SANDS & MCDOUGALL (WHOLESALE) PTY LTD (IN LIQ) & ANOR v FC of T

Judges:
Nathan J

Court:
Supreme Court (Vic)

Judgment date: 29 November 1996

Nathan J

This notice of motion raises the question:- are Sales Tax remittances paid to the Deputy Commissioner refundable in the event of the remitter's insolvency?

I have reduced the complexity of the case to the above question, so that its emergence from the matrix of facts will be more readily apparent. The various issues which are treated hereunder can be related back to the core question.

Identity of the parties

Sands and McDougall Wholesale (in liq.) (S.M.W. or the company) is a wholesale and retailing company within the Sands and McDougall group. It was a printing and stationery group first in the colony of Victoria and later the state. The group is more than 150 years old.

On 20 June 1994 S.M.W. was placed under voluntary administration, one week later the second named applicant, Peter Rogers, was appointed administrator and on 12 September 1994 the company was placed in liquidation and he was appointed as its liquidator. Pursuant to the Corporations Law s. 513B the winding up of S.M.W. is deemed to have commenced on 20 June 1994.

The respondent (whom I shall refer to as the Commissioner) was the recipient of sales tax payments paid by S.M.W. pursuant to the provisions of the Sales Tax Assessment Act 1992 (the Sales Tax Act).

Nature of the claim and introductory chronology

S.M.W. paid the Commissioner $878,000 in sales tax payments between January and June 1994. It wants this sum refunded to it as being preference paid whilst insolvent. These payments were as follows:

21/1/94   $363,000   (the January payment for the November
                     tax due)

22/3/94   $ 20,000   (an instalment for the December tax
                     due)

14/4/94   $ 50,000   (as above)

22/4/94   $ 50,000   (as above)

23/5/94   $226,000   (for the April tax due) paid on time
                     and in full

2/6/94    $169,000   The December sales tax arrears,
                     together with penalties thereon.

All figures rounded to the nearest $1,000 dollars.

Pursuant to the Corporations Law s. 588FE the period for which payments made by S.M.W. may be voidable commences from 20 December 1993, that is, six months before the winding up, I shall call this the ``relevant period''. Its duration is not disputed by the Commissioner.

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S.M.W. asserts all of the payments made during the relevant period were made when it was unable to pay its debts when they became due and payable from its own money. In other words, and perhaps more fully than it needs to, it asserts all payments were made whilst S.M.W. was insolvent. I shall return to this issue as a discrete matter under the heading ``S.M.W. was insolvent''.

S.M.W. contends that each of the payments made during the relevant period, had the effect of the Commissioner receiving from it, more than the Commissioner would have received if the transactions were set aside and the Commissioner were to prove those payments as debts in the winding up of S.M.W. Therefore, so it is said, each of the payments is void so far as the liquidator is concerned, pursuant to the provisions of the Corporations Law ss. 588FE and FF. (I shall refer hereafter to those parts of s. 588 simply by their capital letter sub-parts.)

S.M.W. has requested the Commissioner to refund each of the payments and the Commissioner has refused to do so. By its notice of motion S.M.W. in effect seeks orders that the Commissioner refund the payments to the liquidator.

The Commissioner, so S.M.W. would have it, did not receive the payments in good faith because it had reasonable grounds to suspect that the company was insolvent at the time the payments were made. I can sketch now the reasons why S.M.W. contends the Commissioner had those reasonable grounds. Firstly, the balance sheet of the company as at 30 September 1993 disclosed that it had net liabilities over assets of $4,658,000 and its profit and loss statement for the end of the 30 September disclosed that it had made a loss of $232,000. This information, so S.M.W. contends, was in the public domain or else so easily available that it might as well have been. More particularly S.M.W. contends that as at 1 June 1994 more than $1 million in sales tax was outstanding and there had been defaults during the relevant period which should have informed or at least alerted the Commissioner to S.M.W.'s actual or potential insolvency.

S.M.W. says it paid the sales tax due for the month of December of $169,000 on 1 June 1994 together with the penalties attached and on the same day notified the Commissioner that it would pay the outstanding sales tax by monthly instalments of $150,000. On 9 June the Commissioner sent a letter to S.M.W. informing it that it would defer taking any legal action for the recovery of the outstanding sales tax if S.M.W. adhered to the settled arrangement to pay the monthly payments.

It is relevant here to sketch the Commissioner's propositions. They will be examined more extensively later. They are as follows. S.M.W., having been registered for sales tax purposes in 1984, thereafter made regular remittances and did so for the most part on time and without quibble. Furthermore, the payments made during the relevant period were forthcoming, not as a result of any contact or debt collection action undertaken by the Commissioner. Moreover, on 18 May 1994 very senior S.M.W. executives, Messrs. Richtman and Lipson, entered into discussions with the Commissioner's employees, the end result of which brokered an arrangement for the repayment of outstanding sales tax and the continued payment of the tax as it was incurred. S.M.W.'s representatives at that meeting indicated that its previous financial manager had allowed the remittance of sales tax to fall into arrears and that it was experiencing temporary cash flow difficulties because of that fact and previous mismanagement. Messrs. Richtman and Lipson indicated to the Commissioner that a new broom was sweeping through old corridors and all would be well with S.M.W. fairly shortly.

In addition, the Commissioner says that S.M.W. paid the sales tax due for the month of April on time in May, namely, the sum of $226,000, and that the following month on 1 June it paid the balance of the sales tax due for the month of December 1993.

As a result of these considerations and in addition thereto the Commissioner contends that if the payments are considered voidable, then as a matter of exercising my discretion I should not do so in the company's favour and accordingly deny the applicant's relief. I shall refer to this as the ``discretion'' argument.

In further response the Commissioner contends that all the sales tax payments, both during the relevant period and before it, were received as part of the regular payments of sales tax in accordance with the Sales Tax Act and were for commercial purposes, an integral part of a continuing business relationship between them. It was said the level of the company's indebtedness for sales tax rose and fell from

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time to time. Accordingly, all remittances made, including those during the relevant period, constitute a transaction for the purposes of the Corporations Law s. FA(1) and therefore, so the Commissioner contends, S.M.W. never gave an unfair preference to it. This I shall refer to subsequently as the ``running account defence''. Next the Commissioner asserts that it received the payments in the relevant period in good faith and for valuable consideration.

Moreover, the Commissioner asserts that at the time the payments were received it had no reasonable grounds for suspecting that S.M.W. was insolvent or that a reasonable person in the Commissioner's circumstances would not have had grounds for so suspecting. I shall deal with these matters under the heading ``reasonable grounds to suspect insolvency''.

I end this resume of the Commissioner's position with what was its final but most important submission, namely, that the payments made during the relevant period were remittances of the Commissioner's own money, money which was simply gathered by the company as part of the sales tax mechanism. All S.M.W. did was forward to the Commissioner the tax gathered from transactions already made, and for which the customer had paid or would shortly pay. The money was never the property of S.M.W. despite small sums being paid in respect of some items for which invoices had been rendered and the customer had delayed payment in accordance with S.M.W.'s own terms of trading. Accordingly, S.M.W. could not have back, or have refunded to it, moneys which were never its own in the first place.

Detailed chronology

I have already noted that S.M.W. became registered to pay sales tax in 1984. It did so in accordance with the self-assessing character of the scheme of the Act which I shall examine later but for these purposes it is sufficient to know that the wholesaler is required to calculate the amount of tax and then lodge with the Commissioner a return which details the volume and type of sales on the 21st day of the month following the end of the month in which the sales were made. Therefore, a return for the month of November must be lodged together with the appropriate remittance on 21 December.

As from 1992 it is clear the company began to experience financial difficulties. As this chronology goes on to detail, those difficulties became chronic rather than having acute episodes and resulted, as I shall go on to find, in insolvency at least from December 1993. In August of that year the company's banker reduced its overdraft facility by one half from $400,000 to $200,000. The reduction was a result of the bank's examination of its exposure to the company and reflects to my mind the gathering illnesses to which the company ultimately succumbed.

Some aspects of the company's book- keeping practises were curious and primitive. Unpresented cheques appear to have been kept in a shoe box and other accounts for payment were stored in another box. By September unpresented cheques amounted to $2.7 million, that is, cheques which S.M.W. had drawn but not forwarded to its creditors. I find as a fact, this tardy system was adopted because the company itself appreciated that had the cheques been presented, immediate dishonour would have followed, which it was appreciated, could have led to sudden death, rather than the attrition which ultimately ensued.

In October of 1993 the company had a net deficiency of assets, which if they had then been sold at book value would not have realised sufficient funds to meet all its liabilities. In the following month its credit financier, ``Bridge'', cancelled its floor plan, this heightened the company's liquidity problems. Which factor is further illustrated by the sum of $3.35 million in unpresented cheques for that month.

By 21 December 1993 when sales tax of $363,000 for the goods sold in the month of November became due and payable the company then lodged its return, but did not append any cheque for payment. By the end of that month unpresented cheques had risen in value to $4.24 million.

On 21 January 1994 S.M.W. filed its sales tax return for the month of December 1993 which recorded its liability to pay sales tax in the sum of $289,000 but no payment accompanied the return. However, on the same day the November sales tax was paid, that is, one month late.

On 25 January Sharp Corporation, one of the company's main suppliers, brought to S.M.W.'s attention the fact that it had not been paid for goods supplied in December 1993 and the following day it stopped the supply of goods on

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credit until the company met, at least in part, some of its outstanding indebtedness.

On 27th January 1994 S.M.W. had entered into a deed with its parent forgiving a loan from it of $5 million. The effect of this transaction which I shall consider later, was to effect apparent improvement in the financial health of the company, but at the expense of another within the same group.

By the end of that month unpresented cheques totalled $3.65 million. Another significant trade creditor, 3M, was not paid $180,000 due to it, and this prompted S.M.W. to enter into rollover trade bill facilities with its bankers. Shortly after, the company asked Westpac to increase its overdraft facility to $600,000.

