DFC of T v CHANT & ORS
Judges:Kirby P
Mahoney JA
Hope AJA
Court:
Supreme Court of New South Wales - Court of Appeal
Kirby P
This appeal, from a declaration and orders made by Young J [reported at 91 ATC 4435], concerns the application of s 221P of the Income Tax Assessment Act 1936 (Cth) to the undisputed facts of the present case.
The section relates to the deduction, pursuant to the Act, of instalments of income tax from the salary or wages of employees. The primary liability to make the deductions and pay the same to the Commissioner of Taxation falls upon the employer. However, the Act also covers the case where the employer's property has become vested in, or the control of it has passed to, a trustee, such as a receiver. The relevant provision is:
``221P(1) Where an employer makes a deduction for the purposes of this Division... from the salary or wages paid to an employee... he shall be liable, and where his property has become vested in, or where the control of his property has passed to, a trustee, the trustee shall be liable, to pay that amount to the Commissioner.''
(emphasis added)
By s 221P(2)(a) an amount payable to the Commissioner by a trustee in pursuance of the section has priority over all other debts which are relevant to the facts of the present case.
Tax Commissioner claims unpaid tax with priority
Pursuant to the Act, Alfarm (Australia) Ltd (the company) deducted instalments of income tax from the salary or wages of its employees. A substantial sum (more than $500,000) was deducted. That sum was not paid to the Commissioner as required by s 221F of the Act. The reason for the non-payment was presumably connected with the insolvency of the company. The Court was told that the company owed substantial sums to other creditors, to some of whom it had executed mortgages. These included a first mortgage on land comprising factory premises in Albury to secure a debt of more than $80,000 owed to Albury City Council. The company had also executed what was taken to be a second mortgage in favour of the Westpac Banking Corporation (Westpac) to secure its bank borrowings. These were estimated in February 1987 to amount to nearly $3.5 million. They have doubtless grown larger with the accrual of penalty interest since. In addition to the sum owing to the Commissioner of Taxation for the unpaid income tax instalments of employees, a further sum of approximately $150,000 was owing on unpaid income tax of the company itself.
When the company got into financial difficulties, Westpac, on 5 June 1980 exercised a power previously reserved by it to appoint receivers. They were Mr Errol Chant (the first respondent) and Mr Keith Skinner, chartered accountants. Mr Skinner has dropped out. However, Mr Chant remains the receiver of the company.
By the deed of appointment, clause 1, it was provided:
``1. Westpac, being entitled under the powers conferred by the Debenture, in exercise of such powers and all other powers it has, appoints the Receiver to be the joint and several receiver and manager of all of the Mortgaged Property other than the Land under the Mortgage with all powers conferred by the Debenture on a receiver and manager of the Mortgaged Property other than the Land so appointed or which may under the Debenture be conferred on or exercised by such receiver and manager.''
(emphasis added)
In the closing weeks of the operation of the company, a number of employees, despite its financial predicament, continued at their work. They have not been paid. They are owed more than $500,000. Their claim upon the company's assets was represented in these proceedings by Mr Christopher Beale. He claimed, on his own and their behalf, preferential rights against the assets of the company in respect of the unpaid wages.
ATC 4736
The Commissioner, by his Deputy, sought to recover the whole of the unpaid deductions from the receiver of the company. Upon the basis of s 221P(2)(a) of the Act he asserted the right to have the deductions with priority over all other debts, whether preferential, secured or unsecured, including the employees' unpaid wages. The receiver disputed the Commissioner's claim. In his dispute he was joined by Mr Beale and the unpaid employees. The total assets of the company which passed to the receiver's control were said to be a fund of approximately $697,000. If the Commissioner is right in his interpretation of s 221P of the Act, the receiver must pay the deductions of income tax from that fund before all other debts. If he does so, the amount available to other creditors, including the employees, will be inadequate, indeed negligible.
Uninstructed by authority, I would unhesitatingly have come to the conclusion that the preconditions established by Parliament for the Commissioner's priority under s 221P(1) were made out. It was not disputed that the company, as employer, had made deductions of income tax for the purposes of Division 2 of Part VI of the Act. Those deductions were made from the salary or wages paid by it to its employees. Nor was it disputed that the company, as employer, had failed to deal with the amount so deducted in the manner required by the Division, relevantly by paying the same to the Commissioner. Nor could it be disputed, in the face of the deed of 5 June 1990 that some, indeed most, of the employer's property had passed to Mr Chant as receiver. Likewise, Mr Chant, as receiver, was indubitably a trustee within the meaning of s 221P(1) of the Act by virtue of the definition of that word in s 6. Accordingly, on the face of the section, the preconditions would appear to have been established and the Commissioner's claim made out.
