FEDERAL COURT OF AUSTRALIA Commissioner of Taxation v Park [2012] FCAFC 122 Citation: Commissioner of Taxation v Park [2012] FCAFC 122 Appeal from: Tang & Anor v Bassili & Ors [2011] FMCA 544 Parties: COMMISSIONER OF TAXATION v JOHN PARK and LLOYD LOK ING TANG File number: QUD 209 of 2011 Judges: SIOPIS, JESSUP AND KATZMANN JJ Date of judgment: 31 August 2012 Catchwords: TAXATION – a taxpayer owed a tax debt to the Commissioner of Taxation – the taxpayer entered into a contract for the sale of land - the land was the subject of two registered mortgages - the sale price of the land was insufficient to discharge the debts owed to the mortgagees – before settlement the Commissioner served upon the purchasers of the land, a garnishee notice issued under s 260-5 of Sch 1 of the Taxation Administration Act 1953 (Cth) - the garnishee notice required the purchasers to pay part of the purchase price to the Commissioner in discharge of the taxpayer's tax debt – the Commissioner claimed that he was entitled at settlement to sufficient of the proceeds of the sale of the land to discharge the tax debt in priority to the mortgagee's right to the repayment of the monies advanced to the taxpayer - whether the monies comprising the proceeds of the sale of the land were monies due to the taxpayer pursuant to the contract for the sale of the land – whether on the release of the legal charge under the mortgage to permit settlement to proceed, the mortgagee held an equitable charge over the proceeds of the sale – whether the proceeds of the sale were available monies to which the garnishee notice could attach. Legislation: Acts Interpretation Act 1901 (Cth) s 15A Bankruptcy Act 1966 (Cth) s 50 Judiciary Act 1903 (Cth) s 78B Taxation Administration Act 1953 (Cth) Sch 1 ss 260-5, 260-15, 260-20 Land Title Act 1994 (Qld) s 74 Property Law Act 1974 (Qld) ss 83, 88 Land Transfer Act 1952 (NZ) s 104 Federal Magistrates Court Rules 2001 r 11.01(3) Cases cited: Tricontinental Corporation Ltd v Commissioner of Taxation [1988] 1 Qd R 474 Foran v Wight (1989) 168 CLR 385 Clyne v Deputy Commissioner of Taxation (1981) 150 CLR 1 Bruton Holdings Pty Ltd (in liquidation) v Commissioner of Taxation of the Commonwealth of Australia (2009) 239 CLR 346 Norton v Yates [1906] 1 KB 112 Zuks v Jackson McDonald (a Firm) (1996) 132 FLR 317 Hope v Hope [1977] 1 NZLR 582 Re Murrell; Ex parte Official Trustee in Bankruptcy (1984) 57 ALR 85 AVCO Financial Services Ltd v Commonwealth Bank of Australia (1989) 17 NSWLR 679 Re S & D International Pty Ltd (in liquidation) (receiver and manager appointed) [2009] VSC 225 Aircon Heating and Airconditioning Pty Ltd (in liq) v Crane Distribution Ltd [2006] VSC 76 Buhr v Barclays Bank plc [2001] EWCA Civ 1223 Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1987) 8 NSWLR 270 Trident General Insurance Co Limited v McNiece Bros Proprietary Limited (1988) 165 CLR 107 Byrnes v Kendle (2011) 243 CLR 253 Walker v Corboy (1990) 19 NSWLR 382 Re Australian Elizabethan Theatre Trust (1991) 30 FCR 491 Goode on Legal Problems of Credit and Security (4th ed, Sweet & Maxwell, 2008) Bogert, The Law of Trusts and Trustees (Revised 2nd ed, St Paul, Minn, West Publishing Co, 1984) Date of hearing: 27 February 2012 Place: Brisbane Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 116 Counsel for the Appellant: Mr R Derrington SC with Ms M Brennan Solicitor for the Appellant: Australian Government Solicitor Counsel for the First and Second Respondents: Mr AJG Morris QC with Mr L Jurth Solicitor for the First and Second Respondents: Londy Lawyers IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY GENERAL DIVISION QUD 209 of 2011 ON APPEAL FROM THE FEDERAL MAGISTRATES COURT OF AUSTRALIA BETWEEN: COMMISSIONER OF TAXATION Appellant AND: JOHN PARK First Respondent LLOYD LOK ING TANG Second Respondent JUDGES: SIOPIS, JESSUP AND KATZMANN JJ DATE OF ORDER: 31 august 2012 WHERE MADE: BRISBANE THE COURT ORDERS THAT: 1. The appeal be allowed. 2. Declarations 1 and 2, and Order 3, made by the Federal Magistrates Court on 27 July 2011 be set aside. 3. In place of those declarations and orders: (a) It be declared that the Commissioner of Taxation is entitled to the sum of $75,508.64 paid into court on 2 June 2010, together with any accretions thereto. (b) It be ordered that the said sum and accretions be paid to the Commissioner of Taxation. 4. The appellant pay the first respondent's costs. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY GENERAL DIVISION QUD 209 of 2011 ON APPEAL FROM THE FEDERAL MAGISTRATES COURT OF AUSTRALIA BETWEEN: COMMISSIONER OF TAXATION Appellant AND: JOHN PARK First Respondent LLOYD LOK ING TANG Second Respondent JUDGES: SIOPIS, JESSUP AND KATZMANN JJ DATE: 31 august 2012 PLACE: BRISBANE REASONS FOR JUDGMENT SIOPIS J: 1 I have had the benefit of reading the reasons of Jessup and Katzmann JJ. I have come to a different view and would dismiss the appeal. 2 In order to explain my reasons for coming to this view, it is necessary to refer in further detail to some aspects of the facts, already set out by Jessup and Katzmann JJ. 3 On 19 January 2010, Mrs Milanka Bassili entered into a contract for the sale of the property at 504 Fig Tree Pocket Road, Fig Tree Pocket. There is no dispute that the contract obliged the vendor, Mrs Bassili, to transfer on settlement, unencumbered freehold title to the property. The purchasers, Mr Trevor Boevink (as trustee for the Boevink Family Trust) and Ms Karren Sullivan, agreed to pay the purchase price of $1,675,000 for the transfer of unencumbered freehold title to the property. The parties agreed that the settlement date was 18 February 2010. The contract for the sale of the property described Bevan Bowe & Associates as solicitors for the purchasers and Cooper Grace Ward as solicitors for the vendor. 4 At the time that Mrs Bassili entered into the contract of sale, there were two mortgages registered against the title of the property the subject of the contract of sale. The first mortgage in favour of the National Australia Bank (NAB) had been registered on 26 March 2008. The second mortgage in favour of Instyle had been registered on 16 December 2009. The total amount owed by Mrs Bassili which was secured by the two mortgages was in the region of $1,719,200, being approximately $1,289,000 owed to the NAB, and $430,200 owed to Instyle. This amount exceeded the purchase price. 5 By reason of the registration of each of the mortgages, each mortgagee was the beneficiary of statutory rights and powers in relation to the property, the subject of the contract of sale entered into by Mrs Bassili. These rights included the right under s 83 of the Property Law Act 1974 (Qld) to take possession of and to sell the property. Further, s 88 of the Property Law Act contains the following provision in relation to the disposal of the proceeds of sale following a mortgagee sale: (1) Subject to this section, the money arising from sale, and which is in fact received by the mortgagee, shall be held by the mortgagee in trust to be applied by the mortgagee- (a) firstly, in payment of all costs, charges and expenses properly incurred by the mortgagee as incident to the sale, or any attempted sale, or otherwise; and (b) secondly, in discharge of the mortgage money, interest and costs, and other money (if any) due under the mortgage; and (c) thirdly, in payment of any subsequent mortgages or encumbrances; and the residue (if any) of the money so received shall be paid to the person entitled to receive or entitled to give receipts for the proceeds of sale of the mortgaged property. 6 In order to perform her obligations to transfer unencumbered title at settlement it was necessary that Mrs Bassili procure the release of each of the mortgages at or before the settlement of the contract of sale. It is to be inferred that Mrs Bassili was not in a financial position to repay the debts she owed to each of the mortgagees before settlement from any other source other than the proceeds of sale, from the fact that on 5 February 2010, Mr John Park was, on the application of a creditor, Dr Lloyd Tang, ordered to take control of Mrs Bassili's property pursuant to s 50 of the Bankruptcy Act 1966 (Cth) (the bankruptcy proceeding) and that a sequestration order was made against Mrs Bassili's estate a short time thereafter. 7 It is, also, to be inferred, therefore, that at the time that Mrs Bassili entered into the contract of sale and at all times thereafter, Mrs Bassili intended to use the monies payable by the purchasers under the contract of sale, to pay the monies owed to the two mortgagees, as the means of procuring the release of the registered mortgages and, thereby, performing her obligation under the contract of sale to deliver an unencumbered title. 8 On 11 February 2010, a notice issued under s 260-5 of Sch 1 of the Taxation Administration Act 1953 (Cth) (the s 260-5 notice) was served by the Commissioner of Taxation, on Mr Boevink (as trustee) and Ms Sullivan, the purchasers under the contract of sale. The notice referred to the price payable by the purchasers under the contract of sale, the fact that Mrs Bassili owed a tax debt of $75,508.64, and demanded that the purchasers pay that amount immediately the monies became owing to the taxpayer. 9 On 12 February 2010, the Commissioner of Taxation sent a letter to the purchasers' solicitors stating that by serving the s 260-5 notice, the Commissioner was "enforcing his entitlement ahead of earlier secured creditors". The Commissioner went on to state that the garnishee "has attached to the purchase price and the purchasers' obligation in relation to the garnishee supersedes the obligation or discretion to pay money to the secured creditor". 10 On 17 February 2010, the Commissioner was joined as a party to the bankruptcy proceeding. On the same day, the Federal Magistrates Court made an order that any amount payable in respect of the discharge of the Instyle mortgage was to be paid into the trust account of Warlow Scott, solicitors representing Instyle. 11 By a letter dated 18 February 2010, addressed to the purchasers' solicitors and copied to all the other parties, the Assistant Commissioner of Taxation advised that a representative of the Australian Taxation Office (the ATO) would be attending the settlement to receive any payment which may be payable to the Commissioner by reason of the s 260-5 notice. 12 Bevan Bowe & Associates, the purchasers' solicitors, prepared a settlement statement which included provision for the delivery at settlement of a bank cheque payable to the Department of Justice & Attorney General in payment of the sum of $75,508.64 demanded in the s 260-5 notice. The settlement statement, also, provided for the delivery of a bank cheque payable to Instyle's solicitors in an amount of $251,566.09, being an amount which was $75,508.64 less than the amount Instyle had agreed to accept in consideration for its release of its second mortgage at settlement. The settlement statement, also, contemplated the delivery of releases of the registered mortgages by each of the two registered mortgagees. 13 Cooper Grace Ward, the solicitors for Mrs Bassili, rejected Bevan Bowe & Associates' settlement statement. 