ATO ID 2008/26: Superannuation Guarantee: liability of company for superannuation guarantee charge in respect of a dividend paid by a liquidator for unpaid salary or wages
Date of decision: 23 January 2008
Year of income: Year ended 30 June 2008
Business line: Superannuation

Issue
Where a dividend is paid out of the assets of a company in liquidation by the liquidator to a former employee of the company in respect of a debt for unpaid salary or wages owed by that company to the former employee, is the company in liquidation liable to the superannuation guarantee charge (SGC) under the Superannuation Guarantee (Administration) Act 1992 (SGAA) where the liquidator does not make superannuation contributions in respect of the dividend payment by the relevant quarterly cut-off date?

Decision
Yes. Where a dividend is paid out of the assets of the company in liquidation by the liquidator to a former employee of the company in respect of a debt for unpaid salary or wages owed by that company to the former employee, the company in liquidation is liable to the SGC under the SGAA where the liquidator does not make superannuation contributions in respect of the dividend payment by the relevant quarterly cut-off date.

Facts
The company was placed into liquidation. The effect of the liquidation was the termination of the employment of an employee of the taxpayer. At the date of liquidation, the taxpayer owed the employee an amount for unpaid wages. The employee lodged a proof of debt with the liquidators of the company for the wages owed. The proof of debt was admitted by the liquidators. On the same day a cheque was drawn on account of the company (in liquidation) for the wages payable to the employee. The payment was made in partial payment of the liability of the company to pay the wages owing to the employee at the date of liquidation. It was calculated on a pro rata basis, having regard to other liabilities of the company. No superannuation contributions were made in respect of the dividend payment by the liquidators.

Reasons for decision
Summary: An employer will have a liability to the SGC for a quarter under the SGAA if they do not make sufficient superannuation contributions for the benefit of their eligible employees to a complying superannuation fund or retirement savings account by the relevant quarterly cut-off dates. The SGC is imposed on an employer's superannuation guarantee shortfall (SG shortfall) for a quarter. Subsection 19(1) of the SGAA sets out the formula for the calculation of an employer's individual SG shortfall for an employee for a quarter. The shortfall is calculated by reference to the total salary or wages paid by the employer to the employee for the quarter. If an employer makes a payment to an employee which does not constitute salary or wages or if the payment does constitute salary or wages but it is not paid by the employer (or is not paid 'on behalf of' the employer within the meaning of subsection 6(3) of the SGAA) to the employee, subsection 19(1) of the SGAA will have no application and the employer will not have a liability to the SGC. The definition of salary or wages for the purposes of the SGAA is contained in section 11. A payment that falls within the ordinary meaning of salary or wages will constitute 'salary or wages' under section 11. If the payment does not fall within the ordinary meaning of the term, it will constitute 'salary or wages' for the purposes of the SGAA if the payment falls within the extended definition of 'salary or wages' in paragraphs 11(1)(a) to (e) of the SGAA. In Deputy Commissioner of Taxation v. Applied Design Development Pty Ltd (In Liq) [2002] FCA 205; (2002) 2002 ATC 4193; (2002) 49 ATR 196 ( Applied Design ), the Federal Court held that a priority payment, made under paragraph 556(1)(e) of the Corporations Act 2001 (Corporations Act) to a former employee who had proved a debt for wages, retained its character as salary or wages within the ordinary meaning of that term and was therefore salary or wages for the purposes of section 12-35 of Schedule 1 to the Taxation Administration Act 1953 . The Court looked to the fact that the consideration for the payment (of the dividend) was the services rendered by the former employee to the company prior to its liquidation. It was held that the nature of the payment remained unaltered by the liquidation process. Since the definition of salary or wages in the SGAA relies in part on its common law meaning, the payment of a dividend would also constitute salary or wages for the purposes of the SGAA. Subsection 12(1) of the SGAA provides that the terms 'employer' and 'employee' have their ordinary (that is, common law) meanings. For the purposes of the SGAA, subsections 12(2) to (11) expand the meaning of those terms and make particular provision to avoid doubt as to the status of certain persons. Further, section 15B of the SGAA ensures that a former employee is treated as an employee of their former employer for the purposes of calculating the individual SG shortfall under subsection 19(1) of the SGAA. Normally, where a company has entered into liquidation, the contract of employment between an employee and the company being wound up is terminated on the commencement of the winding up (section 558 of the Corporations Act; Re General Rolling Stock Co; Chapman's Case (1866) LR 1 Eq 346). As a result, the employer/employee relationship between the company and the employee ceases to exist once a winding up order has been made. A liquidator, in applying the company's property in discharging the company's liabilities, is acting as agent for the company - see Re Farrow's Bank Ltd [1921] 2 Ch 164 and Linter Textiles Australia Ltd (in liquidation) v. Commissioner of Taxation [2002] FCA 1089; (2002) 2002 ATC 4785; (2002) 50 ATR 548. Accordingly, any act done by the liquidator as an agent of the company is an act of the company. Therefore, where a liquidator pays a dividend to a former employee in respect of a debt for unpaid salary or wages, this is an act of the company. In terms of the SGAA, this means that it is a payment of salary or wages 'by' the employer to the employee (taking into account the operation of section 15B of the SGAA). Since the dividend payment constitutes salary or wages for the purposes of the SGAA and is paid by the employer to the employee, the company in the circumstances of this case does have a liability for the individual SG shortfall in respect of the employee under subsection 19(1) of the SGAA and consequently, the SGC, as sufficient superannuation contributions were not made by the liquidator, in respect of the payment, by the relevant quarterly cut-off date. The company can avoid a liability to the SGC by the liquidator making the required superannuation contributions to a complying superannuation fund or retirement savings account by the cut off date for the quarter in which the dividend is paid to the former employee.

Legislative references: Superannuation Guarantee (Administration) Act 1992 subsection 6(3) section 11 paragraph 11(1)(a) paragraph 11(1)(b) paragraph 11(1)(ba) paragraph 11(1)(c) paragraph 11(1)(d) paragraph 11(1)(e) subsection 12(1) subsection 12(2) subsection 12(3) subsection 12(4) subsection 12(5) subsection 12(6) subsection 12(7) subsection 12(8) subsection 12(9) subsection 12(9A) subsection 12(10) subsection 12(11) section 15B subsection 19(1)
Case references: Deputy Commissioner of Taxation v. Applied Design Development Pty Ltd (In Liq) [2002] FCA 205 (2002) 2002 ATC 4193 (2002) 49 ATR 196
Related ATO interpretative decisions: ATO ID 2008/25 | ATO ID 2008/27 | ATO ID 2008/28
Subject references: Employees Liquidation Superannuation guarantee charge Superannuation guarantee shortfalls