Federal Commissioner of Taxation v Official Receiver
(1956) 95 CLR 30030 ALJ 143
56 ALR 643
(Judgment by: Taylor J)
Between: Federal Commissioner of Taxation
And: Official Receiver
Judges:
Dixon CJ
Williams J
Fullagar J
Kitto J
Taylor J
Subject References:
Bankruptcy
Judgment date: 6 June 1956
Judgment by:
Taylor J
The first-named respondent to this appeal is the official receiver for the bankruptcy district of Victoria and he is the trustee of the bankrupt estate of one, John Travis, whose estate was sequestrated on 24th February 1950. Travis is still an undischarged bankrupt and during the year which ended on 30th June 1954 he earned salary or wages from which, in accordance with the provisions of s. 221C of the Income Tax and Social Services Contribution Assessment Act 1936-1953, his employer make periodical deductions at the prescribed rate, and, in respect of which the employer otherwise complied with the provisions of Div. 2 of Pt. VI of that Act. After the close of the income year referred to and after the tax payable by the bankrupt in respect of that year had been assessed, it was found that he was entitled to receive from the appellant a refund of 44 pounds 6s. 3d. This fact was communicated by the appellant to the first-named respondent who thereupon claimed to be entitled to this sum as the trustee of the estate of the bankrupt. The claim was rejected by the appellant but, in proceedings subsequently instituted in the Federal Court of Bankruptcy, the said respondent obtained an order directing payment to him of the sum in question. It is from this order that the present appeal is brought. (at p335)
The order appealed from was made upon an application to which the only parties were the appellant and the official receiver. No notice was given to the bankrupt who, apparently, remained unaware of the application and of the making of the order until after appropriate notice was given to him, in accordance with the directions of this Court, of the proceedings in the appeal. Not unnaturally he is content at this stage to allow the appellant to continue to bear the expense of advancing arguments favourable to his interest and, though now a respondent, he does not wish to be represented on the appeal. For reasons which are obvious the original application should not have been entertained in his absence. (at p335)
The right to receive the amount now in question constitutes afteracquired property of the bankrupt and, according to contentions advanced on behalf of the official receiver, this right vested in him, consequent upon the making of the sequestration order, pursuant to ss. 60 (1) and 91 (i) of the Bankruptcy Act 1924-1950. But it is asserted on behalf of the appellant that the amount in question constitutes wages or salary payable to the bankrupt and that s. 91 (i) - which defines "the property of the bankrupt" - does not extend to any part of the personal earnings of the bankrupt after bankruptcy or, alternatively, that it does not extend to any part of such personal earnings as is required for the present maintenance of the bankrupt and his family. The first of these alternative contentions rests upon the view that s. 101 of the Bankruptcy Act constitutes an exclusive provision relating to the personal earnings of bankrupts and, therefore, that it operates to except from the wide provisions of s. 91 (i) salary and wages earned after bankruptcy. Other questions arose upon the appeal but it is convenient to postpone consideration of them for the moment. (at p335)
The first question which arises upon the competing contentions referred to is whether the amount payable by the appellant constitutes wages or salary of the 'bankrupt'. After referring to the relevant provisions of the Income Tax and Social Services Contribution Assessment Act the learned judge in bankruptcy formed the opinion that it does not. He observed that each periodical amount payable to the commissioner under those provisions constituted a debt due to the Queen on behalf of the Commonwealth (s. 221R (1)), THAT ALL MONEYS received by the Commissioner of Taxation in pursuance of those provisions are to form part of the Consolidated Revenue Fund (s. 221U) and that where, upon assessment, it is found that the aggregate of the periodical payments exceeds the tax payable by the employee an amount equal to the excess is to be paid to the latter out of that fund.
But it is of importance to notice that the provisions of Div. 2 of Pt. VI of the Act do not impose upon an employee any obligation to make periodical payments to the commissioner; the obligation is directly imposed upon the employer to make deductions at the prescribed rate from the wages or salary due to an employee and to account to the commissioner for the amount so deducted in one of the methods provided by the Act. If an employer fails to make the appropriate deductions he is, nevertheless, liable to pay to the commissioner the amounts which he has failed to deduct (s. 221N), though it is true that the employer may in such a case, and after he has discharged his liability to the commissioner, recover from the employee any amount or amounts so paid. But at no stage prior to assessment is the employee directly liable to the commissioner to make periodical payments either as tax or on account of a future tax liability; the debt which is created is one which is owed by the employer to the Crown who has no recourse whatever against the employee.
