Notices best served ungarnished
Federal Court confirms the ATO cannot issue garnishee notices to a company being wound up to collect post-liquidation tax liabilities.
The Australian Tax Office (ATO) has sought to use the statutory notice scheme (known as garnishee notices) that forces third parties holding funds on behalf of liquidators or insolvent companies to pay those funds to the ATO or otherwise be liable for committing an offence. In practice, the scheme enabled the ATO to obtain a higher priority for repayment of debts than that afforded to other unsecured creditors under Part 5.6 of the Corporations Act 2001 (Cth) (CA).
In Bruton Holdings Pty Ltd (in liq) v Commissioner of Taxation  HCA 32, the High Court held that a garnishee notice issued to a company in liquidation for a tax liability that arose prior to the liquidation was an attachment to property and therefore void.
In the recent decision of the Federal Court in Bell Group Limited (in liq) v Deputy Commissioner of Taxation  FCA 1056, a liquidator has successfully overturned garnishee notices purportedly requiring a bank holding approximately $300 million for the liquidator to pay $298 million of those funds to the ATO to discharge a post-liquidation tax debt.
This decision confirms the principle established in Bruton Holdings that a garnishee notice is an attachment to property and therefore void under the CA, regardless whether it relates to pre liquidation or post liquidation taxes.
Liquidators should note in particular from the decision that:
- the ATO cannot issue garnishee notices to recover pre-liquidation or post-liquidation tax debts from liquidators or companies that have commenced winding up (whether voluntarily or by court order);
- it does not affect the ATO’s power to issue garnishee notices prior to the commencement of a winding up; and
- the Court questioned whether the ATO generally has payment priority to receive payment for post-liquidation tax liabilities. This issue is subject to the High Court's pending decision in Commissioner of Taxation v Australian Building Systems Pty Ltd (in liq), in which a liquidator's general obligation to retain sufficient assets to discharge post-liquidation tax liabilities is being considered. That case was heard in September 2015 and we expect judgment to be handed down later this year.
A liquidator was appointed by court order to The Bell Group Limited (in liq) (TBGL) in July 1991. As part of settling the colossal Bell Group litigation that commenced in 2008, several banks agreed to pay approximately $982 million over a specified period to the Liquidator to be held on trust for TBGL and its related entities.
In August 2015, the Commissioner of Taxation (Commissioner) issued notices of assessment against TBGL and the Liquidator, determining that the settlement triggered a post-liquidation tax liability of approximately $298 million in respect of the 2014 financial year.
The Liquidator (in his capacity as trustee for TBGL) retained $300 million of the settlement funds in a National Australia Bank Limited (Bank) term deposit account. Shortly after issuing the notices of assessment, the Commissioner also issued garnishee notices (Notices) to the Bank under s 260-5 of Schedule 1 of the Tax Administration Act 1953 (Cth) (TAA) requiring that it directly pay the Commissioner from those funds to discharge the Liquidator's tax liability. The Liquidator and TBGL objected to the assessments and sought to set aside the Notices.
The key issue before the Federal Court was whether the Notices could be issued in respect of a post-liquidation tax liability. This required close consideration of the High Court's reasoning in Bruton Holdings Pty Limited (in liq) v Commissioner of Taxation  HCA 32. In that case, it was decided that garnishee notices could not be issued to recover pre-liquidation tax debts owed by a company after a voluntary winding up had commenced, on the basis that:
- s 500(1) of the CA voids any 'attachment' (including a garnishee notice) against a company's property put into force after a resolution to voluntarily wind the company up has been passed; and
- s 260-45 of Schedule 1 of the TAA outlines the particular statutory scheme applicable to recover tax debts where a liquidator has been appointed to a company. The Commissioner could accordingly not apply the statutory notice scheme under s 260-5 that generally relates to all tax debts.
The Commissioner argued that Bruton could be distinguished on the basis that post-liquidation tax liabilities were subject to a different statutory scheme than pre-liquidation tax liabilities, namely, s 254(1)(d) under the Income Tax Assessment Act 1936 (Cth) (ITTA). Furthermore, s 254(1)(h) provided that the Commissioner could access the same remedies against 'attachable property' vested in trustees (defined to include liquidators) as were available against any other taxpayer, with one of those remedies being garnishee notices.
In contrast, TBGL and Liquidator submitted that the reasoning in Bruton applied equally to a post-liquidation tax liability, and the Commissioner could not rely on the general scheme under s 254(1)(d) of the ITAA when the particular scheme under s 260-45 was applicable.
Justice Wigney decided in TBGL and the Liquidator's favour, making orders that:
- the Notices and decision to issue them be quashed;
- the Bank be restrained from taking any action in relation to them; and
- that the Commissioner pay the Liquidator's and TBGL's costs.
Justice Wigney gave two key reasons for the notices being ineffective.
- The Notices were attachments to TBGL's funds and therefore void under s 468(4) of the CA. As the Notices were void, TBGL's funds were not 'attachable property' that the Commissioner was empowered to seek remedies against by reason of s 254(1)(h) of the ITAA.
- Secondly, the Notices being void supported the High Court's 'clear, unequivocal and unqualified' view that the Commissioner was not empowered to issue garnishee notices in circumstances where the debtor is a liquidator or a company that has commenced winding up. As in Bruton, a general statutory scheme to recover tax liabilities could not be applied when a particular statutory scheme was applicable under s 260-45 of Schedule 1 of the TAA. Moreover, the Commissioner's priority as a creditor in liquidation is determined by other substantive law (particularly the CA) as opposed to the statutory notice scheme or other general taxation schemes.
In rejecting the Commissioner's alternative submission that s 468(4) be read down to permit the Notices to attach to the funds, the Court noted that the submission was based on the incorrect proposition that the Commissioner has priority in respect of post-liquidation tax liabilities. This issue is expected to be resolved by the High Court in Commissioner of Taxation v Australian Building Systems Pty Ltd (in liq) when that decision is handed down later this year.
The Federal Court's decision is strongly supported by the High Court's reasoning in Bruton, although it remains to be seen if the Commissioner will appeal the decision to the Full Court of the Federal Court.
If the decision is not appealed, we anticipate that the Commissioner will publish a Decision Impact Statement in due course confirming that garnishee notices will no longer be issued to recover tax debts from liquidators or companies that have commenced winding up.
We encourage liquidators to monitor the High Court's pending decision in Commissioner of Taxation v Australian Building Systems Pty Ltd (in liq), in which a liquidator's general obligation to retain sufficient assets to discharge post-liquidation tax liabilities is being considered.
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