss 8AAZL and 8AAZLA of the TAA 1953 permit an allocation that meets the description of an allocation of the specified kinds of amount (referred to in s 8AAZL(2) as "such amount" and in s 8AAZLA as "the amount") even if the allocation is not of the whole of the relevant amount. It seems to me that s 8AAZLA(1) supports that reading of the sections so far as it contemplates that "the amount" may be allocated to more than one debt, and the first such allocation would necessarily amount to a partial allocation of that amount. The Plaintiffs also submit that the Commissioner's claim that it "partially" allocated the Credit Amount to the Insolvency Integrated Client Account RBA is not supported by evidence. It seems to me that no evidence is required to support the Commissioner's characterisation of what occurred, beyond the documentary evidence of an allocation of less than the full amount of the Credit Amount to the Insolvency Integrated Client Account RBA to extinguish the debt then recorded in that account. However, I have held above that the allocation was not authorised under Method 1 in s 8AAZLA of the TAA 1953.
On the basis that the allocation of part of the Credit Amount in respect of the First Debit was not properly made, the Commissioner was then entitled, under s 8AAZL of the TAA 1953, to allocate the Credit Amount (which had not been validly applied to the Insolvency Integrated Client Account RBA) using Method 1, since it was an excess non-RBA credit for the purposes of s 8AAZLA(3) of the TAA 1953.
The Commissioner submits that the Second Debit made on 16 April 2013 involved an allocation of the excess non-RBA credit in the Company's income tax account, remaining after the First Debit had been allocated to the Insolvency Integrated Client Account RBA, to discharge unpaid income tax for the year ending 30 June 2010. The Commissioner points out that the Company's unpaid income tax debt was simply debited against the existing credit balance in the income tax account and, as I noted above, the Commissioner draws to the Court's attention that its position is that the income tax account is not, in fact, an RBA but accepts, for the purposes of these proceedings, that it is bound by its admission in its Defence that that account was an RBA. An allocation of the Credit Amount against the Second Debit in that manner is authorised by s 8AAZLA of the TAA 1953 where the debt for income tax was reflected in the income tax account, on the basis that it is treated as an RBA. The Commissioner submits, and I accept, that after the Credit Amount was applied against the Second Debit in the income tax account, s 8AAZLA(2) of the TAA 1953 had no operation as at 16 April 2013, because there was then no other tax debt that had been allocated to the income tax account. The remaining balance of the Credit Amount was then an excess non-RBA credit for the purposes of s 8AAZLA(3) which the Commissioner was authorised by s 8AAZL of the TAA 1953 to allocate or apply using Method 1.
The Commissioner submits that the Third, Fourth and Fifth Debits, each made on 29 April 2013, respectively amount to the allocation of the balance of the Credit Amount, being an excess non-RBA credit in the income tax account in the amount of $2,176 to the Insolvency Integrated Client Account RBA, $52,238.48 to the Integrated Client Account RBA and $35.45 to the Superannuation Guarantee Charge Integrated Client Account RBA. The Commissioner submits that, after those allocations, there were no further tax debts against which the Credit Amount was to be applied and the refund of the balance of the Credit Amount to the Company was made under s 8AAZLF of the TAA 1953. In their supplementary written submissions, the Plaintiffs submit that it was not open to the Commissioner to apply the Method 1 process to the Third - Fifth Debits, two months after the Credit Amount was applied to the Company's income tax account. I accept that submission, although the delay is not necessary to that result. As I noted above, 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 debts that were extinguished by the Third -- Fifth Debits were allocated to accounts other than the income tax account. For that reason, the Third -- Fifth Debits were not authorised by Pt IIB Div 3 of the TAA 1953. For completeness, I note that the Plaintiffs also submit that the recording of the Debits to the income tax account does not establish, as a matter of evidence, that the Debits had been allocated to (presumably, as distinct from recorded against) the income tax account. It seems to me that that inference can readily be drawn from the recording of the Debits against that account.

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