National Australia Bank Ltd v Thorp [No 2]

[2019] WASC 464

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(Judgment by: Coram Master Sanderson)

National Australia Bank Ltd
and Douglas Henry Albert Thorp (First Respondent)
and Nicholas James Murfett (Second Respondent)
and Timothy Richard Stephenson (Third Respondent)
and Cameron Victor Eastwood (Fourth Respondent)
and Richard Sidney Thorp (Fifth Respondent)
and Steven Dale Ciupryk (Sixth Respondent)
and Ricky William Cooper and Liann Cooper (Seventh Respondent)
and The Registrar of Titles (Eighth Respondent)
and Paul Douglas Hudson (Ninth Respondent)
and Deputy Commissioner of Taxation (Tenth Respondent)

Court:

Judge:
Coram Master Sanderson

Legislative References:
Taxation Administration Act 1953 - The Act

Case References:
Commissioner of Taxation v Park - [2012] FCAFC 122

Hearing date: 28 November 2019
Judgment date: 19 December 2019

Perth
File Number Civ 1515 Of 2019

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Judgment by:
Coram Master Sanderson

ORDER

Application dismissed

REASONS FOR DECISION

1 This matter has had a rather torturous history. These reasons concern a dispute which has arisen between the fourth respondent and the tenth respondent. For convenience and without meaning any disrespect I will refer to the fourth respondent throughout these reasons as Eastwood. I will refer to the tenth respondent as Commissioner. The background facts which follow are taken largely from the written submissions filed on behalf of the Commissioner.^[1] There was no dispute between the parties as to these facts.

2 On 25 January 1994 the first respondent and the ninth respondent were registered as proprietors as tenants in common in a property in East Fremantle. On 27 November 1997 the applicant registered a mortgage over the property. On 26 June 2010 the first respondent granted a Deed of Charge (the Charge) to secure the payment of Eastwood's fees for representing the first respondent in court proceedings. On 30 September 2011, after a default under the mortgage, judgment was obtained by the bank for its debt and for possession of the property. On 13 December 2016 Eastwood lodged a caveat on the property to protect his interests granted by the Charge.

3 On 1 December 2018 the applicant as mortgagee in possession entered a contract of sale with the seventh respondents as buyers. Clause 3.7 of the general conditions for the sale of land specifically deal with foreign resident capital gains tax (CGT) withholding.^[2] On 22 February 2019 Eastwood wrote to the solicitor for the bank noting that whether his claim was paid in full depended upon whether it was necessary to withhold an amount for the Commissioner pursuant to subdivision 14-D of Schedule 1 of the Taxation Administration Act 1953 (Cth) (TAA). He acknowledged that his claim would not be fully paid if the amount was withheld.

4 On 20 March 2019 solicitors for the bank arranged registerable withdrawals of each of the caveats in preparation for settlement. The bank anticipated there would be a surplus of funds from the sale of the property following the adjustment of the consideration for rates and taxes, foreign resident CGT withholding payment to the Commissioner and payment of land tax, the costs associated with the sale and the amount owing under the mortgage. The distributions were set out in a settlement statement prepared on 20 March 2019. On that same day Eastwood, having received the settlement statement disclosing the distributions to, among others, the Commissioner, confirmed the release of his previously executed withdrawal of caveat then held in escrow for settlement and authorised the lodgement of the withdrawal of caveat for the purposes of effecting the settlement.

5 On or about 29 March 2019 the Commissioner received $131,250 at settlement. As the first and ninth respondents were tenants in common an amount of $65,625 is attributable to each. On 7 May 2019 I ordered that the first respondent do all things and sign all such documents as may be necessary to notify the Commissioner of sale of the property and obtain a tax clearance certificate for any foreign resident CGT withholding or other tax payable by the first respondent in relation to the sale.

6 As at 31 July 2019 Eastwood claimed from the first respondent $128,290.99 being legal fees secured by the Charge and costs of the originating summons. On 12 August 2019 the first respondent filed an affidavit stating that his accountant advised him that a clearance certificate had to be provided to the buyer 'before' the settlement. The first respondent had not applied as he had not been told to apply. Further he said the matter could not now be finalised until past tax returns had been lodged, the CGT calculated then any excess from withheld amount, over taxes owed, would be refunded to the first respondent. The first respondent indicated he had not lodged a tax return since 2000 and the book work and funding needed to rectify the situation would be available to the first respondent only when proceedings were completed.^[3]

7 On 13 August 2019 there was an order that declared half of the proceeds of sale of the property paid into court to be the sole property of the first respondent. There was a further declaration that the first respondent's property (being half the proceeds paid into court), was charged to the third respondent. From the first respondent's property a sum was paid to the third respondent. The Commissioner was joined as the tenth respondent. On 19 August 2019 Eastwood received $70,385.30 from the Public Trustee being the balance of the funds paid into court for the first respondent's share of the proceeds. That left $58,091.52 as the unpaid portion of Eastwood's claim. Eastwood now seeks the money withheld and paid to the Commissioner to be returned to the first respondent and then from those funds the amount owing to be paid to him.

