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[2010] FCA 642
respondent. Application dismissed; applicant to pay the respondent's costs in respect of the years ended 30 June 2001 and 30 June 2002 (see Orders at [1] and reasons at [43], [46]).
The Court held that the taxpayer was not entitled to PAYG withholding credits for 2000-01 and 2001-02 because the records and testimony showed no actual payment of salary or wages to her from which amounts were contemporaneously withheld. Ledger entries, drawings recorded as loans and year-end reconciliations do not substitute for actual payments or for withholding done at the time of payment; accordingly the claimed credits failed and the application was dismissed (see [33]–[43]).
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Patricia Cassaniti sought declaratory relief in the Federal Court that she was entitled to PAYG withholding credits under s 18-15(1) of Sch 1 to the Taxation Administration Act 1953 (Cth) for the years ended 30 June 2001 and 30 June 2002. Her tax returns for those years reported gross salary or wages from Reliance Financial Services Pty Ltd (RFS, trustee for the Reliance Services Trust) of $468,000 (2001) and $520,000 (2002), and she claimed credits for PAYG withheld of $234,000 and $252,200 respectively (see [5], [15]). The Commissioner had earlier conceded credits for years 1997–2000 after receiving documentary material, leaving 2001 and 2002 in dispute (see [4], [5]).
4 cited instruments linked from this judgment.
Evidence adduced revealed that the taxpayer did not receive salary in the conventional periodic manner. Instead she drew money from the business account as required for household expenses; her credit cards and certain household or building expenses were paid from the business accounts; such drawings and payments were recorded in RFS's books as loans and were reconciled against a wages figure at year end (see [16], [19], [23]). There was no evidence of regular EFT payments to the taxpayer (she did not have a bank account), no written employment agreement fixing gross salary, and the trustee employer had not lodged returns, payment summaries or BASs as required (see [19], [21], [25]). The taxpayer's evidence conceded she had no clear knowledge of how the gross figures were fixed and that she did not receive the net amounts reflected in the records (see [16], [31]).
Edmonds J concluded that the documents and testimony did not establish that salary or wages had been paid to the taxpayer such that PAYG amounts were withheld in the relevant years. Book entries and later reconciliations were insufficient to constitute withholding payments or contemporaneous withholdings under the statutory scheme. The application was dismissed and costs were ordered against the taxpayer for the relevant years (see [40]–[43], Orders).
The Court's decision turned on statutory construction of the withholding regime and the factual question whether any payment of salary or wages, as that term is used in the withholding provisions, had actually been made.
Statutory language: Edmonds J emphasised that a 'withholding payment' is a payment from which an amount must be withheld under Div 12 of Sch 1 to the TAA, and that the statutory verb 'pays' contemplates an actual payment of money to the employee (see [34]–[35]). The judge noted dictionary definitions and prior case law support interpreting 'salary' and 'wages' to involve payment of money, not merely entries (see [35]).
Authorities on book entries: The Court applied settled authority that mere journal or ledger entries, or post-hoc balancing, do not amount to payment for PAYE/withholding purposes. Edmonds J relied on Federal Commissioner of Taxation v Steeves Agnew (82 CLR 408) and Temples Wholesale Flower Supplies v FCT (29 FCR 93) for the proposition that half-yearly apportionments, journals or balancing entries are not the 'payment' event triggering withholding obligations (see [36]–[39]).
Contemporaneous withholding requirement: Section 16-5 requires withholding when the payment is made. The evidence established that the relevant payroll entries were not made contemporaneously with payments; at best they were month-end entries and many of the material records only came into existence after year end (see [41]–[42]). Reconciling loan accounts against wages at year end does not create the necessary contemporaneous arithmetic subtraction from a payment.
Factual deficits: The taxpayer could not show she received the net amounts cited in the records; there was no enforceable contractual entitlement to the gross sums recorded; and the trustee had not remitted withholding amounts to the ATO or lodged required summaries (see [29]–[33], [25], [19]). On this factual matrix, the Court concluded there was no payment of salary or wages from which an amount could be lawfully withheld, and therefore no basis for the credits claimed (see [40]–[43]).
Before this decision, the principles applied by Edmonds J were already established in authority:
Edmonds J applied these authorities to the specific features of the case (family company structure, drawings recorded as loans, absence of a manifest net payment) and reaffirmed that the statutory withholding obligations require an actual payment event and contemporaneous withholding. The decision thus reaffirms and applies pre-existing authorities rather than creating new law. It clarifies that in closely-held or informal payment arrangements (drawings, payments on behalf, year-end reconciliations) a taxpayer cannot rely on ledger entries alone to establish a statutory PAYG withholding event (see [33]–[41]).
