MG JONES (AS TRUSTEE OF THE BANKRUPT ESTATE OF ROGER GRAHAM) v DFC of T & ANORJudges:
This is an application to the Court by the trustee of the bankrupt estate of Roger Henry Wingate Graham (``Dr Graham'') ``for directions in respect of a matter arising in connexion with the administration of the estate'' (s 134(4) of the Bankruptcy Act 1966 (Cth)). The ``matter'' involves consideration of the extent to which taxation liabilities of Dr Graham are debts provable in his bankruptcy.
Dr Graham, an anaesthetist, presented his own petition pursuant to s 55 of the Bankruptcy Act 1966 (Cth) (``the Bankruptcy Act'') on 10 January 1997. He earned income of $335,169 in the financial year ended 30 June 1997. Dr Graham lodged two income tax returns in respect of the year ended 30 June 1997 - the first for the period 1 July 1996 to 9 January 1997 and the second for the period 10 January 1997 to 30 June 1997.
The Deputy Commissioner of Taxation, by letter dated 7 May 1997, advised Dr Graham's accountants that the policy of the Australian Taxation Office is to issue only one assessment for a financial year. She also expressed the opinion in her letter that:-
``an assessment for a year of income which falls after the date of bankruptcy is not provable in a bankruptcy.''
A notice of assessment under the Income Tax Assessment Act 1936 (Cth) (``ITAA'') dated 24 September 1997 has been issued to Dr Graham for the year ended 30 June 1997. It shows the amount payable as $152,262.14. It appears that, if none of this amount is provable as a debt in Dr Graham's present bankruptcy, he will present a second petition and the property currently vested in the applicant will vest in the trustee in the later bankruptcy (s 59(1) of the Bankruptcy Act).
In the Bankruptcy Act, unless a contrary intention appears, the term ``debt'' includes liability (s 5 of the Bankruptcy Act). ``Debt'' is not otherwise defined by the Bankruptcy Act.
Section 82 of the Bankruptcy Act defines the types of debts provable in a bankruptcy. So far as is here relevant, s 82 provides as follows:
``(1) ... all debts and liabilities, present or future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy, or to which he or she may become subject before his or her discharge by reason of an obligation incurred before the date of the bankruptcy, are provable in his or her bankruptcy.
(3B) A debt is not provable in a bankruptcy in so far as the debt consists of interest accruing, in respect of a period commencing on or after the date of the bankruptcy, on a debt that is provable in the bankruptcy.
(4) The trustee shall make an estimate of the value of a debt or liability provable in the bankruptcy which, by reason of its being subject to a contingency, or for any other reason, does not bear a certain value.
(5) A person aggrieved by an estimate so made may appeal to the Court.
(6) If the Court finds that the value of the debt or liability cannot be fairly estimated, the debt or liability shall be deemed not to be provable in the bankruptcy.
(7) If the Court finds that the value of the debt or liability can be fairly estimated, the Court shall assess the value in such a manner as it thinks proper.
(8) In this section, `liability' includes:
- (a) compensation for work or labour done;
- (b) an obligation or possible obligation to pay money or money's worth on the breach of an express or implied covenant, contract, agreement or undertaking, whether or not the breach occurs, is likely to occur or is capable of occurring, before the discharge of the bankrupt; and
- (c) an express or implied engagement, agreement or undertaking, to pay, or capable of resulting in the payment of, money or money's worth, whether the payment is:
- (i) in respect of amount - fixed or unliquidated;
- (ii) in respect of time - present or future, or certain or dependent on a contingency; or
- (iii) in respect of the manner of valuation - capable of being ascertained by fixed rules or only as a matter of opinion.''
Income tax is imposed by s 5 of the Income Tax Act 1986 (Cth), which is to be read as one with the ITAA (s 4 of the Income Tax Act 1986 (Cth)). The rates of income tax are set by s 12 of the Income Tax Rates Act 1986 (Cth), which is also to be read as one with the ITAA (s 4 of the Income Tax Rates Act 1986).
The ITAA is concerned with the imposition, assessment and collection of income tax. Section 17 of the ITAA provides that income tax shall be paid for a financial year ``upon the taxable income derived during the year of income'' by the taxpayer. Section 6 of the ITAA contains a definition of ``taxable income''. For present purposes such definition is ``the amount remaining after deducting from the assessable income all allowable deductions'' (see also s 48 of the ITAA).
