In the case of Perthmetro Pty Ltd, in the matter of Perthmetro Pty Ltd (in liq) [2015] FCA 671 two employees were denied the right to lodge a proof of debt for their accrued employee entitlement claims in the liquidation of their employer, Perthmetro Pty Limited (in liquidation) (Perthmetro).

Prior to the winding up, Perthmetro agreed with two of its employees to direct payment of part of the employees’ salary to their respective wives. The purpose of such an arrangement was to take advantage of the lower income tax rates for lower income earners, in this case the spouses of the employees of Perthmetro. Essentially it was an arrangement that allowed the employees to reduce their own taxation obligations and obtain a benefit by receiving additional tax free income via their non-working spouses.

After Perthmetro was placed into liquidation, its liquidator made an application pursuant to section 511(1)(a) of the Corporations Act 2001 (Cth) seeking directions as to the treatment of the proofs of debt lodged by the employees who perpetrated the tax avoidance scheme.  The liquidator asked the Court to determine whether or not the employees proofs should be rejected on the basis that “their employment contracts are tainted by illegality or are offensive to public policy.”

The Court was scathing of the conduct of the parties in undertaking the course of action to avoid meeting their taxation obligations and held that:

The schemes in the subject employment contracts are, on their face, offensive to the system to collect income tax in Australia.

Gilmore J in finding that the employees were unable to prove in the winding up for accrued employee entitlements relied upon the ratio of Alexander v Rayson [1936] 1 KB 169 in which it was held tat:

“A party who executes a document with the intention of using it for the fraudulent purpose of deceiving and thereby defrauding the revenue authorities is disentitled from relying on that document in subsequent proceedings in a court of law to enforce rights conferred under that document”

The decision reinforces the application longstanding authority that the courts will not provide assistance to those whose claim arises out of an illegal or immoral act.

For more information please contact ERA Legal.