After the decision, the clear takeaway is that where the payee does not receive the net pay by any clear transfer and entries are bookkeeping adjustments, courts will be reluctant to treat such entries as 'payments' triggering withholding obligations. The decision does not alter the statutory text, rather it confirms the existing interpretive line.
"The use of the word 'pays' refers to a payment of money to the employee." [35]
"Where no net amount is transferred to the bank account of the employee, ... and there is nothing but the existence of a book entry to establish a payment, it is not open to conclude that there has been a payment of salary or wages." [38]
"According to s 16-5 of Sch 1 to the TAA, an entity ... must do so when making the payment." [41]
"If on the evidence there was no payment of salary or wages, then there was no 'withholding payment' ..." [40]
The Court's reasoning is aimed at fact patterns with the following characteristics (see [29]–[33], [16], [19], [23], [41]):
Where these features exist, ledger entries and reconciliations will be insufficient to establish a withholding payment and contemporaneous withholding.
The judgment itself does not discuss later judicial treatment of this decision. Edmonds J applied earlier authorities (Steeves Agnew; Temples; Sargon) and did not purport to overrule or extend them beyond their application to the facts. To determine how later courts have treated Cassaniti, separate targeted research is required in case law databases and tax law reports to identify subsequent citations or applications of this specific decision. The judgment makes clear its reliance on established authorities and reasons from first principles of statutory construction and evidentiary sufficiency (see [36]–[41]).
Edmonds J resolved the specific question of entitlement to PAYG credits on the facts before the Court, but in doing so left or highlighted a number of issues that remain conceptually or practically open:
Payments on behalf and derivation of income: The judgment notes uncertainty as to whether payments made on the taxpayer's behalf (credit cards, building expenses) constituted derivations of income by the taxpayer or satisfied the net pay figures (see [30]). A factually different record showing clear attribution of those payments to the employee as income might lead to a different outcome.
Constructive payment or transfer in kind: The Court required actual payment of money or equivalent. The boundary between 'equivalent' payments (payments of liabilities discharged that clearly belong to the employee) and mere corporate expense payments recorded as loans remains fact-sensitive. The judgment suggests the Court requires clear evidence that payments discharged the employee's obligations and thus constituted remuneration (see [30], [31]).
Role of oral agreements in close companies: Here there was evidence of oral discussions about payment levels, but no enforceable written agreement. How much probative force an oral agreement or consistent practice might have in establishing payment and contemporaneous withholding (absent formal bank transfers) is not fully explored and would depend on the evidentiary matrix (see [20], [32]).
Relationship to employer non-compliance: The trustee/employer's failure to register properly, lodge BAS or remit withholdings influenced the Commissioner's approach and the evidentiary picture (see [25]). How the court would treat a case where the employer had otherwise complied administratively but payments were informal is an open factual question.
Collateral implications for assessments: The judge noted the Commissioner had assessed the taxpayer on the gross amounts and that there were live objections which the Court could not determine in this proceeding (see [44]). The interplay between disputing gross assessable income and disputing entitlement to PAYG credits remains a separate contested area in practice.
Each of these issues will turn on the factual texture of subsequent cases; practitioners should treat Cassaniti as authoritative for the proposition that ledger entries and post-hoc reconciliations are insufficient to establish withholding payments, and should structure evidence accordingly where PAYG credits are claimed for informal or in-kind remuneration arrangements (see [33]–[43]).