Section 168 of the ITAA provides as follows:
``(1) The Commissioner may at any time during any year, or after its expiration, make an assessment of the taxable income derived in that year or any part of it by any taxpayer and of the tax payable thereon.
(2) Where the income, in respect of which such an assessment is made, is derived in a period less than a year, the assessment shall be made as if the beginning and end of that period were the beginning and end respectively of the year of income.''
Part VI of the ITAA, which is comprised of ss 203-222ARA, is concerned with the collection and recovery of tax. Section 204 provides:
``Subject to the provisions of this Part, any income tax assessed shall be due and payable by the person liable to pay the tax on the date specified in the notice as the date upon which tax is due and payable, not being less than 30 days after the service of the notice, or, if no date is so specified, on the thirtieth day after the service of the notice.''
Section 206 allows the Commissioner of Taxation to grant to a taxpayer an extension of time for the payment of tax or to permit payment by instalments. Section 208(1) provides:
``Income tax when it becomes due and payable shall be a debt due to the Commonwealth, and payable to the Commissioner in the manner and at the place prescribed.''
Section 82 of the Bankruptcy Act is to be construed generously. In
Official Trustee in Bankruptcy v CS & GJ Handby Pty Ltd (1989) 7 ACLC 1,070 and 1,074; (1989) 21 FCR 19 at 24 the Full Court of this Court, in giving consideration to s 82 of the Bankruptcy Act, cited with apparent approval the following passage from the judgment of James LJ in
Re Hide; Ex parte Llynvi Coal and Iron Co (1871) 7 Ch App 28 at 31-32 where his Lordship said of s 31 of the Bankruptcy Act 1869 (UK):
``Every possible demand, every possible claim, every possible liability, except for personal torts, is to be the subject of proof in bankruptcy, and to be ascertained either by the Court itself or with the aid of a jury. The broad purview of this Act is, that the bankrupt is to be a freed man - freed not only from debts, but from contracts, liabilities, engagements, and contingencies of every kind. On the other hand, all the persons from whose claims, and from liability to whom he is so freed are to come in with the other creditors and share in the distribution of the assets.''
It is not disputed that liability to income tax is imposed by the ITAA itself (
DFC of T v Kavich and Official Trustee in Bankruptcy 96 ATC 4752; (1996) 68 FCR 519 per Lockhart J at ATC 4755; FCR 523). There is divergence of judicial opinion over whether income tax becomes due upon service of a notice of assessment or at an earlier time. In
Clyne & Anor v DFC of T 81 ATC 4429 at 4432; (1981) 150 CLR 1 at 9 Gibbs CJ, after referring to ss 6 and 17 of the ITAA said:
``... These provisions suggest that tax is due, in the sense of owing, once the taxable income during a year of income has been derived because there then arises a legal liability to pay it, notwithstanding that the extent of the liability remains to be ascertained and that payment is to be made in the future.''
However, in Clyne's case, Mason J, with whose reasons for judgment Aikin and Wilson JJ agreed, said at ATC 4437; CLR 16-17:
``... the correct view in my opinion is that income tax is due when it is assessed and notice is served of that assessment and that the tax does not become payable before the date fixed by sec 204... I recognise that on other occasions members of this Court have said that `tax is a debt due and owing, although not payable, notwithstanding that no assessment has been made,' in the words of Gibbs J in Re Mendonca; Ex parte Commissioner of Taxation. This approach can be traced back to the majority decision of this Court in Commr of Stamps (W.A.) v West Australian Trustee Executor & Agency Co. Ltd (Mortimer Kelly's case). I think that the decision is to be explained on the footing that it was held that a debt for income tax not assessed until after the deceased's death was a `debt due by the deceased' for the purposes of Acts imposing death and probate duties.''
In Kavich's case, Lockhart J, with whose reasons for judgment Lee J agreed, expressed
ATC 4900the view at ATC 4758; FCR 527 that the reasons of Mason J in Clyne's case show:
``... that before an assessment has been made the obligation imposed on a taxpayer by the Assessment Act is to pay income tax at a future date when the tax has been assessed and a notice of that assessment has been served.''
However, in Kavich's case, the Court was not required to consider whether the ITAA imposed an obligation on a taxpayer during the course of a financial year to pay the income tax to be assessed in the future in respect of his or her assessable income for that year. Kavich's case was concerned with the income tax payable in respect of a financial year which had ended, although a notice of assessment in respect of it had not issued.
