Federal Commissioner of Taxation v Official Receiver

(1956) 95 CLR 300
30 ALJ 143
56 ALR 643

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(Judgment by: Williams J)

Between: Federal Commissioner of Taxation
And: Official Receiver

Court:

Judges: Dixon CJ

Williams JFullagar J
Kitto J
Taylor J

Subject References:
Bankruptcy

Judgment date: 6 June 1956

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Judgment by:
Williams J

This is an appeal by the Deputy Commissioner of Taxation from an order of the Federal Court of Bankruptcy (Clyne J.) ordering the appellant to pay to the official receiver, the respondent on this appeal, the sum of 44 pounds 6s. 3d. and his costs of and incidental to the motion. The facts are very brief. The official receiver is the trustee of the estate of one John Travis whose estate was sequestrated on 24th February 1950.

In respect of the year of income ending on 30th June 1954 the bankrupt earned salary or wages in respect of which his employer made in that year deductions for income tax and social services contribution and accounted to the Deputy Commissioner of Taxation in accordance with the provisions of Div. 2 of Pt. VI of the Income Tax and Social Services Contribution Assessment Act 1936-1953. In pursuance of the provisions of s. 221H (2) (b) of that Act (hereinafter called the Assessment Act), there is now due and payable by the Deputy Commissioner of Taxation the sum of 44 pounds 6s. 3d. being the amount of the excess of the sums deducted over the tax and social services contribution payable by the bankrupt in that year. The Deputy Commissioner of Taxation informed the official receiver, under what authority to make the disclosure we were not told, that he had this sum in hand and the official receiver claimed that it should be paid to him as the trustee of the bankrupt's estate. But the deputy commissioner refused to do so because he considered that it was necessary for the official receiver first to obtain an order under s. 101 of the Bankruptcy Act 1924-1950. The official receiver considered that no such order was necessary claiming that the amount of the refund became vested in him as after-acquired property of the bankrupt by virtue of s. 91 (i) of the Bankruptcy Act.

He filed a notice of motion in the Bankruptcy Court, making the deputy commissioner the respondent, asking the following questions:

"1.

Whether the sum of 44 pounds 6s. 3d. due and payable by the Commissioner of Taxation in pursuance of the provisions of s. 221H of the Income Tax Assessment Act 1936 being the amount of the excess of the sums deducted by the employer of the said John Travis in the year ending 30th June 1954 over the income tax and social services contribution payable by the said John Travis in that year is property vested in the official receiver.

2.

Whether the said sum is pay pension salary emoluments profits wages earnings or income within the meaning of s. 101 of the Bankruptcy Act.

3.

If yea to 2 whether the said bankrupt is in receipt of the same within the meaning of s. 101 of the Bankruptcy Act.

4.

Whether the said sum is now payable by the Commissioner of Taxation to the official receiver." (at p306)

His Honour did not answer the questions specifically but it is clear from his reasons for judgment that in his opinion the obligation imposed upon the commissioner by s. 221H (2) (B) of the Assessment Act to refund the excess was a chose in action which had vested in the official receiver as after-acquired property of the bankrupt. Accordingly he made the order already mentioned. The case appears to be a test case because there is evidence that the same question has arisen on other occassions between the Deputy Commissioner of Taxation and the official receiver. Remarkable as it may seem, the motion was heard in the absence of the bankrupt and he was not made a respondent to the notice of appeal. But upon the appeal coming on to be heard in this Court we required the bankrupt to be made a respondent and to be served with the notice of appeal. But he did not choose to appear or take any part in the proceedings. (at p307)

The first question that arises for decision is whether his Honour was right in holding that the obligation of the commissioner to repay the 44 pounds 6s. 3d. to the bankrupt is a chose in action which vested in the official receiver under the provisions of the Bankruptcy Act. The official receiver relies on ss. 91 (i) and 99 (4) of that Act. Section 91 (i) provides that, subject to the Act, the property of the bankrupt divisible amongst his creditors (and property includes things in action - s. 4) includes all property which belongs to or is vested in the bankrupt at the commencement of the bankruptcy or is acquired by or devolves on him before his discharge. Section 99 (4) provides that where any part of the property of the bankrupt consists of things in action, they shall be deemed to have been duly assigned to the trustee. The Assessment Act, Pt. VI, Div. 2, provides for the collection of income tax and social services contribution by instalments. It was under these provisions that the employer of the bankrupt, as he was bound to do, made the deductions. (at p307)

The general nature of these provisions is well known and it is unnecessary to go into detail.

