Commissioner Of Taxation v Australian Building Systems Pty Ltd ACN 094 238 678 (In LIQUIDATION)

[2015] HCATrans 82

[2015] HCATrans 082

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Brisbane  No B48 of 2014

B e t w e e n -

COMMISSIONER OF TAXATION

Applicant

and

AUSTRALIAN BUILDING SYSTEMS PTY LTD ACN 094 238 678 (IN LIQUIDATION)

Respondent

Office of the Registry
  Brisbane  No B49 of 2014

B e t w e e n -

COMMISSIONER OF TAXATION

Applicant

and

GINETTE DAWN MULLER AND JOANNE EMILY DUNN AS LIQUIDATORS OF AUSTRALIAN BUILDING SYSTEMS PTY LTD ACN 094 238 678 (IN LIQUIDATION)

Respondent

Applications for special leave to appeal

KIEFEL J
KEANE J

TRANSCRIPT OF PROCEEDINGS

FROM CANBERRA BY VIDEO LINK TO BRISBANE

ON FRIDAY, 17 APRIL 2015, AT 9.52 AM

Copyright in the High Court of Australia

____________________

MR J.T. GLEESON, SC, Solicitor‑General of the Commonwealth of Australia:   May it please the Court, I appear with MR M.J. O’MEARA for the applicant in those two related matters.  (instructed by McInnes Wilson Lawyers)

MR S. DOYLE, QC:   May it please the Court, I appear with my learned friend, MR M. TRIM, for the respondents.  (instructed by Thomson Geer)

KIEFEL J:   Yes, Mr Gleeson.

MR GLEESON: Your Honours, if it is convenient, the three matters that I thought appropriate for emphasis on the oral submissions were, firstly, the Commissioner’s propounded construction of section 254 of the ITAA 1936. Secondly, the radical differences between section 254 and 255 that were adverted to briefly by this Court obiter in Bluebottle at paragraph 84 but overlooked by the courts below and then, thirdly, the three special leave questions. If that is convenient, your Honours will have a joint legislation bundle and section 254 is reproduced at page 7.

KIEFEL J:   Page 7?

MR GLEESON:   Page 7.  The critical starting point is that it applies to every agent and every trustee.  “Trustee” is a defined term on page 3 which includes a broad range of people beyond ordinary trustees under law such as receivers and liquidators.  That illustrates the importance of this question to determine when this section bites and how it bites.  Your Honours, the critical entry point that is paragraph (1)(a) which is that the trustee or agent is:

answerable as taxpayer for the doing of all such things as are required to be done by virtue of this Act in respect of the income, or any profits or gains of capital nature –

which we have crudely summarised as “IPG” – derived by the agent or trustee ‑

in his or her representative capacity . . . and for the payment of tax thereon.

The first point we seek to make is that this is creating a taxation liability in the trustee or agent ancillary, of course, to the primary liability which will rest somewhere else under the Act.  This is a true creation of a liability as well as then being a collection mechanism.  Under paragraph (b) that liability is made more explicit, that the trustee or agent must lodge returns and “be assessed thereon” in the representative capacity.  Then the critical paragraph (d), which is the collection mechanism, should be read in the light of what has gone before so that it is an authority and duty to:

retain from time to time out of any money which comes to him or her in his or her representative capacity so much as is sufficient to pay tax which is or will become due in respect of the income, profits or gains.

So, in practical terms, a commissioner contends that if the liquidator sells a block of land on a certain date in the year for, let us say, a $10 million gain, the section requires the liquidator as a trustee to ensure that sufficient moneys remain in his or her hands to meet the tax when it is assessed at some future point.  The obligation cuts in because the gain has been derived and it has its particular force at the time the liquidator is contemplating paying away money from the fund.  So, in the example I have given, assuming they were the only facts known to the liquidator and the corporate tax rate was 30 per cent, the liquidator before making distributions to creditors or contributories would always make sure $3 million remained in the bank to pay the tax.

