Last year I reviewed the Federal Court’s decision and the Full Federal Court’s decision on appeal in a third party preference case against the Commissioner of Taxation, which had an interesting twist. My review of the first instance decision of Nicholas J of March 2012 in Kassem and Secatore v Commissioner of Taxation [2012] FCA 152 is here. My review of the appeal decision of September 2012, Commissioner of Taxation v Kassem and Secatore [2012] FCAFC 124, is here.

The interesting issue in this case was the ATO’s practice of unilaterally reallocating payments made by taxpayers of tax liabilities from one account (in this case, the integrated client account) to another (in this case, to the superannuation guarantee or “SGER” account), and whether that enables the Commissioner thereby to avoid the reach of the unfair preference provisions.

An argument the Commissioner advanced unsuccessfully both at first instance and on appeal, was that the fact that the payments were (re)allocated to the SGER account in respect of the company’s superannuation guarantee charge liability, meant that there was no unfair preference. A payment of an SGC liability is a priority payment under s 556 of the Corporations Act, so the argument went, and therefore there was no unfair preference to the Commissioner, as he would have received the same priority over other creditors in any event.

In this case, the Full Federal Court went further on this issue than Nicholas J had done. The Full Federal Court noted that the evidence showed that on 31 July 2007, an ATO employee had telephoned the NSW Supreme Court to ascertain the date of the hearing of the application to wind up the relevant company, and was told it was set for 23 August 2007. The next day, 1 August, the relevant payments were “reallocated” by the ATO.

The Full Federal Court made a specific finding (at [90]) that it was plain the Commissioner took the step of reversing and (re)allocating the payments from the integrated client account to the SGER account –

“with a view to obtaining a priority over other unsecured creditors in the event that [the petitioning creditor] obtained a winding up order when the matter was due to come before the Supreme Court.”

Their Honours observed at [91] that –

“It is a fundamental principle of the law of unfair preferences that the present statutory regime, and its predecessors are…intended to render void any transaction which, if allowed to stand, would dislocate the statutory order of priorities among creditors.”

Yet, so their Honours specifically held –

“…that is precisely what the Commissioner intended to achieve.”

Extraordinary. The Full Court observed that it was implicit in the Liquidator’s submissions that on the proper construction of s 8AAZD of the Taxation Administration Act 1953 (Cth), the power of allocation does not extend to a power of reallocation to another ATO account. Thus the Commissioner had no power to so reallocate (at [70]). The Full Court took the view that it did not need to determine this question (at [88]). I discuss this issue in greater depth in my review of the decision (here).

The Commissioner’s response? It escaped my notice at the time, but on 23 November 2012, the Commissioner published a Decision Impact Statement on the case (link). In it the Commissioner notes that he did not apply to the High Court for special leave to appeal the decision.

On this issue here discussed, the Commissioner points to the fact that it was not necessary for the Full Federal Court to make a decision about the Commissioner’s powers to allocate or reallocate payments. The Commissioner then states –

“This decision does not affect the Commissioner’s powers to allocate payments received by taxpayers in accordance with the two methods set out in Division 3 of Part IIB of the Taxation Administration Act 1953.”

It would appear that despite the findings of the Full Federal Court as to the ATO’s conduct, the Commissioner has no intention of taking steps to change the internal practices of the ATO as to reallocations made between the accounts of failing companies. Troubling. Particularly so, one might think, now that directors can be made personally liable for the unpaid and unreported superannuation guarantee charge liabilities of their companies (since 30 June 2012). What is to stop the ATO from unilaterally reallocating payments in the reverse direction, depending upon which way it considers it may best maximise the revenue to be recovered?