Section 221C (1) provides that for the purpose of enabling the collection by instalments from employees of income tax, where an employee receives or is entitled to receive from an employer in respect of a week or part thereof salary or wages in excess of two pounds, the employer shall, at the time of paying the salary or wages, make a deduction therefrom at such rate as is prescribed.

Section 221G (1) provides that an employer... who pays to an employee salary or wages from which he is required to make a deduction shall, in respect of that employee, keep a tax deduction sheet in a form authorised by the commissioner, and shall -

(a)

at the time of paying salary or wages to that employee enter in the spaces provided for the purpose on the tax deduction sheet the amount of the salary or wages before making any deduction and the amount of any deduction made.

The section then goes on to provide for the purchase by the employer and the affixing in the space provided for that purpose on the tax stamps sheet of tax stamps of a face value equal to the amount of the deductions made by him from the salary or wages of that employee paid during that period and for the employer at the end of each year completing and signing the tax stamps certificate and delivering it, together with the tax stamps sheet, to the employee, and signing the tax check sheets for that year in respect of his employees and forwarding them to the commissioner, together with a summary, in a form authorised by the commissioner, of the salaries or wages referred to in the sheets.

Section 221H provides

(1)

for an employee forwarding any tax stamps sheets issued to him in respect of deductions made in any year of income from his salary or wages to the commissioner with the return which he is required under s. 161 of the Act to furnish in respect of that year of income;

(2)

where the commissioner receives from an employee a tax stamps sheet in respect of deductions made in any year of income from his salary or wages and the tax payable by the employee in respect of that year of income has been assessed, the commissioner shall -

...

(b)

if that sum exceeds that tax -

credit so much of that sum as is required in payment of that tax and any other tax payable by the employee, and pay to the employee an amount equal to any excess.

Section 161 provides that every person shall... furnish to the commissioner... a return signed by him setting forth a full and complete statement of the total income derived by him during the year of income, and of any deductions claimed by him.

Section 166 provides that from the returns, and from any other information in his possession, or from any one or more of these sources, the commissioner shall make an assessment of the amount of the taxable income of any taxpayer and of the tax payable thereon. Section 174 provides that as soon as conveniently may be after any assessment is made, the commissioner shall serve notice thereof in writing by post or otherwise upon the person liable to pay the tax. (at p308)

The manner in which the system of collecting income tax by instalments from salary or wages dovetails with the general scheme of the Assessment Act as a whole is plain enough. The instalments are collected on account of the contingent liability of the salary or wage earner to pay income tax which will crystallise into an actual liability upon the making of the assessment. The instalments are collected in advance by the employer on behalf of the commissioner out of salary or wages payable by the employer to the employee. They partially discharge the obligation of the employer to pay the salary or wages. The employee is still under an obligation to furnish an income tax return to the commissioner under s. 161 and it is from that return and from any other information in his possession that the commissioner in accordance with s. 166 makes the usual assessment of the amount of the taxable income of the taxpayer and of the tax payable thereon. Too little or too much may have been collected in advance by instalments. If too little, the salary or wage earner must pay the deficiency to the commissioner. If too much, he is entitled to a refund of the excess. There are several sections in the Assessment Act which require the commissioner to make a refund where the taxpayer has paid a greater amount on account of tax than is exigible under the Act. Section 172 provides that where by reason of any amendment the taxpayer's liability is reduced, the commissioner shall refund any tax overpaid. Section 202 provides that if an assessment is altered on an appeal or reference to a board of review a due adjustment shall be made, for which purpose amounts paid in excess shall be refunded and amounts short paid shall be recoverable as arrears. Section 221YE provides that in the circumstances there mentioned the commissioner shall be liable to refund amounts paid by way of provisional tax to the taxpayer.