14 Further, Cooper Grace Ward, for the vendor, prepared a settlement statement which did not include provision for the payment of any amount to the Commissioner in respect of the demand made in the s 260-5 notice. Rather, the vendor's settlement statement provided for the delivery of a bank cheque made payable to the NAB in the sum of $1,288,901.78 and a bank cheque in the sum of $325,613.66 made payable to Warlow Scott, the solicitors representing Instyle. The settlement statement, also, made provision for the delivery at settlement of a release of each of the first and second registered mortgages. Cooper Grace Ward's covering letter, also, stated, "[t]o be clear, there is no money owed to Mrs Bassili from the proceeds of the settlement". 15 The settlement proposed for 18 February 2010 did not occur on that day but was rescheduled for 19 February 2010. 16 On 19 February 2010, Instyle advised the other parties interested in the settlement of the contract of sale, that it would refuse to release the security should it not receive the balance of the anticipated funds after the payment of the first mortgage, without any deduction in respect of the $75,508.64 claimed by the Commissioner. 17 By a letter dated 19 February 2010, the Assistant Commissioner said that he did not consent to the balance of the anticipated funds being paid without deduction into the Warlow Scott trust account. The letter suggested payment of the funds into the Federal Magistrates Court. 18 On 19 February 2010, Warlow Scott, solicitors for Instyle, wrote to the ATO in the following terms: We act for the second mortgagee Instyle Developments Pty Ltd. Anticipated funds from the settlement to be drawn to our trust account are $327,074.73. This is below our client's principal of $430,000.00 excluding interest and charges. Our client will not be providing a release until the full balance proceeds of settlement are paid to our trust account. We note that the ATO's position has prevented the settlement from occurring. Our client reserves its rights as a result of the ATO's conduct to date. As our client is incurring ongoing losses and these losses are being accentuated by the ATO's conduct, would you please urgently advise that the ATO withdraws its claim against the buyer so that the matter may settle. Should we not receive your confirmation by 11.00 am today, we shall recommend to our client that it proceed with forcing the sale by exercising its rights as mortgagee in possession. Should our client not be able to achieve the same or better net position with a mortgagee in possession sale, our client will hold the ATO directly responsible for its loss. 19 On 19 February 2010, Bevan Bowe & Associates for the purchasers, again prepared a settlement statement which proposed the delivery at settlement of a bank cheque of $75,508.64 in response to the s 260-5 notice, and the delivery of the release of the registered mortgages, by each of the first and second registered mortgagees. 20 On 19 February 2010, the solicitors for Mrs Bassili again rejected the purchasers' settlement statement and prepared a settlement statement which reflected the delivery of bank cheques made payable to each of the registered mortgagees, the delivery by each of the registered mortgagees of the releases of each of their respective registered mortgages, and no payment being made in respect of the demand made in the s 260-5 notice. 21 Shortly before the scheduled time for settlement on 19 February 2010, the Assistant Commissioner sent a letter by facsimile to Warlow Scott which stated: To clarify the position of the Commissioner, please note that the purchaser's obligation under the notices pursuant to section 260-5 of the TAA53 ("the notices") is with respect to the monies payable by the purchaser to the vendor of property and therefore is distinct from the rights which the secured creditors have with respect to property which is the subject of the sale. Accordingly, the order of the Federal Magistrates Court dated 17 February 2010 does not apply to the funds which are payable to the Commissioner pursuant to the notices. Those orders only apply to the amount payable with respect to your client's mortgage. It is for this reason that the Commissioner will not agree to your client's proposal that the monies be paid into your trust account. 22 Settlement did not occur on 19 February 2010. This is because Instyle refused to provide a release of its second registered mortgage, and the vendor was, therefore, not able to deliver unencumbered title. 23 There was initially disagreement between the parties as to the arrangements that should be made between them so as to permit settlement to occur. The ATO, on the one hand, continued to press for a payment of $75,508.64 into court. Mrs Bassili and Instyle, on the other hand, were insistent that the purchasers deliver at settlement a bank cheque without deduction in respect of the amount demanded in the s 260-5 notice, payable to the trust account of Warlow Scott, as a condition of Instyle releasing the legal charge arising under the second registered mortgage. 24 By a letter dated 22 February 2010, the Assistant Commissioner agreed to the payment of the bank cheque without deduction, to the trust account of Warlow Scott, as required by Mrs Bassili and Instyle. The Assistant Commissioner went on to state that the Commissioner's position as to his rights under the s 260-5 notice remained as stated in the ATO's earlier correspondence. That correspondence comprised the letters of 12 February 2010 and 19 February 2010, referred to at [9] and [21] above. The Assistant Commissioner, also, required that arrangements be made so that the amount of $75,508.64 claimed under the s 260-5 notice, could not be released from Warlow Scott's trust account without the Commissioner's consent. The Assistant Commissioner's letter then went on to state: The Garnishee Notice The parties are kindly requested to take note that the Commissioner's consent does not in any way indicate any concessions made as to his entitlement to the funds by reason of the Notices pursuant to the Garnishee Notices. The Commissioner reserves his right to seek declaratory orders from the Federal Magistrates Court, and for recovery of those funds from Warlow Scott's trust account. 25 On 22 February 2010, Mrs Bassili's solicitors circulated a proposed settlement statement which provided for the purchasers to provide bank cheques drawn to each of the registered mortgagees in the sums of $1,289,744.14 and $324,147.31 respectively, the delivery by each of the registered mortgagees of a release of the legal charge arising under each registered mortgage at settlement, and made no provision for the delivery of any bank cheque in favour of the Commissioner. 26 Settlement ultimately occurred on 23 February 2010. At settlement, a bank cheque payable to the trust account of Warlow Scott was delivered by the purchasers, and the release of Instyle's legal charge under its second registered mortgage was delivered. the federal magistrate's decision 27 At trial, the Federal Magistrate, adopted the following observations of Connolly J (with whom Shepherdson J agreed) in Tricontinental Corporation Ltd v Commissioner of Taxation [1988] 1 Qd R 474 at 481 (Tricontinental), and found that the monies comprising the purchase price were not owing to the taxpayer: Whether in a case in which a charge, which, as in this case, is expressed to be a floating charge, has crystallised, that fact would be sufficient to defeat a notice under s 218 of the Income Tax Assessment Act is, I think, not free from difficulty. In form at least, the money is still due or accruing to the taxpayer. The debenture holder enforces his rights by appointing a receiver who would demand and recover the debt in the name of the taxpayer. If the analogy with forms of execution such as garnishment be appropriate, then it might well be right to say that s 218 can only operate on the taxpayer's beneficial interest in the moneys. A more direct approach is to say that once a floating charge has crystallised, moneys the subject of the charge are no longer in reality owing to the taxpayer but to the chargee. 28 The Federal Magistrate determined that the demand made in the s 260-5 notice did not operate in respect of the monies which were due to be tendered at settlement of the contract of sale. This was because by analogy with monies otherwise due to a taxpayer after the crystallisation of a floating charge, the taxpayer had no beneficial interest in the monies and, the monies were in reality, not due to the taxpayer. The Federal Magistrate found that the position was a fortiori because the monies demanded in the s 260-5 notice were monies to be paid in respect of the sale of land which was the subject of two prior registered mortgages. 29 Specifically, the Federal Magistrate found that the monies due to be tendered by the purchasers to the taxpayer at settlement, insofar as they are attributable to the secured debt, are not monies "due" to the taxpayer pursuant to the s 260-5 notice. the contentions on appeal 30 In the appeal, the Commissioner contended that when Mrs Bassili sold the property she became entitled to receive payment of the purchase price, and the charge comprised by Instyle's mortgage only operated as a charge over the property to secure the repayment of the debt, and did not ever operate as a charge over the proceeds of the sale of the property. 31 The Commissioner, also, contended that on a proper analysis, the following process occurred at the settlement of the contract of sale. On the release of its legal charge over the land, each of the registered mortgagees lost its security interest in the land and obtained no security over the proceeds of sale to secure the payment of the debt. As a consequence, each mortgagee was then confined to relying only on the vendor's personal covenant to repay the loans, so that each mortgagee was transformed from a secured to an unsecured creditor of the vendor. On delivery of the unencumbered title, the vendor obtained beneficial interest in all of the monies paid as the purchase price, and the vendor then discharged her personal covenant to each mortgagee from the funds beneficially owned by the vendor. It followed, said the Commissioner, from the fact that the taxpayer held the beneficial ownership of the entire proceeds of the sale before the funds were then used to discharge the debts due to the mortgagees as unsecured creditors, that the s 260-5 notice operated to attach to part of the proceeds of the sale, in priority to the mortgagees. 32 The respondents contended that the Commissioner's argument had not been made in the Federal Magistrates Court. The respondents contended that the Commissioner had conceded before the Federal Magistrate that it did not rely on arguments arising from the fact that settlement of the contract of sale had occurred. The Commissioner's argument before the Federal Magistrates Court, said the respondents, had been confined to an argument that the s 260-5 notice ranked in priority over a registered mortgage which predated the s 260-5 notice, and that the proceeds of the sale of the mortgaged land were, therefore, monies due to the registered proprietor to which the Commissioner's garnishee notice could attach, without reference to the rights of the prior registered mortgagees. 