KIEFEL J:   Do you say the obligation arises upon the receipt on each occasion of income or each transaction by which profit or gain is ‑ ‑ ‑

MR GLEESON:   Yes, it arises because the derivation under paragraph (a), which is treated as being a derivation by the trustee or agent, and he thereby is bound under the obligation for the very good purpose that the whole point is so that the money remains there rather than the liquidator pay it away and then, when an assessment is later issued, the Commissioner would have to try and chase the creditors or the contributories.

The personal liability under paragraph (e) is then hinged to the amount that was retained or should have been retained, and finally, under paragraph (h) there are remedies against attachable property under the control of the agent or trustee by reason of the liability. Your Honours, in essence that is the construction argument. The second question is whether section 254 has a different operation to section 255 which, we submit, it does, and when one looks at section 255 on page 9 one sees a rather different entry point and a rather different purpose.

Section 255 is concerned with a non‑resident deriving income from an Australian source. In section 255, it is the non‑resident who is the person deriving the income and is the taxpayer. What section 255 does is attach to a receiver, a person receiving money of the non‑resident, certain obligations, but it does not make that receiver answerable as taxpayer, does not require the receiver to lodge returns to pay the tax, and what it is is simply a collection mechanism. It is a collection mechanism because under paragraph (a) the receiver shall, only if:

required by the Commissioner –

so that will need a notice under section 255 –

pay the tax due and payable by the non‑resident –

So you pay the non‑resident’s tax, not your own tax.  The Court in Bluebottle held that the tax referred to here, being the non‑resident’s tax, only arises after assessment to the non‑resident, and because the Court held that it thereby construed paragraph (b), which is the retention obligation, as one which by definition can only cut in after there has been an assessment to the non‑resident. 

But one sees in paragraph (b), although there is a superficial similarity in the opening words, the hinge of paragraph (b) in the final line is the tax which “will become due by the non‑resident”, that requires an assessment to the non‑resident and therefore the retention does not cut in until the non‑resident has been assessed. So 255 might have a practical application, for instance, if a bank received money of a non‑resident who has derived Australian‑sourced income and has been assessed a tax and the bank, from that point in time, comes under the duties of section 255. Your Honours, that is the second matter. The three special leave questions we sought to pose are found at page 93.

KEANE J:   Mr Solicitor, if you were to succeed on the third of those questions, do the first two arise?  Or, to put it this way, if you were to succeed on the third, would they not become unnecessary to answer?

MR GLEESON: In a sense, they are wrapped up in the third, as in to win on the third we need to get over two hurdles. We need to get over a hurdle that a liquidator can never be attacked under section 254 because he is not a trustee of a trust estate. We lost on that point with Justice Edmonds. The second point of Justice Edmonds was that 254 is not an independent liability; you must have a liability in you somewhere else in the Act. So those two points we would be dealing with as part of the argument, but having ‑ ‑ ‑

KEANE J:   On the way to three anyway.

MR GLEESON:   On the way to three, which is then assuming a liquidator can be assessed under 254.

KIEFEL J:   They are not grounds upon which the matter will turn.  They are points raised by the Full Court, are they not, that you need to clarify, as you say, on the way through to the central ground?

MR GLEESON:   Yes, I think that is correct.  We need to persuade the Court on three.  We need to make sure that there is no roadblock from one and two.  In terms of the proposed notice of appeal, which is unfortunately found twice, because there are two proceedings, but in the proposed notice of appeal at page 91, for instance, it is really paragraphs 4 and 5 that focus on the ultimate question, and 5 is really the ultimate affirmative construction that we seek to have determined by the Court and then 2 and 3 are the points on the way.  There are errors in 2 and 3 but they are matters that, to put it this way, we need to clear them away, but then we need to persuade the Court on the key point, which is does this obligation cut in on derivation and deceit or does it cut in only on assessment?

KEANE J:   You accept and do not challenge the decision in Bluebottle, you distinguish it for the reasons that you have mentioned?

