The High Court, by a 3:2 majority, has dismissed the Commissioner’s appeals from the Full Court of the Federal Court of Australia, in Commissioner of Taxation v Australian Building Systems PL (in liq)  HCA 48. You can read the summary of the judgment published by the High Court on its website here, and the judgment in full here. Four separate judgments were written: by French CJ and Kiefel J and by Gageler J in the majority; Keane J and Gordon J each wrote separate judgments in dissent.
Last week the Federal Court declared void two s 260-5 “garnishee” notices which had been issued by the Deputy Commissioner of Taxation to NAB requiring payment of post-liquidation tax liabilities assessed against a company in liquidation and its liquidator of over $298 million and $308 million, in The Bell Group Limited (in liq) v Deputy Commissioner of Taxation  FCA 1056.
The Court held that the Commissioner had no power to issue the notices for post-liquidation tax liabilities. It held that –
- A section 260-5 notice is an attachment for the purposes of s 468(4) of the Corporations Act (see ). (Section 468(4) provides that: “Any attachment, sequestration, distress or execution put in force against the property of the company after the commencement of the winding up by the Court is void.”)
- A section 260-5 notice that relates to a post-liquidation tax-related liability does not avoid the operation of s 468(4) as a remedy specifically provided for or preserved by s 254(1)(h) of the ITAA36. It is not so preserved (see ). (Section 254(1)(h) of the ITAA36 provides that: “For the purpose of insuring the payment of tax the Commissioner shall have the same remedies against attachable property of any kind vested in or under the control or management or in the possession of any agent or trustee, as the Commissioner would have against the property of the taxpayer in respect of tax.”)
- Indeed the preferable construction of s 254(1)(h) of the ITAA36 is that it does not confer any remedy on the Commissioner against the property of a company after the commencement of the winding up of the company because such property is not “attachable property”. Thus s 254(1)(h) of the ITAA36 does not override or “trump” s 468(4) of the Corporations Act (see -),
- Nor can s 468(4) be read down to permit such an attachment even if the Commissioner has some level of priority in respect of post-liquidation tax-related liabilities (pursuant to s 556(1)(a) of the Corporations Act) (see ),
- Applying the High Court’s reasoning in Bruton Holdings with respect to pre-liquidation tax debts, the Commissioner also has no power to issue s 260-5 “garnishee” notices to a company in liquidation (or its liquidator) in respect of post-liquidation tax-related liabilities. The High Court’s reasoning as to the regime in s 260-45 of Schedule 1 of the TAA is equally applicable to the scheme in s 254 of the ITAA36. There is no relevant distinction between the two statutory schemes. “Both require the liquidator to set aside amounts to meet expected tax debts, but leave questions of payment and priority to the Corporations Act.” (see  and )
- The Commissioner had no power to issue the notices in this matter. (see )
In summary the key facts – which were not in dispute (see -) – are these –
On 24 July 1991, a liquidator was appointed to The Bell Group Company Limited (TBGL) and related entities by the Supreme Court of Western Australia. On 3 March 2000 Mr Antony Woodings was appointed an additional liquidator, and he became sole liquidator on 21 August 2014.
Back in 2000 the well-known, long-running Bell Group litigation commenced against a number of Australian and overseas banks. On 28 October 2008 in his 2,643 page judgment, Owen J found against the banks and ordered them to pay TGBL and related entities total amounts exceeding $1.5 billion. This was increased on appeal by the WA Court of Appeal to over $2 billion.
The banks then sought and obtained special leave to appeal to the High Court. However prior to hearing, a settlement was agreed. The Deed of Settlement provided, amongst other things, for the banks to pay a settlement sum of just under $1 billion plus adjustments to the liquidator Mr Woodings to be held on trust for TGBL and related entities in certain specified proportions. Broadly, the key clauses provided that Mr Woodings held the sum on trust for each of the “Bell Judgment Creditors” in specified proportions, and that the settlement sum was to be held in an interest bearing trust account or accounts, and the same parties would have a vested and indefeasible interest in their proportion of the interest earned.
TBGL’s proportion of the settlement sum specified in the Deed in 2008 had been just over $5 million, plus a share of the adjustment amounts.
Although the Deed provided for the distribution of the settlement sum, for reasons which Wigney J observed were not necessary to go into, the funds held on trust were not distributed, either pursuant to the settlement deed or in the winding up generally. His Honour noted that it appeared not to be disputed that at some stage the funds would be distributed.
