Federal Commissioner of Taxation v Official Receiver

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

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(Decision by: Fullagar J)

Between: Federal Commissioner of Taxation
And: Official Receiver

Court:

Judges: Dixon CJ
Williams J

Fullagar JKitto J
Taylor J

Subject References:
Bankruptcy

Judgment date: 6 June 1956

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Decision by:
Fullagar J

This is an appeal from an order of the Federal Court of Bankruptcy made on motion at the instance of the official receiver. (at p316)

The estate of John Travis was sequestrated by order made on 24th February 1950. The date of commencement of the bankruptcy does not appear. The bankrupt is still undischarged. During the year ended 30th June 1954 he earned salary or wages, in respect of which his employer, at the time of paying his salary or wages, made the deductions required by s. 221C of the Income Tax and Social Services Contribution Assessment Act 1936-1953 (which I will hereafter call the Assessment Act). The employer duly accounted to the appellant in accordance with the Act for the amounts so deducted.

The bankrupt in due course furnished to the appellant, in compliance with s. 161 (1) and s. 221H (1) of the Act, a return of the income derived by him in the year in question. When the tax payable on that income was assessed, it was found that the total of the amounts deducted by the employer exceeded the amount of the tax payable by 44 pounds 6s. 3d. In that event the appellant is required by s. 221H (2) (b) to pay the amount of the excess to the employee, and this he proposed to do. The respondent, however, claimed that the amount should be paid not to the bankrupt employee but to him. The basis of this contention was that the right to receive the amount in question was after-acquired property of the bankrupt, which vested in him, the official receiver, by virtue of s. 60 (1) and s. 91 (i) of the Bankruptcy Act 1924-1950. Correspondence took place between the appellant and the respondent, in the course of which the appellant maintained that it was his duty under the Assessment Act to pay the sum in question to the bankrupt unless the respondent obtained an order under s. 101 of the Bankruptcy Act directing or authorising him to receive that sum. The basis of this contention was, and is, that that sum represents salary or wages earned by the bankrupt. (at p317)

By notice of motion dated 14th September 1955 the respondent sought from the Court of Bankruptcy, in effect, a decision on the questions whether the right to receive the sum of 44 pounds 6s. 3d. was vested in him, and whether s. 101 of the Bankruptcy Act was applicable to the case. I think that the notice of motion, though it is not very explicit in this respect, should be construed as asking also for an order that the appellant pay that sum to the respondent irrespective of s. 101 or alternatively for an order under s. 101. Clyne J. was of opinion that there was simply a debt due and payable by the appellant to the bankrupt - a debt, so to speak, in gross, though these are not his Honour's own words - and that it was impossible to characterise that debt as being or representing salary or wages of the bankrupt. He said that there was "in law a debt due and payable by the commissioner to the taxpayer, and not a repayment to the latter of part of his earnings". His Honour accordingly held that the right to receive payment of that debt was a chose in action which vested in the respondent under s. 61 (1) and s. 91 (i) of the Bankruptcy Act, and that s. 101 had no application to the case. The order which he made was simply that the appellant pay to the respondent the sum of 44 pounds 6s. 3d. (at p317)

Before proceeding further it should be mentioned that the bankrupt himself was not made a party to the proceedings in the Court of Bankruptcy, and the notice of motion was not served on him. When the appeal came on for hearing, it was pointed out that he was really the person primarily interested, and an order was made by consent joining him as a party to the appeal. The court was then informed on his behalf that he did not wish to take any part in the proceedings or to make any claim to the sum in question. The appeal then proceeded as between the original parties to it. (at p318)

The appellant is not, of course, concerned to protect the interests either of the bankrupt or of his creditors. He is concerned primarily with obtaining a discharge from the duty (or "liability" - see s. 221U) which s. 221H of the Assessment Act imposes. He is also, I should imagine, concerned secondarily with considerations of convenience in the administration of Div. 2 of Pt. VI of the Assessment Act, in which s. 221H occurs. The respondent, for his part, is concerned simply with protecting the interests of creditors of the bankrupt. (at p318)

Section 91 of the Bankruptcy Act, so far as material, provides that

"the property of the bankrupt divisible among his creditors, and in this Act referred to as 'the property of the bankrupt' shall... subject to this Act... include -

(i)

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."