On 23 February 1994 the company filed its sales tax return for the month of January. $269,000 was due, but no remittance accompanied the return.

On 22 March 1994, that is, one month later and in concordance with the Act, the company filed its sales tax return in respect of February. The liability was $291,000 but no payment accompanied the return. Instead, a cheque for $220,000 was enclosed by way of part payment for the December sales tax liability of $288,000. Throughout the remainder of the month the company continued to trade and increase its indebtedness to various creditors.

On 14 April 1994, and out of sequence so far as the Sales Tax Act was concerned, the company paid a further instalment of $50,000 in respect of the December 1993 sales tax liability. In that month unpresented cheques totalled the sum of $3.34 million. On the due date, that is, 21 April, the company failed to lodge its sales tax return for the month of March 1994. It subsequently did so, two weeks late on 4 May when its liability was self-assessed in the sum of $315,000. However, on the due date the company paid a further instalment of $50,000 in respect of the December commitment but nothing in respect of March.

On 4 May 1994 the sales tax return in respect of March was filed but nothing accompanied the return.

On 18 May 1994 and at the request of the company a very significant meeting was conducted at the Australian Taxation Office in Dandenong. The company's representatives were Messrs. Richtman and Lipson to whom I have already referred and they met with Messrs Balancy and Quinn, employees of the Commissioner. As at that date the company owed sales tax of $1.16 million in respect of the five months trading between December and April. As at that date only $120,000 had been paid. Assurances given, which I am certain that at the time they believed, Messrs. Lipson and Richtman, assuaged the apprehensions of the Commissioner's representatives so far as payment of the outstanding sums was concerned. I find, and will later elaborate, that the Commissioner accepted as true the statement from Messrs. Richtman and Lipson that S.M.W. was faced with a temporary cash flow problem, which it would shortly overcome, and would continue trading in such a way as to acquit the sales tax commitments in a relatively short period. I find as a fact that neither Mr Richtman or Lipson were untruthful and in fact to the contrary. I find they both had reason to believe the assurances they gave. They were in no way deceitful or dishonest.

Seven days later Sharp, which was pressing for payment of its April account of $56,000 was assured by the company that temporary cash flow problems prevented immediate payment. Later the same month the company's bankers requested provisional financial statements in order to assess the degree of accommodation it was prepared to extend to the company. The following day 3M, another creditor of the company, pressed for payment of $250,000 due. At that time the company was unable to have recourse to any bank bill facilities or indeed any cash whatsoever to meet this commitment. On 20 June, as have noted, an administrator was appointed. The following day the sales tax return for the month of May was due in the sum of $277,000 and it was not paid. By September the company was placed in liquidation by resolution of the creditors.

Scheme of Sales Tax Act

The Sales Tax Assessment Act 1992 consolidates previous legislation in the area. It is a tax imposed on goods manufactured or imported into Australia for sale. Usually the liability is incurred upon the last wholesale sale of the goods, but if the manufacturer sells the goods by retail, liability is imposed at the time of sale. The tax was first introduced as a temporary measure by Mr Scullin in 1930. Its purpose was to supplement government revenues which had fallen as a result of the

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Depression, it was and is specifically not a turnover tax, being imposed once only, and ad valorem on the value of the sale. (see French J in an article ``Sales Tax: a Seminar in Print''. Taxation in Australia, June 1990 p. 892.)

Liability to pay the tax arises when there is an ``assessable dealing'', per s. 16 and Schedule 1, Table 1. In this case S.M.W. as the seller both by wholesale and retail of goods, engaged in assessable dealings at the time of the sale of such goods and tax was levied upon the price at which the goods were sold. S.M.W. was required to and became registered for sales tax purposes in 1984 (pursuant to the then current Sales Tax Assessment Act No. 1). As such it was required. to, and did in fact, furnish monthly returns to the Australia Tax Office. It is a self- assessment system (s. 63). By that I mean that S.M.W. was liable to remit the sales tax it calculated as being the amount payable, by reference to the scale set out in the Act. Pursuant to s. 61 S.M.W. became obligated to lodge a return each month no later than the 21st day after the end of the preceding month.

In the event that sales tax is not paid by the due date it is deemed under the legislation to become a debt recoverable by the Commissioner (vide s. 69). However, pursuant to ss. 66 and 68 the Commissioner is invested with a discretion to extend the time for payment, should the circumstances warrant, or may permit it to be paid by way of instalments, again, as the circumstances may warrant. Significantly, the same sections permit the Commissioner to provide a credit for the taxpayer in respect of sales tax, where the taxpayer has not been paid by the purchaser but the taxpayer has remitted the tax, upon a subsequently aborted sale, to the Commissioner. In this case such events have occurred. There were occasions upon which S.M.W. had paid sales tax in advance pending receipt of the purchase price from its own customer. Some of those customers defaulted in payment and S.M.W. recovered the sales tax so paid.

In my view the Sales Tax Act imposes the burden of the tax upon the vendor of the goods, as a result of the transaction whereby the vendor becomes the collector of the tax from its customer and must account to the Commissioner for it. For example, s. 125 makes it an offence, for a person to sell goods by a wholesale price which includes sales tax, and where that sales tax ingredient has not been specified on the purchaser's invoice (see
Chippendale Printing Co Pty Ltd v FC of T & Anor 96 A.T.C. 4175 and
Otto Australia Pty Ltd v FC of T 91 A.T.C. 4305). In this case it was S.M.W.'s custom to raise a ``picking slip'' upon receipt of an order. This enabled the storeman to pick from the stores and inventories, the items listed. A document was prepared which recited the goods as selected, it noted in one column the wholesale price and in another, the sales tax. There followed a global sum. The sales tax was included, as it should be under the Act, as a discrete item. The picking slips also operated as invoices. The evidence discloses that the invoice was delivered with the goods. Therefore, all customers of S.M.W. knew from the time they received the goods, what the sales tax in respect of them, was. The customers were obliged to pay S.M.W. the aggregate sum, unless of course special exemptions prevailed.

Thus S.M.W.'s invoices were bifurcated. On the one hand the wholesale price was noted and on the other the sales tax ingredient was also noted. This method of arrangement is in total conformity with the Act.

The evidence

I conclude that none of the witnesses gave false evidence or in any way embroidered or distorted the truth as they saw it. This is one of the few cases where I can accept all the evidence-in-chief and note that none of its veracity was destroyed or tainted by cross- examination. In fact, both parties sought to underscore certain points in their arguments from the evidence of the other side's witnesses. But for a minor matter of imperfect recall by Faye Patterson I am not called upon to prefer one witness viz à viz another, or to comment adversely in respect of any of them.

The first witness was Anthony Johnson, the financial controller of S.M.W. between August 1993 and May 1994. He gave evidence of the company's mode of operation, which I have detailed above and also of its terms of trading. These were to extend credit for 60 days but he noted that many of its customers paid within 30 days. One can characterise its method of operation by saying it received the sales tax contemporaneously with payment by its customers. Allowing for some payments made in advance, it then remitted to the Commissioner money which it had already

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received from its customers. To this extent the case is on all fours with Casatex Australia Pty. Ltd. v Deputy Commissioner of Taxation, a case to which I shall extensively refer to later.

Mr Johnson also gave evidence of the shoe box book-keeping methods, to which I have already referred. Many cheques were often drawn and signed some time prior to their presentation to creditors. Generally no direct adverse inference can be drawn from this fact, because there can be difficulties in obtaining the appropriate signatories. In this case however the compelling inference is that immediate payment could not be made.

More significant was Mr Johnson's evidence relating to the company's superannuation fund. It would appear the superannuation fund was over funded by approximately $3 million. It was thought, perhaps incorrectly, that these sums could be used by S.M.W. or brought into the group as a whole. This factor is of relevance because Messrs. Richtman and Lipson appeared to consider that it might provide liquid funds for the company during its period of cash flow difficulties. Be that as it may, Mr Johnson gave evidence, and I might add from the position of authority and knowledge, that he believed the company was suffering only temporary liquidity problems.

He was of the view the temporary liquidity problems were contributed to by the reduction in overdraft and increase in inventory. Up to April 1994 he felt reasonably confident the position would be overcome, and although it was projected the company would make a loss for the financial year ending in June 1994, he accepted the prediction of a return to profitability the following year. Furthermore, he said he was cognisant, despite the perceived temporary problems, that no creditor had moved to wind the company up.

In support of the above contention and in my view in validation of it, the company called two witnesses, Messrs. Smith and Laur from Sharp Limited and 3M Limited respectively, both of whom swore that as significant creditors of the company, notwithstanding its failure to comply with their terms of trade, they were prepared to continue to trade with it. Furthermore, Sharp had called for and received the company's financials but continued to trade with it.

A most significant witness was Timothy Heesh. He is a partner in the same firm as the liquidator and was authorised by him to swear a series of affidavits. He was and is familiar with the books and records of the company from his examination of them and also from his own knowledge. He commenced by referring to a letter the company received from its bankers in May of 1994. He said this was a positive piece of information and capable of bearing the interpretation that Westpac had confidence the company would return to health. Mr Heesh noted that although the bank did not ultimately provide further support to the company there was no suggestion of positively refusing it. In fact there was evidence that the directors of the company were in the process of establishing intra group debentures, which the bank had required as a condition of its further support, when the administrator was appointed. Mr Heesh also noted the large number of creditors some of whom were owed significant sums, but all of whom continued to trade with S.M.W. during its period of financial stringency. In terms of the company's long term outlook Mr Heesh noted a letter of support from its parent indicating that it would continue to support S.M.W. and this fact combined with the indications of support coming from westpac would have, in his view, given comfort to the company's financial officers that survival was probable if not absolutely certain. The auditors' reports of 1992 and 1993 were referred to by Mr Heesh. These contained qualifications about the capacity of the company to continue as a going concern, and said it was dependent upon forthright action from the directors, and the continued support of its financiers and shareholders, if it was ultimately to return to profitability. Therefore, so Mr Heesh suggested, although the company was aware of its financial difficulties it was reasonable to assume the company was addressing them, and that the company itself would have felt some confidence it would continue in business.