Section 221H (2) (b) contains the special provision providing for a refund where the total sum collected by instalments from an employee in receipt of salary or wages exceeds the amount of tax he is liable to pay. The refund becomes payable when the tax payable by the employee in respect of the year of income has been assessed. It should therefore be repaid to the employee when he receives his notice of assessment. (at p309)

Section 16 of the Assessment Act contains very explicit provisions requiring officers of the Income Tax Department, subject to certain exceptions not applicable to the present case, to maintain secrecy relating to any information acquired by them with respect to the affairs of any person disclosed or obtained under the provisions of the Act. Sub-section (2) of s. 16 provides that subject to this section, an officer shall not either directly or indirectly, except in the performance of any duty as an officer, and either while he is, or after he ceases to be, an officer, make a record of, or divulge or communicate to any person any such information so acquired by him. No distinction whatever is drawn between information relating to the affairs of persons who are not bankrupts and those who are. Every taxpayer has the same protection. (at p309)

These secrecy provisions in themselves, and a fortiori when considered in conjunction with the general scheme of the Act, point and point necessarily to the plain intent, to be gathered from the general structure of the Act and its specific provisions, that the Act should provide a complete and exhaustive code of the rights and obligations of the commissioner and other officers of his department to members of the general public who are subject to its provisions and of those members of the general public to his department. In particular there is the obligation imposed on individuals to make the return required by s. 161 of the Act and the obligation imposed on the commissioner to assess the taxable income of such individuals and the tax payable thereon and to give them notice of the assessment.

It is the amount of tax payable on that assessment that the particular person becomes under an immediate liability to pay. The taxpayer may be satisfied or dissatisfied with the assessment. If dissatisfied, he has the rights of objection, of reference and of appeal conferred upon him by the Act. If as a result of the commissioner acceding to the objection either in whole or in part or of a reference or an appeal succeeding in whole or in part, the liability of the taxpayer is reduced it is the duty of the commissioner to refund any tax overpaid. A similar duty is imposed on the commissioner where he has been overpaid in advance by collections of instalments or of provisional tax. The wording of ss. 172, 202, 221H (2) (b) and 221YE differs slightly but the duty to make a refund which they each create is in essence the same. It is not a duty which confers on taxpayers a right to bring an action against the commissioner personally. If it created an ordinary chose in action, it could be assigned, the assignee could give the commissioner notice of the assignment and the commissioner would become subject to all the incidents of law and equity relating to choses in action which are assignable.

The commissioner would be bound to disclose to the assignee information relating to the affairs of the taxpayer assignor which he is prohibited from disclosing by s. 16 and it is impossible to reconcile such a consequence with the very specific provisions as to secrecy imposed upon the commissioner and his officers by this section.

Section 8 provides that the commissioner shall have the general administration of the Act. In administering the Act the commissioner and his officers are acting on behalf of the Crown in right of the Commonwealth.

Section 208 provides that income tax when it becomes due and payable shall be a debt due to the Queen on behalf of the Commonwealth, and payable to the commissioner in the manner and at the place prescribed.

Section 209 provides that any tax unpaid may be sued for and recovered in any court of competent jurisdiction by the commissioner or deputy commissioner suing in his official name.

The obligations to the commissioner imposed on members of the general public by the Act are duties owed to him as representing the Crown. The taxes collected under the Act belong to the Crown. Likewise the obligations the commissioner and his officers incur under the Act towards members of the public are duties incurred on behalf of the Crown. The duty imposed on the commissioner to make a refund by the sections already referred to is a duty to do so on behalf of the Commonwealth. An action to recover such moneys could presumably be brought against the Commonwealth. The Act requires the commissioner to make the refunds. But it requires him to do so on behalf of the Crown. If the Commonwealth refused to make the necessary funds available for the purpose the commissioner would be under no personal liability to refund. There is no section in the Act corresponding to s. 209 enabling the commissioner or a deputy commissioner to be sued for a refund in his official name. The duty imposed upon the commissioner to refund by s. 221H (2) (b) is of this character.

