FEDERAL COURT OF AUSTRALIA

Robertson v The Deputy Commissioner of Taxation [2003] FCA 944

INCOME TAX – BANKRUPTCY – applicant applied to Administrative Appeals Tribunal for review of Commissioner’s decisions disallowing objections against amended assessments – Commissioner had by then obtained judgment against applicant for primary tax and penalties – applicant subsequently filed a debtor’s petition for bankruptcy – trustee in bankruptcy advised Tribunal that he did not propose to pursue the applications for review – Tribunal decided that, by reason of entering into voluntary bankruptcy, applicant had lost standing to continue applications for review – whether applicant, despite bankruptcy, remained a person “dissatisfied with the Commissioner’s objection decision[s]” – whether possibility existed that applicant might face future personal tax liability post discharge from bankruptcy in respect of the tax debts provable in his bankruptcy which might give him the status of a person so “dissatisfied” – appeal dismissed.

Bankruptcy Act 1966 (Cth), s 153

Income Tax Assessment Act 1936 (Cth) s 221H(2)

Taxation Administration Act 1953 (Cth) ss 2, 14ZZ, Part IIB, Div 3 & 3A, 8AAZA, 8AAZC, 8AAZL-8AAZLF

Cummings v Claremont Petroleum NL (1996) 185 CLR 124 applied

McCallum v Commissioner of Taxation (1997) 75 FCR 458 followed

Taylor v Deputy Federal Commissioner of Taxation (1987) 87 ATC 4,441 distinguished

NATHANIEL ROBERTSON JNR v THE DEPUTY COMMISSIONER OF

TAXATION OF THE COMMONWEALTH OF AUSTRALIA

W315 of 2001

CARR J

8 SEPTEMBER 2003

PERTH

THE COURT ORDERS THAT:

1.         The appeal be dismissed.

2.         The applicant pay the respondent’s costs of the appeal. 

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

REASONS FOR JUDGMENT

introduction

1                     This is an appeal from a decision of the Administrative Appeals Tribunal, made on 20 June 2001, to the effect that the applicant no longer had sufficient standing to maintain his applications for review of the respondent’s objection decisions in relation to the years of income ended 30 June 1989 to 30 June 1992 inclusive.  That was, so the Tribunal decided, because since making those applications the applicant had entered into voluntary bankruptcy. 

factual background

2                     The facts relevant to the determination of this appeal are not in dispute.  On 24 August 1999 the respondent made amended income tax assessments in relation to the applicant in respect of each of the four abovementioned years.  Those amended assessments were made using what is known as an asset betterment method.  The total amount of the amended assessments (including penalties) was $541,163.20.  

3                     On 18 October 1999, the applicant served on the respondent notices of objection to those amended assessments.  In summary, the applicant claimed that the assessments were wrong in law because he was a bona fide prospector for the purposes of s 23(pa) of the Income Tax Assessment Act 1936 (Cth) (“the ITA Act”) and accordingly the relevant income was exempt income. 

4                     On 22 December 1999, the respondent disallowed all of those objections.  On or about 31 January 2000 the respondent obtained judgment against the applicant for the total amount of tax and penalties which was the subject of the four amended assessments (“the Tax Debt Judgment”).  

5                     On 22 February 2000 the applicant applied to the Tribunal for review of the respondent’s decisions to disallow those objections. 

6                     On 26 May 2000, the applicant presented a petition in bankruptcy against himself (i.e. a debtor’s petition) under s 55 of the Bankruptcy Act 1966 (Cth) (“the Act”).  On the same date, pursuant to s 156A(3) of the Act, Mr Geoffrey Frank Totterdell was appointed as trustee of the bankrupt estate of the applicant.  On 15 August 2000, Mr Totterdell wrote to the Tribunal advising that he did not intend to pursue the applications before it “… in my capacity as bankruptcy trustee”. 

7                     On 27 October 2000, the respondent filed with the Tribunal a document headed “Respondent’s Submissions on Standing”.  This would appear to have been pursuant to a direction given by the Tribunal on 12 September 2000. 

8                     It is convenient to set out here some of the details of the further procedural history of the matter because the appellant contends that the Tribunal denied him procedural fairness.

