Decision impact statement

Commissioner of Taxation v Park

Venue: Federal Court of Australia
Venue Reference No: QUD 209 of 2011
Judge Name: Siopis, Reeves & Katzmann JJ
Judgment date: 31 August 2012
Appeals on foot: No
Decision Outcome: Favourable

Impacted Advice

Relevant Rulings/Determinations:

• N/A

Subject References:
Garnishee notice to purchaser of land
Land subject to a pre-existing mortgage
Compliance with garnishee notice
Commissioner's entitlement to settlement proceeds

Précis

Outlines the ATO's response to this case which concerns a Commissioner's garnishee notice served on a purchaser of land for monies due by it to a taxpayer vendor under a contract of sale where that land was subject to a pre-existing registered mortgage.

Brief summary of facts

The taxpayer was the sole registered proprietor of a property which was subject to a registered mortgage to the National Australia Bank ("NAB"). In 2007, the taxpayer granted a second mortgage securing the sum of $430,200 which was duly registered. The taxpayer entered into a contract in January 2013 to sell the property for the sum of $1,675,000 and settlement was to proceed in February 2010. The Commissioner became aware of the contract and issued a notice pursuant to s260-5 in Schedule 1 to the Taxation Administration Act 1953 ("garnishee notice") in January and February 2010. The Commissioner was unaware that an unsecured creditor had served a bankruptcy notice on the taxpayer and in February 2010 had applied for the appointment of an interim trustee.

At settlement of the contract, the second mortgagee expected there would be insufficient funds from the purchase price to discharge the total amount secured by both the NAB mortgage and its mortgage. The second mortgagee had agreed to provide a release of the second mortgage in exchange for the balance amount remaining after discharge of the NAB mortgage.

Initially, the contract did not settle because the purchaser was unwilling to pay the balance amount because it sought to pay the Commissioner in accordance with the garnishee notice. Ultimately, the contract settled on the basis that the sum of $75,508.64 (being the sum sought by the Commissioner) be paid into Court and the second mortgagee assign its rights and interest in the disputed sum to the Trustee. The second mortgagee took the remaining funds in exchange for the release of the second mortgage.

The Commissioner sought to enforce his rights under the garnishee notice.

Issues decided by the court

The Full Federal Court by majority (with Siopis J dissenting) upheld the appeal by setting aside the declarations and orders previously made by the Federal Magistrate, and declared that the Commissioner is entitled to the sum of $75,508.64 paid into Court together with any accretions.

As this case was test case funded, the Federal Magistrate's costs order was left undisturbed and the Court ordered the Commissioner to pay the Trustee's costs of the appeal.

1. Whether the purchase moneys were "due" to the taxpayer vendor which in turn created an obligation on the purchaser to pay the Commissioner pursuant to the garnishee notice instead of the taxpayer vendor.

The majority held that, under s260-5, at the instant the moneys become owing by the purchaser to the taxpayer vendor, the puchaser was under a statutory obligation to pay those moneys to the Commissioner. The moneys became owing by the purchaser to the taxpayer vendor, and the purchaser's obligation to pay the Commissioner became absolute at settlement when the taxpayer vendor offered an unemcumbered title to the purchaser. By reason of s260-15, a payment to the Commissioner by the purchaser was sufficient to satisfy the purchaser's obligation under the contract.

2. Whether security under a mortgage over land extends to the proceeds of sale of the land.

The majority held that security under a mortgage over land does not extend to the proceeds of sale.

ATO view of Decision

This case confirms the ATO view in relation to the Commissioner's rights arising from a garnishee notice and stated in paragraphs 66 and 67 of Practice Statement Law Administration PSLA 2011/18.

Court citation:
[2012] FCAFC 122
2012 ATC 20-344
(2012) 90 ATR 519
(2012) 205 FCR 1
(2012) 294 ALR 1 Related Practice Statements:

• Practice Statement Law Administration 2011/18

Practice Statement Law Administration 2011/18

Legislative References:
Taxation Administration Act 1953
Subsection 260-5

Case References:
Tricontinental Corporation Ltd v Commissioner of Taxation
[1988] 1 QdR 474
18 ATR 827
87 ATC 4454

Foran v Wight
(1989) 168 CLR 385
[1989] HCA 51

Clyne v Deputy Commissioner of Taxation
(1981) 150 CLR 1
12 ATR 173
81 ATC 4429

Bruton Holdings Pty Ltd (in liq) v Commissioner of Taxation
(2009) 239 CLR 346
72 ATR 856
2009 ATC 20-125

Norton v Yates
[1906] 1 KB 112

Zuks v Jackson McDonald (a Firm)
(1996) 132 FLR 317
33 ATR 40
96 ATC 4588