Sands & McDougall v Commissioner of Taxation [1998] VSCA 76

Sands & McDougall v Commissioner of Taxation [1998] VSCA 76 - VSCA 1998 case summary — Zoe

[27]

Payment of sales tax in liquidations in the context of the priority inter se of the Commonwealth and the States has arisen for consideration on numerous occasions. In FCT v. Official Liquidator of E.O. Farley Ltd. (In Liquidation) [1940] HCA 13; (1940) 63 C.L.R. 278, the High Court in the context of the winding up of an insolvent company considered the claims of the Commonwealth in respect of income tax and telephone charges, as against the claims of the State of New South Wales in respect of income tax and unemployment relief tax, all such debts being debts due to the Crown. The Court held that all such debts, by virtue of the prerogative, had priority over debts due to the subject. But as between the debts due to the two governments, there were but co-existing rights standing on an equality in the absence of valid legislation disturbing that position. Then, in In Re Richard Foreman & Sons Pty. Ltd.; Uther v. FCT [1947] HCA 45; (1947) 74 C.L.R. 508, all members of the High Court, again in the context of a winding up, held that it was the intention of the New South Wales Parliament that the Crown in right of the Commonwealth should be bound by the provisions of the Companies Act 1936 (N.S.W.) relating to the priority of debts in the winding up of insolvent companies. Latham, C.J., Rich, Starke and Williams, JJ. (Dixon, J. dissenting) also held that it was within the constitutional competence of the New South Wales Parliament in legislation relating to the winding up of companies, to restrict or abolish the prerogative right of the Crown in right of the Commonwealth to payment of debts due to it in priority to all other debts of equal degree. The same four judges also held that the Sales Tax Assessment Act No. 1 (1930-1942) did not confer any statutory right of priority of payment of debts due for sales tax and payroll tax; and therefore that there was no inconsistency, under s.109 of the Constitution, between those Acts and the provisions of the Companies Act (N.S.W.) depriving the Crown in right of the Commonwealth of priority in the winding up of insolvent companies. Having regard to what had been decided in Farley's Case, counsel for the Commissioner did not argue that s.32 of the Sales Tax Assessment Act 1930-1942, (the predecessor of s.123 of the present Act) conferred any statutory priority on the Commissioner. In his dissent, Dixon, J. said that the Commonwealth's entitlement to priority as a prerogative right could be "relinquished or modified by and with the consent of the Parliament of the Commonwealth. But from its very nature it must be outside the power of the State to detract from it." Dixon, J. went on to make certain observations as to the interpretation of s.32. Then in Commonwealth v. Cigamatic Pty.Limited (In Liquidation) [1962] HCA 40; (1962) 108 C.L.R. 372, the High Court (Dixon, C.J., Kitto, Menzies, Windeyer and Owen, JJ., McTiernan and Taylor, JJ. dissenting) held that the Parliament of a State has no power to control or abolish the Commonwealth's fiscal right as a government to priority of payment of debts due to it when, in an administration of assets, those debts come into competition with debts of equal degree due to its subjects. In his dissenting judgment, Taylor, J. said, at 385-386, that, having regard to what had been said by Dixon, J. in Uther's Case, he entertained the view that "the substantial effect of s.32, as it stood at the time of that decision, was to require a liquidator, out of the assets of the company, to pay sales tax in priority to all debts other than those specified" in s.32(4). Dixon, C.J., Kitto, Menzies and Owen, JJ., however, held that there was no compelling reason for re-considering the views expressed in Uther's Case concerning the meaning and effect of s.32.

[92]