Introduction 1 This is the second of the two applications I heard seeking declaratory relief that each applicant in each proceeding is entitled to a credit equal to the total of amounts said to be withheld from withholding payments (being salary or wages) said to have been made to each applicant during relevant years of income within the meaning of s 18-15(1) of Sch 1 to the Taxation Administration Act 1953 (Cth) ('the TAA'). 2 The applicant ('the taxpayer') by her original application dated 5 July 2008 sought, inter alia, declaratory relief, in reliance on s 221H(2) of the Income Tax Assessment Act 1936 (Cth) ('the ITAA 36'), that the decision of the respondent ('the Commissioner') to refuse to allow her a credit in the sum of $80,000, $150,000, $150,000, $250,000, $250,000, $234,000 and $252,200 for deductions/withholdings said to be made from payments of salary or wages said to be made to her in the years ended 30 June 1996, 30 June 1997, 30 June 1998, 30 June 1999, 30 June 2000, 30 June 2001 and 30 June 2002 respectively, was an invalid decision. 3 By an amended application dated 30 September 2008, the taxpayer amended her claim for relief by excluding the year ended 30 June 1996, in respect of which the Commissioner had since allowed a credit, and by relying on, in lieu of s 221H(2) of the ITAA 36, s 18-15(1) of Sch 1 to the TAA in respect of the years ended 30 June 2001 and 30 June 2002. 4 By letter dated 21 May 2009 (Ex F), the Australian Government Solicitor, on behalf of the Commissioner, wrote to the solicitors for the taxpayer informing them that having regard to the affidavit evidence of Mr Sam Cassaniti (the taxpayer's former husband), including the group certificates for the years ended 30 June 1997 to 30 June 2000 inclusive that were exhibited to his affidavit of 30 September 2008 (Ex 2), the Commissioner was prepared to allow credits for the years of income ended 30 June 1997 to 30 June 2000 inclusive, as follows: 30 June 1997 - $159,351.39 30 June 1998 - $171,496.00 30 June 1999 - $171,496.00 30 June 2000 - $252,200.00 5 In consequence, the only years still in dispute are the years ended 30 June 2001 and 30 June 2002 ('the relevant years of income'). In the year ended 30 June 2001 the taxpayer returned income by way of salary or wages from Reliance Financial Services Pty Ltd ('RFS'), as trustee for the Reliance Services Trust ('the Trust'), in the sum of $468,000, and claimed as a credit, for Pay As You Go ('PAYG') amounts withheld, the sum of $234,000. In the year ended 30 June 2002 the taxpayer returned income by way of salary or wages from RFS, as trustee of the Trust, in the sum of $520,000, and claimed as a credit, for PAYG amounts withheld, the sum of $252,200. 6 The taxpayer's application and amended application sought to invoke the jurisdiction of the Court conferred by both s 39B(1) and s 39B(1A) of the Judiciary Act 1903 (Cth). The Commissioner raised a question as to the taxpayer's entitlement to the relief sought in reliance on the jurisdiction conferred on the Court by s 39B(1), but conceded that the taxpayer could invoke the jurisdiction conferred on the Court by s 39B(1A), which confers jurisdiction in any matter arising under the laws made by the Parliament. So, at the end of the day, the Commissioner did not take any point about the capacity of the Court to deal with the matter. 7 Likewise, in his written outline of submissions, the Commissioner raised matters which appeared to suggest that it was part of his case that the taxpayer was estopped from bringing her application. The matters raised were put as follows: (1) The jurisdiction of the Court under s 39B to grant relief by way of judicial review, in particular a claim for declaratory relief, is plainly discretionary. Relief may be refused under s 39B if the conduct of the party is inconsistent with the application for relief. It may be inconsistent, for example, if there is delay on the part of the applicant or the applicant has waived or acquiesced in the invalidity of the decision or does not come with clean hands. (2) Further, an important element in the exercise of the discretion is the question whether an alternative remedy was available to the taxpayer. According to the Commissioner, it was open to the taxpayer to have claimed a credit for the PAYG withholding in the proceedings in the Supreme Court of NSW in which the Commissioner obtained judgment by consent on 7 December 2007 for income tax and general interest charge in respect of the years of income ended 30 June 1997 - 2002 inclusive. In my view, that must be right: she was not prevented from doing so by s 177(1) of the ITAA 36 as the quantification of the credit stood outside the process of assessment; and s 177(1) was attracted only to the particulars of the assessment. Moreover, the Commissioner makes the observation that clearly the taxpayer was aware of the issue as can be seen from her objection which she had signed on 13 November 2007 prior to consenting to judgment. However, the taxpayer had not sought to pursue that issue in those proceedings; had not filed the present application until 7 July 2008, some seven months later; and now sought to assail the consequence of a judgment to which she consented by a collateral attack in this Court. Notwithstanding, on the last day of the hearing, senior counsel for the Commissioner made it clear that, despite the proceedings in the Supreme Court of NSW, no point was taken, in the way of either issue or Anshun estoppel, against the taxpayer's application in this proceeding. I therefore do not propose to consider the point. 8 Finally, by way of introduction, on the first day of the hearing I granted the taxpayer leave to file two affidavits out of time which necessitated granting the Commissioner an adjournment to consider whether he wished to put on any evidence in reply. As events transpired, he did not do so. At the time of granting the taxpayer leave to file the two affidavits out of time, I indicated I would publish my reasons for doing so when publishing my reasons for judgment. The first affidavit was an affidavit sworn by Mr Sam Cassaniti on 7 September 2009 (Ex 3). He had sworn an earlier affidavit on 30 September 2008 (Ex 2). The second affidavit was an affidavit sworn by Ms Kim Thorn on 6 September 2009 (Ex 4). I granted leave for the taxpayer to file these affidavits out of time because it seemed that nothing new was raised by them; they merely fleshed out, by recourse to documents which had not previously been brought forward, the taxpayer's case as it had always been articulated. Moreover, even if the Commissioner's case was marginally prejudiced by this evidence, and I could not see that it was, it was not a prejudice which could not be cured by the short adjournment I granted.