8 Eastwood originally sought two orders. First a declaration that the 'first respondent's property' (being the proceeds paid into court) stand charged to him. The Commissioner does not oppose that declaration as it relates to the property paid into court by the orders on 26 March 2019. Secondly Eastwood seeks a declaration that the Commissioner forthwith pay to Eastwood the sum of $58,091.52 plus interest at the rate of 6% per annum from 13 August 2019 until the date of judgment and his costs of the proceedings. That direction was opposed.

9 At the hearing of the matter Eastwood tendered what was described as 'Fourth Respondent's Minute of Proposed Orders'. This proposed order dropped the application for a direction. Nothing really turns on the change to the form of orders. The real question between the parties was whether or not there ought be a direction the Commissioner pay an amount to Eastwood.

10 The second of the two orders sought is probably not logically the way the matter should be approached. The order should probably be to the effect the funds be repaid by the Commissioner to the first respondent such funds to be paid into court. There should then be a further order that from the funds paid into court the amount sought by Eastwood should be paid to him. Not a lot turns on the form of the orders but were orders to be made they should reflect the fact any entitlement to the funds is at present an entitlement of the first respondent with Eastwood then having a secured interest over those funds.

11 The essential question is whether the Commissioner is obliged to repay the funds to the first respondent in circumstances where, as at the date of settlement of the sale of the property, Eastwood had a secured interest in relation to the amount he now seeks. The Commissioner does not dispute Eastwood had security over the funds. The Commissioner says given the scheme of the TAA and the way in which the transaction took place there is now no obligation for him to make repayment. It would seem the funds held by the Commissioner would stand to the credit to the first respondent. At present the first respondent is not indebted to the Commissioner although as no tax returns have been lodged for around 20 years, it is not difficult to imagine penalties let alone any tax payable would in due course cancel out the present credit standing in the name of the first respondent.

12 In [22] - [35] of his written submissions counsel for the Commissioner set out what he describes as the 'legislative overview'. None of this was challenged by Eastwood and I can do no better than quote these paragraphs in full.

22. Specifically Subdivision 14-D of Schedule 1 to the TAA imposes a non-final withholding obligation on purchasers of certain Australian assets that are real property that are acquired from a foreign resident vendor (as defined in Subdivision 14-D). The purchasers are required to remit the withheld amount to the Commissioner. The foreign resident vendor from whom amounts have been withheld will be entitled to receive a foreign capital gains withholding credit for the amount paid to the Commissioner. The entitlement to a credit arises when the Commissioner makes an income tax assessment (or determines that no income tax is payable) for the income year. The vendor must lodge an income tax return to claim the credit.

23. The foreign capital gains withholding provisions operate as follows.

Withholding and payment obligation

24. Subsection 14-200(1) of Schedule 1 to the TAA requires you to pay to the Commissioner an amount if:

a.

you become the owner of a CGT asset as a result of acquiring it from one or more entities under one or more transactions; and

b.

Subsection 14-210(1) (about foreign residents) applies to at least one of those entities at the time one of those transactions is entered into; and

c.

At that time, the CGT asset is, relevantly, taxable Australian real property, unless a transaction referred to in paragraph (a) is excluded under section 14-215.

25. By subsection 14-200(2) of Schedule 1 to the TAA, you must pay the amount to the Commissioner on or before the day you became the CGT Asset's owner, (generally that is by settlement).

26. By subsection 14-200(3) of Schedule 1 to the TAA, the amount to be paid to the Commissioner is, relevantly:

a.

An amount equal to 12.5% of:

i.

The first element of the CGT asset's cost base just after the acquisition; or

b.

The varied amount applying under section 14-235.

Excluded transactions

27. By subsection 14-215(1) of Schedule 1 to the TAA, a transaction that results in the acquisition of a CGT asset is excluded under this section if, just after the transaction, the CGT asset is taxable Australian real property and the market value of the CGT asset is less than $750,000. The Commissioner accepts the market value as being the sale price of the property where the transaction was undertaken between independent parties under an arm's length arrangement, as it was in this case.

Foreign resident

28. By section 14-210(1)(e) of Schedule 1 to the TAA, an entity (the seller) will be deemed to be a foreign resident for the purposes of the subdivision if, at the time the transaction is entered into the CGT asset to which the transaction relates is taxable Australian real property - unless the exception in subsection 14-210(2) applies.

29. Subsection 14-210(2) of Schedule 1 to the TAA provides that the foreign resident deeming provision will not apply if:

a.

Before you (the purchaser) pay the Commissioner under section 14-200 in relation to the CGT asset to which the transaction relates, the entity (the seller) gives you a certificate about the entity that:

i.

was issued under subsection 14-220(1); and

ii.

is for a period covering the time the transaction is entered into; and

b.

The CGT asset is a taxable Australian real property.

Commissioner clearance certificates

30. By section 14-220 of Schedule 1 to the TAA, the Commissioner may certify that, based on information before him, there is nothing to suggest that an entity is or will be a foreign resident during a specified period. A certificate may be issued on application to the Commissioner in the approved form and is to be in writing and only applies for the purposes of Subdivision 14-D of the TAA.

