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Tax-evading employees prohibited from proving their employment debts in employer’s liquidation

The Case

Re Perthmetro Pty Ltd (in liq) (2015)

The liquidator involved in a construction company’s liquidation applied to the Federal Court for a determination on whether he should permit four employees to prove their unpaid employment entitlements in the liquidation, given the employment arrangements were clearly designed to evade tax. This was pursuant to section 511 of the Corporations Act 2001 (Cth).

Two male employees had been paid a salary for working full time for the company. The employees’ respective wives also received payments for their husbands’ work. One received this payment in addition to a salary she earned working part time for the company, while the other did no work for the company, but received money for her husband’s work.

The Verdict

The Court found that the four employment contracts were structured to evade tax with the employees’ knowledge.

At law, a person who enters into a contract with the fraudulent purpose of deceiving and defrauding tax is not entitled to have a court enforce the rights conferred under the contract. As such, the Court held that the unpaid entitlements could not be proved in the liquidation, save for the legitimate earnings of one of the wives for her part-time work.

The Lesson

This decision shows that fraudulent employment arrangements may prevent employees from proving their employment entitlement debts in the case of an insolvency.

The case also raises the potential that employers and employees may be prevented from engaging in litigation about arrangements that were made to evade tax. There is also the risk that a court will remit such matters to the Australian Taxation Office.

Entering into fraudulent arrangements with your employees can also attract penalties and prosecution.

Please note: Case law is reported as correct and current at time of publishing. Be aware that cases in lower courts may be appealed and decisions subsequently overturned.

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