33 However, the respondents did seek to address the Commissioner's argument. In opposition to the Commissioner's argument, the respondents contended that at settlement, no monies ever became available to the taxpayer to which the demand under the s 260-5 notice could attach. 34 First, the respondents referred to the observations of Mason CJ in Foran v Wight (1989) 168 CLR 385 at 396 (Foran): In a contract for the sale of land, the vendor's obligation to deliver a good title and the purchaser's obligation to pay the purchase money are concurrent and mutually dependent obligations in the sense that they are "simultaneous acts to be performed interchangeably". (Footnotes omitted.) 35 The respondents contended that the bank cheque delivered to Instyle's solicitors, was made payable direct to the mortgagee and the payment was made as part of the simultaneous process whereby the purchase price was paid, the legal charges under the registered mortgages were released and the transfer of the unencumbered title delivered. Therefore, said the respondents, no monies were ever received by the taxpayer upon which the Commissioner's demand made in the s 260-5 notice could operate. 36 The respondents, also, contended, as an alternative, that if the monies comprising the purchase price were to be regarded as having been paid to the proprietor, then the proceeds of the sale were charged with a trust by way of an equitable security for the payment of the mortgage debts. 37 The respondents did not identify specifically the nature of the trust which attached to the proceeds of sale in the hands of the proprietor, but suggested that it could be one or other of a resulting trust, a constructive trust or a Quistclose trust. 38 The respondents, also, observed that neither the simultaneous discharge argument nor the proceeds being fixed with a trust argument, had been considered by the primary judge because the trial had been conducted on the basis that the Commissioner's counsel had renounced any reliance on the fact that settlement had occurred or that the proceeds had been paid into court. 39 The Commissioner contended that the Foran observations were confined only to the relationship between the vendor and purchaser and did not extend to the relationship between the vendor and mortgagee. In my view, the Commissioner's contention is to be accepted. 40 As to the respondents' argument that the purchase monies were held on trust, the Commissioner contended that the argument conflated the position relating to the interests which existed in the proceeds of a sale of land by a mortgagor, with the position in respect of interests which existed in the proceeds of sale, consequent upon the exercise of a power of sale by a mortgagee. It was only in relation to the latter circumstance, said the Commissioner, that the proceeds of the sale were held on trust subject to the equities of any mortgagee, in priority to the mortgagor. 41 Further, the Commissioner contended that there was no evidence to suggest an agreement or mutual understanding between the Commissioner and Instyle that the mortgage was to be treated as if it did charge the proceeds of the sale. There was no foundation in the evidence or in law, said the Commissioner, for the proposition that, notwithstanding the mortgagor's sale, the mortgagee's charge over the real property was converted on the sale of that property, to a right in the proceeds of the sale. 42 In my view, the following legal principles are relevant to the determination of this appeal. 43 First, whilst the Commissioner, by reason of s 260-5(3) of Sch 1 of the Taxation Administration Act, is entitled to issue a notice before the available monies are payable by the debtor to the taxpayer, the demand to pay the available monies in the notice can only have effect, if, and when, the available monies, in fact, become payable by the debtor to the taxpayer. 44 In the case of Clyne v Deputy Commissioner of Taxation (1981) 150 CLR 1 at 10, Gibbs CJ set out the position as follows: Moreover it would be drastic, and generally speaking unconscionable, to require a third party to pay to the Commissioner money which was owed to the taxpayer but which was not yet payable to him, and doubts might be raised as to the constitutional validity of such a provision. In the event of any ambiguity, s 218 should be construed to avoid the unjust result that a third party should be required to pay to the Commissioner moneys that were not yet payable to the taxpayer. 45 The conditionality attending, whether, and, if so, when, there would be monies payable by the purchasers to Mrs Bassili, upon which the demand in the s 260-5 notice would operate, is recognised by the heading and terms of the notice. The heading of the notice stated: "Notice to pay to the Commissioner money that you may owe to Milanka Bassili". The terms of the notice demanded the purchasers to pay the "available money" immediately, if it was owing. The notice then went on to say: If you do not owe the available money to the debtor but you will later owe it to the debtor, the payment to the Commissioner of Taxation is to be made immediately the money becomes owing to the debtor. 46 The second principle, is that the Commissioner, who has served a s 260-5 notice, is to be regarded as being in a similar position to that of a person who has issued a garnishee notice. In the case of Bruton Holdings Pty Ltd (in liquidation) v Commissioner of Taxation of the Commonwealth of Australia (2009) 239 CLR 346 at [12]-[14], the High Court observed: 12 A notice under s 260-5 gives the Commissioner the right to recover from a third party an amount that the third party owes or may later owe to a taxpayer who is indebted to the Commonwealth for tax. It is established that the remedy given to the Commissioner by s 260-5 is available in respect of revenue obligations, which are given the character of "debts" by force of the Administration Act itself and without prior curial determination. 13 The third party is obliged to pay the Commissioner what is demanded by the notice; failure to comply with the notice is a criminal offence (s 260-20). Section 260-5(3), read with s 260-15, provides, in effect, that the Commissioner has the right to give to the third party a valid receipt and discharge for money paid in compliance with the notice. 14 In these respects, a notice under s 260-5 operates in the manner in which, in Hall v Richards, Kitto J described a garnishee order as operating to attach a debt. Kitto J said: Such an order, though not working an assignment or giving the judgment creditor any proprietary interest in the debt, yet gives him positive rights with respect to it which a creditor having no more than a judgment does not possess; not merely a negative right to prevent the judgment debtor from accepting payment of the debt or disposing of it, but positive rights for the recovery of what is owing on the judgment, namely a right to give a valid receipt and discharge for the money, and a right in case of non-payment to obtain execution against the garnishee: In re Combined Weighing and Advertising Machine Co. (Footnotes omitted.) 47 The third principle, which arises out of the second principle, is that the debt the subject of the demand made in the s 260-5 notice, is subject to the rights and equities which already exist in respect of the debt (Norton v Yates [1906] 1 KB 112 at 121). This is a consequence of the characterisation of the position of the Commissioner under the s 260-5 notice as being akin to that of a garnishor under a garnishee notice. 48 The demand in this case was issued in respect of monies agreed to be paid by the purchasers pursuant to a contract for the sale of land in respect of which the vendor had promised to deliver unencumbered title to the land. Accordingly, the operation of this principle meant that until such time as the vendor was in a position to deliver unencumbered title, no monies would be payable by the purchasers and, therefore, there were no monies upon which the demand in the s 260-5 notice could operate. Further, there were, at the date of the contract of sale, two mortgages registered against the title. The consequence was that unless and until the mortgagees released their respective registered mortgages, the vendor would not be in a position to deliver unencumbered title pursuant to the contract, and the purchasers would not be obliged to pay the price. 49 In this case, Instyle refused to release its legal charge over the land arising under its second registered mortgage and, therefore, settlement could not take place on 19 February 2010, when it should have, and there was talk of Instyle exercising its power of sale. In those circumstances, the s 260-5 notice was a brutum fulmem. The Commissioner had no right by reason of having issued the s 260-5 notice, to payment from the purchasers, no right to require the prior registered mortgagees to release their respective securities to permit settlement to occur, nor, of course, did the Commissioner have the right, as did the registered mortgagees, to sell the property, in order to generate monies upon which the notice could potentially operate. 50 That, would, therefore, be the end of the case, if the Commissioner was precluded from relying on the fact that settlement had, in fact, taken place, and was, thereby, precluded from advancing the argument made in this Court. 51 However, I propose to deal with the argument made by the Commissioner because, on one view, the argument raised by the Commissioner on appeal, was foreshadowed prior to the agreement being reached by the parties which permitted settlement to occur, and the Commissioner's argument was ventilated in the hearing before this Court, and the respondents had the opportunity to deal with the argument. 52 The fourth principle, is that the demand made under a s 260-5 notice, only applies to monies that are payable to the taxpayer, in his or her capacity as beneficial owner (Tricontinental at 482). 53 In the case of Zuks v Jackson McDonald (a Firm) (1996) 132 FLR 317 at 327-328, Steytler J (as his Honour then was) reviewed in detail, a number of cases in which the courts had considered whether a s 218 notice could operate in respect of monies which were not beneficially owned by the taxpayer because they were subject to an equitable charge. Steytler J observed: It will be apparent from the aforegoing review of the case law that there is now a substantial body of authority to support the proposition that, upon the proper construction of s 218, service of a notice under that section will not defeat a prior equitable charge. 54 Those observations were made in the context of the consideration of decided cases where the third party's beneficial interest in the funds otherwise due to the taxpayer, arose by way of the operation of an equitable charge over the funds. However, the principle that the s 260-5 notice can only operate on the taxpayer's beneficial interest in the claimed monies, would apply equally where the taxpayer did not hold the beneficial interest in the monies claimed for some other reason, for example, because the monies were trust funds, in respect of which the taxpayer was a trustee. 