S.M.W. in support of its argument, that it was actually insolvent in December 1993 together with its proposition that a person would or should have suspected insolvency, referred Mr Heesh to a number of financial documents including the records. These documents, so it was suggested, would have revealed the forgiveness of the $5 million loan from the company's parent. It was then suggested to Mr Heesh, this transaction should or would have raised in the mind of a reasonable person a suspicion of actual insolvency. He rejected that

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notion. The proposition he said depends upon the documents being in the hands of that onlooking creditor. In my view it is not reasonable to expect such documents to have been in the hands of a creditor, nor of the Commissioner. They were not publicly available and unless a creditor had asked for and received such accounts, the debt forgiveness would have remained undetectable. It was not reasonable, in my view, for a person in the position of the Commissioner to have asked for these documents, given what I shall go on to find as his stated knowledge in May 1994.

David Lofthouse was the administrator of the company ultimately replaced by the liquidator. Mr Lofthouse was brought in by the company as a rescuer or doctor. I am satisfied by that time, his patient was mortally ill.

He swore that on 9 May 1994 he was approached by the company and asked to investigate its financial affairs and provide an opinion as to its position. As to the bookkeeping methods adopted by the company which I have referred to in part as the shoe box method, he had this to say, ``The accounting system utilised by the company did not operate so as to properly reflect the true financial position of the company at any given point... the records of the company do not accurately reflect the amount owed to creditors by the company from time to time... the system did not reconcile back into it unpresented cheques.'' His report of 13 May did not go so far as to say that the company was not viable, although it did express considerable reservations about the company's capacity to generate sufficient cash to be viable in the future.

At that time S.M.W. had a proximate fear of its near to immediate demise but still thought it was capable of reprieve. In my view this attitude clearly reflects the fact that the company did not know it had then been insolvent for some time but continued to believe optimistically and unrealistically that it had a chance of survival. This reveals what I shall go on to observe is the curious nature of the liquidator's basic contention. Namely, that the Commissioner should have known more about the company than it did about itself. The Commissioner, so the liquidator now says, should have appreciated the company was insolvent when it had failed to do so itself. In effect the company and its directors should have been protected from themselves, and their functions usurped by the Commissioner. Not even Mr Lofthouse with all the access to records he had, thought the company was insolvent as at 13 May 1994.

The national credit manager of the company was Faye Patterson. She swore she spoke to some person in the tax office on 21 December 1993 probably, but not certainly, a Mr Balancy to whom I shall come in due course. She said she sought accommodation for non-payment of the November tax because of what she perceived to be the company's immediate shortage of funds. As she put it she sought ``to make the tax department happy''. She said she told him the company was having severe cash flow problems and could not currently pay the arrears of sales tax, but that she did not tell the Commissioner that there were other creditors in the same position. When asked by the officer from the tax department when the November sales tax instalment would be paid, Miss Patterson said she stalled the enquiry after consulting the shoe box kept in the office in which cheques ready for dispatch to creditors were kept. She also gave evidence that the company paid those creditors who asked first, most often and most noisily, and then put the more pliant of its creditors at the bottom of the box. The liquidator relied on this evidence, firstly to illustrate the desperate financial position of the company as at December 1993, to establish the fact of its insolvency, and secondly, that as the request for the November instalment had come from the Commissioner and it was not met, the Commissioner then should have then reasonably suspected the company was in fact, insolvent.

The Commissioner called its own witnesses. Firstly, Mr Balancy, who was the team leader in the debt collection area of the tax office at the relevant times. He gave evidence of the Commissioner's computer recording system as it operated in December and January 1993 and referred to the changes or ``migration'' of the system early in 1994. He noted that the system would not have shown, as at 27 January 1994, that the December 1993 sales tax had not been paid. He could not account for Miss Patterson's evidence of December 1993 and had no recall of it.

Mr Balancy did swear that the records revealed the company had an impressive history

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of past payment of sales tax. Although some group tax had been paid late, the company had not been significantly in arrears, and in any event late payment is not necessarily an indication of financial difficulty. Mr Balancy gave evidence about the internal structures in the tax office, how the debt collection section became involved in action upon reference from the sales tax area. His section was activated by complaint from the sales tax area or by being alerted from automatic references being downloaded on the computer system. Mr Balancy said that his section was not brought into the matter until May of 1994. He attended the meeting with Messrs Richtman and Lipson, already referred to, and said that because they were the financial controller and accountant of the company, in effect the real controllers of it, he felt assured they were ``people who were well aware of the financial fears of that company''. Accordingly, he was himself assured the company was in the position as stated, namely, in temporary financial problems, and that it had already taken action to address them. Therefore, for his own part he was prepared to accept the proposal from S.M.W. to pay the sales tax arrears by way of instalments and consldered he was acting well within the guidelines set out in Sales Tax Ruling No. ST2123. Mr Balancy was of the view, as at May 1994, that the company had the ability to pay the arrears in the future. My view is that the assurances given at this meeting were necessarily predicated upon an assumption that the company would continue into the future and thus was viable at least in the medium term. These assurances, although incorrect, were honestly tendered and honestly received.

Mr John Gleeson is a technical adviser to the sales tax debt collection section of the Commissioner's office. In that capacity he gave evidence of the Commissioner's system for noting and then recovering unpaid sales tax and in particular that relating to S.M.W. He swore that the time lapse of three and a half weeks between the recording of the failure to pay the November sales tax on 21 December 1993 and the notification of it to the debt collection section in mid January 1994 was normal for such events even excluding the New Year break. He stated that once a matter had been referred to the debt collection section, recovery of it is initiated by a team leader or manager within that section, who allocated the particular default to an officer. However, the system is not exclusive and there were occasions when the sales tax section itself took steps by way of phone call or request, to recover outstanding tax. The computer system recorded by way of codes a narrative relating to unpaid sales tax and this record could become available to officers in the sales tax area if they took the appropriate actions or struck the appropriate keys. The same system records the finalisation of an action, namely, should the debt be paid or some arrangement entered into the appropriate code is entered onto the computer system. After examining the Commissioner's records in respect of S.M.W. he concluded that the system recorded the fact that the November 1993 sales tax debt was referred to the debt collection section on 15 January 1994, and was encoded as being finalised on the 27th of that month. The same system recorded the November debt as being referred to Mr Manongdo on some date prior to 27 January 1994. However, from that day until 27 May 1994 no narrative was put on the computer system. However, Mr Gleeson said debt collection does not depend entirely upon computer recording and that each case must be examined in the context of its circumstances, and the discretion in respect of it, exercised, as is allowed under the terms of the Sales Tax Ruling 2123. He noted that a balance sheet, even if the same had been required by the Commissioner and rendered by the company, would not have actually revealed very much material so far as the health of the company was concerned, and in any event S.M.W. had been paying sales tax in many hundreds of thousands of dollars a month for many years without question or default.

In fact the company's balance statements for the years 1991/92/93 all showed negative asset positions and trading losses, nevertheless the fact remained, that S.M.W. had paid all the sales tax during this period, and on time, until December of 1993. Its prior record of prompt and full payment in spite of its balance sheet position does not, as a matter of history, seem to have affected the company's ability to have paid sales tax at least until November 1993. This record would, as Mr Gleeson said, in fact, did, stand the company in good stead when it made the arrangements to pay the arrears by instalments in May of 1993. He said the late payment of the November tax in December occurred shortly before the Christmas break

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which is a traditional time of disruption and hiatus in the Australian business community and would not of itself have raised any serious concerns in the Commissioner's office.

Mr Jesus Manongdo, an operative within the debt collection section, had the S.M.W.'s file referred to him. He noted the reference to his section was made automatically by downloading from the computer system, but the system itself had been changed significantly during the months of March and April 1994. He stated that it usually takes two to three months after a debt has been incurred for it to become registered or noted by his section and that action thereafter follows within two to three days. When he was informed that the November sales tax due in December had been paid he finalised that debt as I have already noted. It would appear that the non-payment of January and February sales tax was not entered upon the system at that time and accordingly he acquitted the November debt, (although the other defaults might have already been somewhere else in the system). The system then, did not allow for a running account procedure, whereby payments were set off against a total sum of sales tax due, rather, it assigned itself specifically to the defaults arising on a month by month basis.

Patrick Quinn is the officer in charge of the debt collection system and the most senior officer of the Commissioner involved in this case. He is the sales tax compliance manager at the Taxation Office which processes the S.M.W. returns. He confirmed that no compliance action had been taken against S.M.W. since its registration in 1984 and that up until the matter came to his attention in March 1994 its compliance had been excellent. He noted that the scheme was a self-assessing one and the amount payable each month varied considerably as sales rose and fell seasonally or as a result of sales campaigns and the like.

It was not until March 1994 that he first looked at the company's sales tax position. He was not able to recall why he did so at this time but the computer printout showed $289,000 owing, relating to the December period payable in January. It also showed that the November sales tax of $363,000 had been paid one month late but that the October tax had been paid on time. He commenced his investigations and a ``status of lodgement returns'' produced on that day showed that as of 12 March 1994 a final notice for lodgement of the January return had been issued to the company. So far as that payment was concerned it appears to have been lodged at the incorrect office and no payment accompanied the return. The computer printout seems to indicate that during the Christmas break between 21 December and mid January nobody in the tax office appeared to have control of the company's returns. In any event, when Mr Quinn commenced his activities in late March 1994 they came to an end during the first three weeks in April when he went on leave. While he was away the two $50,000 payments to which I have already referred were forwarded by the company and allocated to the December return. These payments, together with the $20,000 to which I have already referred were not engendered by any action from the Commissioner but were forthcoming from the company and allocated to the December return.

