Deputy Federal Commissioner of Taxation v Stranger [1934] HCA 6; (1934) 50 CLR 468 (26 April 1934)

HIGH COURT OF AUSTRALIA

The Deputy Federal Commissioner of Taxation Applicant, Appellant; and Stranger Respondent, Respondent.

H C of A

On appeal from the Court of Bankruptcy.

26 April 1934

Gavan Duffy C.J., Rich, Starke, Evatt and McTiernan JJ.

Sir Thomas Bavin K.C. (with him Telfer), for the appellant.

Abrahams K.C. (with him Stephen), for the respondent.

The following judgments were delivered:—

Gavan Duffy C.J.

Sec. 84 (1) of the Bankruptcy Act 1924-1932 directs the trustee to apply the estate of a bankrupt in the order prescribed by that section. Sub-sec. 1 (h) is as follows: "Sixthly, in payment of all municipal or other local rates due from the bankrupt at the date of the order of sequestration and having become due and payable within twelve months next preceding that date; and all assessed land tax and income tax, assessed under any Act or State Act prior to the date of the order of sequestration and not exceeding in the whole one year's assessment; and in repayment of any advance made to the bankrupt, or in payment of any amount owing by the bankrupt for goods supplied to him, under any Act or State Act or law of a territory relating to or providing for the improvement, development or settlement of land, or the aid, development or encouragement of mining: Provided that, if the bankrupt has given security for the payment or repayment of the amount due, this paragraph shall only apply to the balance due after deducting the net amount realized from the security." The question for our consideration is the construction to be put upon the words "and all assessed land tax and income tax, assessed under any Act or State Act prior to the date of the order of sequestration and not exceeding in the whole one year's assessment."

In my opinion these words direct the trustee to give priority to all assessed land tax and income tax, subject to this condition, that if there be assessments for more years than one the priority must not extend to an amount larger than the amount of the largest of such assessments.

The appeal should be allowed.

Rich J.

This case concerns the interpretation of sec. 84 (1) (h) of the Bankruptcy Act 1924-1932. Sec. 84 provides the order of priority of preferential debts. Sub-sec. 3 of sec. 5 makes the provisions of the Act dealing with this subject bind the Crown. The common law right of the Crown to priority in claims competing with those of a subject is entirely displaced by the statutory order (see Commissioners of Taxation for New South Wales v. Palmer[1]; Food Controller v. Cork[2]). But in that order a preference is given to land and to income taxes. No distinction is drawn between State and Federal taxes, and somewhat surprisingly the place given is as low as sixth in the order of priority. Moreover, that rank is shared with municipal rates and with other claims. Nevertheless the enactment is in derogation of the Crown's rights, and must be so construed. So far as it is material it is as follows: "(h) sixthly in payment of ... all assessed land tax and income tax, assessed under any Act or State Act prior to the date of the order of sequestration and not exceeding in the whole one year's assessment."

In the present case the Crown has proved for three years' State and Federal income tax, all of which was assessed before the required date. But the assessment for the first of these three years was for a larger amount than that for either of the two succeeding years, the amount of the third assessment being the smallest. His Honor Judge Lukin has construed the provision as restricting the Crown to the assessment before the bankruptcy, so that the Crown's preference is only in respect of the last, the smallest, assessment. I am unable to agree with this construction. It depends upon an interpretation of the expression "one year's assessment" which I cannot think tenable. If it is right, those words must mean an assessment for one year before the bankruptcy. But every assessment is in respect of a financial year and is based on the earnings of the taxpayer within the preceding twelve months. To what would the provision refer on such a construction? The date of a bankruptcy does not generally coincide with the end of a financial year. If the year referred to is always that ending with the bankruptcy then a period of two assessments must usually be included. How is the tax for such a year to be ascertained? Is a new calculation of income for this twelve months to be made, or are the taxes to be apportioned over it?

