DFC of T v APPLIED DESIGN DEVELOPMENT PTY LTD (IN LIQ)

Judges:
Mansfield J

Court:
Federal Court

MEDIA NEUTRAL CITATION: [2002] FCA 205

Judgment date: 15 March 2002

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Mansfield J

Introduction

1. This is an application for a declaration that Applied Design Development Pty Ltd (In Liquidation) (the respondent) was obliged to deduct from a payment it made to an individual the sum of $44, and a declaration that the respondent was obliged to pay that sum to the Deputy Commissioner of Taxation (the applicant). The obligations are claimed by the applicant to arise under s 12-35 and s 16-70 of Schedule 1 of the Taxation Administration Act 1953 (Cth) (the TAA). The regime established by Schedule 1 of the TAA came into force on 1 July 2000. The applicant also seeks an order pursuant to Schedule 1 of the TAA that the respondent pay that sum to the applicant.

2. Although the amount involved is trivial, senior counsel for the applicant informed me that the particular circumstances of the payment in issue exemplify a common and significant issue of principle for determination. That issue in a general and abbreviated form may be stated as follows: is the payment of a ``dividend'' from the assets of a corporation in liquidation to meet a debt owing by that corporation to a person who previously was an employee of that corporation arising from the liability of that corporation to pay a salary or wages to that person, outstanding at the date of liquidation, a payment from which a deduction on account of taxation under s 12-35 of Schedule 1 of the TAA and a payment to the respondent on account of taxation under s 16-70 of Schedule 1 of the TAA must be made?

3. The application falls to be determined by reference to the TAA and to the Corporations Law of South Australia (``the Corporations Law''), as those statutes applied to the time the payment was made. The parties accept that the payment in issue was made on 10 July 2000. Accordingly, references to those statutes are references to the Acts prior to their amendment or repeal since that date.

The facts

4. The facts giving rise to the application were largely uncontested.

5. The respondent was placed into liquidation on 9 November 1999 pursuant to s 439C(1) of the Corporations Law by virtue of a resolution of its creditors at a meeting on that day. The effect of the liquidation was the termination of the employment of one ``M'', who had been employed by the respondent as an industrial designer since 1 February 1996.

6. At the date of liquidation, the respondent owed to M $1,784 in respect of wages for the period from 20 September to 12 October 1999. M lodged with the liquidators of the respondent a proof of debt for, among other things, the wages owed. The proof of debt was admitted by the liquidators on 10 July 2000. On the same day a cheque was drawn on the account of the respondent (in liquidation) for $633 payable to M. The payment was made in partial payment of the liability of the respondent to pay the wages outstanding to M at the date of the liquidation. It was calculated on a pro rata basis, having regard to other liabilities of the respondent. It was made pursuant to s 556(1)(e) of the Corporations Law. That provision determines the priority of payment of debts and claims against the liquidated company, and relevantly provides as follows:

``(1) Subject to this Division, in the winding up of a company the following debts and claims must be paid in priority to all other unsecured debts and claims:

• ...
• (e)... next, wages and superannuation contributions payable by the company in respect of services rendered to the company by employees before the relevant date;''

The respondent accepts that no amount was deducted from the payment on account of taxation pursuant to s 12-35 of Schedule 1 of the TAA, nor was a payment made to the applicant on account of taxation pursuant to s 16-70 of Schedule 1 of the Act. There is no dispute that, if such a deduction and payment should have been made by reason of those provisions, the proper figure is $44.

The legislative context

7. Schedule 1 to the Act is given effect by s 34A. Its expressions have the same meaning as in the Income Tax Assessment Act 1997 (Cth) (the ITAA). Section 12-35 of Schedule 1 to the TAA provides:

``An entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that or another entity).''

