Taxation Ruling

IT 2042

S.218 notices and sales of mortgaged properties

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FOI status:

FACTS

A situation which arose recently illustrates the operation of section 218 of the Income Tax Assessment Act in the particular circumstances.

2. A notice under that section had been served upon the prospective purchaser of a parcel of land owned by a taxpayer who had a substantial unpaid liability for income tax. A third party held a registered mortgage over the subject land to secure the repayment of funds previously lent to, and still owing by, the taxpayer. The proceeds of the impending sale would have been insufficient to enable the mortgagee and the Commissioner to be paid in full. The question thus arose as to the respective rights of the mortgagee and the Commissioner to the prospective sale proceeds.

RULING

3. The registration of a mortgage gives to the mortgagee a charge over the mortgaged land and a right to exercise various powers. It is only in respect of the interest in the land (created by the charge) that the mortgagee is given priority over any unregistered or subsequently registered interest. The mortgagee is not given any direct right to the proceeds of sale of the mortgaged land at least until such time as he may exercise his power of sale under the mortgage. In other words, the mortgagee (unless he is exercising his power of sale) has no direct right to the proceeds of sale. It is the mortgagor who has the right to the sale proceeds although, of course, he can only effectively exercise that right if he is in a position to give a clear title and transfer to the prospective purchaser by paying out the mortgagee, thus enabling the mortgage to be discharged.

4. Accordingly, prior to the time of settlement in the case under discussion, the mortgage did not give any priority to the mortgagee as against the Commissioner to the sale proceeds. At the moment of settlement the sale proceeds continued to belong to the taxpayer and the mortgagee had no protection against the operation of the section 218 notice. Once the proceeds became payable by the purchaser to the taxpayer, the Commissioner's rights under section 218 crystallised into a right to require immediate payment from the recipient of the notice, i.e. the purchaser.

COMMISSIONER OF TAXATION
3 June 1983

References

ATO references:
NO 82/5997 F94
BO 4/82 026 900

Date original memo issued:
25.03.83

Subject References:
S.218 NOTICES SALE OF MORTGAGED PROPERTIES
RECOVERY OF TAX

Legislative References:
218