The issue for determination in the present case is that of whether the taxation legislation results in a person being under an obligation during the course of a financial year in respect of the income tax which might be assessed, following the end of that year, as payable on income derived by him or her during that year.
The submissions of the first respondent place considerable weight on the definition of ``taxable income'' in ss 6(1) and 48(1) of the ITAA as being, in effect, assessable income less allowable deductions. The first respondent contends that, since taxable income can only be calculated at the completion of a financial year (ie. when all allowable deductions are known) during the course of the year, there can be no more than a prospective obligation to pay income tax. There was, it is contended, no contingent liability to which Dr Graham was subject as at 10 January 1997 to pay income tax in respect of the year ended 30 June 1997, as taxable income only arises at year's end.
It is difficult and perhaps not useful, to try to define with precision what is meant by a ``contingent'' debt or liability (see
FC of T v Gosstray  VR 876 per Tadgell J at 878). However, it is at the heart of a contingent debt or liability that there be an ``obligation'' out of which a liability will arise in a future event, whether that event must happen or only may happen (
Community Development Pty Ltd v Engwirda Construction Co (1969) 120 CLR 455 per Kitto J at 459). For the purposes of s 82(1) of the Bankruptcy Act, provided that such obligation was incurred before the date of the bankruptcy, it is sufficient that the debt or liability, whether present or future, certain or contingent, is one to which the bankrupt ``may become subject before his or her discharge''. That is, it is not a necessary feature of a debt provable in a bankruptcy that the debt or liability be due or payable at the date of the bankruptcy, or even that the bankrupt should have been subject to such debt or liability at the date of the bankruptcy. What is necessary is that the obligation upon which the debt or liability, whether present or future, certain or contingent, is founded is an obligation which was incurred by the bankrupt before the date of his or her bankruptcy.
The pivotal question in this matter, in my view, is that of whether, within the meaning of s 82(1) of the Bankruptcy Act, the ITAA imposes an obligation on a person who derives assessable income within the meaning of the ITAA at the time that such income is derived, to pay income tax on so much of that income as proves to be taxable income, or whether the ITAA imposes no obligation on a person who derives assessable income until such time as that person's taxable income, if any, for the relevant year can be calculated.
It is of significance, in my view, that s 82(4) of the Bankruptcy Act reflects a recognition that a debt provable in bankruptcy might ``by reason of its being subject to a contingency, or for other reasons'' not bear a certain value. Indeed s 82(6) of the Bankruptcy Act reflects a recognition that the value of debt which is prima facie provable in bankruptcy may not be able to be fairly estimated.
There is plainly a distinction between the existence of an obligation sufficient to found a debt on the one hand, and the existence of a debt that is due, whether or not payable, on the other. Cases such as
Commissioner of Stamps (W.A.) v The Western Australian Trustee Executor and Agency Co Ltd (1926) 38 CLR 63;
DFC of T v Brown (1958) 11 ATD 374; (1957-1958) 100 CLR 32 and Clyne v DFC of T are concerned with when income tax is due rather than with the time at which the obligation to pay such tax arises.
Commissioner of Stamps (W.A.) v The Western Australian Trustee Executor and Agency Co Ltd (Mortimer Kelly's case) (1925) 36 CLR 98 the High Court gave consideration to whether liability to income tax not assessed at the time of an individual's death was a debt ``due by the deceased person'', so as to be
ATC 4901deductible from the value of the estate of the deceased for the purpose of the calculation of the duty payable and the value of the estate under the Administration Act 1903 (WA). The majority of the Court (Knox CJ, Higgins and Starke JJ) held that it was. Knox CJ, at 104, said of the Income Tax Act 1922 (Cth):
``In my opinion, the Income Tax Act imposed on every person who during the year ending 30 June 1922 derived from sources in Australia income which was `taxable' according to the provisions of the Assessment Act an obligation to pay income tax at the rate declared. The obligation, I think, existed from the moment when the Income Tax Act became law.''
