The sequel to Bruton Holdings

Federal Court confirms ATO cannot issue garnishee notices to a company being wound up to collect post-liquidation tax liabilities

What you need to know

• Yesterday, the Federal Court confirmed in The Bell Group Ltd (in liq) v Deputy Commissioner of Taxation [2015] FCA 1056 that the Commissioner of Taxation cannot collect tax which arises during the winding up of a company (“post-liquidation tax”) by using his power to garnish debts owed to the company.
• The case confirms the principle established by the High Court in Bruton Holdings Pty Limited (in liquidation) v Commissioner of Taxation [2009] HCA 32 that garnishee notices are an “attachment” and therefore void under the Corporations Act 2001. This is regardless of whether they relate to the collection of pre-liquidation or post-liquidation taxes.

What you need to do

• Subject to any appeal by the Commissioner, it should now be clear that garnishee notices cannot be used by the Commissioner to collect any taxes (including post-liquidation taxes) from a company once it commences being wound up.
• The obligation of a liquidator to retain amounts for post-liquidation tax is the subject of the High Court case of Commissioner of Taxation v Australian Building Systems Pty Ltd (in liq) in which judgment is pending. Liquidators should look out for the High Court’s pending decision in that case.

ATO garnishee notices against company being wound up always void

Section 260-5 of Schedule 1 to the Taxation Administration Act 1953 (the “TAA”) allows the Commissioner of Taxation to collect taxes payable by a taxpayer by issuing a written notice to a third party that owes or will owe money to the taxpayer and requiring the third party to pay to the Commissioner the amount owed up to the amount of the relevant tax debt (effectively a form of garnishee). Third parties that fail to comply with the Commissioner’s notice are liable to be prosecuted for committing a criminal offence.

Bruton Holdings

A s 260-5 notice was the subject of a unanimous High Court judgment in Bruton Holdings Pty Limited (in liquidation) v Commissioner of Taxation [2009] HCA 32.

In that case the creditors of a company had passed a resolution for the winding up of the company. Just before the resolution was passed, the Commissioner issued a notice of assessment to the company for income tax of $7.7 million. After the passing of the resolution for winding up, the Commissioner lodged a proof of debt in the winding up of the company and also issued a s 260-5 notice to a law firm requiring them to pay to the Commissioner money the company had deposited with the firm.

The High Court held that s 260-5 notice was an “attachment” for the purposes of s 500(1) of the Corporations Act and therefore void.

In addition, the High Court held that s 260-45 of Schedule 1 to the TAA specifically dealt with the collection and recovery of tax liabilities of companies in liquidation from their liquidators and therefore was an example of a specific regime which excludes more general provisions which otherwise might be engaged. The High Court considered its conclusion that the special provisions for liquidators in s 260-45 excluded the application of the Commissioner’s general powers under s 260-5 after a resolution is passed for the winding up of a company or an order for winding up by the court is “at least reinforced, even required” because the Crown in right of the Commonwealth (being represented by the Commissioner) is bound by ss 501 and 555 of the Corporations Act. Those provisions require the property of a company being wound up to be applied equally and proportionately among all creditors (subject to provisions dealing with preferential payments): see s 5A(2) of the Corporations Act.

The High Court also observed that their conclusion was supported by the recognition that:

1. a s 260-5 notice is an “attachment” and therefore void under s 500(1);
2. the language of s 500(1) is “emphatic” and does not provide for any exceptions;
3. when the Crown retained priority for tax debts it was necessary to provide specially a provision in the tax legislation that such priority applied “notwithstanding anything contained in any other Act or State Act” to make it clear that the tax legislation overrides the relevant corporate law provisions which applied to a company being wound up; that provision was repealed when the Crown gave up it priority for tax debts in the Taxation Debts (Abolition of Crown Priority) Act 1980; and
4. the proportionate system established by s 260-45 for liquidations would be subject to “adventitious disruption” if the Commissioner was able to exercise his garnishee rights under s 260-5.

Accordingly, the High Court considered the relevant provisions of the Corporations Act assisted with its construction of s 260-5 of Schedule 1 to the TAA.

Facts in Bell case

The Bell Group Ltd (in liq) (“TBGL”) and a number of its subsidiaries (the “Bell Group”) were the subject of a court-ordered winding up in the early-to-mid 1990s. The winding up of TBGL is therefore dealt with by, among other provisions, Part 5.4 of the Corporations Law (which continues to apply to TBGL)¹. In particular, s 468(4) of the Corporations Act makes any “attachment” put in force against the property of TBGL after the commencement of its winding up by the Court void. Relevantly, s 468(4) is the equivalent to s 500(1) of the Corporations Act (which relates to a company being wound up voluntarily as a result of a resolution by its creditors).