Claim of priority is rejected on the basis of legal authority
However, Mr Chant commenced proceedings (in which Mr Beale on behalf of the employees later joined to support him) seeking a declaration from the Supreme Court to the effect that the Commissioner's claim did not, by virtue of s 221P of the Act, have the priority claimed. The summons seeking the declaration (and further directions and orders consequential upon it) came before Young J. On 14 May 1991 his Honour, by reference to authority, determined the summons in favour of Mr Chant and Mr Beale. He made the declaration which they sought. It is from that declaration and the consequential orders that the Commissioner has appealed to this Court.
At first instance before Young J, and on appeal in this Court, the respondents' primary argument was that a precondition for the application of the priority provided to the Commissioner under s 221P was that (relevantly) the control of the whole of the employer's property had passed to the control of a trustee. By virtue of the terms of the first clause of the deed appointing the receiver, this was not the present case. Expressly, the land under the mortgage was excluded from the mortgaged property which passed under the control of the trustee. Therefore, by its terms, the section did not operate and the Commissioner secured no priority.
As an alternative argument, the respondents argued that, if it were not necessary to show that the control of the whole of the property had passed, but it was possible to ignore minor, personal, trivial or valueless property, the land which did not pass was not within that class. In April 1991 the value of the land, as on a mortgagee's sale with vacant possession, was assessed to be $800,000. Therefore, if derogation from the requirement of the passing of the entire property to the trustee was permitted, it did not avail the Commissioner in this case for that which was held back was a valuable slice of the company's property. It was sufficient to take the Commissioner outside the statutory formula. That formula does not refer to ``some'' of the property or even ``most'' of the property. But it clearly contemplated a trustee stepping into the shoes of the employer. It did not contemplate the exclusion of the major asset.
Purposive construction of taxation legislation
A provision such as s 221P of the Act is not to be construed in isolation. It must be read with reference to the purpose which it seeks to achieve. The modern approach to statutory construction requires courts to avoid a purely textual examination of legislative works and to seek out, instead, the purpose of the legislature so as to fulfil that purpose, within the words
ATC 4737
actually used. CfKingston & Anor v Keprose Pty Limited (1987) 11 NSWLR 404, 423 per McHugh JA. See also the comments of the editor in Butterworths Taxation Service annotations on s 221P, ibid, 4218.1 at 4218.4. Many of the problems which have bedevilled the construction of the Income Tax Assessment Act have derived from the adoption of a purely textual approach and from a tendency to treat the labyrinthine complexity of the Act as an excuse for dealing with it in a special way, different from that adopted in the case of other statutes. There is no legitimate basis for adopting such an approach to the interpretation of the Act. So far as I am concerned, it is just another statute of the Federal Parliament. Within any authority binding on me, its words must be given their ordinary meaning, so far as possible to achieve their ostensible purpose.
As is often the case with statutory provisions, s 221P does not, by its language, envisage all of the possible circumstances which may arise in its application. There is nothing unusual in this. Because not envisaged, the section makes no provision for the circumstance which has here arisen in which the control of a large part, but not all, of the property of the employer has passed to a trustee. Certainly, it does not state in express terms that the control of the
whole
of the property must pass in order to attract the operation of s 221P(1). That is a gloss laid upon the section by judicial opinions. Taken to its extreme, that gloss defeats what is a clear purpose of s 221P stated generally. This is to afford the Commissioner a high priority in the recovery of sums deducted from employees' salary or wages. The primary obligation to pay income tax upon the salary or wages falls upon the employee as taxpayer. In that sense, the employer, by deducting the instalments of income tax but then failing to pay the fund of the deductions to the Commissioner, is acting in breach of an obligation owed not only to the Commissioner but to the employee. The employer is purporting to pay the employee a gross salary (from which deductions will be made). But in fact it is paying a lesser, net salary and, without authority, converting the tax deductions to its own use. Considerations such as this have caused Judges to say that the deductions are ``not morally part of the assets of the employer''. See eg
Murray
J in
Horsburgh
&
Anor
v
DFC of T
84 ATC 4501
;
(1984) 15 ATR 735
. See also in the same case
Anderson
J, at ATC 4505; ATR 741. But for relief provided elsewhere in the Act, the employee would remain responsible for the employer's unpaid instalments.
A construction of the section which adopts the stringent requirement suggested by the respondents defeats the priority of the Commissioner. This doubtless protects the claims of competing creditors, some of whom may be preferential or secured. Because those creditors are visible and their plight very noticeable (as in the case of Mr Beale and his fellow employees) it is comparatively easy to understand the way in which their predicament might ease the path of judicial construction of s 221P so as to defeat the Commissioner's statutory entitlement to priority. But that priority was plainly the overall purpose of Parliament. By the terms of s 221P(2)(a) the Act recognised that the operation of the priority would be to the disadvantage of creditors claiming under ``all other debts... whether preferential, secured or unsecured''. Whereas the judicial mind may not so easily incline to the claims of the Commissioner to priority, in preference to the individuals and corporations who compete with him, Parliament has provided to the contrary. It has done so because, in this respect, the Commissioner represents the community. He protects the contribution of wage and salary earners to the consolidated revenue derived from the deductions duly made from salaries and wages. It is not self-evident to me that the section should be approached in a way which defeats the Commissioner's priority provided by Parliament. Doing so, effectively gives private individuals an equal, or even preferred, claim upon the employer's assets which may, in turn, have been enlarged unlawfully by the unpaid deductions which the Act earmarks to the benefit of the Commissioner but which were not paid by him.
Competing creditors should not control priorities
Least of all is it obvious that the Act should be capable of being circumvented by the action of the very creditors who compete with the Commissioner. In this case, the action which is said to disqualify the Commissioner from the priority provided by Parliament is that of another creditor, Westpac. It is its deed of
ATC 4738
appointment, by which the land under the mortgage was excluded from the receiver's powers, that is said to give rise to the inapplicability of s 221P. If this argument is correct, the position reached must be bluntly stated. A creditor, in competition with the Commissioner, is able, by its own unilateral act and pursuant to contractual arrangements it had with the employer, effectively to deprive the Commissioner (ie the community) of the priority which the Parliament of the Commonwealth of Australia determined that the Commissioner should have. This proposition has only to be stated to expose its unacceptability. It is scarcely likely that Parliament, in enacting s 221P(1), had the purpose of permitting a creditor so readily to deprive the Commissioner of the priority which the section envisaged he should enjoy. Of course, Parliament can make mistakes. The ultimate duty of the Court is to give effect to its purpose as expressed in the words used.Re Bolton & Anor , ex parte Beane (1987) 162 CLR 514, 518 . Those words may occasionally frustrate the achievement of the purpose. But it is legitimate to test the suggested construction of the section where alternatives compete for acceptance, by the consequences which the alternatives variously produce. The construction urged for the respondents has such an unlikely result that only the clearest binding authority would require me to accept it when an alternative construction is open which has no such absurd potential.
The alternative construction would reject the contention that s 221P(1), where it refers to ``the control of his property'', means ``all of his property''. If, as a matter of fact, a trustee has taken control of the property of the employer, the liability would fall upon that trustee, simply because the preconditions of the section, according to its language, have been fully made out. Generally, a trustee of a bankrupt, insolvent or other disabled person does take control, effectively, of most of the valuable property of that person. But whether, in a particular case, it is so or not, there is no warrant in my view to gloss the section and to exclude its operation where some property has not passed to the trustee, however practically insignificant that property is for the winding up of the person's affairs. The suggested inequity to other creditors which would then arise from the priority given to the Commissioner over whatever property has passed to the trustee's control is unpersuasive in the face of s 221P and its plain purpose. In any case, it is insignificant in comparison to the absurd results, defeating a clear object of the section, achieved by the order of Young J now under appeal.
Does Parliament endorse judicial decisions by inactivity?
In response to these difficulties of principle, the respondents fell back on authority binding on this Court and on the many opportunities which the Commissioner had allowed to pass by in which the Act could have been amended to overcome those authorities.
