• The impact of this case on ATO policy is discussed in Decision Impact Statement: Ultra Thoroughbred Racing Pty Ltd v Commissioner of Taxation & Anor (Published 27 March 2014).

ULTRA THOROUGHBRED RACING PTY LTD V COMMISSIONER OF TAXATION & ANOR

Judges:
Pagone J

Court:
Federal Court of Australia, Melbourne

MEDIA NEUTRAL CITATION: [2013] FCA 1300

Judgment date: 3 December 2013

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Pagone J

1. The applicant seeks to prevent the second respondent, Racing Victoria Limited, from paying money to the first respondent, the Commissioner of Taxation, under a garnishee notice dated 28 October 2013. The proceeding was issued on 12 November 2013 and came on for interlocutory orders on 15 November 2013. At that hearing orders were also made for the final hearing of the matter to proceed on 2 December 2013 by affidavits and written submissions in lieu of pleadings.

2. The dispute concerns the winnings of a racehorse race. The horse, Shamus Award, was entered into and won the Cox Plate on 26 October 2013. The prize money for the Cox Plate was $900,000 less deductions on account of jockey and trainer entitlements. The horse had previously raced and was placed third in the Melbourne Racing Club Caulfield Guineas. The prize money for that race was $43,000 less deductions on account of jockey and trainer entitlements. A Mr Peter Buckley, who is not a party to the proceedings, was registered as the managing owner of a 50% share in the horse and under the racing rules of Racing Victoria is described as being alone entitled to receive any prize money. Mr Buckley has a tax debt in excess of $11m due to the Commonwealth and the Commissioner has required that any prize money payable by Racing Victoria to Mr Buckley to be paid to the Commissioner in partial discharge of the tax debt. The applicant contends that the money in dispute does not belong to Mr Buckley and that the garnishee notice cannot require Racing Victoria to pay the money to the Commissioner.

3. The Commissioner issued the garnishee notice on 28 October 2013 addressed to Racing Victoria. The notice itself informed Racing Victoria that it was a third party "who owe[d] money" to Mr Buckley who, in turn, had a debt payable to the Commonwealth. The notice was received by Racing Victoria with a covering letter and an extract of the relevant provision of the Taxation Administration Act 1953 (Cth) (" 1953 Act ") under which the notice was given.

4. A great deal of the evidence in the proceeding went to establishing that the applicant and not Mr Buckley was the owner of Shamus Award. The Commissioner's entitlement to require Racing Victoria to pay any part of the prize money to him depends, however, not upon whether Mr Buckley is the owner of the horse, but on whether the money to be paid by Racing Victoria to Mr Buckley belongs to him. Section 260-5(2) of Sch 1 to the 1953 Act entitles the Commissioner to give notice to an entity such as Racing Victoria where the entity owes money to a third party:

"The Commissioner may give a written notice to an entity (the third party) under this section if the third party owes or may later owe money to the debtor".

Sub-section (3) provides for when a person is regarded as owing money for the purposes of sub-section (2):

"The third party is taken to owe money (the available money) to the debtor if the third party:

• (a) is an entity by whom the money is due or accruing to the debtor; or
• (b) holds the money for or on account of the debtor; or
• (c) holds the money on account of some other entity for payment to the debtor; or
• (d) has authority from some other entity to pay the money to the debtor.

  The third party is so taken to owe the money to the debtor even if:

• (e) the money is not due, or is not so held, or payable under the authority, unless a condition is fulfilled; and
• (f) the condition has not been fulfilled.

The notice to Racing Victoria set out these provisions and required immediate payment to the Commissioner of the money Racing Victoria owes Mr Buckley.

5. The applicant's case is that Mr Buckley's role in relation to the racehorse was essentially to act as nominee (whether as trustee or agent) for the applicant in the racing of the horse. Mr Hamish Murdoch, director of Ultra Tune Australia Pty Ltd, the parent company of the applicant, deposed in his affidavit to Mr Buckley's role as "lending his name only for racing registration purposes for the horses that raced", but that the horses, including Shamus Award, were all purchased by Ultra Tune Australia and all expenses and income relating to the thoroughbred operations had been recorded in its accounts and are duly returned for income tax purposes. The specific acquisition of Shamus Award was the subject of evidence by Ms Jacqueline Davey who produced a tax invoice dated 12 April 2012 for the purchase of the horse at the Australian Easter yearling sale for the applicant.

