New Zealand: IRD plays PAYE priority trump card – and wins

Brief Counsel

Inland Revenue is now ahead of liquidators and receivers in the queue for payment where cash is available in liquidation and PAYE is owed.

Industry practice has been that PAYE is paid to the Commissioner of IRD only after the insolvency practitioners' fees and employees' wages have been paid but the Court of Appeal has accepted the IRD's argument that the Commissioner has first claim.1

The Commissioner has taken a new approach, which is to apply section 167 of the Tax Administration Act to say that available cash up to the value of PAYE deducted is held on trust for the Commissioner and forms no part of the company's estate on liquidation. A majority in the Court of Appeal has accepted this approach. The result is that the Schedule 7 waterfall is bypassed.

The legislation

Schedule 7 of the Companies Act sets out the priority of payments to preferential creditors and puts IRD behind fees and other expenses incurred by the liquidator and others, behind certain recoveries for creditors who fund the liquidator's recoveries, and behind any monies owed to the employees.

But the Tax Administration Act (section 167) creates a trust over PAYE 'deducted' from payments to employees and certain contractors (section 167). There are two limbs to the section:

  • subsection (1), where PAYE has been dealt with properly by the employer, provides that the money is held on trust for the Commissioner and does not form part of the company's estate on receivership or liquidation, and
  • subsection (2), where the employer has failed to deal properly with PAYE deducted, provides that the Commissioner ranks in accordance with Schedule 7.

The Commissioner accepted that the two limbs seem inconsistent, but argued that the PAYE owing was held in trust for her under section 167, so she was entitled to retain it. The liquidators argued that the Commissioner's protection under section 167 is lost upon liquidation.

The decision

Overturning the decision of the High Court2, the majority in the Court of Appeal found that where subsection (1) applies, the trust it creates is not extinguished on liquidation of the company, so the PAYE owing is paid straight to the Commissioner, as opposed to being subject to the Schedule 7 waterfall.

Whether an amount falls under the first or second limb of section 167 depends on whether the employer has 'dealt properly' with the PAYE deductions. The Court said that a company will have failed to deal properly with the PAYE if the money deducted is not paid to the Commissioner by the due date or is no longer held by the Company at the time of liquidation.

Ellen France J gave a dissenting judgment, upholding current practice, finding that subsection (2) applies to PAYE in arrears at the time of liquidation.

The consequences

The effect of the decision is that the status of PAYE deductions depends on whether the employer has a credit balance in their bank account at the time of liquidation. This is a surprising result given that there is no requirement for an employer to keep PAYE amounts separate, or to keep their bank account in credit with an equivalent amount.

A company that runs a perpetual bank account overdraft would automatically fall under subsection (2) as having failed to deal with the PAYE properly, despite the fact that it has not breached any obligations if the PAYE is not yet due.

Liquidators need to be aware that outstanding PAYE will be held on trust for the Commissioner where, upon appointment, the company has a credit bank balance. These funds cannot be applied to other creditors.

This decision impacts not only PAYE withheld from employees, but amounts of withholding tax deducted from "schedular payments" under the Income Tax Act 2007, including directors fees and payments made to non-resident contractors. Note however, that this decision does not extend to GST.

Receivers too will be affected by the decision. On appointment, funds held by the company will be subject to a trust for the Commissioner up to the value of the unpaid PAYE so the waterfall in section 30(2) of the Receiverships Act 1993 will, like schedule 7, be bypassed.

Chapman Tripp comment

The case signals the start of the Commissioner's new approach to section 167. In our view it is regrettable that more guidance has not been offered as to the demarcation between dealing properly with PAYE deductions and failing to do so, and on the practicalities of assessing that demarcation by a bank account balance at the date of liquidation.

Reconciled approach?

We consider that there is a workable approach to section 167, which allows the two limbs to work in tandem.

  • Subsection (1) applies to current PAYE. That is, PAYE that has been deducted but is not yet due for payment to IRD. On liquidation, the trust over that money remains in place, as the employer has not failed to deal properly with the amount.
  • Subsection (2) applies to PAYE in arrears. This is PAYE that the company has deducted but failed to pay to the Commissioner. In respect of recouping those amounts, the Commissioner ranks in accordance with Schedule 7.

We believe there is scope for the Supreme Court to engage with these issues. The liquidators have sought leave to appeal the decision to the Supreme Court. We will keep you informed of the outcome.

Our thanks to Stephanie Irons for writing this Brief Counsel.


1Commissioner of Inland Revenue v Jennings Roadfreight Limited (in liquidation) & Ors [2013] NZCA 455. For a copy of the case click here
2Jennings Roadfreight Limited (in liquidation) & Anor v Commissioner of Inland Revenue (2012) 11 NZCLC, [2012] NZHC 1441. For a copy of the case click here

The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Michael Arthur
Michael Harper
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions