Burwood Municipal Council v Sydney Legacy Appeals Fund

Federal Court of Australia|1995-07-01|Before: Drummond J

ce and from the trustees' own evidence that the trustees have not deducted anything in respect of income tax or expenses associated with the generation of the $70,522. Mr. Ellis challenges the validity of the notice and the assessment made by the trustees reflected in the notice on three grounds. He contends that in making the assessment, firstly, the trustees simply ascribed to him income earned by his employer as Mr. Ellis' own income. The trustees did not use information, so it is said, available to the trustees to identify Mr. Ellis' own income, and it is also said that the trustees did not invoke s. 139Y, as they could have, if they considered Mr. Ellis performed services for his employer that should have returned him more than he was paid by his employer in the form of wages. Secondly, the trustees, in making their assessment, failed to make any allowance for expenses incurred by Mr. Ellis in earning income and (insofar as s. 139L(f) is relevant) for expenses incurred by his employer in connection with the services rendered by Mr. Ellis to, and paid for by, clients of the employer. Thirdly, it is said the trustees failed to make any allowance for income tax, contrary to s. 139N(a)(i). Mr. Ellis contends that the Court has jurisdiction under s. 30(1)(b) to grant the declaratory relief sought. His solicitor submitted that the fact that the Act sets up a system specifically providing for review of a trustee's decision to make a contribution assessment by the Inspector-General and by the Administrative Appeals Tribunal ("the AAT") under ss. 139ZA and 139ZF does not exclude the Court's power to grant the declaration that is sought. It is well established that the Court will not infer that its jurisdiction to make declarations is excluded by a statute, except by clear intendment. See P.W. Young, Declaratory Orders, 2nd Ed., 1984, paragraph 501. I accept that Subdivision G of Division 4B of the Act, which provides for review of a trustee's decision in relation to contribution assessments by the Inspector-General and by the AAT, does not show any clear intention to exclude the Court's declaratory jurisdiction under s. 30(1) of the Act. However, the grant of declaratory relief is always discretionary. In Burwood Municipal Council v Sydney Legacy Appeals Fund (1980) 39 L.G.R.A. 299 at 302, Hunt J said: "The exercise of the court's discretion to grant that relief is however another matter. That discretion is always described as a very wide one."

And then (I omit a few words) his Honour continued: "In Sutherland Shire Council v Leyendekkers, an appeal to the Court of Petty Sessions against the validity of the Council's general rate had not been determined when this Court was approached to grant such relief. Street J., as he then was, recognized the existence of another tribunal as a factor to be weighed in the exercise of a Court's discretion. Although he thought it was not decisive, it was nevertheless a matter of importance."