The amount of the refund could not be recovered in an action brought by the salary or wage earner against the commissioner personally or in his official capacity. Section 221U of the Assessment Act no doubt provides that all moneys received by the commissioner in pursuance of Pt. VI, Div. 2 shall form part of the Consolidated Revenue Fund, and there shall be payable out of that fund (which is, to the necessary extent, thereby appropriated accordingly) such amounts as the commissioner becomes liable to pay in accordance with the provisions of this division. But the mere fact that moneys are provided to enable the commissioner to fulfil the duty imposed upon him by the Act does not alter the character of the duty.

The obligation to make the refund is simply one of a number of statutory duties imposed upon the commissioner by s. 221H (2). It is of the same quality as the other obligations contained in the sub-section. The commissioner is under a public duty to salary and wage earners to perform all of them, and to make and issue an assessment showing the state of account between him and them so that they will know whether they are entitled to a refund or not and be placed in a position to claim it. These are duties which could be enforced by mandamus: Reg v. Lords of the Treasury [1851] 16 QB 357 (117 ER 916); Reg. v. Commissioners for Special Purposes of Income Tax (1888) 21 QBD 313; Reg. v. Commissioners for Special Purposes of Income Tax (1888) 59 LT 455; Commissioners for Special Purposes of Income Tax v. Pemsel [1891] AC 531 . If public funds are made available to the commissioner to enable him to fulfil his duty to make a refund he could presumably be ordered to make it by mandamus. But if the Commonwealth pursued the completely unlikely course of refusing to make such funds available the commissioner could not be ordered to repay the excess personally and the only course open to the taxpayer would appear to be to sue the Commonwealth.

Accordingly the contention of the official receiver that the right of the bankrupt to recover the 44 pounds 6s. 3d. from the commissioner is a chose in action which vested in him as after acquired property of the bankrupt is untenable, the duty of the commissioner under s. 221H (2) (b) of the Assessment Act is a duty to pay the refund to the taxpayer and to him only (or his personal representative) and the order below must be set aside on this ground alone. (at p312)

But we heard considerable argument as to the meaning and effect of certain provisions of the Bankruptcy Act 1924-1950 and in particular of the extent to which the personal earnings of a bankrupt are after-acquired property which becomes divisible amongst his creditors under s. 91 (i) of the Bankruptcy Act. All property of a bankrupt which he acquires or which devolves upon him before his discharge does not necessarily become divisible among his creditors. Section 98 of the Bankruptcy Act validates all transactions by a bankrupt with any person dealing with him bona fide and for value, in respect of property, whether real or personal, acquired by the bankrupt after the sequestration, if completed before any intervention by the trustee. In addition to this general provision relating to intervention by the trustee there is also the very specific provision contained in s. 101. This section provides that subject to the Act, where a bankrupt is in receipt of pay, pension, salary, emoluments, profits, wages, earnings, or income, the trustee shall receive for distribution amongst the creditors so much thereof as the court, on the application of the trustee, directs. His Honour, having formed the opinion that the obligation of the commissioner to make a refund to the taxpayer was a chose in action deemed to be assigned to the official receiver, did not think it strictly necessary to refer to s. 101 but, "in deference to counsel", he made a brief reference to it. He said:

"The after-acquired property of a bankrupt becomes vested in his trustee. See In re Pascoe (1944) Ch 219.

To this statement of the law there are some qualifications, and one of these qualifications is contained in s. 101. Whether it is a matter of implication or a matter of assumption moneys of the various descriptions mentioned in s. 101 which are being received by a bankrupt and will in the ordinary course of things continue to be received by him can be retained by him unless the court orders that such moneys or a portion thereof should be received by the trustee for the benefit of the bankrupt's creditors. Section 101 is, I consider, an extension of the long established principle of the bankruptcy law that a bankrupt is entitled to retain out of the fruits of his labours sufficient for the purpose of maintaining himself and his family."