Section 101 is in the following terms:

"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 so 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 section is much wider in scope than the corresponding provision in the English Act, which is sub-s. (2) of s. 51 of the Bankruptcy Act 1914. That sub-section refers only to "salary or income" other than the "pay or salary" of servants of the Crown, for whom special provision is made by sub-s. (1), and it does not contain the proviso which appears in our s. 101. The word "income" in s. 51 has been construed as ejusdem generis with "salary". (at p318)

It seems never to have been doubted that, in respect of a bankrupt's personal earnings after sequestration and before discharge, the absolute terms of s. 91 (i), which is s. 38 (a) of the English Act of 1914, must be read subject to a qualification. The qualification might have been regarded as arising from an implication to be found in s. 51 (2) (our s. 101). But in In re Roberts [1900] 1 QB 122 , Lindley M.R. placed it on more general grounds. The Master of the Rolls said:

"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" (our s. 91 (i)), "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" (1900) 1 QB, at p 128.

With regard to the extent of the qualification, two alternative views were open. It might have been held that personal earnings did not vest in the official receiver, and that his only right in respect thereof was to obtain an order under s. 51 (2) (our s. 101), which might be expected to give him so much of those personal earnings as were not required for the support of the bankrupt and of his family, if any. Or it might have been held that personal earnings did vest in the official receiver except to the extent to which they were required for the support of the bankrupt and his family. I should have thought myself, both prima facie as a matter of construction and on general considerations of convenience, that the former view was to be preferred. It is the latter view, however, that seems to have been accepted and established in England. Thus in the case, already cited, of In re Roberts [1900] 1 QB 122 , the Master of the Rolls, after referring to a number of decisions, said:

"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" (our s. 91 (i)).

"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 p 129.

See also Williams v. Chambers [1847] 10 QB 337 (116 ER 130), noting the form of the plea which was held good on demurrer, and In re Walker; Slocock v. Official Receiver (1929) 1 Ch 647, at pp 652, 653. In Nette v. Howarth (1935) 53 CLR 55 Dixon J. referred to "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. (at p319)

The distinction between the two possible views which I have mentioned is probably not of great practical importance in view of the rule laid down in Cohen v. Mitchell (1890) 25 QBD 262 that "until the trustee intervenes, all transactions by a bankrupt after his bankruptcy with any person dealing with him bona fide and for value, in respect of his after-acquired property, whether with or without knowledge of the bankruptcy, are valid against the trustee" (1890) 25 QBD, at p 267. In the case of personal earnings after bankruptcy, I am of opinion that, whatever may be the position under the English Act, under the Australian Act the only way in which the trustee can effectively "intervene" is by making an application for an order under s. 101. (at p320)

I did not understand the view which I have just expressed to be contested in the present case. The respondent has maintained throughout, and Clyne J. has held, that the sum of 44 pounds 6s. 3d., which is in question, did not represent personal earnings of the bankrupt, but was simply the amount of a debt which became due and payable to the bankrupt as soon as the income tax payable by him on income derived in the year ended 30th June 1954 had been assessed by the Commissioner of Taxation. If this view is correct, the position is simply that a chose in action came into existence when the assessment was made, and vested eo instanti in the respondent, and s. 101 has nothing to do with the case. (at p320)

Division 2 of Pt. VI of the Assessment Act has for its object the collection of income tax by instalments from "employees". For this purpose s. 221C requires the employer, at the time of paying salary or wages to an employee, to make a deduction therefrom at such rate as is prescribed. The amounts so deducted are, in effect, paid by the employer to the Commissioner of Taxation. Two alternative procedures are provided, the one of which involves the issue of a "group certificate", and the other of which involves the purchase and cancellation of "tax stamps", but these things are merely matters of machinery. It is obviously impracticable for the "prescribed rate" of deduction to take into account all contingencies which may affect the amount of tax which will actually be payable on the employee's income of any year. He may derive income other than his salary or wages - e.g. income from property, or income from a business or profession. Or, on the other hand, he may be entitled to make from his assessable income such "allowable deductions" as life insurance premiums or medical expenses. Section 221D authorises the commissioner in special cases to vary the prescribed deduction which the employer is to make when paying salary or wages. In due course the employee must furnish to the commissioner under s. 161 his return of income derived during the year. The tax payable by him for the year is then assessed. It may then appear that the amount which has already been paid by means of the deductions from salary or wages made by the employer during the year is equal to, or more or less than, the tax payable for the year. Section 221H (2) accordingly provides that the commissioner shall