9                     On 3 November 2000, the Tribunal made some further directions.  It directed:

·          the applicant to file and serve a response to the respondent’s submissions on standing on or before 24 November 2000; 

·          the respondent to file and serve a reply to that response before 8 December 2000; and

·          that the matter be listed “for a hearing to determine the question of jurisdiction” as soon as practicable after 8 December 2000.

10                  On 26 March 2001, the Tribunal conducted a hearing on the question whether the appellant had standing to prosecute the applications for review.  That hearing was adjourned to allow the parties to file further documents including submissions.  The Tribunal made orders in the following terms:

‘1.        The applicant to file with the Registry a copy of his Statement of Affairs filed in relation to his bankruptcy, and any other relevant documents made (sic) in his “Reply to the respondent’s Response to the Applicant’s Submissions”, and serve copies on the respondent, on or before 9 April 2000. [On 24 April 2001 the Applicant sent a letter to the Tribunal enclosing various documents including a copy of his Statement of Affairs].

2.         The respondent to file with the Registry any submissions relevant in response to the abovementioned Direction 1, and serve a copy on the applicant, on or before 23 April 2001.  [The respondent filed its further submissions on 9 May 2001]. 

3.         The applicant to file with the Registry a response to the abovementioned Direction 2, and serve a copy on the respondent, on or before 30 April 2001.’  [I was informed by counsel for the applicant that on 20 June 2001 the applicant filed and served a document headed “Applicant’s Reply to the Respondent’s Further Submissions].

11                  For reasons which were published on 20 June 2001, in which there was no reference to the applicant’s document of the same date, the Tribunal made the following decision: 

‘Notwithstanding the applicant having, on 22 February 2000, made valid applications pursuant to s 14ZZ of the Taxation Administration Act 1953 for a review of objection decisions in relation to the years of income ended 30 June 1989 to 30 June 1992 inclusively, by reason of the applicant having entered into voluntary bankruptcy on 26 May 2000 and the appointment on that day of a trustee in bankruptcy for the applicant’s estate, the applicant lost standing on that day to continue those applications, that standing having been vested in the applicant’s trustee in bankruptcy by operation of law.’

the appeal

12                  Although the notice of appeal lists 17 questions of law and 19 grounds of appeal, it was common ground that there were only two issues in the appeal.  The first was whether the applicant continued to have the necessary standing or interest to proceed with his applications for review before the Tribunal of the respondent’s objection decisions despite having entered into voluntary bankruptcy since making those applications.  In short, was he still “… a person dissatisfied …” with those decisions within the meaning of s 14ZZ of the Taxation Administration Act 1953 (Cth)?  The second issue was whether, in all the circumstances, the Tribunal had denied the applicant procedural fairness by deciding that he lacked standing or interest without giving him an opportunity to present oral and documentary evidence about matters relied on or otherwise considered in reaching that decision. 

the first point: was the applicant “… a person dissatisfied …”?

13                  In summary, the applicant contended that he was a person dissatisfied with the objection decisions for the following reasons:

(a)        if he were entirely successful in the review of the objection decisions before the Tribunal, the very basis of his ongoing bankruptcy would be eliminated, he would be entitled to have his bankruptcy annulled and thereupon to recover his assets which became part of his bankrupt estate and were “paid out” to his creditors, including the respondent;

(b)        he could still be personally liable for some or all of the Tax Debt Judgment by virtue of the operation of s 221H(2) of the ITA Act when read with Divisions 3 and 3A of Part IIB of the Taxation Administration Act (and in particular ss 8AAZL to 8AAZLF inclusive of that Act), notwithstanding the operation of ss 58(3)(a) and 82 of the Act;

(c)        (i)         the respondent was only able to obtain the Tax Debt Judgment by relying on the provisions of s 177(1) of the ITA Act and s 14ZZM of the Taxation Administration Act which effectively allowed the respondent to recover the total amount of the amended assessments despite the fact that the applicant had objected to those assessments and sought review in the Tribunal of the respondent’s decisions to disallow the objections;

            (ii)        he had filed his own petition in bankruptcy only after receiving legal advice that this would be the best course and that by doing so he would not be prevented from pursuing his applications for review of the objection decisions before the Tribunal.  He had lodged those objections for review only after obtaining legal advice that he had excellent prospects of success;

