Stapleton v Federal Commissioner of Taxation [1955] HCA 58; (1955) 93 CLR 603 (31 October 1955)

HIGH COURT OF AUSTRALIA

STAPLETON v. FEDERAL COMMISSIONER OF TAXATION [1955] HCA 58; (1955) 93 CLR 603
Income Tax (Cth.) - Income Tax Assessment Act 1936-1953 (No. 27 of 1946-No. 28

of 1953), ss. 216, 221 (1) (b) (i)

High Court of Australia
Dixon C.J.(1), McTiernan(1), Williams(1), Webb(1) and Taylor(1) JJ.

CATCHWORDS

Income Tax (Cth.) - Assessment - Deceased estate being administered in bankruptcy - Commissioner to have same powers etc. against the "trustees of the estate of the taxpayer" as against taxpayer if still living - Tax payable by such trustees to be first charge on estate in their hands - Capacity in &which liability imposed on trustees - "Estate of the taxpayer" - What comprised in - Assets charged in favour of third parties - Whether Official Receiver is trustee of "estate of taxpayer" - Provision under Income Tax Assessment Act for trustee within meaning of Bankruptcy Act to apply "estate of the bankrupt" in payment of tax due in priority to all other unsecured debts except those referred to in certain provisions in Bankruptcy Act - Whether Income Tax Assessment Act provision an amendment of Bankruptcy Act provision - "Estate of the bankrupt" - Meaning of words - Administration order - Effect - Whether to make deceased debtor a bankrupt.

Income Tax Assessment Act 1936-1953 (No. 27 of 1946 - No. 28 of 1953), ss. 216, 221 (1) (b) (i) - Bankruptcy Act 1924-1950 (No. 37 of 1924 - No. 80 of 1950), ss. 84, 155.

HEARING

Melbourne, 1955, October 7, 10, 11; 31. 31:10:1955
APPEAL from the Court of Bankruptcy, District of South Queensland.

DECISION

October 31.
THE COURT delivered the following written judgment: -
On 7th June 1951 the above-named William Fox died and on 31st October in the to the executors therein named. The deceased died owing a number of debts and nearly three years later, on 3rd July 1953, the executors, pursuant to s. 155 of the Bankruptcy Act 1924-1950, presented to the Court of Bankruptcy for the District of Southern Queensland a petition "praying for an order for the administration in bankruptcy of the deceased debtor's estate". On the same day such an order was made and, pursuant to sub-s. (5) of that section, the property of the debtor vested in the above-named appellant, the official receiver for the above-named bankruptcy district, as trustee thereof. Thereafter, on 4th August 1953, the respondent issued notices of amended assessments purporting to assess the "Official Receiver in Bankruptcy" as "Trustee in Estate of William Fox, dec'd." for income tax, social services contribution and additional tax for the years ended 30th June 1946, 1947, 1949 and 1950. The amounts for which the appellant was assessed for these years were respectively 8,494 pounds 5s. 0d., 607 pounds 2s. 0d., 2,743 pounds 8s. 0d. and 20,445 pounds 11s. 0d. On the same day an original assessment in respect of the income of the deceased from 1st July 1950 up to the date of his death was also issued. This assessment was for the sum of 21,170 pounds 5s. 0d. The total of these assessments was 53,460 pounds 11s. 0d. and to the extent of this sum the respondent claims a first charge on all the assets which, by virtue of the order above referred to, vested in the hands of the official receiver. Alternatively, it is claimed on behalf of the respondent that he is entitled to prove against the estate for this amount in priority to all unsecured creditors except those claiming in respect of debts to which priority is given by pars. (a), (d) and (e) of sub-s. (1) of s. 84 of the Bankruptcy Act. The claims of the respondent were rejected by the appellant who admitted the respondent's proof "as an ordinary unsecured claim for the amount of 53,460 pounds 11s. 0d." (at p613)

