Commissioner of Taxation for the Commonwealth of Australia v Tomaras & Ors

[2018] HCATrans 56

[2018] HCATrans 056

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Brisbane  No B65 of 2017

B e t w e e n -

COMMISSIONER OF TAXATON FOR THE COMMONWEALTH OF AUSTRALIA

Applicant

and

TOMARAS

First Respondent

TOMARAS

Second Respondent

OFFICIAL TRUSTEE IN BANKRUPTCY

Third Respondent

Application for special leave to appeal

KEANE J
EDELMAN J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 23 MARCH 2018, AT 11.16 AM

Copyright in the High Court of Australia

MR S.B. LLOYD, SC:   May it please the Court, I appear with MR L.T. LIVINGSTON for the Commissioner.  (instructed by Australian Government Solicitor)

MR M.L. ROBERTSON, QC:  If the Court pleases, I appear with my learned friend, MR S.J. CARIUS, for the first respondent.  (instructed by Hartnett Lawyers)

KEANE J:   I notice there is no appearance for the second or third respondents.  Mr Lloyd.

MR LLOYD: The ultimate issue to be determined in this proposed appeal is whether the power of the Family Court under section 90AE of the Family Law Act to make substitution orders directed to creditors extends to the making of such orders directed to the Commissioner in respect of tax‑related liabilities.  The Commissioner contends that the power does not so extend and that the court below erred.

The first special leave question concerns the correct approach to determining when the presumption is engaged. The joint judgment concluded that the presumption – that is the presumption that statutory provisions expressed in general terms do not bind the Crown – was not even engaged by section 90AE.

Before identifying why we say their Honours erred, we note that the respondent does not accept that this was even a part of the ratio of the joint judgment because it was not argued in the court below. If that were correct, that would simply mean that that is a matter about which we do not need to find error. However, we would say that as attractive as that might be, the court, in paragraphs 15, 20 and 21, on pages 18 and 19 of the application book, in the joint judgment does clearly decide the matter on the basis that the presumption is not even applicable or engaged at all by section 90AE.

EDELMAN J:   Part of the difficulty is really talking about it in terms of a presumption, though, is it not?  If one thinks of it in terms of a rule of construction that applies with differing degrees of force, then a lot of this is just verbiage rather than substance.

MR LLOYD:   That would only then be another way of saying that we do not have to get over the first reason that the joint judgment rejected the proposition.  They, in effect, say, because ‑ ‑ ‑

EDELMAN J:   It might really just be a way of saying that in all of the circumstances of this legislation, properly construed there is not much room for this rule of construction.

MR LLOYD:   We accept that ultimately that is what the court should have done.  What we are saying was done by the joint judgment is they said applying older concepts in relation to the presumption it was not engaged because this section can only work for the benefit of the Crown and so, therefore, there is no reason not to do it.

We say, which is I think not dissimilar to what your Honour is putting to me, that one just looks at whether or not the law is a law which regulates the conduct of persons or the property or the use of property of persons and in that context the rule of construction, if it is put that way, is apt to apply.  Then one looks at all the circumstances to see how much weight is given.

So to that extent really our whole first point is that the court, in rejecting that approach, erred.  They should have - and to be fair to their Honours as a fall‑back they did then go on and consider what if they are wrong about the notion that the presumption or the rule of construction does not apply at all.  They then did look at it in the broader context, but our first ground and the first special leave point is whether or not that is the correct way of approaching it.

They have applied some older cases and we say that this Court has in Bass v Perpetual Trustees and in a more recent line of cases expressed the way that the presumption is engaged differently, that is, the respondents do not seek to defend this aspect of the decision of the court below as we apprehend their case. 

So that is probably all I need to say about it, save that insofar as their Honours, having found that there was this dichotomy between benefit and burden or benefit and restraint, went on to find that it could only operate as a benefit for the Crown, and one sees that in paragraph 17.

Justice Aldridge, in paragraphs 72 and 73, in his separate judgment, gives reasons why that is not correct and we would respectfully embrace those reasons and we would say that where a creditor is required to come along to a court in order to maintain their existing rights, if they want that to be done, that itself is a burden.  It is not correct to say that this provision can only operate to the benefit of the creditor.

