CATCHWORDS
BANKRUPTCY - creditor's petition - petition opposed - additional tax levied for incorrect tax return - no tax return filed at the relevant time - whether sufficient grounds for exercise of Court's discretion not to make sequestration order under s52(2) Bankruptcy Act 1966.
INCOME TAX - notice under s218 of the Income Tax Assessment Act 1936 served on the Victoria Police - effect of application by Police for a forfeiture order under s5(1) Crimes (Confiscation of Profits) Act 1986 (Vic) - whether Deputy Commissioner of Taxation acquired a vested interest in money seized by the police.
Bankruptcy Act 1966 sub-section 52(2).
Income Tax Assessment Act 1936 section 218.
Crimes (Confiscation of Profits) Act 1986 (Vic) ss5(1), 38 and 41.
RE JOHN FALZON EX PARTE DEPUTY COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
VP No. 400 of 1996
Olney J
Melbourne
22 July 1996
IN THE FEDERAL COURT OF AUSTRALIA
GENERAL DIVISION
BANKRUPTCY DISTRICT OF THE
STATE OF VICTORIA No VP 400 of 1996
Re: JOHN FALZON
Judgment Debtor
EX PARTE: DEPUTY COMMISSIONER OF TAXATION
OF THE COMMONWEALTH OF AUSTRALIA
Petitioning Creditor
Coram: Olney J
Place: Melbourne
Date: 22 July 1996
REASONS FOR JUDGMENT
The petitioning creditor (hereafter referred to as the Commissioner) obtained judgment against John Falzon (the debtor) in the Supreme Court of Victoria on 9 December 1994 in the sum of $358,826.91 (for income tax) plus $4,205.82 (for interest) and $1,324.00 (for costs). The total judgment was for the sum of $391,357.73.
On 27 September 1995 the amount due under the judgment was reduced by $31,700 as the result of a sale by the Sheriff in execution of a warrant of seizure and sale issued against the debtor's goods.
On 2 May 1996 the Commissioner caused a bankruptcy
notice to be issued which required payment within 14 days after service of
$431,120.52 being the amount of the original judgment, less $31,700 plus
$71,402.79 for further interest calculated under the Penalty Interest Rates Act
1983 up to 30 April 1996.
Personal service of the bankruptcy notice was effected on 3 May 1996. The debtor did not make any response and
accordingly on 17 May 1996 he committed an act of bankruptcy.
The Commissioner presented a bankruptcy petition on 20 May 1996 and personal service was effected on 22 May 1996. The debtor opposes the making of a sequestration order on two grounds. First, he says he is solvent. As no evidence as to his solvency has been put before the Court there is no basis upon which a finding of solvency can be made. The second ground of opposition asserts that for sufficient cause a sequestration order ought not be made. The debtor seeks the exercise of the Court's discretion under s 52(2) of the Bankruptcy Act1996. Particulars of this ground are pleaded but before referring to them, and thus being able to understand the case put on behalf of the debtor, it will be necessary to rehearse the factual context in which the case has arisen.
On 24 May 1992 an officer of the Victoria Police seized three sums of money totalling $216,430 from the debtor. Some of the money was handed to police by the debtor, some was found in a wallet on his person and the balance was found in the backyard of premises at Sunshine. The debtor was charged with a number of drug related offences following the seizure.
As the debtor had not filed income tax returns for the years 1991 and 1992, the Commissioner, on 23 April 1993, issued default assessments for those years for a total sum of $314,317.53. The assessments were made on a betterment basis, and took into account the money seized on 24 May 1992 (the seized property). On the same day as the income tax assessments were issued, the Commissioner also issued a notice under s 218 of the Income Tax Assessment Act and served same on the police officer having custody of the seized property. The debtor lodged objections against the notices of assessment. The objections were disallowed on 19 October 1994. No application was made to review the decision to disallow the objections.
On 23 May 1994, in the County Court at Melbourne, the debtor pleaded guilty to five counts of drug trafficking. At that time the Crown made application pursuant to s 5(1) of the Crimes (Confiscation of Profits) Act 1986 (Vic) for a forfeiture order in respect, inter alia, of the seized property. The County Court did not immediately proceed to sentence the debtor but rather adjourned sentencing and the hearing of the forfeiture application. The matter did not come on again until 25 September 1995.
In the period which had intervened since the plea, as a result of negotiations between the debtor's legal representative and the Crown, the debtor agreed to consent to forfeiture orders in relation to the seized property and the Crown agreed to make no application for a pecuniary penalty. A forfeiture order was duly made on 29 September 1995 in favour of the State of Victoria and no pecuniary penalty was imposed. The debtor was sentenced to a term of imprisonment.
