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Can a trustee be liable for a member’s tax debt?

Shaun Backhaus ([email protected]), Lawyer and William Fettes ([email protected]), Senior Associate, DBA Lawyers

This article discusses the case of Commissioner of State Revenue v Can Barz Pty Ltd & Anor [2016] QCA 323. Broadly, this case deals with the ability of the Commissioner to recover a member’s tax debts from money that is payable to the trustee of the member’s superannuation fund.

Facts

Can Barz Pty Ltd (‘Can Barz’) held real estate as bare trustee for Ms Bird and Mr Scott as trustees (‘Trustees’)for the Mewcastle Superannuation Fund (‘Fund’).Ms Bird and Mr Scott were the only members of the Fund.

Can Barz had entered into a contract to sell the real estate it held on bare trust. In the normal course of events, the sale proceeds would have been paid at settlement to Can Barz (less the relevant amount required to discharge the mortgage on the property and other conveyancing expenses) who would then pay this to the Trustees as the beneficiaries of the bare trust.

Ms Bird and Mr Scott became liable to pay an amount under the Payroll Tax Act 1971 (Qld) due to the grouping provisions under that Act whereby they became jointly liable with other entities for an unpaid payroll tax assessment.In order to secure payment of this tax, the Commissioner issued garnishee notices pursuant to the Taxation Administration Act 2001 (Qld) (‘TAA’) to the following persons:

  • the real estate agents and the purchaser of the property— these notices sought payment to the Commissioner for monies that would otherwise have been paid to Can Barz; and
  • Can Barz— this notice sought payment to the Commissioner for monies which would otherwise have been paid to the Trustees.

The question in this case was whether Can Barz could be compelled to provide the proceeds of saleto the Commissioner as part of the Commissioner’s collection activities against the tax liability of Ms Bird and Mr Scott under s 50 of the TAA. Relevantly, s 50 of the TAA provides:

Collection of amounts from a garnishee

  1.  This section applies if—
    1. under a tax law, a debt is payable by a taxpayer; and
    2. the commissioner reasonably believes a person (the garnishee)—
      1. holds or may receive an amount for or on account of the taxpayer; or
      2. is liable or may become liable to pay an amount to the taxpayer; or
      3. has authority to pay an amount to the taxpayer.
  2.  Subsection (1)(b) applies even though the taxpayer’s entitlement to the amount may be subject to unfulfilled conditions.
  3. The commissioner may, by written notice given to the garnishee (the garnishee notice), require the garnishee to pay to the commissioner by a stated date a stated amount (the garnishee amount).

Importantly, it was not in dispute that Ms Bird and Mr Scott had no present beneficial interest in the assets of the Fund. More specifically:

  • as trustees of the Fund, they were obliged to comply with superannuation law, including the Superannuation Industry (Supervision) Act 1993 (Cth) (‘SISA’), and could only pay members of the Fund in accordance with the relevant provisions of the Fund’s deed and as allowed under the SISA; and
  • as members of the Fund, the property of the Fund was vested in the trustee of the Fund and they did not have any legal or beneficial interest in the property of Fund except as provided in the Fund’s deed and under the SISA.

Can Barz arguments

Can Barz argued that s 50 of the TAA does not authorise the Commissioner to issue a garnishee notice in respect of monies which the garnishee is liable to pay to a taxpayer, where the Commissioner knows that the taxpayer’s right to receive the payment is not beneficially held by the taxpayer.This argument is based on the idea that the capacity in which the taxpayer would actually receive the money, (that is, as trustees of the Fund) meant they would not receive the money beneficially but rather on trust. Can Barz argued that the purpose of s 50 of the TAA is not to have money paid to the Commissioner that does not beneficially belong to the taxpayer.

In the alterative, Can Barz raised a constitutional law argument that if the garnishee notices were effective, this would give rise to an operational inconsistency between s 50 of the TAA and the SISA. This is because the power to require payment of the Fund’s monies in satisfaction of Ms Bird and Mr Scott’s tax liability would be inconsistent with the requirements of the SISA regarding the manner in which the Trustees were able to deal with the property of the Fund. Accordingly, any state law such as s 50 of the TAA would be invalid or inoperative to the extent of any inconsistency.