I think it is reasonably clear that "one year's assessment" does not mean to refer to twelve months as opposed to other periods of assessment, or to a period ending with the bankruptcy. The emphasis is upon the "one." It means to limit the proof to one, as opposed to two or more, annual assessments.

One year's assessment does not mean a year's assessment, but a single assessment for a year. If the expression were equivocal, it should be construed so as to impose the less, not the greater, restriction upon the Crown. But, in any case, I think its true meaning is that of the years in respect of which the Federal or State Commissioner, as the case may be, has proved for assessed land and income tax, he shall have a preference in respect of one. There is no question of electing which year. The total of all the assessments is the proved debt. Of this total so much is preferred as does not exceed the maximum attained by any one year's assessments for land and income tax.

The appeal should be allowed, with costs out of the estate.

The order of the Court of Bankruptcy should be discharged, and it should be declared that the proofs by the respective Commissioners should be treated as preferential to the extent of any one year's assessment.

Starke J.

The best we can do is to try and express clearly the meaning of the priority section. I would express it in this way: sixthly, in payment of all land tax and income tax assessed and unpaid prior to the date of the order of sequestration, but if the tax assessed be for more than one year, then the priority shall not exceed the amount for the year in respect of which the largest assessment is made. The result in these cases would be that the Federal authorities should be admitted to a priority claim in respect of £231 11s. 6d., and the State authority to a priority claim in respect of £294 10s. 11d. The English cases of Gowers v. Walker[3] and In re Cockell; Jackson v. Attorney-General[4] are in line with this view.

Evatt J.

The question for decision on this appeal is the meaning of the phrase "not exceeding in the whole one year's assessment" in that part of sec. 84 (1) (h) of the Bankruptcy Act giving a "sixth" priority, inter alia, to assessed Federal income tax and to assessed State income tax. In my opinion the argument of Sir Thomas Bavin is right and the word "any" should be understood after the words "in the whole," so that although, prima facie, priority is accorded to all unpaid assessments of Federal as well as of State income tax, its extent is qualified by limiting the amount to a sum "not exceeding ... any one" of the unpaid tax assessments. It necessarily follows that the largest unpaid assessment of Federal income tax obtains the described priority, not because of any selection or election by the trustee or by the creditor, but because of the operation of the section itself, properly construed.

Mr. Abrahams concluded that a general principle of pre-established harmony unites the whole list of debts which are given priority by sec. 84 (1), the principle being that all "stale" claims are excluded. But his construction of sec. 84 (1) (h), that priority is given to the amount of the unpaid assessment next preceding sequestration, also involves the position that a very old claim may secure priority. Either construction, therefore, admits the possibility of having to go back to a year preceding the twelve months before sequestration. Further, Sir Thomas Bavin's construction involves little or no change in the wording of the sub-section, and it seems to find solid support in the English cases to which unfortunately Lukin J. was not referred, Gowers v. Walker[5]; In re Cockell; Jackson v. Attorney-General[6]; and the obiter dictum in Commercial Bank of Scotland v. Campbell[7]. Nor does Lord Atkin's observation in Attorney-General v. Jackson[8] really point in the contrary direction.

The appeal should be allowed.

McTiernan J.

I agree. I have nothing to add except to say that the conclusion at which we have arrived is, in my opinion, supported by Gowers v. Walker[9] and In re Cockell; Jackson v. Attorney-General[10].

Appeal allowed with costs.

Solicitor for the appellant, W. H. Sharwood, Commonwealth Crown Solicitor.

Solicitors for the respondent, Deane, Haselhurst & Howard.

[1] (1907) A.C. 179.

[2] (1923) A.C. 647.

[3] (1930) 1 Ch. 262.

[4] (1932) W.N. 172.

[5] (1930) 1 Ch. 262.

[6] (1932) W.N. 172.

[7] (1923) 10 Tax Cas. 585.

[8] (1932) A.C., at p. 373.

[9] (1930) 1 Ch. 262.

[10] (1932) W.N. 172.