Syme. 8 - JUDGMENT No. b\4/ oh CATCHWORDS BANKRUPTCY - Income tax - Effect of notices under s.218 of the Income Tax Assessment Act 1936 where taxpayer becomes bankrupt - Notices in respect of payments constituting income of bankrupt - Position in respect of income earned prior to bankruptcy. Bankruptcy Act 1966, 83.118, 131 Income Tax Assessment Act 1936, 3.218 DESMOND WILLIAM KNIGHT AS TRUSTEE OF THE BANKRUPT ESTATE OF GEO TER EDELSTEN & GEO WALTER EDELSTEN -V- DEPUTY COMMISSIO fT. ON . No. 1136 of 1987 Burchett J. Sydney 4 November 1987 | ) i 1 ~9NOVI987 FEDERAL COURT OF AUSTRALIA PRINCIPAL REGISTRY N FEDERAL COURT OF AUSTRALIA G DIVISION R Y DISTRICT OF THE STATE OF NEW SOUTH WALES AND THE AUSTRALIAN APITAL TORY No. 1136 of 1987 BETWEEN : DESMOND WILLIAM KNIGHT AS TRUSTEE OF THE BANKRUPT ESTATE OF GEOFFREY WALTER EDELSTEN First Applicant GEOFFREY WALTER EDELSTEN Second Applicant DEPUTY COMMISSTONER OF TAXATION First Respondent HEALTH INSURANCE COMMISSION Second Respondent REASONS FOR JUDGMENT BURCHETT J. By an application (as amended by leave during the course of the hearing) the applicants sought relief in respect of certain notices under s.218 of the Income Tax Assessment Act 1936 issued by the first respondent. The second respondent, the recipient of the notices, submitted to such order other than as 2. to costs as the Court might make. During the course of the hearing, on 22 October 1987, a special resolution was passed at a meeting of creditors removing Mr. Knight from his trusteeship and appointing Mr. M.C. Donnelly, a registered trustee, as trustee in his place. Mr. Donnelly arranged for counsel to be briefed who repeated certain of the submissions previously made to me on behalf of the former trustee, but Mr. Donnelly has not as yet been formally substituted as an applicant or joined as a respondent. I propose to hear counsel further as to the appropriate course upon the bringing in of short minutes which will be required pursuant to these reasons. Following the substitution of Mr. Donnelly, I excused the solicitor, who had until then represented the trustee, from further attendance, but it will be necessary also to make an order to provide for the costs of the estate up to that time. The applicant, Dr. Edelsten, presented his own petition by virtue of which he became bankrupt on 21 September 1987. (Two annulment applications have been made, but as these have not yet been heard, whatever the ultimate position, Dr. Edelsten is presently bankrupt by virtue of the terms of 3.55(3) of the Bankruptcy Act 1966.) Prior to Dr. Edelsten's bankruptcy, namely on 7 July 1987, the respondent Deputy Commissioner of Taxation issued notices under s.218 of the Income Tax Assessment Act requiring the Health Insurance Commission, on the basis that it fell within the terms of paragraphs (a), (b), (c) and (d) of sgub-3s.(1) of 3.218 in respect of Dr. Edelsten, and that Dr. Edelsten was a taxpayer by whom an amount of $692,832-20 was due, to pay to the Commissioner 100 cents in every dollar of each 3. payment due to Dr. Edelisten "until the amount of $692,832-20 due by the taxpayer is satisfied". Some reference was made in argument to circumstances which arose earlier than 7 July, and which concerned previous notices under s.218 requiring payment of a lesser proportion of sums due to Dr. Edelsten, but it is unnecessary for present purposes to go into these matters. By an earlier application, which was made under the Administrative Decisions (Judicial Review) Act 1977, Dr. Edelsten challenged the decisions pursuant to which the earlier notices were revoked and the notices of 7 July issued, but judgment has not been delivered in those proceedings, by reason of an application by the Commissioner of Taxation to reopen his evidence and the subsequent bankruptcy of Dr. Edelsten. Dr. Edelsten is a medical practitioner. By virtue of the scheme set up under the Health Insurance Act 1973, and particularly ss.20, 20A and 20B, provision is made for what is known as "bulk billing", by which a medical practitioner obtains an assignment from a patient of the "medicare benefit" payable to the patient by the Commonwealth, and lodges a claim in accordance with the approved form for payment of the benefit direct to the medical practitioner. Dr. Edelsten followed this practice. By the notices under 8.218, the Commissioner of Taxation required payment to be made of the whole of the amounts payable under the bulk billing procedure, not to Dr. Edelsten, but to himself. The fundamental question in the present applications is whether, as the Commissioner claims, the notices under s.218 continued to operate, in respect of all amounts otherwise payable to Dr. Edelsten, after he became a bankrupt. The amount of tax which the Commissioner alleges