(d)        as an undischarged bankrupt he had been unable to obtain any credit or to be a director of any company, which had effectively prevented him from taking up business opportunities and earning income;

(e)        the pursuit of the applications for review would have no adverse effect on his bankrupt estate, irrespective of their outcome.  His trustee in bankruptcy had no objection to the applicant pursuing the application for review before the Tribunal.

some further details of the appellant’s contentions, and my reasoning on this point

The consequences of an entirely successful review

14                  In my view, the decision of the High Court of Australia in Cummings v Claremont Petroleum NL (1996) 185 CLR 124 as applied by a Full Court of this Court in McCallum v Commissioner of Taxation (1997) 75 FCR 458 presents a significant obstacle in the applicant’s path.  The Tribunal expressly relied on these two authorities in reaching its decision. 

15                  In Cummings, the High Court held, by a majority, that a bankrupt has no locus standi to institute an appeal under s 24 of the Federal Court of Australia Act 1976 (Cth).  That was because, so far as a judgment entered against a bankrupt creates or evidences a provable debt in the bankruptcy, the bankrupt has no financial interest which confers locus standi to appeal in his own name against the judgment.  Even his contingent interest in a surplus in the estate did not give him such an interest.  The majority, Brennan CJ, Gaudron and McHugh JJ also held that a judgment debtor’s right to appeal was not “property” within the meaning of that term in s 5(1) of the Act. 

16                  The other two judges in Cummings, Dawson and Toohey JJ, held that a right of appeal was property and that because that property had vested in the trustee in bankruptcy, a bankrupt could not in his own name appeal from a judgment which was enforceable only against the estate which was vested in his trustee. 

17                  In McCallum the taxpayer objected against some amended assessments.  He was made bankrupt on a creditor’s petition (not the Commissioner’s) before the Commissioner disallowed his objections.  Following such disallowance, Mr McCallum applied to the Administrative Appeals Tribunal for review of the Commissioner’s objection decisions. 

18                  The Commissioner conceded that the right to pursue an appeal against the Commissioner’s objection decisions was not “property” which vested in Mr McCallum’s trustee in bankruptcy.  The Commissioner submitted, by analogy with Cummings, that Mr McCallum had no locus standi to prosecute an application for review of an objection decision. 

19                  The majority in McCallum (Lehane J with whom Whitlam J agreed) held that there was no relevant distinction in principle between the right to seek review of an objection decision and the right to prosecute an appeal against a judgment debt (see p 472).  At 475 Lehane J said this:

‘Thus, with great respect, [clearly referring to Hill J’s views in dissent] I am unable to see any firm basis on which the principle laid down in Cummings should be held not to be applicable here.  If, in the one case, standing is lost because the debt concerned is payable solely out of the bankrupt estate, and is no longer otherwise recoverable from the debtor, I can see no reason why that is not equally so in the other case; and if, in the one case, it makes no difference that success in an appeal may result in a surplus in the estate (Cummings at 138) I cannot see why it does not equally make no difference in the other case, where a successful review may equally result in a surplus.’ 

20                  His Honour, later on the same page, then expressed the opinion that the decision in Cummings was applicable to that case and that Mr McCallum was “likely to lack standing” to apply to the Tribunal for a review of the objection decision.  It is the next passage upon which the applicant in this appeal relies:

‘I use the phrase “is likely to” deliberately: he will not have standing merely because, for example, a successful challenge to the objection decision may result in a surplus in his bankrupt estate or because of any effect that the assessments and the objection decision may have upon his reputation.  It is conceivable, however, that there may be some other footing in which he could claim standing: for example, it may be that an objection decision in relation to a particular assessment will have consequences in relation to tax payable, perhaps in years following discharge from bankruptcy, for which Mr McCallum will be personally liable.  Such a possibility was not canvassed in argument, and I express no opinion about it.  There seems to be no difficulty in principle, in such a case, in according standing concurrently to a bankrupt and to the bankrupt’s trustee in bankruptcy: United Telephone Co v Bassano (1886) 31 Ch D 630.’ 