MR GLEESON:   Yes.  We do point out that the most relevant paragraph of Bluebottle for this application is paragraph 84, which is the one when the Court said historically there appear to be some radical contextual

differences between the provisions, and that paragraph 84 was not addressed by any of the courts below.  That is part of our ground, that the very important question of ascertaining whether Bluebottle carries over to 254, which requires analysis of these contextual differences, has not really been particularly engaged with…..Your Honours, they are the matters we wish to put.

KIEFEL J:   What do you say – I think you have dealt with this in your reply – to the respondents’ argument that your construction leads to difficult results about how the liquidator has to estimate exact amounts?

MR GLEESON:   It may or may not require attention by the liquidator to those questions.  If it does, that does not call for any different construction, because the point of being a liquidator or a trustee or an agent, by taking on that responsibility the Act has placed upon you the duty to sufficiently inform yourself of the circumstances of the trust estate or the principal’s affairs with which you are acting in a representative capacity.

What the liquidator does – I have given a simple example where the liquidator says, “I must keep $3 million back from the creditors”, and if later on in the year there are further transactions on the tax account which the liquidator has information which might adjust the amount that he or she needs to keep, he or she makes an adjustment.  But the critical thing is, the purpose of it is, do not pay away the money which needs to be there to make sure the Commissioner can recover the tax.  By taking on the duty of trustee or agent you take on a statutory responsibility to ensure that is done.  May it please the Court.

KIEFEL J:   Thank you, Mr Solicitor.  Yes, Mr Doyle.

MR DOYLE:   Your Honours, the declaration that was made at first instance is at page 5 of the application book, which is a declaration concerning the construction of section 254(1)(d). There is a like order made in the mirror proceedings on the objection to the private ruling. It is our submission that special leave should be refused because that declaration is correct. Section 254(1)(d) is expressed in materially identical terms to section 255(1)(b) of the Act which was the subject of consideration by this Court in Bluebottle.  The declaration gives effect to the same approach to construction of those identical provisions which was applied in Bluebottle.

We are not going to revisit Bluebottle, and we will show you in a moment, there is really no sound basis for distinguishing it from the operation of section 254(1)(d). There are some other issues raised in our learned friend’s special leave grounds 1 and 2 to which I will return later. They really afford additional hurdles, as my friend has put it, to overcome but the core issue is the operation of section 254(1)(d) and that is the third issue raised in their special leave submissions. As a matter of construction, section 254(1)(d) both authorises and requires the agent or trustee to retain money from its principal. The extent of that commission and obligation is limited to:

so much as is sufficient to pay tax which is or will become due –

and section 254(1)(e) limits the liability of the trustee. He is made “personally liable” to the extent of the amount that is the subject of 254(1)(d) and all other personal liability is excluded. The respondent contends that ‑ I mean, the key words really are in 254(1)(d):

to pay tax which is or will become due ‑

The respondent’s contention is “due” there means payable and our learned friend’s contention is that it means “owing” and it turns therefore on the question of whether there need be or need not be an assessment.

The construction for which the respondent contends, we would submit, is plainly right.  It is required by the language of 254(1)(d), which speaks of a sum which is due but, more importantly, of a sum which will become due, not as the case against us requires that it be understood as if it might become due because our learned friend’s capital gain tax case is a good example upon the sale for a capital gain one can postulate that tax might become due, one cannot say that tax will become due without having regard to the totality of the affairs of the principal, the underlying taxpayer.

Additionally, the construction for which we contend gives defined content to the obligation to retain sufficient to pay because it is only when there is an assessment that one can know what that figure is.  Our learned friend says against us that a liquidator has an obligation to understand the affairs of the company or a trustee has an obligation to understand the estate assets.  This is not a question of diligence.  This is a question of certainty.  There is a defined obligation which requires one to be able to say, what is the sum sufficient to pay for the tax?  The construction for which the respondent contends – which was favoured below – permits that to occur; the opposite construction does not.

KIEFEL J:   Are you saying that the liquidator should only be required to be in a position to understand the overall obligations to pay tax on behalf of the company for the whole year rather than it being considered on a transactional basis?