I then move to the second and third grounds, which I will address together, and the second special leave issue is whether the Court erred in finding the presumption was rebutted.  I am instructed that in the short period since the Full Court’s decision, a number of applications have already been filed for so‑called “Tomaras orders” – that is, applications seeking to have substitution orders made in respect of tax‑related liabilities. 

If, as we contend, the presumption was not rebutted and section 90AE does not extend to the Commissioner and tax‑related liabilities, the Commissioner would not be drawn into such litigation. There would be no need for the first instance courts or affected parties to have to address what we would characterise as apparently intractable problems arising from the interaction between the tax legislation and the substitution orders.

KEANE J:   Mr Lloyd, the Court might be assisted if we hear from your opponent. 

MR LLOYD:  Thank you, your Honours.

KEANE J:   Mr Robertson, it does seem that there is a question rising, even on the reasons of the court below, as to the proper application of the Bropho test and there does also seem to be a question arising as to the proper construction of section 90AE, having regard to subsection (4) and in the light of the Tax Act. Do you want to tell us why those tentative appreciations are correct?

MR ROBERTSON:   First of all, you must appreciate the actual facts of this case.  The debts that we are talking about are, first of all, the general interest charge, which is a tax‑related liability as defined in Division 255.  It is not a debt which is subject to the special Part IVC procedure that the Commissioner relies on here.

The second class of debt that on the facts arises is an income tax debt or a number of income tax debts, but they are spent or the taxpayer’s rights of objection are long gone.  So we have a finalised debt which cannot be interfered with or the Family Court orders cannot interfere with the Part IVC procedure.  It is exactly the same as if the wife had objected under Part IVC and had contested that and had received a final order from the court.  After we have a final order, all there is is a bare debt to the Commonwealth which is collectable by the Commissioner.

So this is not an appropriate vehicle to test the propositions that my learned friends are putting.  An appropriate vehicle would be one where the Family Court is proposing to transfer a debt which is the subject of an active objection and appeal procedure under the Taxation Administration Act.

KEANE J:   But is not the relevance of the taxation regime not because of its operation in any particular case but is not the relevance of the taxation regime here that it bears on the proper construction and operation of section 90AE of the Family Law Act?

MR ROBERTSON:   What it bears upon, as the Full Court properly said, is on its operation in the circumstances of whether it should exercise its power, but once the tax regime of challenge has been spent or does not even arise because, for example, interest is like interest of any other creditor, then there is no basis for the court to pause and wait to see ‑ ‑ ‑

KEANE J:   But the question the court was addressing, as is apparent from paragraph 1 at page 14, is not whether the exercise of the power was correct; it is whether the power exists.

MR ROBERTSON:   Yes.

KEANE J:   Their Honours took the view, on the basis of the construction they adopted, that the power does indeed exist and then they exercised it.  Sorry - they concluded it did exist and that it was available for exercise on the basis that the Commissioner could be directed to substitute one debtor for another.

MR ROBERTSON:   Yes, and whether it should be exercised or not would depend on whether the wife was at that time proposing to challenge the quantum of that debt in the Part IVC proceedings.  Justice Aldridge said it was a theoretical question because it could hardly be supposed that the court would exercise the power to transfer or substitute a debtor in the circumstances where that debt was under challenge in the special Part IVC procedures.

So it is a nice theoretical question, but it has no practical relevance when the tax position or the tax debt is no different from any other Crown debt.  For example, under a Crown lease, if the husband owes rent to the Crown, it seems to be accepted that that could be a debt or the Crown could be a creditor that could be substituted.  When the tax debt or when the rights of review have been spent ‑ ‑ ‑

EDELMAN J:   Where is that position accepted?

MR ROBERTSON:   What the Commissioner has said in the first – “accepting” is the wrong word; it is more hedging.  He says there is Crown immunity at least in respect of tax debts.  So he does not accept that there is no Crown immunity in other cases but he only confines his case to this special tax regime and he bases that only on the proposition that there is a special objection and review procedure, and this was discussed in ‑ ‑ ‑

KEANE J:   Well, a review procedure that gives effect to the provision of section 255(5), Schedule 1 of the Taxation Administration Act, which imposes a liability for income tax on a given individual.

MR ROBERTSON:   Yes.

KEANE J:   The argument is that the provisions of 90AE do not operate to alter that operation of that provision of the Act.  It seems to be at least a respectable argument.