6. The applicant was incorporated as a subsidiary of Ultra Tune Australia pursuant to a decision made in 2003 as the vehicle through which Ultra Tune Australia was to carry out its breeding and racing operations. Ms Davey was charged with the responsibility of the filing and registration of horses purchased by the applicant with the relevant racing authorities. She had been informed by Racing Victoria that companies could not be registered as owners of a racehorse and that owners had to be either individuals or a syndicate. It seems that the applicant could have been registered as the owner of Shamus Award at least as part of a syndicate but for convenience it was decided that Mr Buckley was to be registered as the managing owner of Shamus Award as it was her understanding that there would always need to be an individual "noted as the managing owner", even if a syndicate was registered at a later time showing the applicant as owner. On 6 July 2005 a horse agreement was entered into between Mr Buckley and the applicant setting out the arrangements between them and through which Shamus Award was acquired by the applicant but registered in Mr Buckley's name. The tax invoice dated 12 April 2012, consistently with the arrangements between them, was addressed to Mr Buckley and the applicant trading as Barree Stud. It was Ms Davey who completed the horse registration pursuant to the arrangement he had with the applicant with the Registrar of Racehorses for Shamus Award showing Mr Buckley having a 50% share of Shamus Award and G & C Pastoral Syndicate having the other 50% share.

7. The purpose of garnishee notices issued under s 260-5 is to enable the Commissioner to facilitate the recovery of tax payable by a taxpayer by requiring that money of the taxpayer be paid to the Commissioner. The purpose of the provision is not to have paid to the Commissioner money which does not belong to the taxpayer. The provisions analogous to those now found in s 260-5 of the 1953 Act were previously those in s 218 of the Income Tax Assessment Act 1936 (Cth) in materially similar if not identical terms. In
Zuks v Jackson McDonald (1996) 132 FLR 317 Steytler J said at 328 of the purpose of such provisions:

"The purpose behind s 218 seems to me to be that of rendering more effective the Commissioner's power to recover property of a taxpayer in payment of his or her unpaid tax rather than that of, in effect, picking the pocket of a third party (who might have acted entirely in good faith) in order to satisfy the obligation of a defaulting taxpayer."

In that case the court held that an effective equitable assignment would not be defeated by the issue of a s 218 notice. In
Tricontinental Corporation Ltd v Federal Commissioner of Taxation (1986) 17 ATR 803 Carter J similarly observed at 806-7 that the purpose of s 218 was to permit the Commissioner to have access to a fund of money "otherwise payable to the taxpayer" to effectively enforce payment of the taxpayer's income tax liability. The authorities to which each case refers are consistent with that purpose and establish that the effect of s 260-5, and its preceding version in s 218, is to permit the Commissioner to require payment to the Commissioner of that which belongs to the taxpayer and not that which does not belong to the taxpayer.

8. The dispute between the parties at the hearing was about whether the prize money payable by Racing Victoria to Mr Buckley belonged to Mr Buckley at the time any obligation arose in Racing Victoria to pay the amount to Mr Buckley. The applicant did not contend that it had been assigned a debt belonging to Mr Buckley by Racing Victoria but, rather, that any amount payable by Racing Victoria belonged to the applicant itself from inception. The Commissioner, in contrast, contended that the contractual arrangements between Mr Buckley and Racing Victoria were such that any debt of Racing Victoria was a debt due to Mr Buckley and not to the applicant.

9. The contractual agreement between Mr Buckley and the applicant expressly provided that any winnings from the horses to which the agreement related, including Shamus Award, belonged to the applicant and not at all to Mr Buckley. Clause 4 provided:

"All revenue (including any sales and/or winnings from any of the Horses belongs to [the applicant] and Buckley (and his estate) foregoes any rights or entitlement to ownership of such revenue. Buckley shall transfer or direct payment of such revenue to [the applicant]."

The registration of Shamus Award is consistent with the agreement including the identification of the applicant's bank details for those of the owner of the horse upon its registration. Three pages of the horse registration form for Shamus Award were tendered in evidence including the two pages relevant to ownership. The first of those had the words "managing owner" on the top right-hand corner and identified Mr Buckley as individual owner. On that page there was provision to be inserted for the contact details, GST status and bank account details. The bank account name and account number given at the time of registration of Shamus Award was that of the applicant and not Mr Buckley.