I am not persuaded that courts should necessarily postpone a correction of an erroneous construction of a statute, simply because Parliament, following judicial criticism, has failed to reform the statute to conform to the suggested alternative meaning. There may be many reasons, distinct from the acceptance of a judicial interpretation, which explain Parliament's inactivity in a particular case. The notion that the legislature, and those advising it, attend to every judicial criticism of legislation and seek quickly to repair it, is self-evidently false. Recent experience in the High Court of Australia demonstrates the fact that earlier approaches to the construction of provisions of the
Income Tax Assessment Act
have been achieved by judicial decision and this despite the intervention of many amending statutes where the opportunity could have been availed of by the legislature to achieve statutory reform. See eg
FC of T
v
Gulland
85 ATC 4765
;
(1985) 160 CLR 55
; and
John
v
FC of T
89 ATC 4101
;
(1988-1989) 166 CLR 417
where
Curran
v
FC of T
74 ATC 4296
;
(1974) 131 CLR 409
was overruled.
In the case of 221P, there may well be other explanations for the delay in proposing legislative amendments different from acceptance in Parliament of the earlier views of the courts. The Law Reform Commission has recommended that the Commissioner's priority under the section should not merely be restricted but abolished. See The Law Reform Commission (Cth), General Insolvency Inquiry (ALRC 45), AGPS, Canberra, 1988, vol 1,304 (para 743). Such a recommendation (which may take years to complete its consideration of and may hold up intervening amendments of
ATC 4739
the section) does not relieve courts of the obligation to give a true construction to an Act of Parliament.The effect of authority binding on this Court
I will not trace the decisions of the High Court on the section. They appear most notably in
FC of T
v
Card
(1963) 13 ATD 149
;
(1963) 109 CLR 177
and
FC of T
v
Barnes
75 ATC 4262
;
(1975) 133 CLR 483
. Those decisions have been applied and explained in this Court in a number of cases. See eg
DFC of T
v
AGC (Advances) Limited
&
Ors
84 ATC 4177
;
[1984] 1 NSWLR 29
and
James
v
DFC of T
88 ATC 4812
. I am bound by the holdings of those decisions. The holdings of the High Court must be followed in this Court so long as they subsist.
The Commissioner formally submitted, in effect, that Card and Barnes were wrongly decided and that the High Court should further consider the proper construction of s 221P of the Act. Whilst that submission is noted, it is one which must be addressed to the High Court. No application was made to reargue the correctness of AGC (Advances) Limited or James in this Court, so far as those decisions applied in Card and Barnes.
The Commissioner next sought to distinguish Barnes, as the last word of the High Court on the section. It was argued that in this case the land excluded from the receiver's deed of appointment of 5 June 1990 was already a specific asset separately charged, independently of the deed of charge appointing the receiver. It was thus argued that control over the land could not pass to the receiver so long as the first and second real property mortgages over the land subsisted. To that extent, the purported exclusion of the land was ``otiose''.
I do not believe that this argument provides a valid distinction of Barnes. The majority in that case ( Barwick CJ, Mason and Jacobs JJ) were quite clear [at ATC 4266]:
``Section 221P deals with cases where the defaulting employer either remains in control of the whole of his property (subject of course to any security given by him over particular assets) and cases where the whole of that property (again subject to the same qualification) has vested in or passed under the control of a trustee. Thus, for example, if a defauiting employer assigns the whole of his property to a trustee as security for all or some of his debts, the property is the whole of his assets subject to any security previously existing over less than the whole.''
(emphasis added)
In DFC of T v AGC (Advances) Limited (above) this Court made it clear that for s 221P to operate in favour of the Commissioner, all the property of the defaulting employer must pass to the control of the trustee. This was reiterated in James v DFC of T (above) by Mahoney JA:
``It is established by Barnes' case (supra) that, presumably because of the words `the control of his property', sec. 221P operates only where, in the relevant sense, all and not merely part of the property of the employer has passed under the control of the trustee.''
Whilst the holding in
Barnes
stands, as interpreted in this Court, it is not in my opinion open to me to circumvent it in the way urged for the Commissioner. I do not believe that I should add to the ``fine factual distinctions'' which, as
Kearney
J pointed out in
Re Rothercroft Pty Limited
86 ATC 4339, 4342
;
(1986) 4 NSWLR 673, 677
, provide the only bases for reconciling the multitude of decisions of various courts upon s 221P. I agree with his Honour that many of the decisions are extremely difficult to reconcile. This point was also made, with reference to
Card
and
Barnes,
by
Murphy
J in the Victorian Supreme Court in
Oldfield v Tilley
&
Anor
[1988] VR 77, 79
.
Considering commercial practicalities
Alternatively, the Commissioner latched on to the words of Gibbs J in Barnes. His Honour (unlike Stephen J, the other Judge participating in the decision) was not in dissent. He joined in the order of the Court in that case. His reasoning is thus part of the Court's holding, to the extent that it is compatible with the reasoning of the majority.
