Case X18

Members:
PM Roach SM

Tribunal:
Administrative Appeals Tribunal

Decision date: 25 January 1990.

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P.M. Roach (Senior Member)

These references relate to all years of income in the period of the year of income ended 30 June 1977 to that ended 30 June 1986 with the exception of the year of income ended 30 June 1978. The issue to be determined is whether the applicant, a person now bankrupt, is competent to prosecute these proceedings or, in the circumstances of the case, ever was competent to request the Commissioner to refer his decisions upon objections made in the name of the applicant to this Tribunal for independent determination. The issue is one of general importance to bankrupts for it raises questions as to the extent to which sequestration orders made under provisions of the Bankruptcy Act 1966 disable bankrupted taxpayers from challenging disputed assessments of income tax. The issue is such that the personal particulars of the applicant are of no significance. I therefore confine my findings to the matters following.

2. A sequestration order was made against the applicant by an order of the Federal Court of Australia of March 1988. Prior to that the applicant had objected to assessments of income tax made in relation to all years now before the Tribunal, up to the year of income ended 30 June 1985. The objections had been disallowed in May 1987 and, as a result, the applicant had made an appropriate request in writing of the Commissioner that he refer his decisions upon the objections to this Tribunal for independent review. The applicant paid the $1,600 ($200 for each of eight disputed assessments) which was then required as the price of instituting a challenge to such decisions. The fees so paid were paid pursuant to the provisions of sec. 14ZAB and 14ZAC of the Taxation Administration Act. Section 14ZAE of the Taxation Administration Act provides:

``Where -

• (a) a person has lodged with, or sends to, the Commissioner a request to refer an objection decision to the Tribunal...; and
• (b) the request was accompanied by the required fee,

the Commissioner shall refund the fee to the person if -

• (c)...
• (d) the decision is varied by the Commissioner in a manner favourable to the person; or
• (e) proceedings in relation to the decision terminate in a manner favourable to the person.''

3. The Commissioner failed to promptly discharge his statutory duty to effect the references with a result that at the date of sequestration the matters remained untransferred. The necessary action to effect the transfer of the references was taken in June 1988.

4. The proceedings in relation to the assessment for the year of income ended 30 June 1986 stand on a different footing. At the date of sequestration in March 1988, the objection which the applicant had lodged in July 1987 to an assessment of income tax for the year of income ended 30 June 1986 lay undetermined. In May 1988 the Commissioner determined to wholly disallow the objection and accordingly gave notice to the applicant to that effect. By letter of 7 June 1988, the applicant by his accountant in writing advised the Commissioner:

``We are in receipt of your letter dated 19 [sic] May 1988 in respect of the above taxpayer and wish to advise that the taxpayer is dissatisfied with the decision and requests that the matter be referred to the Federal Court.

A cheque to the sum of $240 is enclosed with this request.''

5. Although the Commissioner now contends that at the relevant time the applicant was incapable of effectively making a request for reference to this Tribunal and notwithstanding the fact that the request referred to the Federal Court of Australia, the Commissioner, in purported compliance with the request, in June 1988 forwarded all relevant papers to the Tribunal together with the papers relevant to the earlier years.

6. In referring the matters, the Commissioner did not disclose anything of the bankruptcy of the applicant to the Tribunal. As a result, preliminary conferences were conducted, by telephone, as if the applicant were competent to conduct the proceedings. In the course of those conferences, the fact of the bankruptcy was disclosed and upon the trustee

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in bankruptcy being consulted, he, by his solicitors advised (inter alia):

``To the extent that (the trustee) is empowered to make an election as to whether or not to proceed with these proceedings in accordance with Section 60(2) of the Bankruptcy Act 1966, (the trustee) elects not to proceed with these proceedings. In this regard (the trustee) seeks the Tribunal's leave pursuant to Section 42A of the Administrative Appeals Tribunal Act to have the applications referred to above dismissed.''

7. In consequence the Commissioner now contends that the Tribunal should either dismiss the proceedings with or without confirming the assessments or should, at least, decline to exercise any further jurisdiction in these matters.

8. On the other hand the applicant contends that he is competent to pursue these issues and that the just determination of questions as to whether the assessments made against him are excessive requires that he should be able to do so. It is acknowledged that the claims made by the assessments for payment of tax have not been satisfied. It follows that, so long as the assessments stand, the prospects for the applicant of securing his discharge in bankruptcy are diminished in that without a reduction in his liability in tax as raised by the assessments, the aggregate of his debts will not be reduced; the amount necessary to effect the payments in full of the claims of his creditors will not be lessened; and the power of the Commissioner by his vote as a creditor in the bankruptcy will remain undiminished.