MR DOYLE:   It can only be when there is an assessment made.  Assuming there are other affairs of the company within that period, it is only when there is an assessment issue that one can say that there is tax which will become due and that gives definition to the content of the obligation to retain a sum sufficient to pay it.  It also gives content to – I hope I have answered your Honour’s question.

KIEFEL J:   Yes.

MR DOYLE:   Yes, is what we are saying.

KIEFEL J:   Yes.

MR DOYLE:   It is not a question of diligence.  This section is not directed only to liquidators.  It is addressed to a great many people and so it cannot be dismissed on the basis that a liquidator should have a particular state of knowledge.  If the section applies, it applies more broadly.  But, equally, the approach that the respondent contends for gives defined content to, if you like, the dual obligations in 254 – the dual characteristics of 254(1)(e).  That is, it is only then that one can know the defined extent of the amount which has to be retained to which the trustee or agent is then made personally liable and know the extent of the exclusion of that personal liability because 254(1)(e) provides – as you see in the concluding words – that:

he or she shall not be otherwise personally liable for the tax.

So, it is only, in our submission, when there is an assessment that one can read these two provisions as identifying, with any degree of certainty, that there will be a sum that will become payable and which defines the extent of the permission to withhold money from the principal and the extent of the personal liability of the trustee agent to pay the tax.

Those two provisions are materially identical in section 255 which is the next section in the Act. If your Honours turn to 255(1)(b) you will see that it is materially identical to 254(1)(d) and 255(1)(c) is materially identical to 254(1)(e).

KEANE J:   One obvious contextual difference is that 254 is concerned with trustees, liquidators, persons generally responsible for the generation of the income profits and gains and, indeed, in 254(1)(a) they are obliged to prepare the returns, and so forth, in relation to that.  Whereas, the receiver who is the target of 255 is a person who is in receipt of particular sums and is not in a position to have any certain understanding of the liability to tax in respect of those sums.

MR DOYLE:   That is so, your Honour, and that is indeed one of the factors which form part of the reasoning in Bluebottle that, because of the nature of 255, it would be hard to know with certainty what the extent of the obligation was.

KEANE J:   Whereas under 254, it is actually the obligation of the person who is the target to produce the certain outcome in terms of the returns and so forth under (1)(a).

MR DOYLE:   Ultimately, but the obligation which is contended for by the applicant arises before – can I start again. There is undoubtedly scope for greater certainty – that is, a greater knowledge of the facts – for the trustee agent under section 254 than might be the case for many of the recipients of the money under 255. That is, the lack of certainty of the recipient in 255 which influenced the Court in Bluebottle to conclude as it did – still exists in 254 but perhaps to a lesser extent, but nonetheless that is a different ‑ ‑ ‑

KEANE J:   Well, it is not just a question of degree, is it?  It is a question of responsibility.  Under 254, the responsibility for getting it right in terms of the income, profits and gains is actually upon the person to whom the notice under 254(1)(a) is addressed.

MR DOYLE:   Your Honour, that is so, and the second feature of the section is that it imposes under (a) an obligation to be answerable in a certain way as taxpayer and it imposes a personal liability which we urge is constrained by the concluding words of 254(1)(d) which prescribes that he shall not be otherwise personally liable for the tax.  So it is true to say the entry point is different but the key provision is identical.  In order to identify the extent of liability or the exclusion from liability, one needs to be able to answer the question, what is the sum sufficient to pay the tax due under 254(1)(d) so as to give content to 254(1)(e) which is exactly the same question.

KIEFEL J: Section 255(1)(a) is not found in section 254, is that a point of distinction?

MR DOYLE:   That is so.It is the one that our friends rely upon.  It is said that it is only after – well, there are two points of distinction there.

KIEFEL J:   Well, that does rather point to an assessment, does it not?

MR DOYLE:   It does.  It speaks of “pay the tax due and payable”.

KIEFEL J:   Yes.

MR DOYLE:   And that was one of the features that was relied upon in Bluebottle, to conclude the construction.

KIEFEL J:   Quite.

