Federal Court Denies Tax Creditor’s Attempt to Amend Bankruptcy Petition

OUTCOME: [NAME]'s petition - conditions on which a [NAME] may petition - amendment to petition - debt - income tax - whether debts due and payable after issue of notice of assessment can be substituted for amount in petition already paid by [NAME] - debt must exist at date of relevant act of bankruptcy INCOME TAX - bankruptcy - income tax not due until assessed and notice of assessment served Bankruptcy Act 1966: ss. 44(1), 52, 82, 115 Income Tax Assessment Act 1936: ss. 207(2), 208B [NAME]; EX [NAME] OF TAXATION NP 1080 of 1995 LOCKHART J. 26 APRIL 1996 SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA) ) NEW SOUTH WALES DISTRICT REGISTRY) No. NP 1080 of 1995 ) GENERAL DIVISION ) RE: [NAME] [NAME] EX PARTE: [NAME] OF TAXATION Petitioner

JUDGE MAKING ORDER: LOCKHART J. WHERE ORDER MADE: SYDNEY DATE ORDER MADE: 26 APRIL 1996

MINUTE OF

ORDER THE COURT ORDERS THAT:

1. The motion by the petitioning [NAME] to amend paragraph 2 of the petition is dismissed.

2. The petition is dismissed.

3. The [NAME] shall pay the costs of the petitioning [NAME] of the petition up to and including 31 October 1995; and the petitioning [NAME] shall pay the costs of the [NAME] of the petition after that date; in each case including reserved costs, if any.

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

26 APRIL 1996

REASONS FOR

JUDGMENT LOCKHART J. The question in this case is whether the petitioning [NAME], the [NAME] of Taxation, is entitled to amend the petition which he presented on 29 May 1995, seeking sequestration of the estate of the [NAME], [NAME]. The petition asserts that the [NAME] is indebted to the [NAME] in the sum of $77,822.30, being (a) the amount due under a final judgment ($8,444.70 for income tax and $184.63 interest); and (b) a further $36,181.45 as a judgment debt for tax instalment deductions and additional amounts for late payment and relevant penalties less certain remissions. The act of bankruptcy on which the petition is based is the failure of the [NAME], on or before 31 January 1995, to comply with the requirements of a bankruptcy notice served on him on 10 January 1995, or to satisfy the Court that he has the requisite counter-claim, set-off or cross-demand. After the presentation of the petition the [NAME] paid to the [NAME] the amount of $77,822.30 claimed in the petition. When the petition was called on for hearing, counsel for the [NAME] sought leave to amend paragraph 2 of the petition in the following terms: '2. The [NAME] is justly and truly indebted to the petitioner in the sum of $161,437.26 being:- The amount due under the final judgment recovered in the [ADDRESS] of New South Wales at [ADDRESS], Newcastle on the 16th day of November, 1994 ($8,444.70) for income tax and ($184.63) interest thereon to 31 January 1995. Together with ($36,181.45) further Judgment debt for Tax Instalments Deductions, ($29,595.00) tax instalment deductions due, ($1392.99) additional amounts for late payment and ($2023.53) relevant penalties less remission thereon to the 2nd day of May, 1995. Less the sum of $77,822.37 remitted to the [NAME] on 30 October 1995. Together with an amount of $25,349.25 comprising of further non-remitted tax instalment deductions of $20,844.05 for the period 1 April 1995 to 31 August 1995, together with $1310.35 relevant penalty less remission, and $3194.85 additional amounts for late payment thereon to the 17th day of April, 1996. Together with an amount of $28,178.36 which comprises of Income Tax for the year ending 30 June 1994 issued on the 24th day of July, 1995 which detailed an amount of $106,153.44 as payable, less $84,888.46 credited, $2786.34 additional amount for late payment, $4127.04 penalty interest thereon to the 17th day of April 1996. Together with an amount of $80,575.63 which comprises Provision Tax for the year ending 30 June 1995 issued on the 24th day of July, 1995 which detailed an amount of $102,241.00 as payable, less $30,684.00 credited, $3 649.68 additional amount for late payment, $5368.95 penalty interest thereon to the 17th day of April 1996. Together with an amount of $27,334.09 first Quarterly Provisional Tax Instalment for the year of Income ending 30 June 1996 issued on 1 August 1995 for an amount of $25,560.00 which became due and payable on 1 September 1995 less $1238.00 credited, $1219.19 additional amount for late payment, $1792.90 penalty interest thereon to 17 April 1996.' The additional claims of the [NAME] arise in the following circumstances. A notice of assessment of income tax for the year ending 30 June 1994 was issued by the [NAME] to the [NAME] on 24 July 1995, stating that an amount of $106,153.44 was payable on 28 August 1995. Amendments were made to the assessments for the financial years ended 30 June 1993 and 30 June 1994, resulting in total credits in favour of the [NAME] of $35,090.79; they were employed to reduce the amount of $106,153.44. A credit of $49,797.50, resulting from the 1995 assessment, further reduced that amount. The outstanding balance of $21,265.15 remains unpaid and was not included in the petition. A provisional tax notice for the year of income ended 30 June 1995 was issued by the [NAME] on 24 July 1995 and stated that an amount of $102,241 was payable. An adjustment to provisional tax calculations on 25 January 1996 resulted in a credit in favour of the [NAME] of $30,684. The outstanding balance of $71,557 remains unpaid and was not included in the petition. Group tax due by the [NAME] to the [NAME] for the period of 1 April 1995 to 31 May 1995 amounts to $20,844.05. This amount remains unpaid and was not included in the petition. Quarterly provisional tax in the amount of $24,322 for the 1996 year of income remains unpaid and was not included in the petition. The present indebtedness of the [NAME] to the [NAME] is $268,847.60, consisting of tax the liability for which, the [NAME] asserts, arose prior to the presentation of the petition, although the assessment was issued after the date of presentation of the petition, and the liability to pay the tax arose after that date. The [NAME] opposes the amendments to the petition.

