Commissioner of Taxation v Barnes Development Pty Ltd
Document type: Decision Impact Statement
Venue: Federal Court of Australia (WAD 215 of 2008)
Judgment date: 7 August 2009
Date published: 28 January 2010
Decision outcome: Partly adverse

Summary of decision:
Outlines the ATO's response to this case concerning whether an action in debt arises under general law to recover an amount required to be paid to the Commissioner by a notice given under s 260-5 of the Tax Administration Act 1953.

Overview of facts:
1. Subdivision 260-A of the Taxation Administration Act 1953 ("TAA") provides a regime for a form of statutory garnishee. A notice served under s 260-5 gives the Commissioner the right to recover from a third party an amount that the third party owes or may later owe to a taxpayer who is indebted to the Commonwealth for tax. 2. On 22 June 2007, the Commissioner served notices pursuant to s 260-5 to the respondent, Barnes Development Pty Ltd as trustee for the Barnes Family Trust ("the respondent"), requiring payment in respect of tax-related liabilities said to be payable by Mr Barnes and Mrs Barnes at the time. 3. As at 22 June 2007, the amount due by the respondent to Mrs Barnes was $383,451.31 and Mr Barnes at that time owed the respondent $236,782.66. 4. After 30 June 2007, a journal entry was made in the General Ledger in which an amount of $309,609.31 was credited to the loan account of Mr Barnes, converting the debit balance as at 30 June 2007 to a credit balance of $73,842 (rounded). The same figure of $309,609.31 was applied as a debit to the loan account of Mrs Barnes, reducing her loan account to a credit balance of $73,842 (rounded). 5. The Commissioner filed civil recovery proceedings against the respondent seeking payment of $383,451.31 allegedly due by the respondent to Mrs Barnes on the date of the issue of the s 260-5 notices and, in the case of Mr Barnes, the amount of $73,842 which became due subsequently. 6. After the Court reserved its decision, the Commissioner advised the Court that the claim for $73,842.00 in respect of Mr Barnes was no longer pressed, although the position that he was entitled to relief to this sum was maintained. | 1. Subdivision 260-A of the Taxation Administration Act 1953 ("TAA") provides a regime for a form of statutory garnishee. A notice served under s 260-5 gives the Commissioner the right to recover from a third party an amount that the third party owes or may later owe to a taxpayer who is indebted to the Commonwealth for tax. 2. On 22 June 2007, the Commissioner served notices pursuant to s 260-5 to the respondent, Barnes Development Pty Ltd as trustee for the Barnes Family Trust ("the respondent"), requiring payment in respect of tax-related liabilities said to be payable by Mr Barnes and Mrs Barnes at the time. 3. As at 22 June 2007, the amount due by the respondent to Mrs Barnes was $383,451.31 and Mr Barnes at that time owed the respondent $236,782.66. 4. After 30 June 2007, a journal entry was made in the General Ledger in which an amount of $309,609.31 was credited to the loan account of Mr Barnes, converting the debit balance as at 30 June 2007 to a credit balance of $73,842 (rounded). The same figure of $309,609.31 was applied as a debit to the loan account of Mrs Barnes, reducing her loan account to a credit balance of $73,842 (rounded). 5. The Commissioner filed civil recovery proceedings against the respondent seeking payment of $383,451.31 allegedly due by the respondent to Mrs Barnes on the date of the issue of the s 260-5 notices and, in the case of Mr Barnes, the amount of $73,842 which became due subsequently. 6. After the Court reserved its decision, the Commissioner advised the Court that the claim for $73,842.00 in respect of Mr Barnes was no longer pressed, although the position that he was entitled to relief to this sum was maintained. | Issues decided by the court or tribunal | There was a threshold legal issue as to whether civil recovery proceedings are available to the Commissioner. The respondent contended that s 260-5 does not enable the Commissioner to pursue civil recovery proceedings, as it is a penal provision, and that non-compliance with this provision does not entitle the Commissioner to recover from it the amount specified in the notices. | After consideration of the relevant authorities, the Court rejected the taxpayer's various arguments and concluded that there is nothing to displace the ordinary rule that, where a statute creates an obligation to pay money, an action in debt will lie to enforce the obligation. Therefore, the Commissioner may sue in debt to recover an amount that is required to be paid by a notice under s 260-5, when the time for payment of that amount as specified in s 260-5(5) has arrived. | Although the Commissioner advised his Honour, after the decision was reserved, that the claim of $73,842 in respect of Mr Barnes was no longer pressed, whilst maintaining the position that the Commissioner was entitled to relief in that sum, his Honour considered it appropriate to explain in his reasons why he had come to an opposite conclusion. In relation to the amounts allegedly owed by the Respondent to Mr & Mrs Barnes, his Honour decided that to accept the Commissioner's argument that attributing the benefit of the subsequent journal entry to Mr Barnes' loan account, but not to Mrs Barnes' loan account would work an injustice on the respondent by artificially increasing the loan account of Mrs Barnes, viewed on a joint basis. | His Honour was satisfied that the Commissioner had established the claim in respect to the monies owed by the respondent to Mrs Barnes in the amount of $383,451 but not at all in respect to the monies allegedly owed by the respondent to Mr Barnes. His Honour found that Mr Barnes was indebted to the respondent during the relevant period.