MR DOYLE:   But not the only one, your Honours.  The features which were relied upon in the construction of the two that we are concerned with, (b) and (c), were the ambiguity of the expression “due” as either meaning owing, which is what is put against us, or payable, which is what the Court concluded it meant, because of that being the only means by which you could define the content of the obligation under 255(1)(b) and the extent of the personal liability under (c). 

Now, those same considerations apply, we would submit, with equal force to the operation of 254 – that is, the section is not based in terms of the trustee or the liquidator subjective view as to what is due.  It is the sum which is due, sufficient to pay the tax due, or is to become due.  That language, in order to have any degree of certainty, so as to define the mutual obligations to retain and the right to withhold from the principal, for it to have certainty requires there be an assessment.

To answer your Honour Justice Keane’s question, it is right to say the liquidator conducts the affairs of the company and has the obligation to put the tax return in.  But our learned friend’s contention is the content of the obligation to withhold the money from the principal and to retain it under relevantly (d) and (e) arises long before that is done – arises at the moment of each receipt as it was put to you.  That requires one to be able to say, the statute imposes a definable obligation on someone to withhold – as is the case here – a sum sufficient to pay the tax due upon a sale which gives rise to a capital gain in circumstances where there is no sum which can be defined as the tax due, or will become due, because of the other uncertainties which will influence the amount, if any, of tax which will become due.

That is, in our submission, the real difficulty with the case which is put by the applicant.  It requires you to be able to say that when a liquidator makes a sale at a capital gain, he is obliged to do something to retain that money – that is, obliged by the Tax Act – forgetting his obligations as a liquidator – obliged by the Tax Act to do something with that money in circumstances where it is not possible to say how much.  It is not possible to say there will, in fact, be tax due because subsequent events may mean there is no tax due. 

Our learned friend offers really two answers to that. He says that section 254(1)(d) provides the outer limit. The outer limit being to retain the whole of the sum in substance or I suppose, perhaps, the whole of the sum multiplied by the top tax rate, but that is not what the section says. The section not only requires that the liquidator trustee withhold something, it is the sum sufficient to pay the tax and it is the authorisation of withholding that sum which authorises the trustee from not dealing with it in any other way. So, to say that you can set the outer limit might be true. What you cannot say, though, is that it sets the amounts and the section operates by reference not to the range but to an amount.

The second thing that is said against us in that context is you can make an inquiry and determine these things and if later on it emerges that you have overestimated, you can adjust the figure.  There is sort of ongoing adjustment.  That, too, is no doubt a practical thing to do but it is not what the section calls for.  The section does not call for a subjective assessment by the trustee or agent of the figure.  It calls for the defined figure.  It is no answer to a liquidator later on to say you have underestimated or overestimated.  He is liable if he has underestimated because the section contemplates.  He is personally liable to the extent that he should have held a sum sufficient to pay the tax which will become due.

Your Honours, there are differences between 255 and 254.  We have touch upon them.  They are described by our learned friend as radical differences.  Those words come from the discussion in paragraph 84 in Bluebottle.  In fact, what the Court was doing in Bluebottle was discussing the radical differences.  Sorry – the Court in Bluebottle was considering the historical content for the development of section 255 and they did so by referring to the form of section 52, I think, in the 1915 Act which is broadly the analogue the 254 before there was an analogue of section 255 and in the context of discussing the historical context of 255, describe the provision of the Act – which is the analogue of 254 when there was no 255 – as radically different in two respects.

But when one reads the reasons which are given for the ultimate determination of the case, it includes an observation by the Court that these matters of historical context are really of very little value, and we would obviously urge that.  Secondly, the important factors were the only means – the only construction which gave certainty and definition to the obligation to retain and the power to withhold was by construing the words “is or will become due” as requiring there be an assessment.

Speaking of the circumstances that it is due because there is an assessment and it is payable, or will become due because there is an assessment and it will become payable at some time in the future, and that is by reference to the language which is identical in section 255 and 254. Recognising the different entry points as they are called it is not sufficient, in our submission, to warrant really – including there are reasonable prospects of success on this application.