The [NAME] asserts that he is entitled to have the amendments made to the petition for the following reasons. Section 44(1) of the Bankruptcy Act 1966 ('the Act') is in the following terms: "44(1) A [NAME]'s petition shall not be presented against a [NAME] unless: (a) there is owing by the [NAME] to the petitioning [NAME] a debt that amounts to $1,500 or 2 or more debts that amount in the aggregate to $1,500, or, where 2 or more creditors join in the petition, there is owing by the [NAME] to the several petitioning creditors debts that amount in the aggregate to $1,500; (b) that debt, or each of those debts, as the case may be: (i) is a liquidated sum due at law or in equity or partly at law and partly in equity; and (ii)is payable either immediately or at a certain future time; and (c) the act of bankruptcy on which the petition is founded was committed within 6 months before the presentation of the petition.' Section 52(1) of the Act provides that the Court shall require proof of the fact that the debts on which the petitioning [NAME] relies are still owing. Section 204 of the Income Tax Assessment Act 1936 ('the Assessment Act') provides that tax is due and payable on the date specified in the notice of assessment. Thus, so it was argued, although none of the later tax was due and payable at the time the petition was presented, the liability to pay income tax arises at the end of each financial year. Hence, so the argument proceeded, on the date of presentation of the petition the liability to pay the tax had already arisen, although the tax was not due and payable until August 1995. Counsel for the [NAME] then turned to s. 207(2) which provides that the Commissioner may sue for the recovery of unpaid tax immediately when it becomes due and payable. By this reasoning, the liability to pay the 1994 tax arose prior to the presentation of the petition, and the later tax is now a liquidated sum and is immediately payable. Counsel for the [NAME] laid emphasis on s. 208B of the Act (the terms of which I shall set out later). It was said that the section entitles him to apply any payment by a [NAME] as he sees fit, including the reduction of the total debt outstanding and then proceeding for the balance. In these circumstances, if the full present indebtedness of the [NAME] is considered, the debts upon which the Commissioner wishes to rely are still due and owing. However, the solicitor for the [NAME] observed that, when the [NAME] paid the Commissioner $77,822.30 after the presentation of the petition, the Commissioner applied that amount in discharge of the [NAME]'s indebtedness as claimed in the petition. He did not apply it towards the tax which later fell due and became payable. Counsel for the [NAME] relied upon the fact that, when considering a [NAME]'s solvency for the purposes of s. 52(2)(a) of the Act, the Court looks at solvency at the time of the hearing, not at the time of presentation of the petition or at the earlier date of commission of the relevant act of bankruptcy. It was submitted that each of the debts sought to be relied upon by way of amendment to the petition would be a provable debt if a sequestration order were to be made on the petition, since bankruptcy is deemed to commence at the date of the commission of the first available act of bankruptcy (s. 115), whereas the relevant date for determining what debts are provable in the bankruptcy is the date of the bankruptcy (s. 82). The solicitor who appeared for the [NAME] argued that tax did not become due and payable until the date for payment specified in the relevant notices of assessment, and accordingly, that each of the debts relied on by the Commissioner to support the amendment must have been in existence in the sense that they must satisfy the provisions of s. 44(1) of the Act; at the date of the presentation of the petition, each of the debts must be not only a liquidated sum due at law or in equity, but also payable either