The Issue 9 As indicated in [1] above, the issue before the Court is whether the taxpayer is entitled to a credit equal to the total of amounts said to be withheld from payments of salary or wages said to have been made to her in each of the relevant years of income within the meaning of s 18-15(1) of Sch 1 to the TAA. 10 The case advanced by the taxpayer is that during the relevant years of income, she was employed by RFS, as trustee of the Trust; that she is entitled to a credit, in the sum of $234,000 in the 2001 year and in the sum of $252,200 in the 2002 year, for PAYG amounts said to be withheld from payments of salary or wages said to be made to her. 11 The case advanced by the Commissioner is that the amounts of PAYG alleged to have been withheld in the relevant years of income are fictional, inflated or both; as are the amounts of salary or wages said to have been paid to her by RFS, as trustee of the Trust. 12 The Commissioner observed that consideration of the amounts which the taxpayer claims were withheld in the relevant years of income shows that they are more than what was required to be withheld under the tax tables and would have generated a significant refund:
Year Amount said to have been withheld annually Amount said to have been withheld weekly Annual amount as per tax tables Weekly amount as per tax table 2001 468,000 234,000 4,500 214,360 4,122.31 2002 520,000 252,200 4,850 239,580 4,607.31
Legislative Scheme 13 The legislative scheme, both its history and the current withholding system in Pt 2-5 of Sch 1 to the TAA, is set out in [12] to [41] inclusive of my reasons in David Cassaniti v Commissioner of Taxation [2010] FCA 641.
The Taxpayer's Evidence 14 The taxpayer swore an affidavit on 5 July 2008 (Ex 1). In relation to the year ended 30 June 2001, she deposed that she was employed by RFS as trustee of the Trust; that she earned $468,000 and had $234,000 deducted for PAYG tax from her salary; and that: 'I am not aware whether the PAYG tax was deducted from my salary'. In relation to the year ended 30 June 2002, she deposed that she earned $520,000 and had $252,000 deducted for PAYG tax from her salary; and that: 'I am aware whether the PAYG tax was deducted from my salary'. In cross-examination it was suggested to the taxpayer that the word 'not' should have appeared after the words 'I am …' to make it consistent with what she deposed to in relation to the 2001 year. She responded that she is now aware that PAYG tax was deducted; that at the time of swearing her affidavit she was not aware whether deductions had been made because she had forgotten about the PAYG summaries; she did not have access to them at the time. She conceded that the only basis of her present belief that PAYG tax was deducted are the PAYG summaries for the 2001 and 2002 years (Ex 5). 15 The taxpayer exhibited to her affidavit a copy of her income tax returns for the years ended 30 June 2001 and 30 June 2002 as lodged. In her return for the 2001 year, the taxpayer returned income by way of salary or wages of $468,000 and claimed a credit for a PAYG withholding amount of $234,000. That was consistent with the terms of her affidavit. In her return for the 2002 year, the taxpayer returned income by way of salary or wages of $520,000 and claimed a credit for a PAYG withholding amount of $252,200, $200 more than she deposed to in her affidavit. This was not explored with her in cross-examination, presumably because the PAYG summary for the 2002 year shows a PAYG amount withheld for that year of $252,200 suggesting that the amount appearing in the body of her affidavit should have read '$252,200', and not '$252,000'. 16 In the course of cross-examination the taxpayer said that: (1) She did not receive money in the traditional way that employees receive remuneration, that is, a regular amount of money at a regular time, typically weekly or monthly. That from time to time she drew money as she needed it for living expenses; this was also accommodated by her husband giving her cash; there was no regularity in time or amount, it was simply on a needs basis; enough to keep the functioning of the home and household for one or two weeks; in terms of amounts, something like $1,000 or $2,000. (2) Her credit card and other account expenses were paid through the business; that her credit card was used for items of expenditure such as petrol and clothing for herself and her two children so that the cash she drew or received from her husband was probably all used for grocery shopping. (3) She had no knowledge that money which was drawn out of the business account for her expenses was recorded as loans by RFS. (4) There was no written agreement by which her gross salary was fixed. She imagined that her husband set the figure of $468,000 for the 2001 year 'because I had nothing to do with it'. (5) Her question had always been why her income was so high, but she never got an answer to that. (6) The state of finance of the business towards the end of the year 2001 was such that it was not capable of paying her a salary of $468,000; nor was it capable of paying the withholding tax of $234,000. (7) She did not have any discussions with her husband as to what she was to be paid in the 2002 year. (8) She did not receive the net amount of salary or wages for the 2002 year ($267,800); it was unreasonable for the business to pay her that kind of money and she could not understand it: 'I didn't ask for it, and it was never discussed.' 17 In response to questions I put to the taxpayer she said that: (1) She did not receive the net amounts of wages or salary in either the 2001 year, namely, $234,000, or in the 2002 year, namely, $267,800. (2) She was not aware of any loan accounts she had with any entities associated with her husband's business; nor of any credits to any such loan accounts; nor that any drawings she made might have been booked as loans against wages.