Your Honours, in terms of why there should or should not be special leave, in substance our submission is there should not be because the declaration made is correct.  There are not sufficient prospects of it being overturned to warrant the grant of special leave.  There are some other

points which arise out of the course of reasoning by two of the judges in the Full Federal Court.  In our submission, in one sense, of course, it can always be said to be of utility for the High Court to adjudicate upon the construction of provisions.  This is not the case, in our submission, to do that because we will not be contending for the obverse on appeal.  That is, we will be contending only the point of construction that I have addressed to you and not the divergent points which were the alternative or additional reasoning which was expressed in the Full Federal Court. 

Properly construed, we would urge that the reasons of Justice Edmonds and Justice Collier, in fact, are supportive of the construction for which we contend. They both proceed on the basis that an assessment is required in order to enliven the operation of section 254(1). They go on to discuss it is to be an assessment of a different kind but that, of course, is inconsistent with the case that is put against us. Also, the declaration that was made merely speaks, as I have shown you, in terms of in the absence at present of an assessment, and the very question which the first and second special leave issues that our learned friend raised as to the quality or the character of that assessment are not raised by the declaration that was made or by the application that we made for that declaration.

There will be another – if the point is one which will arise again, and it may well do, although reading our learned friend’s submissions it would seem it has not arisen since Federation ‑ if it arises again, it can arise in a context in which they can squarely raise for consideration by the Court at first instance and the Full Federal Court the questions they wish to agitate under those first two special leave questions.  In our submission, they will not arise as between us if special leave is granted.  Those are our submissions.

KIEFEL J:   Thank you, Mr Doyle.  Anything in reply, Mr Solicitor?

MR GLEESON:   Your Honour, there are just two matters.  I heard near the end there that if leave were granted the respondent does not contend for the correctness of the reasoning found, for example, in Justice Edmonds’ at page 46 in paragraphs 28 and 29.  That is where his Honour said:

Prior to the issue of an assessment to the liquidators (trustees), in reliance on one or more of the provisions of Div 6 of Pt III of the 1936 Act referred to in the passage from the judgment of the High Court in Prestige Motors extracted above, there can be no tax which “is . . . due” by the liquidators, in the sense of “owing”.

What that means is that the key reasoning which underpins the declaration is not defended by the respondent as such.  We would submit that on that ground alone it is unsatisfactory because the Commissioner would be

required to administer the Act in accordance with paragraph 29 which explains the declaration.

But on the main point, all I would wish to say is it is apparent there are substantial differences in the language between these two provisions, reflecting a different purpose and a different result and those differences have not been adequately addressed in any of the courts below and there are strong prospects that the construction that has been reached is incorrect.

The one matter I did want to advert to in the differences is, if your Honours have 254(1)(d), it was said a number of times, it is identical to 255(1)(b).  What that overlooks is that the fulcrum of 254(1)(d) in the concluding words is the:

tax which is or will become due in respect of the income, profits or gains.

That is, the income, profits or gains which under paragraph (a) have been derived by the trustee or agent and for which the trustee or agent is:

answerable as taxpayer ‑

and must pay the tax thereon.  So, that is quite different to 255 where the fulcrum is the tax due by the non‑resident, and so one comes back to the critical difference in the context that 254(1)(a) requires one to treat the income, profits or gains as an item to be taxed.

Now, how that is reconciled with the tax year or a period shorter than a year, that has to be done, but it treats that as something which is subject to tax and you are responsible to pay it and that provides one of the key differences.  May it please the Court.

KIEFEL J:   Yes, there will be a grant of special leave in this matter.  The Court notes the Commission is undertaking to pay the respondent’s costs, regardless of the outcome in this matter.  The parties should obtain a copy of the directions for the filing of submissions with respect to this matter and, of course, to adhere strictly to the timetable there set out.  Time estimate?  No more than a day?  Do you agree with that, Mr Doyle?

MR DOYLE:   Yes, your Honours.

KIEFEL J:   Yes.  Thank you.

AT 10.27 AM THE MATTERS WERE CONCLUDED