Re Evans; Ex parte Sweeney v Evans

[1995] FCA 1147

CATCHWORDS

BANKRUPT - administration of bankrupt's property - tax refund for pre-bankruptcy tax years assessed and received after sequestration - application by trustee for directions - whether entitlement to the refund is a pre-bankruptcy asset that vested in the trustee - whether entitlement to refund depends upon assessment - whether refund is income earned post-bankruptcy and subject to income contribution assessment.

Bankruptcy Act 1966, ss 134(4), 30
Income Tax Assessment Act 1936 (Cth) s 221H(2)

Federal Commissioner of Taxation v Official Receiver (1956) 95 CLR 300
Re Mondin; Ex parte Bradshaw (1985) 60 ALR 439

RE: ROSS ALEXANDER EVANS (Bankrupt); EX PARTE: PAUL DESMOND SWEENEY (Applicant Trustee) and ROSS ALEXANDER EVANS, MELANIE JANE EVANS and JAMES E KERN & ASSOCIATES (Respondents)
No. QP 388 of 1992

SPENDER J
BRISBANE
3 NOVEMBER 1995

IN THE FEDERAL COURT OF AUSTRALIA )
GENERAL DIVISION                 )
  No.  QP 388 of 1992
BANKRUPTCY DISTRICT OF THE       )
STATE OF QUEENSLAND              )

RE:ROSS ALEXANDER EVANS

Bankrupt

EX PARTE: PAUL DESMOND SWEENEY
  Applicant Trustee

AND:ROSS ALEXANDER EVANS, MELANIE JANE EVANS and JAMES E KERN & ASSOCIATES

Respondents

MINUTES OF ORDER

JUDGE MAKING ORDER:     Spender J

DATE OF ORDER:         3 November 1995

WHERE MADE:            Brisbane

THE COURT DECLARES that the sum of $38,338.53 paid by the Commissioner of Taxation to the accountant for the bankrupt subsequent to September 1993 is an asset which vests in the applicant as trustee of the property of the bankrupt.

THE COURT GRANTS liberty to the trustee and to each of the respondents to apply to the court for any further orders that they might seek in respect of the payment of $3905.09 to a child support agency. 

THE COURT ORDERS that the costs of and incidental to this application should be the costs of the trustee in the administration of the estate.

NOTE:     Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules.

IN THE FEDERAL COURT OF AUSTRALIA )
GENERAL DIVISION                 )
  No. QP 388 of 1992
BANKRUPTCY DISTRICT OF THE       )
STATE OF QUEENSLAND              )

RE:ROSS ALEXANDER EVANS

Bankrupt

EX PARTE: PAUL DESMOND SWEENEY
  Applicant Trustee

AND:ROSS ALEXANDER EVANS, MELANIE JANE EVANS and JAMES E KERN & ASSOCIATES

Respondents

CORAM:    Spender J
DATE:     3 November 1995
PLACE:    Brisbane

REASONS FOR JUDGMENT

This is an application which was filed on 18 August 1995 by Paul Desmond Sweeney, a chartered accountant of Hall Chadwick, who is the trustee of the estate of Ross Alexander Evans. A sequestration order was made against the estate of Dr Evans on 19 February 1992 upon a creditor's petition. The application is brought pursuant to s 134(4) of the Bankruptcy Act 1966 ('the Act') which provides:

"The trustee may at any time apply to the Court for directions in respect of a matter arising in connexion with the administration of the estate. "

The application seeks directions as follows:

"1.  Directions as to whether the refund of income tax received by the bankrupt on or about 5 October, 1993 in the net sum of $38,338.53 is -

(a)an asset which vests in the applicant as trustee of the property of the bankrupt; or

(b)income of the bankrupt to which an income contribution assessment can be made pursuant to Part VI Division 4B of the Bankruptcy Act 1966;

2.Such further directions as to the treatment of the said tax refund as to the court may seem meet. "

I should note s. 30 of the Act, which relevantly provides:

"(1)  The Court -

(a)has full power to decide all questions, whether of law or of fact, in any case of bankruptcy ... coming within the cognizance of the Court; and

(b)may make such orders (including declaratory orders and orders granting injunctions or other equitable remedies) as the Court considers necessary for the purposes of carrying out or giving effect to this Act in any such case or matter. "

The material before the court shows that the bankrupt lodged tax returns probably in May 1993 but certainly at some time between 4 May 1993, which is the date of various signed statutory declarations contained in the returns, and 30 September 1993, which is the date of the notices of assessment.  The returns were in respect of the tax years from 1 July 1987 to 30 June 1991, that is to say, the returns were lodged after Dr Evans became a bankrupt but were in respect of periods prior to his bankruptcy.

The details of the income disclosed in the tax returns for the tax years 1988/89, 1989/90 and 1990/91 are:

"1988/89     Wages or salary        $62,493.00

Business income         $3,739.00

$66,232.00

1989/90     Wages or salary       $189,840.00
                   Less deductions         $3,168.00

$186,672.00

1990/91     Wages or salary       $112,924.00
                   Less deductions         $2,737.00

$110,187.00"

For those years, Dr Evans claimed in his tax returns that he had had the following amounts of group tax deducted:

1988/89  $33,573.00
         1989/90  $91,369.00
         1990/91  $72,002.00

$196,944.00

The Commissioner of Taxation accepted the returns and paid a tax refund in September 1993, which was made up as follows:

"Carried forward tax payable 87/88     $(1,638.87)

Refund 88/89  $7,924.42
       Refund 89/90  $8,276.04
       Refund 90/91  $27,682.03

Total Refund  $42,243.62

Less payment to child support agency $(3,905.09)

$38,338.53" 

The sum of $38,338.53 was sent to the bankrupt's accountant, who banked the moneys to his account, deducted fees of $2838.53 and drew a cheque in the amount of $35,500 payable to the bankrupt.  That cheque was later deposited to an account at Suncorp Building Society in the name of Melanie Evans, on 15 October 1993. 

The issues that fall for determination in this application for directions is whether the tax refund of $42,243.62 is income earned by the bankrupt after the date of his bankruptcy, in which case it can be included in the calculation of income contribution assessments under Division 4B of Part VI of the Act. In that circumstance, the trustee would be entitled to recover a portion of the tax refund according to the formula stipulated for such assessments.

Alternatively, if the tax refund is not considered to be income earned by the bankrupt post-bankruptcy, but rather a realisation of a prior existing asset, then that asset would have vested in the trustee, who would be entitled to recover all of it. 

Having regard to the history of the material before me, it is to be noted that when the application for directions was earlier before the court on 20 September 1995, Cooper J directed that the trustee, Mr Sweeney, serve the application on the bankrupt, on his wife and on James E. Kern & Associates, accountants, and directed that each of those persons and the firm be respondents to the application.

The matter was adjourned on 20 September to 11 October 1995 for directions and the costs of those orders were ordered to be the trustee's costs in the administration of the estate.  Affidavits concerning service on each of the bankrupt, his wife and James E Kern & Associates, established compliance with his Honour's directions as to service.

On 11 October the matter was further adjourned until today.  On 11 October there was no appearance on behalf of the bankrupt, his wife or the firm.  The Registrar, however, yesterday received by facsimile from Connolly Suthers, Solicitors, in Townsville, a letter in the following terms:

"We enclose herewith a copy of an Affidavit of Ross Alexander Evans the original of which will be filed by leave tomorrow. 

You will note paragraph 6 of the Affidavit provides that the Bankrupt cannot afford to be legally represented at the hearing and we would therefore ask that you ensure the contents of this Affidavit are brought to the attention of the Registrar prior to the hearing in Townsville. "

With that facsimile letter was a facsimile affidavit by Dr Evans, witnessed by a solicitor of Connolly Suthers, in which Dr Evans says:

"I have obtained legal advice concerning the Application for Directions dated 18 August 1995 made by the Applicant Trustee.