10. The arrangements between the applicant and Mr Buckley establish that any amount payable to him by Racing Victoria for the winnings of Shamus Award belonged to the applicant from inception. In
Palette Shoes Pty Ltd (in liq) v Krohn (1937) 58 CLR 1 ("Palette Shoes") the High Court considered the effect of an agreement between a manufacturer of shoes and a purchaser ("the plaintiff") from the manufacturer which included a clause requiring the manufacturer to pay to the plaintiff within 48 hours after receipt any money received by the manufacturer for the shoes it had sold on behalf of the plaintiff. The relevant clause, clause 7, was in the following terms:

"The manufacturer shall within forty-eight hours after the receipt thereof pay all moneys received by it on account of such boots and shoes supplied by it as aforesaid to the credit of such account and at such bank as the purchasers may from time to time appoint and shall at least once in each month render to the purchasers a statement in writing showing all moneys received by it as aforesaid during the preceding period."

The court held that the clause was not an assignment of a debt but a contractual provision which created a direct entitlement in the plaintiff over the money upon receipt by the manufacturer from the purchaser's customers. Latham CJ concluded at 13 that the clause did not effect an assignment and at 14 said:

"When the company received payment from the customers, such payment would be received as the proceeds of the plaintiffs' goods. Under clause 7 of the agreement the company was bound to pay all such money to the plaintiffs within forty-eight hours of the receipt thereof. The whole proceeds were to be paid to the plaintiffs…There is authority to support the proposition that, in such circumstances, the beneficial interest in the moneys, when received by the company, belonged to the plaintiffs and never to the company and that the company held the moneys in trust for the plaintiffs."

A similar view was expressed by Dixon J at 27 when his Honour said:

"Because value has been given on the one side, the conscience of the other party is bound when the subject comes into existence, that is, when, as is generally the case, the legal property vests in him. Because his conscience is bound in respect of a subject of property, equity fastens upon the property itself and makes him a trustee of the legal rights or ownership for the assignee. But, although the matter rests primarily in contract, the prospective right in property which the assignee obtains "is a higher right than the right to have specific performance of contract", and it may survive the assignor's bankruptcy because it attaches without more eo instanti when the property arises and gives the assignee an equitable interest therein…".

Similar views were expressed by McTiernan J at 34-37 and by Rich J who agreed with the reasons of the other members of the court, observing at 17 that the matter depended upon contract.

11. It follows that the contract between Mr Buckley and the applicant, like that in Palette Shoes, created an entitlement in the applicant to any money payable by Racing Victoria to the winnings of Shamus Award. A different conclusion might be required if the contract between Mr Buckley and Racing Victoria prevented amounts payable to him being those of the applicant or if the terms of the contract between Mr Buckley and Racing Victoria established an intention that the contract was intended to confer upon Mr Buckley a direct benefit with an interest to protect: see
Marks v CCH Australia Limited [1999] 3 VR 513 at 532-3. However, the applicable rules governing the dealings between Mr Buckley and Racing Victoria, and existing between them as a contract, require no such conclusion. The rules are not concerned with entitlements beyond the discharge of any obligations which Racing Victoria may have in payment of money due to others. AR 57(2) of the Racing Victoria Rules provides:

"The manager of a horse shall, alone of the joint owners, lessees or syndicate members be entitled to:

• […]
• (c) receive any prize money or trophy won by such horse; or
• (d) act for and represent the joint owners, lessees or syndicate members in relation to the horse in all respects for the purpose of these Rules."

The person identified as "the manager" for the purpose of this rule is that identified by the definition of "manager" as being the firstnamed person recorded by the registrar of racehorses in the official ownership records. The provision entitling the manager to "receive" any prize money "alone of the joint owners" does not affect the beneficial ownership in the prize money of the joint owners upon the entitlement arising. The clause contemplates joint ownership and, no doubt for convenience, provides that one of the joint owners is entitled to receipt of the prize money. A function of such a clause is to ensure that payment by Racing Victoria to the manager acts as an effective receipt and a discharge of any obligations it would otherwise have to make payment to those who may be entitled to the winnings. It does not purport to alter the entitlement which the owners may have to the winnings immediately.

12. Accordingly, the applicant is entitled to the following declarations:

• (a) That it is the legal and beneficial owner of 50% of the winnings and place prize money entitlements in respect of "Shamus Award" having competed in the MRC Caulfield Guineas horse races on 12 October 2013 and the Cox Plate on 26 October 2013; and
• (b) That Racing Victoria is not required, under the garnishee notice dated 28 October 2013, to pay to the first respondent any prize money entitlement in respect of "Shamus Award" having competed in the MRC Caulfield Guineas and the Cox Plate horse races on 12 October 2013 and 26 October 2013 respectively.