2. The alternate claims of the respondent were founded upon the provisions of s. 216 (d) and s. 221 (b) (i) of the Income Tax and Social Services Contribution Assessment Act 1936-1953, and it is desirable that the relevant provisions should be set out: "216. The following provisions shall apply in any case where, whether intentionally or not, a taxpayer escapes full taxation in his lifetime by reason of not having duly made full complete and accurate returns: - (a) the commissioner shall have the same powers and remedies against the trustees of the estate of the taxpayer in respect of the taxable income of the taxpayer as he would have against the taxpayer if the taxpayer were still living. (b) The trustees shall make such returns as the commissioner requires for the purpose of an accurate assessment. (c) The trustees shall be subject to additional tax to the same extent as the taxpayer would be subject to additional tax if he were still living: Provided that the commissioner may in any particular case, for reasons which he thinks sufficient, remit the additional tax or any part thereof. (d) The amount of any tax payable by the trustees shall be a first charge on all the taxpayer's estate in their hands". (at p613)

3. "221. For the better securing to the Commonwealth of the revenue required for the purposes of the Commonwealth - (a) . . . (b) notwithstanding anything contained in any other Act or State Act - (i) a person who is a trustee within the meaning of the Bankruptcy Act 1924-1933 shall apply the estate of the bankrupt in payment of tax due under this Act (whether assessed before or after the date of the order of sequestration) in priority to all other unsecured debts other than debts of the classes specified in paragraphs (a), (d) or (e) of sub-section (1) of section eighty-four of that Act". (at p614)

4. As will be seen from a perusal of these provisions s. 221 alone expressly applies to cases where bankruptcy has occurred whilst a liability for tax, whether assessed or not, remains outstanding. The earlier section is in quite general terms and applies where a taxpayer has died before full assessment to income tax in respect of his income during his lifetime if he has escaped full assessment in his lifetime by reason of not having made full, complete and accurate returns. (at p614)

5. Following the decision of the appellant to admit the proof of the respondent in competition with the ordinary creditors of the deceased the latter, in proceedings before the Bankruptcy Court, sought and obtained a declaration that to the extent of the total sum previously mentioned he was entitled to a priority of the character specified in s. 221 (b) (i). He was, however, unsuccessful in the contention, then advanced, that, pursuant to s. 216 (d), he was entitled to a first charge on all the assets in the hands of the appellant at the time when the assessments were made and notified. From the order of the Bankruptcy Court which, to the extent indicated, reversed the decision of the appellant this appeal is brought and the respondent, by cross-appeal, challenged the decision of that court that s. 216 had no application in determining the extent, if any, to which he is entitled to receive payment in priority to other creditors, secured and unsecured, of the deceased. (at p614)

6. Before proceeding to discuss whether the circumstances of this case are apt to invoke the application of either section it is desirable that something should be said concerning par. (d) of the earlier section. The respondent has contended that the "first charge on all the taxpayer's estate" which that paragraph purports to create in appropriate circumstances is a charge which takes priority over every other charge or encumbrance on the property vested in the deceased immediately before his death or in his trustees immediately before the making of the order of administration. The contention proceeds upon the assumption that the "estate" of the deceased includes all such property. With one qualification which will presently appear it may, in one sense, be said that it does; it may, perhaps, be called his gross estate. But the expression "all the taxpayer's estate" is a compendious term comprehending that to which he was entitled at his death and where assets are charged he is entitled to them subject only to the charge and it is his interest in such assets which forms part of his estate. But, however this may be, it is quite clear that, if s. 216 applies where both death and an administration order intervene before assessment to tax on some part of the deceased's income, the estate of the deceased in the hands of the official receiver for the purposes of that section is constituted by the assets which pass to him "subject to all liens, charges and rights subsisting in other persons" (Hasluck v. Clark (1899) 1 QB 699, at p 707 ; Lloyd v. Public Trustee (N.S.W.) [1930] HCA 40; (1930) 44 CLR 312, at p 316 and Vacuum Oil Co. Pty. Ltd. v. Wiltshire [1945] HCA 37; (1945) 72 CLR 319, at pp 336, 337 ). It follows from this that if s. 216 applies in the circumstances of this case the degree of priority which it gives is little or no higher than that given by s. 221 (b) (i) in the cases in which it applies. (at p615)

7. Examination of the effect of the sections discloses good reason for supposing that the earlier section was not intended to give any higher degree of priority than this. The latter section would, of course, apply in the case of a taxpayer who, up to the making of a sequestration order against him, has escaped full taxation by reason of not having made full, complete and accurate returns. Should bankruptcy intervene the commissioner would be entitled after assessment to prove in the bankrupt estate in priority to all unsecured debts other than those specified in the section. But if, no sequestration order having been made in the taxpayer's lifetime, an administration order were made after his death, the commissioner would, on the argument presented on his behalf, be entitled to receive payment in priority to all creditors whether secured or not. In other words, the commissioner would, in the latter circumstances, be entitled to have, not only the deceased's "property", but also "property" belonging to persons other than the deceased appropriated in payment of the assessment. No suggestion was made why any such distinction should be made and we are satisfied that the language of s. 216, if it applies in such a case as this, does not produce that result. (at p615)

