Original article by Scott Morris via LinkedIn.
Claims for the recovery of unfair preference payments are the bread and butter of liquidations. The Commissioner of Taxation (Commissioner) is invariably the number one recipient of unfair preference payments and liquidators can, on occasion, become frustrated with the time that it takes for the Commissioner to disgorge such payments.
Here are a few tips to assist legal representatives in making a more timely (and fulsome) claim against the Commissioner:
Prior to issuing proceedings, obtain a copy of the ATO’s internal records. Every time the ATO chases up the collection of tax related liabilities, the ATO’s business line keep a written record of their communications with the company (that is, details of phone conversations; letters of demand and reminders; payment arrangements; statutory demands; garnishee notices and director penalty notices). This information is informative of whether the Commissioner may be able to raise a statutory ‘good faith’ defence pursuant to s.588FG.
Do not make claims for payments that cannot constitute unfair preference payments. Unilateral ‘transactions’ by the Deputy Commissioner or Commissioner such as the recovery of money via a garnishee notice; or the application of a tax credit to another tax liability (ie. an offset) are not transactions for the purpose of s.588FA (Macquarie Health Corporation Ltd v Federal Commissioner of Taxation(1999) 169 ALR 16; and Nicholas Paul Driver liquidator of Tilse Building Pty Ltd (in liqu) v Commissioner of Taxation and Anor  NSWCA 247, respectively).
When considering the issue of insolvency, the company’s liability to the Commissioner should be taken into account even if the company had entered a payment arrangement prior to making the unfair preference payment/s to the Commissioner. The arrangement with the Commissioner does not change the date that the tax liabilities were due (s.255-15 of Schedule 1 to the Taxation Administration Act 1953).
If any of the payments have been paid in discharge of PAYG withholding or the superannuation guarantee charge, then the Commissioner will have an entitlement to seek an indemnity against the company director/s pursuant to s.588FGA. If the Commissioner wishes to exercise its right to pursue the indemnity, it will do so by bringing its indemnity claim in the same proceeding instituted by the liquidator. Whilst the preference claim can be brought against the Commissioner in a lower Court with jurisdiction, it is only the Federal Court and Supreme Court that has jurisdiction to determine the indemnity claim (both being capital ‘C’ Courts for the purpose of s.588FGA). Accordingly, prior to issuing proceedings on behalf of a liquidator, it is prudent to ask the Commissioner whether the Commissioner intends to exercise any available right to seek an indemnity against the director/s so as to avoid the circumstance of issuing proceedings in a lower court and then having to wait for the Commissioner to seek an uplift of that proceeding to allow the indemnity proceeding to be joined to the action.
Institute the claim against the Commissioner, not the Deputy Commissioner. Unfair preference payments are received by the Commissioner and claims must be brought against the Commissioner, not the Deputy Commissioner of Taxation (who, incidentally, recovers tax related liabilities for the Commissioner under a delegation).
Scott K Morris is a barrister at the Victorian Bar. He was previously a Senior Lawyer at the ATO.