In Kassem and Secatore v Commissioner of Taxation [2012] FCA 152, the Federal Court dealt, fairly brutally, with three arguments often raised by the ATO in the defence of unfair preference claims: –

1. The money came from another entity, not the taxpayer company itself. Therefore, the company and the ATO were not “parties to the transaction” as required by section 588FA of the Corporations Act 2001 (Cth.).
2. Further, for the same reason (i.e. that payment was made by a third party), the making of the payment did not deplete the company’s asset pool. Therefore, other creditors were not deprived of assets that would otherwise be available, which really means that no preference was given to the ATO in the distribution of those assets.
3. Finally, as the money was applied to Superannuation Guarantee Charge debt (which is a priority payment under section 556) and, at the time of the payment, there were no other creditors enjoying such a high priority, the payment did not result in “unfair” preference being given to the ATO, because it would have received the same preference over the same creditors in a  winding up anyway.

These arguments are all commonly made and the ATO has, in recent months, even taken to reallocating historical payments of PAYG and GST to taxpayers’ SGC accounts just so that grounds are artificially established for the making of the third such argument.

However, in Kassem, the Court effectively put an end to all three arguments, saying (in essence): –

1. The “payment came from another entity” point does not stand up to scrutiny. The evidence was the other entity in question offered to lend the taxpayer money to pay the debt and then, at the taxpayer’s direction, paid that money directly to the ATO on its behalf. Therefore, the money was really paid by the taxpayer all along. (It should also be noted that, in previous decisions, the courts have dealt with such arguments by deciding that a payment made with the authority of an taxpayer is considered to be made by the taxpayer for unfair preference purposes – see for instance Re Emanuel (1997) 147 ALR 281 and Denward Lane Pty. Limited (in liquidation) [2009] FCA 893 at paragraph 45.)
2. The “didn’t deplete the company’s asset pool” point does not work either. If it is assumed that the payment by the related entity was (as alleged) a loan to the taxpayer, then the only effect of the transaction is to replace one debt (to the ATO) with another equal debt (to the related entity). Consequently, there was no “enlargement or enhancement of the pool of assets available” for eventual distribution to the taxpayer’s creditors.
3. Finally, the SCG point does not work on closer analysis. One should not look at whether the payment resulted in preference being given in a theoretical winding up at the time of the payment. One looks at whether the ATO in fact did better as a result of the payment than it would have done in the actual winding up that occurred. As the Court put it: –

Once it is accepted that the Commissioner received $70,000 which he would not receive if he was instead to prove for that amount in the winding up of [the taxpayer], I think it follows that he has received an unfair preference. The fact that he may have obtained a different result if he had proven in a winding up of [the taxpayer] at some earlier point in time is irrelevant.

In the circumstances all three arguments were unsuccessful and the ATO was directed to repay the preferential payments it had received. This occurred even though the Liquidator’s evidence was that “he [did] not expect there to be any distribution to any class of creditor” even if the preferences were repaid.

The ATO is the largest recipient of unfair preference payments in Australia. Whilst it generally behaves reasonably when required to disgorge preference payments, arguments such as those set out above are sometimes raised to stymie recovery action. Often, the mere fact that the arguments are raised is sufficient to dissuade a liquidator – particularly an unfunded liquidator – from taking the matter any further, potentially resulting in injustice.

Whilst this decision turns, to some extent, on its own facts (particularly as regards the circumstances in which the payment was made and how it was accounted for as between the taxpayer and the related entity), facts such as these are fairly commonly encountered. This case removes any doubt that had previously existed about the merit of the three arguments concerned, and this helpful clarification of the law should make it easier for liquidators to make a decision about recovery action, and to obtaining funding with which to progress such action.

This case is also authority for the proposition that the fact that no distribution at all will be made to any creditor, even if the preference is recovered, does not deprive the court of its power to make the order. It should be noted however that this issue does not seem to have been confronted head on and it is not clear whether the decision represents a change from the view of the New South Wales Supreme Court in Hall v Poolman [2007] NSWSC 1330.

It would not be surprising, given the potential importance of the decision, if the ATO were to appeal this decision. However, until this occurs, insolvency practitioners will benefit from greater certainty about when such preferences are recoverable.