Evidence of Mr Sam Cassaniti 18 As indicated in [8] above, Mr Sam Cassaniti swore two affidavits, one on 30 September 2008 (Ex 2) and a second on 7 September 2009 (Ex 3). Annexed to Ex 3 as annexure 'C' was a spreadsheet summary of wages paid by RFS, as trustee for the Trust, to 24 employees (including the taxpayer) for the year ended 30 June 2001 and 14 PAYG Payment Summary forms for that year for 14 of those employees (including the taxpayer). Annexed to Ex 3 as annexure 'D' was a spreadsheet summary of wages paid by RFS, as trustee for the Trust, to 24 employees (including the taxpayer) for the year ended 30 June 2002, 23 PAYG Payment Summary forms for that year for 23 of those employees (including the taxpayer) and a PAYG Payment Summary Statement for that year for all employees of RFS. 19 In the course of cross-examination, Mr Cassaniti confirmed or said that: (1) The taxpayer was not paid by regular EFT into a bank account as she did not have a bank account. (2) As at 30 June 1999 RFS was in debt to the Australian Taxation Office ('ATO') in the sum of $254,581.99 for PAYG withholdings; that as at 30 June 2000, this had increased to $473,697.32; that as at 30 June 2001, this had increased by a further $400,000; and that there had been no remittances of the $691,790.20 said to be withheld from wages during the year ended 30 June 2002. (3) When his wife required money for expenses she drew money out of the business account; so did he; that transactions of that nature were recorded as loans: 'It was offset against a loan account'; her credit cards were paid, as well as motor vehicle and house expenses: 'We were building a house'; that everything that came out of the cheque account that was drawn to the taxpayer or himself would be offset against the loan account and then reconciled with the wages at the end of the year: 'But I didn't do it every year, because I didn't have the time'. (4) There was no wages account shown within the accounting records, only a loan account: '[A]nd then you journalled out at the end of the year to show the wages. Do you understand?' (5) He could not recall how the taxpayer's gross wage of $468,000 for the 2001 year was fixed or worked out. (6) The taxpayer was paid the net amount of her wage for the 2001 year, namely, $234,000 in the form of payment of her credit cards, the bricks for the house, the concrete, the excavation: 'She got it' - these payments were sourced from the business bank accounts and he would find them if he had to, but he hadn't tried to find them: 'I didn't think it was important'. (7) He could not recall how the taxpayer's gross salary of $520,000 for the year ending 30 June 2002 was fixed or structured: 'We calculated it on some basis. I can't remember exactly how it was, but that is how it worked out'. There was nothing in the nature of an employment agreement which recorded the sum. (8) The PAYG withheld of $252,200 in the 2002 year was arrived at from the wages payment slip but when reminded that there had not been any wages as such, he said: 'But if you keep the wages book to show what the gross of the tax is, and there is the net, at the end of the year reconcile what you actually drew. If you only drew half of it then you are still owed half by the company. If you drew more, then you owe the company money, so it is quite simple.' 20 In response to questions I put to Mr Cassaniti he said that: (1) He always discussed with the taxpayer and Ms Thorn at the beginning of the year what amounts he and the taxpayer were going to be paid for the year; there was an oral agreement between him and the taxpayer as to how much each was to be paid. (2) When he wanted money he did the same thing as the taxpayer - he got the taxpayer to draw a cheque in his favour; when she wanted money, she drew a cheque in her favour or to MasterCard or for motor vehicle expenses: '[B]ut the wages themselves were based on the wage page, the wage - it's not a wage book, it's a wage summary sheet that was done monthly with the tax deducted, bang, bang, bang'. (3) He gave the taxpayer cash, rarely but sometimes, from the business. 21 Insofar as there are inconsistencies between the evidence of Mr Cassaniti and the evidence of the taxpayer, and there are a number, I prefer the evidence of the taxpayer.
