The accountant who was liable

The following is a de-identified summary of a pattern of facts and legal arguments that have occurred to several bookkeepers and accountants. Some of these matters have concluded with the bankruptcy of the accountant involved, and other matters are ongoing at the time of writing. At essence is the question of what constitutes a payment. The accountant operated a bookkeeping and payroll service. The accountant’s usual payroll services and procedures were as follows:

• A client would send the accountant the details of their employees’ timesheets and salaries for a payment period (typically a fortnight);
• The accountant would calculate from that information the client’s payroll obligations, including gross wages per employee, net wages to pay each employee, superannuation guarantee for each employee to be paid into the superannuation fund’s clearing house, PAYG withholding to be remitted to the ATO, and payroll tax (if applicable);
• The accountant would have third party access authorisation to the client’s bank accounts and prepare an Australian Banking Association (ABA) file showing the net amount to pay to each payee that would allow all employee net wages to be processed for payment in one batch (rather than processing each individual payment);
• the accountant would send the payroll summary to the client for approval, and then upload the ABA into the client’s bank account and request, via the bank, for the client to authorise the payment of the net wages and superannuation guarantee via the client’s bank account in accordance with the ABA;
• the client would then organise the payments of PAYG withholding and payroll tax in accordance with the calculations of the accountant; and
• the accountant was paid their typical hourly charge rate (a modest sum). One client of the accountant operated a labour hire business (the labour hire client):
• the accountant and the labour hire client were unrelated entities;
• the accountant was instructed by the director of the labour hire client (the director) to process payroll and do bookkeeping for employees of the labour hire client. The accountant later found out that:
• the director was a puppet or patsy for some rogue operators; and
• the rogue operators were using the labour hire client as part of a PAYG scheme. Under this scheme, an amount of PAYG was not remitted and was instead pocketed by the rogue operators. The accountant was scrupulous in their own affairs and paid their own employees, remitted the necessary withholding amounts, and disclosed and lodged their relevant PAYG withholding amounts through their monthly instalment activity statement by the lodgment due dates. The ATO did not assert that the accountant was one of the rogues behind the PAYG scheme. The ATO investigated the rogue operators and sent out seven-figure assessments to all persons involved, including the director and the accountant:
• the Commissioner informed the accountant that the accountant had miscalculated their PAYG withholding obligations. The Commissioner stated that the amounts disclosed in the accountant’s monthly activity statements were understated, as they did not include the amounts which relate to the labour hire client;
• the Commissioner pointed to the obligation to withhold PAYG under s 12-35 of Sch 1 to the Taxation Administration Act 1953 (Cth) (TAA53) lies on the payer of the salary and wages. This section states that an entity must withhold an amount from salary, wages, commission, bonuses or allowances that it pays to an individual as an employee (whether of that or another entity);
• in the Commissioner’s view, the accountant was the payer of salary and wages, by reason of uploading the ABA file, and therefore responsible to withhold PAYG;