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For the purposes of that section, an ``entity'' is defined (via s 3AA(2) of the TAA) by s 960-100 of the ITAA as follows:

```Entity' means any of the following:

• (a) an individual;
• (b) a body corporate;
• (c) a body politic;
• (d) a partnership;
• (e) any other unincorporated association or body of persons;
• (f) a trust;
• (g) a superannuation fund.

Note: the term entity is used in a number of different but related senses. It covers all kinds of legal person.''

The respondent points out that there is in that definition no reference to the liquidators of a corporation in liquidation.

8. There are no statutory definitions provided for the other elements of s 12-35. Of particular importance in the present application is the absence of statutory definitions of the words ``salary'' or ``wage''. In the absence of statutory definitions, meaning should be given to those words according to the ordinary meaning conveyed by the text of the provision, and taking into account their context in the legislative scheme and the objects of the Act. The words ``salary'' and ``wage'' denote an amount of money payable, the consideration for which is the performance of work or services. That meaning is reflected in the definitions provided for the terms in the Oxford English Dictionary, 2nd ed:

• Salary : fixed payment made periodically to a person as compensation for regular work.
• Wage : a payment to a person for services rendered.

I adopt those definitions in the determination of these proceedings.

9. Section 12-35 of Schedule 1 to the TAA appears in Part 2 of the TAA which enacts the Pay As You Go (PAYG) tax system. The object of the PAYG system as provided in s 6-1 to Schedule 1 of the TAA is:

``To help taxpayers meet their annual income tax liability, they are required to pay amounts of their income at regular intervals as it is earned during the year...''

and s 11-1 includes the objective of the PAYG withholding provisions as ensuring the efficient collection of income tax. Section 12-35 is within the Division which identifies the payments from which amounts must be withheld. Section 16-70 then provides:

``An entity that withholds an amount under Division 12 must pay the amount to the Commissioner in accordance with this Subdivision.''

It is clear that the purpose of the PAYG system is to provide for payments of income tax throughout the year by instalments, rather than all income tax being collected after the year has ended. Section 11-1 provides that the object of Part 2 includes ensuring the efficient collection of income tax.

10. There are provisions which complement the obligations imposed by ss 12-35 and 16- 70. As noted, ss 15-10 to 15-35 prescribe the amount to be withheld. Section 16-20 discharges an entity that makes a withholding from all liability to pay that amount to anyone except the Commissioner of Taxation. And s 6-10 entitles the person who would otherwise have received the amount withheld to a credit against that person's taxation liability to that amount.

The contentions

11. The applicant contends that the payment in issue gave rise to an obligation on the part of the respondent under s 12-35 to withhold the amount of $44, and an obligation under s 16-70 to pay that amount to the Commissioner of Taxation. The amount of $44 is the prescribed withholding amount under ss 15-10 to 15-35. If that contention is correct, the respondent would be liable to a civil penalty under s 16-30(1)(a) of the TAA which provides:

``An entity... that:

• (a) fails to withhold an amount as required by Division 12;
• ...

is liable to pay the commissioner a penalty (the penalty amount ) equal to that amount.''

12. The correctness of the applicant's contention depends on the proper construction of s 12-35, and on the characterisation of the payment of 10 July 2000 as a payment of (in this case) wages to M as an employee. In my view, this is so whether or not the payment was made by the liquidated company itself, or by the liquidators in their capacity as agents of the liquidated company, or by the liquidators in

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pursuance of a statutory duty under the Corporations Law, or in their personal capacity. That is because s 12-35 does not impose the obligation to withhold the prescribed amount by reference to the identity or character of the entity that in fact pays the employee. Indeed, it specifically provides for the possibility that one entity may make a payment of salary, wages, commission, bonuses or allowances to an individual, being an employee of another entity. So much can be concluded from the text of the provision, and support for that conclusion can be found in the contrast between s 12-35 and its immediate predecessor, s 221C(1A) of the ITAA: see
Beckwith v R (1976) 12 ALR 333 at 340-344 per Mason J. It relevantly provided:

``Where an employer pays to an employee salary or wages,... the employer shall, at the time of paying the salary or wages, make a deduction from the salary or wages...''

That provision only imposed an obligation to withhold a taxation amount in circumstances where a payment was made by an employer to an employee. The authorities cited by both parties in the present application were determined in relation to that section or its ancestors, and are therefore largely concerned with the question whether the entity making the payment for salary or wages could be properly characterised as an employer. That is an issue that is not directly relevant to the present application, which turns on the question of whether the payment made on 10 July 2000 could be properly characterised as a payment in the nature of wages made to M in his capacity as an employee.