Evidence of Ms Kim Thorn 22 Ms Kim Thorn swore an affidavit on 6 September 2009 (Ex 4). I was informed that Ms Thorn was not available to be cross-examined on her affidavit owing to illness in her family which prevented her attending Court. Senior counsel for the Commissioner did not press for her to be called saying that he had explored directly with the taxpayer and Mr Sam Cassaniti the matters he would have otherwise put to Ms Thorn. 23 In her affidavit, Ms Thorn deposed: '8. All the wage records for the staff (other than Sam and the Applicant) were kept on MYOB. For privacy reasons the wages of Sam and the Applicant were recorded in a separate wages book where the entries were made by me manually writing up the wages book each month. 9. I manually wrote up the wages book for the financial years ended 30 June 2001 and 2002. The wages book considered of loose sheets in which holes were punched and the sheets placed within a folder. Each of Sam and the Applicant had a separate wage sheet. A (blank) example of the wage book is annexed and marked "A". 10. In the wages book for each of Sam and the Applicant I recorded in each column the following: (a) first column (headed weekly pay period ending): the month ending date; (b) second column (ordinary pay): the gross salaries and wages for the month; (c) third column (overtime), fourth and fifth column; nothing; (d) sixth column: the tax deducted - in this regard I deducted the amount instructed by Sam and the Applicant, as the deduction was greater than the scales issued by the Australian Taxation Office for salaries paid on a monthly basis; (e) seventh column - nothing. (f) eighth column (net payment): the amount remaining after deducting the tax from the gross salary and wage; (g) ninth column (employer award superannuation contributions): I was instructed not to deduct any amount for superannuation; (h) tenth column (Signature): nothing. 11. The only two person that did not have their pay telegraphically transferred on a weekly basis were Sam and the Applicant. 12. The Applicant when she required money for expenses simply drew the money out of the business account and the transactions were recorded as loans by the company. At the end of the year a reconciliation was done between the loan account and the wages account.'
Evidence of Mr Gary Elmer 24 Mr Gary Elmer, an officer within the ATO, swore two affidavits, one on 6 March 2009 (Ex B) and the second on 5 May 2009 (Ex C). He was not required for cross-examination. 25 The Commissioner's records as set out in Ex B disclosed the following: (1) That while RFS, as trustee of the Trust, was registered for withholding purposes from 1 July 2000, this registration had been initiated by the Commissioner on 14 September 2006; (2) that no TFN declaration in the name of the taxpayer was lodged with the Commissioner; (3) that the trustee, RFS, had never lodged an income tax return; (4) that the trustee had not lodged with the Commissioner an annual payment summary report as required by subs 16-153(2)(a) or subs (3) of Sch 1 to the TAA; (5) that no BAS were lodged by the trustee; (6) that when required by the Commissioner to supply documentation to support her claim for credits the taxpayer had failed to do so.