Mr Quinn also gave evidence about the Commissioner's debt collection system. He referred to the fact that the debt collection section would only be activated upon reference from the sales tax collection section. Thus if no debit is raised on the computer system it could not be referred to the debt collection section. Furthermore, there was no person in the Commissioner's office who had supervisory functions or auditing functions of companies lodging sales tax returns and as there were more than 70,000 such tax payers it was impracticable to expect otherwise. However, should he, as the manager, consider there was some reason which had been brought to his notice which required the company to be audited the Commissioner would allocate a specific officer. Nevertheless, as at March 1994 the company had been an exemplary tax payer and no information to the contrary had come to his attention.

I return to Mr Quinn's efforts to deal with the company's tax position. In March he phoned the person at S.M.W. responsible for lodging the January return to enquire about the non- payment. He was fobbed off and did not reactivate the file until his return from leave. On 13 May 1994 he telephoned the company and spoke with Mr Richtman. I accept that Mr Richtman was completely frank as to the company's position and acknowledged that $316,000 was due for sales tax for the month of March. There was also $291,000 outstanding for February. In fact an up to date computer

ATC 5227

printout indicated the sum of $1,000,045 was outstanding for sales tax and Mr Quinn told Mr Richtman of that figure. An interview between representatives of the Commissioner and the company was arranged for 18 May 1994. It took place at the Commissioner's office. Mr Balancy attended on behalf of the Commissioner and Messrs. Richtman and Lipson from the company. I accept Mr Quinn's evidence as to what occurred at that meeting and I quote his evidence: ``I was told by Richtman and Lipson that the previous financial manager of the company had allowed the account to fall into arrears. I was also told that the company was experiencing cash flow difficulties because of mismanagement by the previous financial manager but strategies were being put into place to address those problems and that Mr Richtman had been appointed the new finance manager. They sought a time of two weeks in which to submit a firm proposal to clear the balance. They also wanted to pay at that interview the balance of the December 1993 sales tax. I advised them that the taxation office policy was not to enter into any arrangement unless the current and future sales tax were met on time. I requested that instead of the company paying off the balance of the December 1993 sales tax that it pay the April 1994 sales tax which was due on 21 May 1994 and then apart from agreeing to pay the future sales tax on time it would only be necessary to make arrangements for repayment of the arrears for December, January, February and March.'' In fact, the company paid the April sales tax on 21 May, on time, as it did for the payment due in June. Subsequently, an arrangement was entered into with Mr Balancy to pay off the outstanding arrears at $150,000 per month over the ensuing six months. A letter confirming this arrangement is dated 9 June 1994.

Mr Richtman gave evidence on behalf of the Commissioner. He became the financial controller of S.M.W. on 26 April 1994. He confirmed the conversation and arrangement with Mr Quinn which I have referred to. He went on to say that between the date of that meeting and 1 June he prepared a repayment schedule, that is, the $150,000 per month, based upon his examination of the company's position. He included in his calculations, considerations relating to the expected cash flow from trading and expected financial facility to be made available from Westpac, and further a proposal whereby directors would repatriate the surplus benefits from the superannuation fund. He attended a meeting at the tax office with Mr Balancy on 1 June when the arrangement was approved by the commissioner and says of it, ``I entered the arrangement on behalf of the company with the belief that the company would be able to make the scheduled payments under the arrangements.'' However, the company was placed under administration on 20 June 1994 before any payments were due under the arrangement.

Mr Lipson confirmed Mr Richtman's evidence and there is no need for me to examine his material any more closely.

There is other documentary evidence pertinent to the contentious issues to which I must refer. I have already noted that the parent had resolved to continue financially supporting S.M.W. until 30 June 1994 at least and that the company was continuing to trade at traditional levels. Neither sales nor revenue seemed to have altered in the relevant period.

So far as its bankers were concerned Westpac was giving consideration to increasing its accommodation to the company and had created a charge securing future as well as past borrowings which transaction was recorded in the company's ASC returns for 1994.

Extracts of the relevant legislation

For ease of comprehension I rehearse below in truncated and edited form the provisions of the Corporations Law which are the subject of attention.

``SECTION 588F CERTAIN TAXATION LIABILITIES TAKEN TO BE DEBTS

588F(1) [Tax remittance liabilities are debts] For the purposes of this Part, a company's liability under a remittance provision to pay to the Commissioner of Taxation an amount equal to a deduction made by the company, after the commencement of this section, from a payment:

(a) is taken to be a debt; and

...

588F(2) [`remittance provision'] In this section:

`remittance provision' means any of the following provisions of the Income Tax

ATC 5228
Assessment Act 1936: (Note sales tax is not included.)

(a) section 221F (except subsection 221F(12)) or section 221G (except subsection 221G(4A));

(b) subsection 221YHDC(2);

(c) subsection 221YHZD(1) or (1A);

(d) subsection 221YN(1).''

``Division 2 - Voidable transactions

SECTION 588FA UNFAIR PREFERENCES

588FA(1) [What is unfair preference] A transaction is an unfair preference given by a company to a creditor of the company if, and only if:

(a)...

(b) the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company;...''

``588FA(2) [Transaction part of continuing business relationship] Where:

(a) a transaction is, for commercial purposes, an integral part of a continuing business relationship (for example, a running account)... and;

(b) in the course of the relationship, the level of the company's net indebtedness to the creditor is increased and reduced from time to time as the result of a series of transactions forming part of the relationship;

then:

(c) subsection (1) applies in relation to all the transactions forming part of the relationship as if they together constituted a single transaction; and...''

``SECTION 588FC INSOLVENT TRANSACTIONS

588FC A transaction of a company is an insolvent transaction of the company if, and only if, it is an unfair preference given by the company,... and:

(a) any of the following happens at a time when the company is insolvent:

(i) the transaction is entered into;

(ii)...''

ATC 5229

``SECTION 588FE VOIDABLE TRANSACTIONS

588FE(1) [Effect of section] Where a company is being wound up, a transaction of the company that was entered into at or after the commencement of this Part may be voidable because of any one or more of the following subsections.

588FE(2) [Insolvent transactions] The transaction is voidable if:

(a) it is an insolvent transaction of the company; and

...''

``SECTION 588FF COURT MAY MAKE ORDERS ABOUT VOIDABLE TRANSACTIONS

588FF(1) [Power of the court] Where, on the application of a company's liquidator, a court is satisfied that a transaction of the company is voidable because of section 588FE, the court may make one or more of the following orders:

(a) an order directing a person to pay to the company an amount equal to some or all of the money that the company has paid under the transaction;

(b)...

(c) an order requiring a person to pay to the company an amount that, in the court's opinion, fairly represents some or all of the benefits that the person has received because of the transaction.''

``SECTION 588FG TRANSACTION NOT VOIDABLE AS AGAINST CERTAIN PERSONS

588FG(1) [Person received no benefit or benefit in good faith] A court is not to make under section 588FF an order materially prejudicing a right or interest of a person other than a party to the transaction if it is proved that:

(a) the person received no benefit because of the transaction.''

``588FG(2) [Good faith and no reasonable grounds to suspect insolvency] A court is not to make under section 588FF an order materially prejudicing a right or interest of a person if the transaction is not an unfair loan to the company and it is proved that:

(a) the person became a party to the transaction in good faith; and

(b) at the time when the person became such a party:

(i) the person had no reasonable grounds for suspecting that the company was insolvent at that time or would become insolvent as mentioned in paragraph 588FC(b); and

(ii) a reasonable person in the person's circumstances would have had no such grounds for so suspecting; and

(c) the person has provided valuable consideration under the transaction or has changed his, her or its position in reliance on the transaction.

588FG(3) [Discharge of tax is valuable consideration] For the purposes of paragraph (2)(c), if an amount has been paid or applied towards discharging to a particular extent a liability to pay tax, the discharge is valuable consideration provided:

...

588FG(4) [`tax'] In subsection (3):

`tax' means tax (however described) payable under a law of the Commonwealth...''

Sales Tax remittances cannot be unfair preferences

My conclusion expressed in the sub-heading above disposes of this case. However, as the parties have expressly requested me to deal with the issues of fact and the other contentions of the plaintiff I shall, in fairness to them, continue with this megillah.

The scheme of the Act configures the sales tax remitter as a tax gatherer for and on behalf of the Commissioner. Despite being nominated as a debt, the Sales Tax is assessed and collected by the remitter from its own customers and is then passed on to the Commissioner without deduction, commission or interference. Therefore, S.M.W. is not now and never was in a position to ask for a refund of money, never its own. The goods upon which the sales tax was paid and those for which it remains due, were in fact sold by S.M.W. Were it to receive a refund a curious and absurd position would result, some of its customers would have paid a price including tax, and others paid another price less tax, all for the same type of goods. An even more absurd position would also obtain, namely that an insolvent company or a company trading during a period of insolvency could be seen as exempt from making sales tax remittances. When the contentions of the plaintiff are examined from the position of all tax payers the audacious nature of this action is exposed. In effect the liquidator wants the return of public moneys, as sales tax is, so that he may spread that benefit amongst all creditors. And yet to do so, in respect of goods sold and presumably consumed by the customers, he asks the return of monies from the public purse to put it into the private one.

I turn now to examine the parties' arguments on this point and then to justify my conclusions stated above.

The Commissioner's arguments

The Commissioner contends the scheme of the Sales Tax Act is to make the seller, in this case S.M.W., a self-assessing collector of the tax and conduit of it from the seller to the Commissioner. The tax, so the Commissioner contends, is liable to be paid by virtue of the sale whether or not the vendor chooses to pass on the tax as a discrete item in the sale price. For ease of collection, sales tax due and liable, is characterised under the Act as a debt due by the seller to the Commissioner. This enables the Commissioner to sue without formal demand, but, even so the Commissioner contends, that mechanism does not convert sales tax remittances into undue preference payments, should the seller be insolvent.