9. The question places in tension the provisions of Pt V of the Income Tax Assessment Act (``the Assessment Act'') which are directed to the determination as to whether the liability in tax of the taxpayer as assessed is excessive (as the taxpayer contends) and the provisions of the Bankruptcy Act which casts upon his trustee in bankruptcy responsibility for fixing the quantum of the applicant's debts and the distribution of his available property.

10. Section 82(1) of the Bankruptcy Act provides that:

``... all debts and liabilities, present or future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy... are provable in his bankruptcy.''

In consequence the claim of the Commissioner to tax constitutes a provable debt. To effect the claim, a proof of debt must be lodged as required by sec. 84 of the Bankruptcy Act and thereupon it becomes the obligation of the trustee to examine the grounds of the debt sought to be proved and thereon, in due discharge of his responsibilities as a trustee, to admit the proof wholly or in part; to reject it in whole or in part; or to require further evidence in support of it (sec. 102 Bankruptcy Act). Should a creditor be dissatisfied with the decision of the trustee in respect of proof of debt, he may apply to the Court to review the decision pursuant to sec. 104 of the Bankruptcy Act.

11. Since the Assessment Act provides that [at sec. 177(1)]:

``The production of a notice of assessment, or of a document under the hand of the Commissioner, a second Commissioner, or a Deputy Commissioner, purporting to be a copy of a notice of assessment, shall be conclusive evidence of the due making of the assessment and, except in proceedings under Pt V on a review or appeal relating to the assessment, that the amount and all the particulars of the assessment are correct.''

I am satisfied that the assessments will stand in full force and effect for all purposes, including the purposes of the Bankruptcy Act unless and until the assessments are varied in consequence of proceedings under Pt V of the Assessments Act. It follows that, if the present applications of the Commissioner are granted, the applicant will not hereafter be able to establish that any of the assessments are excessive, even if it happens that they are.

12. The argument as presented largely revolved round the question as to whether the right to protest the assessments of income tax which had been made against the applicant was such as never to have vested in the trustee in bankruptcy. However the argument was so conducted as not to draw attention to the circumstance that, at date of sequestration, one asset which was vested in the bankrupt was a contingent entitlement to have refunded to him the sum of $1,600 which he had been obliged to pay to secure an independent determination

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from this Tribunal. Section 116(1) of the Bankruptcy Act provides that:

``Subject to this Act -

• (a) all property that belonged to, or was vested in, a bankrupt at the commencement of the bankruptcy, or has been acquired or is acquired by him, or has devolved or devolves on him, after the commencement of the bankruptcy and before his discharge; and
• (b) the capacity to exercise, and to take proceedings for exercising, all such powers in, over or in respect of property as might have been exercised by the bankrupt for his own benefit at the commencement of the bankruptcy or at any time after the commencement of the bankruptcy and before his discharge,

is property divisible amongst the creditors of the bankrupt.''

13. At first impression the decision of a Full Bench of the High Court of Australia in
F.C. of T. v. Official Receiver & Anor (1956) 95 C.L.R. 300 seems to lend some support to the claims of the bankrupt. In that case, it was held that an undisputed claim in a bankrupt to receive a refund of tax and stored deductions paid on his account following bankruptcy in consequence of an assessment of tax, was held not to vest in the official receiver. But the decision is not to the point. In the present case no question arises in relation to rights arising only during bankruptcy. Nor does any question arise as to the right of the bankrupt rather than his trustee to claim payment of moneys pursuant to a claim arising after bankruptcy or as to his capacity to give a good discharge to third parties for such moneys.

14. Exceptions are allowed for by sec. 116(2) of the Bankruptcy Act which provides (so far as is material):

``The last preceding sub-section does not extend to the following property:

• ...
• (g) any right of the bankrupt to recover damages or compensation -
  • (i) for personal injury or wrong done to the bankrupt, the spouse of the bankrupt or a member of the family of the bankrupt; or
  • (ii) in respect of the death of the spouse of the bankrupt or a member of the family of the bankrupt,

  and any damages or compensation recovered by the bankrupt (whether before or after he became a bankrupt) in respect of such an injury or wrong or the death of such a person;...''

