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Corrs Insolvency Alert - In a 5 nil drubbing the High Court has effectively told the Tax Office to get back in line with other creditors in a winding up27 August 2009
The case has its origins in a separate dispute between Bruton Holdings and the Australian Taxation Office (ATO) regarding whether it was a tax exempt charity. In 2007 administrators were appointed amid fears the ongoing dispute would render Bruton insolvent. A month later the ATO issued a tax assessment for $7.7 million and Bruton was placed into liquidation. The ATO then issued a statutory form of garnishee notice to one of Bruton's debtors under s 260-5 of the Tax Administration Act (Tax Garnishee Notice).
The central issue in the case was whether the Tax Garnishee Notice was effective to require the debtor to pay its debt directly to the ATO instead of the liquidator. The ATO submitted that the debtor was obligated to do so and faced criminal sanctions for non-compliance. If this was upheld the ATO could gain priority over unsecured creditors to a company's debtors even though winding up had commenced.
The Full Federal Court found in favour of the ATO in a controversial decision that cut across what was previously considered settled practice in the insolvency profession. Many will breathe a sigh of relief that the High Court has reaffirmed the policy decision made long ago to abolish the priority of tax debts to aid the survival of struggling companies. Specifically the five judges unanimously held that the ATO cannot issue a valid Tax Garnishee Notice after a liquidator has been appointed.
NOT ALL GOOD NEWS
The decision is confined to the specific question of validity of Tax Garnishee Notices issued post liquidation. The judgement also acknowledges authority that may give preference to specific tax provisions to protect tax revenue where they conflict with the Corporations Act. The decision refers to the specific tax rules for liquidators in s 260-45. Other examples are the specific rules for receivers (Subdivision 260-C) and potentially s 254 of the Income Tax Assessment Act 1936 which applies to receivers, administrators and liquidators. All of these provisions can apply to impose personal liability and in extreme cases, criminal sanctions.
This article provides information about topical legal issues.
Information contained in this article is intended as an introduction only
and should not be relied on in place of legal advice.
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