The advice I have received is that the Application is unnecessary. It is plain that the refund of income tax received by me on or about 5 October 1993 in the nett sum of $38,338.53 is part of my income to which an income contribution assessment can be made pursuant to Part VI Division 4B of the Bankruptcy Act 1966.

Alternatively that is a matter on which the Applicant Trustee should obtain his own legal
advice and act upon that advice without going to the expense of obtaining directions.

I consider that the Application has been made unnecessarily but in an attempt to increase costs payable by my estate.

I cannot afford to be represented on the hearing of the Application.

I seek an order that the Application be dismissed with all costs of the Application being payable by the Applicant Trustee out of his own funds. "

The central question on this application is whether what Dr Evans says is plain in paragraph 3 of his affidavit is in fact correct.

In my opinion an entitlement to a tax refund in respect of income which is earned prior to bankruptcy is a chose in action which existed at the date of the bankruptcy and therefore vests in the trustee.  It seems that Dr Evans has misunderstood the effect of the High Court's decision in Federal Commissioner of Taxation v Official Receiver (1956) 95 CLR 300.

In that case Mr Travis's estate was sequestrated on 24 February 1950.  In respect of the year ending 30 June 1954 the bankrupt earned salary or wages in respect of which his employer made, in that year, deductions for income tax and social services contribution and accounted to the Deputy Commissioner of Taxation in accordance with the provisions of Div 2 of Pt VI of the Income Tax and Social Services
Contribution Assessment Act 1936-53.  As the judgment of Williams J at 306 demonstrates:

"In pursuance of the provisions of section 221H(2)(b) of that Act...there is now due and payable by the Deputy Commissioner of Taxation the sum of £44 6s.3d. being the amount of the excess of the sums deducted over the tax and social services contribution payable by the bankrupt in that year. "

The High Court concluded:

"That the sum in question represented personal earnings of the bankrupt subsequent to his bankruptcy, and did not vest in the official receiver in the absence of an order made under s 101 of the Bankruptcy Act. "

Section 101 of the Bankruptcy Act was the provision then in place in respect of contributions from post-bankruptcy earnings. 

In that case the refund was in respect of deductions on account of tax for earnings in the period subsequent to the making of the sequestration order and is to be contrasted with the circumstances in the present case.  Williams J said at pp 308-309:

"The instalments are collected on account of the contingent liability of the salary or wage earner to pay income tax which will crystallise into an actual liability upon the making of the assessment.  The instalments are collected in advance by the employer on behalf of the commissioner out of salary or wages payable by the employer to the employee.  They partially discharge the obligation of the employer to pay the salary or wages.  The employee is still under an obligation to furnish an income tax return to the commissioner under s. 161 and it is from that return and from any other information in his possession that the commissioner in accordance with s. 166 makes the usual assessment of the amount of the taxable income of the taxpayer and of the tax payable thereon.  Too little or too much may have been collected in advance by instalments.  If too little, the salary or wage earner must pay the deficiency to the commissioner.  If too much, he is entitled to a refund of the excess. "

His Honour continued at p 309:

"Section 221H(2)(b) contains the special provision providing for a refund where the total sum collected by instalments from an employee in receipt of salary or wages exceeds the amount of tax he is liable to pay.  The refund becomes payable when the tax payable by the employee in respect of the year of income has been assessed.  It should therefore be repaid to the employee when he receives his notice of assessment. "

Of that duty his Honour said at 310:

"It is not a duty which confers on taxpayers a right to bring an action against the commissioner personally.  If it created an ordinary chose in action, it could be assigned, the assignee could give the commissioner notice of the assignment and the commissioner would become subject to all the incidents of law and equity relating to choses in action which are assignable. "

Fullagher J said at 321:

"The sum of £44 6s.3d. therefore, simply represents the difference between the tax payable by him and the total of the amounts deducted by his employer from his salary or wages during the year.