immediately or at a certain future time - at the date of the commission of the act of bankruptcy or at the date of presentation of the petition. Even if there were a liability, he argued, there were no debts due at any relevant time. In these circumstances, therefore, these further and later debts cannot be substituted for the amount set out in the [NAME]'s petition and paid by the [NAME] to the [NAME]. It is well established that the debt, upon which a petition and a sequestration order are based, must be a debt which existed at the date of the relevant act of bankruptcy: Moss v Smith (1808) 1 Camp 489; 170 ER 1031; Ex parte [NAME]; In re [NAME] (1871) LR 6 Ch App 546; Re [NAME]; Ex parte d'Arcy & Co (1890) 1 BC(NSW) 53; In re Debtors [1927] 1 Ch 19; McNamara v Langford (1931) 45 CLR 267; In re a [NAME]; Ex parte the [NAME] v Scott [1954] 1 WLR 1190; Re [NAME]; Ex parte Commissioner of Taxation (1969) 15 FLR 256 per [NAME]. at 257; [NAME] v Elder Smith Goldsborough Mort Limited (1976) 133 CLR 637 at 639; [NAME] v [COMPANY] (1981) 51 FLR 317 at 323. The question in this case is whether the debts due by the [NAME] to the Commissioner, which are sought to be substituted as the debts to found a sequestration order, were in existence at the time of the relevant act of bankruptcy, namely, 31 January 1995. Certain monies due by the [NAME] to the [NAME] answered that description; but those debts were discharged when the Commissioner accepted payment from the [NAME] of $77,822.30, after the presentation of the petition. In this regard, the critical section is s. 44(1) of the Act, which is set out earlier. It is well settled that liability to income tax is imposed by the Assessment Act itself. But there is some divergence of opinion over whether income tax becomes due before the assessment of tax has been made, or upon assessment and service of notice of the assessment. In Re [NAME], [NAME]. said at 259-260: 'It is now settled that the effect of these and similar provisions [a reference to ss. 17, 204, 208 and 209 of the Assessment Act in the form which it took in 1969] is that the liability to income tax is imposed by the statute itself and that assessment is only a method of ascertaining the extent of the liability, so that the tax is a debt due and owing, although not payable, notwithstanding that no assessment has been made ... . At the dates of the acts of bankruptcy in the present case the tax in respect of the years 1962 to 1967 was therefore due and owing, and since, at those dates the notices of assessment had been issued, fixing both the time for payment and the amount payable, the debt was for a liquidated sum payable at a certain future time. The tax was not payable at the dates of the acts of bankruptcy, but, as I have said, that is immaterial. ... The Commissioner was therefore entitled to present the present petition. In the case of the tax in respect of the year 1968, no assessment had been issued at the dates of the acts of bankruptcy, and it seems to me that, although the tax was owing at those dates, it was then neither liquidated nor payable either immediately or at a certain future time. As at present advised, therefore, I would hold that the Commissioner is not entitled to petition in respect of the debt representing that tax, but the erroneous inclusion of this debt does not render the petition invalid.' In [NAME] v Commissioner of Taxation (1987) 16 FCR 212 Woodward and Northrop JJ. in a joint judgment, after referring to the judgment of [NAME]. in [NAME], said at 217: 'A consideration of decisions by the High Court shows that income tax does not become due until it is assessed and notice of the assessment is served. This is made clear by what was said in [NAME] v [NAME] of Taxation (1981) 150 CLR 1.' In [NAME]'s Case, Gibbs C.J., after referring to s. 17 of the Assessment Act, said at 9: 'These provisions suggest that the 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. ...'