21                  Hill J, in dissent, held that it was not necessary to determine whether the trustee in bankruptcy could pursue objections and appeal procedures under the Taxation Administration Act (see p 468).  But his Honour held that as a matter of statutory construction of the expression “dissatisfied” Mr McCallum had standing as a person dissatisfied with the Commissioner’s objection decision, within the meaning of s 14ZZ of the Taxation Administration Act.  He distinguished Cummings as being a case which involved standing in a court of appeal. 

22                  Mr N Rosenbaum, counsel for the applicant, submitted that the Courts in Cummings and McCallum only considered situations in which the proceedings which the undischarged bankrupt wished to pursue would, if successful, result at best in a greater dividend being paid to the remaining creditors.  He submitted that neither case contemplated the situation where the successful outcome of the proceedings would eliminate entirely the basis of the bankruptcy itself, as would be the situation, so it was contended, in the present matter.  I doubt whether on the facts, there was such a distinction.  It appears (see p 467) that Mr McCallum was seeking to lay the groundwork for an application for annulment of his bankruptcy.

23                  But, in my view, the distinction which the applicant seeks to draw between a successful taxation review resulting in a surplus to the estate on the one hand and the basis (put forward in this case) for an application for annulment of bankruptcy on the other hand, is not a valid one.  Both have as their factual basis the contingency that success in the review proceedings may result in a surplus to the estate.  It is quite clear from the High Court’s decision in Cummings and the majority judgments in McCallum that the reason why the bankrupt loses standing is because the debt concerned is payable solely out of the bankrupt’s estate, and is no longer otherwise recoverable from the debtor.  It makes no difference that success in an appeal (Cummings at 138) or any review might result in a surplus (McCallum at 475). 

Future personal liability

24                  In essence, the applicant’s contention that he may in future, after his discharge from bankruptcy, become personally liable for the Tax Debt Judgment, and notwithstanding his bankruptcy, relates to the possibility that in future he may be an employee.  His employer may make deductions in accordance with the ITA Act in excess of the tax payable in any particular year thus giving rise to a credit.  But for the operation of the sections upon which the applicant relies, the amount of that credit would be payable to him.  The effect of those sections, so the applicant contends, would be that that credit will be offset against some or all of the Tax Debt Judgment.  The applicant says that possibility gives him sufficient standing or interest to continue with his applications for review before the Tribunal.  I turn to the various statutory provisions upon which the applicant relies for that proposition. 

25                  Section 221H(2) of the ITA Act relevantly provides that if an employer has made any deductions in respect of an employee and an assessment has been made of the tax payable, or the Commissioner is satisfied that no tax is payable, by the employee in relation to the year of income, the employee is entitled to a credit equal to the sum of the deductions.  The mechanism for refunding and the application of any excess deductions is found in Division 3 of Part IIB of the Taxation Administration Act. 

26                  Section 8AAZL of the Taxation Administration Act provides that Division 3 sets out how the Commissioner must treat certain payments which he receives in respect of a current or anticipated tax debt or tax debts of an entity, a credit (including an “excess non-RBA credit” – “RBA” is explained below) that an entity is entitled to under a taxation law, and an RBA surplus of an entity.  The term “tax debt” is defined in s 8AAZA as meaning a primary tax debt or a secondary tax debt.  The same section provides that a primary tax debt means any amount due to the Commonwealth directly under a taxation law, including any such amount that is not yet payable.  Section 2 of the Taxation Administration Act relevantly provides that a taxation law is any law of which the Commissioner has the general administration.  The Commissioner has the general administration of the ITA Act pursuant to s 8 of that Act.  The term “entity” is defined, by s 8AAZA of the Taxation Administration Act, as meaning any of the following, namely, a company, partnership, a person in a particular capacity of trustee, a body politic, a corporation sole, or “any other person”. 

27                  Section 8AAZC of the Taxation Administration Act provides that the Commissioner may establish one or more systems of accounts for primary tax debts, that each account is to be known as a Running Balance Account (or “RBA”), that an RBA may be established for any entity, on any basis that the Commissioner determines, and that separate RBAs may be established for different types of primary tax debts. 

