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Commissioner successful in establishing that a section 167(1) trust survives liquidation

Decision date: 1 October 2013

Case: Commissioner of Inland Revenue v Jennings Roadfreight Limited (in liq) [2013] NZCA 455

Act(s): Tax Administration Act 1994

Keywords: Section 167(1), section 167(2), PAYE deductions, trust, liquidation


This case was an appeal from the High Court which held that the statutory trust pursuant to section 167(1) of the Tax Administration Act 1994 ("the Act") is extinguished upon a company being liquidated. The majority of the Court of Appeal overturned the decision of the High Court and concluded after consideration of the legislative scheme and history and applicable case law that an established section 167(1) trust will not be extinguished upon liquidation.

Impact of decision

Where PAYE deductions are held in trust under section 167(1) of the Act, the trust remains in existence upon liquidation and is not terminated by section 167(2). Accordingly, the deductions are held in trust in favour of the Commissioner of Inland Revenue ("the Commissioner") and are required to be paid to the Commissioner despite liquidation occurring. However, where monies/deductions are not held on trust, the Commissioner will be subject to the priorities under schedule 7 of the Companies Act 1993 as a preferential creditor.


This was an appeal by the Commissioner against the decision of High Court Associate Judge Doogue. The High Court held that the Commissioner was not entitled to retain amounts paid to her by the Bank of New Zealand ("BNZ") pursuant to a deduction notice.

In the High Court, the Commissioner argued that the amounts deducted represented unpaid PAYE deductions and therefore were subject to a statutory trust in her favour under section 167(1) of the Act. The High Court held that the statutory trust under section 167(1) of the Act must come to an end on liquidation and this is made clear by section 167(2) of the Act (Jennings Roadfreight Ltd (in liq) v Commissioner of Inland Revenue [2012] NZHC 1441).

As at 15 March 2011, Jennings Roadfreight Limited ("Jennings") owed the Commissioner $49,889.90 in PAYE for the month of February 2011. On the same day the Commissioner issued a notice pursuant to section 157 of the Act requiring BNZ to deduct funds from the respondent's bank account. The notice was issued in respect of goods and services tax (GST), not PAYE.

BNZ made various deductions from Jennings' bank account in accordance with the section 157 notice. The deductions totalled $26,777.80. The Commissioner accepted that she was only entitled to retain the $14,076.38 credit available in Jenning's bank account at the time the company went into liquidation and must account to the liquidators for the balance.


The majority (Wild and White JJ) held that the purpose of section 167(1) of the Act is to create a statutory trust, ensuring that any money in the trust remains outside the employer's estate on liquidation. The majority went on to specify that the trust fund would be a fluctuating credit balance of the employer's bank account. Further to this, the majority added that Jennings' liquidation did not extinguish the trust.

Wild and White JJ considered that the language of section 167(1) only made sense if the money is still held in the statutory trust created by section 167(1). Accordingly, Wild and White JJ considered Parliament's intent a critical point and specifically said that "Parliament would not have created the trust and provided for the exclusion of the trust money from the employer's estate upon liquidation if it had intended otherwise" (at [22]).

Section 167

The majority considered the application of sections 167(1) and (2) of the Act, finding that section 167(1) deals with the situation where the employer has dealt properly with the PAYE deduction(s), while section 167(2) deals with the situation where the employer has "failed" to deal properly with the "amount of the tax … deducted … in the manner required by section 167(1)".

An employer will have failed to meet the requirements of section 167(1) if it no longer holds the PAYE it has deducted but not yet paid it to the Commissioner, in other words, if the employer has misapplied the monies held in trust for the Crown. Section 167(2) applies to PAYE deducted and neither paid by the employer to the Commissioner, nor held by the employer in its bank accounts available for payment to the Commissioner.

In respect of Jennings, the majority determined that section 167(1) of the Act applied to the $14,076.38 in Jennings' bank account when it was put into liquidation. The effect of section 167(1) being that the $14,076.38 was held in trust for the Commissioner and "shall remain apart, and form no part of the estate in … liquidation".

The majority considered that section 167(2) applied to the $35,813.52 difference between the $49,889.90 Jennings had deducted and the $14,076.38 Jennings held in its bank account at the time of liquidation. The effect of section 167(2) being that the Commissioner's claim for that $35,813.52 ranked under the schedule 7 priorities of the Companies Act 1993.

The majority went on to consider the legislative scheme, history and case law on sections 167(1) and (2) and concluded that these supported their interpretation of the sections. The majority therefore allowed the Commissioner's appeal.

Ellen-France J dissented and referred to North P in Westmoreland (Re Westmoreland Box Company Ltd (in liq), Crawshaw v Commissioner of Inland Revenue [1968] NZLR 834 (CA) at 842.) in support of her view that the $14,076.38 credited to the Commissioner by BNZ was not trust property.


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