I attach considerable importance to the fact that in the scheme contained in Division 4B, the Parliament has made detailed provision for review of a trustee's assessment decision. The solicitor for Mr. Ellis stated that Mr. Ellis intended to seek a review of the trustees' decision under these provisions. It may be that time has precluded this. But I do not know. The notice was served on 18 January, 1995 and I would not assume, without evidence, that the Inspector-General, or the AAT, could not dispose of such a review application as a matter of urgency, in any particular case. Mr. Ellis has offered no explanation, however, for coming to the Court rather than to one of these other bodies, which are designated by the Legislature as the appropriate ones, prima facie, for the purpose. That is one consideration that tells against exercising the discretion in his favour, even if he can raise a question as to the validity of the notice. If I were satisfied, in the circumstances of this case where Mr. Ellis wishes to travel overseas, that the trustees had exercised their power of assessment arbitrarily, or capriciously, or in bad faith, and that the assessment and notice were therefore bad, I would regard that as an important matter in favour of the grant of declaratory relief. The solicitor for Mr. Ellis initially disclaimed any suggestion of bad faith on the part of the trustees, although he did later make such a suggestion. He here relied on the width of the trustees' demands in the s. 77C notices directed to the bankrupt and his employer, and said they were so wide as to be invalid. But even assuming (without deciding it) that that is right, that is a long way from amounting to evidence of bad faith on the part of the trustees in the making of their assessment. The main argument was directed to the three complaints I have already set out, and to which I now turn. Mr. Ellis' employer is Kriscourt Consultants Pty. Ltd. ("the company"). Until 1 June, 1994, its name was G.J. and J.M. Ellis Pty. Ltd.. This company was formed on 20 October, 1992 to be the trustee of the Ellis Family Trust. Mr. Ellis was bankrupted in respect of a judgment on guarantees he gave in respect of his company, Southern Cross Electrical Services Pty. Ltd.. This company was wound up in March 1993. What he describes in his answer to the trustees' questionnaire as a winding-up notice was served on this company two months or so before the trust was set up. The company continues in its trustee capacity, although the trust is now called the Wright Ellis Trust. Mr. Ellis and his wife, Mrs. J.M. Ellis, ceased, on becoming bankrupt, to be directors of the company. The directors now are a Ms. D.M. Wright and a Ms. C.G. Wright, who I was told by Mr. Ellis' solicitor are Mrs. Ellis' mother and sister. Mr. Ellis is an eligible beneficiary under the discretionary trust. As to the first complaint concerning the way in which the trustees assessed Mr. Ellis' income for the relevant period, obtaining information with respect to Mr. Ellis' earnings has not been a straightforward matter for the trustees. In his response to the trustees' questionnaire of 18 October, 1993, Mr. Ellis stated he received a gross annual wage of $19,000, which equated to a net weekly wage of $306, from the company. Mr. Ellis stated that he then had average weekly housekeeping expenses of $150 and expenses in respect of petrol (although he does not own a motor vehicle), medical, school, insurance and miscellaneous of a further $156 per week overall. It appears the home he and his wife and family live in, although originally purchased by Mr. and Mrs. Ellis jointly, is now owned by the company and he pays no rent. He said he had no assets other than tools to the value of $1,300 and no bank account. Initially, the trustees said that, following requests to Mr. Ellis for details of his income, they requested Mr. Ellis in writing, in reliance on s. 77 of the Act, to deliver up various books and records of account of himself, the company and the trust, for the purposes of determining whether Mr. Ellis would be liable to pay a contribution pursuant to Division 4B. This letter is quite explicit insofar as it details the documents of Mr. Ellis personally, the company and the trust that the trustees were seeking and insofar as it details the purpose for which that information was sought. The response it produced came from Mr. Ellis' accountants, who said: "Mr GJ Ellis has asked me to respond to your letter of 18th May 1994. GJ & JM Ellis Pty. Ltd. is not an associated entity of Mr GJ Ellis. He is neither a Director or a Shareholder of the company. GJ & JM Ellis Pty. Ltd. is the Trustee of the Wright Ellis Trust. Mr GJ Ellis is merely a beneficiary of the Trust. As such he is not in a position to supply you with the documents you requested for either GJ & JM Ellis Pty. Ltd. or the Wright Ellis Trust."

Mr. Ellis thus did not attempt to exercise his right of access to the trust documents to get this information for his trustees in bankruptcy, although his accountants did enclose a copy of his 1992/93 tax return. The trustees repeatedly thereafter sought documentary information to identify Mr. Ellis' income from the company. Mr. Ellis was, I think, well capable, as a matter of fact, of arranging for the company to furnish such information, as is shown by the ease with which he was able to obtain from the company for the trustees the company's records relating to expenses incurred by Mr. Ellis and the company in earning income in the contribution period, once he agreed to arrange for the provision of those documents, in February last, i.e., after the receipt by him of the contribution notice. This is not surprising, given his relationship to the trust of which the company is trustee and to the present directors of the company. He was also, I think, entitled at law, as an eligible beneficiary under this discretionary trust, to extensive (but not unlimited) access to the trust documents. These documents would, I think, include documents relating to the business the trustee carried on and from which it generated the trust income. This business appears to consist, in large part at least, of selling to the company's clients consultancy services that are provided wholly by Mr. Ellis. See Morris v Morris (1993) 9 W.A.R. 150 at 153 and 155 and Hartigan Nominees Pty. Ltd. v Rydge (1992) 29 N.S.W.L.R. 405. Following receipt of the unhelpful advice from Mr. Ellis' accountants, the trustees then served noticed under s. 77A(2) on Mr. Ellis and on the company at its registered office at the office of Mr. Ellis' accountants to produce a range of documents, including company and trust documents, that might be expected to show what income Mr. Ellis had received from the trust on any account. The accountants' response was that the company directors, rather than themselves, held the company documents. The trustees then called on Mr. Ellis and the secretary of the company to produce those documents and attend for examination, by notices issued under s. 77C, in a further attempt to ascertain details of Mr. Ellis' income. Both attended and the trustees say both: "... provided information and documents which formed the basis of the Income Contribution Assessment and Notice of Compulsory Contributions ... on 18 January 1995."

Of the information the trustees have received with respect to Mr. Ellis' income, a trustee says that: "I have never been provided with details of the Applicant/Bankrupt's income over the contribution period of 20 September 1993 to 19 September 1994 other than invoices obtained from the Applicant's employer in response to the Notices to Give Evidence and Produce Documents covering the contribution period which indicate the billings by the employer for the personal exertions of the Applicant/Bankrupt which are detailed in the Income Contribution Assessment."