Higgins J at 114-115 and Starke J at 117 also expressed the view that the relevant Income Tax Acts imposed obligations on the deceased during his life although the amounts to be paid had not been ascertained or included in assessment during his life. It is necessary to note that Mortimer Kelly's case was concerned only with income tax payable in respect of financial years which had ended before the death of the taxpayer. The deceased, Mortimer Kelly, died on 18 November 1922. After his death assessments to income tax issued for the years ended 30 June 1919, 30 June 1920 and 30 June 1922. The tax in respect of the income derived during the year ended 30 June 1919 was imposed by the Income Tax Act 1919 (Cth); that in respect of income derived during the year ended 30 June 1920 was imposed by the Income Tax Act 1920 (Cth); and that in respect of income derived during the year ended 30 June 1922 was imposed by the Income Tax Act 1922 (Cth). The Income Tax Act 1922 (Cth) came into force on 18 October 1922 (ie. during the lifetime of the deceased). It provided by s 2 that it was to be read as one with the Income Tax Assessment Act 1922 (Cth). That is, in contrast with the ITAA, the Income Tax Assessment Act 1922 (Cth) levied income tax for a financial year not on the taxable income of a taxpayer derived during that year, but on his or her taxable income derived during the previous financial year (s 13(1) of the Income Tax Assessment Act 1922 (Cth)).
In DFC of T v Brown, a case in which the taxpayer had died nine days into a financial year, only Kitto and Taylor JJ (both in dissent) gave consideration to Mortimer Kelly's case. As can be seen most clearly from a passage from the judgment of Kitto J, their Honours understood Mortimer Kelly's case to be authority for the proposition that the taxing Acts there under consideration imposed a liability during the course of a financial year for payment of income tax on the income derived during that financial year. Kitto J said at ATD 386; CLR 58:
``... it may be observed that the deceased was at the time of his death under an actual liability, under taxing Acts already in force, to pay tax on all the income to which the amended assessments and the original assessment relate. Even as to the income of the last nine days this was so...''
Although the approach adopted by Gibbs J in
Re Mendonca; Ex parte Commissioner of Taxation (1969) 15 FLR 256 and in Clyne's case, has been disapproved by the majority of the High Court in Clyne's case, I do not understand Mortimer Kelly's case to have been overruled or disapproved of by the High Court. Of course, Mortimer Kelly's case is a case concerning the proper construction of now repealed Western Australian legislation. Nonetheless, having regard to the evident purpose of s 82 of the Bankruptcy Act, a similar approach to that adopted by the majority of the High Court in Mortimer Kelly's case seems to me to be appropriate to be adopted here.
Some limited support for this view may be gleaned from the decision of the Full Federal Court in
Taylor v DFC of T 87 ATC 4441; (1987) 16 FCR 212. In Taylor's case, the applicant taxpayer became bankrupt on 30 June 1980. He claimed that the income tax payable by him for the financial year ended 30 June 1980 was a debt provable in his bankruptcy. Woodward and Northrop JJ held that, were it not for the operation of s 221H of the ITAA, which has no relevance on this application, the assessment which issued during the applicant's bankruptcy for the year ended 30 June 1980 would have been a debt provable in his bankruptcy. Their Honours appear to have acted on the basis that the date of the applicant's bankruptcy coincided precisely with the end of the relevant financial year. There was, in fact, probably a difference of one day between the two dates so that the applicant in Taylor's case was bankrupt for twenty-four hours before the close of the financial year. However, acting on the basis that the applicant became bankrupt at the end of the financial year, their Honours,
ATC 4902after noting that it was not necessary to give consideration to the provisions of s 82 of the Bankruptcy Act other than those contained in s 82(1), said at ATC 4446; FCR 219:
``... Nor is it necessary to consider what the legal position is when the assessment is made with respect to a financial year part of which coincides with a period of bankruptcy. In such circumstances, the provisions of sec 168 of the Income Tax [ Assessment] Act may enable two assessments to issue with respect to any one year commencing on 1 July. One special assessment would be with respect to the period from 1 July to the date of bankruptcy and the second special assessment from the date of the bankruptcy to 30 June. The first assessment would be a provable debt in the bankruptcy and the second would not.''
Section 168 of the ITAA, which is set out above, authorises the Commissioner to make special assessments, including assessments made during the course of a year, of the taxable income derived in that year or any part of that year and of the tax payable thereon. In
FC of T v Stokes 97 ATC 4001 at 4006; (1996) 141 ALR 653 at 658 the Full Court of this Court noted that the usual application of the power conferred by the section was in respect of part of a year where, for example, a taxpayer dies or a company goes into liquidation at some stage during the year of income. It seems to me that in giving to the Commissioner the authority during the course of the year, to issue an assessment of the tax payable on taxable income derived during part of that year, the legislature may be thought to have recognised that the ITAA imposes on a taxpayer during the course of a financial year an obligation to pay income tax on income derived during that year.