On 20 February 1996 the debtor lodged 6 income tax returns including returns for the years 1991 and 1992. On 6 June 1996 the Commissioner advised the debtor that the 1991 and 1992 assessments issued on 23 April 1993 would not be amended. According to the evidence of an officer of the ATO which is not contested, if any review action is taken by the debtor in respect of the decision not to amend the assessments, the debtor would nevertheless, on the basis of his own returns, be liable to income tax for the years 1991 and 1992 in the sum of $110,342.59.
The s 218 notice required the police officer to pay the Commissioner forthwith any money then due by him to the debtor and to pay any money subsequently becoming due forthwith upon it becoming due. The total of the liability sought to be recovered under the notice was $314,683.28.
In the period intervening between the service of the s 218 notice and the making of the forfeiture order the Commissioner and the Crown had addressed the question of whether the notice would take priority over any application for forfeiture and apparently both came to the conclusion that the notice would have the effect of requiring payment of the seized property to the Commissioner only if the police officer was, or became, liable to pay it to the debtor and further that pending resolution of the forfeiture application he was not under any such liability. Accordingly, if and when a forfeiture order was made, the money would be payable to the State and there would therefore be no occasion when the s 218 notice would impose an obligation on the police officer to pay it to the Commissioner. The Commissioner accepted these propositions and made no attempt to intervene in the forfeiture proceeding.
The notice of assessment for the 1991 year contains the following items:
Tax on taxable income $77,401.57 DR
Medicare levy $2,265.07 DR
Additional tax for $39,833.00 DR
for incorrect return
Provisional tax credit $871.00 CR
Amount payable on this $117,628.64 DR
assessment
Other amounts payable $ 367.75 DR
TOTAL AMOUNT PAYABLE $118,994.39 DR
The assessment for 1992 contains similar items of different amounts including a debit of $65,229.00 for
"Additional tax for incorrect return"
In each case the amount of the additional tax is 50% of the total of the respective amounts of the tax on taxable income and the medicare levy.
It is now possible to return to the particulars pleaded in support of the debtor's second ground of objection. He says:
1. The Commissioner acquired a vested interest in the money seized by the police when it served the s 218 notice.
2. Excluding the total of $105,062 assessed as "additional tax for incorrect return", the debtor's liability as at 23 April 1993 was $209,621.
3. The Commissioner failed to take appropriate action to recover the $216,430 seized by the police and on 25 September 1995 abandoned those rights to the detriment of the debtor.
Put succinctly, the argument is that the items assessed for "additional tax for incorrect return" should be deducted from the assessments because, it is said, the returns could not have been incorrect as no returns had been filed. Having thus reduced the total liability to $209,621, the amount recoverable under the s 218 notice would have satisfied the balance due under the assessments as at the date the notice was served.
In my opinion the assertion that the service of the s 218 notice gave the Commissioner a vested interest in the seized property would be correct only if at the time of service of the notice the police officer was obliged, or has since become under an obligation, to return the money to the debtor. If the money had been seized in the execution of a search warrant then it is clear from the provisions of ss 38 and 41 of the Crimes (Confiscation of Property) Act 1986 that, on the facts of this case, the obligation to return the money to the debtor never arose. I do not know whether the money was seized in the execution of a search warrant. No evidence has been led on that question. However, the Commissioner was apparently satisfied that the s 218 notice has not operated so as to impose an obligation upon the police officer to pay the money to him and unless it can be shown that the Commissioner's conclusion is either wrong or unreasonable I would not be prepared to exercise my discretion under s 52(2) of the Bankruptcy Act in favour of the debtor. As no attempt has been made to establish the circumstances giving rise to the seizure of the money I am not satisfied that the Commissioner has acted either incorrectly or unreasonably in relation to the s 218 notice and the forfeiture order.
The debtor's suggestion that the amount of his liability should be reduced by $105,062 because the penalties are described as being for incorrect returns rather than for non-lodgment of returns is, to put it mildly, audacious. The Commissioner was obviously entitled to impose a penalty for non-lodgment. There is evidence that the practice is to impose the same penalty for lodging an incorrect return as for not lodging a return. The debtor objected to the assessments and took no action to have the disallowance of his obligations reviewed. The occasion for complaint about the contents of the assessment has passed. There is nothing about the assessments or the Commissioner's conduct in relation to them that justifies the exercise of the Court's discretion to refrain from making a sequestration order.
The petitioning creditor is in my opinion entitled to a sequestration order against the estate of the debtor.
I certify that this and the preceding 7 pages are a true copy of the Reasons for Judgment of the Honourable Justice Olney
Associate:
Dated:
Heard: 16 July 1966
Place: Melbourne
Judgment:22 July 1966
Appearances:
Mr J. Nolan (instructed by Australian Government Solicitor) appeared for the petitioning creditor.
Mr A.W. Ellis (instructed by Alex Lewenberg) appeared for the debtor.