to be due, as stated in the 3.218 notices, is part of the amount assessed pursuant to amended assessments issued prior to the bankruptcy, and in respect of which, I was informed without objection in the course of argument, proof of debt has been lodged. Counsel for Dr. Edelsten, who claims to be entitled under s.131 of the Bankruptcy Act to the moneys payable pursuant to the bulk billing procedure, as income of which he is in receipt, accordingly contends that from the date of the bankruptcy there has been no tax due by Dr. Edelsten to which the 8.218 notices could relate. The Commissioner's right to be paid by Dr. Edelsten has been converted into a right of proof in the bankruptcy, and counsel also submits that 3.58 of the Bankruptcy Act bars the Commissioner from enforcing the notices, which he says constitute a "remedy" within the meaning of that section. The decision of the High Court in Clyne _v. Deputy Commissioner of Taxation (1984) 154 C.L.R. 589 (see also Taylor v. Deput ommissioner of T tion (Vic (1987) 73 A.L.R. 219) establishes, to quote from the joint judgment of Gibbs C.J. and Murphy, Brennan and Dawson JJ. at 594-5, that upon the bankruptcy of a bankrupt: "the remedies against the person and property formerly available to the Deputy Commissioner had been taken away and there was substituted a right to prove against the estate which had become vested in Cthe trustee] as trustee... . At that time the Deputy Commissioner 'was not a mere creditor. CHel was a creditor whose claim was in proof. CHis] claim was no longer a mere right of action for a debt. [CHe] could no longer have maintained an action as for a debt. The debt 5. had been, at any rate provisionally, merged in an equitable execution ...' ... Amounts which were owed by a debtor at the date of the bankruptcy May, notwithstanding his bankruptcy, still be described as debts, and the Act refers to them as such... . eee However, in our opinion, they are no longer debts 'still owing' within the meaning of 8.52(1)(c). Although, as was rightly observed in the Federal Court, one dictionary meaning of 'owing' is 'that is yet to be paid', the word connotes a sense of obligation to make the payment. The effect of the bankruptcy however is that the debtor is no longer obliged to pay his creditors; indeed he is disabled from doing so. If he offered payment they could not safely accept it; their right is a right of proof against the estate." The joint judgment continues at p.595 to discuss certain cases where a second sequestration order was rescinded (the judgment points out it should have been annulled), and comments: "However the true ground of the decisions is that the earlier bankruptcy had converted the creditor's right to be paid by the debtor into a right of proof, and the debt was not still 'owing' within the meaning of the statute." Section 218 of the Income Tax Assessment Act provides relevantly as follows: "(L) The Commissioner may at any time, or from time to time, by notice in writing (a copy of which shall be forwarded to the taxpayer at his last place of address known to the Commissioner), require - (a) any person by whom any money is due or accruing or May become due to a taxpayer; (b) any person who holds or may subsequently hold money for or on account of a taxpayer; (c) any person who holds or may subsequently hold money on account of some other person for payment to a taxpayer; or (d) any person having authority from some other person to pay money to a taxpayer, to pay to the Commissioner, either forthwith upon the money becoming due or being held, or at or within a time specified in the notice (not being a time before the money becomes due or is held) - (e) so much of the money as is sufficient to pay the amount due by the taxpayer in respect of tax or, if the amount of the money is equal to or less than the amount due by the taxpayer in respect of tax, the amount of the money; or (f) such amount as is specified in the notice out of each payment that the person so notified becomes liable from time to time to make to the taxpayer until the amount due by the taxpayer in respect of tax is satisfied, and may at any time, or from time to time, amend or revoke any such notice, or extend the time for making any payment in pursuance of the notice. (2) Any person who refuses or fails to comply with any notice under this section is guilty of an offence. Penalty: $1,000. (4) Any person making any payment in pursuance of this section shall be deemed to have been acting under the authority of the taxpayer and of all other persons concerned and is hereby indemnified in respect of such payment. (5) If the Commissioner receives any payment in respect of the amount due by the taxpayer before payment is made by the person so notified he shall forthwith give notice thereof to that person. " eee By virtue of sub-s.