Analysis of the Submissions 26 The taxpayer submitted that having regard to the documentary evidence and, where a document was not available, the oral evidence adduced as to the contents of the document, the Court should be satisfied that amounts were withheld from payments of salary or wages made to the taxpayer during the relevant years of income equal to the credit claimed by her in each of those years, namely, $234,000 in the 2001 year and $252,200 in the 2002 year. This submission was put on the basis that a 'withholding' under the PAYG withholding system involved no more than a 'deduction' under the PAYE deduction system and that did not specifically require the retention of the amount so deducted in any identifiable form, but was satisfied by an 'arithmetic subtraction' from the gross wages of the employee and the payment of the resulting remainder, that is, the net pay, to the employee: Deputy Commissioner of Taxation (Vic) v Sargon (1985) 16 ATR 355 at 358 per Ormiston J. 27 The documentary evidence upon which the taxpayer relied for her submission in [26] above consisted of: (1) Her tax returns as lodged showing in the 2001 year a gross salary of $468,000 and a credit for PAYG withholding of $234,000; and in the 2002 year a gross salary of $520,000 and a credit for PAYG withholding of $252,200. (2) Business records of RFS comprising: (a) a spreadsheet summary of wages paid by RFS, as trustee of the Trust, to 24 employees (including the taxpayer) for the 2001 year showing in the case of the taxpayer, gross salary of $468,000 and PAYG withheld of $234,000 and a spreadsheet summary of wages paid by RFS, as trustee of the Trust, to 24 employees (including the taxpayer) for the 2002 year showing in the case of the taxpayer, gross salary of $520,000 and PAYG withheld of $252,200; (b) PAYG payment summaries for 14 of the employees (including the taxpayer) in the 2001 year and for 23 of the employees (including the taxpayer) in the 2002 year; and (c) A PAYG Payment Summary Statement (albeit only for the 2002 year) for all employees that was consistent with the spreadsheet in (a) and the individual PAYG payment summaries in (b). 28 The oral evidence upon which the taxpayer relied for her submission in [26] above consisted of: (1) The statements made in her affidavit (Ex 1) that in the 2001 year, she earned $468,000 and had $234,000 withheld for PAYG from her salary; that in the 2002 year, she earned $520,000 and had $252,000 withheld for PAYG from her salary. (2) The statements made in the affidavit of Ms Kim Thorn (Ex 4) set out in [23] above. 29 Where an employee is dealing with his or her employer at arm's length and there are no affiliations or circumstances which might infect or colour such a characterisation of their course of dealing; and where one can independently identify both the employee's gross salary by reference to a contractual entitlement or otherwise, and his or her net pay by reference to a credit to his or her bank account or otherwise, such evidence upon which the taxpayer relies as set out in [27] above would, as a general rule, be sufficient to prove, on the balance of probabilities, that a withholding of a PAYG amount equal to the difference between the gross salary and the net pay had occurred, even where the amount of the withholding was not remitted by the employer to the ATO as required by Pt 2-5 of Sch 1 to the TAA. But the factual context in which the issue arises in this case is very different from the hypothesis upon which that conclusion is drawn. This can be illustrated by reference to three circumstances peculiar to this case. 30 First, the taxpayer was not remunerated in the traditional way that employees are paid, namely, by weekly or other periodical payments of fixed amount. She drew money on the business account as she needed it for her household requirements, in particular, groceries, but also for the needs of herself and her children, and from time to time she received cash from her husband. Her credit card and other account expenses were paid out of the business account as were expenses incurred in relation to the building of a new house although it is not clear from the evidence whether the payment of these latter expenses discharged the taxpayer's liability or that of another person; this may be important to a conclusion as to whether the payment of such expenses constituted a derivation of income by the taxpayer. 31 Second, there is absolutely no evidence before the Court as to how much the taxpayer received by way of these drawings or payments, in either of the relevant years of income, nor is there any evidence of the amount of payments made on her behalf, that is, which discharged obligations for which she was liable, in either of those years. The contrast with the traditional hypothesis in [29] above, where the net pay can be readily ascertained, is stark. Indeed, the evidence of the taxpayer was that she did not receive the net pay as shown in the documentary evidence upon which she relied - $234,000 in the 2001 year and $267,800 in the 2002 year - and there is no evidence before the Court which would enable one to conclude that the net pay figures in the documentary evidence were made good by also taking into account payments made on her behalf. 32 Third, the taxpayer's evidence, confirmed by Mr Cassaniti, that she had no contractual entitlement in either of the relevant years of income to the amounts shown in the documentary evidence as her gross salary; her evidence that her gross salary was fixed or set by her husband and that she had nothing to do with it and that she could never understand why it was so high but she never got an answer to that question, make it impossible to independently identify her gross salary as being consistent with that shown in the documentary evidence. 33 In any event, for the reasons more fully developed below, the documentary evidence set out in [27] above and the statements made in the affidavit of Ms Thorn set out in [23] above, detailing the entries she made in the wages book (the wages book itself not being able to be located) she manually wrote up in the relevant years of income, do not, either alone or together, establish: (1) That withholding payments (being salary or wages) were made to the taxpayer in the relevant years of income; and (2) that PAYG amounts were withheld from payments of salary or wages to the taxpayer in those years. 