It may, of course, be said that the purpose of the legislation is to permit and, in fact, require the appropria tion of some part of an employee's earnings to discharge an indebtedness of the employer and that, in this sense, a liability is imposed upon the employee. Again, it may be said that the employee's right to recover the residue of his wages or salary from his employer is extinguished and that after a deduction has been made he has no further interest, as wages or salary or at all, in the amount thereof. But his right is not extinguished by payment either to him or on account of any existing liability on his part.
The substance of the matter, as I see it, is that the Act directs interception of portion of the wages or salary payable to an employee and authorises the retention by the commissioner of sums so deducted and collected in accordance with the provisions of the Act to answer the future tax liability, if any, of the employee. The fact that amounts received by the commissioner are paid into consolidated revenue and that excess payments are repayable out of this fund in no way affects the substance of the matter. Portion of the wages or salary of the employee is withheld and retained against his future contingent liability and if an excessive amount is withheld and retained the excess when paid to him is simply a deferred payment of portion of his wages or salary.
This view would, I think, be inescapable if periodical deductions were made by the direction of the employee for the purpose of constituting a fund to meet a future unascertained liability and I can see no reason why the same view should not prevail where the deductions are made for this purpose under the authority of a statute. The legislative provisions are quite unlike those under consideration in Nette v. Howarth (1935) 53 CLR 55 where the view was taken that a refund of contributions paid pursuant to the Superannuation Act 1916-1930 (N.S.W.) was not a deferred payment of salary. (at p337)
If, as I think, such payments constitute deferred salary or wages the question which next arises is whether the right to receive the sum in question in this case ever vested in the respondent. The first contention of the appellant on this point concedes that the wide language of s. 91 (i) of the Bankruptcy Act - "all property which belongs to or is vested in the bankrupt at the commencement of bankruptcy, or is acquired by or devolves on him before his discharge" - is adequate to embrace the personal earnings of a bankrupt but it asserts that the provisions of s. 101 are intended to deal exclusively with after-acquired property of this description. That section is in the following terms:
- "101.
- Subject to this 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 as much thereof as the court, on the application of the trustee, directs: Provided that this section shall not apply to any pay, pension, salary, or wages which by any Act or State Act is made exempt from attachment or incapable of being assigned or charged."
This provision, it is said, shows that after-acquired property of the character to which the section applies was not intended to vest in the trustee pursuant to ss. 60 (1) and 91 (i) and that the right of a trustee to resort to it, or to any part of it, depends upon the making of an appropriate order under the section. The argument was reinforced by reference to the decision in Williams v. Chambers [1847] 10 QB 337 (116 ER 130) as an authority for the proposition that the right to sue for personal earnings accruing due after bankruptcy does not vest in a bankrupt's trustee.
The observations of Lord Denman in this case rather suggest that in no circumstances could the assignee of an insolvent debtor sue to recover any part of the personal earnings of the debtor. But the case was decided on demurrer and for the purposes of the question of law involved it was common ground that the earnings which the assignee of the insolvent debtor sought to recover were not more than sufficient for the necessary support of the debtor and his family. In these circumstances I find difficulty in attributing to his Lordship any intention to decide that in no circumstances could the assignee of an insolvent debtor, under the relevant English legislation, sue to recover part of the personal earnings of the latter. (See also per Blackburn J. in Wadling v. Oliphant (1875) 1 QBD 145 , at p 149). Moreover, such a broad view would be quite inconsistent with later cases in England where provisions resembling those under consideration in this case have been reviewed on a number of occasions. In particular, as early as In re Roberts [1900] 1 QB 122 , it was said: "It may be that a bankrupt's trustee cannot maintain an action for money earned by the bankrupt since his bankruptcy by his personal exertions, if such money is required by him for his personal support and maintenance: see Williams v. Chambers [1847] 10 QB 337 (116 ER 130), the pleadings in which, however, alleged promises to pay the assignees for work done by the bankrupt. The Bankruptcy Act of-1883, like its predecessors, excepts a bankrupt's tools and contemplates the acquisition of future property by a bankrupt, and he must live to use his tools and acquire such property. The present Act, like previous Bankruptcy Acts, must be construed so as to enable him to do so; and the language of s. 44, clear and express as it is, must not, therefore, 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.