At the time of this hearing, Mr Woodings held $300 million paid pursuant to the Deed of Settlement in a NAB term deposit account in the name “ALJ Woodings as Trustee for the Bell Judgment Creditors”. This investment matured on 2 October 2015.
On Wednesday 5 August 2015 Mr Woodings, in his capacity as liquidator of TBGL (as head company of a consolidated group), caused TGBL to elect to form an income tax consolidated group under Part 3-90 of the Income Tax Assessment Act 1997 (Cth) (ITAA97), and the companies entered into a tax sharing agreement for the purposes of Division 721 of the ITAA97. It was common ground that the terms of both of these had no bearing on the validity of the garnishee notices.
On Monday 10 August 2015 the Commissioner issued a notice of assessment to TBGL as head company of the consolidated group for the 2014 income year, assessing TBGL’s taxable income in the amount of over $1 billion and the tax payable in an amount of over $308 million.
On 18 August 2015, due to a calculation error in the assessment, the Commissioner issued an amended assessment to TBGL assessing the 2014 taxable income as nearly $994 million and the tax payable as over $298 million.
Corresponding assessments were also issued to Mr Woodings in his capacity as liquidator of TBGL, relating to the same income and the assessed tax payable of over $298 million.
On 14 August 2015 the Deputy Commissioner issued the two garnishee notices to NAB – one in respect of the assessment issued to TBGL and the other to Mr Woodings. The TBGL notice specified the amount originally assessed of over $308 million, although the NAB was subsequently advised that the amount due under the notice was varied to just over $298 million.
Objections were lodged by both TBGL and Mr Woodings.
Summary – Submissions
TBGL and its liquidator submitted that the reasoning in Bruton Holdings PL (in liq) v Commissioner of Taxation  HCA 32; (2009) 239 CLR 346 applied to the two garnishee notices even though Bruton Holdings dealt with the scheme for pre-liquidation tax-related liabilities in s 260-45 of Schedule 1 to the Tax Administration Act 1952 (Cth) (TAA), as opposed to post-liquidation tax-related liaiblities, and involved the operation of s 500(1) rather than s 468(4) of the Corporations Act. They argued – successfully – that –
- The Hight Court made emphatic and unequivocal statements in Bruton Holdings, in particular at ,  and , that the power conferred on the Commissioner by s 260-5 of Schedule 1 to the TAA does not extend to the case of a company in liquidation, including where there has been a court ordered winding up.
- The High Court’s reasoning applies equally to the case of post-liquidation tax-related liabilities. This is because post-liquidation tax-related liabilities are also the subject of a specific scheme, being the scheme in s 254 of the ITAA36 and Chapter 5 of the Corporations Act, in particular s 556.
- That specific scheme excludes the more general provision in s 260-5 of Schedule 1 to the TAA for exactly the same reasons as those given by the High Court in Bruton Holdings in respect of the specific scheme in s 260-45 of Schedule 1 to the TAA. (See )
Contrary to this, the Commissioner submitted that the reasoning in Bruton Holdings was inapplicable to the circumstances of this case because –
- The statutory scheme in respect of post-liquidation tax-related liabilities in s 254(1) of the ITAA36 is different to the scheme in s 260-45 of Schedule 1 to the TAA in respect of pre-liquidation tax-related liabilities.
- The main difference is that s 254(1)(h) of the ITAA36 – properly construed – specifically provides for or preserves the availability of hte Commissioner’s remedy in s 260-5 of Schedule 1 to the TAA.
- As a result, s 254(1)(h) operates to “trump” the more general provision in s 468(4) of the Corporations Act.
- The Commissioner pointed to several authorities which he argued provided support for the proposition that preference is to be given to specific schemes in taxation legislation designed to protect the revenue over “more general schemes in the Corporations Law”. Those authorities included the High Court’s decisions in COT v Broadbeach Properties PL  HCA 41; (2008) 237 CLR 473 and DCOT v Moorebank PL  HCA 29; (1988) 165 CLR 55, and the NSWCA in Muc v DCOT  NSWCA 96; (2008) 73 NSWLR 378.
Alternatively, the Commissioner submitted that –
- Even if s 254(1)(h) of the ITAA36 did not operate as he contended, the word “attachment” in s 468(4) of the Corporations Act should be read down so as to permit s 260-5 notices in respect of priority debts.
- Post-liquidation tax-related liabilities were a priority debt because they would be an expense within s 556(1)(a) of the Corporations Act.