This statement can broadly be accepted. The personal earnings of a bankrupt, including his earnings by way of salary or wages, are, on the literal reading of s. 91 (i), after-acquired property of the bankrupt. As such they would vest in the official receiver, as and when the bankrupt received them, and, subject to s. 98, would be part of the property of the bankrupt divisible amongst his creditors. But it has invariably been held that the vesting provisions of Bankruptcy Acts must not be read literally so as to vest the whole of the personal earnings of the bankrupt in his official assignee because to do so would mean that the assignee might, in the words of Lord Mansfield in Chippendale v. Tomlinson (1785) 1 Co Bank L 428, at p 432: "let the insolvent out to hire, and contract himself for his personal labour": Williams v. Chambers [1847] 10 QB 337 , at p 345 (116 ER 130, at p 133).

In In re Roberts [1900] 1 QB 122 , Lindley. M.R., delivering the judgment of the Court of Appeal, said that the language of s. 44 (i) of the Bankruptcy Act 1883 (Imp.) (which corresponds to s. 91 (i) of our Act),

"clear and express as it is, must not,... be taken so literally as to deprive the bankrupt of those fruits of his personal exertions which are necessary to enable him to live. But, on the other hand, the necessity is the limit of the exception" (1900) 1 QB, at p 128.

His Lordship then referred to certain cases and continued:

"Those cases are no authority for the proposition that property of a bankrupt acquired by his personal exertions since his bankruptcy and not wanted for his present support does not belong to his trustee. No such doctrine can be maintained in face of s. 44. After bankruptcy, and before his discharge, whatever property a bankrupt acquires belongs to his trustee, save only what is necessary for his support" (1900) 1 QB, at p 129.

These passages would at first sight suggest that the earnings of a bankrupt would automatically vest in his trustee except so much thereof as was required for the present support of himself and his family without the trustee obtaining an order of the court directing payment of the earnings or part thereof to him during the bankruptcy. But in the later case in the Court of Appeal of Affleck v. Hammond [1912] 3 KB 162 , this judgment of Lindley M.R. was discussed and it was pointed out by Buckley L.J. (as Lord Wrenbury then was) that it was one of the facts in In re Roberts [1900] 1 QB 122

"that the property was not wanted for the bankrupt's support or maintenance; the trustee would therefore be entitled to the whole of it" (1912) 3 KB, at p 170.

In Affleck v. Hammond [1912] 3 KB 162 it was held that a bankrupt who earns salary or wages is entitled to have them paid to him and that he can, if necessary, sue to recover the whole of his personal earnings because, to the extent that they are required for his maintenance, the earnings do not vest in the trustee. Buckley L.J. said:

"the trustee can only get the money upon an application to the court" (1912) 3 KB, at p 170.

In Nette v. Howarth (1935) 53 CLR 55 , Dixon J. (as he then was) said:

"In the receipts enumerated in s. 101 the words 'pay', 'salary' and 'wages' refer to remuneration earned by present service. 'Pension' refers predominantly to payments which follow service. The time has passed when the idiomatic use of the word extended to non-recurring payments. But it may perhaps include in this section a succession of payments which are not the consequence of past service or the like. 'Emolument' too is a word which has ceased to bear its original meaning of mere gain, profit, or advantage. It too relates to revenue, whether casual or constant, arising from an office, station, or situation. 'Profits', 'earnings' and 'income' are wide words. They cover the fruits of labour and much more besides. For example, 'income' in the analogous s. 51 (2) of the English Bankruptcy Act 1914 includes maintenance payable under an order in divorce (In re Landau; Ex parte Trustee (1934) Ch 549).

Decisions interpreting expressions reproduced in the Australian section which occur in s. 51 and corresponding previous British enactments will be found in that case (In re Landau (1934) Ch 549) and in Hollinshead v. Hazleton [1916] 1 AC 428 . But the English and Australian provisions alike appear to be directed at revenue receipts. Indeed, they are reminiscent of the rule long established in bankruptcy, that the personal earnings of a bankrupt do not pass to his trustee except to the extent that they are not required for the support of himself and his family" (1935) 53 CLR, at p 65.