Can Barz was successful at trial in the first instance. As Can Barz’s first argument was accepted, the constitutional law argument was not considered at trial.

Commissioner’s arguments

On appeal to the Queensland Court of Appeal, the Commissioner presented the following arguments:

  • that the language of s 50 of the TAA rendered it unnecessary, indeed impermissible, to inquire into the nature of the taxpayer’s entitlement to the garnishee amount. That is, it must only be established that liability exists between the garnishee (Can Barz) and the taxpayer (Ms Bird and Mr Scott)—the capacity in which the they were entitled to that money was of no relevance; and
  • alternatively,the relevant inquiry is properly confined to whether there had been a prior disposition of property and only such “prior dispositions, including those recognised in equity as effective, which may not be garnisheed”. The Commissioner argued based on certain relevant to provisions analogous to s 50 that garnishee provisions are limited in relation to equitable interests where there has been a disposition of an interest in the monies including by way of an equitable assignment or charge, but there was no general exclusion in relation to monies subject to a trust relationship.

Court’s findings

The Court of Appeal upheld the trial judge’s findings that the garnishee notices were invalid. The Court rejected the Commissioner’s argument that the capacity in which the taxpayer was entitled to payment was irrelevant.

The Court found at par 27 that:

As the primary judge correctly found, “the Commissioner must be taken to have reasonably known that at the time of the notices the taxpayer to whom the debt was owed did not have a full legal and beneficial interest in the debt”.

In interpreting the meaning of s 50 of the TAA, the Court stated at par 26 that:

the phrase “is liable to pay” should, consistent with established equitable principles, be construed, as the primary judge found, as “encompassing only circumstances in which the right to payment from the garnishee was legally and beneficially held by the taxpayer and the taxpayer was free to use the right in the taxpayer’s own interest”.

Upon his interpretation of the relevant legislation, McMurdo JA found that:

The purpose of the statute is not to permit the recovery of tax by recourse to money which belongs to someone other than the taxpayer or which, for some other reason, could not be lawfully applied by the taxpayer in the payment of his or her own tax debt.

The Court found that s 50 of the TAA only encompasses circumstances where the right to payment from the garnishee was legally and beneficially held by the taxpayer and the taxpayer was free to use the right in the taxpayer’s own interest. Therefore, Can Barz could not be compelled to pay money to the Commissioner which it was otherwise obligated to pay to the taxpayers (Ms Bird and Mr Scott) in their capacity as trustees of the Fund. If the money were held by Ms Bird and Mr Scott, they could not choose to pay such monies to the Commissioner as this would be contrary to the terms of the Fund and in contravention of the SISA.

Conclusion

The judgement in this case is helpful in that it supports the proposition that the trustee of a superannuation fund holds the property of the fund on trust for the members in accordance with the terms of the trust and the SISA. A member of a superannuation fund in many situations is not entitled to be paid or transferred the property of the fund until they at least attain their preservation age and retire or satisfy another condition of release.

Thus, this case provides a clear statement from the court regarding the different capacities in which a person may have an interest in a superannuation fund and the requirements and limitations in dealing with the property of the fund in those capacities.

While the Court did not deal with the constitutional argument put forward by Can Barz, it made helpful comments regarding the limitations of a trustee to pay monies in a way that was inconsistent with the SISA.

Another risk that often arises in relation to SMSF trustees is that creditors of the trustee may seek to access SMSF assets which are held on trust for the members of the fund in accordance with the SMSF deed. This is one reason why we strongly recommend that a sole purpose corporate trustee be used so that, for instance, a trading company or professional practice company that also acts as trustee does not expose the fund’s assets to the practical and potentially very costly process of having to defend the fund’s assets from creditor claims in the event an action is initiated against a trustee.

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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.

Note: DBA Lawyers hold SMSFCPD training at venues all around Australia and online. For more details or to register, visit www.dbanetwork.com.au or call 03 9092 9400.

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