MR ROBERTSON:   Well, this Court in Brown’s Case drew a distinction between a tax debt that was finalised, in the sense that I am talking about, and one where rights of objection still remained.  One can go through the individual judgments in Brown and see that the Court were unanimous in deciding that where the tax debt had been finalised it was to be treated as any other debt subject to, in that case, the laws of estates and equitable tracing in certain circumstances where there had been a distribution by trustees of an estate without that debt having been paid.

But they said in the special circumstance where the assessment was still alive and there had to be a taxpayer who could object against it and that in that special circumstance - in that interim period the debt had a special character but once that period had been spent it was just like any ordinary debt, no different from any other.

Therefore in circumstances where the example Justice Dixon gave was where a taxpayer had been assessed a tax before he died and then upon death the right to challenge that debt ceased but then the executors distributed the estate to the beneficiaries without making provision for the payment of that debt, then the Commissioner could apply the equitable rule to require the beneficiaries to disgorge their proceeds so that that debt could be paid.  That is what we have on the facts of this case.  We do not have anything special; we have finalised debts which are no different from any other debt.

EDELMAN J:  It does mean you potentially have to construe section 90AE in a bifurcated way.

MR ROBERTSON:   It would but for the operation of 90AC.  So you do start to construe it in a bifurcated way in that the Income Tax Assessment Act itself gives rise to a special regime in this interim period.  But then 90AC says this provision overrides the provision of any other written law of the Commonwealth. 

So, our submission is that the court – I am going to take your Honours back to section 79 in a moment – we submit, has the clear power to substitute debtors just like any other debt and in a tax circumstance where we are in this special period it still has that power because of 90AC, but as Justice Aldridge said, that would be a circumstance to take into account in working out whether it should exercise the power.

What I wanted to take your Honours to were the actual words of section 90AE. If we go to annexure A in the application book at page 51, “Part VIIIAA‑Orders and injunctions binding third parties” – are your Honours there?

KEANE J:   Yes.

MR ROBERTSON:   The first thing we see at 90AA is:

The object of this Part is to allow the court, in relation to the proposition of a party to a marriage, to:

(a)       make an order under section 79 . . . 

that is directed –

Then if we go to the substantive section itself, on the next page:

In proceedings under section 79, the court may make any of the following orders -

My learned friend’s submissions give no focus whatsoever to 79, but 90AE in this division requires you to understand 79 and how it operates and affects the rights of creditors.  I can take you back to page 45 where we have section 79.  The first thing we see at subsection (1) is:

In property settlement proceedings, the court may make such order as it considers appropriate:

(a)in the case of proceedings with respect to the property of the parties to the marriage or either of them‑altering the interests of the parties to the marriage -.

Subsection (2) enjoins the court from making an order:

unless it is satisfied that, in all the circumstances, it is just and equitable to make the order.

The authorities are clear that one of the first things that must be done is for the parties to a marriage to identify their rights and their liabilities, what their assets are and who their creditors are.  I would like your Honours to note subsection (5):

Without limiting the power of any court to grant an adjournment in proceedings under this Act, where, in property settlement proceedings, a court is of the opinion:

(a)that there is likely to be a significant change in the financial circumstances ‑

it has the power to adjourn the proceedings and subsection (6) gives the court the power to make interim orders.  The important and critical section is on page 48 which is subsection (10):

The following are entitled to become a party to proceedings in which an application is made for an order under this section by a party to a marriage . . . 

(a)a creditor of a party to the proceedings if the creditor may not be able to recover his or her debt if the order were made -

Now, if we apply our rule of Crown immunity to the word “creditor” we start with the proposition credit does not include the Crown, but there can be no doubt that in this provision, and it is not controverted, that the Crown is a creditor, and most importantly, Parliament is ‑ ‑ ‑

KEANE J:   The question is not about recovering the debt; it is about the debt disappearing.

MR ROBERTSON:   The first thing that we have in section 79(10) is an acknowledgement that the debt may disappear in an economic sense but not a legal sense.  In other words, if property of the marriage is shifted away from the debtor to the other party then the creditor may have a legal right but that legal right may be hollow.

KEANE J:   That is right.  They may not be able to recover on that legal right.