(6B) "person" includes any public authority of the Commonwealth, and it is not contested that the section applies to the Health Insurance Commission. It will be noticed that paragraphs (e) and (f) of sub-s.(1) are expressed in the alternative. The notices in question in the present matter have been formulated using the language of paragraph (f), notwithstanding that the amount specified in the notices out of each payment is the whole of the payment, for the wording is: "an amount of 100 cents in every dollar of each payment until the amount of $692,832-20 due by the taxpayer is satisfied." But whether regard is had to paragraph (e) or paragraph (f), the question arises whether there is an "amount due by the taxpayer", within the meaning of the section, after the bankruptcy. In Clyne v. Deputy Commissioner of Taxation (1981) 150 C.L.R. 1 at 8, Gibbs C.J. said that the word "due" in s.218(1)(1) (the paragraph that became paragraph (e), not being relevantly different in terms) "must mean 'owing'". Mason J. at 15-17 made it clear the word "bears its prima facie meaning", which "would include all sums certain which any person is legally liable to pay, whether such sums had become actually payable or not." Aickin and Wilson JJ. agreed with Mason J., and Brennan J. also agreed on this point. But in the light of the later Clyne. case, already cited, how can it be said that Dr. Edelsten, after his bankruptcy, is "legally liable to pay" the tax in question? Senior counsel for the Commissioner endeavours to meet the difficulty by submitting that the only relevant time at which . 8. to consider the validity and effectiveness of the s.218 notices is the time when they were given. He submits that it does not matter if the tax ceased to be owing at a subsequent time - the notices still continued to operate. In my opinion, it would require extraordinarily intractable language to produce this result. It has been said of the Commissioner's powers to enforce assessments, even before there has been an opportunity to test them on appeal, utilizing notices under s.218, that these are "very wide powers which can undoubtedly in many cases create undue hardship" (per Fox J. in Huston v. Deputy Federal Commissioner of Taxation (1983) 83 A.T.C. 4525 at 4529); but such powers have been justified as necessary "to enable the recovery of tax" (see F.J. Bloemen Proprietary Limited v. The Commissioner of Taxation the Comm alth of Australia (1981) 147 C.L.R. 360 at 375). It is not necessary that powers of this kind (which may also affect other persons, such as assignees or persons holding a floating charge) should be exercisable at a time when no tax ig due. In any case, sub-s.(5) of s.218, which requires the Commissioner forthwith to give notice of any payment received by him in respect of the amount due by the taxpayer "before payment is made by the person s0 notified", seems plainly inconsistent with the Commissioner's contention. The purpose of sub-s.(5) must be to ensure that the Commissioner is paid no more under a 8.218 notice than is at the time of payment (not at the time of the giving of the notice) actually due by the taxpayer. It cannot have been intended that the recipient of the notice should be notified of payment in full of the outstanding tax, and yet should remain liable to comply with the original notice. If it be objected that no dispensation from the requirements imposed on him at the time of service is expressly stated, the answer is that his obligation under s.218 is only ever a matter of implication: Clyne's case 150 C.L.R. at 11, 17. It is therefore quite in keeping with the manner in which the section is framed, that an exoneration from compliance is also by implication. And the Court should not be less ready to read into the section the exoneration than the burden. Yet senior counsel for the Commissioner says I am bound by statements made in the High Court judgments in Clyne's case (that reported in 150 C.L.R. at 1) to hold otherwise. It is true it was there held a s.218 notice, when served, fastens bindingly upon a sum of money which is "due or accruing or may become due to a taxpayer" so as to prevent the taxpayer thereafter defeating the notice by assignment of his right. But the High Court was concerned with the effect under the section of a notice in respect of moneys "owing to the taxpayer when the notice (was) given" (per Mason J. at 23), though not payable till a later date, there being a tax debt at all times due (though also not immediately payable at the date of the notice). The question was whether Mr. Clyne could assign his right to avoid the obligation of the notice, not whether that obligation would itself be dissolved upon dissolution of the tax debt which justified it. In Clyne's case there was some discussion concerning the precise effect of a s.218 notice. Mason J., with the agreement of Aickin and Wilson JJ., said at 19: "IT regard the effect of the notice as similar to that of a garnishee order." 