55 The fifth principle, is that where land the subject of an existing equitable mortgage is sold, the charge under the equitable mortgage over the land converts to an equitable charge over the proceeds of the sale. I do not accept, as the Commissioner contended, that this principle is confined only to circumstances where the funds comprising the proceeds of the sale, have been generated by the exercise of a mortgagee's power of sale. 56 In Hope v Hope [1977] 1 NZLR 582 (Hope), Wilson J held that, in equity, where land over which there was an equitable mortgage, was sold, the charge over the land under the equitable mortgage, was converted on the sale of that land to an equitable charge over the proceeds. 57 In that case, there had been a sale by the first mortgagee of land belonging to the petitioner which, after deductions to pay the first mortgagee's debt, yielded a surplus of approximately $9,500 for the petitioner who was the mortgagor. In matrimonial proceedings, Wilson J ordered that this amount stand as security for the payment of a maintenance order in favour of the respondent, the petitioner's spouse. However, at the time the land had been sold, it had been the subject of an unregistered second mortgage, in favour of a party referred to in the judgment as "Alitalia". The second mortgagee claimed to have a priority interest in the proceeds of sale by reason of its unregistered second mortgage. There was a contest, therefore, between the second mortgagee and the respondent in respect of the priority to the surplus funds. 58 The respondent argued that s 104 of the Land Transfer Act 1952 (NZ) (the equivalent of s 88 of the Property Law Act (Qld)) which provided for the priority in which the mortgagee exercising the power of sale was to distribute the proceeds of the sale, did not contemplate any distribution being made from the proceeds to an unregistered second mortgagee. Therefore, contended the respondent, when the land was sold by the first registered mortgagee exercising the power of sale, the unregistered second mortgagee's interest in the land was lost and the unregistered second mortgagee had no security interest in the surplus funds which had been derived from that sale. 59 Wilson J accepted that s 104 did not refer to a distribution being made to an unregistered mortgagee, but otherwise rejected the respondent's argument. Wilson J accepted the argument made by the second mortgagee that its unregistered second mortgage over the land was converted on the sale of the land to an equitable charge on the proceeds of the sale. It followed, said Wilson J, that when the surplus proceeds were paid to the mortgagor, he took those proceeds, subject to the second mortgagee's security interest which equity had imposed upon the proceeds. At 583, Wilson J observed: Mr Blackmore, however, submitted that Alitalia's equitable charge on the petitioner's interest in the land was converted, on the sale of the land, to an equitable charge on the petitioner's interest in the proceeds and attached to the moneys payable to the petitioner under para (d) of s 104(1)… I think that Mr Blackmore is right. Section 104 does not abrogate the rights of mortgagees under unregistered mortgages – it merely postpones them to those of mortgagees under registered mortgages. Paragraph (d) does not vest the surplus from a mortgagee's sale in the mortgagor free from all equities but subject to them. In equity the equitable charge on the land is converted, on the sale of the land, to a charge on the proceeds. 60 In my view, the fact that the proceeds of sale in Hope were generated by a first mortgagee's sale, and, therefore, fell to be distributed pursuant to s 104(1) of the Land Transfer Act (NZ) was incidental to, and did not motivate the finding by Wilson J that on the sale of land the equitable charge over the land arising under an equitable mortgage, converted to a charge on the proceeds of the land. Wilson J did not find that the conversion was the product of the operation of the statute - to the contrary, Wilson J found that s 104 did not touch upon the position of an equitable mortgagee. Rather, said Wilson J, the conversion was effected by the operation of equity which bound the proceeds in the hands of the mortgagor. 61 The decision of Wilson J in Hope, was applied by (among others) Smithers J in Re Murrell; Ex parte Official Trustee in Bankruptcy (1984) 57 ALR 85 (Murrell) and by Young J (as his Honour then was) in the case of AVCO Financial Services Ltd v Commonwealth Bank of Australia (1989) 17 NSWLR 679 (AVCO). (See, also, Re S & D International Pty Ltd (in liquidation) (receiver and manager appointed) [2009] VSC 225, where Robson J undertook an analysis of the authorities.) 62 Further, in the case of Aircon Heating and Airconditioning Pty Ltd (in liq) v Crane Distribution Ltd [2006] VSC 76 (Aircon), Hansen J held that the principle, whereby the charge held by an equitable mortgagee over the land was converted into an equitable charge over the proceeds of sale of the land, applied in circumstances where the sale of the land was made by the registered proprietor. Hansen J expressly rejected the contention that the principle was confined to circumstances where the sale of the land the subject of the equitable mortgage, was made by a mortgagee exercising the power of sale. At [47]-[51], Hansen J observed: 47 It is clear from these submissions, and it was made clear by Crane's counsel in argument, that the central point of Crane's concern, and ground of opposition to removal of the caveat, was that the consequence of removal and completion of the sale of the property would be that Crane lost its status as a secured creditor and would become an unsecured creditor. That this fundamental premise of Crane's submission is wrong is made clear by established authority to which Crane's counsel did not refer and which Aircon's counsel assumed but without making reference to it. I considered that Aircon's counsel was correct but Crane's counsel challenged the proposition. 48 It is sufficient, by way of authority on this point, to refer to the decision of Young J in AVCO Financial Services Ltd v Commonwealth Bank of Australia. In that case a mortgagee of Torrens System Land had sold the land and paid into Court the balance remaining of the sale proceeds after recouping the amount owed to him. On an equitable chargee applying for payment out of the fund in Court it was held, granting the application, that on the land being sold the equitable charge attached to the fund that was produced as a result of there being a surplus on the sale. In so holding, Young J followed the earlier New Zealand decisions of Beeby v Official Assignee of Pickering and Pickering and Hope v Hope. Indeed, even earlier than AVCO, Smithers J had expressed the same view as Young J, and referred with approval to Beeby and Hope, in Re Murrell. And in Nichols v Go-Tell Nominees Ltd, JD Phillips JA made observations which reflect this position. 49 In seeking to deal with this point Crane's counsel, in a written submission provided subsequent to the hearing, submitted that the observations of JD Phillips JA in Nichols were made in the context of considering the rights of an equitable chargee under a mortgagee sale and that his conclusion was correct because of the application of s 77(3) of the Transfer of Land Act which provides for the application of purchase monies and in particular for the payment of subsequent mortgages and charges in the order of their respective priorities. It was submitted that as the present case was not a mortgagee sale s 77(3) would not protect an equitable chargee. Accordingly, it was submitted, at the highest Crane would be left with an argument that it has a claim as a secured creditor to the proceeds and priority to other unknown claimants such as the liquidator's own claim, secured creditors, other priority creditors and unsecured creditors. 50 I do not accept this submission. In the first place, the submission sought to confine the observations of JD Phillips JA to a context different from the present and, further, to somehow confine the observations to the context of a case in which s 77(3) was applicable. Secondly, the submission ignored the well-established principle of equity referred to above. Thirdly, in my view, the observations of JD Phillips JA are not properly to be understood as confined as Crane's counsel suggested but is reflective of the more general principle that after sale of the secured property an equitable mortgage is converted to a charge on the proceeds of sale for the interest of the mortgagee. 51 It is thus seen that Crane's submission that removal of the caveat and completion of the sale meant that it would lose the benefit of its security as equitable mortgagee and, indeed, become an unsecured creditor, is wrong. (Footnotes omitted.) 63 Further, in the case of Buhr v Barclays Bank plc [2001] EWCA Civ 1223 (Buhr), the Court of Appeal of England and Wales found that where the registered proprietor of land, the subject of an unregistered mortgage, sold the land, the interest which the unregistered mortgagee had in the land was converted into an interest in the proceeds. I do not accept the contention by the Commissioner that this case is distinguishable on the grounds that this was not a case involving land the subject of the Torrens system of land registration. Each of the Hope, Murrell, AVCO and Aircon cases, upheld the operation of equitable principles, in relation to land which was subject to the operation of the Torrens system of land registration. 64 Indeed, Smithers J in Murrell, expressly recognised the co-existence of equitable interests within the Torrens system, and went on to find that such interests were not "destroyed" where there was a mortgagee sale. At 91-92, Smithers J observed: It is unnecessary for the purposes of the Torrens system that provision be made for the payment to a mortgagor of a sum of money being the proceeds of an interest in land in respect of which the mortgagor had given security to persons who had given valuable consideration therefor to him. The notion that for the purpose of maintaining the purity of the register Parliament might, in effect, abrogate lawful interests arising from transactions entered into in good faith is unacceptable. It is not the purpose of the Torrens system as exemplified in the TLA to destroy, as between a registered proprietor and a person doing business with him, an equitable interest created by the registered proprietor in the ordinary course of business. To destroy such an interest where it was an encumbrance on the land subject to a mortgage pursuant to which a power of sale had been exercised, but not otherwise, would be remarkable indeed. The section may be construed therefore as operating subject to valid claims of third persons against the mortgagor, in respect of a surplus of proceeds from a sale of the property by the mortgagee, as exist according to law. 65 Further, it is to be observed that the premise underlying the observations of Smithers J is that the equitable interests of which he spoke, would arise in respect of the sale of Torrens system land, other than sales effected by the exercise of a mortgagee's power of sale. The contention which Smithers J rejected, was that the same could not be said in relation to sales effected by a mortgagee's exercise of the power of sale. 66 The Commissioner, also, sought to distinguish the decision in Buhr on the basis that the sale by the registered proprietor of the land in that case, had not been authorised by the unregistered mortgagee. One of the bases upon which the Court of Appeal found that the security interest of the equitable mortgagee in the land converted to being a charge on the proceeds of sale, was the writings of Professor Roy Goode. The Commissioner, however, contended that it was Professor Goode's view that where a mortgagee had authorised the sale of land, the mortgagee's rights did not extend to the proceeds of the sale. The Commissioner referred specifically to a passage in Professor Goode's work (Goode on Legal Problems of Credit and Security (4th ed, Sweet & Maxwell, 2008) at 42). However, the part of the passage upon which the Commissioner relies, is distinguishable. That part of the passage (when read with footnote 233) deals with the disposition of an asset by a floating chargee and does not address the circumstances which occurred in this case. 67 Also, the Court of Appeal did not rely only on Professor Goode's writings in reaching its decision. The Court of Appeal based its decision, primarily, on the principle that the security interest of a mortgage over land would extend to the land and any accretions to and substitutions for, the mortgaged land (Buhr at [39]-[44]). 