The Commissioner says it has the weight of judicial authority in its favour and specifically relies upon the unreported decision of
Casatex Australia Pty Ltd v Deputy Commissioner of Taxation per Davies, J, 9 December 1994, No. V.G. 324 of 1993, unreported.

S.M.W.'s arguments

Because I reject the company's arguments it is necessary to spell them out more fully than those of the Commissioner. I now do so.

ATC 5230

Section 16 of the Sales Tax Act was relied upon. Pursuant to sub-s. 1 the table sets out all the assessable dealings that are subject to sales tax. Pursuant to sub-s. 2 the person specified in the table is liable to the tax, in this case S.M.W., as a seller. It becomes liable to pay the tax at the time of the dealing as specified in column four, that is, the twenty first day of the month following the sale. Liability for the tax becomes vested at the actual time of the sale (see ss. 61 to 63).

Reference was made to s. 68 which provides that should a person liable to pay sales tax not do so, a penalty may be imposed. This section, so it was argued, is indicative of the proposition that liability for the tax itself is personal to the seller. It was suggested that if a penalty geared to the tax commitment becomes payable by the seller, then the debt itself should be seen as personal to that person.

I cannot accept that submission. In my view the penalty provision merely imposes a sanction upon the Commissioner's collector to do that which the Act prescribes should be done, namely, to assess and collect the tax. The section imposes a monetary burden, rated upon a specific interest rate, but locked into the extent of the seller's default, namely, the amount of unpaid tax. It is sensible to have sanctions of this kind where, the greater the default, the greater the penalty. This mechanism simply gives force to the sanction involved and does not in any way change the characterisation of the underlying obligation. In my view these same observations can be made with respect to ss. 96 and 99 which deal with the failure of a person liable to the tax to provide returns and the assessment of penalties in respect thereof.

I turn now to the Sales Tax Act s. 69 which provides ``unpaid tax may be recovered as a debt in any court of competent jurisdiction by the Commissioner or by Deputy Commissioner suing in his or her official name''. Section 100 provides for the remission of penalties and allows the Commissioner to remit all of the penalty at any time.

In these circumstances, so it was said by S.M.W. as the party liable to pay sales tax, and by virtue of being a monthly remitter, the tax became payable on the twenty first day after the end of that month. Non-payment thereafter automatically raised ``a debt''. It appears that in early June the Commissioner did extend the time for payment under the provisions of s. 66 but this does not alter the thrust of the argument or my findings stated below. S.M.W.'s argument continued by way of reference to the Corporations Law s. 588 which by its various parts, so it was argued, establishes the liability of the company itself, and not as being a mere conduit of funds to the Commissioner. First it was noted that s. F(1)(a) and (2) defined remittance provisions as being debts of the company. The recited list of Acts includes group tax and other taxes but not sales tax. It was then said that the taxes recited, are by their nature collected by a party other than the actual tax payer, should they not be deemed as debts, they might otherwise be susceptible of being impressed with a trust. Therefore, so it was argued, sales tax, by being excluded from the recitation of Acts, it did not have the character of debt in the same way as the other taxes, and accordingly S.M.W. was not a mere collector on behalf of the Commissioner. In my view, this is a boot straps argument. The omission of sales tax from the sub-section must be regarded as deliberate and therefore it says nothing about the nature of the tax or the tax payer. One needs to look elsewhere in the section to elucidate that character.

Next the argument was that as sub-ss. FG(3) refers to ``discharge'' of a tax as valuable consideration, and as the definition of tax must include sales tax, then all the characteristics of a ``debt'' are encompassed by the legislation therefore the payment of the tax should itself be characterised as ``payment of a debt'' as that phrase is commonly understood. Hence, so it was argued, the liability for the tax, is imposed upon the seller and there is no obligation to pass on that tax to its customer. If it is passed on by a wholesaler then the wholesaler should specify the amount of tax, and this is nothing more than S.M.W. actually did. The scheme of the act, so the argument went, permits the taxpayer, in the event of default, to claim a refund of the sales tax in respect of that particular sale, but it does not give to the Commissioner a right to directly pursue the wholesaler's customer. It was said that receipt of the monies from a customer would go into the seller's general revenue funds, out of which the seller might pay other suppliers or dispose of them in any way thought fit. Yet the Commissioner's access is to the general funds of the seller, and not to any specified or discreet account, even if one were kept, for the payment of sales tax; thus, so it

ATC 5231

was said, default in payment bore the usual characteristics of a debt. It was then said that S.M.W., due to its terms of trade, became liable to pay sales tax before it had received monies from its customers. Accordingly, no trust was involved, furthermore there can be no tracing, as there was no money specifically appropriated to the Commissioner. Finally, it was said that Casatex was wrong, but even so, Davies, J had accepted the contention that sales tax rnoney received by the seller were not trust monies. In S.M.W.'s case, so it was put, there simply could be no trust, because there were occasions on which it became liable to the tax and in fact paid it, before it had received the money from its customer.

Seller is a tax gatherer

I come now to my findings. In my view the scheme of the Sales Tax Act is as follows. It levies a tax upon transactions. It taxes the value of sales by wholesalers and some retailers. Because it would be impossible to do otherwise, the Act invests vendors with the obligation of assessing what tax is payable upon each and every one of its transactions, and then of collecting that tax from its customers and periodically remitting those amounts to the Commissioner.

Mr Scullin P.M. when referring back to this introduction of sales tax in 1930, said in 1932 ``The sales tax is like a customs duty, or indirect impost, and undoubtedly the burden of it falls mainly on the consumer''. That sales tax is an impost upon transactions to be distinguished from group tax or poll taxes, is exemplified by the remarks of Dixon, J in
DFC of T v. Ellis & Clarke (1934) 3 ATD 98; (1934) 52 C.L.R. 85.

Liability so assessed arises at the time of sale and by virtue of it, remittance follows later. It is the sale which gives rise to the obligation to forward the appropriate tax upon it, whether or not actual payment has been received from the customer; accordingly, the scheme of the Act permits the tax payer to obtain a refund in the event its customers default. The tax, which becomes due by virtue of the sale, never becomes the money of the tax payer.

In those instances where the vendor receives cash or payment from its customer, prior to the time it is obliged to lodge its return and remit the sales tax on the twenty first day of the month following the sale, that money is only temporarily in the possession of the vendor before it is passed on to the Commissioner. The scheme could not work otherwise. Some cash sales might be made at the beginning of the month and others at the end of it. Therefore, the vendor may be in possession of some funds for seven weeks prior to remittance being required, and other funds for merely one or two days. The period during which the tax payer possesses those funds will vary from time to time and month to month. This fact is recognised by most financiers and bankers; when the cash position of a tax payer is examined, liability for unpaid tax is taken into account and deducted from the current cash position of the proposed borrower.

The sales tax ingredient of the price of ``goods'' is something over which the vendor or entrepreneur has very little control. The rates of sales tax on classes and categories of goods will vary from time to time and sometimes place to place, all of which are at the option of the parliament and not the vendor. Although the individual entrepreneur may vary purchase prices up or down, depending on market exigencies and desired margins, what the entrepreneur cannot do, is exclude the sales tax component. Of course, as the price falls so does the quantum of the sales tax, generally the lower the wholesale price the lower the tax and vice versa. But what is not variable is the commitment to collect and remit the tax.

An explication might be drawn from group tax. In those cases where the employer deducts group tax from its employees salary cheques, the remittance of those monies to the Commissioner acquits the liability of the employee to income tax. That money never was the employer's money but is merely held back by the employer, again temporarily, and subsequently transferred to the Commissioner. In this case the employer is merely the collector of the tax and it has never been suggested otherwise.

I return to my introductory remarks, especially those concerning the fact that tax becomes liable by virtue of the sales transaction. In this case the payments made to the Commissioner during the relevant period were all referable to sales which had actually occurred. In fact, there are many completed sales upon which the tax ingredient has not been paid by the company. The company does not contest its liability to pay these outstanding amounts, were it not for the fact, that it says it

ATC 5232

was insolvent. What the liquidator now asks, is that those payments the company made in respect of completed sales transactions, be returned as undue preferences, and be distributed to other creditors. To do so defies logic. It would mean that the sales tax actually paid by the purchasers of the company's goods in the month of October 1993 would go into the public's purse and those payments made by the company's customers in November 1993 would be returned to the company's creditors. To do this would extract money out of the public purse, and put it into private ones. Therefore, within the space of a few months some transactions would be tax free and others carry the burden. I do not think the parliament when it addressed itself to the matter of undue preferences under the Act could have intended such an absurd result.

The Act has nominated unpaid sales tax as a debt and invested the same with the consideration necessary to support that nomination. In my view the nomenclature used does not convert the nature of the tax or its scheme of collection, into the equivalent of a debt as between trading enterprises. The Commissioner simply is not a trading enterprise or a commercial entity in the sense that debits and credits arise out of trading transactions. The Commissioner is not engaged in commercial activity or vending or purchasing in the way in which debts arise and are liquidated between such enterprises. The Act in order to facilitate the collection of unpaid tax has adopted mechanisms and concepts well known to the law, and has used a form of words which enables unremitted tax to be pursued as a debt. All that the Act does is to devise a mechanism whereby the Commissioner receives from its collectors the money gathered by them as if it was a debt in the event that they have failed to remit it.

This view of the scheme of the Act is supported by the provisions which enable the Commissioner to remit any additional tax paid and for a credit to be given in respect of sales tax where the vendor has not been paid by its purchaser but the vendor has paid the appropriate tax. Furthermore, the Act requires the sales tax ingredient to be endorsed upon the invoice to the purchaser (Section 125). I do not think the comments used in the following West Australian payroll tax case detracts from these conclusions, namely
Commissioner of State Taxation (WA) v. Pollock 93 ATC 5220; (1994) 12 A.C.L.C. 28. Ipp, J relying on and incorporating the earlier authorities said:

``... there is a long line of authority within England and Australia to the effect that tax is a debt in the ordinary sense of the word.''