(a)

if the sum of those deductions does not exceed the tax payable, credit that sum in payment or part payment of that tax;

(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; or

(c)

if he is satisfied that there is no tax payable by the employee, pay to the employee an amount equal to that sum. (at p321)

The present case falls within par. (b) of s. 221H (2). The assessment disclosed that the sum of the deductions made during the year by his employer from the bankrupt's salary or wages exceeded the tax payable by him for the year by 44 pounds 6s. 3d. It does not appear that any tax other than the tax on his salary or wages was payable by him. The sum of 44 pounds 6s 3d., therefore, simply represents the difference between the tax payable by him and the total of the amounts deducted by his employer from his salary or wages during the year. (at p321)

It does not, to my mind, carry the matter any further to say that a "debt" due and payable to the bankrupt arose when the assessment was made. It is obvious that the bankrupt became, by virtue of the statute, entitled to be paid some money, and in this sense, of course, it is true to say that a debt became due and payable to him. The statute created the "debt". But it did not create it out of nothing. It does not simply oblige the commissioner for no reason at all to pay a sum of money to the bankrupt. The question to be answered is: - Does that "debt", in substance and in reality, represent personal earnings of the bankrupt, or does it represent some other and different thing? (at p321)

The question is not, in my opinion, answered by saying that the "debt" arose out of a right to a refund of income tax overpaid by the bankrupt or on his behalf. That is the truth, but it is not the whole truth, and to say that payment of the sum of 44 pounds 6s. 3d. will be a repayment of income tax overpaid is not inconsistent with saying that that sum represents personal earnings of the bankrupt for the purposes of the Bankruptcy Act. In order to arrive at the reality of the position, it is necessary to inquire how the bankrupt became entitled to payment of the sum in question. By virtue of what acts or things done or promised by him did that sum become payable? It is not simply that he made, or somebody made for him, an overpayment of income tax. The truth can be expressed by saying that he worked for that sum of 44 pounds 6s. 3d. He worked for his employer. His contractual remuneration was x pounds. He was paid (x-y pounds), the sum of y pounds representing the amount of income tax which it was assumed that he would be in due course required by law to pay. If that amount could have been accurately foreseen, he would have been paid not (x-y) pounds but (x-z) pounds, z being less than y. He is now to receive the difference between y pounds and z pounds - not indeed from his employer, but from a person to whom the amount of that difference has been paid. But it is immaterial that he receives it not from his employer but from that other person. If the statute had required the Commissioner of Taxation to pay the difference between y pounds and z pounds to the employer, and required the employer to pay that difference to the employee, the position could never have been in doubt. The fact that the statute, avoiding unnecessary circuity, requires direct payment by the commissioner to the employee may make the position less obvious, but does not alter its reality. The right to receive this sum of 44 pounds 6s. 3d. really is a right to receive money which the bankrupt earned.

How else did he acquire the right to payment of that sum? It is not the price of an article sold by him, or an instalment of the rent of a house let by him, or a dividend on shares owned by him. His right to payment arises because, and only because, he worked for a remuneration which is found, on a contingency which was contemplated throughout, not to have been paid to him in full. (at p322)

For these reasons I am of opinion that the sum in question does represent personal earnings of the bankrupt, and that the respondent has no right in respect of that sum unless he can obtain an order under s. 101 of the Bankruptcy Act. (at p322)

