Inspector-General in Bankruptcy v McGushin

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FEDERAL COURT OF AUSTRALIA

Inspector-General in Bankruptcy v McGushin [2009] FCA 662

BANKRUPTCY - appeal by Inspector-General in Bankruptcy from decision of Tribunal – surgeon employed by company - Tribunal found net income of company was distinct from income paid to respondent – held net income of company not income ‘derived by the bankrupt’ for the purposes of s 139W of the Bankruptcy Act 1966 (BA) – whether Tribunal correctly interpreted operation of s 139(L)(a)(vii) BA – whether income received by company was income ‘derived by’ the respondent – whether income derived by company could be deemed as being income derived by employee by virtue of s 139M BA

Held:  The appeal be dismissed.

Bankruptcy Act 1966 (Cth) ss 139K, 139L, 139L(1)(a)(vii), 139M, 139M(1), 139Y, 139W, 139W(1)

Re Gillies; Ex parte Official Trustee in Bankruptcy v Gillies (1993) 42 FCR 571
Re Stevenson and Inspector-General in Bankruptcy, Re (1996) 45 ALD 775

Robbins and Insolvency & Trustee Service Australia, Re; AAT Case 13,585 [1998] 43 ATR 1262

INSPECTOR-GENERAL IN BANKRUPTCY v MICHAEL MCGUSHIN

WAD 203 of 2008

MCKERRACHER J
18 JUNE 2009
PERTH


IN THE FEDERAL COURT OF AUSTRALIA

WESTERN AUSTRALIA DISTRICT REGISTRY

WAD 203 of 2008

ON APPEAL FROM THE GENERAL ADMINISTRATIVE DIVISION OF THE ADMINISTRATIVE APPEALS TRIBUNAL CONSTITUTED BY A SENIOR MEMBER
BETWEEN:

INSPECTOR-GENERAL IN BANKRUPTCY
Applicant

AND:

MICHAEL MCGUSHIN
Respondent

JUDGE:

MCKERRACHER J

DATE OF ORDER:

18 JUNE 2009

WHERE MADE:

PERTH

THE COURT ORDERS THAT:

1.The appeal be dismissed.

2.The applicant pay the respondent's costs of the appeal, including any reserved costs, to be taxed if not agreed.

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.


The text of entered orders can be located using eSearch on the Court’s website.


IN THE FEDERAL COURT OF AUSTRALIA

WESTERN AUSTRALIA DISTRICT REGISTRY

WAD 203 of 2008

ON APPEAL FROM THE GENERAL ADMINISTRATIVE DIVISION OF THE ADMINISTRATIVE APPEALS TRIBUNAL CONSTITUTED BY A SENIOR MEMBER
BETWEEN:

INSPECTOR-GENERAL IN BANKRUPTCY
Applicant

AND:

MICHAEL MCGUSHIN
Respondent

JUDGE:

MCKERRACHER J

DATE:

18 JUNE 2009

PLACE:

PERTH

REASONS FOR JUDGMENT

INTRODUCTION

  1. The applicant (the Inspector-General) appeals from the decision of the Administrative Appeals Tribunal (the Tribunal) constituted by a Senior Member. The decision was given in August 2008. The Tribunal set aside the decision of the Inspector-General to include ten elevenths of the net income of M. K. McGushin Pty Ltd in its assessment of the assessable contribution of the respondent (Mr McGushin) pursuant to s 139W(1) of the Bankruptcy Act 1966 (Cth) (BA) for the Contribution Assessment Period from the commencement of the bankruptcy on 6 March 2003 to 5 March 2004 (the CAP).