13. The respondent contends that the payment made on 10 July 2000 was not a payment in the nature of wages to M, and the payment was not made to M as an employee, but a payment in the nature of a dividend to M as a creditor of the respondent. The characterisation of the payment as a payment of a dividend to a creditor is said by the respondent to flow from the following propositions:

• 1. M's personal contractual right to pursue against the respondent wages owed to him from the date of liquidation was substituted by a statutory right to receive a dividend in the distribution of the assets of the respondent.
• 2. The liquidators of the respondent, in determining whether to admit the proofs of debt lodged following the liquidation fulfilled a personal statutory duty, and were not acting as agents of the respondent.
• 3. A right to a payment of salary or wage can only arise from a contractual relationship of employer and employee, and such a relationship did not exist at the time the payment was made.

14. The first and second propositions are said to be founded on a proper construction of the Corporations Law in the light of analogies and contrasts provided by cases decided under bankruptcy legislation referred to by the respondent. They are questions that necessarily divert, for a time, from a consideration of the ordinary meaning of the provision the operation of which is at issue, that is, s 12-35 of the TAA. That provision does not expressly anticipate interaction of the PAYG scheme with the winding up of a company, so the question of whether or not the facts in the present matter attract the operation of s 12-35 of the TAA requires attention to be directed to both the TAA and the Corporations Law.

15. The third proposition implies that s 12-35 requires a temporal connection between the making of the payment of salary or wages and the obligation to withhold an amount, and a continuing employer/employee relationship.

Substitution of rights

16. The parties accept that, prior to the date of liquidation, M was paid wages by the respondent pursuant to a contract of employment. At that time, the owed wages constituted a debt giving rise to a contractual right of action in M against the respondent. On the liquidation of the company, the employment contract between M and the respondent was terminated:
Re General Rolling Stock Co; Chapman's Case (1886) 1 Eq 346; Corporations Law s 558;
Re Beverage Packers (Australia) Pty Ltd [1990] VR 446. As a consequence of that termination and the operation of s 471B of the Corporations Law, M's personal right of action against the respondent was, in the words of the respondent, ``forever compromised''. Section 471B of the Corporations Law provides:

``While a company is being wound up in insolvency or by the Court, or a provisional

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liquidator of a company is acting, a person cannot begin or proceed with:

• (a) a proceeding in a court against the company or in relation to property of the company; or
• (b) enforcement process in relation to such property;

except with the leave of the Court and in accordance with such terms (if any) as the Court imposes.''

17. In addition, the respondent relied upon bankruptcy cases that illustrate that on the day of bankruptcy, all provable debts owing by the debtor are substituted with a statutory right to share in the distribution of the bankrupt's estate. The respondent submitted that the conceptual nature of that substitution or ``exchange'' of rights is applicable to the liquidation of a company and therefore to the present application.

18. I accept that in
Re Johnson and Anor; Ex parte Law (1946) ABC 43 (Johnson) Clyne J held (at 45-46) that the contractual remedies of an employee for the recovery of a debt in the nature of wages is compromised by the bankruptcy of the debtor. His Honour said:

``... the remedies, which the creditors had against the debtor and his property before bankruptcy, are taken away and they acquire instead a right to share equally and proportionately in the distribution of the property [of the bankrupt]... it would be palpably absurd to say that a trustee, who pays or is bound to pay dividends to creditors of a bankrupt who have proved for wages, was an employer of those creditors and that in paying them these dividends he was paying them wages.''

19. Importantly, that finding was made in a legislative context substantially similar to that which generally reflected the terms of s 221C(1A) of the ITAA. The provision under consideration by Clyne J in Johnson, namely s 221A of the ITAA was inserted by the Income Tax Assessment Act (No. 2) 1940 (Cth). It required that, in order for the obligation to withhold an amount from a payment or to make a payment to the Commissioner to arise, the payment must be made by an employer to an employee. His Honour's finding that the trustee in bankruptcy was not the employer of the payee was determinative of the issue before him. Having regard to the role of the trustee of a bankrupt estate under the Bankruptcy Act, his Honour said concerning the then s 221A of the ITAA at 46:

``It cannot be said that under this section the trustee of a deed of arrangement becomes an employer of the creditors to whom he has paid or is bound to pay dividends or proofs of debt for wages lodged by them; that these creditors who receive or are entitled to receive such dividends are employees of the trustee; and that the dividends paid to them are salary or wages.''

20. His Honour's focus, as required by s 221A of the ITAA, was largely upon whether the trustee had the character of an employer when making the payment in question.