It will be seen that Davies, J. expressly rejected the view that the amount added to the price for sales tax, when received by Casatex, constituted trust moneys; nor, it seems to me, was his Honour saying that these moneys were the property of the Commissioner. Since the obligation imposed on the wholesaler by s.63 is to pay sales tax 21 days after the month in which the sale transaction took place, regardless of whether the purchaser has actually paid the wholesaler, it would be difficult indeed to see how it could be otherwise. The language used by Davies, J. ("the moneys represented tax that was specifically charged as such to the customer") suggests some form of charge or lien. But there would seem to be no justification in the wording of the legislation for imposing any sort of charge on the moneys, again because of the presence of s.63, which is, it seems to me, a central component of the scheme of the Act. Davies, J., I think, considered that although remittances made by the wholesaler were not of "trust moneys" or the Commissioner's own property (an argument also disclaimed in this Court by Mrs. Crennan), these remittances were nonetheless in substance money paid by the retailer - i.e. that it was the purchasers who "really" bore the tax, which was being collected by the wholesaler as the Commissioner's agent. It was on an implicit assertion that there was reasonable contemporaneity between payment by the purchaser and the remittance by the wholesaler to the Commissioner, that Mrs. Crennan submitted to this Court that the wholesaler is merely an agent who collects the tax and, acting as a conduit, transmits it to the Commissioner. The difficulty I have with these propositions is that, in my view, they are not to be found expressly stated in any provision of the Sales Tax Act, and it is no easy matter to discover upon what principle Davies, J. arrived at his conclusions. In this context it is to be noted that in Smith v. Deputy Commissioner of Taxation (1997) 23 A.C.S.R. 611, a case which was heard several months after the decision of the trial judge in the present case was handed down, the Commissioner expressly informed the court through counsel that he did not, despite the judge's reasoning in the present case, submit "that the effect of recovery of sales tax can never be a preference because the remitted sales tax was never the company's money" (see 23 A.C.S.R. at 617). Mrs. Crennan in this Court, as I have said, put her argument in like manner to the Commissioner's counsel in Smith.

[142]

The learned judge found that the company was insolvent at least from December 1993. The facts which led his Honour to this conclusion are set out in great detail in the reasons for judgment and may be summarized in the following way. As from 1991 the company had begun to experience financial difficulties, which worsened afterwards on a continuous basis. The company's income tax return for the year 30 June 1991 showed a trading loss of $1,412,751 and a net deficiency of assets of $874,622. The company's income tax return for the financial year ending 30 June 1992 was due to be filed on 21 December 1992, but was never in fact filed. The company's banker on 31 July 1993 reduced the company's only overdraft facility from $400,000 to $200,000. The company's bookkeeping practices were found by the learned judge to be "both curious and primitive". Unpresented cheques were kept in a shoe-box and other accounts for payment stored in another box. By September 1993, unpresented cheques (that is cheques which the company had drawn but not forwarded to its creditors) amounted to $2.7m. The learned judge found as a fact that this system was adopted because the company itself appreciated that had the cheques been presented, immediate dishonour would have followed which it was appreciated could have led to the company's winding-up. In October 1993, the company had a net deficiency of assets in that if the company's assets had been sold at book value they would not have realized sufficient funds to meet all its liabilities. In the following month, the company's credit financier, "Bridge Wholesale", cancelled its floor plan, thus heightening the company's liquidity problems. By November 1993 unpresented cheques then totalled $3,354,000. By 21 December 1993, when sales tax of $363,000 for goods sold in the month of November became due and payable, the company then lodged its return but did not append any cheque for payment. By the end of December unpresented cheques had risen in value to $4.24m. The company's income tax return for the year ended 30 June 1993 was due to be filed in December 1993 but was never filed. On 21 January 1994, the company filed its sales tax return for the month of December 1993 which recorded its liability to pay sales tax in the sum of $289,000 but no payment accompanied the return. On the same day however, the November sales tax was paid, one month late. On 25 January 1994 Sharp Corporation, one of the company's main suppliers, brought to the company's attention the fact that it had not been paid for goods supplied in December 1993, and the following day stopped the supply of goods on credit until the company met, at least in part, some of its outstanding indebtedness. On 27 January 1994 the company entered into a deed with its parent, forgiving a loan from the parent of $5m. as from June 1993. The effect of this transaction, as found by the learned judge, was to bring about an apparent improvement in the financial health of the company, at the expense of another within the same group (although there was no evidence that the Commissioner was ever made aware of this post-dated transaction) but the artificial surplus created by this transaction had already been extinguished by October 1993. The company's overall position was set out by the learned judge in the following passage, at 404, which amply demonstrates the correctness of his Honour's conclusion as to the company's insolvency -

At a glance

Court

Decision date

Before

Source

Judgment (168 paragraphs)

Parties

Legislation Cited (2)