• the entity responsible for withholding PAYG under s 12-35, Sch 1 TAA53 is also obligated to pay those amounts to the Commissioner under s 16-70, Sch 1 TAA53;
• s 16-70 requires a taxpayer to pay to the Commissioner all amounts withheld under Div 12, Sch 1 TAA53. This includes amounts of PAYG withholding payable;
• s 16-150, Sch 1 TAA53 states that an entity that must pay an amount to the Commissioner under s 16-70(1) must notify the Commissioner of the amount on or before the day on which the amount is due to be paid (regardless of whether it is paid). The notification must be in the approved form and lodged with the Commissioner;
• s 268-10, Sch 1 TAA53 empowers the Commissioner to estimate unpaid amounts of PAYG for entities required to withhold an amount under s 16-70 TAA53; and
• in the event that the PAYG estimates were incorrect, the Commissioner invited the accountant to provide a statutory declaration stating as such and the amount that the estimates should be reduced. Given that the PAYG estimates are an immediately enforceable debt, with no right of reply, objection or appeal, the provision of a statutory declaration to inform the Commissioner of an incorrect estimate is an important right of the taxpayer. The accountant lodged a statutory declaration to the Commissioner, stating that the PAYG estimates that
the Commissioner made by reference to the amounts transferred according to the ABA files were not subject to PAYG withholding per s 12-35, Sch 1 TAA53 because they were payments on behalf of another entity and that the accountant did not employ the staff the subject of the PAYG estimates. The Commissioner disregarded the statutory declaration with the following reasoning:
• TR 2005/16 states: “66. Where the payment is a reward for services provided by the employee to the employer in the capacity of employee, the payment would be incidental to the employment regardless of whether the payment is made by the employer or another entity. If the payment is a payment of salary, wages, commission, bonus or allowance then the entity that made the payment will be required to withhold under section 12-35 of Schedule 1 to the TAA 1953.”
• in David Cassaniti v FCT 1 (Cassaniti), Edmonds J held that the obligation to withhold lies with the payer of the salary or wages, irrespective of whether that payer was the employer or otherwise;
• in Sunraysia Harvesting Contractors Pty Ltd as trustee of the Sunraysia Harvesting Contractors Trust and FCT 2 (Sunraysia Harvesting Contractors), Deputy President PE Hack provided an introduction to an arrangement between Sunraysia Harvesting Contractors and three other companies which were contracted to engage and pay employees, and, necessarily, to account for PAYG deductions and for payroll tax if necessary:

“38. For the present case the Commissioner alleges that the arrangements between Sunraysia and Danood, Jameron and Kigra were not as they appear to be. Those companies, it is said, were not genuine arm’s-length entities, contracting with Sunraysia to provide the labour required by Sunraysia’s customers and employing the workers required to meet its contractual obligations…

39. It is for Sunraysia to show that the assessments were excessive and it seeks to do so by showing that the arrangements with Danood, Jameron and Kigra were genuine and real and that there was no disconnect or inconsistency between appearance and reality of documents and actions.

40. In my view Sunraysia has failed to discharge that onus. For the reasons that follow, I am not satisfied, on the balance of probabilities, that payments by Sunraysia to Danood, Jameron and Kigra were made in accordance with a contract between those entities for the subcontracting company to provide labour to meet Sunraysia’s obligations to growers. Indeed, were it necessary, I would have been affirmatively satisfied that Sunraysia’s arrangements with Danood, Jameron and Kigra were never intended to create any legally enforceable obligation between Sunraysia and the subcontractor and were simply part of a scheme devised by SME’s R Us to allow Sunraysia to avoid remitting PAYG deductions for persons who were, and remained throughout, its employees.” The problem with the Commissioner’s reasoning is as follows:

• the Commissioner had drawn the wrong conclusion from the cases cited:
• in Sunraysia Harvesting Contractors, the court held that the employer and the payer were not dealing at arm’s length, and were operating together as part of a scheme. In the above discussion about the accountant who was liable, the Commissioner had not asserted that the accountant was dealing at anything other than arm’s length with the labour hire client, and so this seems irrelevant. It would, however, be a reasonable basis to assess the rogue operators behind the labour hire client;
• in Cassaniti, the employers were paying their employees indirectly through a third party. The third party made payments at the direction of the employers. In each instance, the employers were the relevant payers of the salary or wages of the applicant, and not the third party who merely acted as a conduit under the direction of the employers;
• in the present case, the labour hire clients had a contractual obligation with the host employers to pay the employees on their behalf. Therefore, they were the payers of the salaries and wages as per the contractual agreement; and
• even if the Commissioner’s view in Cassaniti was to be applied to the current facts, the employers would be the host employers, and the third party meeting the payroll obligations would be labour hire client as they were contracted by the host employers to pay the employees. Therefore, applying the Commissioner’s interpretation of the case, the labour hire client, being the payer of the salaries and wages, is responsible for withholding PAYG amounts under s 12-35, Sch 1 TAA53, and subsequently responsible for paying these amounts to the Commissioner per s 16-70, Sch 1 TAA53. The accountant, on the other hand, had no contractual relationship with the host employers or their employees. Their only obligation was a contractual one with the labour hire client;
• it was said by Edmond J in Cassaniti that:

“170. In the normal course, it could be expected that a payer of salary of wages who was making withholdings at the required rate would have in its possession, accounting and wage records showing an arithmetic subtraction from a gross amount and payment of the net amount …”

The labour hire client would instruct for payment to be made by authorising such payments, which provided the amount (being the net wages) to be transferred to the payees;

• in Cassaniti, Edmond J further stated that:

“164. Where an amount has been set aside by the payer and is quarantined in a bank account pending its remission to the Commissioner clearly the presence of the funds so designated will demonstrate that a withholding has been made.”