Whether the respondent could obtain an order under s. 101 against the bankrupt, requiring the bankrupt to pay to him the whole or some part of the sum of 44 pounds 6s. 3d. when received, is a question which does not arise on this appeal. The respondent did not by his motion seek such an order. What he sought and obtained was an order against the Commissioner of Taxation, and that order was made not under s. 101 but on the footing that the sum in question did not represent personal earnings of the bankrupt. But, if, as I hold, that sum does represent personal earnings, the question does arise whether an order under s. 101 can be made against the commissioner. I have said that I think that the notice of motion should be construed as asking, in the alternative, for such an order. Obviously no such order could be made on this appeal. If this Court thought that such an order could be made, the matter would have to be remitted to Clyne J. But I am of opinion that, whether or not the sum in question is correctly regarded as personal earnings, no order under s. 101 can lawfully be made against the commissioner. (at p323)

It is, indeed, only because of the possibility of an order against the bankrupt himself being sought in the future that I have thought it desirable to answer the question whether the sum of 44 pounds 6s. 3d. represents personal earnings. For the whole assumption on which the case was argued in the Court of Bankruptcy seems to me to be unfounded. That assumption was that on assessment of tax a chose in action came into existence which - whether absolutely or subject to the qualification stated in In re Roberts [1900] 1 QB 122 - vested in the respondent under s. 50 (1) and s. 91 (i) of the Bankruptcy Act. The correctness of the assumption depends not on the Bankruptcy Act but on the Assessment Act. It is natural enough to say that, when s. 221H (2)(b) of that Act comes into operation, it creates a "debt", but it is apt to be misleading. (at p323)

Division 2 of Pt. VI of the Assessment Act contains an elaborate and carefully worked out scheme for the collection of tax by instalments from "employees". The scheme involves the imposition of duties upon a particular class of taxpayers, upon their employers, and upon the commissioner. The scheme is such that it is inevitable that, at the end of a financial year, it will be found that some taxpayers of that class have paid too much tax, so that a refund to them is necessary. It is prima facie very unlikely that, when such a refund comes to be made, it should be intended that the commissioner should have to concern himself with such things as assignments, charges, bankruptcies or executions, with questions of validity and questions of priority. From the point of view of the legislature it is all a matter between the commissioner and the taxpayer, and the improbability of such an intention is increased by the direction of official secrecy which is contained in s. 16 of the Act. And, when the Act comes to prescribe what is to be done in the case where the deductions exceed the tax payable, we find it saying simply that "the commissioner shall pay to the employee" an amount equal to the excess. Those words mean, in my opinion, literally what they say, in the sense that they are to be regarded as requiring the commissioner to pay the amount of the excess to the taxpayer and not to anyone else. If he is dead, of course, the payment must be made to his personal representative, because that will be the only way in which payment can be made to him, but in all other cases it must be made to him personally. (at p323)

In another sense, of course, the words do not mean literally what they say. They do not mean that the commissioner is personally liable to make the payment. Section 221U speaks of the commissioner as being "liable to pay", but provides that payment is to be made out of the Consolidated Revenue Fund, which is "to the necessary extent appropriated accordingly". I would not think that any action would lie against the commissioner for recovery of the amount of any excess. What s. 221H (2)(b) really means is that the commissioner is to take all necessary steps to see that payment is made in the course of normal departmental procedure out of Consolidated Revenue Fund. Mandamus might lie against him to compel him to take those steps. An action might lie against the Commonwealth. It is not necessary to determine these matters, but a consideration of them serves to emphasise that we have here nothing really analogous to an ordinary "debt", but simply a statutory direction to an officer of the Commonwealth to cause a payment to be made out of consolidated revenue to a specified person and an appropriation of consolidated revenue for the purpose of that payment and of no other payment. (at p324)

The view which I have expressed does not mean that an amount which becomes payable to an employee taxpayer under s. 221H (2)(b) is incapable of being assigned or charged in the sense in which e.g. worker's compensation and some pensions are incapable of being assigned or charged. It does not deny the possibility of a transaction which will bind the sum received by the payee by making him a trustee of it for an assignee or chargee. But it does mean that the responsibility of the commissioner to the taxpayer is to him, and is not transmuted by the bankruptcy of the taxpayer into a liability to the official receiver under the Bankruptcy Act. (at p324)

The appeal should, in my opinion, be allowed, and the order of the Court of Bankruptcy discharged. Since the only questions really argued on the motion and on this appeal were questions as between the appellant and the respondent, I think that this Court should simply order, in lieu of the order discharged, that the motion be dismissed. (at p324)