Decision impact statement

Bruton Holdings Pty Ltd (in liquidation) v Commissioner of Taxation

Court Citation(s):
[2009] HCA 32
2009 ATC 20-125
72 ATR 856

Venue: High Court
Venue Reference No: S158/2009
Judge Name: French CJ, Gummow, Hayne, Heydon and Bell JJ
Judgment date: 26 August 2009
Appeals on foot:
N/A

Impacted Advice

Relevant Rulings/Determinations:

• N/A

Subject References:
Recovery of tax debts
Trustee company
Administration
Liquidation
Remedies against trustees in liquidation
Trust property
Attachments

Précis

Outlines the Tax Office's response to this case which concerned a section 260-5 notice issued to a third party which held, on trust, assets of the Trust. The notice required payment to the Commissioner of those assets. The former trustee of the Trust was a company that had been put into voluntary liquidation.

Brief summary of facts

Bruton Holdings Pty Limited ("Bruton"), as trustee of the Bruton Educational Trust ("the Trust"), deposited funds totalling $470,000 in the trust account of Piper Alderman, a firm of lawyers ("the firm"). These funds were to be used by the firm to represent Bruton in Federal Court proceedings commenced by Bruton on behalf of the Trust. The proceedings were an appeal against a decision by the Commissioner disallowing the Trust's endorsement as a tax exempt charity.

On 28 February 2007, Bruton ceased to be the trustee as a result of the appointment of administrators.

On 26 March 2007 the Commissioner issued an assessment to Bruton for the Trust's tax liability in the sum of $7,715,873.73.

On 30 April 2007 Bruton was placed into liquidation. The winding-up of the company commenced on 28 February, the day on which the administration began.

On 9 May 2007 the Commissioner served notices on the firm under section 260-5 of Subdivision 260-A, Schedule 1 to the Taxation Administration Act 1953 (Cth) ("TAA") ("section 260-5 notice"). The effect of these notices was to require the firm to pay to the Commissioner the amounts remaining in its trust account and owed to the Trust, up to the liability of Bruton for the tax liability of the Trust.

The liquidators of Bruton then sought a declaration from the Federal Court that the s 260-5 notices were invalid. In his judgement of 2 November 2007, Allsop J decided (amongst other things) as follows:

a.

The funds in the trust account were owed by the firm directly to Bruton as the payer of the money to that firm;

b.

A notice pursuant to s 260-5 of the TAA is an 'attachment' for the purposes of s 500 of the Corporations Act 2001; and

c.

In consequence the notice issued to Bruton was 'void'.

The Commissioner appealed to the Full Federal Court. The Full Court held that:

a.

Bruton had the legal title to the debt owed to it by Piper Alderman (i.e. the right to be paid);

b.

Bruton had a lien over that property arising from its right to indemnity for debts incurred by it as trustee; and

c.

the notice was not an 'attachment' for the purposes of s 500 of the Corporations Act and was therefore valid.

The liquidators of Bruton sought special leave to appeal to the High Court. Leave was granted. The appeal was heard on 4 August 2009. The High Court delivered its judgment on 26 August 2009.

Issues decided by the High Court

Bruton was owed money by Piper Alderman under s 255 of the Legal Profession Act 2004 (NSW) (at [46]).

Bruton had rights of recoupment and exoneration in respect of liabilities, costs and expenses properly incurred by it in the administration of the Trust. The amounts so secured were yet to be determined (at [43]). These rights were supported by a lien over the whole of the trust assets, amounting to a proprietary interest therein, including over Piper Alderman's obligation to account to Bruton under s 255 (at [47]).

As held by the primary judge and the Full Court, Bruton's proprietary interest in Piper Alderman's obligation to account under s 255 appeared to be 'property' of Bruton's such as was protected by s 500(1) of the Corporations Act against any attachment put in force against it during the winding up.

The notice under s260-5 was void because a liquidator had been appointed to the company prior to the issuance of the notice. In those circumstances s 260-45 superseded the operation of s 260-5 (at [10]):

'[T]he Commissioner's general power to issue a notice under s260-5 is not available if a liquidator has been appointed to a company. In that latter circumstance, only the more particular provisions of s260-45 of the Administration Act are engaged. That being so, there is no disruption of the operation of Ch 5 of the Corporations Act, and, in particular, no attachment to be rendered void by s500(1)'.

Put differently (at [51]):

'the remedy available to the Commissioner on the facts of this case was that under the regime for liquidations (s 260-45), not the garnishee regime provided by s 260-5'

Construed in that way, there was no conflict between the operation of s 260-5 and s 500(1).

That said, their Honours, in obiter dicta, indicated that an examination of s 500(1) and Ch 5 of the Corporations Act of which it forms part, did not reveal any reason to restrict the meaning of the expression 'any attachment' to curial attachments (at [38]). Accordingly, and contrary to the holding by the Full Court, the High Court held that the power conferred on the Commissioner by s 260-5 does not extend to debts owed to a company in liquidation (at [39]).