It does not, to my mind, carry the matter any further to say that a 'debt' due and payable to the bankrupt arose when the assessment was made.  It is obvious that the bankrupt became, by virtue of the statute, entitled to be paid some money, and in this sense, of course, it is true to say that a debt became due and payable to him.  The statute created the 'debt'.  But it did not create it out of nothing.  It does not simply oblige the commissioner for no reason at all to pay a sum of money to the bankrupt.  The question to be answered is:- Does that 'debt', in substance and in reality, represent personal earnings of the bankrupt, or does it represent some other and different thing. "

Later, at 321-22, his Honour said:

"In order to arrive at the reality of the position, it is necessary to inquire how the bankrupt became entitled to payment of the sum in question.  By virtue of what acts or things done or promised by him did that sum become payable?   It is not simply that he made, or somebody made for him, an overpayment of income tax.  The truth can be expressed by saying that he worked for that sum of £44 6s.3d.  He worked for his employer. "

And later:

"The right to receive this sum of £44 6s.3d. really is a right to receive money which the bankrupt earned. "

And he said:

"...I am of opinion that the sum in question does represent personal earnings of the bankrupt, and that the respondent has no right in respect of that sum unless he can obtain an order under s. 101 of the Bankruptcy Act. "

The position in the present case, in my opinion, is made plain by the judgment of Smithers J in Re Mondin; Ex parte Bradshaw (1985) 60 ALR 439. That case was concerned with a repayment of provisional tax, but as Smithers J indicated, there is no distinction in principle between payments made by way of provisional tax and deductions paid by way of group deductions. His Honour said at 444:

"Both s 221H(2) and s 221YB are in Div 3 of Pt VI of the ITA Act.  That part is headed 'Collection and Recovery of Tax'.  The requirement that payments be made against an employee's contingent liability for tax is, as described in the statute, 'for the purpose of enabling the collection by instalments from employees of income tax': see s 221(c)(1) of the ITA Act.  It is of course inherent in the system that there is the possibility that the instalments paid will exceed the tax liability of the employee taxpayer.  For the purpose of adjusting the situation as between the Commonwealth and the taxpayer so that it will accord with the actual liability of the taxpayer for tax according to
law, a duty is imposed on the Commissioner under s 221H(2) to make an assessment which will disclose that liability and the amount of any excess and to pay such excess to the taxpayer. "

In Mondin's Case, on 21 August 1981 the debtor had entered into a deed of arrangement pursuant to s. 237(2) of the Bankruptcy Act which provided for the assignment to the trustee under the deed of all the debtor's estate, which in effect included all property that belonged to or was vested in him as at the date of the deed. 

The applicant had, at some time after 6 August 1981, as tax agent for the debtor, prepared and filed tax returns for the years ending 30 June 1979, 30 June 1980 and 30 June 1981.

In January 1982 the Deputy Commissioner of Taxation issued a notice of assessment for the year ended 30 June 1979 showing a credit balance being a provisional tax credit of $866.24 which amount was carried forward in Refund Notices issued for the subsequent two years.  A cheque for that amount drawn to the order of the debtor accompanied the refund notice for the year ended 30 June 1981.  On 9 April 1984 a sequestration order was made against the debtor in respect of debts incurred by the debtor following the execution of the deed of arrangement.

In a procedure similar to what has been adopted by the trustee in the present case, the tax agent sought directions as to whether it was his duty to hold the sum of $866.24 for the trustee in bankruptcy, or for the debtor, or as property assigned to him under the deed. Smithers J ordered that the tax agent hold the sum of $866.24 as part of the property of the debtor which had been assigned to him under the deed. His Honour held it was necessary on the evidence to proceed on the basis that at the date of the deed the debtor had not made the returns of income and accordingly the condition for performance of the functions which the Commissioner would have performed under s. 221YE of the Income Tax Assessment Act 1936 (Cth) had these returns been made, had not been satisfied.