- Given that priority status, there was no basis for reading the term “attachment” in s 468(4) of the Corporations Act so as to exclude the giving of a s 260-5 notice to enforce that statutory priority. (See -)
His Honour Justice Wigney held that the notices were void for two related reasons –
- Each notice was an attachment against the property of TBGL and therefore void by operation of s 468(4) of the Corporations Act, and
- That conclusion supports the more general proposition that the power conferred on the Commissioner to issue notices under s 260-5 of Schedule 1 to the TAA is not available where the relevant “debtor” for the purposes of that section is a company which is being wound up (or its liquidator). That is so even where the relevant debt is for tax payable on income derived after the commencement of the winding up. (See -)
His Honour observed that –
- The High Court concluded in Bruton Holdings that a s 260-5 notice is an attachment for the purposes of s 500(1) of the Corporations Act. (Section 500(1) provides: Any attachment, sequestration, distress or execution put in force against the property of the company after the passing of the resolution for voluntary winding up is void.”) While in some respects this finding was secondary to the broader finding as to the Commissioner’s power to issue a notice in respect of a tax debt of a company in liquidation, it was nonetheless an unequivocal and unqualified finding.
- It applies equally to s 468(4) of the Corporations Act, which is in identical terms to s 500(1) (save that the latter applies to voluntary liquidations, and the former to Court-ordered liquidations).
- The High Court’s conclusions in Bruton Holdings at both  and  refer to winding up by court order, “thus clearly indicating that the court saw no relevant distinction between ss 468(4) and 500(1) of the Corporations Act”.
Wigney J noted that the Commissioner “in effect” accepted that a s 260-5 notice was an attachment for the purposes of s 468(4) of the Corporations Act. He referred to the Commissioner’s arguments that s 468(4) did not however render such a notice void if the notice related to post-liquidation tax-related liabilities, because either s 254(1)(h) of the ITAA36 “trumped” s 468(4), or because s 468(4) should be read down. His Honour’s assessment of these arguments at  was crisp and succinct: “Neither contention has any merit.”
Construction of s 254(1)(h) of the ITAA36
His Honour took issue with the Commissioner’s contentions as to the proper construction of s 254(1)(h) of the ITAA36 – see -. He discussed the use of the word “attachable” in s 254(1)(h), and took the view that it evinced a legislative intention to avoid any potential conflict between s 254(1)(h) and provisions such as ss 468(4) and 500(1) of the Corporations Act, that prevent attachment of certain types of property. Wigney J observed that a construction of s 254(1)(h) which allows it to operate harmoniously with ss 468(4) and 500(1) of the Corporations Act is to be preferred to one that potentially puts the provisions of two Commonwealth statutes in conflict, or results in a provision of one statute overriding (or “trumping”) a provision in another statute.
His Honour noted at  that this meant s 254(1)(h) effectively has no application in the case of a company in liquidation, but found that that does not militate against its availability. The subsection still has significant work to do, even if it does not apply to liquidators, because it operates also in the case of all agents and trustees who derive income in a representative capacity, or by reason of their agency. Subsection 254(1)(h) still has work to do in the case of other agents or trustees, where attachment of property under their control or management is not prevented by provisions equivalent to ss 468(4) and 500(1) of the Corporations Act.
Wigney J held that “the preferable construction of s 254(1)(h) of the ITAA36 is that it does not confer any remedy on the Commissioner against the property of a company after the commencement of the winding up of the company because such property is not attachable property.” See )
Whether s 468(4) of the Corps Act should be read down to permit s 260-5 notices for post-liquidation tax debts
Wigney J discussed the Commissioner’s submission that s 468(4) of the Corporations Act should be read down to permit s 260-5 notices for post-liquidation tax debts and noted that it seemed to rely on two propositions: (1) that ss 468(4) and 500(1) of the Corporations Act only operate to render void an attachment if the effect of the attachment is to secure priority for the payment of a debt that is not otherwise a priority debt; and (2) that the Commissioner has priority in respect of post-liquidation tax-related liabilities. His Honour again crisply dispatched these too: “Neither proposition is correct.” (See )
Whether the Commissioner has priority for post-liquidation tax debts
- It is not strictly correct to say that the Commissioner has priority in respect of post-liquidation tax-related liabilities by reason of s 556(1)(a) of the Corporations Act.
- Subsection 556(1)(a) gives priority to expenses incurred by, relevantly, a liquidator, in preserving, realising or getting in property of a company, or in carrying on the company’s business.