10. (Similarly, the power conferred by the section was described in F.J. m Vv. mmonvw: t ustralia (1981) 147 C.L.R. 360 at 375 as "the garnishee power in 3s.218". See also Tricontinental Corporation Ltd v. Federal Commissioner of Taxation (1987) 73 A.L.R. 433 at 436 and Huston's case, supra, at 4526, 4531.) At 17-18 Mason J. left open the question whether the notice created "a charge over, or interest in, the moneys in favour of the Commissioner." Brennan J. at 26 made it clear that he thought the notice resulted in a statutory charge. But whether the obligation imposed by the section is of the character produced by a garnishee order or should be described as a statutory charge, it is incontrovertible that, as Mason J. said at 17: "The section only imposes an obligation to pay in accordance with its terms." There can be no charge over moneys which do not exist. If, when moneys come into existence, the terms of the section and of the notice given under it are not, or are no longer, apt to apply to those moneys (as for example if the Commissioner of Taxation has given a notice under sub-s.(5) covering the full amount of the tax debt) it seems to me the s.218 notice cannot affect those moneys. In the present case, it could not be said that sums of money were due from the Health Insurance Commission to the bankrupt before submission of the claims for benefit and assignment forms. Where sums have become due since the ll. bankruptcy, at the time they became due it could no longer be said that there was any "amount due by the taxpayer in respect of tax" in relation to which they could be paid to the Commissioner. Since the notices were framed in accordance with paragraph (f) of s.218(1), it is important to note that the "obligation to pay in accordance with its terms" is only "until the amount due by the taxpayer in respect of tax is satisfied." On behalf of Dr. Edelsten and the trustee, it was urged that if 3.218 were construed as supporting notices to continue to operate after the bankruptcy of a taxpayer the result would be to subvert the operation of the Bankruptcy Act. The Commissioner could simply give notices to all of a debtor's creditors. If he also gave notice to the employer of an employed debtor, and assuming that the prospect that wages may become due by an employer from time to time is sufficient to satisfy s.218(1)(a), consequences would ensue which were regarded as harsh in the eighteenth century, and have been eschewed in the ordinary bankruptcy law by s.131 of the Bankruptcy Act (see per Williams J. in Federal Commissioner of Taxation v. Official Receiver (1956) 95 C.L.R. 300 at 313, quoting Lord Mansfield in support of the proposition that the whole of a bankrupt's personal earnings do not vest in his official assignee). It was pointed out that a limited priority conferred on the Commissioner of Taxation by s.109(1)(j) of the Bankruptcy Act, and a specific protection accorded under s.123(6)(b) to payments made under s.218 of the Income Tax Assessment Act (though that referred, not to the possibility of a taxpayer 12. becoming bankrupt, but to the possibility of the payer becoming bankrupt), which previously existed under the Bankruptcy Act, were each removed by amendment in 1980. The argument asserted that the amendments cast some light on the view taken of s.218 by the Parliament when it amended the Bankruptcy Act, but I have difficulty in seeing how that assists me to interpret the true intent of 8.218, adopted as it was on a different occasion and as part of a different Act. (Cf. the remarks of Wallace J. and Kennedy J. in Norgard v. Deputy Federal Co ssioner of Taxation (1986) 86 A.T.C. 4947 at 4962 and 4969.) However it is unnecessary to discuss this argument further in view of the conclusion I have reached as to the meaning conveyed by the terms of s.218 itself. For the reasons already stated, I do not think the s.218 notices could continue to apply to health insurance payments which became payable to the bankrupt after his bankruptcy. The next question concerns the consequences of this ruling. It will be easy to apply to payments which relate to work done by Dr. Edelsten after his bankruptcy. The s.218 notices will have no application to those payments. At the other end of the spectrum, there is no occasion to consider payments which were made by the Health Insurance Commission to _ the Commissioner of Taxation in compliance with the notices during the period prior to the bankruptcy, though I am informed the