Issues decided:
There was a threshold legal issue as to whether civil recovery proceedings are available to the Commissioner. The respondent contended that s 260-5 does not enable the Commissioner to pursue civil recovery proceedings, as it is a penal provision, and that non-compliance with this provision does not entitle the Commissioner to recover from it the amount specified in the notices. After consideration of the relevant authorities, the Court rejected the taxpayer's various arguments and concluded that there is nothing to displace the ordinary rule that, where a statute creates an obligation to pay money, an action in debt will lie to enforce the obligation. Therefore, the Commissioner may sue in debt to recover an amount that is required to be paid by a notice under s 260-5, when the time for payment of that amount as specified in s 260-5(5) has arrived. Although the Commissioner advised his Honour, after the decision was reserved, that the claim of $73,842 in respect of Mr Barnes was no longer pressed, whilst maintaining the position that the Commissioner was entitled to relief in that sum, his Honour considered it appropriate to explain in his reasons why he had come to an opposite conclusion. In relation to the amounts allegedly owed by the Respondent to Mr & Mrs Barnes, his Honour decided that to accept the Commissioner's argument that attributing the benefit of the subsequent journal entry to Mr Barnes' loan account, but not to Mrs Barnes' loan account would work an injustice on the respondent by artificially increasing the loan account of Mrs Barnes, viewed on a joint basis. His Honour was satisfied that the Commissioner had established the claim in respect to the monies owed by the respondent to Mrs Barnes in the amount of $383,451 but not at all in respect to the monies allegedly owed by the respondent to Mr Barnes. His Honour found that Mr Barnes was indebted to the respondent during the relevant period.

ATO view of decision:
Whether the Commissioner can alternatively sue under Subdivision 250-A | In an alternative argument, the Commissioner relied on s 255-5 as a means of recovering the amounts due under the notices. Section 255-5 provides that a "tax-related liability" that is due and payable, is a debt due to the Commonwealth and the Commissioner may sue to recover that debt in a court of competent jurisdiction. A "tax-related liability" is defined by s 255-1 as "a pecuniary liability to the Commonwealth arising directly under a taxation law". | The Commissioner's alternative argument was not decided by the Court. The Commissioner's position on this provision is that if an obligation comes within the statutory description in s 255-1(1), it is a "tax-related liability" for the purposes of the TAA, notwithstanding that the provision creating the obligation is not listed in s 250-10: Muc v Deputy Federal Commissioner of Taxation [2008] NSWCA 96 at [41]-[57] per Mason P (Beazley and Giles JJA agreeing). It is not necessary to rely on the provision to sue in debt for recovery of amounts due under a s 260-5 notice where the Commissioner can sue in debt at general law. | The amount due to Mr Barnes | His Honour did not order in the Commissioner's favour on the notice issued in respect of the amount said to be due from the respondent to Mr Barnes after the journal entry was made that resulted in Mr Barnes being owed $73,842. | Importantly, the Court summed up its reasons on this point at [50] where it was said: "I am satisfied that the Commissioner has established its claim in respect to monies owed by the respondent to Mrs Barnes in the amount of $383,451.31 but not at all in respect to monies alleged owed by the respondent to Mr Barnes. I find that as from 22 June 2007 to 9 April 2008, Mr Barnes was indebted to the respondent. " (underlining added) | The Commissioner accepts this factual finding as being available in the circumstances of this particular case.

Administrative treatment:
Implications on current Public Rulings & Determinations | None.

Legislative references: Taxation Administration Act 1953 (Cth) 260-5 Income Tax Assessment Act 1936 (Cth) 218
Case references: Bluebottle UK Ltd v Deputy Commissioner of Taxation 232 CLR 598 [2007] HCA 54 67 ATR 1 2007 ATC 5302 Clyne v Deputy Commissioner of Taxation 150 CLR 1 81 ATC 4429 12 ATR 173 Mallinson v Scottish Australian Investment Co Ltd 28 CLR 66 [1920] HCA 51 26 ALR 225 Muc v Deputy Federal Commissioner of Taxation [2008] NSWCA 96 2008 ATC 20-032 72 ATR 369
Subject references: Collection and recovery Notices for payment under s 260-5 of the Taxation Administration Act 1953 Tax-related liability Default in payment Entitlement to sue Action in debt