Mr. Ellis disputes this. He says that his employer provided his trustees in bankruptcy with documentary evidence of his income over the relevant period and that details of this income were set out in what Mr. Ellis refers to as "a running check register" supplied by the directors of the company. He says, furthermore, that he personally did not have any documents relating to the income that he earned from the company and that this income was paid in cash. He also says that he attended in obedience to the s. 77C notice and gave evidence as required, answering all the questions that were asked of him. The trustees say they never received this running check register referred to by Mr. Ellis from the company. There does not appear on the receipt apparently prepared by the company itself, which the Official Receiver signed when he got the company documents pursuant to the s. 77C notices, reference to any such document. I am not prepared to accept that the trustees did receive the company's running check register, which is the only document which Mr. Ellis says contains details of his income from the company. The trustees did receive the company's bank statements and used cheque books, but Mr. Ellis does not say that the income he received in cash could be identified from a perusal of these records. The trustees say the only information with respect to Mr. Ellis' income in the contribution period they have received are the invoices to which I have referred. I am not prepared to accept the suggestion in argument by Mr. Ellis' solicitor that Mr. Ellis' income, insofar as that comprised payments to him by the company, can be determined from a perusal of the used cheque books. The solicitor submits that there is no challenge to what Mr. Ellis says about answering all questions put to him by the trustees on his compulsory attendance under the s. 77C notice. I am asked to infer that the trustees could have elicited information about Mr. Ellis' income then if they had asked the right questions. That can be accepted. But the trustees had previously tried unsuccessfully to elicit this information. They say they have only got limited information relevant to identifying Mr. Ellis' income. I do not think that, in view of Mr. Ellis' obligations under s. 77 of the Act, and in particular under s. 77 paragraph (g), to "aid to the utmost of his power in the administration of his estate", he can obtain any forensic advantage in these proceedings from the apparent failure of the trustees to make more effective use of their powers of compulsory interrogation. It appears from the evidence the trustees, because of difficulties they had in identifying Mr. Ellis' actual income, assessed his gross income as the same amount that the company billed to its clients for Mr. Ellis' services, i.e., the effect of what the trustees did was to aggregate the amount that Mr. Ellis received from the company as wages, which the trustees could not identify, with the difference between that amount and the total the company billed its clients for Mr. Ellis' services. I think s. 139L(f) authorised the trustees to do this in the circumstances of this case. The unidentifiable wages were income in Mr. Ellis' hands according to ordinary usages, and the trustees complied with s. 139L(f) by in effect acknowledging that as an expense to be deducted from what the company received as a result of Mr. Ellis' services to its clients. I have referred to what the trustees say about having treated the company's billings in respect of Mr. Ellis' services to its clients as Mr. Ellis' income assessable for the purposes of Division 4B. Mr. Ellis says: "The amount set forth in the notice of compulsory contributions required sets forth my income from personal exertion as $70,552.98. That is not the income that I have earned, but is the income that the trust has earned as a result of income from the following sources: (a) arrangements it has with Halmac Services, G.J. Kennedy Investments Pty Ltd and Sunstate Cement Pty Ltd for the provision of business consultancy advices; (b) earnings by Jennifer May Ellis in connection with craft work performed by her and sold to craft shops throughout Queensland; (c) consultancy services performed by Jennifer May Ellis for a personnel company."

Mr. Ellis does not, however, say how much falls into each of these three categories. He is also contradicted here by what his solicitor said in his letter of 3 February, 1995 to the trustees about the whole of the company's receipts being in respect of Mr. Ellis' services: "In looking at the calculation in your notice, I make the following comments: The amounts set forth as `income from personal exertion' has been calculated by you by reference to time sheets issued by my client in respect of services he has provided as an employee of Kriscourt Consultants Pty Ltd for Halmac Services Pty Ltd. In fact however, my client is an employee of Kriscourt Consultants Pty Ltd as trustee for the Wright Ellis Trust (a discretionary trust of which my client is a beneficiary); My client has not in fact earned income for himself of $70,522.98, he has merely issued time sheets to the company who employs him for this figure."