68 In any event, it could not be contended, on the facts in this case, that Instyle authorised the sale of the land by Mrs Bassili on the basis that Mrs Bassili would be entitled to the beneficial interest in the proceeds, and that it would be reduced to the status of an unsecured creditor in respect of the debt secured by the mortgage. (See Buhr at [45].) 69 In my view, therefore, insofar as there was any temporal interval between release by Instyle of its legal charge over the land and its receipt of proceeds of the sale of the land, those proceeds would, on the application of principle referred to in the aforementioned cases, have been the subject of an equitable charge in favour of Instyle. 70 It follows that in this case, the taxpayer, Mrs Bassili, never obtained any beneficial interest in the proceeds of the sale, and, therefore, there were no available monies upon which the demand in the s 260-5 notice could operate. For this reason, I would dismiss the appeal. 71 As mentioned, the question of interests of the respective parties to, and in, the proceeds of the sale at settlement, was not the subject of the Federal Magistrate's judgment. Nor was there argument before this Court which addressed specifically whether, on the evidence, Mrs Bassili held the benefit of the purchasers' promise under the contract of sale to pay the purchase price on trust for the two mortgagees. 72 Had I not come to the view expressed in [69] and [70] above, I would have sought further submissions from the parties on the question referred to in the preceding paragraph. This is because it is my tentative view, alternative to the view expressed in [69]-[70] above, that the evidence was open to support a finding that Mrs Bassili held the benefit of the purchasers' promise to pay the purchase price on trust for the NAB and Instyle, with the consequence that, to the extent that any proceeds of the sale were ever paid to Mrs Bassili, the monies were held on trust for the NAB and Instyle. 73 It is well-established that the beneficiary of a promise may hold that promise on trust for a third party. The trust can attach to the benefit of the whole contract or part of a contractual obligation (Trident General Insurance Co Limited v McNiece Bros Proprietary Limited (1988) 165 CLR 107 (Trident) at 147 Deane J). 74 In Bogert, The Law of Trusts and Trustees (Revised 2nd ed, St Paul, Minn, West Publishing Co, 1984) the following passage appears: 19. Debt Payable From Identified Fund Debtor Declaring Himself Trustee for Creditor A debtor may promise to pay his debt out of a specified portion of his present assets or out of described property which he expects to obtain in the future. He may intend merely to create a contract obligation to that effect, or he may intend to give the creditor some kind of a property interest in the specified fund or other asset by making himself a trustee of it for the creditor or in some other way giving the creditor a security interest in it. Examples are found in cases where the debtor agrees to pay out of the future net profits of a business or out of the proceeds or profits from the sale of described property owned by the debtor. (Footnotes omitted.) 75 Whether a promise is held on trust by a promisee, will depend upon the intention of the promisee (Trident at 121 Mason CJ and Wilson J, and at 147 Deane J; Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1987) 8 NSWLR 270 at 286 McHugh JA (as his Honour then was)). Whether a person had the intention to hold property on trust is objectively determined. The intention may be inferred or imputed from the language used and from the surrounding circumstances (Byrnes v Kendle (2011) 243 CLR 253). 76 One of the most telling of the surrounding circumstances is whether any monies to be received by the intended recipient were to be held or dealt with separately for the account of the beneficiaries, rather than being mingled with funds otherwise belonging to the recipient (Walker v Corboy (1990) 19 NSWLR 382 at 385, 389, 397-398; Re Australian Elizabethan Theatre Trust (1991) 30 FCR 491 at 498). 77 As mentioned, in my tentative view, the evidence before the Federal Magistrate was open to support a finding that Mrs Bassili, at the time she entered into the contract of sale, intended to hold the purchasers' promises on trust for the benefit of the two mortgagees for the purpose of discharging debts due to the mortgagees (or, in Instyle's case, partially discharging the debt) and so procuring the release by each of the registered mortgagees of their respective legal charges at the settlement. 78 That this was Mrs Bassili's intention is open to be inferred from the following facts: (a) at the time of entering into the contract, Mrs Bassili had no other means of discharging the debts due to the two registered mortgagees, (b) Mrs Bassili, through her solicitors, insisted in the settlement statements that there be separate bank cheques made payable directly to each of the registered mortgagees, (c) Mrs Bassili did not claim to have any beneficial interest in the proceeds of the sale of the property, nor did she require that the proceeds of the sale be paid into her bank account. In fact, Mrs Bassili, through her solicitors, renounced any beneficial interest in the proceeds of sale. 79 As I have previously said, for the reasons stated in [69]-[70] above, I would dismiss the appeal. I certify that the preceding seventy-nine (79) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Siopis. Associate: Dated: 31 August 2012 IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY GENERAL DIVISION QUD 209 of 2011 ON APPEAL FROM THE FEDERAL MAGISTRATES COURT OF AUSTRALIA BETWEEN: COMMISSIONER OF TAXATION Appellant AND: JOHN PARK First Respondent LLOYD LOK ING TANG Second Respondent JUDGES: SIOPIS, JESSUP AND KATZMANN JJ DATE: 31 august 2012 PLACE: BRISBANE REASONS FOR JUDGMENT Jessup and Katzmann JJ: 80 This is an appeal by the Commissioner of Taxation ("the Commissioner") against orders made on 20 and 27 July 2011 by the Federal Magistrates Court of Australia in a proceeding to which the respondent to the appeal, John Park ("the trustee"), was then the only applicant and the Commissioner was then the only respondent. The effect of the orders was that the trustee was entitled to the sum of $75,508.64 previously paid into court, and the Commissioner had no right to or interest in that sum pursuant to certain notices which he had caused to be issued under s 260-5 of Sch 1 to the Taxation Administration Act 1953 (Cth) ("the Administration Act"). How the trustee and the Commissioner came to be the only parties to that proceeding and the nature of the controversy which the Federal Magistrate settled by those orders are matters best explained by laying out a narrative of the events which led to, and which occurred in, the proceeding itself. 81 Before the events which became controversial in the Federal Magistrates Court, Milanka Bassili was the registered proprietor of a property at Fig Tree Pocket ("the property"). The property was mortgaged to National Australia Bank Limited ("the Bank"). On 7 May 2007, Ms Bassili granted a second mortgage over the property to Instyle Developments Pty Ltd ("Instyle"). That mortgage, which secured the sum of $430,200 together with other monies advanced by, or owing to, Instyle, was duly registered. 82 On 21 August 2009, the Commissioner commenced proceedings against Ms Bassili in the District Court of Queensland, claiming the sum of $69,366.26 for unpaid tax and general interest charge pursuant to the Administration Act. The Commissioner also claimed ongoing general interest charge at the appropriate rates. It does not appear from the material before the Full Court whether the Commissioner's claim progressed to judgment, but there is an affidavit, relied upon in the proceeding below, in which it was deposed that, taking into account notices of assessment for the tax years ending on 30 June 2007 and 30 June 2008, penalties, general interest charge and other adjustments, as at 2 January 2010, Ms Bassili was in debt to the Commonwealth in the sum of $75,508.64. 83 On 19 January 2010, Ms Bassili entered into a contract for the sale of the property to Trevor Boevink (as trustee for the Boevink Family Trust) and Karren Sullivan ("the purchasers"). Under that contract, the purchase price was $1.675m, and settlement was to take place on 18 February 2010. The contract as such is not contained in the material put before the Full Court, that material being limited to a government warning statement signed by the purchasers and to a facsimile of the first three pages of what appears to have been an eight-page document. The Federal Magistrate found (and we were assured on appeal) that the contract was otherwise in what was described as standard REIQ form. The case was conducted – both below and on appeal – on the assumption that the contract provided for the property to be sold free of encumbrances, although we would have to say that, at least from our own reading of them, the pages of the contract to which we were exposed do not seem to bear out that assumption. It is, however, an assumption we shall make in the balance of these reasons. 84 On a date which does not appear either in the Federal Magistrate's reasons or in the material made available to the Full Court, but which was, on any view, before 5 February 2010, Lloyd Lok Ing Tang commenced a proceeding in the Federal Magistrates Court against Ms Bassili. It is the proceeding in which the Federal Magistrate gave the judgment which is the subject of the present appeal. Dr Tang sought the following orders: 1. That John Park (a registered trustee) take control of the property of the debtor Milanka Bassili pursuant to section 50 of the Bankruptcy Act 1966. 