34 First, there is a real question whether in the absence of a valid agreement a mere crediting of an amount by way of salary and wages in the employer's wages books without any physical or electronic transfer of funds amounts to a 'withholding payment'. Section 995-1 of the Income Tax Assessment Act 1997 (Cth) relevantly defines a withholding payment to mean a payment from which an amount must be withheld under Div 12 of Sch 1 to the TAA. The relevant withholding provision is s 12-35 which introduces the concept of 'salary' and 'wages' that an entity 'pays' to an individual as an employee. 35 The use of the word 'pays' refers to a payment of money to the employee. This construction is supported by the references to 'salary' or 'wages'. The Oxford English Dictionary defines 'salary' as a 'fixed payment made periodically as compensation for regular work'. The ITAA 36 contained a definition of 'salary and wages' in former s 221A for the purposes of the PAYE system: 'payments made: (a) under a contract that is wholly or principally for the labour of the person to whom payments are made.' 36 In Federal Commissioner of Taxation v Steeves Agnew and Co (Vic) Pty Limited (1951) 82 CLR 408, a manager had been employed by a company upon the basis that he was entitled to draw monthly in anticipation of remuneration which was to consist of a share of profits calculated half yearly after balancing the employer's accounts. Dixon J (as his Honour then was) held that the half-yearly ascertainment did not constitute a payment of salary or wages and that there was no definite transaction which would serve to fix a 'time of making payment' within s 221C(1) of the ITAA 36, subsequently s 221C(1A), the statutory deduction obligations under the former PAYE system equivalent to ss 12-35 and 16-5. At 421, his Honour said: 'Section 221C appears to be directed to the making of deductions from sums of money paid over and not to the discharge of an obligation for salary or wages by other means.' 37 In Temples Wholesale Flower Supplies Pty Ltd v Federal Commissioner of Taxation (1991) 29 FCR 93, the question was whether a mere journal entry, unsupported by any agreement, is enough to constitute a payment of salary or wages. A Full Court held that it was not. 38 Where no net amount is transferred to the bank account of the employee, as was the case here, or handed to the employee in a wage packet and there is nothing but the existence of a book entry to establish a payment, it is not open to conclude that there has been a payment of salary or wages. In the words of Dixon J in Steeves Agnew at 422: 'There was no definite transaction after the remuneration was ascertained amounting to payment, and as such affording a specific occasion for the making of the deduction at the rates prescribed.' 39 Moreover, there is no evidence of any agreement, express or implied, that salary or wages were to be paid by journal entry. On the authorities it is clear that entries of this kind, standing alone, do not evidence the transaction: see, Temples Wholesale Flower Supplies at 100 - 103. 40 If on the evidence there was no payment of salary or wages, then there was no 'withholding payment' from which an amount could be withheld for the purposes of s 12-35 of Sch 1 to the TAA. 41 Second, according to s 16-5 of Sch 1 to the TAA, an entity that is required to withhold an amount from a payment under Div 12 must do so when making the payment. Even if the amount which the taxpayer drew or was paid out of the business account, or the amounts which were paid out of the business account on her behalf, were payments of salary or wages and therefore withholding payments, neither the documentary evidence set out in [27] above nor the entries in the wages book to which Ms Thorn deposes, constitutes a contemporaneous withholding of amounts of PAYG from such payments of salary or wages. Such records or entries do not constitute a contemporaneous arithmetic subtraction from such payments because they were not recorded or entered at the time the payments were made. At the earliest, the entries in the wages book were entered at the end of each month and the other documentary evidence in [27] above only came into existence after the end of each year. 42 Moreover, the reconciliation which occurred at the end of the financial year was not a payment of salary or wages affording a specific occasion for the making of a withholding of PAYG: see Steeves Agnew at 422 per Dixon J (at [38] above).
Conclusion 43 For the foregoing reasons, the taxpayer's amended application in respect of the relevant years of income must be dismissed. 44 I am mindful that the Commissioner has assessed the taxpayer on the gross amounts of salary or wages returned by her - $468,000 in the year ended 30 June 2001 and $520,000 in the year ended 30 June 2002. I am also mindful that the taxpayer may wish to revisit that issue; there are, I understand, 'live' objections in respect of each of those years although, at the present time, the grounds may not be sufficiently comprehensive to cover that issue. However, this is not a matter I can accommodate, even if the taxpayer wishes to take it further, in the present proceeding. 45 I see no utility in making orders of the kind sought by the taxpayer in respect of the years of income ended 30 June 1997 to 2000 inclusive as credits in respect of those years have been allowed to the taxpayer and notice to her has been given. I do not propose to make any order as to costs in respect of those years. 46 The taxpayer must pay the Commissioner's costs in respect of the relevant years of income. I certify that the preceding forty-six (46) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Edmonds.
Patricia Cassaniti
Commissioner of Taxation
Application dismissed; applicant to pay the respondent's costs in respect of the years ended 30 June 2001 and 30 June 2002 (see Orders at [1] and reasons at [43], [46]).