He referred to the local legislation and considered that the State Commissioner was capable of suing for unpaid tax on the basis of it being a debt. The facts here are dissimilar to Pollock. Here S.M.W. wants to recover a debt so-called, paid during insolvency, and not meet a claim for a debt due from a completed transaction where the legislation is limited and specific. This decision is in alignment with my conclusion that the Commissioner may seek to recover unpaid tax as a debt; but that does not put remittances already paid into the class of being debts capable of being ``unfair preferences''.

In my view the figure of the tax gatherer is well known in history. The character pre-dates the Bible and reference is made in Sumerian and Babylonian literature. For example, one could imagine the amazement of the central Ottoman authorities, or for that matter, the feudal kings of England, if any one of their tax gatherers asked for a refund of the tax gathered, simply because their own businesses had soured or they were in fact personally bankrupt. Yet this is what the liquidator asks for in this case. S.M.W. was in the position of being a tax gatherer. It did remit some of the monies it gathered to the central authorities and it now wants it back because its own business failed.

I return to Casatex. The facts of the case are very similar to those before me and the basis of the liquidator's claim was the same. The case was decided upon the basis of the former legislation being the Sales Tax Act 1930, the Companies Code s. 565 and the Bankruptcy Act 1966 s. 122. The previous legislation is in substantially the same form as that which I have already rehearsed. Davies, J stated the facts shortly thus. ``This is an application brought by the liquidator of Casatex against the Commissioner. The liquidator seeks to recover sales tax (paid for a five month period shortly before the company went into liquidation in August 1992).'' Casatex had fallen into arrears as from September 1990 having been in earlier default but having made good the previous arrears. It wrote a letter to the Commissioner in terms which were similar to the conference

ATC 5233

conducted between Messrs Lipson and Richtman on the one hand, and Quinn and Balancy on the other, it referred to itself as having a temporary liquidity problem but that its circumstances were showing ``potentially profitable and enduring business enterprise''.

S.M.W. suggested that Casatex has no application to the present case because it did not apply to the definition of ``unfair preference'' under s. FA. It was said that hereunder s. FA it is not necessary to show the creditor obtained an advantage over other creditors, all that is necessary is to show is that the creditor i.e. the Commissioner, obtained more than it would have obtained in a winding up. On the facts, so it was argued, the Commissioner did not receive more than he would have received in a winding up. In my view, the argument does not, whatever the arithmetical results, impugn the efficacy of Casatex. S.M.W. also referred again to Commissioner of State Taxation (W.A.) v. Pollock and in particular to the reference Ipp, J made to, and his reliance upon
W.A. v. The West Australian Trustee Company Trustee Executor and Agency Company Ltd. (1925) 36 C.L.R. 98 per Isaacs and Rich, JJ, which merely reiterated the fact that when parliament creates a taxing obligation and makes express provision for it there is no room for implication about the subject.

In my view, there is no need to imply any meaning of the word debt. Section F(1) must be given its ordinary meaning. It says ``For the purposes of this Part'' (my emphasis; but the words are not of general application; they constrain the meaning of the word ``debt'' to Part 5.7B)... a remittance provision to pay to the Commissioner (again my emphasis, and note it is to pay and not to receive) is (a) taken to be a debt. (Note ``taken as'' and not ``is a debt''.) Furthermore, s. F(1) does not apply to Sales Tax, therefore whatever persuasive influence that might have, should be assessed in this light. Moreover, s. FA is in another Division of s. 588, it deals with ``Voidable Transactions'', it considers the concept of indebtedness only in s. FA(2)(b) and then only in the context of a ``continuing business relationship''. The section merely clothes the obligation to pay sales tax, with the concept of debt so far as recovery of it by the Commissioner is concerned. This case does not concern the Commissioner attempting to recover a debt. It concerns a company seeking to recover an alleged undue preference.

I do not consider the remittance of tax of the Commissioner's own funds as being the equivalent of or even in the nature of paying a debt. It is simply not of the same character as payroll tax (as in Pollock), which is an impost levied upon the employer, payment of which is the obligation of the employer, regardless of whether it sells goods or trades successfully or otherwise. Non-payment of pay-roll tax may be considered a debt because there is an obligation residing with the company, to meet the required remittance from its own funds, whereas the money to meet a sales tax remittance is derived from the vendor's customers.

Davies, J distinguished
Spedley Securities Ltd (in liq) & Anor v. Western United Ltd (in liq) & Anor (1992) 10 ACLC 357; [1992] 27 N.S.W.L.R. 111 where he noted that a preference was proved, subject to proof that other debts, remained due, whereas in the Casatex and as is the situation before me, the question is whether the payments were preferences. After referring to
Queensland Bacon Pty Ltd v. Rees (1966) 115 C.L.R. 266 to which I too shall later return, Davies, J then said this-

``In this light (ie Queensland Bacon) the first point I should make is that a court would be unlikely to hold that a regular payment to the Commissioner of sales tax due in accordance with the provisions of the Sales Tax Assessment Acts constituted the payment of a preference. This is because the Sales Tax Assessment Acts provide a means for the collection of sales tax. Save in the circumstances that the wholesaler applies the goods to its own use, the scheme intends that the wholesaler will add the sales tax to the price of the goods sold and will remit the tax to the taxation office.

If payment is not received by the wholesaler, there may be refund under s. 26 - the period specified 21 days after the end of the month, allows the wholesaler time to collect the tax from the purchaser, usually a retailer. As a matter of practice, the taxation office appears to be generous in its administration of the time. Whether or not the wholesaler in its invoice specifies the separate amount for sales tax, and most wholesalers do so, a purchasing retailer will understand that included in the price is an amount

ATC 5234
representing the sales tax which is imposed at the wholesale level.''

S.M.W. did render invoices which were in fact its picking slips and they desegregated the sales tax component. Davies, J was prepared to assume that Casatex similarly invoiced its customers and he went on to say-

``I could not conclude that the regular remittance of this tax to the Commissioner would constitute a preference priority or advantage to the Commissioner over other creditors. Although the amount added to the price for sales tax, when received by Casatex, would not have been trust monies, nevertheless the monies represent a tax that was specifically charged as such to the customer or was incorporated into the price as sales tax. It would have given other creditors a preference priority advantage if the sales tax, when received by Casatex, was not remitted to the Commissioner but was applied for their benefit, sales tax is imposed as a tax and a wholesaler is the instrument of collection.''

I conclude that Davies, J was correct. The legislation before me is in alignment with that which was before him. For the reasons I have stated, together with the comity I should accord to a judge of a co-ordinate jurisdiction, I am satisfied the liquidator's relief as sought, should not be granted.

S.M.W. was insolvent throughout the relevant period S 96A & FC

I have already said it is not strictly necessary for me to continue with the argument, S.M.W. having failed to hurdle the first threshold. I do so in deference to the parties. I did consider each of the payments made during the relevant period seriatim. However, as I have concluded that all of them were remitted while the company was insolvent I can now deal with them as an envelope.

The answer to the question - is or was a company insolvent? - is ultimately a legal one, although like every other such question the answer depends upon the facts which give rise to it. Section FC is that relied upon by S.M.W. Had it established insolvency then the issue of whether there was an unfair preference would have followed. Section 9 of the Corporations Law defines insolvent as having the same meaning as s. 95A(2) which defines solvency and insolvency. The definition invites some circuitry as a person who is not solvent is insolvent and a person is solvent if that person is able to pay all debts as and when they become due and payable. In my view there is little difference in the current position than that which prevailed prior to 1992. Under the previous law a person was insolvent if they were unable to pay debts as and when they became due and payable from their own monies. (See the Bankruptcy Act 1966 s. 122 and the old Companies Code ss. 565 and 592.) In any event, recent authorities have referred to the cases decided under the previous law when interpreting the new definition of solvency. (See
Melbase Corporation Pty Ltd v. Segenhoe Ltd (1995) 13 A.C.L.C. 823 and
Sandell v. Porter (1966) 115 C.L.R. 666. Also
Reece v. Bank of New South Wales (1964) 111 C.L.R. 210.) I am satisfied that one of the criteria for testing solvency is the company's ability to meet its debts as they become due. It is correct to say that a temporary cash flow problem will not amount to insolvency. That is so because the ability to pay is not extinguished if there is a temporal inability of a transitory kind (see
Hamilton v B.H.P. Steel (J.L.A.) Pty Ltd (1995) 13 A.C.L.C. 1548 and/or
Olifant v Everest Products (1996) 14 A.C.L.C. 24.

In my view the evidence from Miss Patterson, Mr Johnson and Mr Heesh relating to the shoebox bookkeeping, the desperate measures taken to meet only the claims of those trade creditors who asked most noisily, and the fact that this situation had been current for some time all establish the company's cash flow problems were not temporary or transitory but were chronic, enduring and worsening. The company's inability to meet its creditors demands as from at least December 1993 and probably pre-dating that period, resulted not in a series of acute episodes, but became endemic. This showed it could not meet its commitments as they fell due. As the debts accumulated the problem was exacerbated.

I choose to adopt the approach of Lindgren, J in the Melbase case and consider that the word debt in s. 95A and the ``ability'' to meet them requires interpretation by a pragmatic approach. These are factual issues to be determined in the light of the circumstances. Even excluding the required remittances to the Commissioner, the evidence establishes that S.M.W. was unable to meet its commitments. I refer to the evidence from Mr Smith from Sharp and the affidavit

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material relating to 3M and my acceptance of S.M.W.'s own witnesses.