2. That the debtor Milanka Bassili produce to the said John Park all documents relating to the Mortgage no 712940471 over the property situated at 504 Fig Tree Pocket Road, Fig Tree Pocket described as Lot 54 on Registered Plan no 909090, County of Stanley, Parish of Indooroopilly. The mortgage referred to was the second mortgage (in favour of Instyle) referred to above. On 5 February 2010, the trustee was directed to take control of Ms Bassili's property, pursuant to s 50 of the Bankruptcy Act 1966 (Cth). That direction operated until 10 February 2010, but was subsequently extended until 23 April 2010, on which day Ms Bassili was made bankrupt, and the trustee was appointed the trustee in bankruptcy of her estate. 85 On 9 February 2010, the Commissioner served a notice under s 260-5 of the Administration Act on the purchasers' solicitors. Section 260-5 provides as follows: Amount recoverable under this Subdivision (1) This Subdivision applies if any of the following amounts (the debt) is payable to the Commonwealth by an entity (the debtor) (whether or not the debt has become due and payable): (a) an amount of a tax-related liability; (b) a judgment debt for a tax-related liability; (c) costs for such a judgment debt; (d) an amount that a court has ordered the debtor to pay to the Commissioner following the debtor's conviction for an offence against a taxation law. Commissioner may give notice to an entity (2) The Commissioner may give a written notice to an entity (the third party) under this section if the third party owes or may later owe money to the debtor. Third party regarded as owing money in these circumstances (3) The third party is taken to owe money (the available money) to the debtor if the third party: (a) is an entity by whom the money is due or accruing to the debtor; or (b) holds the money for or on account of the debtor; or (c) holds the money on account of some other entity for payment to the debtor; or (d) has authority from some other entity to pay the money to the debtor. The third party is so taken to owe the money to the debtor even if: (e) the money is not due, or is not so held, or payable under the authority, unless a condition is fulfilled; and (f) the condition has not been fulfilled. How much is payable under the notice (4) A notice under this section must: (a) require the third party to pay to the Commissioner the lesser of, or a specified amount not exceeding the lesser of: (i) the debt; or (ii) the available money; or (b) if there will be amounts of the available money from time to time—require the third party to pay to the Commissioner a specified amount, or a specified percentage, of each amount of the available money, until the debt is satisfied. When amount must be paid (5) The notice must require the third party to pay an amount under paragraph (4)(a), or each amount under paragraph (4)(b): (a) immediately after; or (b) at or within a specified time after; the amount of the available money concerned becomes an amount owing to the debtor. Debtor must be notified (6) The Commissioner must send a copy of the notice to the debtor. Setting-off amounts (7) If an entity other than the third party has paid an amount to the Commissioner that satisfies all or part of the debt: (a) the Commissioner must notify the third party of that fact; and (b) any amount that the third party is required to pay under the notice is reduced by the amount so paid. 86 The Commissioner served a second notice under s 260-5 on the purchasers themselves on 11 February 2010. The notices referred to a debt owing to the Commonwealth by Ms Bassili in the sum of $75,508.64, and averred that the purchasers owed, or might later owe, money to her. The purchasers were required to pay that sum, or, if the money available to them were less than that sum, the whole of the available money, to the Commissioner. The notices continued: If you do not owe the available money to the debtor but you will later owe it to the debtor, the payment to the Commissioner of Taxation is to be made immediately the money becomes owing to the debtor. 87 Also on 11 February 2010 (but seemingly unrelated to the events referred to in the previous paragraph), Dr Tang filed an amended application in his proceeding against Ms Bassili. The trustee was named as second applicant (presumably pursuant to his consent as contemplated by r 11.01(3) of the Federal Magistrates Court Rules 2001) and Instyle was named as second respondent. Although the Federal Magistrate said nothing about it in his reasons (and it does not otherwise appear in the material filed on appeal), we were informed, seemingly uncontroversially, that there was, at this time, a dispute between the trustee and Instyle as to the validity of the latter's mortgage. If there were such a dispute, it may have presented a practical impediment to settlement under Ms Bassili's contract with the purchaser, but that is something which it is unnecessary to explore further here. But possibly for that reason, on 17 February 2010, the Federal Magistrates Court ordered, by consent, that so much of the money received upon settlement of the sale of the property to the purchasers as represented Instyle's debt secured by its second mortgage be paid into the trust account of the solicitors for Instyle and there held pending the written consent of Instyle and the trustee. 88 Also on 17 February 2010, and also by consent, the Commissioner was, on his own application, joined as a respondent in the proceeding in the Federal Magistrates Court. 89 Settlement did not occur on 18 February 2010 in accordance with the contract of sale of the property and was re-scheduled to the following day. However, settlement did not occur on that day either. According to an affidavit filed below by the trustee, the Commissioner refused to release the purchasers from the s 260-5 notices unless they paid the sum of $75,508.64 into court. Likewise, Instyle refused to agree to the discharge of its mortgage unless it was paid the full amount of the agreed purchase price remaining after satisfaction of the debt to the Bank (it being the fact that the purchase price was less than the amounts owing to both mortgagees). 90 The sale of the property settled on 23 February 2010. What actually happened on that day is critical to the resolution of the respective rights of the trustee and the Commissioner. To the extent that the Federal Magistrate made any finding on the subject, it was contained in the following paragraph of his Honour's reasons: It was expected by Instyle, as second mortgagee, that at settlement of the contract there would be insufficient funds from the purchase price to discharge the total amount secured by both the NAB mortgage and its mortgage. Notwithstanding that matter Instyle, as second mortgagee, agreed to provide a release of the second mortgage in exchange for the balance amount remaining after discharge of the NAB mortgage and proper expenses. With respect, this passage is not very revealing. 91 Of the events of 23 February 2010, the trustee said the following in his affidavit sworn on 31 August 2010: Finally, the sale of the Property settled on 23 February 2010, on the basis of an undertaking by Warlow Scott, the solicitors for Instyle, not to release the Mortgage Proceeds from its trust account without the consent of the Australian Taxation Office. At that settlement, I caused a release of the Caveat to be handed to the solicitor for the Purchaser. That final sentence was a reference to a caveat which had been lodged by the trustee, a subject which does not bear on the present controversy. The other available evidence as to the events of 23 February 2010 was that given by Joseph Frangieh, a director of Instyle, in his affidavit sworn on 31 August 2010: The solicitors for Instyle attended at the settlement of the sale of the Property on 23 February 2010 and in exchange for a release of the Mortgage registrable form, received two cheques totalling $324,146.52, in favour of Warlow Scott trust account comprising the Mortgage Proceeds…. That is, in our view, the clearest statement in the evidence of what actually occurred at settlement on 23 February 2010. 92 The derivation of the sum referred to by Mr Frangieh is to be seen in the Settlement Statement dated 23 February 2010 which was in evidence before the Federal Magistrate. The adjusted balance due from the purchasers on settlement was $1,624,243.00, to be applied as follows: 1. Cooper Grace Ward Lawyers 8,277.47 2. NAB cr a/c M Bassili 1,289,744.14 3. Brisbane City Council 657.87 4. Queensland Urban Utilities 517.00 5. Commissioner of State Revenue 900.00 6. Warlow Scott Lawyers Trust Account 324,146.52 Cooper Grace Ward acted for Ms Bassili. Warlow Scott acted for Instyle. "NAB" was, of course, the Bank, and the figure of $1,289,744.14 represented settlement under its first mortgage. The sum of $324,146.52 was the residual figure after other claims had been paid. 93 The Commissioner asserted that his s 260-5 notices entitled him, as against the purchasers, to be paid the sum of $75,508.64. At this point (23 February 2010), Instyle asserted that they did not. 94 On 17 March 2010, Instyle's solicitors undertook to the Federal Magistrates Court not to release the funds held in their trust account without the written consent of the Commissioner (in addition to that of the trustee and of Instyle). 95 On 26 May 2010, the Federal Magistrates Court made certain orders on the consent of Dr Tang, the trustee, Instyle and the Commissioner. The application as against Instyle was dismissed. Dr Tang and Ms Bassili were removed as parties to the proceeding. Instyle was ordered to pay the sum of $75,508.64 into court, and, upon that payment being made, Instyle's solicitors were to be released from their undertaking of 17 March 2010. 96 On 2 June 2010, the sum of $75,508.64 was paid into court from the funds held on trust by Instyle's solicitors, and the balance remaining from those funds was paid to Instyle in part satisfaction of the sum owing by Ms Bassili. On the same day, Instyle assigned to the trustee all of its right and title to, and interest in, the sum then paid into court. That left the trustee and the Commissioner as the only parties contesting the issue which remained for resolution in the Federal Magistrates Court, but the trustee's claim derived from the assignment referred to. That issue, as identified by the Federal Magistrate in his reasons of 20 July 2011, related to "the respective interests of each of the trustee and the Commissioner in the disputed sum", namely, the sum paid into court on 2 June 2010. 97 After contested proceedings as between those parties, on 27 July 2011 the Federal Magistrate declared that the trustee was entitled to the sum paid into court and that the Commissioner had "no right to or interest in" that sum pursuant to the s 260-5 notices of 9 and 11 February 2010; and ordered that the sum, together with any accretions, be paid to the trustee. The gravamen of his Honour's reasoning to that conclusion was that the relative interests of the Commissioner and Instyle were akin to those that would arise where the Commissioner had served a s 260-5 notice after crystallisation of a floating charge over the debts due, or to be due, to a company. In such a case, there was authority that, after crystallisation, the debts were owing to the chargee, or to the receiver where one had been appointed, rather than to the taxpayer company, the result of which was that a s 260-5 notice would not operate with respect to those debts. The relevance of that analogy, in the view of his Honour, was as follows: Here the relevant charge is a registered mortgage securing a loan in respect of a crystallised amount. The facts here present a much plainer case than case (sic) involving company charges where questions of crystallisation of debt also arise for consideration. 