    BACKGROUND

  2. Mr McGushin is a general surgeon practising in Kalgoorlie, Western Australia.  At the time he became bankrupt he was director of M. K. McGushin Pty Ltd (the Company).  Mr McGushin held ten of the eleven issued shares.  His former wife was one director and Mr McGushin was the other.  The company operated a medical practice in which the only practitioner…

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Details
Case
[2009] FCA 662
Decision Date

CaseChat Overview and Summary

The Inspector-General in Bankruptcy has appealed against a decision of the Administrative Appeals Tribunal that set aside the decision of the Inspector-General to include ten elevenths of the net income of M. K. McGushin Pty Ltd in its assessment of the assessable contribution of Mr McGushin. The case concerns the interpretation of sections 139L(1)(a)(vii) and 139W of the Bankruptcy Act 1966 (Cth) (BA) and whether the Inspector-General was correct to include ten elevenths of the net income of the company in the assessable contribution of Mr McGushin. Mr McGushin, a general surgeon, was director of M. K. McGushin Pty Ltd at the time of his bankruptcy. The company operated a medical practice in which the only practitioner was Mr McGushin. The Tribunal held that the Inspector-General’s decision was incorrect and dismissed the appeal. The Tribunal found that Mr McGushin’s income was not assessable income because it was not derived by Mr McGushin. The Tribunal held that the Inspector-General’s interpretation of section 139L(1)(a)(vii) was too broad and did not take into account the specific circumstances of the case.

The Tribunal considered the definition of ‘income’ under the BA and concluded that for the purposes of the trustee’s assessments, income is identified not simply by virtue of having been received but also on the basis of it having been ‘derived’. The Tribunal found that Mr McGushin’s income was not derived by him because he did not receive any distribution of profit from the company during the Contribution Assessment Period. The Tribunal also found that Mr McGushin did not have a set salary and the amount he would draw from the company would differ from year to year. However, he did receive fortnightly periodic transfers automatically from the company’s bank account into his personal bank account. The Tribunal held that these transfers were not assessable income because they were not derived by Mr McGushin. The Tribunal also found that the corporate structure was not a sham or a device employed by Mr McGushin for the purpose of seeking to avoid the provisions of the BA.

The Inspector-General argued that the simple application of the ordinary meaning of the words in s 139L(1)(a)(vii) BA meant that the fees paid to the company were still assessable income. However, the Tribunal held that the Inspector-General’s interpretation was too broad and did not take into account the specific circumstances of the case. The Tribunal held that the income was not derived by Mr McGushin and therefore was not assessable income. The Tribunal also held that the Inspector-General’s decision was incorrect because it did not take into account the specific circumstances of the case. The Tribunal concluded that the Inspector-General’s decision was not supported by the evidence and was therefore incorrect.

The appeal was dismissed and the applicant was ordered to pay the respondent's costs of the appeal, including any reserved costs, to be taxed if not agreed. The Tribunal held that the Inspector-General’s decision was not supported by the evidence and was therefore incorrect. The Tribunal also held that the Inspector-General’s interpretation of section 139L(1)(a)(vii) was too broad and did not take into account the specific circumstances of the case. The Tribunal concluded that the Inspector-General’s decision was not supported by the evidence and was therefore incorrect. The Tribunal also held that the Inspector-General’s decision was not in accordance with the law and was therefore incorrect.

Orders

Orders of the court

1. The appeal be dismissed.

2. The applicant pay the respondent's costs of the appeal, including any reserved costs, to be taxed if not agreed.

Note:

Background

Background to the litigation

The applicant (the Inspector-General) appeals from the decision of the Administrative Appeals Tribunal (the Tribunal) constituted by a Senior Member. The decision was given in August 2008. The Tribunal set aside the decision of the Inspector-General to include ten elevenths of the net income of M. K. McGushin Pty Ltd in its assessment of the assessable contribution of the respondent (Mr McGushin) pursuant to s 139W(1) of the Bankruptcy Act 1966 (Cth) (BA) for the Contribution Assessment Period from the commencement of the bankruptcy on 6 March 2003 to 5 March 2004 (the CAP). BACKGROUND Mr McGushin is a general surgeon practising in Kalgoorlie, Western Australia. At the time he became bankrupt he was director of M. K. McGushin Pty Ltd (the Company). Mr McGushin held ten of the eleven issued shares. His former wife was one director and Mr McGushin was the other. The company operated a medical practice in which the only practitioner was Mr McGushin. On 6 March 2003 a sequestration order was made against his estate and on 21 August 2003, Mr McGushin and his former wife were replaced as directors of the Company by his subsequent wife and by Dr Keith McCallum, a medical colleague. Not long after (on 8 December 2003), the Company also went into liquidation. Mr McGushin thereafter was employed by another company. In the meantime, on 19 November 2003, Mr McGushin’s trustee in bankruptcy issued a notice of assessment of contributions for the CAP. Mr McGushin requested the Inspector-General to review the trustee’s decision. By a reviewable decision delivered on 14 September 2007 the Inspector-General set aside the trustee’s decision and decided Mr McGushin’s assessed income should be reduced. The only live issue before the Tribunal related to the determination of the Inspector-General that ten elevenths of the net income of the Company was assessable income of Mr McGushin by virtue of s 139L(1)(a)(vii) BA. Mr McGushin did not receive any distribution of profit from the Company during the CAP nor did he expect to do so because the Company was liquidated in December 2003. Whatever assets the Company held at that date were taken over by the liquidators. When Mr McGushin was operating the Company he did not have any set salary and the amount he would draw from the Company would differ from year to year. However, he did receive fortnightly periodic transfers automatically from the Company’s bank account into his personal bank account. His practice had also been to additionally transfer lump sums when available and when needed. Those transactions were all recorded and the Company’s bank account showed the transfers of funds as did cheque butts. The accounting was left in the hands of Mr McGushin’s accountant. All of the funds received by ongoing automatic payments from the Company until the appointment of the liquidators were included in Mr McGushin’s tax return as part of his salary. He did not receive any other distribution from the Company after it was wound up. The Inspector-General made the assessment however on the basis of ten elevenths of the fees paid to the Company to reflect the shareholding of Mr McGushin in the Company. It is that specific analysis which has fallen for consideration.

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

MCKERRACHER J
The effect of these provisions is that for the purposes of the trustee’s assessments, income is identified not simply by virtue of having been received but also and importantly in the present context at least, on the basis of it having been ‘derived’. Although income still does not vest in the trustee (Re Gillies; Ex parte Official Trustee in Bankruptcy v Gillies (1993) 42 FCR 571 at 577), the process of assessing income in its broad meaning involves applying a formula as against that assessed income for the purposes of making contributions by a bankrupt towards his or her estate. THE TRIBUNAL HEARING AND DECISION Evidence was given in the Tribunal hearing by Mr McGushin and by his accountant. Dr McCallum was also called to give evidence as to taking over all responsibility of staffing issues when he was appointed a director such that Mr McGushin became an employee of the Company. He said that he took complete control of the Company and did not allow Mr McGushin to access any Company monies. Ultimately the Tribunal found that the historic procedure had been that in addition to a fortnightly periodic payment transferred from the Company’s bank account to Mr McGushin’s own bank account, Mr McGushin would transfer lump sums from the Company’s bank account into his personal bank account from time to time as and when such funding was available and was needed by him. He also had used the Company’s bank account to pay some of his personal expenses and drew cheques for his personal use. Those transactions would all be recorded. At the end of the year they would be totalled with the total becoming his income for the financial year. The Tribunal found that when Mr McGushin became bankrupt on 6 March 2003 he continued to work in the medical practice and to draw an income the same way that he did before being made bankrupt. He was signatory to the Company cheque account until Dr McCallum was appointed as a director of the Company on 20 August 2003. Administrators were appointed to the Company on 10 December 2003 and were then appointed liquidators on 13 January 2004. The Tribunal did emphasise that it was important that there was no suggestion that the corporate structure was any form of a sham or a device employed by Mr McGushin for the purpose of seeking to avoid the provisions of the BA. That factor was common ground in the hearing of this appeal. But the argument for the Inspector-General was that the simple application of the ordinary meaning of the words in s 139L(1)(a)(vii) BA meant that the fees paid to the Company were still assessable income as determined by the Inspector-General. The Tribunal concluded that the Inspector-General’s decision was incorrect. The Tribunal noted that the definition of ‘income’ had been considerably broadened but it concluded that to be the ‘bankrupt’s income’ and therefore capable of being included in the contribution assessment in the CAP, it was necessary to also consider s 139W BA and to determine whether the income was ‘likely to be derived or was derived by the bankrupt’.

Ratio Decidendi

Legal Principle Established

Established by: MCKERRACHER J

Full text does not contain this section.