This evidence suggests that even now Mr. Ellis is not prepared to be frank or to identify just what the value of his services was to the company. I accept that the amount assessed as Mr. Ellis' income is the amount of these billings. He has not provided the trustees with any documentary information that confirms what he said in his answers to the trustees' questionnaire. The trustees were entitled to rely on s. 139L(f) in the circumstances of this case. I do not think that the trustees' actions in taking into account, in assessing Mr. Ellis' income for the purposes of Division 4B, what the company billed his clients for Mr. Ellis' services, against the background of attempts by the trustees to identify Mr. Ellis' income, were unjustifiable. As to the second ground of complaint to the effect that the trustees did not make proper allowance for expenses, the trustees say that on 8 February, 1985 they "... [were] provided with a large quantity of invoices by [Mr. Ellis] which purport to detail expenses necessarily incurred by [Mr. Ellis] in the course of securing his income". However, the trustees say that "... the invoices draw no distinction between merely personal expenditure and expenditure necessarily incurred in the production of income and it is not possible ... to determine what, if any, of the claimed amounts can be applied in reduction of the Income Contribution Assessment". The trustees make the point that no expense information was provided prior to that date, i.e., prior to when he issued the assessment notice. Mr. Ellis' response is to the effect that he attended a "without prejudice" meeting at the offices of his trustees in bankruptcy with his solicitor on 6 February, 1995 and told his trustees in bankruptcy that he would "request the directors of [his] employer to produce vouchers so that [he] could deliver the vouchers to [his] trustee[s] in bankruptcy". He says that he contacted Ms. Catherine Wright, one of the directors of his employer company, and asked that "she supply [him] with the vouchers relating to the expenses of Kriscourt Consultants Pty Ltd during the contribution period so that [he] could supply [them] to [the] trustee[s] in bankruptcy", and this was done. Mr. Ellis also says that the information contained in these vouchers was already contained in the company's cheque butts and in the running cheque register already referred to which was supplied to the trustees prior to the issue of a notice. He only took action to have these vouchers made available to the trustees after the notice was issued. In any event, I have explained why I am not prepared to accept the trustees did receive the company's running cheque register upon which Mr. Ellis also here relies. Given what a trustee says in paragraph 13 of his affidavit filed 14 February, 1995, I am not prepared to accept the submission that it can be assumed that an examination of the company's cheque butts by the trustees would have revealed all the relevant expense information. The position is thus one in which Mr. Ellis has failed to persuade me that the trustees were, prior to the issue of the notice, in a position to make an allowance in his contribution assessment for the 12 months in question of the expenses, if any, Mr. Ellis himself incurred in earning income from the company and, insofar as it is relevant because of s. 139L(f), for the expenses incurred by the company in connection with the moneys it received as a result of the services provided by Mr. Ellis to the company's clients. As to the third complaint to the effect that the trustees failed to make a proper allowance for income tax in assessing Mr. Ellis' income for the purposes of the Bankruptcy Act 1966 (Cth), the trustees say that Mr. Ellis has provided no details as to his actual or likely income tax liability in respect of income derived for the relevant period and it has not been possible for the trustees to deduct an amount equivalent to the amount of tax that Mr. Ellis is likely to be liable to pay in respect of income that was so derived. Mr. Ellis' only response to this is to say that he has not yet put in an income tax return for the 1993/94 year and that he is informed by Ms. Wright that the company, as trustee for the Wright Ellis Trust, has not filed such a return either, and that both the company and he have until 31 March, 1995 to lodge returns for the 1993/94 year. The solicitor for Mr. Ellis submits that if the trustees had estimated the tax that Mr. Ellis would pay on a gross income of $70,522, that would have reduced the contribution assessment amount from $20,983 to $8,882. He submits that s. 139N(a)(i) requires the trustees to make such an assessment and the assessment actually made is thus for a much larger amount than the Act authorises. However, I do not think that the trustees should be taken to have assessed Mr. Ellis' actual income at $70,522. I think that rather did they take that as composed of an unidentifiable component in the form of wages received by Mr. Ellis from the company, and a balance amount deemed to be part of Mr. Ellis' income by force of s. 139L(f), although it was actually never received as income by Mr. Ellis, but was received by the company as its own income. I consider that the trustees were not able to assess Mr. Ellis' actual income because assistance sought by the trustees from Mr. Ellis was not provided. Section 139N(a)(i) only requires the trustees to reduce the bankrupt's assessed income by the amount the bankrupt himself pays or is likely to be liable to pay during the relevant contribution period. The section does not give the bankrupt the benefit, by way of deduction from his assessable income, of the tax payable by the person who benefits from the bankrupt's services on the moneys received by that person. The bankrupt is not of course liable to pay tax on that particular figure. Section 139L(f) requires certain expenses incurred by the person who receives money as a result of services performed by the bankrupt to