21. The applicant also contends that the relationship of a trustee in bankruptcy to the bankrupt or the bankrupt's estate is different from that of a liquidator of a company in liquidation to the company itself. That is a matter considered later in these reasons.

22. It may also be observed that in certain different contexts, s 221C of the ITAA has been held to impose upon an entity other than a direct employer an obligation to withhold an amount from the payment of wages:
Re S & N (Nominees) Pty Ltd (in liq) 84 ATC 4253; (1984) 15 ATR 475;
Dean & Anor v FC of T 97 ATC 4792; (1997) 37 ATR 52; and
Re Hartland & Hyde Pty Ltd (in liq) & The Corporations Law 97 ATC 5114; (1997) 37 ATR 521. In each of those cases, there was some internal corporate arrangement within a group for one entity to pay the wages to employees of another group entity. None of those cases concerned a provision in terms precisely like s 12-35. It was not necessary in Johnson for Clyne J to ask whether, notwithstanding the finding that the trustee was not an employer, the payment of the dividend was nonetheless a payment in the nature of salary or wages. While his Honour concluded that the payment in that case was not a payment in the nature of wages, in my view he did so as a consequence of his finding that a trustee in bankruptcy was not an employer in the context of the then legislative provisions which anticipated that a payment could not be a payment of wages if it were not made by an employer to an employee. His Honour's reasons do not consider the nature of the payment as a separate question. It was not necessary to do so.

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23. In the present case, I agree that M's contractual right to enforce the debt owed by the respondent for his outstanding wages was ``compromised'' on the winding up of the respondent. That conclusion is a consequence of the operation of s 471B of the Corporations Law. It does not depend on the applicability of bankruptcy authorities to the winding up of a company.

24. However, for reasons set out below, I do not consider that that conclusion assists in answering the question now posed by s 12-35 as to whether a payment made by the liquidator of a company by way of a dividend to a past employee by reason of a debt owed by the company for salary or wages is a payment in the nature of salary or wages to that employee.

25. A debt comprised of owed wages is ordinarily enforceable pursuant to a personal contractual right in an employee against an employer. However, the right to recover as a debt salary or wages owing is not an essential element of the ordinary meaning of the word ``salary'' or the word ``wage''. Whether the debt is enforceable pursuant to a personal contractual right, or whether the eventual payment of the debt is made pursuant to a statutory right to participate in the winding up of a company, the nature of the payment as a payment in respect of services rendered by an individual to an employer may nevertheless be unaltered. The fact that the payment to M was made by way of a dividend in circumstances where the employment relationship had terminated, does not in my judgment preclude its characterisation as a payment in the nature of salary or wages.

26. In my view, the provisions of the Corporations Law lead to the conclusion that the payment to M was a payment in respect of services rendered to the company (s 556(1)(e)), albeit made by way of a dividend pursuant to M's right as a creditor to participate in the winding up of the company (ss 553 and 553E). Nothing turns in the present case on the fact the payment was made to M by way of a dividend pursuant to his statutory right to receive it. The consideration for the payment was the services M rendered to the company prior to its liquidation. But for that consideration, the proof of debt lodged by M would not have been admitted to rank as a liability of the respondent. It is that consideration that leads to the characterisation of the payment as a payment in the nature of salary or wages. The nature of that consideration is not only unaltered by the winding up process under the Corporations Law, but expressly acknowledged as the criterion under which M's entitlement to the priority payment under s 556(1)(e) arose. The priority accorded to M's debt was because his debt constituted wages (defined in s 9(1) to include amounts payable to an employee of the company) payable by the respondent in respect of services rendered by him as an employee to the respondent.

Liquidator as agent for the respondent

27. In his written and oral submissions, counsel for the applicant contended that the liquidator, in applying the company's property in discharging the company's liabilities, was acting as agent for the company:
Trueman's Estate; Hooke v Piper (1872) LR 14 Eq 278 at 281;
Re Anglo-Moravian Hungarian Junction Railway Co; Ex parte Watkin (1875) 1 ChD 130 at 133-134;
Bank of Scotland v Macleod [1914] AC 311 at 321;
Reigate v Union Manufacturing Company (Ramsbottom) Ltd [1918] 1 KB 592 at 606;
Re Farrow's Bank [1921] 2 Ch 164 at 173-174;
Hillman v Crystal Bowl Amusements Ltd [1973] 1 WLR 162 at 166;
Pyramid Building Society v Howell & Bannister (1994) 12 ACLC 953 at 955; (1994) 14 ACSR 633 at 636.

28. Support for that submission is to be found in s 471A(1) of the Corporations Law, which provides in part:

``... a person cannot perform or exercise and must not purport to perform or exercise, a function or power as an officer of the company, except... as a liquidator appointed for the purposes of the winding up...''

and in s 478(1)(a) and s 556 of the Corporations Law. The liquidator is required to collect the assets of the company and to apply them in discharge of its liabilities, including for unpaid wages: s 556(1)(e).