8. These considerations dispose of the reason for regarding the respondent's claim for priority under that section as his primary claim and, that being so, it is convenient for the purpose of discussing the meaning and effect of the two sections with which the Court is concerned, to go at once to s. 221, for its provisions purport to deal with the position of persons who are trustees within the meaning of the Bankruptcy Act. (at p616)

9. That the appellant is and was such a trustee is beyond question and there is little room for doubt that for, at least, many of the purposes of the Bankruptcy Act he may properly be regarded as the "trustee of the bankrupt's estate". By sub-s. (5) of s. 155 of that Act the effect of the making of an order for the administration of a deceased debtor's estate is to vest the property of the debtor in the official receiver as trustee thereof. Sub-section (4) provides that with the modifications mentioned in the section all the provisions of the Act relating to the administration of the property of a bankrupt and to trustees shall, so far as they are applicable, apply to the case of an order for administration under this section in like manner as to a sequestration order and by sub-s. (4A) the provisions of s. 80 of the Act and those of Div. 4 of Pt. VI of the Act shall, so far as they are applicable, apply to the case of an order for administration in like manner as to a sequestration order. Reference to Div. 4 of Pt. VI of the Act shows that many of the provisions therein contained are incapable of application in cases where orders have been made under s. 155 unless the deceased is regarded as a debtor and the order regarded as a sequestration order. This, of course, carries with it the notion that the deceased should be regarded for the purposes of the administration in bankruptcy as having attained posthumously the status of a bankrupt though many of the provisions of the Act relating to bankrupts could not take effect (cf. R. v. Adams [1935] HCA 62; (1935) 53 CLR 563 ). But although these conceptions are necessary if effect is to be given to the directions contained in sub-ss. (4) and (4A) of s. 155 the fact is that an order for administration under that section is not a sequestration order nor is, or was, the deceased debtor a bankrupt. In these circumstances it is difficult to see how s. 221 (b) (i) of the Income Tax and Social Services Contribution Assessment Act can have any application to this case. It requires a person who is a trustee within the meaning of the Bankruptcy Act to apply the estate of the bankrupt in payment of tax due under the Act (whether assessed before or after the date of the order of sequestration) in priority to certain other debts but it does not follow that, because s. 155 of the Bankruptcy Act assimilates the estate of a deceased debtor to the position of the estate of a bankrupt for purposes of administration, this is so for the purposes of any other Act. Indeed, even if s. 155 of the Bankruptcy Act provided that upon the making of an administration order the debtor should be deemed for the purposes of that Act to be a bankrupt and that, for the like purposes, the administration order should be deemed to be a sequestration order the case of the respondent would not be advanced. The fiction would be introduced for a limited purpose and the use of the word "bankrupt" and of the expression "sequestration order" in another statute would not constitute either a reference to a deceased debtor or to an order under s. 155. At the most the provisions of that section go no further than this and there is, therefore, no warrant for concluding that the deceased is or was a bankrupt or that the order for administration was a sequestration order within the meaning or for the purposes of s. 221 (b) (i) of the Income Tax and Social Services Contribution Assessment Act. (at p617)

10. The provisions of s. 15 of the Acts Interpretation Act 1901-1950 are of no avail to the respondent on this point nor is the suggestion that s. 221 (b) (i) operates as an amendment of and, therefore, as part of s. 84 of the Bankruptcy Act. The effect of this submission, if accepted, would be firstly, to incorporate s. 221 (b) (i) into s. 84 of the Bankruptcy Act as a provision relating to the administration of bankrupt estates and, secondly, to render it applicable in the administration of a deceased estate as one of "the provisions of this Act" pursuant to sub-s. (4) of s. 155. But although the provisions of s. 221 (b) (i) purport to override the provisions of s. 84 in particular circumstances it is not an amendment of that section nor can it, on any view, be taken to form part of the Bankruptcy Act or to constitute one of its provisions. The paragraph operates to override, pro tanto, anything contained in any other federal or State Act. It could not amend a State Act. It could only invalidate it under s. 109 of the Constitution to the extent of the inconsistency. The provisions of the paragraph are intended to override any inconsistent provisions in any other Act, State or federal, and not to amend any of these Acts. The paragraph was introduced into the Income Tax Assessment Act by the Income Tax Assessment Act (No. 22 of 1942). Section 1 (3) of the latter Act provides that the principal Act as amended by this Act may be cited as the Income Tax Assessment Act 1936-1942. It is therefore expressed to be an amendment of the Income Tax Assessment Act and s. 15 of the Acts Interpretation Act would apply to it as an amendment of this Act and would not make it part of some other Act. The inescapable conclusion is that no degree of priority is granted to the respondent by s. 221 (b) (i) in the circumstances of this case. (at p617)

