When Does A Company "Incur" A Tax Debt For The Purposes Of A Claim Under Section 588G?

Vincent Young


Vincent Young is a true boutique construction, property + projects, employment + workplace relations firm. We are hands on. We manage every matter as if it were our own. We mix and match our lawyers and consultants to seamlessly produce cost effective, high quality work consistent with the client risk profile.
Section 588G of the Corporations Act 2001 (Cth) imposes a positive duty on company directors to stop a company they control from incurring a debt once it has become insolvent.
Australia Tax
To print this article, all you need is to be registered or login on Mondaq.com.

Section 588G of the Corporations Act 2001  (Cth) imposes a positive duty on company directors to stop a company they control from incurring a debt once it has become insolvent. Insolvent trading claims often constitute one of the easiest recoveries available in liquidation. Complexities however can arise when considering when a company has ‘incurred' tax debt for the purposes of section 588G. This article will explore how the Courts have historically dealt with this issue.

A “debt”

Generally, a debt is incurred for the purposes of section 588G when there is a liability to pay an ascertained amount (Commissioner for Corporate Affairs v Abbott  (1980) CLC 40-667). The act of incurring a debt is extended by section 588(1A), which deems certain transactions to constitute incurring a debt at a specified time. None of those provisions give any guidance to a tax debt for the purposes of considering when a company has incurred a liability to pay payroll or income tax.

“Incurring” a debt

The earlier authorities have suggested that an obligation to pay payroll tax or income tax is not a “debt” and is not “incurred” for the purposes of insolvent trading.1 However, in later cases, such as in Commissioner of State Taxation (WA) v Pollock  (1993) 11 WAR 64, the Full Court of the Supreme Court of Western Australia held that liability for payroll tax can potentially constitute a ‘debt' for the purposes of insolvent trading. The Full Court considered that payroll tax becomes a ‘debt' upon the expiry of the month in which the payroll tax was incurred, because it is only at this time that the amount of payroll tax to be paid can be ascertained.2 It was also held in State Government Insurance Corporation v Pollock  (1993) 11 ACSR 333 that a company “incurred” a liability to pay a worker's compensation premium for the purposes of the insolvent trading provisions, by its voluntary act in employing workers and obtaining a policy to cover its workers compensation liabilities. Pollock continues to be consistently applied in recent cases since its decision.3

In the case of Walsh Engineering Services Pty Ltd (in liq) v Walsh Group (Aust) Pty Ltd [2021] VSC 206 at [38] it was observed that taxation liabilities are considered debts for the purpose of section 588G even before there has been a formal determination or assessment to collect that tax. A debt may arise where the taxpayer has performed transactions to generate a tax liability and when the tax in question is capable of calculation.

The analysis in Walsh is consistent with the 2003 decision of Australian Securities and Investments Commission v Plymin4 where the Court was of the opinion that, for the purposes of determining whether a tax debt has been “incurred”, the word “accrues” is more appropriate than “incurs” given that the period to which a tax debt is best related is commonly not the period when the debt becomes payable, but when a tax liability has arose as a result of the company's activity and operation.


In summary, the development of cases since Pollock seems to suggest that:

  • a company's liability to pay income tax and payroll tax is a ‘debt' of the company for the purposes of s 588M; and
  • a tax ‘debt' is ‘incurred' when, by conduct or operations, the company necessarily subjected itself to a conditional but unavoidable obligation to pay tax at a future time.

Given that section 588G allows the personal assets of the directors to be used for the repayment of the company's debts, this article proves as an important reminder for directors to weigh the company's solvency against ongoing company activity that may attract future tax liabilities.


1. Castrisios v McManus  [1990] 9 ACLC 287 – this case concerned sales tax. The Court found that the requirement of a positive act on behalf of a company precluded the finding that the incurring of sales tax by a company amounted to incurring a debt. The reason for that was because sales tax is a consequence of the contractual agreement between the wholesaler and purchaser. It did not give rise to a debtor and creditor relationship.

2. Commissioner of State Taxation (WA) v Pollock  (1993) 11 WAR 64 at [231]

3. Hurst, in the matter of Lloyds Curry Shop Pty Ltd (in liq) v Prasad (No 3)  [2023] FCA 1174, Re Rococo Group Pty Ltd (in liq) [2022] VSC 167 and Walsh Engineering Services Pty Ltd (in liq) v Walsh Group (Aust) Pty Ltd  [2021] VSC 206.

4. [2003] VSC 123

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

See More Popular Content From

Mondaq uses cookies on this website. By using our website you agree to our use of cookies as set out in our Privacy Policy.

Learn More