In Deputy Commissioner of Taxation v Pedley (No 2) (2018) FCA 2015 (Pedley), the Federal Court confirmed the wide discretion available to the Australian Taxation Office’s (ATO) to allocate payments made to it for tax debts especially where the taxpayer has not provided explicit direction as to what payments should be applied to which debts.
Pedley provides a salutary lesson to be clear and direct when making payments to the ATO if they are intended to be applied against specific tax debts.
On 21 January 2014, the Commissioner of Taxation (Commissioner) issued a Directors Penalty Notice (DPN) to Mr Pedley in relation to outstanding ‘Pay As You Go Withholding’ (PAYGW) liabilities of a company of which Mr Pedley was a director.
The DPN was issued under Division 269 of Schedule 1 of the Taxation Administration Act 1953 (TAA 1953). Division 269 imposes a duty on directors to ensure a company meets its obligations with respect to PAYGW or, alternatively, that the company either places itself into either administration or liquidation. It was common ground the company had made several payments to the Commissioner in relation to its tax liabilities.
As the payments by the company did not exactly match the liabilities, the issue before the Court was whether there was an agreement with the ATO that these payments were made, and should be applied, to reduce the PAYGW liabilities first and not the other tax liabilities of the company.
The Commissioner claimed that none of the payments made by the company were in relation to specific debts. Therefore, those payments were allocated by the ATO based on the principles in Practice Statement Law Administration 2011/20 (PS LA 2011/20) that the oldest debts of a company were to be paid first.
Mr Pedley’s position
Mr Pedley contended that due to communication between his accountant and the ATO it was clearly intended that the payments were intended to be applied against the PAYGW liabilities, which would have also reduced Mr Pedley’s DPN liabilities, and the ATO should have allocated the payments accordingly.
Federal Court’s decision
The Federal Court held there was no evidence of any agreement dealing with the allocation of payments and thus none of the payments for which the Commissioner sought recovery were payments made by the company in reduction of its PAYGW liabilities.
The Federal Court held further there was no basis for a conclusion that the payments made under the general payment arrangement were intended to be made by the company for the benefit of reducing the company’s PAYGW liabilities, nor that any such request was made at any time, and thus the payments were applied in reduction of the company’s debt.
In order to establish whether there has been a specific agreement between the parties, the Court considered relevant evidence including from the ATO officer responsible for the allocation of payments, internal ATO procedures, PS LA 2011/20 and the communications between the company and Mr Pedley.
The ATO officer made a statement during his evidence that if Mr Pedly had contacted the ATO and asked that the payments be allocated differently consideration would have been given to making a decision on allocation along those lines. Without any statement from Mr Pedley, the ATO applied PS LA 2011/20.
PS LA 2011/20
Generally, the common law provides that a person who owes two debts to the same person is entitled to nominate a payment be applied against one debt rather than the other. Even without a nomination, it may be clear in certain circumstances that the amount of a payment is to be allocated to a specific debt. However, the creditor is entitled to allocate payments to a specific debt when the debtor fails to indicate the specific debt at the time of the payment.
Section 8AAZLE of the TAA 1953 allows the Commissioner to set aside the taxpayer’s directions and allocate amounts to liabilities where it is not clear which liability is intended to be paid or reduced.
From PS LA 2011/20, the following are noted as examples where this may be done:
the payment either does not finalise outstanding tax debts or is less than the amount owed;
the law requires certain payments be allocated against specific debts (for example the superannuation guarantee charge); or
an account reconciliation is required to isolate certain component debts (for example, DPN liabilities).
Unless there are circumstances (see examples above) where the Commissioner may set aside the taxpayer’s directions, PS LA 2011/20 provides when allocating a payment for which no direction is received that all payments will be allocated to the earliest (oldest) debts within an account (a first-in-first-out basis), except where the payment relates to a ‘listed payment’.
‘Listed payments’, include payments made to reduce tax liabilities by instalment or liabilities relating to a DPN issued to a director of a company (such as Superannuation Guarantee Charge and PAYGW liabilities). However, even in the case of listed payments such as DPN liabilities, there must still be directions by the taxpayer or an arrangement between the taxpayer and the Commissioner on the allocation of the payment.
The decision in Pedley demonstrates the importance of taxpayers giving clear directions to the allocation of a payment to the ATO when it is intended that payment be applied to pay off a specific liability. Failure to do so will result in the payment being allocated to the ‘oldest’ liability.
The administrative practices in PS LA 2011/20 for allocating payments to certain liabilities are complex but a careful consideration of those practices is especially important when it comes to DPN liabilities of a company for which the director may be personally liable.
If you have any questions about the tax implications of Pedley or any other tax matter, please contact:
T +61 3 9611 0196
Level 5, 707 Collins Street, Melbourne, 3008, Victoria, Australia