His Honour continued at 9-10 (in a passage also cited by Woodward and Northrop JJ. in [NAME]):

'This may be the correct view for most practical purposes. Certainly a notice under s. 218 could not be given before the taxpayer had been assessed, for until that time "the amount due by the taxpayer" could not be ascertained. However, all the authorities to which I have referred are opposed to the view which Williams J. expressed in [COMPANY] v Federal Commissioner of Taxation [(1949) 9 ATD 43 at 46] and seems to have repeated in [NAME] v [NAME] [(1958) 100 CLR 32 at 50], that tax becomes due only when it is payable. At the latest when tax is assessed it becomes a debt due to the Crown although it is not payable until the later date specified in the notice of assessment.

For these reasons when the word "due" is used in the Act, without the accompanying words "and payable", it will prima facie mean simply owing.' Also in [NAME] J., with whose reasons for judgment [NAME] JJ. agreed, said at 16-17: 'However 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 s. 204. Dixon C.J., [NAME], Williams, Webb and Fullagar JJ. in [NAME] v Federal Commissioner of Taxation [(1952) 86 CLR 183 at 207] said that "tax is only due after it is 'assessed' (see, for example, s. 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 [NAME]. in Re [NAME]; Ex parte Federal Commissioner of Taxation [(1969) 15 FLR 256 at 259]. This approach can be traced back to the majority decision of this Court in Commissioner of Stamps (WA) v West Australian Trustee, Executor and Agency Co Ltd ([NAME]'s Case) [(1925) 36 CLR 98 esp. at pp. 105, 116 and 118]. 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. The decision was so explained by [NAME]. (dissenting) in [NAME] v [NAME] [(1958) 100 CLR 32 at 63-64] and this explanation derives support from the judgments of Higgins and Starke JJ., if not from the judgment of the third member of the majority, [NAME]., in [NAME]'s Case.' It was this review of the authorities which led Woodward and Northrop JJ. to say in [NAME] at 217 that a consideration of the High Court's decisions revealed that income tax does not become due until it is assessed and notice of the assessment is served. Whether income tax is due before it is assessed, or only after it is assessed and notice is served of that assessment, is not a matter which I need consider further in this case, because none of the debts which the Commissioner relies on to found the proposed amendment to the petition can be said to have been on 31 January 1995 a liquidated sum payable either immediately or at a certain future time. The cases to which I have referred, including [NAME], are clear authority for this conclusion. The debts which the [NAME] asks to be substituted include income tax and provisional tax payable in respect of the years ending 30 June 1994, 30 June 1995 and 30 June 1996. The assessments in respect of those amounts were not issued until 24 July 1995 and 1 August 1995, and the relevant amounts became due and payable on 28 August 1995 and 1 September 1995 - all dates later than 31 January 1995. Similarly, the non‑remitted tax instalment deductions, relevant penalties less remission, and additional amounts for late payment relate to periods after 31 January 1995. It follows that a sequestration order cannot be founded on any of these debts; hence the amendment must be refused. Counsel for the [NAME] relied on s. 208B of the Assessment Act in support of his argument that the debts the subject of the proposed amendment can found the making of a sequestration order. Section 208B reads as follows: '208B(1) In this section, "debt to which this section applies" means a debt owing to the Commonwealth under section 208. 208B(2) Where: (a) 2 or more debts to which this section applies are owing by a person; (b) an amount is paid to or credited by the Commissioner, or an amount is paid to and an amount is credited by the Commissioner, in respect of all or any of the debts; and (c) the total amount of the debts exceeds the amount so paid or credited or the sum of the amounts so paid and credited, as the case may be, the Commissioner may, notwithstanding any directions given to him by or on behalf of the person by whom the debts are owed, apply the payment or the credit, or the payment and the credit, in partial discharge of the total amount of the debts and recover the amount by which the total amount of the debts exceeds the amount of the payment or credit, or the sum of the amount of the payment and the amount of the credit, as the case may be, without allocating the payment or the credit, or the payment and the credit, towards the discharge of any particular debt or debts.'

In my opinion s. 208B has no relevance to the present question, if only because the [NAME] in fact applied the payment of $77,822.30, made by the [NAME] after the presentation of the petition, in discharge of the debts on which the petition was initially founded. It is not necessary, therefore, to give any further consideration to s. 208B in this case. The application to amend the petition and the petition itself must be dismissed. On the question of costs, the parties do not dispute that the [NAME] is entitled to his costs of the petition up to and including 31 October 1995, when the [NAME] paid the [NAME] $77,822.30. As the [NAME] has succeeded in resisting the petition after that date, in my opinion, the [NAME] should be ordered to pay the [NAME]'s subsequent costs. The orders of the Court are as follows:

2. The petition is dismissed.

I certify that this and the preceding fourteen (14) pages are a true copy of the reasons for judgment herein of the Honourable Justice Lockhart. Associate Dated: 26 April 1996 Solicitors for the [NAME] : [NAME] Counsel for the Petitioner : [redacted] Solicitors for the Petitioner : [redacted] Date of Hearing : 18 April 1996 Date of Judgment : 26 April 1996