98 In the present appeal, the trustee accepted that, at the time they were served, the Commissioner's s 260-5 notices were valid and effective according to their terms. However, it was submitted that the amount referred to in them did not become "owing" to Ms Bassili until settlement under her contract with the purchasers. That submission was based on a perception of the timing of the parties' obligations under a conventional contract for the sale and purchase of Torrens system land which was derived from what had been said by Mason CJ in his dissenting (but not on this point) judgment in Foran v Wight (1989) 168 CLR 385, 396: In a contract for the sale of land, the vendor's obligation to deliver a good title and the purchaser's obligation to pay the purchase money are concurrent and mutually dependent obligations in the sense that they are "simultaneous acts to be performed interchangeably": Palmer v Lark [1945] Ch 182 at 184–5 Michael Realty Pty Ltd v Carr [1977] 1 NSWLR 553 at 571; Frankcombe v Foster Investments Pty Ltd [1978] 2 NSWLR 41 at 48. The Commissioner accepted the correctness of that statement, and its relevance to the circumstances of the present case. 99 In the trustee's submission, where the land to be transferred was secured by a registered mortgage, and the contract of sale provided for an unencumbered title to be passed, the vendor could not perform his or her part of these "mutually dependent obligations" unless he or she had first secured the release of the mortgage by the extinguishment of the debt which was secured by the mortgage. However, in most cases – and certainly on the facts of the present case – that could not be done unless the vendor first had in his or her hands the purchaser's cheque, and once that occurred two things followed: first, the money the subject of the cheque would have to be paid directly to the mortgagee (to the extent of the latter's entitlement); and secondly, the vendor would no longer be a person to whom an amount was owing by the purchaser. The trustee then invoked what had been said by Connolly J, with the assent of Shepherdson J, in Tricontinental Corporation Ltd v Commissioner of Taxation [1988] 1 Qd R 474, 481: Whether in a case in which a charge, which, as in this case, is expressed to be a floating charge, has crystallised, that fact would be sufficient to defeat a notice under s.218 of the Income Tax Assessment Act is, I think, not free from difficulty. In form at least, the money is still due or accruing to the taxpayer. The debenture holder enforces his rights by appointing a receiver who would demand and recover the debt in the name of the taxpayer. If the analogy with forms of execution such as garnishment be appropriate, then it might well be right to say that s.218 can only operate on the taxpayer's beneficial interest in the moneys. A more direct approach is to say that once a floating charge has crystallised, moneys the subject of the charge are no longer in reality owing to the taxpayer but to the chargee. 100 Yet, in the present case (which did not, as counsel for the Commissioner stressed, involve a charge over amounts owing to Ms Bassili), it was accepted by counsel for the trustee that, however one characterised the timing of obligations arising on settlement, there could never be a situation in which the purchasers owed anything to Instyle, as mortgagee. Instyle had security over the property, and, if circumstances arose in which it was entitled to foreclose, and it did so, it would, subject to the Bank's prior security, achieve satisfaction of its money claim as against Ms Bassili by that means. But, Ms Bassili was always the only person who owed money to Instyle. And the purchasers only ever owed money to Ms Bassili, as vendor. It may be that they did not do so until she offered an unencumbered title in exchange, but there was never a point at which, in the words of Connolly J, the amount to be received from the purchasers was "no longer in reality owing to the taxpayer but to the [mortgagee]". As we say, ultimately counsel for the trustee accepted as much. 101 Counsel's alternative argument was to adopt the first of Connolly J's formulations, namely, that the s 260-5 notice could only operate on Ms Bassili's beneficial interest in the moneys owing by the purchasers. According to the argument, it was Instyle (because of its mortgage) which held the beneficial interest in those moneys. If Ms Bassili did receive them, she received the legal interest only, and the Commissioner's notice either had no effect or, at most, entitled him to take the moneys subject to Instyle's beneficial interest. In its crudest form as so expressed, this is not an argument that could be accepted. Under a Torrens system mortgage, the mortgagee has a registered security over the land, not a beneficial interest in all moneys that become owing to the registered proprietor, even under a contract for the sale of the land as such. However, there was a more sophisticated form of this argument which was advanced on behalf of the trustee. 102 That form of the argument, as we would interpret it, ran somewhat as follows. Ms Bassili entered into an unconditional contract to sell the unencumbered title to the property to the purchasers. At the time of the contract, she did not have such a title to sell, and that remained the case shortly before the point of settlement on 23 February 2010. These circumstances foreshadowed, therefore, an unauthorised disposition. In such a case – assuming that such a sale went ahead – the defrauded mortgagee would have an equitable charge over the proceeds: Buhr v Barclays Bank plc [2001] EWCA Civ 1223 at [40]. Counsel for the Commissioner submitted that this argument amounted to an attempt to uphold the judgment of the Federal Magistrate upon a ground other than those upon which it had been based, and should have been the subject of a Notice of Contention. Subject to that protest, they accepted that, in the circumstances postulated, the mortgagee would have such a charge. 103 This more sophisticated formulation of the trustee's argument should be rejected, if for no other reason than because it was not covered by a Notice of Contention, and no attempt to come to terms with that omission was made on behalf of those representing the trustee. The argument was of some complexity, particularly in the context of its application to a registered Torrens system mortgage. We do not consider that the requirement for a notice should, in the circumstances, be regarded as a mere formality. We would, however, add that an equitable charge of the kind proposed in the argument would operate only with respect to the proceeds of the unauthorised disposition in the hands of the errant vendor. The silent premise on which the trustee's argument is based is that the Commissioner's rights under a s 260-5 notice are somehow derivative apropos those of the vendor/taxpayer in a situation in which the purchase moneys were notionally paid to him or her. Such an approach, however, implicitly mischaracterises the way that s 260-5 operates. A notice under s 260-5 (which this one was) imposes an obligation on the addressee immediately money becomes owing to the taxpayer. The money must be paid to the Commissioner instead of being paid to the taxpayer. There would, therefore, never be proceeds in the hands of the errant vendor which might be the subject of a charge in favour of the mortgagee. 104 Counsel for the trustee also submitted that, as a matter of construction, s 260-5 should not be understood as entitling the Commissioner to step in and take the moneys promised to be paid to the vendor of a mortgaged property by his or her purchaser, at the expense of the mortgagee. This submission involved four points, to which we shall come, but they were all based upon the proposition which lay at the core of the trustee's case, namely, that judgment for the Commissioner in a case such as the present would have the effect of turning the mortgagee into an unsecured creditor. Dealing with it at the general level – which must be the approach required in an exercise by way of construction – the proposition cannot be accepted. In the circumstances postulated, nothing but the repayment of the secured moneys or the voluntary act of the mortgagee could result in him or her losing the security. The vendor and the purchaser could not, by their own agreement alone, deprive the mortgagee of the security. A notice under s 260-5, if complied with by the purchaser, would not affect the security. There is no conceivable construction of the section – at least none for which the Commissioner pressed on the present occasion – which could leave an unwilling mortgagee in the position of an unsecured creditor. 105 Turning to the trustee's constructional points as such, the first was expressed as follows: The first is that, perhaps the obvious one, that it would be a statutory interference with vested rights. We have here a situation where the second mortgagee has a registered mortgage with all of the rights and benefits that conveys under the general law and it is unthinkable, frankly, unthinkable, that parliament intended to take those rights away and say that when it comes down to the question of who misses out, whether it's the Commissioner of Taxation who misses out because he's not paid in full, or the mortgagee who misses out because the mortgagee is not paid in full, but this legislation would by a side wind take away the benefit of a secured position and advance that of the Commissioner above that of the secured creditor. For reasons given in the previous paragraph, this argument cannot be accepted. 106 The second point was that, under s 260-20, failure to comply with a notice was attended by a criminal sanction, and – … it would be an extraordinary thing if parliament intended a person who has no relevant interest in the matter, other than the fact that he or she owes money to or has otherwise had a dealing with a tax payer, would be liable to criminal punishment merely for giving effect to the terms of a security. This argument, however, mischaracterises the operation of the section. And it also mischaracterises the act by which a purchaser of land performs his or her contract. The contractual obligation is not to give effect to the terms of the vendor's security. The terms of the security are entirely a matter for the vendor. He or she is under no obligation to use the purchaser's money to disencumber the title. Neither is the purchaser under any obligation to take the slightest interest in the subject. He or she may well have contracted to take a clean title, but how that state of affairs might be brought about is not a matter about which he or she need be concerned. Indeed, returning to the Administration Act itself, under s 260-15 a payment to the Commissioner in compliance with the s 260-5 notice is taken to have been authorised by the vendor, and to be the subject of an indemnity. The only thing to which s 260-20 attaches a criminal sanction is the purchaser's failure to pay the money owing by him or her to the Commissioner rather than to the vendor. The relevant provisions are quite unconcerned with the terms of any security which the vendor may have given over property, if the exchange of property for value is indeed the kind of transaction to which the s 260-5 notice attaches. 