11. The next contention with which it is necessary to deal is that the respondent is entitled under s. 216 to a first charge on all the deceased's estate in the appellant's hands pursuant to s. 216 (d). That section applies in any case where, whether intentionally or not, "a taxpayer escapes full taxation in his lifetime by reason of not having made full, complete and accurate returns" and for the purposes of considering the validity of this contention it may be assumed that this is such a case. It is, therefore, a case in which the respondent has the same powers and remedies against the trustees of the estate of the deceased in respect of the taxable income of the deceased as he would have had against the deceased if he were still living. By the relevant provisions of s. 216 (a) the respondent was, as we understand them, authorized for all purposes relating to the assessment and recovery of tax to regard the trustee or trustees of the deceased's estate as if they were the deceased himself. He might assess the trustees of the estate and proceed against them for the recovery of tax though he could not, of course, recover from them anything in excess of the value of the assets in their hands at the time of the assessment or coming to their hands thereafter (cf. Patterson v. Federal Commissioner of Taxation (1936) 56 CLR 507, at pp 518, 519 ). In addition, the respondent, by virtue of s. 216 (d) is given a first charge "on all the taxpayer's estate in their hands". It was said in the course of argument that the liability of the trustees in such a case is an original and independent liability and, therefore, that it does not constitute a debt provable in the course of a bankruptcy administration but this view must be rejected. The section contemplates the imposition of a liability upon the trustees who represent the deceased taxpayer, the amount of the assessment is enforceable only to the extent of the trust estate in their hands and payment to this extent is secured by a charge on the estate. The liability is one which is imposed upon them in a representative capacity and is truly one which fastens on the estate itself. These considerations dispose entirely of the suggestion that an assessment validly made under s. 216 does not constitute a debt owing by the estate. (at p618)

12. From what has been said it is apparent that had an assessment been made before the making of the order for administration in bankruptcy the respondent would have been entitled to a first charge, in the sense already indicated, on all the assets then in, or thereafter coming to the hands of, the executors and that he might thereupon have taken steps to enforce it. Subsequently, upon the making of the order for administration, he might have claimed priority by virtue of the charge previously acquired. But this was not the sequence of events. The order for administration preceded the assessment, the latter being made at a time when by virtue of s. 155 (5) of the Bankruptcy Act the property of the deceased debtor had vested in the appellant "as trustee thereof." whose duty it became to "proceed forthwith to realise and distribute the same in accordance with the provisions of" the Act. It is perhaps of some importance to observe that the property which vests pursuant to this sub-section is the "property of the bankrupt" within the meaning of s. 91 of the Bankruptcy Act and that, therefore, there may in any particular case be a residue of property which will not pass from a deceased debtor's executors to the official receiver. Moreover, notwithstanding the effect of the order in transferring property from the executors to the official receiver the former will remain the representatives of the deceased and will continue to hold any such residue. They will, momentarily at least, succeed to any after acquired property and it will be to them that any surplus remaining after completion of the administration in bankruptcy will pass. (at p619)