This is in entire accordance with modern decisions: see Mercer v. Vans Colina (1898) 67 LJ (QB) 424; In re Graydon [1896] 1 QB 417 ; Wadling v. Oliphant (1875) 1 QBD 145 ; Emden v. Carte (1881) 17 Ch D 768; In re Rogers [1894] 1 QB 425 ; Benwell's Case (1884) 14 QBD 301; and does not conflict with other cases. That case turns entirely on s. 53, and is only an authority for the proposition that a prospective order cannot be made impounding the future personal earnings of a bankrupt. Similar observations apply to In re Shine; Ex parte Shine [1892] 1 QB 522 . 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. He may sue for and recover his earnings if his trustee does not interfere, but what he recovers he recovers for the benefit of his creditors, except to the extent necessary to support himself and his wife and family. The exception seems to include them" (1900) 1 QB, at pp 128, 129. So far as I can see the rule as stated in the second last sentence of these observations has never been doubted in England and has been referred to in Australia as "the rule long established in bankruptcy" (Nette v. Howarth (1935) 53 CLR, at p 65). (at p339)
The rule as stated, however, leaves much to be desired as a practical definition of the respective rights of a bankrupt and his trustee and in this circumstance, no doubt, is to be found the reason for the making of special provision - in England as early as 1869 - with respect to the salary and income of bankrupts. By the Bankruptcy Act 1869 "the property of the bankrupt" was defined in terms almost identical with and, certainly, as wide as the language employed in s. 91 (i) of the present Australian Act. But by ss. 89 and 90 of the former Act special provision was made relating to, first of all, the pay, salary, emoluments and pensions of bankrupts who were or had been officers of the army or navy, or officers or clerks or otherwise employed in the civil service of the Crown, or, who were in the enjoyment of any pension or compensation granted by the Treasury and, secondly, relating to the salary or income, other than as aforesaid, of persons becoming bankrupt. With respect to income of the former character s. 89 provided that "the trustee... shall receive for distribution amongst the creditors so much of the bankrupt's pay, half pay, salary, emolument, or pension as the court, upon the application of the trustee, thinks just and reasonable, to be paid in such manner and at such times as the court, with the consent in writing of the chief officer of the department under which the pay, half pay, salary, emolument, pension or compensation is enjoyed, directs".
But with respect to salary and income falling into the second category it was provided, by s. 90, that the court should "upon the application of the trustee... 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... to be applied by him in such manner as the court may direct". In the main the first of these sections dealt with personal earnings which would not vest in the trustee of a bankrupt by force of the general provisions of the Act, whilst the second section was dealing with earnings which, to the extent to which they were not required for the maintenance of the bankrupt and his family, would so vest. Consequently the trustee's right to receive any part of personal earnings falling into the first category depended entirely on s. 89 whereas, it may be said, the trustee's right to earnings which fell into the second category did not entirely depend upon the provisions of s. 90; the latter section was quite capable of being regarded merely as providing a summary method of ascertaining the extent of the trustee's right to some part of a bankrupt's salary or income and as convenient machinery for enforcing the right when ascertained. With this in mind significant differences are discernible in the language employed in the sections. Appropriately enough s. 89 provided that "the trustee... shall receive for distribution amongst the creditors so much" of the bankrupt's personal earnings "as the court... thinks just and reasonable" for the section was enacted on the view that all or, at the least, a great part of the personal earnings referred to in the section would not otherwise become available to the trustee for distribution. Consequently an order made pursuant to its terms was to be the trustee's title to receive some part of them. Section 90 pursued a different form.
It merely provided that "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 earnings "or any part thereof, to the trustee". The presence of such a provision as this was not inconsistent with the notion that the trustee was, otherwise, entitled to such part of a bankrupt's salary or income as was not required for the maintenance of himself and his family. The difficulties in the way of giving practical effect to that notion furnish a ready reason for the provision of special machinery to enable the respective rights of a bankrupt and his trustee to be determined in one proceeding rather than in repeated and interminable proceedings from time to time. The later Bankruptcy Acts of 1883 (sub-ss. 53 (1) and (2) and of 1914 (sub-ss. 51 (1) and (2)) contain provisions similar to those contained in the earlier Act and the distinction in verbiage in relation to the two categories of personal earnings is preserved. But s. 101 of the Act under consideration in this case presents features of a different character. Section 101 deals generally with income of the character therein specified subject to a proviso which makes it inapplicable to any pay, pension, salary or wages which by any Act or State Act is made exempt from attachment or incapable of being assigned or charged. With respect, however, to other personal earnings it expressly provides that "the trustee shall receive for distribution amongst the creditors so much thereof as the court, on the application of the trustee, directs." What has already been said is sufficient to indicate that these words are capable of a meaning which would give to the section an operation beyond that of a mere machinery provision designed to enable the extent of the trustee's right to be determined and enforced in a summary manner.