Section 5(1) of the Bankruptcy Act provides (inter alia) that:

``In this Act, unless the contrary intention appears -

• ...
• `the property of the bankrupt', in relation to a bankrupt, means the property divisible amongst the creditors of the bankrupt and includes any rights and powers in relation to that property that would have been exercisable by the bankrupt if he had not become a bankrupt;''

Against that background, sec. 58(1) of the Bankruptcy Act states that:

``Subject to this Act, where a debtor becomes a bankrupt:

• (a) the property of the bankrupt, not being after-acquired property, vests forthwith in The Official Receiver in Bankruptcy;''

And sec. 132(1) provides:

``... where a trustee is appointed by the creditors, the property of the bankrupt passes to and vests in the trustee so appointed on the day in which the appointment takes effect.''

Section 60 of the Act provides (inter alia):

``Subject to:

• (1)...
• (2) An action commenced by a person who subsequently becomes a bankrupt is, upon his becoming a bankrupt, stayed until the trustee makes election, in writing, to prosecute or discontinue the action.
• (3) If the trustee does not make such an election within 28 days after notice of the action is served upon him by a defendant or other party to the action, he

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  shall be deemed to have abandoned the action.
• (4) Notwithstanding anything contained in this Section, a bankrupt may continue, in his own name, an action commenced by him before he became a bankrupt in respect of:
  • (a) any personal injury or wrong done to the bankrupt, his spouse or a member of his family; or
  • (b) the death of his spouse or of a member of his family.
• (5) In this section `action' means any civil proceeding, whether at law or in equity.''

15. I am of opinion that the term ``action'', defined in the Bankruptcy Act to mean ``any civil proceeding'', is a term appropriate to identify proceedings before this Tribunal constituted in consequence of a competent request for reference for independent review by this Tribunal. That being so, it will be subject to the provisions of subsec. 60(2) and (3) of the Bankruptcy Act, unless it falls to be characterised as an action within the meaning of subsec. 60(4) of that Act. In my view, it is not to be so characterised. The subject of sec. 60(4) is a right of action vested in the bankrupt by reason of personal injury or by reason of other wrong done to the person or reputation of the bankrupt, his spouse, or a member of his family. It does not embrace an ``action'' which has as its objective a determination whether or not a bankrupt has been subjected to an excessive assessment of liability to income tax. For my part I consider that sec. 116(2)(g) and 60 of the Bankruptcy Act are directed to the reservation to the bankrupt upon his bankruptcy of those rights which are personal to him in the sense of being rights which entitled him to a remedy in tort for wrongs done to him personally, whether physically (as with personal injury) or to him personally in the sense of damage to his reputation or personal relationships. In that context I refer to McDonald Henry and Meek, 5th ed. para. 613 and following and to the observations of Parke B. in
Beckham v. Drake (1849) 2 H.L.Cas. 579 at p. 627). The rights so referred to do not extend to a claim to be relieved from the burden of statutory imposition, such as liability to income tax, which burden is said to be excessive.

16. It follows that the right to conduct these proceedings passed to the trustee in bankruptcy. With that passed the right to bring those proceedings to a conclusion by any process of discontinuance even to the point where, should the trustee not make an election to prosecute or discontinue within the time allowed, he shall be deemed to have abandoned the proceedings. I am satisfied that it is within the competence of the trustee to consent to the dismissal of all applications before the Tribunal in relation to all years up to and including the year of income ended 30 June 1985. I am confirmed in that view by the circumstance that, upon sequestration, there passed to the trustee the contingent right which had been vested earlier in the bankrupt to recover the $1,600 which had been paid in fees. If the applicant is dissatisfied with that course his remedy (if any) must be sought against his trustee.

17. However the status of the application in relation to the year of income ended 30 June 1986 is different. On the basis of the materials before me, there is nothing which even purports to constitute a reference to this Tribunal, whether effected at the instance of the applicant or any other person. That being so, it is unnecessary to consider whether or not the applicant might have had status at the time in question to effectively request such a reference. In those circumstances I am satisfied that there is no application at all before the Tribunal investing it with jurisdiction to make any determination touching the matter of the assessment of the bankrupt as a person liable to pay income tax in relation to the year of income ended 30 June 1986. That being so, the only appropriate order in relation to the year of income ended 30 June 1986 is that the matter be removed from the list of references awaiting determination by the Tribunal.