13. In these circumstances the question now is whether the appellant became, within the meaning of s. 216, "the trustee of the estate of the taxpayer". In our view he did not. He did, no doubt, become a trustee within the wide definition of that term in s. 6 of the Act but there are many reasons why he should not be regarded as a "trustee of the estate of the taxpayer" as that expression is used in s. 216. In the first place, although he may conveniently be designated for the purposes of the Bankruptcy Act as the trustee of the estate of the debtor, the assets which came to his hands did not, strictly, constitute the estate of the deceased. The estate which passes to the official receiver upon the making of an order for administration under s. 155 is constituted by the "property of the bankrupt" which in any particular case may or may not comprehend the whole of the estate of the deceased. Further, the "property" of the bankrupt having vested in the official receiver, the executors or trustees of the deceased debtor cease to have any interest in the assets comprehended by that expression except to the extent to which a surplus may result after completion of the bankruptcy administration. Nor does the official receiver represent the debtor in any real sense. Under par. (a) of s. 216 the commissioner is to have the same powers and remedies against the trustee in respect of the taxable income of the deceased as he would have against the deceased if he were still living. That is to say the trustee may be assessed and tax may be recovered from him. By par. (b) he is required to make such returns as the commissioner requires and under par. (c) he is to be subject to additional tax to the same extent as the taxpayer would be if he were still living. The character of these provisions suggests that, while they are appropriate to impose obligations upon representatives of the deceased debtor, they were not intended to treat the official receiver, in his capacity of trustee of the bankrupt estate of a deceased taxpayer, as the trustee of the estate of the deceased taxpayer. In s. 216 "estate of the taxpayer" has its natural meaning, i.e., the estate that passes to his personal representatives on death. (at p620)

14. These considerations are sufficient to dispose of the contention that the appellant can be regarded as the trustee of the estate of the deceased taxpayer within the meaning of s. 216 and that this is the correct conclusion is fortified by a brief examination of the effect of the section if the true view were otherwise. Where death has intervened before assessment to tax the problem of recognizing what powers and remedies the commissioner would have had if the taxpayer were still living is reasonably easily solved. But what is the position if both death and an administration order under s. 155 of the Bankruptcy Act intervene? In such circumstances, if the section applies to a case such as the present, what assumption is to be made for the purpose of ascertaining the powers and remedies which the commissioner would have had if the deceased were still living? Is it to be assumed that if the deceased were still living he would be a bankrupt, in which case the commissioner could recover tax only by proving in his estate and receiving the priority specified in s. 221 (b) (i) of the Income Tax and Social Services Contribution Assessment Act? Or is it to be assumed that an administration in bankruptcy would not have intervened and that, therefore, the commissioner may recover outstanding tax by action against the official receiver as he might have against the deceased if he were still alive? Both hypotheses are, of course, completely artificial and there is no reason why either should be preferred to the other. The considerations which are evident provide cogent grounds for thinking that s. 216 was intended to deal with a situation brought about by the death of a taxpayer by subjecting the trustees of his estate to the like powers and remedies as would have been available to the commissioner against the taxpayer if the crucial event which is designed to bring the section into play had not occurred. But beyond this the section does not go; it does not authorize the notional annihilation of events other than death for the purpose of measuring the rights and powers of the commissioner. Moreover, notwithstanding the making of an administration order under s. 155 of the Bankruptcy Act, the executors of a deceased person remain the trustees of his estate. Against whom, in these circumstances, are the powers and remedies of the commissioner available? On the respondent's argument they would be available against both the official receiver and the executors and this, it appears to us, is not a result which the language of the section is designed or intended to produce. (at p621)

15. The foregoing observations may appear to suggest that neither s. 216 nor s. 221 (1) (i) authorized the making of the assessments in question but the assessments may have been justified under other provisions of the Act: (cf. Cadbury-Fry-Pascall Pty. Ltd. v. Federal Commissioner of Taxation [1944] HCA 31; (1944) 70 CLR 362, at pp 380, 381 ). But whether this be so or not liability under the assessments has been admitted and the only question which arises in this appeal is the question of the extent of the priority, if any, to which the respondent is entitled. Moreover, since this is not an appeal against the assessments the question of their validity is not open. (at p621)

16. The reasons which have been given lead, in the result, to the conclusion that the respondent was not entitled to a charge by virtue of the provisions of s. 216 and that he is not entitled to the priority which s. 221 (b) (i) affords in cases where a sequestration order has been made. Accordingly we are of the opinion that the respondent's proof of debt should be permitted to rank pari passu with the ordinary unsecured creditors of the deceased and accordingly the appeal should be allowed and the cross-appeal dismissed. (at p621)

ORDER

Appeal allowed with costs. Order of Mansfield S.P.J. of 31st March 1955 discharged. In lieu thereof order that the motion be dismissed with costs.

Cross-appeal dismissed with costs.