trustee will be pursuing a claim made by his predecessor under 8.118 of the Bankruptcy Act, or otherwise, for recovery of those payments received during the period of relation back, on the footing that, as he asserts, they are the fruits of an attachment 13. (cf. Re Lupkovics. Ex parte The Trustee v. Freville £1954] 2 All E.R. 125 at 129-130) not protected by 3.123 (which does protect certain payments of tax). Having regard to s.118(4) and s.131, the bankrupt also has a possible interest in that claim, but the trustee has merely foreshadowed his pursuit of it, without argument, at this stage. I therefore say nothing about it. It appears there are two other categories of payment which also require consideration. One is payments in respect of work done by Dr. Edelsten as a medical practitioner before his bankruptcy, in relation to which he submitted claims and assignment forms that had not been processed to payment at the date of the bankruptcy. The other consists of moneys which have arisen or will arise from work done prior to the bankruptcy in respect of which claims were withheld by Dr. Edelsten until after his bankruptcy. Where claims relating to work done before the bankruptcy have been submitted after the bankruptcy to the Health Insurance Commission, it follows from what I have already said that the notices under s.218 could have no application. But the trustee argues that the rights to submit the claims to the Health Insurance Commission constituted property which passed to him upon the bankruptcy, and that accordingly any amounts payable should be paid to him. This argument necessitates an examination of s.131 of the Bankruptcy Act which relevantly provides as follows: "131(1) Subject to this section, a bankrupt who is in receipt of income is entitled to retain it for his own benefit. 14. (2) The Court may, upon the application of the trustee, order that all, or such part as the Court thinks fit, of the income of the bankrupt shall be paid to the trustee for the benefit of the bankrupt's creditors. In ss; Ex rte Official Trustee in nkruptcy (1985) 7 F.C.R. 121 at 123-4 Lockhart J. said: "The word 'income' is not defined in the Act; but in the context of s 131 and comparable provisions in other bankruptcy legislation, it has been held to bea word of large meaning." He cited a dictum of Sir George Jessel M.R. that it was "as large aword as can be used". When the matter went on appeal, as Weissova v. The Official Trustee in Bankruptcy (1986) 12 F.C.R. 106, the Court referred to Federa Commiss Taxation v. Official Receiver (1956) 95 C.L.R. 300 at 319, where Fullagar J. expressed preference for the view that the bankrupt's personal earnings did not vest in the Official Receiver, whose only right was to seek an order from the Court in respect of them. (In that case, a refund of deductions from wages in respect of income tax was held to constitute personal earnings of the bankrupt.) Beaumont J., in Weissova's case at 109, pointed out that the Committee whose recommendations led to the enactment of s.131 had expressed the intention of giving effect to the view preferred by Fullagar J. That that intention was carried out is confirmed by the observation of Bowen C.J. in Eq. (as he then was) in Thistlethwayte v. Gender Estate ty Ltd (1976) 8 A.L.R. 700 at 702 where he said: ° 15. "It appears to me that s 131(1) of the Bankruptcy Act 1966, as amended, is worded More strongly in favour of the bankrupt than s 101 of the Bankruptcy Act 1924. Even under that section, and the corresponding section in the United Kingdom, the view was taken by the courts that a bankrupt was entitled to receive and, if necessary, to sue for moneys which, by his personal effort, he had earned unless and until the Official Receiver or trustee intervened ... ." In Weissova's case at 110-111 reference was made to a passage in the judgment of Dixon C.J., Taylor and Menzies JJ. in Falstein v. Official Receiver (1962) 108 C.L.R. 523 at 528: "The contention is, however, sufficiently answered by the words of Dixon J. (as he then was) in Nette v. Howarth (1935) 53 C.L.R. 55 where his Honour said: 'Whilst these words' (that is 'in receipt of') 'do not connote necessarily a regular periodicity, they do suggest recurrence as an actual or expected characteristic of the things the section proceeds to describe. 