The law is stated in the same way in In re Walter; Slocock v. Official Receiver (1929) 1 Ch 647 where Tomlin J. (as Lord Tomlin then was) said:

"the section (that is s. 38 of the Bankruptcy Act 1914) does not deprive the bankrupt of those fruits of his personal exertions which are necessary to enable him to live; in other words it is only the surplus over and above that which vests in the trustee" (1929) 1 Ch, at p 653.

In In re Shine; Ex parte Shine [1892] 1 QB 522 , Bowen L.J. said:

"As the Master of the Rolls has already said, the original contract was for personal services, and the creditors are not entitled to the benefit of it by the law of bankruptcy; and, until this sub-section was put in force against him, by diverting to the use and advantage of his creditors that which was prima facie up to that moment his own, he had a perfect right, although he was a bankrupt, to make any bargain he pleased with any person as to the remuneration which he was to receive for his personal services" (1892) 1 QB, at p 530.

These and other cases cited to us establish that the question whether any part and if so what part of the personal earnings of a bankrupt vests in the official receiver as after-acquired property is really academic. If the official receiver claims any part of these earnings, he must apply to the Bankruptcy Court for an order. He must intervene in this specific manner. In the absence of such an order the bankrupt is free to dispose of the whole of these earnings. The English cases were decided in relation to sections in succeeding English Bankruptcy Acts which provided that, so far as material, where a bankrupt is in the receipt of a salary or income... the court upon the application of the trustee shall from time to time make such order as it thinks just for the payment of such salary or income, or of any part thereof, to the trustee during the bankruptcy.

The sections in question are - in the Bankruptcy Act 1869 (Imp.), s. 90, the Bankruptcy Act 1883 (Imp.), s. 53 (2), the Bankruptcy Act 1914 (Imp.), s. 51 (2). Section 101 of the Bankruptcy Act (Cth.) includes more classes of property than the English Acts and it is also somewhat differently expressed. It provides that where a bankrupt is in receipt of pay etc. the trustee shall receive... so much thereof as the court, on the application of the trustee, directs. It therefore provides in express terms that an order of the court is necessary before any part of such pay etc. can be recovered by the trustee and it is implicit in the section that in the absence of such an order none of the pay etc. vests in the trustee under s. 91 (i) of the Act. It is the order that effectively vests the pay or any part thereof in the trustee. It thereby becomes part of the property of the bankrupt divisible amongst his creditors. The order can only apply to pay etc. of which the bankrupt is "in receipt" and this means in actual receipt (per Bowen L.J. in In re Shine; E x parte Shine (1892) 1 QB, at p 531).

His Honour, in his reasons, said that it would be strange indeed that where a taxpayer has paid to the commissioner a sum which is more than sufficient to discharge his liability for tax, the excess amount which the taxpayer is entitled to receive back from the commissioner can be regarded as earnings or income of the taxpayer within the meaning of s. 101. But what is there strange about that? The instalments on account of tax that were deducted under the provisions of Pt. VI, Div. 2 of the Assessment Act were made from the salary or wages of the employee.

Apart from these provisions the employer would have been bound to pay the bankrupt his salary or wages in full. It was part of these earnings that were appropriated for that purpose. But it was only a provisional appropriation. The commissioner is obliged to repay any sum found to be in excess of the required amount. The commissioner is obliged to restore the excess to the taxpayer and if the over collections were made out of salary or wages the restoration must be a refund of part of these salary or wages. It is a refund of part of the earnings of the bankrupt and money which he is entitled to retain in the absence of an order of the court under s. 101 of the Act. When he receives the refund and not before he will become for the first time in actual receipt of this part of his earnings. The official receiver may be able to obtain an order of the Bankruptcy Court under s. 101 of the Bankruptcy Act against the bankrupt for payment by the bankrupt of this sum or part thereof to him but it is not an order with which the deputy commissioner is concerned. It is the duty of the latter to pay the whole of the sum in question to the bankrupt and to make no disclosures about it to the official receiver. How otherwise could he comply with s. 16 of the Assessment Act. (at p316)

For these reasons the appeal should be allowed with costs, the order below should be set aside and in lieu thereof there should be an order dismissing the motion with costs. (at p316)