MR ROBERTSON:   That is right ‑ may not be able to recover.  So what we have is Parliament giving the Family Court the power to make an order that denudes the Crown of its economic value of a chose in action.  So, 79 is a power which directly can adversely affect the economic interests of creditors and that is why creditors are given rights.  So that is the context in which 90AE arises.  The context is where the court is given the power to strip creditors of their economic rights, not their legal chose in action.

KEANE J:   Well, to adversely affect the economic interests of a creditor.

MR ROBERTSON:   Yes, but what we see is a power to act to the detriment of the Crown and that is why the Commissioner intervenes if he considers that he may not be able to recover as a result of proposed orders.  So that is the context in which we are interpreting the word “creditor” in 90AE in a context where the Family Court already has the power to adversely affect the economic interests of the Crown.

If we go to 90AE, the question is whether “creditor”, which includes the Crown in 79, also includes the Crown in 90AE and there is no reason and there can be no reason to suggest that creditor, the person who can be adversely affected by a section 79 order, is not the same person to whom a 90AE order can be directed.

Now, the difference, your Honour, between 79 and 90AE is that 90AE only allows the court to alter the legal identity of the chose in action. Section 79 is a substantive power which allows the real economic interest of the Crown to be potentially destroyed or lessened. Section 90AE does not do that. Section 90AE is conditioned on it being not foreseeable at the time that the order is made that to make it the order would result in the debt not being paid in full.

So 90AE(3)(b) fully protects the economic interests of the Crown and all it does is allow the legal right to be altered but not the economic interests to be in any way prejudiced and there is very good reason for that.  Let us take an example where the court considers it just and equitable under 79(2) that the wife should keep the marital home, which is in joint names, but there is a tax debt which is owed by the husband.

The court wants the marital home to be kept and the husband’s interest transferred to the wife.  The Commissioner has intervened and, as in…..Case, wants the marital home sold, his debt to be taken away and the wife to then buy a smaller flat or something, but the court thinks it is better for the stability of the children and a whole heap of other reasons that the marital home remain in the ownership of the wife.

What it can do is order that the husband’s half interest be transferred to the wife and order that she be substituted as the debtor, so that she owes the tax.  Obviously other considerations intrude, such as her ability to pay the tax debt.  The court can only do that if they are fully satisfied that the economic interests of the Crown are protected.

So what 90AE is doing is protecting the Crown’s interests in circumstances where a 79 order would otherwise adversely affect the Crown as a creditor.  So this in terrorem notion that 90AE destroys choses in actions is technically correct because the legal chose in action against the husband is gone, it is now a legal chose in action against the wife, but it is there to facilitate the just and equitable division of property of the marriage in circumstances where the economic protection of the creditor, including the Crown, is fully protected.

EDELMAN J:  So you say a section 90AE order could never be made in circumstances where it would inure to the detriment of the Crown?

MR ROBERTSON: No. Section 90AE(3)(b) proscribes that occurring and that is what I think the majority were talking about when they said we do not even get to the presumption. Bropho’s Case identifies this non‑prejudice principle as coming from the Privy Council decision in the Madras Case, and Justice Edelman, you were right in your identification of it as verbiage.

Back in the Madras Case, the court was hamstrung by the express or necessary implication requirement and in that case the person was used relevantly twice in the taxing legislation.  A person was charged with tax and the first question was does that apply to the Crown and the court said, “Of course not.  There is no express provision which taxes the Crown and there is nothing by necessary implication”.

The real fight in that case was in relation to a taxpayer who was subject to tax if it sold its business to another person and the argument for the taxpayer was that there is Crown immunity; “person” does not include the Crown, unless it expressly says so or says so by necessary intendment and it does not and so therefore the taxpayer should not be subject to tax because it sold its business not to a person but to the Crown who was excluded from the meaning of “person”.

In those circumstances, the Privy Council said, “We don’t even get to the presumption.  There’s no prejudice that is suffered by the Crown in those circumstances”.  Lord Tucker said it does not matter how you get there.

KEANE J:    The red light is on, Mr Robertson.  You might like to finish up.

MR ROBERTSON:   If the Court pleases.  What we say is that there is no doubt in the result of the court by reason of a proper analysis of the interaction between sections 79 and 90AE.  The criticisms made of the majority are mere verbiage and we also say that it is not an appropriate vehicle to test out this interim period where a tax debt is under challenge under Part IVC because that is not the facts in this case.  If the Court pleases.