'In receipt of' is, we think, descriptive of an existing and continuing state of affairs Nette v. Howarth, supra, is an interesting case. It was decided upon s.101 of the Bankruptcy Act 1924, which used the expression "where a bankrupt is in receipt of pay, pension, salary, emoluments, profits, wages, earnings, or income... ". The estate of the bankrupt was sequestrated on 10 July 1934. He had been a New South Wales public servant, and had made contributions from his salary under the State Superannuation Act 1916. He resigned from the Public Service on 28 August 1934, being then entitled to receive a lump sum equal to the contributions paid by him in respect of superannuation. The 16. question was whether the lump sum payment belonged to the Official Receiver or the bankrupt. It was held that the Official Receiver was entitled to the money. As Rich J. said at 59: "It is a lump sum which the Superannuation Board is bound by statute to pay. It is not a payment in respect of past or current services." Starke J. at 61-2 said: "It does not represent the personal earnings of the bankrupt or any return of those earnings to him. ... It is a sum payable to him under and by virtue of the provision contained in sec.38 of the Superannuation Act." Dixon J. at 64 said: "The governing words of sec.10l are 'is in receipt of.' Whilst these words do not connote necessarily a reguiar periodicity, they do suggest recurrence as an actual or expected characteristic of the things the section proceeds to describe. They raise a presumption that they will be of a revenue nature. The lump sum payable to a contributor on his retirement is to be equal to his contributions, and those contributions were deducted from his. salary. But the contributions ceased to be salary when they were made to the fund. The lump sum cannot be considered deferred salary or pay. vee 'Profits', 'earnings' and 'income' are wide words. They cover the fruits of labour and much more besides. ... The words of sec.101 refer to the character in which money is paid or received. The character in which an accumulated fund is received is not determined by the source of the accumulations. The sum now in question is not in truth even an accumulation of income, salary or the like. It is a sum payable pursuant to statute, which is ascertained by a calculation of the amount contributed in the past from income by deductions from salaries. It comes into the hands of the retiring contributor simply as Money. It is, as it appears to me, a capital receipt." 17. For present purposes, it is important to note that although almost the whole sum involved in Nette's case must have been referrable to deductions from his salary over many years prior to his bankruptcy (he entered the Public Service in 1914), there is no suggestion in any of the majority judgments that 3.101 of the Bankruptcy Act 1924 could not have applied because the income was past income; the bankrupt failed because, although the source of the accumulations was income, payment made out of the fund was a capital payment pursuant to statute which did not represent the earnings from which the original contributions had been made. The dissenting Judges, Evatt and McTiernan JJ., dissented precisely because, in their view, the payment in question was, as they said at 67, "a return to him by one payment of income which he earned but did not enjoy." In my opinion, the moneys I am presently considering can only be regarded as deferred income. They have not been received and paid into a fund as happened in Nette's case. Receipt has simply been deferred for a few months. Accordingly, these moneys constitute income which the bankrupt is entitled to retain for his own benefit, subject to the power of the Court, upon the application of the trustee, to order that all or part of that income shall be paid to the trustee for the benefit of the bankrupt's creditors. It remains to consider the position of moneys representing claims, which were submitted to the Health Insurance Commission and were payable prior to the bankruptcy, in respect of which payment was not made by reason of the disputes 18. concerning the 93.218 notices which then existed (and indeed continue to exist). These amounts were prima facie within the reach of the 3.218 notices, but in view of the income character of such payments, a question would arise, if the trustee should be successful in his announced claim against the Commissioner of Taxation, whether Dr. Edelsten is entitled to receive these amounts from the trustee, and if so, whether an order should be made under s.131 affecting any such entitlement. In view of the anticipated claim of the trustee and the paucity of the evidence concerning the details of the amounts to which this question would relate, I think it is preferable that I refrain at this stage from making any declaration concerning then. I direct that the applicant bring in short minutes to reflect these reasons, whereupon [I shall hear the parties as' to the appropriate orders in respect of costs. I certify that this and the preceding seventeen (17) pages are a true copy of the Reasons for Judgment herein of his Honour Mr. Justice Burchett. fia tock Associate Dated: 4 November, 1987.