29. The respondent acknowledged that upon their appointment, the liquidator became the agents of the respondent for many purposes. However, it contended that in adjudicating upon proofs of debt, and making payments by way of dividends to those whose proofs had been admitted, the liquidator was not acting as an agent of the respondent company, but ``fulfilling his personal statutory responsibilities'' under the Corporations Law. It

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places reliance upon
Tanning Research Laboratories v O'Brien Inc (1987) 5 ACLC 820 at 828 (Tanning at first instance);
O'Brien v Tanning Research Laboratories Inc (1989) 7 ACLC 182 (Tanning on appeal);
Tanning Research Laboratories Inc v O'Brien (1990) 8 ACLC 248 at 253-256; (1989-1990) 169 CLR 332 at 338-344;
Re Quatrovision Pty Ltd (in liq) (1982) 1 ACLC 105; (1982) 1 NSWLR 95.

30. I do not need to address those decisions or that proposition. It is not contested that both the liquidator of the respondent, and the respondent, fall within the definition of ``entity'' in s 960-100 of the ITAA, which definition applies to s 12-35 of Schedule 1 to the TAA. The role of the entity making a certain payment, whether as agent of a company or pursuant to a statutory duty, may in some instances assist in addressing the question of whether that payment made by that entity is a payment in the nature of salary or wages. It is not conclusive of the question. Having regard to the conclusion I have reached above, I do not consider it necessary to decide the capacity in which the liquidator acted when it applied the property of the company in discharging the company's liability to M by making the payment under consideration. As I have indicated, in my judgment the focus in s 12-35 is upon whether the payment was wages paid to M and whether that payment was made to M as an employee. The capacity of the payer is no longer a focus of the provision, as it had previously been.

31. I note that the respondent contended that the position of the liquidator in adjudicating upon proofs of debt is different from the position of the liquidator in making payments from the assets of the respondent under s 556 of the Corporations Law. The adjudication process is subject to the court's control, as an appeal lies from the liquidator's decision and so ultimately the adjudication may be by decision of the Court; s 1321 of the Corporations Law. He also contended that the payment of creditors of the company in accordance with s 556 of the Corporations Law is done by the liquidator of the company as its agent, even if the liquidator's adjudicative role is performed in a different capacity. The decision of Cohen J in Tanning at first instance recognises the administrative role of a liquidator in adjudicating upon proofs of debt. His Honour at 828 added that, after that adjudication process (whether by the liquidator or on appeal by the court), the liquidator then carries out an ``administrative duty'' in paying the dividends in accordance with s 556(1). I do not think that his Honour was, in that remark, suggesting that the liquidator was not making such payments as agent for the company in liquidation. Kirby P in Tanning on appeal at 185 said that the liquidator may enjoy both the quasi-judicial or adjudicative function and at the same time, in respect of other functions, be acting as the agent of the company in liquidation. As I have said, it is not necessary in my view to further address those questions in this matter.

The employer/employee relationship

32. The third proposition of the respondent concerned the agreed fact that the contractual employer/employee relationship between the respondent company and M ``did not exist at the time of the payment''. The respondent contends that a right to a payment of a salary or a wage can only arise as a matter of law from such a contractual relationship.

33. In my view, that contention diverts attention from the question as to whether s 12-35 of Schedule 1 to the TAA applies to the respondent, that is whether the respondent was obliged to withhold a payment, which in turn depended on whether the payment of $633 was wages paid to M as an employee (whether of the payer or of another entity). The respondent itself accepts that M was an employee of the respondent and that $1,784 was owed by the respondent to M at the time of the respondent's liquidation ``in respect of the period of his former employment from 20 September 1999 to 12 October 1999''. The payment to M pursuant to s 556(1)(e) of the Corporations Law was made in acknowledgment by the respondent through the liquidator that M was an employee who rendered services to the company prior to the company's liquidation. M's right to those wages arose as a matter of law from an employer/employee relationship. Section 12-35 does not require that there exist an employer/ employee relationship at the time of the payment. It is the character of the payment which attracts the operation of the section. The section would apply, in my view, if the payment were made by an employer after the employment relationship had ceased. It would apply whether such a payment were made with or without court proceedings to enforce it. If that were not the case, the purpose of Part 2 of

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Schedule 1 to the TAA would be frustrated in such circumstances. That is clearly not the legislative intention. Once it is accepted that s 12-35 may operate upon a payment of wages made to an individual as an employee after the relevant employer/employee relationship has ceased, the fact that such a relationship did not exist at the time of the payment is of no particular moment. Indeed, the definition of ``employee'' in s 556(2) of the Corporations Law, which is in the following terms:

```employee' in relation to a company, means a person:

• who has been or is an employee of the company, whether remunerated by salary, wages, commission or otherwise; and
• whose employment by the company commenced before the relevant date.''

makes it clear that, for the purposes of making the payments on the priority directed by s 556(1)(e), the wages payable to employees which are given that priority are or include wages payable to persons who have been employees of the company.

34. Moreover, M's status as a creditor in the winding up of the respondent is not inconsistent with his characterisation as a past employee of the company. In my view, at the time the payment was made, he was both ``an employee'' as that term is used in s 12-35 and a creditor of the respondent.

Conclusion

35. In my view, the fact that the payment of 10 July 2000 was made to M under s 556(1)(e) of the Corporations Law as an employee as defined by that Act, and the fact that the payment was a payment in the nature of wages, being a payment for services rendered to the respondent prior to its liquidation, brought the payment within the operation of s 12-35 of Schedule 1 to the TAA and gave rise to an obligation on the respondent through its liquidator to withhold $44 from that payment. The respondent accepts that it did not withhold that amount from the payment. I declare it was obliged to do so. It follows that the respondent was obliged by s 16-70 of Schedule 1 of the TAA to pay to the applicant $44. I order that the respondent pay $44 to the applicant.

THE COURT DECLARES THAT:

1. Applied Design Development Pty Ltd (In Liquidation) was obliged to deduct from the payment of $1,784 it made to an individual on 10 July 2000 the sum of $44 pursuant to s 12-35 of Schedule 1 to the Taxation Administration Act 1953 (Cth).

2. Applied Design Development Pty Ltd (In Liquidation) was obliged to pay the said sum of $44 to the Deputy Commissioner of Taxation pursuant to s 16-70 of the said Act.

THE COURT ORDERS THAT:

1. Applied Design Development Pty Ltd (In Liquidation) pay to the Deputy Commissioner of Taxation the sum of $44.