No duty had then arisen in the Commissioner to make any refund to the debtor.  His Honour said at 443:

"It is apparent however, on the facts relating to the income of the debtor in the relevant years and which would have been disclosed to the Commissioner  if income tax returns for those years or even those for the years ending 30 June 1979 and 1980 had been before him, the Commissioner would have issued the refund notices referred to above.  In that event the stated refunds would, no doubt, have been paid to the debtor.  If not, the obligation to do so would have been enforceable by some appropriate process.  Although the refund was not recoverable by action against the Commissioner, the duty imposed on him by Parliament as an officer of the Commonwealth to make the refund on behalf of the Commonwealth was clear.

It is apparent also that at the date of the deed and indeed for a considerable time before then the debtor had the capacity to activate the performance of the functions of the Commissioner with respect to the matter of the refund by making returns of his income. "

I interpolate to say that that is precisely the situation in the present case, and it would be strange if in fact the character of the entitlement to the moneys repaid by the Commissioner were to depend on whether there had been a timely compliance by a tax payer of his obligations to lodge returns, compared with the situation where a taxpayer had been dilatory, and had filed a number of tax returns years after they were properly to have been filed. 

Smithers J said at 445:

"An obligation to pay a sum of money in the future, measurable according to the operation of law in relation to such events as may occur before the time for payment, is a chose in action.  Such a situation is to be distinguished from one in which there is merely a possibility or expectation: see Norman v Federal Commissioner of Taxation (1963) 109 CLR 9. "

The conclusion of Smithers J is to be found in his observations at 447:

"In the present case the critical factors are that at the date of the deed there existed a relationship between the Commonwealth and the taxpayer arising out of the statutory purpose for which the provisional tax was paid. Further, the facts by reference to which the disposition of that provisional payment would be determined had then occurred, and it was therefore within the power of the debtor to activate the exercise by the Commissioner of his functions under 221YE of the ITA Act. "

And his Honour ordered:

"That the applicant hold the sum of $866.24 as part of the divisible property of the debtor referred to in the schedule to the deed of arrangement. "

In the present case the refund was in respect of income earned prior to the bankruptcy.  At any time after 30 June 1991, which is still before his bankruptcy, Dr Evans had a right to obtain that refund.  In my opinion that right vested in the trustee upon his bankruptcy.  In my opinion the total amount of $42,243.62, being the amount of the refund to which Dr Evans was entitled, made up of the actual sum paid, $38,338.53, together with the payment to a child support agency of $3,905.09 which is a deduction taken from the total amount of the refund (but which does not, in my opinion, affect the amount or characterisation of the nature of the refund), was an asset which vested in the trustee as trustee of the property of the bankrupt.

However, there is a difficulty, it seems to me, from an evidentiary viewpoint, as to what is the position in respect of the amount of $3905.09, being an amount in the notice of assessment, referred to as a payment to the Child Support Agency.  The material presently before the court does not permit a final conclusion to be made as to any entitlement to those moneys as at the date of bankruptcy.  The application, I note also, is directed, in paragraph 1, to only "the net sum of $38,338.53".

In those circumstances, while there is a question mark as to the amount of $3905.09, it seems to me that I ought to declare that the sum of $38,338.53 paid by the Commissioner of Taxation to the accountant for the bankrupt subsequent to September 1993 is an asset which vests in the applicant as trustee of the property of the bankrupt. 

Having regard to what appears to have been the disposition of those funds, and to the question mark concerning the amount of the payment of $3905.09 to the Child Support Agency, I will give liberty to the trustee and to each of the respondents to apply to the court for any further orders that they might seek.  As to costs, it seems to me that the costs of and incidental to this application should be the costs of the trustee in the administration of the estate.

I certify that this and the preceding thirteen (13) pages are a true copy of the reasons for judgment herein of the Honourable Justice Spender.

Associate

Date: 3 November 1995

Solicitor for
the applicant trustee:           Mr G Rodgers of Gadens Ridgeway

Date of Hearing:               3 November 1995