ATO v Liquidators – The tables are turned

The Federal Court’s decision in Commissioner of Taxation v Warner [2015] FCA 659 has clarified that the Australian Taxation Office’s (ATO) coercive powers requiring a taxpayer to produce documents and information to the ATO prevail over section 486 of the Corporations Act 2001 (Cth) (CA) (section 486 provides that a Court order must first be obtained before a creditor is authorised to inspect the books of a company).

This is a rare situation where the ATO has preferential treatment over other unsecured creditors of a company in liquidation.

Background

The respondents to the proceedings were the liquidators of various companies in a consolidated group (Liquidators) and the companies themselves.

The ATO (or more specifically, the Commissioner of Taxation) was a creditor to those companies.

A notice was issued by the Commissioner under section 353-10 of Sch I to the Taxation Administration Act 1953 (Cth) (TAA) and section 264 of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936)¹, (collectively Coercive Powers) for the production of documents by the Liquidators of a number of the respondent companies in liquidation (Notice).

The Liquidators refused to produce the documents specified in the Notice on the basis that section 486 of the CA requires a Court order to first be obtained before the Liquidator was authorised to produce them to the ATO as a creditor of the respondent companies.

The relevant legislation

Section 264 of the ITAA 1936 has previously been interpreted as giving the Court very broad powers to require a tax payer to produce documents and information for the purpose of the Commissioner undertaking its duties. For example, the ATO may validly issue a notice under this section in the absence of any issue or dispute between the taxpayer and the Commissioner. Significantly, this section has been interpreted as granting the Commissioner the power to undertaking a ‘fishing expedition’ in relation to a taxpayer’s affairs.

Section 353-10 of the TAA was the ‘sister’ provision of section 264, and provided similar coercive powers to the ATO to require a taxpayer to produce documents and information relating to indirect taxes. It has now been amended to incorporate the powers previously provided for under section 264.

Section 486 of the CA provides, among other matters, that a Court may make such order for the inspection of the books of a company in liquidation by a creditor as the Court thinks just.

Decision

The Commissioner sought a declaration that se 486 of the CA had a different field of operation from the Coercive Powers and did not affect the Liquidators’ obligation to comply with the Notice.

While a number of arguments were put to His Honour Justice Perry on behalf of the Liquidators, ultimately, His Honour held:

1. The Coercive Powers authorise the Commissioner to require production of documents from any person, irrespective of whether or not the recipient of the notice is the liquidator of the company taxpayer in liquidation.
2. The obligation to comply with a section 264 notice is not subject to, or affected by, section 486 of the CA. It was not justifiable to read section 486 as if it contained an exception in favour of the Liquidators from the obligation to comply with the Notice.
3. It was not warranted to limit the Commissioner’s powers otherwise than by reference to the purposes of the taxation laws merely because a company is in liquidation.  The Commissioner has a legitimate interest irrespective of the winding up in having access to the company’s books in order to discharge his or her statutory duty to ascertain a company’s tax liability.

Implications

Due to changes made to the corporations legislation in 1993, it was understood that the ATO was not entitled to receive preferential treatment over other unsecured creditors of a company in liquidation.

However, the decision of Commissioner of Taxation v Warner makes it clear that the ATO does enjoy superior rights to other creditors (provided it first issues a notice under its Coercive Powers) regarding inspecting the documents of a company in liquidation.

This decision also reiterates the primacy and remarkable breadth of the Commissioner’s powers to require a taxpayer to produce documents and information.

¹This section has now been repealed and replaced with section 353-10 of Sch 1 of the TAA.