- By reason of s 254(1)(e) of the ITAA36, a liquidator is personally liable for the tax payable in respect of post-liquidation income to the extent of any amount that he or she has, or should have, retained under s 254(1)(d) of the ITAA36. **Sidenote: See below under the heading “Comments” – there is an important appeal that has just been heard by the High Court on ss 254(1)(d) and (e) of the ITAA36.
- If, for whatever reason, the liquidator does not discharge the company’s tax-related liabilities from its available assets, but instead personally pays (or is required to personally pay) that amount, it might well be regarded as an expense in getting in property of the company or carrying on its business.
- The liquidator would have priority in recovering that expense by reason of s 556(1)(a) of the Corporations Act.
- That does not mean however, his Honour observed, that the Commissioner has priority in respect of post-liquidation tax-related liabilities.
- Wigney J noted that in any event, that expense would not rank any higher than other expenses incurred by the liquidator that might also fall within s 556(1)(a) of the Corporations Act. If there are a number of these but insufficient assets to meet them all, they would rank equally and be met proportionally. His Honour noted that this proportionate system of entitlement would be subject to potential disruption if the Commissioner had full garnishee rights in relation to post-liquidation tax debts in those circumstances.
No Power to issue the Notices
Wigney J referred to the High Court in Bruton Holdings‘ conclusion that the power to issue garnishee notices conferred by s 260-5 of Schedule 1 to the TAA does not extend to a company in liquidation. This is expressed three times in the judgment – at ,  and  in clear, unequivocal and unqualified terms.
His Honour took the view that the reasoning of the High Court in Bruton Holdings, insofar as it involved consideration of the regime in s 260-45 of Schedule 1 to the TAA in respect of pre-liquidation tax-related liabilities, is equally applicable in cases which involve the scheme in s 254 of the ITAA36 in relation to post-liquidation tax-related liabilities. There is no relevant distinction between the two statutory schemes. “Both require the liquidator to set aside amounts to meet expected tax debts, but leave questions of payment and priority to the Corporations Act.”
Accordingly, Wigney J held that the Commissioner had no power to issue the notices in this matter. (See -)
Trustee Capacity Issue
Whilst noting it was strictly unnecessary, Wigney J addressed the submission for TBGL and its liquidator that the notices were either invalid or not engaged, because the funds held in the NAB account were held by Mr Woodings in his capacity as trustee for the Bell Judgment Creditors. By reason of the definition of “entity” in the relevant provisions of the ITAA97, Mr Woodings is taken to be a different entity in that trustee capacity, than his capacity as liquidator of TBGL.
His Honour took the view that this argument had some merit in the case of the notice referable to the liquidator Mr Woodings, having regard to the applicable proviisons of the ITAA97. NAB did not owe money to Mr Woodings in his capacity as liquidator of TBGL, but in his capacity as trustee. Therefore, even if the Woodings Notice was not void by reason of s 468(4) of the Corporations Act, it would nevertheless have no application to the NAB account. His Honour took the view that this capacity issue did not, however, affect the validity of the TBGL Notice, if it were not otherwise void by reason of s 468(4). (See -)
Tax Laws v Insolvency Laws – Another current case – COT v Australian Building Systems
As many of you will know, this is not the only significant case before the courts at present, involving a clash of sorts between provisions of the tax legislation and insolvency provisions of the Corporations Act.
Just last month the High Court heard the Commissioner’s appeal from the decision in Commissioner of Taxation v Australian Building Systems Pty Ltd (in liq)  FCAFC 133, a CGT case largely concerned with s 254(1)(d) and (e) of the ITAA36. For my previous posts discussing the first instance decision of Logan J in that case and the High Court’s hearing of the special leave application, see here and here respectively. The transcript of the hearing in the High Court can be read here.
At first instance this case was, at least in part, more squarely run as a clash between these provisions of the ITAA36 and the scheme of priority laid down by the Corporations Act; particularly notable given that the former crown priority for unpaid tax debts was abolished in the early 1980’s with the passing of legislation. However the appellable issues were narrowed by the reasons for judgment given at first instance. On appeal to the High Court, the submissions filed for the parties show that of the 3 issues raised in the appeal by the Commissioner, only one was contested by the liquidators. (The parties’ submissions may be read here.) That issue was this:
Whether, following the derivation by a trustee or agent of income profits or gains in a representative capacity, but prior to a tax assessment, s 254(1)(d) requires and authorises the agent or trustee to retain moneys then in their hands or thereafter coming to them so much as is sufficient to pay tax on it; or whether s 254(1)(d) only authorises and requires a trustee or agent to retain such moneys after an assessment for tax on the income profits or gains.