107 The third point was based upon something said by Arden LJ in Buhr at [55]: Mortgages, despite their roots in twelfth and thirteenth centuries, are still an important means of raising money and using assets for this purpose. Mr and Mrs Buhr like many other small entrepreneurs used their home as security for their business interests. This is a very important function of mortgages of every kind and I would have been loathe to reach a conclusion which would have exposed a significant technical gap in the protection given to mortgagees. It would in my view be contrary to expectation and common sense. That conclusion would have been liable to cause mortgagees to decline to permit sales by mortgagors without their consent. That would hamper the freedom of mortgagors or dissuade mortgagees from lending money on the security of mortgages at all. It matters that there should be appropriate incentives and protections in the law for mortgagees as well as mortgagors. It was submitted on behalf of the trustee that a judgment in favour of the Commissioner in the present appeal would affect "every species of fixed mortgage, whether it's ships or whether it's crop liens or whether it's land or whether it's bills of sale over chattels" and would, therefore, be contrary to sound commercial expectations of the kind seemingly endorsed by Arden LJ. But Buhr was a very particular sort of case, and her Ladyship's words must be understood accordingly. The security in question was a charge which ranked subsequent to a first mortgage to a third party. Because of the way the charge was noted on the registry, the registration of it was of no effect. The registered proprietors sold under a contract which promised "full title guarantee", and the question was whether some part of the proceeds of the sale were the entitlement, in equity, of the chargee rather than of the vendors (by now bankrupt). Clearly Arden LJ's reluctance "to reach a conclusion which would have exposed a significant technical gap in the protection given to mortgagees" would have no relevance to a valid registered mortgage. In the case of the latter, there is no "technical gap": the mortgagee is entitled to the protection provided by his or her security for so long as the obligation secured thereby remains outstanding. A judgment in favour of the Commissioner on the present appeal may well apply to other forms of debt secured by mortgage, but, if it does so, it would not have the consequence that all these other mortgagees would be at risk of losing their securities without satisfaction of the obligations to which they relate. 108 The fourth point was that, consistently with s 15A of the Acts Interpretation Act 1901 (Cth), s 260-5 had to be construed so as not to exceed the Parliament's legislative power, and, if s 260-5 – … takes away the existing right of a secured creditor and subordinates that right to the right of the Commissioner to collect money that's due to him – then that is nothing less than an … acquisition of property, otherwise than on just terms. It should be clear by now that we would reject the proposition that s 260-5, even on the case of the Commissioner, has any such effect. However, we would not consider this constitutional argument in the highly undeveloped form in which it was presented to us. It was not contained in the trustee's outline, no notices had been given under s 78B of the Judiciary Act 1903 (Cth) and no systematic approach to the relevant jurisprudence was taken in counsel's high-level, almost perfunctory, submissions on the subject. Either way, we would reject the fourth point. 109 Before leaving the trustee's case in the appeal, we should refer to the following submission which was made on his behalf: Given what we see in this case, that the Commissioner doesn't have the guts to take on a bank because, in this case, the first registered mortgagee was a bank and the Commissioner let the bank take 100 cents in the dollar because the Commissioner wasn't going to take on a bank. For our own part, we can discern in the facts of the present case no greater an inclination on the part of the Commissioner to "take on" Instyle rather than the Bank. The Commissioner's s 260-5 notice was not concerned with the debts that were owed by Ms Bassili, or with the arrangements which secured them. It was not within the Commissioner's province to determine who might not be paid if the purchasers complied with the notice. If the Commissioner succeeds on the present appeal, it will be because the purchasers ought to have paid the sum of $75,508.64 to him instead of paying the whole of the settlement sum to Ms Bassili. How the balance was to be distributed as between the first and second mortgagees was not a matter for the Commissioner. The other parties appear to have accepted that, as between the Bank and Instyle, the Bank, as first mortgagee, ought to be paid out in full. We have no difficulty with that outcome, or with the legal assumptions upon which it was implicitly based, but we do not accept that it carries the corollary that the Commissioner did not "have the guts to take on a bank". 110 That brings us to the reasons of the Federal Magistrate and to the criticisms of them contained in submissions advanced on behalf of the Commissioner. As we have indicated above, his Honour effectively assimilated the position in the case to that of a creditor who held a floating charge over the assets of a company. His Honour took the view, based on what Connolly J had said in Tricontinental, that, upon crystallisation, debts covered by such a charge were owed not to the company but to the chargee. His Honour also took the view that, because a mortgage was a security tied to a specific asset, it should be treated, in effect, as being in a post-crystallisation situation, even, on the facts of the present case, before the contract of sale was made, and necessarily before the Commissioner's s 260-5 notice was served. 111 Counsel for the Commissioner submitted that the Federal Magistrate's floating charge analogy was an inapt one. In the case of a floating charge, the charge, and therefore the security, relates to the sums owing as such, and when the charge crystallises it does so with respect to the debtor's rights of action in respect of those sums. By contrast, a mortgage of Torrens system land relates not to moneys owed by third parties but to the land itself: Land Title Act 1994 (Qld), s 74. Moneys owed by a third party – even someone who had contracted to purchase the land – are not the subject of the security. There was nothing which the mortgagee could, or need, do to convert himself or herself into a person to whom those moneys were owed, in place of the debtor. His or her security remained always on the land as such, and his or her protection was the ability to foreclose, by whomever the land might be owned, so long as the mortgage remained on the register. 112 Counsel for the trustee did not engage directly with these submissions advanced on behalf of the Commissioner. Indeed, we take the view that there is no satisfactory answer to them. It was, in our respectful view, an error for the Federal Magistrate to have decided the point which arose before him by reference to the floating charge analogy. 113 How, then, should the present appeal be decided? Once the trustee's points of construction have been dealt with in the way that we have above, the only question which remains is whether s 260-5 imposed upon the purchasers an obligation to make a payment to the Commissioner of the kind referred to in his notice. Under the section, at the instant moneys became owing by the purchasers to Ms Bassili, the former fell under the statutory obligation to pay those moneys to the Commissioner. At settlement, in the present case on 23 February 2010, Ms Bassili offered an unencumbered title to the purchasers. In exchange for that, the purchasers came under a contractual obligation to tender the whole of the purchase price, including the $75,508.64 presently in controversy. That is to say, the moneys then became owing by the purchasers to Ms Bassili. At that point, the purchasers' obligation to pay to the Commissioner under s 260-5 became absolute. By reason of s 260-15, a payment to the Commissioner would, in effect, be sufficient (as against Ms Bassili) to satisfy the purchasers' obligations under their contract. 114 We can well understand that the trustee, as the assignee of Instyle, would regard this result as unsatisfactory. However, if there is a discernible point at which Instyle's position was compromised by the sequence of events which occurred on 23 February 2010, it was when it released its mortgage over the property. Although the Commissioner consented to settlement going ahead under arrangements which included that release, he made it clear in correspondence that his consent was not to be interpreted as surrender of his claim under s 260-5. On the present appeal, the outline originally filed on behalf of the Commissioner placed some significance on the circumstance that Instyle had (voluntarily it would seem) released its mortgage. Counsel for the trustee submitted that a case along those lines on behalf of the Commissioner would amount to a departure from the way in which the proceeding had been conducted before the Federal Magistrate. Counsel for the Commissioner accepted that criticism, and withdrew the offending submissions. However, they made it clear that their case still involved the proposition that, as events in fact played themselves out on 23 February 2010, Ms Bassili was in a position to perform, and did perform, her part under the contract of sale such that the purchase price became unconditionally owing to her by the purchasers. They were entitled to so submit. The Commissioner was entitled to conduct his case on appeal by reference to the facts as they actually were. 115 We would uphold the appeal, set aside the declarations, and Order 3, made by the Federal Magistrate on 27 July 2011, declare that the Commissioner is entitled to the sum of $75,508.64 paid into court on 2 June 2010 together with any accretions thereto and order that that sum, together with any such accretions, be paid to the Commissioner. 116 Counsel for the Commissioner informed us that, because of the importance of the case, his client had agreed to pay the costs of the proceeding. We would, therefore, leave the Federal Magistrate's costs order undisturbed and order the Commissioner to pay the trustee's costs of the appeal. I certify that the preceding thirty-seven (37) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Jessup and Katzmann. Associate: Dated: 31 August 2012