At the directions of the labour hire client, the accountant calculated the entirety of the PAYG withholding amounts so that the labour hire client could retain them. Therefore, the PAYG withholding amounts were set aside at the direction of labour hire client, and quarantined in their accounts to be remitted to the Commissioner;

• the labour hire client (or at least the rogues behind it) was aware of their responsibility to withhold PAYG amounts under s 12-35, Sch 1 TAA53. The labour hire client did withhold the payments required by them under s 12-35 — they just did not remit it to the Commissioner. Consequently, the labour hire client (not the accountant) had an obligation to pay these amounts to the Commissioner per s 16-70, Sch 1 TAA53;
• whether the accountant made the payment through an ABA file that was approved by the director, or had direct access to the bank account of the labour hire client with permission to make payments, or even if the salary and wages were paid from the bank account of the accountant, is of no relevance as it is not considered by the courts to be a determining factor as to who was responsible for the payments being made to the Commissioner under s 16-70:

• in Naumcevski v DCT, 3 White JA stated:

“107. Thus, irrespective of the identity of the company from whose bank account moneys were withdrawn to pay the wages or salaries, the evidence demonstrates that Lucas Homes Administration withheld the amounts of PAYG tax and Medicare levy. The appellant was obliged to ensure that Lucas Homes Administration paid the amounts it withheld to the Commissioner …’

Therefore, it is the entity who withheld the payments, in this case, the labour hire client, who is obligated under s 16-70, Sch 1 TAA53 to make those payments to the Commissioner; and
• suggesting that the accountant is responsible for PAYG withholding because it had transferred the payment to the employees is a misinterpretation of the law. If it were true that the transferer of the payment was responsible for PAYG withholding, then, by that argument, the bank or financial institution is responsible as they directly transferred the payment at the request of the accountant. That very argument, that the bank or financial institution is responsible as the direct transferer of funds, has previously been rejected by the courts in the case of CLK Kitchens & Joinery Pty Ltd v FCT, 4 where Derrington J said at para 102:

“102. … The transfer by the financial institution does not, of itself, discharge anything. It is the mere mechanical transfer of money or credit. The ability to discharge an obligation arises from the authority of the payer to do so. Whilst the bank requires a mandate from its customer to transfer funds from an account, it is the customer’s authority to discharge a debt which is crucial to the efficacy of the transaction. In the ordinary course, the transferring bank has no authority to discharge a debt; in this case a wages debt. Its authority is to transfer money. It is only the customer with the relevant authority (in this case CLK Kitchens) which, through the medium of its bank, discharges the wages debt and can be said to have ‘paid the wages’.” (emphasis added)

Therefore, it is not a question of who transferred the money or credit, but who authorised the discharge of the employee payment. The accountant did not have authority to discharge the wage debt on behalf of the labour hire client. Their authority was to transfer money at the instructions of the labour hire client. The labour hire client, through the medium of the accountant, discharged its wages debt and therefore was the entity who paid the wages. The Commissioner’s rejection of the statutory declaration is problematic because:
• the Commissioner has erred in his interpretation of the case law, with a position that makes ordinary professionals (and even banks) liable for the unremitted PAYG of their clients; and

• the failure to accept the statutory declaration has the result that the Commissioner is treating the PAYG estimates as an “incontestable tax”, arguably rendering the tax invalid as described in DCT v Brown5 and DCT v Hankin.6 In the author’s view, the Commissioner’s interpretation of who is making a payment should be revised. Otherwise, judicial or legislative intervention will be necessary.