KEANE J:   Mr Lloyd.

MR LLOYD:   Your Honours, my friend started by saying that this is, I think the thrust of it was that it is not a good vehicle because here there is a judgment debt.  That does not answer the point for two reasons.  First of all, on our construction, as a matter of power, if our construction is correct then it is an appropriate vehicle because it means that the result would have been different.  So to that extent it is not an answer. 

More importantly, his premise was that because there is judgment debt somehow the Part IV rights are over or gone but that is simply wrong. What makes tax debts unique is that the Commissioner can bring proceedings to get judgment debts while Part IV proceedings continue afoot and that is one reason why there are significant problems with having section 90AE apply to tax debts because one could have a situation where a judgment debt is transferred to one party while the other party might have an ability to exercise those rights and may then choose not to do so because they have nothing to be gained from pursuing those rights. We say that that is in fact a significant problem.

There are many aspects of the tax legislation that do not mesh well with the notion that section 90AE would apply. First of all, there is a question as to whether or not, upon a substitution order, the newly created debt is a tax‑related liability at all under the definition in the Tax Administration Act. A tax‑related liability is one that arises directly under a taxation law.

This debt would seem not to do that and that would mean that the Commissioner is in every case to which a substitution order is made denied the ability to use prima facie evidence certificates in order to pursue tax‑related debts, to require security deposits, to use the statutory rights of garnishee notices, all of which powers ‑ ‑ ‑

KEANE J:   What do you say about Mr Robertson’s response to that, which is 90AC(1)?

MR LLOYD: Section 90AC(1) - we say the question of construction arises first. If our question of construction is correct, then the presumption applies and section 90AE does not extend to tax‑related liabilities and then in those circumstances this part has effect despite anything to the contrary. There will not be anything to the contrary because it will not apply to the Commissioner.

EDELMAN J:   Except, on another view, one does not even ask that question.  The whole point of section 90AC(1) is not to need to ask whether there is anything to the contrary.

MR LLOYD:  With respect, your Honour, I think it applies not only to Commonwealth laws but also to State laws and it would be relevant, for example, for section 109 instances to overrule State laws but we say that it is not a reason – it might be a matter that the Court would appropriately take into account but we would say it is not itself an answer to the notion that the presumption is available here when there are very significant impacts in relation to the tax legislation, which I started to identify.

There is a further problems - this Court has in Bell Group, for example, noted the special features in relation to the tax legislation and tax debts.  There is also an ability for the Commissioner to make later amendments in relation to tax debts, which would raise all kinds of issues as to whether or not there are two taxpayers, is the spouse somehow a deemed taxpayer for part of the debt but not for the amended part of the debt or when there is an amendment does the first debt disappear and the new debt is under the new amended assessment and not even under the original amended assessment?

Then there is the idea that in relation to the review rights - the review rights are important because Part IVC review rights are what makes the tax not an incontestable tax.  If those rights are put at risk or displaced or not available to somebody who has been substituted as a tax debtor, then that may be a question of whether or not an incontestable tax has been imposed.

But even if one were to construe the legislation as allowing the substituted person to access all the same review rights, those review rights are premised upon an onus of proof being imposed upon the taxpayer.  That is an entirely fair and just approach when the taxpayer is the one who did the transactions but if the taxpayer is somebody else who did not do the transactions then they may be in no position to answer that case.  We say that these are significant matters, none of which the court below took into the balance because it felt that a substitution order would somehow resolve all of those difficulties and we say they are not resolved. 

In relation to what my friend says about section 79, we say that 90AE says that in proceedings under section 79, which is to say property settlement proceedings, a new array of orders can be made.  We say that the word “creditor” there is a general language and the presumption can and should apply and should not be displaced.  Now, at the same time, we are content with saying that the word “creditor” in section 79(10), which in that context confers only a procedural fairness right upon the Commissioner, is not displaced.  In Bropho, this Court said that the presumption may apply to some provisions in a section and not to other provisions and we would seek to argue that that is the position in this case.

KEANE J:   Thanks, Mr Lloyd.   There will be a grant of special leave in this matter.  The parties should obtain copies of the directions for the filing of submissions from the Deputy Registrar and those directions should be adhered to.  We note the agreement of the parties in relation to costs.

AT 11.54 AM THE MATTER WAS CONCLUDED