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The ATO has published a Decision Impact Statement in relation to the Federal Court decision in David Cassaniti v FCT [2010] FCA 641; 2010 ATC 20-192. The case concerned what constitutes the withholding of an amount from salary or wages under the PAYG system, whether the taxpayer is entitled to a credit for amounts withheld regardless of whether any amount was actually withheld and whether PAYG withholding forms part of the assessment process.

The taxpayer was an employee of Reliance Financial Services (RFS). RFS provided services to Cassaniti & Associates, Accountants (controlled by the taxpayer's cousin, Sam Cassaniti). The taxpayer claimed he was paid a gross salary of approximately $130,000 p.a. for the years of income ended 30 June 2002, 30 June 2003 and 30 June 2004. He further claimed his employer withheld the sum of approximately $56,000 p.a.

The Commissioner refused to allow the full amount of credits sought on the basis that the amounts were fictional, inflated or both, and that the central document relied upon by the taxpayer to show that the credits were withheld was unreliable.

Edmonds J held that there must be a process by which the withholding takes place, and whether there has been a legitimate process of withholding will depend upon a close examination of the books of account and records of the payer, and the surrounding circumstances to see whether it can be inferred from those records and circumstances that a withholding has occurred. A mere journal entry, in the absence of other evidence, may not be sufficient. The authorities establish that entries of this kind, standing alone, are not conclusive evidence of the transaction.

His Honour upheld the Commissioner's submission that the information relied on by the taxpayer was not contemporaneous but was concocted at a later point in time. However, he held that the taxpayer was entitled to a credit of part of the amount claimed.

His Honour also held that the PAYG credit is not protected by s 177(1) ITAA 1936. It is not a particular of the assessment - it is a particular of the statement of account between the taxpayer and the Commissioner.

The Decision Impact Statement states:

"Following the decision in this case, concern was expressed that, where an employer and an employee/taxpayer are not at arm's length (other than in circumstances where the ATO has reasonable grounds to suspect improper conduct), an unfair onus may be placed on the employee/taxpayer to provide information which an employee would not ordinarily be expected to provide.

The Tax Office has agreed to undertake a review of its policy and procedures in regard to disputed claims for PAYG withholding credits. Consultation will be undertaken as part of that process."


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