Such recognition is consistent with the approach taken by the Privy Council in
Guyana Industrial and Commercial Investments Ltd v Inland Revenue Commissioner (No. 2)  AC 841 where their Lordships were required to give consideration to the tax legislation of Guyana. Their Lordships said at 848:
Income Tax Commissioner v Barcellos (1957) L.R.B.G. 105, the question arose whether income tax assessed in what was then British Guiana, upon a person after the date when a receiving order was made against him, but referable to income earned before that date, was provable as a debt in insolvency. Stoby J held that it could: and in the course of his judgment allowing the proof said, at p. 106:
`As soon as income is derived in the colony over and above a certain sum the obligation to pay income tax arises. The taxpayer's liability does not depend on the arithmetical calculation of a government official: ``it is the extent of his liability which is dependent on the ascertainment of his chargeable income. A clear distinction must be drawn between the liability to pay on the one hand and the amount required to be paid as a result of the liability on the other hand''. And again ``... in the present case the obligation to pay tax arose as soon as the income was earned''.'
Not unnaturally, the appellant company relied heavily on these observations but in their Lordships' opinion they refer to a completely different state of affairs. They do not assist the appellant company's case if the true sense in which the words `obligation' and `liability' were being used by Stoby J is considered. What he is clearly meaning is that by virtue of the charge to income tax imposed by the Income Tax Ordinance, the moment that a taxpayer receives taxable income he incurs a prospective obligation or liability to pay income tax thereon in due course and subject to the provisions of the Income Tax Ordinance.''
A similar analysis of the liability to pay pay- roll tax under the Pay-roll Tax Assessment Act 1971 (WA) was made by Ipp J, with whom Wallwork J agreed, in
Commissioner of State Taxation (WA) v Pollock 93 ATC 5220; (1993) 12 ACSR 217. Ipp J at ATC 5231; ACSR 231 said:
``In my view, pay-roll tax only becomes owing when the pay-roll tax in question is capable of calculation, and that will ordinarily be upon the expiry of the month in which pay-roll tax liability has been incurred.
However, when an employer employs an employee to work in a given month, in consideration of the payment of wages, the employer becomes liable under the Pay-roll Tax Assessment Act to pay-roll tax in an amount which can only be ascertained in the
ATC 4903future. In such circumstances the employer incurs a contingent liability to pay pay-roll tax.
In my opinion, by such conduct, the employer becomes liable to a contingent debt. That contingent debt matures into a debt that is owing when the liability to pay- roll tax is ascertained.''
It is not necessary for me to determine whether a taxpayer becomes liable to a contingent debt upon deriving income that may be taxable income under the ITAA (but may not be) depending upon the value of the tax deduction available to him or her at the end of the financial year. For the purposes of s 82 of the Bankruptcy Act, it is sufficient that the bankrupt may become subject to a debt or liability, present or future, certain or contingent, before his or her discharge by reason of an obligation incurred before the date of bankruptcy. The reasoning adopted by Ipp J in Pollock's case tends to support a conclusion that, in the circumstances of this case, the ITAA imposed an obligation upon Dr Graham before the date of his bankruptcy to pay income tax, albeit that the amount which he was obliged to pay could not be ascertained until after the date of his bankruptcy.
I conclude that, within the meaning of s 82(1) of the Bankruptcy Act, Dr Graham incurred an obligation under the ITAA before the date of his bankruptcy to pay income tax in respect of income derived by him between 1 July 1996 and 9 January 1997. I am comforted to note that in
DFC of T v Jones 98 ATC 4374 Acting District Court Judge Raphael, sitting in the District Court of New South Wales at Sydney, reached a similar conclusion. I further conclude that by reason of such obligation, Dr Graham has or may become subject before his discharge from bankruptcy, to a debt or liability within the meaning of s 82 of the Bankruptcy Act.
I will hear counsel as to the appropriate directions to be made in the light of these reasons for judgment, and as to costs.
THE COURT ORDERS THAT:
1. The applicant is to file and serve written submissions on the questions of:
- (a) the appropriate directions to be made in the light of the reasons for judgment; and
- (b) costs;
by no later than 11 September 1998.
2. The respondent is to file and serve written submissions in response to those filed by the applicant by no later than 16 September 1998.
3. The matter to be relisted, if necessary, on a date and at a time to be fixed by the Associate to Branson J.