Note that the personal liability imposed upon agents and trustees (including liquidators by s 254(1)(e) applies to the extent of any amount that he or she has retained, or should have retained under paragraph (d).
It will be interesting to see the extent to which the High Court grasps the opportunity in COT v Australian Building Systems to clarify the operation of both ss 245(1)(d) and (e) in its decision in this case, and provide certainty for liquidators as to their potential scope for personal liability under s 245(1)(e). That is, as to how s 245(1)(e) operates – in light of the conclusions the Court may reach as to the proper construction of s 245(1)(d) – and the extent to which s 245(1)(e) might (as the Commissioner argued in Bell Group vis a vis s 245(1)(h)) serve to override or “trump” certain provisions of the Corporations Act; here the scheme of priorities laid down in the Corporations Act. It is unfortunate but it may be the case that as events have transpired, it may not turn out to be the ideal test case vehicle for this issue.
The Bell Group Collapse – 20+ years and counting – mixed messages as to handling of distribution
You may recall in the chronology above that the Deed of Settlement was reached in 2008 and we presume that payments made thereunder in about 2008. The next step in the chronology recited above is the activity in August 2015 in relation to taxation matters.
Between those points in the chronology, I ought to interpose the observation that reportedly there had been other litigation both threatened and run about the distribution of money from the pool both in the WA Supreme Court and in the British High Court. In May 2015, it was reported by ABC news that according to the WA State Government, the total $1.7 billion settlement sum was going to be disbursed through a statutory authority. ABC News reported that WA Treasurer Mike Nahan had mentioned the introduction of legislation to ensure there was certainty about the process of distributing funds to treasurers. They reported that a bill had been introduced to Parliament by Dr Nahan to dissolve the companies and place the assets under the control of a statutory authority that would administer and distribute them. Dr Nahan reportedly said that the four major creditors owed money were the Insurance Council of WA, the ATO, and two other legal parties. Dr Nahan, it was reported, said that “the bill would ensure an expeditious end to the Bell litigation and the equitable distribution of the pool of funds.” One cannot know all that transpired thereafter. Perhaps the forming of the consolidated group for taxation purposes may have triggered the ATO’s actions. However it would appear possible that the Commissioner may not have concurred with the approach put forward in the bill.
This is a brief heads up for those who have been waiting for this. Last week the High Court granted special leave to the Commissioner to appeal the decision of the Full Court of the Federal Court in Commissioner of Taxation v Australian Building Systems Pty Ltd (in liq)  FCAFC 133. For my discussion of the first instance decision of Logan J, see my earlier post here.
It will indeed be interesting to see the High Court’s decision on this, after the appeal is heard. For those interested, the transcript of the special leave hearing may be read here. It can be seen that the Commissioner emphasised several matters in oral submissions, including the Commissioner’s propounded construction of section 254 of the ITAA 1936, and what the Solicitor-General described as “the radical differences” between sections 254 and 255, the construction of the latter having been decided previously by the High Court in Bluebottle UK Ltd v Deputy Commissioner of Taxation  HCA 54; (2007) 232 CLR 598. The High Court’s decision in Bluebottle was relied on heavily by the primary judge in his reasoning.
In oral submissions, the Solicitor-General advanced the argument that section 254(1)(a) creates a taxation liability in the trustee or agent. This, of course, is contrary to what the Full Federal Court had held. See, for instance, at  where Edmonds J observed (with whom Collier and Davies JJ agreed):
“That s 254 is a “collecting section” and has no operation to render a trustee liable to be assessed to tax if the trustee is not otherwise liable to be assessed under the provisions of Div 6 of Pt III of the 1936 Act, comes out of two more recent High Court authorities.”
The Solicitor-General argued that this taxation liability which he said is created by s 254(1)(a) is ancillary to the primary liability which, he acknowledged, will rest somewhere else in the Act. But he submitted that it was a true creation of a liability as well as then being a collection mechanism. He submitted that s 254(1)(b) makes that liability more explicit, that the trustee or agent must lodge returns and “be assessed thereon” in the representative capacity. And, so he submitted, then the critical paragraph (d), which is the collection mechanism, should be read in the light of what has gone before so that it is an authority and duty to “retain from time to time out of any money which comes to him or her in his or her representative capacity so much as is suffficient to pay tax which is or will become due in respect of the income, profits or gains.“