There are further factors which reveal the company's insolvency throughout the relevant period. There is the deficiency of assets over liability in each of the financial years 1991 to 1993, and this is so despite the massaging of the 1993 balance sheet by the post dated transaction whereby a debt of $5 million to its parent was forgiven. In my view the artificial surplus created by that transaction was consumed by further trading losses which occurred thereafter and its benefit had been consumed by October 1993. If this were not enough the company operated at a loss from 1991 until the last record available as at June 1993. Thereafter it had operating losses from July through to December 1993. It was simply continuing to trade in an ever worsening situation with its losses accumulating, whether measured against its trading position or asset position. An injection of $5 million, albeit by way of book entry, failed to staunch the flow. In my view the company was fatally wounded during the years 1991 to 1993, its anaemia incapable of resuscitation by December 1993. Furthermore, I have referred to the unpresented cheques which by March 1994 totalled almost $2 million. The company's ability to meet its debts was further diminished by the withdrawal of its credit facility with Bridge and the reduction, at least temporarily, of its overdraft accommodation from Westpac.

In my view the evidence of Messrs Richtman and Lipson is telling on this point of insolvency. They took over the company when they thought it had a chance of being revived. Following their examination of it, and as a result of professional advice obtained, but not until June 1994, they ultimately came to the view the company was insolvent and sought the appointment of an administrator. Their evidence supports the proposition that the company was insolvent at the time of their appointments and had been so for at least the preceding six months. Finally, the accumulation of the unpaid sales tax remittances is evidence itself of the company's failure to meet its obligations as they were incurred.

My conclusion is that whatever notion of solvency or insolvency is adopted, whether under the new or the former law, this company was not solvent at any time throughout the relevant period.

Good faith and s. FG

The Commissioner sought to rely on this section in the event it failed on the main argument. The explanatory memorandum accompanying the introduction into parliament of the section read in part as follows - ``The defence as provided under s. FG are similar to defence provisions currently provided under the Bankruptcy Act s. 122. The requirement of good faith is supplemented by requiring that on an objective basis the person had no reasonable grounds for suspecting that the company was insolvent at the time or would become insolvent.'' Ashley, J in
Downey v. Aira Pty Ltd (1996) 14 A.C.L.C. 1,068 referred to this memorandum and then extensively examined the authorities. In concluding what the law re FG(2) now is he said [at 1,075-1,076]-

``Looking to s. 588FG(2) some matters may be immediately stated. Thus

• `good faith' now contains no objective element; what was previously the objective element of `good faith' is expressed in sub-s. (2)(b);

• the former objective element of good faith is now unambiguously limited to suspicion - as contrasted with knowledge - of insolvency;

• `insolvency' - a term defined in s. 95A - stands in place of the two matters previously referred to in the Bankruptcy Act s. 122(4)(c)(i) and (ii)....

• sub-section (2)(b)(i) refers both to suspicion of insolvency at the time when that creditor became a party to the transaction and, and to suspicion that the debtor might become insolvent by reason of the transaction itself;

• it is now clear that the creditor must prove both the subjective and objective elements of what were the old s. 122(2) and (4). That is evident not only from the opening words of s. 588FG(2), but also from the formulation of sub-paragraphs (b)(i) and (ii);

• the requirement in Bankruptcy Act s. 122(2) that a payee show that the payment was made `in the ordinary course of business' has not been replicated.''

I can do nothing more than repeat Ashley, J's formulation of the law with a minor qualification that sub-ss. 2(b)(i) and (ii) might

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contain a subtle distinction and more of this in the next sub-section.

I considered, as did Ashley, J, that good faith in s. FG should be read according to its ordinary meaning and that is by acting honestly and with propriety. In my view the Commissioner in accepting the payments during the relevant period was doing no more than properly receiving its own money as statutorily obliged to do. No suggestion of dishonesty has been raised anywhere and I can put that matter to one side. Even if this were wrong and good faith continued to have its meaning as considered by the courts in the context of the Bankruptcy Act s. 122, the Commissioner acted in complete good faith. (As to the judicial consideration of ``good faith'' see
Downes Distributing Company Pty Ltd v. Associated Blue Star Stores Pty Ltd (1948) 76 C.L.R. 463 at 475 and Reece v. Bank of New South Wales (1964) 111 C.L.R. 210.)

The Commissioner's good faith and that he had no grounds to suspect insolvency, S. FG(2)(a) and (b)

The court is prohibited from making an order under s. FF, that is, refunding monies, should the court decide in the exercise of its discretion that the transaction is voidable under the terms of FE. However, the terms of s. FG(2) prohibit a court from making such an order if it is proved that the Commissioner acted in good faith and at the time had no reasonable grounds for suspecting the company was insolvent or that a reasonable person in the Commissioner's position would have had no such grounds for so suspecting. The requirements under sub-ss. (a) and (b) are conjunctive and can be seen to proffer variable standards of proof. Part FG(2)(c) also requires S.M.W. to have provided valuable consideration by way of the remittances or changed its position in reliance of the transaction. The latter sub-section (c) is disjunctive insofar as ``valuable consideration'' will be sufficient on the one hand or ``alteration of position'' in reliance of making the remittances on the other. The obligation under sub-part (a) resides with the Commissioner. He must establish that the remittances of sales tax were accepted during the relevant period in good faith. The Commissioner seeks to invoke the defence so he must establish it. I am aware that Mr Justice Ashley in Downey v. Aira Pty Ltd, was of the view that sub-parts (b)(i) and (ii) devised the same test in that whether or not a reasonable person in the circumstances the Commissioner in part (ii) would have grounds for suspecting is no more than a reiteration of the reasonable person in part (i). (See also
Oliphent v. Australian Wine Industries (1996) 14 A.C.L.C. 510.) However, I think there may be a subtle difference between (b)(i) and (b)(ii) in that the reasonable person in (ii) imports an objective test of what or who is such a person, and the next phrase ``in the person's circumstances'' imports a subjective element. However, it is unnecessary for me to resolve this dichotomy, if there is one, because whether tested objectively or subjectively, neither the Commissioner, nor anyone else in the Commissioner's position would have had reasonable grounds, or indeed any grounds at all, for suspecting the company was insolvent.

In order to justify this conclusion it is necessary to return to the evidence. Neither Mr Quinn nor Mr Balancy, who were responsible for dealing with S.M.W., and particularly so after the appointment of Richtman and Lipson, had reason to suspect insolvency. Quite to the contrary Messrs Lipson and Richtman, although they initially thought the position of the company was tight, were of the view its difficulties were temporary. I am convinced they entered into discussions on 18 May, and subsequently concluded the agreement to pay by instalments, solely on the basis the company would overcome what then appeared to be temporary problems. In any event, the Commissioner's staff knew of S.M.W.'s compliance with its sales tax obligations over the preceding decade and this was so despite very large amounts of sales tax remitted by S.M.W. It was the principal contributor to sales tax as recorded in the Commissioner's Dandenong office. I accept the evidence of Messrs Quinn and Balancy. I find the evidence of Miss Patterson confusing on this point and it does not overbear the cogency of the Commissioner's witnesses.

No reasonable grounds for suspicion, s. FB(2)(b)(i)

The Commissioner may prove that it had no grounds (qua grounds) for suspecting the company was insolvent, or secondly, that if there were grounds then those grounds were not reasonable in the given circumstances.

A similar provision obtained under the Company's Code s. 556(2). It was examined in
Metal Manufacturers Ltd v. Lewis & Anor

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(1986) 4 ACLC 739; (1986) 11 A.C.L.R. 122. Of it Hodson, J of the Supreme Court of New South Wales in its equity division said this-

``It is best to approach the question of s. 556 to be as a single question, namely has the defendant proved that he did not have reasonable cause to expect that the company would be unable to pay its debts as they fell due. In considering that question, one must have regard to facts and circumstances known to the defendant and also facts and circumstances which by reason of the defendant's duties ought to have been known by the defendant.''

In this court Tadgell, J considered the same section in
Commonwealth Bank v. Freidrich 5 A.C.S.R. 115. He said, in applying that test-

``In applying this test matters personal to the defendant can of course be taken into account. In particular, it would appear to be proper to consider in deciding whether the defendant did not have reasonable cause to suspect, et cetera, all the circumstances in which he found himself at the time when the debt in question was incurred by the company.''

I return now to the submissions concerning Part (i) which, if I might say, were repeated in respect of (ii). Mr Nash for S.M.W., reiterated the matters I have already referred to in respect of actual insolvency, and said the same should have operated upon the mind of the Commissioner so as to induce a reasonable suspicion that S.M.W. was at all times insolvent. For the reasons I have already given in respect of actual insolvency, in my view the contrary is the case. The fact is that the company's own officers, who would be expected to be in a far better and more knowledgeable position than the Commissioner's, did not themselves believe that their company was insolvent. What Mr Nash really advances is that the Commissioner should have had the perspicacity which the company itself lacked. It is not the role of the Commissioner to supervise or audit its tax payers. In this case, although late payment of sales tax should and did cause the Commissioner to be alert, the fact is that the December payment, was acquitted by March, although the non-payments thereafter received tardy attention from the Commissioner, at least until after Mr Quinn returned from holidays. Thereafter, the appropriate investigations were put in place and the 18 May meeting and arrangement was subsequently concluded. In my view, and bearing in mind the authorities I have quoted, the Commissioner acted reasonably. The Commissioner was entitled to be assuaged by what were then the valid and bona fide protestations of the company that its difficulties were merely temporary. In my view on any test, whether subjective or objective, no person could have had reasonable grounds for suspecting insolvency even before the company's protestations of viability were made. The Commissioner neither had such grounds nor was there material upon which such grounds could reasonably be held.