28                  Section 8AAZLA of the Taxation Administration Act relevantly provides that the Commissioner may allocate a payment received in respect of a current or anticipated tax debt or a credit that an entity is entitled to under a taxation law to an RBA of the entity.  If so he must then apply such amounts against tax debts that have been allocated to that RBA and any general interest charge on such tax debts. 

29                  Mr Rosenbaum submitted that the Commissioner would be able, pursuant to these provisions, to apply any tax credits to which the applicant may become entitled as a result of any future employment, in satisfaction of some or all of the Tax Debt Judgment.  He relied upon a decision of a Full Court of this Court, Taylor v Deputy Federal Commissioner of Taxation (1987) 87 ATC 4,441 for that proposition.  Accordingly, the applicant had sufficient standing or interest to be a person dissatisfied with the objection decisions. 

30                  In my view, the decision in Taylor does not give rise to any such principles of personal liability on the applicant’s part in this matter.  In Taylor the Full Court simply held that the Commissioner had correctly applied, and was entitled to apply, the set-off provisions of s 221H(2)(b) of the ITA Act, notwithstanding the provisions of s 58(3)(a) of the Act which preclude a creditor from enforcing any remedy against the property of a bankrupt in respect of a provable debt.  The rationale of Taylor can be seen in the judgment of Jenkinson J (with whom Woodward and Northrop JJ agreed) at 4,450 to the effect that money deducted by an employer from an employee’s wage loses its identity upon payment into the consolidated revenue fund and was not property of the applicant bankrupt in that matter.  The same applies, in my view, in relation to the balancing of payments, credits and the like in Part IIB Div 3 and 3A of the Taxation Administration Act. 

31                  It is true that in Taylor Jenkinson J (with whose reasoning Woodward and Northrop JJ agreed – see p 4,447) expressed the view, at 4,449, that the operation of Div 2 of Part VI of the ITA Act was independent of the operation of bankruptcy law in relation to employees.  But a substantial part of that reasoning was based on the then current statutory treatment under the Act of personal earnings of the bankrupt, and the extent of statutory protection provided by the ITA Act to employees in relation to amounts deducted by employers.  I think that it is important to note that (at the foot of p 4,449), after finding that s 221H(2) entitled the Commissioner to the set-off, Jenkinson J said this: 

‘Whatever remains unpaid at the conclusion of that process will be the measure of any provable debt, in my opinion.’

32                  The Full Court in Taylor was not concerned with the operation of s 153 of the Act, but nothing in Jenkinson J’s reasoning would deny giving full effect to s 153 so that upon discharge, a bankrupt would be released by the operation of that section from the provable debt resulting from the balancing process which their Honours considered to be required by s 221H(2).

33                  No question arises about any relevant personal liability on the applicant’s part in this case.  Upon his discharge from bankruptcy, s 153(1) of the Act operates to release the applicant from all debts provable in the bankruptcy.  None of the exceptions referred to in s 153 have any application in this matter.  Discharge from bankruptcy releases the applicant from the tax liability to which he was subject at the time he became bankrupt.  That release from the tax liability means that no part of the tax debt which was the subject of the Tax Debt Judgment will be capable of allocation to a Running Balance Account. 

The manner in which the Tax Judgment was obtained and why the applicant filed his petition

34                  In my opinion, even if the factual basis for the assertions summarised at paragraph [13(c)] above had been established, the statutory regime limiting challenges to income tax assessments to the objection and review procedures cannot in themselves confer interest or standing upon the applicant sufficient to maintain his status, after becoming bankrupt, as a “person dissatisfied” within the meaning of s 14ZZ of the Taxation Administration Act.  That would, in my view, be to fly in the face of what was decided in Cummings and McCallum. 

35                  In relation to the matter of the applicant having acted on legal advice, the Tribunal said this: 

‘18.   The remaining ground of submission by the applicant is that his decision to go into voluntary bankruptcy following judgment being obtained by the respondent was precipitated by legal advice to the effect that in doing so he would not prejudice his right to contest the objections at the Tribunal.  The applicant was not able to provide any documentary evidence that he was so advised, even though he had ample opportunity to do so.  In any event, even though wrong legal advice may possibly be a mitigating circumstance, that for reasons already expressed, it would not assist the applicant.’ 

36                  Whether the applicant acted upon legal advice in lodging his own petition is, in my opinion, irrelevant. 