Varying amounts to be paid to the Commissioner

31. By subsection 14-235(2) of Schedule 1 to the TAA, the Commissioner may, in writing, vary a particular amount payable by you (the purchaser) to the Commissioner under the Subdivision. The variation takes effect when you (the purchaser) become aware of it. It follows that a variation can only take effect when it is made by the Commissioner before the day the purchaser becomes the CGT asset's owner and the purchaser is notified of it.

32. By subsection 14-235(3) of Schedule 1 to the TAA an application for a variation may be made by the purchaser, the vendor or any entity that is owed a debt by the vendor.

33. By subsection 14-235(1) of Schedule 1 to the TAA, in exercising a power to vary an amount, the Commissioner must have regard to the need to protect a creditor's right to recover a debt.

Obligation to withhold and penalties for failure to pay the Commissioner

34. By subsection 16-20(2) of Schedule 1 to the TAA, a purchaser is required to pay an amount to the Commissioner under Subdivision 14-D is entitled to withhold the amount from the foreign resident.

35. By section 16-25 of Schedule 1 to the TAA, an entity must not fail to pay the Commissioner an amount as required under Subdivision 14-D. There is a penalty for failing to comply and the offence is a strict liability offence. Section 16-40 provides an alternative administrative penalty for an entity which fails to pay an amount to the Commissioner as required by Subdivision 14-D.

13 The Commissioner submits the property satisfied the statutory definition of a CGT asset that was taxable Australian real property as it comprised land and buildings that was real property situated in Australia. The transaction was not an excluded transaction under s 14-215 of Sch 1 to the TAA as the market value of the property exceeded the statutory minimum of $750,000. Therefore the purchaser had a statutory obligation to withhold and pay the Commissioner 12.5% of the amount paid to acquire the property because the first and ninth respondents were, irrespective of their actual residency deemed to be foreign residents for the purposes of Subdivision 14-D of Schedule 1 to the TAA.

14 No exemptions apply because at or before the date of settlement of the transaction no application was made to the Commissioner prior to settlement for the issue of a clearance certificate. Further no application was made to the Commissioner for a variation by the purchaser, seller or any entity owed a debt by the seller and the Commissioner did not vary the amount payable to him. Accordingly the purchaser was obliged by statute to pay $131,250 to the Commissioner and the Commissioner was therefore entitled to receive the withheld amounts. Eastwood does not challenge that analysis of the legislative effect of the relevant provisions.

15 Eastwood's point is that subdivision14-D of Sch 1 of the TAA does not interfere with his rights as a secured creditor and that orders should be made facilitating the payment of the balance of his claim for monies paid to the Commissioner to reflect his secured position.

16 The Commissioner answers that submission in two ways. First he says at the time Eastwood provided his consent to the bank to lodge his withdrawal of caveat he was aware of the contract and the settlement statement which stipulated payment to the Commissioner. In other words it is submitted Eastwood voluntarily relinquished his security interest by consenting to the withdrawal of his caveat over the property and permitting the settlement to be effective. The Commissioner points out Eastwood could have refused to remove his caveat thus ensuring his secured interest was protected.

17 Eastwood says that, practically speaking, no such option existed. The property had been sold by the bank pursuant to a mortgage. The purchaser wanted to settle. To have maintained his caveat and frustrated the settlement while attempting to obtain a clearance from the Commissioner was simply not a practical option. In 'real world' terms Eastwood had no choice but to allow the settlement to proceed. In doing so he never intended to compromise his secured position.

18 In my view the Commissioner's argument on this point must be accepted. The statute requires 12.5% of the purchase price to be remitted to the Commissioner. That is then retained by the Commissioner in anticipation the vendor may be liable for CGT. There is no mention in the statute of creditors secured or otherwise. It may be the case that a property was sold by the holder of a first registered mortgage for an amount that did not discharge the amount owing under the mortgage - in other words the property when sold had negative equity. That would not alter the statutory obligation to forward the prescribed percentage of the purchase price to the Commissioner. To that extent it is of no consequence that Eastwood held security over the proceeds.

19 That view is consistent with the decision of the Full Court of the Federal Court in Commissioner of Taxation v Park [2012] FCAFC 122. In that case the Court was dealing with the competing interest between a second mortgagee and the Commissioner who had issued a garnishee note to the purchaser pursuant to s 260-5 of Sch 1 to the TAA. The majority concluded that the mortgagee has a registered security over the land not a beneficial in the monies that become owing to the registered proprietor even under a contract for the sale of land. The same reasoning would apply in this case.

20 The second point made by the Commissioner is that Eastwood did not apply to vary the amount to be paid to the Commissioner pursuant to the statute. Eastwood makes the point it was impractical to do so. The fact remains the statute provides a mechanism to cover a situation such as the present. The fact that no variation application was made limits the capacity retrospectively of Eastwood to now seek to have the Commissioner disgorge funds. Counsel for the Commissioner in his written submissions characterised the failure of Eastwood to apply for a variation as a compromise of his position. Unfortunate and as uncomfortable as that may be that characterisation is in my view correct.

21 Accordingly I am not satisfied it is open to me to make the orders sought by Eastwood. His application to that effect will be dismissed. I will hear the parties as to costs.