Re Falzon, John Ex Parte Deputy Commissioner of Taxation of the Commonwealth of Australia [1996] FCA 621

CATCHWORDS BANKRUPTCY - creditor's petition - petition opposed - additional tax levied for incorrect tax return - no tax return filed at the relevant time - whether sufficient grounds for exercise of Court's discretion not to make sequestration order under s52(2) Bankruptcy Act 1966. INCOME TAX - notice under s218 of the Income Tax Assessment Act 1936 served on the Victoria Police - effect of application by Police for a forfeiture order under s5(1) Crimes (Confiscation of Profits) Act 1986 (Vic) - whether Deputy Commissioner of Taxation acquired a vested interest in money seized by the police. Bankruptcy Act 1966 sub-section 52(2). Income Tax Assessment Act 1936 section 218. Crimes (Confiscation of Profits) Act 1986 (Vic) ss5(1), 38 and 41. RE JOHN FALZON EX PARTE DEPUTY COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA VP No. 400 of 1996 Olney J Melbourne 22 July 1996

IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION BANKRUPTCY DISTRICT OF THE STATE OF VICTORIA No VP 400 of 1996

Re: JOHN FALZON Judgment Debtor

EX PARTE: DEPUTY COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Petitioning Creditor Coram: Olney J Place: Melbourne Date: 22 July 1996 REASONS FOR JUDGMENT The petitioning creditor (hereafter referred to as the Commissioner) obtained judgment against John Falzon (the debtor) in the Supreme Court of Victoria on 9 December 1994 in the sum of $358,826.91 (for income tax) plus $4,205.82 (for interest) and $1,324.00 (for costs). The total judgment was for the sum of $391,357.73. On 27 September 1995 the amount due under the judgment was reduced by $31,700 as the result of a sale by the Sheriff in execution of a warrant of seizure and sale issued against the debtor's goods. On 2 May 1996 the Commissioner caused a bankruptcy notice to be issued which required payment within 14 days after service of $431,120.52 being the amount of the original judgment, less $31,700 plus $71,402.79 for further interest calculated under the Penalty Interest Rates Act 1983 up to 30 April 1996. Personal service of the bankruptcy notice was effected on 3 May 1996. The debtor did not make any response and accordingly on 17 May 1996 he committed an act of bankruptcy. The Commissioner presented a bankruptcy petition on 20 May 1996 and personal service was effected on 22 May 1996. The debtor opposes the making of a sequestration order on two grounds. First, he says he is solvent. As no evidence as to his solvency has been put before the Court there is no basis upon which a finding of solvency can be made. The second ground of opposition asserts that for sufficient cause a sequestration order ought not be made. The debtor seeks the exercise of the Court's discretion under s 52(2) of the Bankruptcy Act1996. Particulars of this ground are pleaded but before referring to them, and thus being able to understand the case put on behalf of the debtor, it will be necessary to rehearse the factual context in which the case has arisen. On 24 May 1992 an officer of the Victoria Police seized three sums of money totalling $216,430 from the debtor. Some of the money was handed to police by the debtor, some was found in a wallet on his person and the balance was found in the backyard of premises at Sunshine. The debtor was charged with a number of drug related offences following the seizure. As the debtor had not filed income tax returns for the years 1991 and 1992, the Commissioner, on 23 April 1993, issued default assessments for those years for a total sum of $314,317.53. The assessments were made on a betterment basis, and took into account the money seized on 24 May 1992 (the seized property). On the same day as the income tax assessments were issued, the Commissioner also issued a notice under s 218 of the Income Tax Assessment Act and served same on the police officer having custody of the seized property. The debtor lodged objections against the notices of assessment. The objections were disallowed on 19 October 1994. No application was made to review the decision to disallow the objections. On 23 May 1994, in the County Court at Melbourne, the debtor pleaded guilty to five counts of drug trafficking. At that time the Crown made application pursuant to s 5(1) of the Crimes (Confiscation of Profits) Act 1986 (Vic) for a forfeiture order in respect, inter alia, of the seized property. The County Court did not immediately proceed to sentence the debtor but rather adjourned sentencing and the hearing of the forfeiture application. The matter did not come on again until 25 September 1995. In the period which had intervened since the plea, as a result of negotiations between the debtor's legal representative and the Crown, the debtor agreed to consent to forfeiture orders in relation to the seized property and the Crown agreed to make no application for a pecuniary penalty. A forfeiture order was duly made on 29 September 1995 in favour of the State of Victoria and no pecuniary penalty was imposed. The debtor was sentenced to a term of imprisonment. On 20 February 1996 the debtor lodged 6 income tax returns including returns for the years 1991 and 1992. On 6 June 1996 the Commissioner advised the debtor that the 1991 and 1992 assessments issued on 23 April 1993 would not be amended. According to the evidence of an officer of the ATO which is not contested, if any review action is taken by the debtor in respect of the decision not to amend the assessments, the debtor would nevertheless, on the basis of his own returns, be liable to income tax for the years 1991 and 1992 in the sum of $110,342.59. The s 218 notice required the police officer to pay the Commissioner forthwith any money then due by him to the debtor and to pay any money subsequently becoming due forthwith upon it becoming due. The total of the liability sought to be recovered under the notice was $314,683.28. In the period intervening between the service of the s 218 notice and the making of the forfeiture order the Commissioner and the Crown had addressed the question of whether the notice would take priority over any application for forfeiture and apparently both came to the conclusion that the notice would have the effect of requiring payment of the seized property to the Commissioner only if the police officer was, or became, liable to pay it to the debtor and further that pending resolution of the forfeiture application he was not under any such liability. Accordingly, if and when a forfeiture order was made, the money would be payable to the State and there would therefore be no occasion when the s 218 notice would impose an obligation on the police officer to pay it to the Commissioner. The Commissioner accepted these propositions and made no attempt to intervene in the forfeiture proceeding. The notice of assessment for the 1991 year contains the following items: Tax on taxable income $77,401.57 DR Medicare levy $2,265.07 DR Additional tax for $39,833.00 DR for incorrect return Provisional tax credit $871.00 CR Amount payable on this $117,628.64 DR assessment Other amounts payable $ 367.75 DR TOTAL AMOUNT PAYABLE $118,994.39 DR