It rather suggests that the title to the trustee's right to receive any part of a bankrupt's personal earnings after bankruptcy will be found in an order made under this section and that such an order will not constitute a mere quantification of the trustee's pre-existing right. The express statement in the section that the latter shall receive for distribution amongst the creditors so much thereof as the court directs strongly suggests that apart from the making of an order no part of the personal earnings are to be available for this purpose. Further, the language employed is that which for many years has been used in relation to personal earnings which, in the main, were not available to creditors without an order of the court and it has been chosen notwithstanding that language appropriate to a mere machinery provision had for many years been used in juxtaposition. Apart from any other considerations, however, I feel that there is great force in the contention that when the section says that the trustee shall receive so much of a bankrupt's earnings as the court directs it means that he shall receive the amount or amounts specified in an order and no more. The language used seems to me to indicate that it was intended that such an order should constitute the title of the trustee to receive such part of the bankrupt's personal earnings as the court should think ought to be made available for distribution amongst the creditors and that without any such order he should have no title to any part. Perhaps another way of stating the effect of the section is to say, as was said by Lukin J. in In re Howarth; Ex parte Official Receiver (1934) 8 ABC 16 , that the trustee's right to intervene in relation to after-acquired income of the character specified in s. 101, is restricted by that section to an application pursuant to its provisions. It is perhaps worthy of note that this view, though referred to, was not questioned in the subsequent appeal to this Court: Nette v. Howarth (1935) 53 CLR 55 .
In my view the language of s. 101, particularly when it is considered in the light of the parallel provisions which have existed in England for so many years, is consistent only with an intention that its special provisions should operate exclusively in relation to the subject matter to which it applies and, accordingly, I am of the opinion that personal earnings of the nature specified do not pass to the trustee in bankruptcy under the general provisions of ss. 60 (1) and 91 (i). (at p341)
What already appears is sufficient to dispose of the appeal but before parting with the case I should refer to the suggestion made during argument that the right of an employee to repayment of any excess moneys in the hands of the commissioner is not a right capable of assignment or one which will devolve upon his trustee in bankruptcy. But the fact that the payment is one required to be made by the Crown does not, of itself, lead to this conclusion: R. v. Brown (1912) 14 CLR 17 , nor was any such suggestion made; on the contrary reliance was placed on grounds of a rather more special character. Section 221H (2) provides that where the commissioner receives from an employee a tax stamps sheet or a group certificate, or both, 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, 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. It is contended that this provision requires the payment of any excess amount to be made to the employee and to nobody else and this is so, it is said, whether or not the moneys payable represent salary or wages of the employee. It is not suggested that this result is produced by any express provision of the Act but rather that it follows from the personal and confidential nature of the relationship established by the Act between the commissioner and the taxpayer. In particular the secrecy provisions in s. 16 of the Act were referred to and it was suggested that it would be contrary to these provisions for the commissioner or an officer to disclose information to or deal with an assignee, whether voluntary or statutory, in matters touching a taxpayer's affairs.
Indeed, it was said that the disclosure to the official receiver that a sum in excess of that required to discharge the tax liability of the bankrupt was held by the appellant may well be a breach of these provisions. But the answer is to be found in an examination of the provisions of s. 16. The prohibition which it is material to consider is to be found in sub-s. (2) which provides, in effect, that 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 informatio n acquired by him, by reason of his appointment, or employment, or in the course of that employment, respecting the affairs of any other person disclosed or obtained under the provisions of the Act or of any previous law of the Commonwealth relating to income tax. Of course, if the Act provided that the right to receive excess payments should not be assignable it would be improper for an officer to deal with a person who claimed to be an assignee of such a right. But if such a right be assignable it would be the plain duty of an officer to recognise and deal with an assignee and, indeed, in cases where there is a dispute as to the existence of a valid agreement, to notify both parties and, in substance, interplead. I find nothing in these provisions to indicate that s. 221H should be understood as creating a right which is not assignable; the provisions are neutral and throw no light on this point. I should add that so far as I can see there is no other provision of the Act or any consideration of public policy which should lead us to that conclusion. The section creates a right to payment, the right constitutes a chose in action and as such it is assignable. In these circumstances there is nothing in this independent argument to assist the appellant but for the reasons given earlier the order appealed from should be discharged. (at p343)