Doubtless drawing on his many years as the Federal Judge in Bankruptcy, Gibbs J recognised that, in reality, it would rarely be the case that absolutely every item of a person's property passed to a receiver or trustee. At ATC 4262-4270; CLR 498-499, his Honour said:
``It may be assumed that sec. 221P contemplates a general vesting of property in the trustee, and that the section is
ATC 4740
therefore not intended to apply to the case where a mortgage under which a receiver is appointed charges part only of the employer's property. However, it is difficult to accept that the section is intended only to apply if literally every item of property belonging to the employer vests in, or passes under the control of, the trustee, because if that were its effect the section would not in every case apply to a trustee in bankruptcy, since in a particular case there may be a residue of the bankrupt's property which will not vest in the trustee: sec. 5 (`the property of the bankrupt'), 58, 116 of the Bankruptcy Act 1966 ... However, it is clearly the intention of the Parliament that the section applies to every trustee in bankruptcy: sec. 109(1) of the Bankruptcy Act 1966. But even if it be accepted that `his property' in sec. 221P means `all his property', it seems to me that in the present case the control of all the property of the company, within the meaning of the section, did pass to the receiver. It is perfectly true that the company had an equitable interest in the property with which the receiver could not deal and which did not pass into his control, so that technically it can be said that the company had an interest in the property which did not pass under the control of the receiver. However, from a practical or commercial point of view it seems to me natural to describe the effect of the deed as being that all of the property of the company passed under the control of the receiver notwithstanding that the company retained an equitable interest in it.''(emphasis added)
In the facts of the present case the value of the land, excluded from the control of the receiver, was assessed at $800,000. But the amount owing to the bank, secured by mortgage of the land, was nearly $3.5 million. Accordingly, to adopt what Gibbs J said in Barnes (at ATC 4270; CLR 499):
``from a practical or commercial point of view... the equitable interest of the company was valueless.''
The respondents resisted this contention. They suggested that it would be odd if the operation of s 221P were dependent upon a subjective evaluation of the equity of redemption being worthless. They argued that the value of the property might, in some circumstances, increase to a figure exceeding the amount secured. Alternatively, in a particular case, a mortgagor might be entitled to have the security set aside, eg under the Trade Practices Act 1974 s 52 or otherwise. These possibilities would have to be taken into account, so it was urged, in the construction of the section. So they might. But upon the approach of Gibbs J in Barnes it is permissible to look at the matter ``from a practical or commercial point of view'', ie as a matter of fact in each case. So looking at the facts of this case, I am convinced that the value of the mortgaged land excluded from the control of the receiver, had no real residual value to the company at all. Accordingly, upon Gibbs J's approach, it could be disregarded and s 221P applied to secure the priority of the Commissioner.
Binding authority defeats Commissioner's priority
The question thus comes down to whether I am authorised to apply the approach adopted by Gibbs J. It will by now be plain that, if I were free to do so, I would accept his Honour's approach, at least in preference to that of the majority in Barnes.
Three possibilities at least are available for the meaning of the ``property'' the control of which has passed to a trustee for the purpose of s 221P. They are:
- (a) The whole of the property, without exception;
- (b) Most of the property, but excluding personal, trivial or valueless items or items not significant from a practical or commercial point of view; or
- (c) The property, as envisaged by the section, being such as is appropriate to a trustee taking ``control'' of the property of another, as in the case of bankruptcy, insolvency or other like disability.
The majority in Barnes, as interpreted in this Court, opted for (a), allowing the exclusion only of those assets which were not properly described as the ``property'' of the employer. Gibbs J in Barnes opted for (b). My own preference is for (c).
I do not believe that I am free to adopt my own preference or the minority approach of Gibbs J in Barnes. Having regard to what was
ATC 4741
said in the joint judgment of Barwick CJ and Mason and Jacobs JJ in Barnes, at least as that holding has been construed on a number of occasions in this Court, the preferable constructions of s 221P are unavailable. ``Control of his property'' means ``control of all property'' of the employer. By that test, albeit as a result of the unilateral act of another creditor, the receiver's control over the mortgaged land was excluded. That exclusion renders s 221P(1) inapplicable. Young J was therefore correct to make the declaration sought.I agree with what Mahoney JA has said about the separate costs of the respondents.
Order
The appeal should be dismissed with costs.
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