The Commissioner issued notices of assessment to TBGL and its liquidator, which assessed income tax of $298,190,348.70 in connection with funds TBGL and other members of its income tax consolidated group derived during the income year ended 30 June 2014 (related mainly to proceeds from major litigation against several banks). Shortly thereafter the Commissioner issued s 260-5 notices to the National Australia Bank (the second respondent) which held funds that had been deposited by the liquidator. Proceedings were brought in the Federal Court by TBGL and its liquidator to have the s 260-5 notices declared void.

The decision

Justice Wigney ordered that the Commissioner’s decision to issue the s 260-5 notices be quashed and that the National Australia Bank be restrained from taking any action in reliance on the notices.

TBGL and its liquidator submitted that the reasoning in Bruton Holdings applied to the s 260-5 notices, notwithstanding that Bruton Holdings dealt with the collection of pre-liquidation tax and a company the subject of a creditors’ voluntary winding up. It was noted that the High Court had itself remarked in Bruton Holdings that the s 260-5 notice dealt with in that case would have also been void if the company was the subject to a court-ordered winding up.

The Commissioner contended that Bruton Holdings was distinguishable because the statutory scheme for collection of post-liquidation taxes is dealt with in s 254 of the Income Tax Assessment Act 1936 (the “ITAA 1936?) rather than s 260-45 of Schedule 1 to the TAA (and its predecessor, former s 215 of the ITAA 1936, which continues to apply to the liquidator of TBGL and which operates in the same way as s 260-45). In particular, the Commissioner submitted that s 254(1)(h) of the ITAA 1936 preserved the ability of the Commissioner to collect post-liquidation tax from a company’s liquidator.

Alternatively, even if s 254(1)(h) of the ITAA 1936 did not operate in the way, the Commissioner contended the word “attachment” in s 468(4) of the Corporations Act should be read down to permit a s 260-5 notice to be issued because, the Commissioner contended, post-liquidation tax was a priority expense within s 556(1)(a) of the Corporations Act.²

His Honour held that the s 260-5 notices were void for two reasons:

• firstly, they were attachments against property and therefore void by operation of s 468(4) of the Corporations Act; and
• secondly, that conclusion on the operation of s 468(4) of the Corporations Act supported the conclusion that the Commissioner’s power to issue a s 260-5 notice was not available where a debtor is a company being wound up or its liquidator, even where post-liquidation tax is payable.

His Honour held that the Commissioner’s contentions had no merit. In particular, s 254(1)(h) only applied to “attachable” property and because any attachment against the property of TBGL would be void by operation of s 468(4) of the Corporations Act (a provisions which has a long history in legislation dealing with companies), none of its property was “attachable”. This reading of the term “attachable property” allowed s 254 of the ITAA 1936 to operate harmoniously with the Corporations Act.

Priority of post-liquidation tax

The judgment made some remarks on the liquidator’s obligation to pay post-liquidation tax and the priority of post-liquidation tax which are apposite in light of the High Court’s pending judgment in Australian Building Systems. For more information on the background to that case, see our 15 October 2014 Insolvency and Tax Alert.

The Court confirmed that tax collection provisions which apply to a liquidator (such as s 260-45 of Schedule 1 to the TAA and s 254 of the ITAA 1936) do not deal with questions of priority and preference, which are ultimately dealt with by the Corporations Act or other provisions of the law. There is therefore no conflict between those tax collection provisions and the provisions dealing with priorities and preferences in relation to the debts of a company being wound up.

However, at a practical level, the obligation of a liquidator to retain an amount out of the income, profits and gains derived by a company in liquidation for post-liquidation tax will be critical in determining the extent to which post-liquidation tax should be paid by a liquidator. Accordingly, the High Court’s pending judgment in Australian Building Systems should provide some guidance to liquidators and creditors about the extent to which post-liquidation tax will affect the amount and timing of distributions by a company in its winding up.

_Notes

_{^1. For present purposes, the relevant provisions of the former Corporations Law are on the same terms as the Corporations Act and therefore a reference to the Corporations Act includes the Corporations Law.
^2. Paragraph 254(1)(h) provides that “the Commissioner shall have the same remedies against attachable property of any kind vested in or under the control of management or in the possession of [the liquidator], as the Commissioner would have against the property of any other taxpayer in respect of tax” (our emphasis).}