Tax Office view of Decision

Operation of s 260-5

It had been the longstanding view of the Commissioner that a notice under s 260-5 should not be issued to third party debtors in respect of tax related liabilities of a company in liquidation, other than tax related liabilities incurred by a company in the capacity of a trustee of a trust.

Following the High Court's decision in this matter, the Commissioner will cease to issue notices under s 260-5 in respect of tax related liabilities of companies in liquidation that have incurred their tax related liabilities in the capacity of a trustee of a trust.

Operation of s 260-45

Consistent with the Court's view that the remedy available to the Commissioner in respect of a trustee company in liquidation is the regime for liquidations (s 260-45) and not the garnishee regime (s 260-5), the Commissioner will seek to apply s 260-45 in respect of all of the tax related liabilities of such a company, whether they are liabilities incurred by the company in the proper administration of the trust or wholly in its personal capacity.

The Commissioner is of the view that section 260-45 requires the liquidator to notify the Commissioner of his appointment, and upon receipt of such notification, the Commissioner must notify the total outstanding tax-related liabilities of the company at the time of the notice.

Between appointment and receipt of the notification by the Commissioner, the liquidator must not disperse any of the company's assets, except to pay secured or preferred debtors. Upon receipt of the notification, the liquidator must set aside assets sufficient to pay the Commissioner out of a sum calculated by a formula set out in ss 260-45(5) and (6). Should the liquidator fail to so comply, then the liquidator is personally liable to the Commissioner to the extent of that value.

The Commissioner considers that where the company is assessed on trust income, under ss 98, 99 or 99A of the ITAA 1936, the amounts assessed (together with any other tax-related debts) are outstanding tax-related liabilities that may be the subject of a s 260-45 notice.

The Commissioner further considers that in applying the formula in s 260-45(5) and (6) the 'assets available to pay ordinary debts' will include the company's proprietary interest in any trust assets arising from the company's rights, as trustee, to be indemnified out of the trust estate for the liabilities and expenses incurred by the trustee in administering the trust. This will be the case irrespective of whether the company's right of indemnity is a right of recoupment or a right of exoneration.

As explained by the Full Federal Court (at [47] - [57]), there is a fundamental distinction between rights of recoupment and rights of exoneration. So far as a company is entitled to recoupment from trust assets, the proceeds of the indemnity are available for division among the bankrupt's creditors generally. The position with respect to a right of exoneration is less clear. There are conflicting authorities as to whether the proceeds of the indemnity can be used to discharge third party business creditors as well as trust creditors. The High Court indicated that it did not need to resolve those questions.

Administrative Treatment

Implications on current Public Rulings & Determinations

None.

Implications on Law Administration Practice Statements

None.

Legislative References:
Taxation Administration Act 1953 (Cth)
Sch1
260-5
260-15
260-45
260-50

Corporations Act 2001 (Cth)
5A(2)
9
468(4)
500(1)
500(2)
501
555
569

Legal Profession Act 2004 (NSW)
s 255

Case References:
Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd
[2008] HCA 41
82 ALJR 1411
248 ALR 693
69 ATR 357
2008 ATC 20-045

Hall v Richards
[1961] HCA 34
108 CLR 84

Bluebottle UK Ltd v Deputy Commissioner of Taxation
[2007] HCA 54
232 CLR 598
67 ATR 1
2007 ATC 5302

FJ Bloemen Pty Ltd v Federal Commissioner of Taxation
[1981] HCA 27
177 ALR 611
147 CLR 360
11 ATR 914
81 ATC 4280

Clyne v Deputy Commissioner of Taxation
[1981] HCA 40
150 CLR 1
12 ATR 173
81 ATC 4429

Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd
[2008] HCA 41
82 ALJR 1411
248 ALR 693
69 ATR 357
2008 ATC 20-045

Deputy Commissioner of Taxation v Moorebank Pty Ltd
[1988] HCA 29
165 CLR 55
19 ATR 1156
88 ATC 4443

The State of Victoria v The Commonwealth
[1957] HCA 54
99 CLR 575

Bank of New South Wales v Federal Commissioner of Taxation
[1979] HCA 64
145 CLR 438
10 ATR 482
79 ATC 4687

Commissioner of Taxation v Donnelly
(1989) 25 FCR 432
89 ATC 5071
20 ATR 1331

Macquarie Health Corp Ltd v Commissioner of Taxation
[1999] FCA 1819
96 FCR 238
43 ATR 650
2000 ATC 4015

Chief Commissioner of Stamp Duties (NSW) v Buckle
[1998] HCA 4
(1998) 192 CLR 226
37 ATR 393
98 ATC 4097