The reasonable person test s. FG2B(ii)

In the event that it may be thought that this section has a separate and distinct operation from sub-part (i), and this would be my favoured view were I called upon to determine the matter, then it would appear to impose both subjective and objective tests. In this case the onus would be upon the Commissioner to rebut those facts which would give a person in the position of the Commissioner reasonable grounds not to suspect the insolvency of the company? This rather obtuse way of putting the question can be restated thus. The questions should be asked, what would a creditor in the position of the Commissioner have had regard to should he suspect that the company was insolvent when the payments were made? In this case those matters would have included the continued capacity of the company to trade and the fact that it was doing so. Secondly, whether any other creditor, particularly of the trade variety, had taken any action to recover outstanding debts or wind the company up. No such action had been taken. Thirdly, was the company being backed by its financiers and parent? All of these investigations would have revealed the company was being supported. Similarly, if the company's accounts were to have been examined, a surplus for 1993, at least on a paper basis, would have been revealed vis-à -vis a loss in the preceding year. Perhaps it might be asked what knowledge was available to the Commissioner about the company's financial circumstances if specific enquiries were not made. This knowledge would have included the past history of compliance and at worst, the representations of the company that it was in temporary financial difficulties. Therefore, again, and on any view, no

ATC 5238

reasonable person in the Commissioner's circumstances could have had reason for suspecting the insolvency of the company or not suspecting that it was not solvent.

S.M.W. contended the Commissioner's own evidence is inconsistent with an absence of reasonable grounds for suspecting the insolvency of the company at least as from 21 January and thereafter. The evidence referred to was the company's default in December of paying the November sales tax, followed by the filing on time in January of the December return but not paying it until 22 March 1994. The further fact that the November tax paid in January 1994 was only forthcoming after the matter had been referred to the debt collection section and that no explanation consistent with solvency was forthcoming from S.M.W. relating to its failure to pay both the November and December 1993 remittances on time. Furthermore, that in February the return for January was received by the Commissioner's office but was not accompanied by payment. The following month, the March return for the February period was also not paid. Then followed the series of payments $20,000 and two payments of $50,000 paid between 22 March and 20 April 1994 in respect of the December sales tax period which itself was followed a day later when the tax for March was due, the return having been filed but no payment in respect of it made. Reference was then made to the conversation between Mr Quinn and Richtman of 13 May 1994 in which the matter of outstanding sales tax was raised and the subsequent arrangements for the meeting and payment by instalment entered into. All of this was said by S.M.W. to have created an omnibus of circumstances whereby a reasonable person in the Commissioner's position would have had reasonable grounds for suspecting the company was insolvent and that the Commissioner should have drawn that conclusion from the above facts.

I have taken the trouble to re-state S.M.W.'s contentions on this point in order to weigh them against the standard of reasonableness. Doing so, I repeat my conclusions and add that the inaction within the Commissioner's office between the middle of March and the middle of May, although regrettable, is of itself a wholly reasonable circumstance. That is, the person in control had for a substantial time during that period, taken leave, and that the system itself was slowed down due to a change of its computer programming. These are just as much reasonable circumstances which come to bear upon any creditor in a like position to the Commissioner, and are to be taken into account when assessing the whole of the circumstances in which the Commissioner found itself. Accordingly, I reiterate my conclusion and find that S.M.W. would have failed on the facts in this part of its argument.

Valuable consideration

The statute runs in favour of S.M.W. Section FG(3) provides that for the purposes of FG(2) the discharge of tax is to be taken as being valuable consideration.

Remittances were ``a business relationship'' or a ``running account'' s. FA(2)

As a separate ground of defence the Commissioner contended that no unfair preference had been given within the meaning of FA, because each remittance formed part of a continuing business relationship between it and the company within the meaning of FA(2) which in effect gives statutory effect to the running account defence. (See also ss. F, FU(3) and FG(5).) It was contended that as sales tax liability is incurred as the result of vending either at a wholesale or retail level then the liability to make such remittances is an integral part of the business enterprise. Next it was argued, that as s. FA(1)(b) would make it an ``undue preference'' if the transaction in issue resulted in the Commissioner receiving from S.M.W. more than it would have, if the transactions were set aside and the Commissioner had to prove as in a liquidation. But FA(2)(a) provides a statutory qualification, that is, if the transaction is for ``commercial purposes and integral part of a continuing business relationship''. It was argued that all the transactions needed to be put together as a conglomerate (ie. sub-part FA(2)(a) and (b) are conjunctive) and then examined to determine whether or not the Commissioner had received more from S.M.W. in respect of the debt than if all the transactions were set aside and the Commissioner had to prove as in a winding up. The reference to ``running accounts'' in the section was said, as must be the case, to be an exemplar and not exhaustive. Therefore, so it was argued the section applied to general commercial transactions assessed by the internal criteria set out in the section, that is, that they be of a commercial nature between a

ATC 5239

company and its creditor as part of a continuing business relationship and an integral part of that relationship. The final internal criteria is that the level of S.M.W.'s indebtedness to the Commissioner should have increased and decreased as a result of transactions within that relationship. The liability to remit sales tax is statutorily based. Nevertheless, so it was argued, it was an obligation arising during the course of the company's business and directly referrable to its turnover. The relationship was said to exist because it arose from the mere fact of S.M.W. conducting its wholesaling and retailing business.

Furthermore, throughout the relevant period S.M.W.'s indebtedness to the Commissioner rose and fell as further liabilities were incurred and as some were acquitted, for example, the three part-payments of the December tax. Therefore, the company's own asset position increased or decreased by the quantum of the sales tax it failed to remit. It had obtained funds from others but had not transferred them to the Commissioner. It could be said that the amount of unpaid tax represented a loan from the Commissioner or at least the extension of liberal terms of credit. Thus it may be said that the parties were engaged in a mutual business enterprise.

The Commissioner also asserted that the amount of sales tax arrears due at the end of the relevant period exceeded the amount paid during it; and thus it was not captured by s. FA(1)(b) at all. I shall return to this point when dealing with ``discretion''.

Mr Nash countered the Commissioner's arguments by reference to Queensland Bacon (supra) and
Richardson v Commercial Banking Co. of Sydney Ltd. (1951-1952) 85 C.L.R. 110; also
Petagna Nominees v. Ledger 1 A.C.S.R. 547;
Ferrier v. Civil Aviation Authority (1994) 127 A.L.R. 472 and
Airservices Australia v. Ferrier (1996) 14 ACLC 1,403; (1996) 137 A.L.R. 609. He contended the essence of a business relationship could be assessed at least in part, by reference to a running account, ie. on ``what goes in'' and ``what comes out'' approach. As the traffic was all one way between S.M.W. and the Commissioner there could be no running account and no business relationship.

The scheme of the Act, in my view, acquits a tax payer ie S.M.W. of its liability to the Commissioner by the payment of the tax. In the event that the remittances are not the Commissioner's own monies then it could be said that the Act creates a liability vested in the tax payer, and thus there is a business relationship between that person and the Commissioner because the Commissioner is an agency of the Crown in a business engaged in non-profitable activities. (see Evidence Act (C'wlth) 1995 wherein the term ``business'' includes any activity engaged in or carried on by the Crown in any of its capacities and by s. 2A and includes a business not engaged in or carried on for profit.) In this case the instalments of $50,000 and $20,000 together with the increase in arrears noted in the Commissioner's computer records and referred to at the 18 May meeting, all take on the characteristics of a ``running account''.

How discretion would have been exercised

I consider that s. FF(1) invests the court with a discretion whether or not re-payment of what could be considered to be an unfair preference, should be ordered. That the discretion is wide is illustrated by the range of the forms of orders that the court could pronounce in respect of voidable transactions (see sub-s. 1A and my emphasis). The court can make orders for partial re-payment, or refund, and sub-s. 2 provides that nothing in it limits the generality of sub-s. 1. The provision should be distinguished from that which previously obtained under the Corporations Law s. 565. That latter provision was the object of consideration in Casatex. Pursuant to it a payment was void if the effect was to give a creditor a preference over others. The section required and was given examination in that case, that resulted in a comparison being made between the position of the creditor who received the payment vis-à-vis the positions of the others. This was done in order to see whether the person who had received the payment was in a better position than the general body of creditors. That is not the current position here; which by virtue of s. FA(1)(b) imposes the following test:- If a payment to a creditor results in that person receiving more than he or she would have received in respect of the debt if the transaction were to be set aside and the creditor had to prove in liquidation, then that transaction amounts to being an unfair preference. I would need to do that arithmetic.

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There is no need for me to canvass the mathematics in this case but I do find much attraction in the Commissioner's contention that, if the amount of sales tax remitted during the relevant period is offset against that which was properly incurred, then the Commissioner has not received more, as a percentage than the other creditors will receive in the event of a finalised liquidation. Assuming for the purposes of this argument that there is an imbalance and the Commissioner might be seen to have received more than it would, in the event of a liquidation I would have exercised my discretion not to require it to refund any tax as arising out of a ``voidable'' transaction. I would have exercised my discretion in this manner because the tax paid arose out of sales to the company's customers and it would not be fair to put them in the position of not having paid sales tax whereas others would have done so. Furthermore, funds which should have been forwarded to the Commissioner, were probably retained and utilised by the company during the relevant period. As a matter of fairness it should not prosper from this recalcitrance.

The distortions to the general market place resulting from a refund would be grossly unfair and amount to treating the company's customers unequally. Furthermore, the perverse position would obtain that by virtue of refunding the tax, the company would increase its assets for not doing what it should have done, it would be put into a position of advantage and in my view disequilibrium vis-à- vis its trading competitors. More significantly, the pool of creditors should not prosper at the expense of the public.

Conclusion

The commissioner is not obliged to refund to the liquidator any sales tax remittances made by S.M.W. during the relevant period. The money involved was the Commissioner's, and never S.M.W.'s. Should that be wrong, although S.M.W. was insolvent, then neither the Commissioner, nor any person in the position of the Commissioner, would have had grounds to suspect or grounds upon which to have raised a reasonable suspicion the company was insolvent. In any event the remittances were probably not unfair preferences because the Commissioner would not be in any better position than other creditors if it had to prove as in a liquidation. Furthermore, the Commissioner was involved in a business relationship with S.M.W. evidenced by the running account kept between them. Finally, even if the transaction were voidable I would not exercise my discretion so as to order any form of re-payment. The motion will be dismissed.

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