be brought into account to reduce the amount included in the bankrupt's assessable income. But the wording of s. 139L(f) does not, I think, allow for tax payable by the actual recipient of money generated by the performance of work or services by the bankrupt to be treated as an "expense" within the meaning of the section. This means that the bankrupt can be assessed for contribution on the gross rather than net after tax income received by the beneficiary of a bankrupt's efforts. I am not satisfied that the trustees were in possession of sufficient information to enable them to say, otherwise than by speculating, what Mr. Ellis' own income for the period was likely to be. They were thus not able to estimate or otherwise identify any amount of tax that was likely to be paid by the bankrupt on that income. That is, I think, due to lack of co-operation by the bankrupt. Even now, Mr. Ellis contents himself with saying that he has not put in a tax return for the 1993/94 year and does not have to until March next. He does not throw any light on what tax he is likely to pay for that part of the contribution period in that year or in the rest of the contribution period. He nowhere states what income he received in the contribution period and he nowhere explains the basis on which he is entitled to remuneration by the company, whether it be by way of weekly wages or by way of some special contractual arrangement. The tax payable in respect of Mr. Ellis' income for the 1992/93 year, in respect of which the trustees have some information provided by the bankrupt, is no basis for the trustees, in the circumstances of this case, assuming that the amount of tax Mr. Ellis is likely to pay in the contribution period will be of a similar amount. The trustees are in a position where they could not say whether any sum was likely to be payable by Mr. Ellis on the income he earned in the relevant period. I do not accept that the assessment and contribution notice are defective because they fail to allow for tax on Mr. Ellis' income in the relevant period. It may be that on a review of the kind provided for by Subdivision G of Division 4B of the Act, Mr. Ellis may be able to persuade the Inspector-General or the AAT, or the AAT on review of the Inspector-General's own review, that the amount of the assessment should be reduced. Although he did not seek to do so on the application before me, Mr. Ellis would be free to put fresh evidence before the Inspector-General and the AAT designed to persuade them that a much lower contribution is all that should be required. But in the result, I am not persuaded that the notice of contribution is invalid because of the basis on which the amount of the contribution therein recorded was assessed. Even if I considered that there was some substance in Mr. Ellis' complaints about the validity of the notice, I would in the circumstances of this case be reluctant to grant declaratory relief and would be inclined to leave Mr. Ellis to his other remedies. There is no ground for thinking that the trustees' assessment was wholly unjustifiable. Mr. Ellis has not given the trustees, with respect to relevant matters, the full co-operation required by the Bankruptcy Act 1966 (Cth) and should not be permitted to rely on the position so contributed to by his actions to his own advantage. He has other avenues open to him under Subdivision G of Division 4B to challenge the assessment which the Act, I think, designates as those which a bankrupt should prima facie follow. There is no evidence before me that it would have been impossible, as a matter of practical reality, for Mr. Ellis to obtain a review of the assessment by the Inspector-General or the AAT before he was to travel overseas. The claim for relief in paragraph 1 of the application is therefore dismissed. As to the claim in paragraph 3 for a review by the Court under s. 178 of the trustees' assessment, Mr. Ellis relies on the same grounds upon which he argued unsuccessfully for the declaration claimed in paragraph 1. The question of whether it remains open to the Court to review such a decision under s. 178, having regard to the review procedures provided for by Subdivision G of Division 4B of the Act, was expressly left open in McGoldrick v Official Trustee in Bankruptcy (1993) 47 F.C.R. 547 at 554 (although I note that the Court there described the provisions of Division 4B as a code). Moreover, an appeal lies to the Federal Court, on questions of law only, from the AAT under s. 44 the Administrative Appeals Tribunal Act 1975 (Cth): it is therefore unlikely that, having enacted Division 4B, the Legislature intended that there would continue to co-exist with the power to review a trustee's decision with respect to a contribution assessment vested in the Inspector-General and the AAT, power in the Court to review the trustees' decision under s. 178 on both fact and law. It is, however, unnecessary to reach any firm conclusion on this point. This part of the application, founded as it is on the same grounds advanced in support of the claim in paragraph 1, must be dismissed for the same reasons as the claim for the declaration. Paragraph 2 of the application can be shortly disposed of. There is no basis on the material before me upon which I could be satisfied, as I must be, before I am permitted to grant the bankrupt permission to leave Australia, that the bankrupt has made payments of the amount of the contribution or has made arrangements satisfactory to the Court for ensuring that those payments will be made.

The entire application is therefore dismissed. I certify that this and the preceding 20 pages are a true copy of the reasons for judgment herein of the Honourable Justice Drummond. Associate: Date: 17 February, 1995

Solicitors for the applicant: James Conomos Counsel for the respondents: Mr. R.F. Quinn Solicitors for the respondents: C.A. Sciacca & Associates Date of Hearing: 17 February, 1995

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