Inability to obtain credit or serve as a director; no adverse effect on the estate

37                  Once again, applying the principles explained in Cummings and McCallum, in my opinion, none of the remaining factors relied upon by the applicant enable him to maintain his previous status of a person dissatisfied with the objection decision.  His concerns about obtaining credit and serving as a director are, in reality, dissatisfactions with his status as a bankrupt. 

procedural fairness

38                  The applicant contended that the Tribunal had denied him procedural fairness by denying him a proper opportunity to present oral and documentary evidence in relation to (but said not to be limited to) two matters, namely:

·          the fact that he decided to lodge his bankruptcy petition on the basis of legal advice that this would not prejudice his ability to pursue the applications for review; and

·          “the extent of the liabilities claimed by the Respondent in the bankruptcy of the Applicant”.

39                  The respondent, in my view quite sensibly, did not deny that the Tribunal was obliged to accord procedural fairness to the applicant.  In my opinion, it was clearly obliged to do that. 

40                  I have earlier in these reasons referred to the directions which were made both before the hearing by the Tribunal and at the conclusion of the first day of the hearing.  The applicant was given ample opportunity, in my view, to place before the Tribunal any evidentiary material or further submissions.  In addition to the hearing on the standing point, the Tribunal’s directions provided for both pre-hearing and post-hearing submissions.  The applicant was represented by counsel (via telephone) at the hearing. 

41                  As to the extent of the liabilities claimed by the respondent, it is apparent (from p 5 of the Tribunal’s reasons), and not in issue, that the applicant chose to file, out of time, a copy of his Statement of Affairs.  That document was in evidence before me.  Whilst it did not give a figure for the income tax claimed by the Australian Taxation Office, there was a reference, under the heading “unsecured creditors”, to the Australian Taxation Office and a judgment debt.  Also in evidence was the respondent’s proof of debt dated 8 September 2000 in the sum of $589,978.49.  That document shows that the trustee admitted the respondent’s proof of debt in that amount. 

42                  The applicant was unable to point to any evidence which he may have wished to put before the Tribunal about “the extent of the liabilities claimed by the Respondent” in his bankruptcy.  There were some oral submissions to the effect that the Tribunal had misunderstood the quantum of the debts owed to secured creditors as shown in the applicant’s statement of affairs.  Although in the relevant paragraph there may be some ambiguity in the Tribunal’s reference to the assets of the estate and the extent to which those assets were subject to security, I do not think it made any such error.  It is, in my view, sufficiently clear from the figures set out later in that paragraph that the Tribunal appreciated that the amount secured was $60,000 not $260,000.  But even if it had made such an error, I am satisfied that evidence about the correct quantum of secured debts would have made no difference to the outcome.  

43                  The applicant submitted that the respondent’s further submissions to the Tribunal went beyond the Tribunal’s directions orders made on 26 March 2001 but dated the following day.  In my view, a fair reading of those further submissions is that they were in response to the matters contained in the applicant’s Statement of Affairs, or were otherwise responsive to the documents forwarded by the applicant to the Tribunal under cover of his letter dated 24 April 2001, save for paragraphs 8, 9 and 10 of the respondent’s further submissions.  Those three paragraphs related to the applicant’s prospects of success on the s 23(pa) point, if the matter went to a hearing.  The Tribunal made no reference to that part of the submissions in its reasons. 

44                  In any event, the question whether the applicant continued to be a “person dissatisfied” with the objection decisions was largely one of law.  In my view, the Tribunal did not deny the applicant procedural fairness.  On the contrary, I think that it gave him ample opportunity to put his case before it.  Mr Rosenbaum was the counsel referred to above who appeared for him before the Tribunal by telephone and (so I was told from the bar table) took it through Taylor’s case in some detail. 

Conclusion

45                  After I had reserved judgment the respondent’s solicitor (with the applicant’s consent) wrote to my associate advising that the applicant had been discharged from bankruptcy, by the effluxion of the statutory three year period, on 27 May 2003.  The letter also stated that neither party believed that that fact required any further submissions.  I agree.

46                  For the foregoing reasons the appeal will be dismissed with costs.

Associate:

Dated:              8 September 2003